CESTAT order No.657-659/04-NB (A) dated 1/7/2004

In the case Appeal No. C/601/2001 NB(A) M/s DABHOL POWER COMPANY Vs CC, PUNE pertaining to importation of equipment and machinery for the LNG facility by M/S. Dabhol Power Company, the CESTAT, NEW DELHI has passed order No.657-659/04-NB (A) dated 1/7/2004 wherein on the issue of valuation the CESTAT has upheld the principles on which the elements of service charges were included in the value in terms of Rule 9 (1) (b) (iv) of the Customs Valuation Rules, 1988.

In this case, the importers M/s. Dabhol Power Co. had taken a stand that the service charges related to the determination of specifications for ordering the goods, and therefore it would not come under the purview of the elements like engineering, development etc. specified in the aforesaid Rule 9 (1) (b) (iv). While overruling this contention of the importers, the CESTAT has however vendor/manufacturer could have manufactured equipment and materials for LNG facility, which is based on state of art technology, without the help of these assists provided by the importer i.e. DPC through the service of the contractor like KJV and SCL. The Commissioner has correctly relied on the ratio of the decision in the case of Andhra Petrochemicals ltd."

This order of the CESTAT on the issue of valuation may be of help in determination of value in other similar cases of importation through various other ports. The relevant extract of CESTAT order is appended.

CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
WEST BLOCK 2. R.K. PURAM, NEW DELHI

Date of Hearing : 15.12.2003

Date of Decision : 01.07.2004

Appeal No. C/601/2001 NB(A)

Arising out of order in original No.11/Cus/2001 Dated : 25.10.2001 passed by Commissioner of Customs, Pune

Appeal No. C/519/2000-NB

Arising out of order in appeal No. CUS/NK-/2000 Dated : 26.06.2000 Passed by the Commissioner of Customs (Appeals) Pune.

M/s DABHOL POWER COMPANY

Appellant : Rep. by Shri M. Chandra Sekharan, Sr. Adv.
with Shri Monish Pushkarna Advocate
Respondent : Rep. by Shri V. Lakshmikumaran, Adv. and
Shri R. Parathasarathy, Advocate

CORAM :

Hon'ble Justice Smt. K.K. Usha, President
Shri C.N.B. Nair, Member (Technical)

FINAL ORDER NO . 657-659/04-NB(A) Dated : 01.07.2004

Per : Justice K.K. Usha :

Appeal No. C/601/2001 filed by the importer M/s. Dhabol Power Co. (DPC) is directed against order passed by the Commissioner of Customs, Pune dated 25.10.2001. Appeal No.C/519/2000 at the instance of DPC and Appeal No.C/520/2002 at the instance of Chief Commissioner of Customs, Pune are against the order passed by the Commissioner of Customs (Appeals), Pune dated 26.6.2000. Since the issues in the above appeals are inter linked and the imports which are subject matter of the appeals are made by DPC, we heard the appeals together and they are being disposed of under a common order.

Under order dated 25.10.2001 the Commissioner held that the various items of equipment, machinery etc. imported for the Liquefied Natural Gas (for short, LNG) facility are not entitled to assessment under Tariff Item 9801.00 (3) as well as under Tariff Item 9801.00 (1) as project imports. It was also held that a portion of the value of the off-shore services contract is liable to be added to the declared value of the equipment etc. imported for the LNG facility. On the above basis provisional assessment was finalized and demand of duty of Rs. 245,58.73,987/- was upheld on imports effected and cleared under 319 Bills of entry. There is also a demand of Rs.8,30,94,084/- in respect of certain goods that have been assessed provisionally but are pending clearance and a demand of Rs. 21,44,77,666/- on items imported under 63 Bills of Entry that are pending assessment and clearance. The learned Commissioner also held that all items imported for LNG facility are liable for confiscation under Section 11(m) of the Customs Act, 1962 for alleged mis-declaration and he imposed redemption fine in lieu of confiscation of an amount of Rs. 1,33,54,841/- on items which are pending clearance/assessment. He further imposed a penalty of Rs. 45 crores on the importer/appellant under Section 112(a) of Customs Act, 1962.

In Revenue's appeal No.C/520/2000 challenge is against an order passed on appeal filed by DPC against an adjudication order passed by Commissioner (Appeals), Pune dated 26.06.2000 on an appeal filed by DPC against adjudication order passed by the Assistant Commissioner of Customs, Dapoli Division dated 15.01.99. Under the above order the adjudicating authority took the view that various machinery and equipment imported for Single Point Mooring (SPM) system are not covered under Heading 9801.00 as a project import and a differential Customs duty of Rs.33,29,22,069/- was demanded. It was held that SPM system which was a system of unloading of fuel from tanker and transporting it to fuel storage tanks installed at the project site is not integrated to the project of generation of power. He also took note of the fact that power project ultimately is to be fueled by LNG facility for which a separate LNG facility was being constructed and therefore, at the second stage SPM system will normally he idle. It has only the function of temporary facility and therefore not an integral part of power project. On appeal the Commissioner took the view that SPM system attains the character of integral part of the project approved by various sponsoring authorities and which has been registered in 1996 under Project Import Regulation, 1986 without any objection. According to the Commissioner (Appeals) as a result of the restrictions imposed by the Government of India that the appellant should not use the infrastructure facilities of public sector canalizing agencies and existing port infrastructure for the import of fuel, they were compelled to find a source of supply fuel which has to be imported and this could be done only with the help of SPM system. Therefore, according to him, the SPM system became a part and parcel of the project. He also took the view that having registered the project under Project Regulation, 1986 it would qualify for classification under Chapter 98.01. Taking into consideration the submission made by the appellants that even after commissioning of Phase II, SPM would not remain idle and would be used as back up system, the Commissioner took the view that SPM system would qualify for project import as an auxiliary system or an integral part of the project. However, after holding as above, the Commissioner remanded the matter to the adjudicating authority with a direction "to consider the assessment of SPM appropriately while finalizing the provisional assessment after examining its role in the second phase and thereafter decide the matter appropriately". The Revenue has come in appeal C/520/2000 against the above order contending that finding entered by the Commissioner (Appeals) that SPM system would qualify for project import as an auxiliary system for an integral part of the project, cannot be sustained. DPC has filed appeal No.C/519/2000 challenging that part of the order of the Commissioner where he remands the case directing Assistant Commissioner to finalize the provisional assessment of SPM after considering its note in the second phase.

