1. MR. ZIAHLLAH KAYANI (CHAIRMAN).-(l). By this common order, will intend to dispose off aforesaid
(2) Customs Appeal, filed by the appellants against Order-in-Appeal 75- 76/2009 dated 17.02.2009, passed by the Collector of Customs, Sales Tax & Federal Excise (Appeals), Lahore. These appeals have identical issues of law and facts and are, therefore, being heard, dealt with and disposed off simultaneously through this order.
2. That brief facts of the case are that in the light of FBR's clarification C.No.1(29)S&R-2/90 dated 16.02.2005 read with the Directorate of Customs Valuation & PCA, Karachi's letter No. 1160/98- XV/524 dated 01.02.2005, the Directorate of Intelligence & Investigation (Customs & Excise), Lahore registered a contravention case against the appellants alleging that they had not included as required under clauses (d) and (e) of section 25(2) of the Customs Act, 1969 read with paragraph 1(c) or WTO's Interpretative Note to Article 8 of WTO Rules on Customs Valuation and further read with rule 113 of the Customs Rules 2001 together with advisory opinion No. 4.1 of the WTO Technical Committee On Customs Valuation, the amounts of licence fees and running royalty in the customs value of their imports of CKD kits and parts (including replacement parts) during the period from July 2000 to June, 2005. These fees and royalties have been paid by the appellants to their foreign (Japanese) principal under the Licence and Technical Assistance Agreement entered on 01.04.1994 (LTA agreement). The amounts of such fees and running royalty paid by the appellants during the said period to their principal in Japan was Rs. 70,59,80,565/- and customs duty, sales tax and income tax calculated and declared recoverable were Rs. 24,70,93,197/-, Rs. 14,29,61,064/- and Rs.
2. 6,57,62,089/-respectively. On adjudication, the alleged short paid amounts were adjudged as payable besides penalties of Rs. 1,000,000/- inflicted on the appellants and Rs. 1000,000/- on their two clearing agents. Appellants preferred appeals which were also decided against the appellants.
3. The grounds incorporated in the common order impugned before this Tribunal are as follows:-
(a) That the Impugned Order proceeds on palpably flawed construction of the law and facts applicable to the instant case and it has failed to advert to the true construction of the entire circumstances affecting the instant case.
(b) That the Impugned Order has been passed in a slipshod manner and no reasons have been given in support of the findings. The learned Collector has confirmed the order in original without even considering the substantial question of law and facts raised in appeal. The Impugned Order has been passed without adverting to the Grounds and objections raised by the Appellants and the aspect of the case that the department has miserably failed to discharge the onus of proving the allegations and have not brought forth any evidence to establish them. Hence the department has failed to discharge the burden of proof.
(c) That the circumstances and the international trade in perspective of the World Trade Organization (WTO) regime, as raised in reply to the Notice have not only been ignored but have been brushed under the carpet in order to bring home the baseless contentions of the Detecting Agency which, least to say, are nothing but an hyperbole.
(d) That the learned Collector Appeals (the "Collector") has failed to notice the amendment of August 2000 brought about in the LICENSE AND TECHNICAL ASSISTANCE AGREEMENT dated 01.04.1994 (the "LTA Agreement") between the appellants and Honda Japan (the "Licensor"). The decision of the Collector therefore proceeded on a fallacy and is based on a mistake as to facts. The amendment was executed between the parties in August 2000 and entirely changed the tenor of clause 12.1(b) of the LTA Agreement. It was to the following effect: "Article 2 (Change of Royalty Rate) Article 2.1(b) of the Original license Agreement states "The royalty corresponding to ONE POINT FIVE PERCENT (1.5%) of the ex-factory price of each of the products assembled, manufactured, sold or otherwise disposed of by LICENSEE hereunder. For the purpose of this Article, the ex-factory price shall be deemed to be the Retail Price less Sales Tax and Commissions". For the purpose of this clause parties hereto agree to apply new royalty rates set forth." The clause prior to the amendment was as follows: "(b) the royalty corresponding to three percent (3%) of price of the Domestic Parts incorporated in the Products assembled, manufactured, sold or otherwise disposed of by LICENSEE hereunder. For the purpose of this Article, the price of the Domestic Parts shall be deemed to be the same as the price of corresponding parts of LICENSOR quoted in the then current price list of LICENSOR". It is clear from a comparison of the two that the amendment brought a sea change in the nature of an obligation called the royalty between the parties. The shape of the term described as royalty in the LTA Agreement and its true nature will be unfolded in the proceeding paragraphs but suffice it to say that it had no nexus with the imports."
