Engineering and technical service charges form part of assessable value when they are a condition of sale, rules Supreme Court

A bench of Justices Abhay S. Oka and Ujjal Bhuyan heard an appeal by a state-owned importer challenging CESTAT’s affirmation that engineering and technical service fees paid to a domestic distributor were includible in the customs assessable value of imported spare parts. The question before the Court was whether an 8% “engineering & technical service” payment made to the Indian distributor/distributor-agent formed part of the transaction value under Section 14 of the Customs Act, 1962 read with the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (CVR).

The Court dismissed the appeal and held that the payments were includible in assessable value because they constituted a condition of sale and had a direct nexus to the imported goods. The Court relied upon the scheme of Section 14 and Rule 9(1)(e) of the CVR and concluded that the service charges were not post-importation maintenance or technical assistance excluded by the Note to Rule 4. The Court, in its reasoning, observed: “Applying the above ratio to the facts of the present case, we find that the services rendered by the Indian agent were not post-importation activities. The services provided were directly relatable to the import of the goods by way of product support service which is covered by Sections 14(1) and 14(1A) of the Customs Act read with Rule 9(1)(e) of the Customs Valuation Rules.” The judgment noted that the foreign supplier’s quotation expressly stated that “this payment is to be made to Voltas and is not to be deducted from the FOB amount payable to us,” and treated the 8% payment as a condition of sale within Rule 9(1)(e).

Background The dispute arose from a purchase order placed by a subsidiary of the appellant for spare parts for P&H shovels. The foreign principal (Harnischfeger Corporation, USA) quoted that an additional eight percent of the FOB amount was payable pro rata to its Indian distributor, M/s Voltas Ltd., in Indian rupees; the quotation clarified that this payment “is not to be deducted from the FOB amount payable” to the principal. The imported consignments were provisionally assessed and later finalized by the Assistant Commissioner, who held (03.03.2004) that the engineering and technical service charges payable to Voltas were includible in assessable value under Rule 9(1)(a) and Rule 9(1)(e), resulting in a duty shortfall of Rs.64,47,244. The Commissioner (Appeals) and thereafter CESTAT upheld the inclusion, finding that the charges were an integral condition of sale and that Voltas acted as the foreign supplier’s agent/distributor.

The appellant argued that the payments compensated services and maintenance, had no direct nexus to the value of imported goods, and fell within exclusions under the Note to Rule 4 as post-importation services. It relied on precedents such as Collector of Customs v. Essar Gujarat, Tata Iron & Steel Co. v. Commissioner and earlier decisions distinguishing post-importation technical assistance. The revenue contended that the stipulation in the seller’s quotation made the payment a contractual condition of sale, that Voltas acted on behalf of the foreign seller, and that the services were pre-importation and directly related to procurement and sale.

The Supreme Court examined Section 14, Rules 4 and 9 of CVR and prior decisions including J.K. Corporation and Ferodo India, concluded that the payments were not for post-importation maintenance or after-sale technical assistance, and found the authorities below to have correctly included the charges under Rule 9(1)(e). The Court dismissed the appeal and directed no further orders; no interim directions were recorded.

Case No.: CIVIL APPEAL NO. 8028 OF 2010 Case Title: M/s. Coal India Limited v. Commissioner of Customs (Port), Customs House, Kolkata Appearances: For the Petitioner(s): [Counsel not specified in the reported judgment] For the Respondent(s): [Counsel not specified in the reported judgment]