We will first take up appeal No.C/601/2001 filed by DPC. The issues coming up for consideration are-

1. Whether the various items of equipment, machinery etc. imported for LNG facility are entitled to the concessional rate of Customs duty under Tariff Item 9801.0 Project Imports?
2. Whether a portion of the value of the Off-shore Services Contract is liable to be added to the declared value of the equipment under Rule 9(1) (b)(iv) of the Customs Valuation Rules, 1988? and
3. Whether the provisions of Section 111(m) and 112 are attracted to the facts of the present case?

On the first issue the Commissioner came to the conclusion that the materials, equipment and machinery for setting up the LNG facility will not be covered under Tariff Heading 9801.00(3) and therefore, are entitled to concessional rate of duty for project import. He also held that machinery and material imported for LNG facility are not required for substantial expansion of an existing unit of specified power project. According to the Commissioner, LNG facility is an independent fuel venture. The Phase I of the power project had been generating power independent of LNG facility. Even Phase II the power project is capable of generating power with Naphtha/Distillate had already been constructed for catering to the phase II of the power project. He further held that LNG facility cannot be considered as auxiliary equipment of the power project for the purpose of Tariff Heading 9801.0 inasmuch as Tariff Heading does not deal with the auxiliary equipment required in connection with substantial expansion of the existing unit of the power project. Tariff Heading covers only auxiliary equipment required for substantial expansion etc. Reliance was then placed on the decision of this Tribunal in NALCO 1997 (94) ELT 409 = (2002-TIOL-138-CESTAT-DEL-LB). The alternate submissions made by the assessee that LNG facility has to be covered as an independent industrial plant, was also rejected by the Commissioner.

It is contended on behalf of the appellant that the above finding of the Commissioner is not liable to be sustained. A memorandum of understanding was executed on 20.06.92 amongst the Maharasthra State Electricity Board (MSEB), Enron Power Corporation (EPC) and General Electric Corporation (GEC). The above document outlined in general terms agreement between the parties for the power development, purchase and sale contract, design, construction, operation and ownership of an independent power generating facility at Dabhol with a minimum capacity of 2000 MW. The agreement contemplated the establishment of a joint venture Company named 'Dabhol Power Company' (DPC). The power plant will have generating facility of 2000-2400 MW nominal capacity. It also mentioned "Project includes construction of regasification facilities for LNG and pipeline interconnections to power plant. According to the appellant, since this is the first power generation facility to work on LNG and LNG is not available in India it had to be imported. The setting up of an LNG facility is an integral part of power plant. Referring to its letter dated 28th August 1992 seeking approval of the Government of India for setting up of the project the appellant would contend that proposal to FIPB was a consolidated proposal that included setting up of LNG facility as a part and parcel of the power project. The cost of LNG was identified separately as 845 million US$. It is submitted that the above aspects formed part of the project report submitted to FIPB. Paragraph 1.06.02 referred to initial use of fuel oil for the power station till the availability of externally sourced LNG. Letter dated 3.2.93 from FIPB conveying the approval of Government of India for setting up of the power project at Dabhol would also show that it was an integrated project including LNG facility.

Subsequently, the approval was modified by FIPB under communication dated 23.03.94. Pursuant thereto the project has been divided into two phases. Phase I was to run on Diesel as the raw material and Phase II on LNG. The appellant submits that consequentially LNG facility became part and parcel of Phase II of a single project. Phase I was to have a capacity of 695 MW and Phase II 1320 MW. The above would show, according to the appellant that Phase II contemplated a substantial expansion in the generating capacity vis-a-vis Phase I. Apart from the above, in the amendment letter the Government imposed a condition that import of fuel (Diesel/LNG) for project should not use infrastructure facilities of the Public Sector canalizing agencies and the existing port infrastructure. Under letter dated 24.04.98, Ministry of Industry confirmed that their approval is for execution/implementation of an integrated project involving power project and LNG regasification facility and associated infrastructure. Pursuant thereto DPC applied to the Assistant Commissioner of Dapoli for registration of the Phase II Power Project under the Project Import Regulation, 1986. In the above letter, DPC had indicated that the material imported for power project and LNG facility shall not be used for any other purpose. Therefore, according to the appellant, even though the initial proposal to FIPB recognized the capability of LNG facility for distributing gas, application for project import registration categorically stated that the LNG facility will not be used for any other purpose. The Government of Maharashtra, the sponsoring authority had recommended grant of project import concession for the equipments required for Phase II and also for LNG facility. Thus, according to the appellant, Phase II with integrated LNG facility fully satisfied the conditions required for grant of concessional rate of Customs duty applicable to power projects under Tariff Item 98.01.

The appellant also refers to terms of the Power Purchase Agreement (PPA) executed on 8.12.93 between DPC and Maharasthra State Electricity Board (MSEB) in support of its contention on LNG facility. The preamble to the agreement specifies that DPC will also construct facilities for the receipt, storage and transmission of fuel to the power station. These facilities include the single point, mooring and tankage for liquid fuel in Phase I and a breakwater jetty and facilities for the receipt, storage and regasification of LNG for Phase II.