(e) That it is established that in order for the royalty to be included in the transaction value of the imported goods, the basis must be the agreement between the parties (the LTA Agreement in this case) which would govern, in the ultimate analysis, the true nature of any amount to be added to the transaction value. Describing it by the name of royalty will make little or no difference since the mere fact will not ipso facto result in its addition to the transaction value.
(f) That the amendment brings forth ineluctably that the royalty shall correspond to the ex-factory price of each of the products assembled, manufactured, sold or otherwise disposed of by the licensee. It has therefore relation to the products assembled, manufactured, sold etc. And not to imports of any parts thereof. In order that the royalty in terms of Section 25 of the Act be liable to be included in the customs values, the two pre-conditions must be met, they are:- The royalty must be related to the goods being valued; and The royalty must be paid as a condition of sale of the goods being valued.
4. In the instant case the use of the term royalty merely denotes the amount being paid in lieu of the use of Honda symbols and insignia, etc. It is more akin to the intellectual property rights and their usage by and virtue of the amendment in the LTA Agreement it has clearly been de-linked and severed from imports altogether. None of the two conditions which are a sine qua non for including the royalty to the customs value is satisfied in the instant case.
(g) That we must bear in mind that duties of custom are levied on imports and exports. Under the GATT dispensation the royalty is required to be added in the customs value of the goods imported.
5. By a necessary corollary, if there are no imports then the issue of adding royalty does not arise.
6. Duties and taxes cannot be imposed on hypothetical situations; they can only be assessed and recovered on actual events taken place. The mere fact that the appellants are paying some form of a royalty does not create a nexus with all or any imports, for, as will be submitted, the appellants may not carry out, any imports at all. Be that as it may, royalty, if at all, has to be added to defined and ascertainable goods and the two should have a clear relation i.e. a certain amount of royalty should be identified with the imports of certain goods. This is the clear nexus that the law contemplates. Royalty cannot be divorced from goods nor can it be imposed in the air.
(h) That in order to arrive at the true nature of the charge described as royalty, the agreement must form the premise. This has been admitted to be the case by the Collector too. Article l2 of the LTA Agreement deals with the issue and is titled CONSIDERATION. The opening part of 12.1 reads as under: "In consideration of the rights and licenses and technical assistance granted and provided by LICENSOR hereunder, LICENSEE shall pay to LICENSOR".
7. 12.1(b) spells out the quantum and the method of calculation of royalty. It will be seen from the opening lines of 12.1 that the royalty is being paid in consideration of the rights, licenses and technical assistance granted and provided by the Licensor. The royalty therefore is in lieu of the "ordinary assistance" provided by the Licensor. The licensed products are the automobiles to be manufactured under the agreement as well as specific parts. It is to be seen that the technical know-how, information, etc. To be furnished are for studying the feasibility of local parts manufacturing, for manufacturing of local parts, for production, preparation of licensed products etc. What is important is that none of the assistance is in relation to the goods under import. Thus, the computation also has no bearing upon the imported goods or their value. In the agreement under question there is nothing indicating that royalty, payment is a condition of the sale of the imported goods. Thus the requirement of royalty being a condition of sale also is not satisfied. In sum, all payments are towards assistance rendered for setting up the plant and manufacture of products and none of this is in relation to the goods under import. Therefore, the other condition of the twin pillars, i.e., of the payment being related to the imported goods, also goes abegging.
(i) The Notice is vague and lacking in material particulars. As a first step, the Notice has to satisfy with clarity and exactitude as to which goods are being valued to which the royalty is to be added.
8. Since the Notice does not satisfy or identify, those goods, it must be concluded, on the basis of respectable authority that the Notice must be thrown out on this mere ground. From the grounds adumbrated, it is evident by now that the royalty is in consideration for and is being paid as a condition of sale of products and not on account of goods imported. The products, we must bear in mind are not being imported; they are being manufactured in Pakistan. The supply of parts may not take place at all and as will be explicated by incontroverted facts that the appellants imports a very small percentage of the parts from the licensor.
(j) That the assessm ent of custom duties must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia, by way of transfer of license or technical know-how for the purpose of manufacture of products, the same would not be computed for the said purpose. Any amount paid for postimportation services or activities, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duties or otherwise.
(k) That the original Article 12.1(b) referred to Parts and their deletions thereof in the products and made it the benchmark for calculation of royalty. However, in the amendment brought about, any reference to the parts was done away with and the sale of products was made the basis for calculation. The LTA Agreement defines the word "parts" and "product" differently and one is not included in the other. Products are not imported though parts may be.
(l) That the interpretative notes annexed with the WTO Valuation Agreement further clarify and establish the construction sought to be put by the appellants. In the relevant notes to article 8, paragraph 1(c), the following observation has been made:- The royalty and license fee referred to in paragraph 1(c) of article 8 may include, among other thing, payment in respect of patents, trademark and copy rights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value.