The learned Sr. counsel who appeared on behalf of the Revenue submitted that in the matter of deciding classification Customs Department is the final authority and that the appellant cannot seek shelter under the approval granted by FIPB or the recommendation of the sponsoring authority. In support of the above proposition he placed reliance on the decision of the Supreme Court in Jackson Thevara 1992 (61) ELT 343 (SC) = (2002-TIOL-213-SC-CUS) and the decisions of this Tribunal in NALCO 1997 (94) ELT 409 = (2002-TIOL-138-CESTAT-DEL-LB) and EID Party 1991 (100) ELT 275(T). The Revenue would contend that LNG facility has been set up to make available Natural Gas which is the raw material for various industrial consumers including the Power Project. The equipment and material imported for implementing processes before gas came into existence (including unloading terminal, storage tank and regas terminal) cannot be regarded as equipment and material imported for initial setting up of the Power Project or substantial expansion of the existing Power Project within the meaning of Customs Tariff Heading 9801. Strong reliance was placed by the learned counsel on the decision of this Tribunal in NALCO wherein the port facility for unloading raw material and loading finished goods was denied the project import benefit by a Larger Bench of the Tribunal. It was further submitted that ratio of the decision in Indian Charge Chrome 1991 (112) ELT 753 (SC) could not support the appellant as it was contended. According to the Revenue the decision of Tribunal in Paradeep Phosphates Ltd. 2000 (120) ELT 704 is no longer good a law in view of the Larger Bench decision in NALCO. The decision of the Tribunal in TOYA Engineering 2000 (122) ELT 315 was rendered under different facts and that the decision is pending in appeal before the Supreme Court.

The Revenue would further contend that LNG facility is required neither for initial setting up of Phase I of the Power Project nor for substantial expansion of the existing unit. It only makes the project more cost effective. Therefore, the goods imported for setting up LNG facility cannot be brought within the purview of Customs Tariff Heading 9801.00(3). Equipment and material imported for setting up of LNG facility is not directly used in setting up the power project. Therefore, it cannot be treated as auxiliary equipment. This is the ratio of the decision of this Tribunal in Punjab State electricity Board 1987 (27) ELT 432. An auxiliary equipment required in connection with the substantial expansion is not covered under Tariff Heading 9801. Therefore, according to the Revenue, the LNG facility cannot be brought within the purview of the description given under Customs Tariff Heading 9801.00 (3), nor can it be considered an integral part of the power project.

On the second issue the Commissioner took the view that a portion of the value of off-shore services contract is liable to be added to the declared value of equipments under Rule 9(1)(b)(iv) of the Customs Valuation Rules. The Commissioner took into consideration the following facts.

The appellant had entered into four contracts, two off-shore contracts and two on-shore contracts. Out of the two off-shore contracts one relates to supply of equipment and machinery covered by the off-shore supply contract and the other relates to supply of services undertaken outside India covered by the off-shore services contracts. While the contract value for supply of machinery and equipment for the LNG facility was 103.354 million US$ the contract value for service charges was 149.379 million US$. Thus, the contract value for service charges for LNG facility would be 144.53% of the contract value for the machinery and equipment. In order to set up Phase II of the power project, DPC entered into two off-shore contracts. Off-shore supply contract for the supply of machinery was for 400 million US$ while the off-shore services contract for various services undertaken outside India was for consideration of 10 million US$. Thus in respect of Phase II of the Power project, the contract value for services charges was 25% of the contract value for machinery and equipment Following are the additions made by the Commissioner apportioning a portion of the service charges in respect of different items. They are given below under three charts:-

OTHER THAN MARINE i.e. LNG TERMINAL (Breakup of offshore services by Kvaerner)

MARINE WORK (Break-up of offshore services by Six Construct Ltd.)

NOTE- @ 1/3 of the estimated value of the service mentioned at Column (3)

#@ 100% of the estimated value of the services mentioned at Column (3)

Break up of offshore Services by the Prime Contractor i.e. E.P.S.

Note *-@ 74.07% of the Service Charges estimated at Column (3)

#-@ 100% of the Service Charges estimated at Column (3)

The Commissioner thus found that out of the total Offshore Services contract dated 20th Nov. 1998 value of 115.672 Million US$, the amount of Services Charges worth 76,794.649.20 US$ are includable in the assessable value. The amount of 115.672 US$ included the estimated value of marine sub-contract services, namely, 1616000 US$. But no part of the above amount was proposed by the Commissioner to be included in the assessable value of the imported goods. All offshore and onshore contracts for setting up LNG facility were amended on 28th April 2000. The amended value for the offshore supply contract is 103.354 Million US$ and for the offshore services contract is 149.376 Million Us$. In the absence of information on the item-wise increase in the value of services, Commissioner took the view that it is reasonable to apply the pro rata method. He came to the conclusion that out of amended total value of Us$149.37 million worth of services 99.170724 Million US$ worth of services is includible in the assessable value of the imports. For the purpose of determining the transaction value of the goods for setting up the LNG facility in terms of Rule 4 read with Rule 9(1)(b)(iv) a loading @ 95.95% of the declared value was directed to the made.

The Commissioner further observed that there is no clear indication available in the contract or any other document as to how service charges for different elements have to be apportioned. The apportionment will have to be made in a reasonable manner appropriate to the circumstances and in accordance with the generally accepted accounting principles. Reliance was placed on a Customs Cooperation Counsel (CCC) Technical Committee Case Study 1.1 which dealt with the treatment of assists like engineering, development etc. The payment for plans drawings etc. was made for four plants, while the imported goods were used for setting up only one plant. The case study determined the Customs Value by adding one quarter of the total payments for the drawings and plans, by apportioning one fourth liability for the imported plant, since three other plants were manufactured on the basis of same plans and designs. Reliance was also placed on the decision of the Supreme Court in Essar Gujarat (1996 (88) ELT 609). In the above case the Apex Court held as follows:

"Since there is no clear indication as to how the various services have been valued separately, 10% of the amount of DM 23,100,000 should be added to the value of the plant on this account".

The appellant would contend that offshore services contract is not related to offshore supply contract. No part of the value of the services contract is includible in the value of imported equipments since imported equipment was not manufactured according to any drawing or design, developed under the services contract and made available to the manufacturer/supplier of the equipments. The appellant would intimate the required specification to the prospective suppliers who would manufacture the goods as per the specification. According to the appellant, making available specification is outside the purview of Rule 9(1)(b)(iv). The Ld. Counsel for the appellant referred to "Customs Valuation-Commentary on the Gatt Customs Valuation Code" by Saul L. Sherman and H. Glashoff. The relevant portion from para 117 book is extracted below:

"Detailed specifications including various dimensions noted on a drawing of the machine, are included inn the buyer's order, so as to advise the exporters/manufacturer of what the buyer needs. The cost of engineering and drawing are not part of customs value, even if undertaking outside the country, to which the machine is shipped, to the extent that they are an appropriate way of ordering the machine, - i.e., of telling the manufacturer the specifications of what is being ordered."

The unloading arms are not items manufactured according to any drawing made available by the appellant. They are standard items manufactured according to the drawings and designs of the equipment suppliers. As mentioned earlier the appellant had provided only the required specifications. Reliance placed by the Commissioner on Clause 2.5 of the document "Instruction to Vendors" relating to unloading arm is misplaced. The appellant would submit that such a provision for review is provided only to ensure that manufacturing drawing prepared by the vendor is in fact according to the specifications. The appellant relies on the following provisions in the data sheet in support of its contention that specification provided by it would not amount to engineering design for manufacture or unloading arms:

"C.21 Article 4 specifically provides as follows:

'Unloading arms shall be vendors standard design, which has a proven track record.'

C.22 Article 5.3 also makes this clear and is reproduce below:

'The supply shall include the testing, fabrication, Shop Erection, testing, certification, documentation and packing in accordance with the data sheets, specifications and other documents as referenced in the material requisition."

C.23 Article 7.1.1 dealing with the testing requirements is also important:

'The design, engineering and manufacture of unloading arms shall be as per vendors standard Marine type for LNG service, meeting of technical design requirements as specified in this specification and any documents referenced herein.'

C,24 Article 7.1.3 is also important:

'The intention of this specification is to minimize the purchaser's involvement in the detailed design of the unloading arms. It relies on the skill and experience of the vendor in the design and packing of LNG unloading arms, in environments similar to that specified in the Dabhol terminal. It is intended that the equipment is as close to the vendors standard as possible, while maximizing the use of components proven in LNG service.'

C.25 Article 7.10.1 dealing with materials specifies that 'all materials used shall be vendors standard, suitable for LNG service and the marine environment of Dabhol.'

C,26 Article 12.1 dealing with the documentation provides as follows:

'Relevant drawings and documentation shall be provided by the vendor in accordance with the requirements of the purchaser's Vendor Document Requirement Schedule (VDRS), which forms part of the requisition.'

The appellant would further contend that no data is provided by the offshore contractor as an assist necessary for production of steel plants required for fabricating the tanks. The role of the offshore service contractor was limited to determining the pressure, temperature and other parameters of the LNG at different parts of the tank and from these data arrive at the thickness of the steel sheets / plants required for different portions of the tank. The manufacture of the steel plates is not as a result of identifying the thickness or quantity. The design, fabrication and construction etc. of the LNG storage tank at Dabhol site referred in Article 1.1.1 is out of standard imported material like Ally/carbon steel plate. The detailed drawings developed by the contractor are of the tanks to be constructed in India. These drawings and design of the tank are reviewed by the service contractor. There is no drawing or design prepared by the manufacture/supplier of the 9% nickel steel plate/carbon steel plate. These are manufactured according to the normal production process of the steel mills and supplied in the specified quantities and dimensions. Therefore, according to the appellant in respect of the above item also no addition could be made under Rule 9(1)(b)(iv).

The marine work takes in construction of breakwater, dredging and LNG Jetty. Equipment under import in the circuit LNG Jetty are foundation piles, steel profiles fenders, mooring systems, navigational aids etc. The Commissioner had included only those service charges which according to him related to imported goods meant for the jetty. It is contended on behalf of the appellant that the nature of the service rendered by the sub-contractor Six Construct Limited, is such that its value is not includible. Therefore, the assumption that one third of the value of the services under this heading should be added to the transaction value of the imported equipment is incorrect. The appellant submits that the service rendered under the Heading 'Engineering & management does not at all involve identifying any specification for any equipment or material required for marine works. It relates to cost to Six Construct Limited for planning, directing, controlling, evaluating the activities in order to accomplish the task. Under the Heading 'Commercial Management' the service provider has covered its cost of commercial management and coordination of financing, management taxes and duties, insurance services, currency management etc. It has no connection to the services contemplated under Rule 9(1)(b)(iv). As far as Heading 'Detailed Engineering Design' is concerned, the appellant would contend that imported items for the Jetty are readily available articles such as plies, fenders, mooring systems, navigation aids etc. which do not require any design or engineering drawing supplied by the purchaser. The Basic Engineering and Stability calculation is an activity which precedes detailed engineering and therefore, its has also no connection to the services contemplated under Rule 9(1)(b)(iv). Seismic Engineering is something related to the site in India which also does not involve any engineering required for production of imported goods. This service rendered under Heading 'Scheduling' is in respect of an overall project schedule for implementation of project execution. It contemplates targets for completion and progress on monthly basis. The service has also no relevance under Rule 9(1)(b)(iv). According to the appellant to the appellant, the service rendered under Mathematical Mooring Testing is also not connected with any engineering design specification. The services rendered under Mathematical Wave Testing relates to determination of design parameters at the berth and along the trestle. it is part of jetty work which is mostly a concrete construction utilising materials purchased in India. The appellant would, therefore, submit that addition made by the Commissioner in respect of the activities undertaken under the marine work is unsustainable.

According to the appellant, none of the services by prima contractor involved any preparation of specifications nor any engineering. Each of those items related to the coordination of the various works of marine and LNG terminal. The services under the Heading 'Sunk Development Costs' was in relation to developing various methodologies of implementing the project and choosing one of such alternatives. It is not identical with the term 'development' as understood in the context of Research & Development'. According to the appellant prima contractor's service did not at all involve any engineering or specification r review of drawings. It relates only to coordination with various sub-contractors entrusted with the execution of other works.

On the issue of includibility of different elements of services charges in the value of imported goods for LNG facility under Rule 9(1)(b)(iv) of the Customs Valuation Rules, 1988, the Ld. Senior counsel addressed arguments in support of the finding of the Commissioner. According to hi, following are the relevant conditions for inclusion of the value of services in the value of the imported goods under Rule 9(1)(b)(iv):

1. The value of the services has not already been included in the price actually paid or payable for the imported goods.
2. The services were supplied directly or indirectly by the buyer free of charge.
3. The services have to be undertaken elsewhere than in India.
4. The subject services fall in any of the categories like engineering,
5. The services were supplied by the buyer 'for use in connection with the production and sale for export of the imported goods' (emphasis supplied).
6. The services are' necessary for the production of the imported goods' (emphasis supplied).

There is no dispute regarding the first three conditions being present in this case. But according to the appellant the facts would not satisfy condition (d) to (f) since the services rendered relating to identifying the specifications do not fall in any of the category of services described in Rule 9(1)(b)(iv). The Ld. Senior Counsel would submit that identification of the specification is also very much part of the engineering and drawing. He quoted the following by Sherman and Glashoff relied on by the appellant:

"The cost of engineering and drawing are not part of the Customs value, even if undertaken outside the country to which the machine is shipped to the extent that they are an appropriate way of ordering the machine-that is, of telling the manufacturer the specifications of what is being ordered. Only if the engineering or drawing goes further, should it be deemed to be a part of the production process" (Emphasis supplied.)

Reliance was placed by the Ld. Counsel on the decision of the Supreme Court in Andhra Petro Chemicals (APCL) 1997 (90 ELT 275 (SC) = (2002-TIOL-43-SC-CUS). In the above case as similar plea that the supplier had given only specification to the sub-vendor to conform to the operational requirements of the equipment was taken. The Tribunal took the view that these charges for specifications are to be included in the value of the goods. The above decision was upheld by the Hon'ble Supreme Court.

Revenue contends that the imported goods are tailor-made for the state of art LNG facility utilizing cryogenic technology. The processes involved for setting up the LNG facility are unique to Dabhol, and are confidential information. Therefore, an unconnected vendor will not be able to supply the goods unless the process and the associated drawing and engineering specifications, whether patented or not, are forwarded to the vendor. The Ld. Counsel points out that reference to the instructions to vendors (ITV) would clearly show the involvement of the service contractor in detailed designing of unloading arms. The coordinated activities between vendor and the offshore service contractor/sub-contractor shows continuous interaction between the service contractor and the vendor till the design/drawing is finalized. Service contractors/sub-contractors review the drawing submitted by the vendors and thus assist the vendor in the process of the imported goods.

According to the Revenue, the LNG storage tanks are imported in disassembled form which have been assembled/erected at the site after importation. The imported items are not steel plants simpliciter, but they are identifiable parts of the storage tank. The drawings submitted by DPC prepared by the service sub-contractor for LNG storage tank, it was shown that the cylindrical walls of the tank is divided into eleven cylindrical trips each of width 3391 mm. Each strip has been referred to as a course. Each course is divided into curved plates called as shell plates. 24 shell plates when joined together will make one course. Eleven such courses make up walls of the tank. Service contractor/sub-contractor has prepared detailed drawings of tanks as well as plates under import. On the basis of these drawings, the vendor has manufactured the plates. It can, therefore, be seen that when moves form bottom of the tank towards the top, the thickness of the shell decreases. The invoice dated 21.2.2000 pertaining to Bill of Entry No.566 dated 1.3.2000 would clearly show that the plates were manufactured as per the details shown in drawing No. 69 B 02 MF 0004.

According to the Revenue the scheme of the contracts is designed in such a manner that engineering is divided between the service contractor and the vendor depending upon the experience of the vendor. The service contractor had supplied, inter alia, the following documents to the vendor:

1. Material requisition including P & Ids, Block diagram of the equipment.
2. Instruction to vendors (proves process of review and inter action)
3. Data Sheets (Dimensions of arms)
4. Specification of 'unloading arms' (General Instructions).

P & ID diagram is a drawing which shows details of the concerned equipment and their inter connection with other equipment for a particular portion of the LNG facility. Block Diagram is a diagram which shows the general details of equipment and its interconnection with other equipments. The above mentioned documents are passed on to the vendors only for the reason that these documents are necessary for the production of the imported goods. ON the basis of the above mentioned diagrams, the vendor had developed P & Ids and manufacturing drawing of the equipment which are further reviewed by the service contractor. Therefore, the activities undertaken by the service contractor/sub-contractor are necessary for the production for the production of the goods. According to the Revenue the Commissioner was fully justified in making the additions and the appellant's case both on the issue of classification and valuation is only to be rejected.

Appeal Nos. C/520/2000-NB (A) & C/519/2000-NB (A)

In these lapels at the instance of DPC and Revenue challenge is against the order passed by the Commissioner (Appeals) dated 26.6.2000. The Commissioner (Appeals) took the view that Single Point Mooring System (SPM) is part and parcel of the project and therefore, the goods imported for setting up will have the benefit of concessional rate of duty under Project Import Regulations. In coming to the above conclusion the Commissioner (Appeals) has referred to the restrictions imposed by the Government of India on the appellant that it will not use the infrastructure facilities of Public Sector Canalizing agencies and existing port infrastructure in the import of fuel. Commissioner (Appeals) thereafter observed that in the light of the restrictions imposed by the Government DPC have not other go but to put up SPM system to proceed with the project. Under these circumstances, the Commissioner (Appeals) took the view that SPM would become part and parcel of the project. He had also noted the fact that SOM has been treated as part of the project approved by various sponsoring authorities. It was registered in December 1996 as such without any objection. He took the view that SPM system cannot be compared to the usage of vehicles in transportation of goods to the project. Even after IInd phase SPSM system qualifies for project import as an auxiliary system.

It is contented by DPC that once the Commissioner came to the conclusion that SPM was part and parcel of power project, no question would arise for further examining the role of SPM in the second phase. SPM is basically required for the first phase of the project. SPM was one of the items of machinery included in the list submitted by the sponsoring authority to the Central Excise & Customs, Pune. Therefore, the above mentioned direction given by the Commissioner is totally extraneous and irrelevant. Apart from the above, it is submitted by DPC that role of SPM in the second phase of the power project was neither raised in the show cause notice nor in the original order of the Assistant Commissioner. Under these circumstances, the Commissioner could not have enlarged the scope of the enquiry by a direction in the order of remand. The appellant would further submit that even after second phase was commissioned the appellant would still require to maintain SPM system to ensure supply of Naphtha or Distillate as back up fuel or/to commission or start the power plant after it was shut down for any reason. According to the appellant, SPM facility was not a temporary facility. Even if the SPM system is not to be used at Phase II stage, it cannot be denied the benefit of Heading 9801.

The contentions raised by the Revenue in its Appeal No.C/520/2000 are similar to those in the case of LNG facility in the appeal filed by DPD. It is contended that SPM system cannot be treated as part and parcel of the project and neither auxiliary equipment of the project. The Ld. Counsel for the respondent supported the finding of the Commissioner (Appeals) on the basis of the arguments addressed by him in Appeal No.C/601/2001-NB (A).

We will first consider the issue whether various items of machinery equipments etc. imported for LNG facility are entitled t concessional rate of Customs duty under Tariff Item 9801.00 as Project Import. The Revenue is seeking to support the finding of the Commissioner against the assessee relying on larger Bench decision of this Tribunal in NALCO. Appellant on the other hand would contend that the facts of the present case are more akin to the facts of Paradeep Phosphates Ltd. and also Toyo Engineering. In NALCO the Larger Bench took the view that supply of equipments for port facility at Visakhapatnam cannot be considered as equipment imported for initial setting up of a unit or substantial expansion of existing unit of an industrial plant. Unloading raw material at the port or even at the plant may be necessary for the activity of manufacture or process in an industrial plant, but that cannot be treated as equipment required for the initial setting up of a unit or for substantial expansion of an existing unit which is a required condition for being treated as project import under Item 1 (D)(1) of Heading 84.66. On going through the facts in the NALCO case, we find that contention raised by the Revenue was that the project in the case consisted only of extraction of aluminum ore and manufacture of alumina and port facility system had nothing to do with the mining operation or manufacture of alumina and it was situated miles away form the former.

The facts in Paradeep Phosphates Ltd. are slightly different. It was held that a captive berth for import of raw material is required in connection with setting up of fertilizer project. Mobile Continuous Ship Unloader completely assembled was registered under Project Import Regulations, 1986. Rejecting the contention taken by the Revenue that the ship unloader was not an integral part of the project import for manufacture of fertilizer project, the Tribunal took the view that imported machinery would appropriately be covered by the expression 'auxiliary equipment' mentioned under Heading 98.01. The Tribunal took note of the fact that construction of captive berth for import of raw materials was part of setting up of the fertilizer project.

We now examine the LNG facility. It was being treated as part of the Power Project by the parties to the agreement. Appellant has placed reliance on item 4 of the term sheet filed along with the memorandum of understanding (MOU) which reads as follows:

"4. Power Plant

Assumed 2000-2400 MW nominal capacity;

Plant will be designed as a combined cycle facility including gas turbines, steam turbines, heat recovery steam generators, demineralized water plant, cooling tower(s), 400 MW substation fuel storage to accommodate 30 days light oil storage (collectively, the 'Power Plants')

Project includes construction of regasification facilities for LNG and pipeline interconnections to Power Plant (collectively, the 'Gas Facilities')"

In the letter dated 3.2.93 the FIPB convoyed the approval of the Government of India to the setting up of the power project at Dabhol. The relevant portion is quoted below it is seen that -

"Set-up, own and operate a Natural Gas fired combined cycle power station of a capacity of 1920 MW (the capacity may be extended to 2550 MW at a future date), based on imported Liquefied natural Gas (LNG) along with an integrated facility for sourcing, import, reception, handling, storage and regasification of LNG, for fuel supply to the power station."

Even when the project was divided into two phases, LNG facility was part of the project. In the letter dated 23.3.94 FIPB, while approving the modification of the project into two phases, a condition was imposed that the infrastructure facility of the Public Sector canalizing agency and the existing port infrastructure should not be used for import of fuel (Diesel/LNG). Such a condition is not available in NALCO. There is merit in the contention of the appellant that when such a condition was imposed, in this case, LNG facility, including regasification facility, was to be treated as part of the integrated project. In reply to the letter dated 31.8.98 addressed by Enron International, Ministry of Industry vide letter dated 24th September 98 confirmed that the integrated project involved power plant, LNG regasification and associated infrastructure. It is in this background DPC applied to the Assistant Commissioner of Customs, Dapoli for registration of Phase II of the Power Project under Project Import Regulation 1986.

There cannot be any dispute on the legal position that it is the Customs authorities who are competent to arrive at a decision regarding classification of the goods not withstanding any view taken by the licensing authority. But we are referring to the correspondence between the parties as above and terms of agreement only to examine whether the regasification of LNG for fuel supply to the power plant was part of an integrated project so that import made for LNG facility would come under sub-heading 9801.00. If regasification facility is port of the integrated project, then import of equipment etc. in connection with LNG facility will be entitled to the benefit of project import, as was held in Paradeep Phosphates Ltd. and such a conclusion would not be against the ratio of NALCO also.

Taking into consideration the entire material before us we are inclined to take the view that LNG facility is part of the integrated power project and therefore, various items of machinery and equipment imported for LNG facility are entitled to concessional rate of Customs duty under Tariff Item 9801.00 as project import.

In this context, it may not be out of place to refer to the settlement arrived at between the parties in NALCO while their appeal against the decision of this Tribunal was pending before the Supreme Court. Civil Appeal No. 6902-6906/97 filed by NALCO was disposed of by the Hon'ble Supreme Court on the basis of the Settlement by order dated 10.3.2004. When this order was reported as 2004 (167) ELT A96. We reposted the present appeals which were reserved for orders and heard both sides. It was submitted before us that the issues arising in NALCO were not decided by the Hon'ble Supreme court on merits. The order of the Hon'ble Supreme Court reads as follows :

"Application has been filed indicating that the matter in this dispute has been settled between the parties and a Committee on Dispute has ultimately taken the view that the Equipment connected with the storage of caustic soda and alumina can be considered as part of manufacturing process and project import benefit could be considered for these equipment as mode of settlement. Other than the above equipment all other equipment of part facilities should be considered as port handling equipment and thereof, could not be eligible for project benefit.

In view of this settlement the impugned order under appeal is set aside and is ordered in terms of the settlement. The appeal stands disposed of accordingly.

The learned counsel appearing on behalf of the Revenue brought to out notice the minutes of the meeting of the Committee on Disputes held on 17.2.2004 which would show that the Department of Revenue has agreed to the terms of agreement without prejudice to their right in any other case on similar issue. Therefore, the settlement may not be taken as an admission on the part of the department regarding the legal position. We may point out that the view taken by us, the eligibility for concessional rate of duty as project import, is on the basis of the facts in the present case and the contentions raised by both sides.

Now we come to the issue on valuation. The total value of the offshore service charges would come to 149 million US$. The assessee contended that no part of the service charges is addable to the value of the imported goods since offshore service supplied has not relation to the manufacture of the goods imported and that a portion of the service charges related to post importation activity. The Commissioner took the view that amount of 99 million US$ of service charges would be relatable to the manufacture of imported goods and therefore, includible in the value of goods in terms of Rules 9(1)(b)(iv) of the Customs Valuation Rules, 1988.

It is relevant to note that permissions was granted to Enron Power Corporation to set up, own and operate a natural gas fired combined cycle power station at Dabhol. for the above purpose joint venture company known as Dabhol Power Company was formed by Enron, Maharastra State, Maharastra State Electricity Board and General Electric Corporation. DPC entered into off-shore contract with Enron Equipment Procurement Company (EEPC). While the value of supply of machinery and equipment for LNG facility under the above contract was 103.357 million US$, the contract value for service charges was 149.376 US$. It is thus noticed that the contract value of service charges for LNG facility is 144.53% of the contract value of machinery and equipment. In respect of Phase II of the power project the off-shore contract was with M/s. General Electric, Japan Ltd. and its value was 400 million US$. The off -shore service contract was with Bechtel Overseas Corporation, Enron Power Services BV and GE Power Systems Inc. The value of the various service contracts referred above was 100 million US$.

The main contention raised by the assessee-appellant is that only 'specification' is provided under the service contract and it can, in no way be, brought under Rule 9(1)(b)(iv). No engineering drawing is being given under the offshore service contract on the basis of which manufacture of different items had taken place. On the other hand, the Revenue would contend that what has been provided under the offshore service is much more than the specification. If it is beyond the specification, then the ratio of the decision of the supreme Court in Andhra Petro Chemicals Vs. CC, Madras. 1997 (90) ELT 275 (SC) = ((2002-TIOL-43-SC-CUS) would apply. Therefore, we have to examine in this case whether on the facts the offshore service contract provided much more than specification so that it would amount to design and engineering to enable production of the goods imported. In Andhra Petro Chemicals Ltd. Vs. CC Madras 1997 (90) ELT 349 (SC) the decision of the Tribunal was affirmed by the Supreme Court. On going through the decision of the Tribunal which is reported as Andhra Petrochemical Ltd. Vs. CCE, Madras 1997 (91) ELT 349 we find two relevant factors - (1) Davy Mekee (London) Ltd. Entered into contract with M/s. APCL for supply of equipment and material, for technical know-how and for servicing of the plant propose to be erected. DML supplied detailed specifications for each item, standards and data sheets as listed on the engineering document list, general design requirements, layout and other relevant technical information while placing the purchase orders on the manufacturers. (2) the drawing submitted by the manufacturers were required to be reviewed and approved by DML . Equipment was required to be inspected by DML. Invoices by the manufacturer were raised on DML. In turn DML raised invoices on APL. It was contended on behalf of the appellant that the DML had not taken up themselves any responsibility for providing designs etc. necessary for the production of the imported goods and that the responsibility of DML confined to providing know-how and front end engineering package of the plant at Vizag. The Tribunal took the view that the services rendered towards engineering design, work plans, sketches etc. undertaken by the DML elsewhere than in India were necessary for the projection of the imported goods got manufactured by DML and supplied to APL and therefore, the value of the services are covered by the provisions of Rule 9(1)(b)(iv) of the Customs Valuation Rules.

EPS, the off-shore service contractor has engaged two major sub-contractors-Six Construct Ltd. (SCL) for marine work and Kvaerner Dabhol LNG joint venture (KJV) for LNG Terminal. Apart from the above, EPS as a prime contractor has also provided services in terms of Off-shore Services contract. Clause 3.0.1 of Pr. CP would show that EPS and KJV are assigned the job of offshore engineering. Clause 1.2.2. of PRCP makes it clear that EPS and KJV are responsible for Project Management and Engineering (Offshore). Clause 2.1 would further sow that EPS ; is to supply Lump Sum Turn Key facility covering design, engineering, procurement, construction and commissioning. Clause 2.2 makes it the responsibility of KJV for the facility covering, inter alia, All Design and Engineering Process, Design, Tankage Envelope, Civils, Site Preparation, Process Area, Jetty Top Sides, Pipework Corridor, and preparation of specification and procedures for design, construction, testing and commissioning. 'Quality Plant for Design and Procurement' also would show that the design and engineering taken by offshore service contract is in the form of drawings, specification, calculations, mannuals etc. The equipment designed by the vendors/manufacturers on the basis of design and engineering specifications provided by the service contractor is also subject to review and control by service contractor. An examination of Instructions to Vendors (ITV) would make it further clear that the details of the design are subject to review and modification by the service contractor. Service Contractor has to provide date sheets and drawings to the vendor. In the nature of the different part to be manufactured, it is evident that an unconnected vendor without such data sheets and drawings from the service contractor cannot manufacture the imported goods. The above mentioned documents would clearly show that the manufacture of the goods imported requires coordinated activity between the vendor and offshore service contractor/sub-contractor. There is continuous interaction between them till a design/drawing is finalized.

The instructions to vendor would also show that the vendor has to submit calculations, performance and materials, engineering data and certification and manufacturing date dossier for review of the offshore service contractor in addition to the date sheets and drawings. Therefore, the offshore service contractor in addition to providing design and engineering specifications to the vendors, has assisted not only in the development of manufacturing drawing of the imported equipment but also in the development of manufacturing date dossier of the project.

The Piping and Instrumentation Diagrams (P & ID's) developed by the service sub-contractor are essential in the further development of drawings by the vendor for the manufacture of LNG unloading arms. Such drawings are not limited for the purpose of erection alone.

In the case of LNG storage tank also, the contention raised by the appellant that the service contractor gives only specifications is not seen correct. Detailed design and drawings were provided by the service contractor in respect of every part of the storage tank. The material requisition, date sheets and drawings of the tank would clearly show that the service contractor had intimated the vendor about the complex requirement of production of the plates. Without such design and drawings the vendor could not have produced and supplied the required plates etc. for the storage tanks. Similarly, in respect of other equipment like BOG condensers, compressors, LNG vaporisers etc. there had been continuous interaction between service contractors an vendors in finalizing the drawings required for the manufacture. The Commissioner has correctly held that no unconnected vendor/manufacturer could have manufactured equipment and materials for LNG facility, which is based on state of art technology, without the help of these assists provided by the importer i.e. DPC through the service of the contractor like KJV and SCL. The Commissioner has correctly relied on the ratio of the decision in the case of Andhra Petrochemicals Ltd.

In relation to marine work also it is seen that the service contractor had provided considerable support by design and engineering. Equipments which were imported in respect of LNG Jetty are foundation piles, steel piles, steel profiles, fenders, mooring systems, navigational aids etc. From the scope Book for the Marine Work it is seen that considerable engineering has to be undertaken to arrive at the specifications of piles, steel profiles, mooring systems, fenders etc. the depth to which the piles are to be installed, load on the piles including the load of the pre-stressed concrete beams and pipelines etc. are all to be taken into account. It cannot be contended that standard production by the sellers would serve the purpose. Therefore, a part of the service charges relating to the marine Work is also liable to be added to the imports made in connection with the above work.

On going through different items coming under each category, we find that some of services may not have any impact at all on the production of the goods imported. For example, under the heading 'Other than marine i.e. LNG Terminal', Item 3 Commercial management and item 7 Constructability. The value of these services have nothing to do with the production of the goods imported and therefore cannot be included in their assessable value. We are also of the view that in respect of Items 1, 2, 6, 8 and 12 the entire value of service contract cannot be added to the assessable value of the goods imported. About 50% of the value can be estimated as that will be relatable to the equipments imported. In the result, the amount of the value of the services to be included in respect of import relating to other than Marine i.e. LNG will have to be modified as follows :

In the case of offshore service by Six Construct Ltd. we find Item No. 2,5,10 and 12 are not relatable at all to the equipments imported. In respect of Item Nos. (1), (6) and (11) we hold that only 50% of the amount included by the Commissioner could be includible. As far as Item 4, namely Basis Engineering and Stability Calculation is concerned, we upheld the amount included by the Commissioner. In the result, the amount that has to be included in respect of offshore service in respect of Six Contruct Ltd. would be as follows :

For Marine Sub-contractor Services total value would come to 1616000 US$ out of which no portion was added by the Commissioner to the assessable value of goods imported. We do not propose to make any deviation on this aspect.

On the above basis the percentage of addition to be made would be as follows :

By applying the above ratio, out of the estimated value of45666000 US$ of Services in respect of Offshore Services by the Prima Contractor the amount to be included in the assessable value of goods would be 13,120,011 US$. Prime Contractor Services cover both LNG Terminal and Marine Works.

Now we will consider the enhancement consequent to the amendment to the agreement on 28th April 2000. The original value of offshore service at US$ 115.672 million was enhanced as US$ 149.376 Million. Out of the additional value of US$ 33.704 Million only a portion is relatable to equipments. Therefore, by applying the ratio of 28.73% the amount to be included in the assessable value will be as follows :

Thus out of the total value of US$ 149.37 Million Worth of Services, 36,524299 MUS$ worth of Services has to be included in the assessable value as follows :

The Commissioner took the view that on the issue of claiming project import benefit there has been no mis-declaration warranting confiscation under Section 111(m) of the Customs Act and therefore penal provisions of Section 111(a) are not to be invoked. In respect of mis-declaration of value of the goods that Commissioner took the view that the impugned goods are liable to confiscation under Section 111(m) of the Customs Act. He also held that penalty under Section 112(a) has to be imposed.

On the issue of confiscation, imposition of redemption fine and penalty we are inclined to accept the contention raised by the appellant. It is contended that the existence and the scope of offshore services contract were in the knowledge of the department, that in fact the first Bill of Entry was assessed by including the value of offshore services contract in the value of imported pipes. Apart for the above, since this is a case where provisional assessments were finalized, no penalty is liable to be imposed. In view of the above, we set aside that portion of the order of the Commissioner directing confiscation of the goods, imposition of redemption fine and penalty.

The assessments will be finalized taking into consideration the finding in this order on the eligibility to claim for concessional rate of Customs duty under Tariff Item 9801.00 as project imports and the quantum of value of offshore services contract to be added to the declared value of the equipments under Rule 9(1)(b)(iv) of the Customs Valuation Rules 1988.

Appeal Nos. C/519/2000 and C/520/2000

For the reasons we have already recorded while considering Appeal No. C/601/2000 we agree with the view taken by the Commissioner that the imports relating to SPM system are to be treated as Project Import under 9801.00 entitling concessional rate of duty. The direction given by the Commissioner to the Assistant Commissioner for further investigation is vacated. The Assistant Commissioner will proceed to finalize the provisional assessments on the above basis.

In the result, Appeal No. C/601/2001 filed by DPC stands partly allowed. Appeal No. C/519/2000 filed by DPC is allowed and the Appeal No. C/520/2000 filed by the Revenue is dismissed.