9. In essence therefore, the payment of royalty under the agreement is in fact "the charge for the right to reproduce the imported goods" and nothing more or less.
10. It is admitted on all hands that under the program of deletion a substantial number of parts used in the produce is being reproduced in Pakistan as a result of the technical assistance and know- how provided by the Licensor. For all intents the intention of the members and parties to the GATT Agreement was to include the payment of royalty only when it was related to the goods imported directly and specifically and not where it was merely a charge for the rights and technical assistance granted or for the right to reproduce the imported goods in the same or different forms.
(m) That it will be demonstrated in due course and by tangible evidence that the payment of royalty over a period of time is inversely proportionate to the import of parts from the licensor. A chart has been annexed with the appeal. It will be seen that royalty has progressively increased over the years while the imports have decreased. Had the payment of royalty been linked with the import, then obviously the royalty should have declined over the years. It will be borne in mind that the option was and is entirely with the appellants to order the parts as per their requirements, that there was no obligation on the Appellants to purchase the CKD packs at all. The LT A Agreement therefore is not about the sale of parts but is about the right to assist in the technical know-how and this is the distinction on which the true essence of the payment of royalty will be determined. It is trite principle that the courts should proceed on the basis that the apparent tenor of the agreement reflects the real state affairs.
(n) That the Notice is unlawful and bad since demands were straightaway raised purportedly under Section 32 of the Customs Act. However, that provision requires the issuance first of a show cause notice. The law is settled that demand notice in absence of statutory show cause notice is without lawful foundation. A thing required by law to be done in a particular manner must be done in that manner or not at all. Reliance is placed on: PTCL 2002 CL. 1 = 2001 SCMR 838.
(o) The Detecting Agency does not have any jurisdiction in the matter, since in post-importation matters, jurisdiction is vested in the only to issue show cause notice under Section 32. Reliance is placed on: CGO 12/2002 para 44 read with SRO 203(0/1995 dated 14.03.95 and SRO 917(0/2004 dated 11.11.04. PTCL 2007 CL. 78 at 97-100 = 2006 PTD 2237 at 2251-53.
(P) The Detecting Agency does not have any jurisdiction in the matter since the issue involved in the present Appeal is purely a valuation dispute under Section 25, and only Valuation Department has been designated as 'authorized officers' for purposes of Section 25. Other customs officer (including Detecting Agency) have not been designated as 'authorized officers'. Reliance is placed on:-
(a) SRO 917(0/2Q04 dated 11.11.04 designating Valuation Department as 'authorized officers' for Section 25 read with Customs Rules, 2001, Chapter 9 where all valuation functions/powers must be performed/exercised by the 'authorized officer',
(b) SRO 371(I)/2002 dated 15.06.2002, relating to the powers of other customs officers, which does not designate them as 'authorized officers' for section 25 purposes.
(q) Customs officers have no jurisdiction to recover any amount of sales tax at post importation stage. Neither the income tax can be recovered from the appellants as it has exemption certificates for the relevant years.
(a) Section 6(1) of the Sales Tax Act which clearly states that sales tax on imports is to be recovered as a duty of customs under the Customs Act except where a specific provision exists in this regard in the Sales Tax Act itself. Section 36(2) expressly confers such power to recover non or short levied sales tax. (It is infact, the exact equivalent of Section 32(3) of the Customs Act).
11. Therefore, since an express provision exists in the Sales Tax Act, the enabling provisions of the Customs Act under Section 6(1) do not apply and hence Collectorate of Customs has no jurisdiction.
(b) The Appellants are registered with the LTU Collectorate Lahore. Jurisdiction under the Sales Tax Act falls exclusively on the LTU Collectorate Lahore. Therefore, for any recovery of sales tax allegedly non or short levied, it was only those officers who were empowered to act. < (r) A notice must be precise and must state in detail the particulars of the case being made out against the importer. In the instant Appeal, the notice refers to both clauses (d) and (e) of Section 25(2). Obviously, both cannot apply to the same fact situation. In other words, the Department itself does not know which is the applicable provision (if any, which is denied).
(s) The Appellants are engaged in local manufacturing activities of car manufacturers. Thus the LTA Agreement was entered into before section 25 took its present form i.e. WTO regime mandated form. No question therefore could possibly arise of the LTA Agreement having been drafted to 'get around' the provisions of Section 25. The law is settled that agreements are to be interpreted as they stand strictly and literally and) without deviating or implying anything therein which is not supported by the intention of the parties. Reliance is placed on 1992 SCMR 19 at 27.
(t) The utmost importance to note that the LTA Agreement is License and Technical Assistance agreement. By means of the LTA Agreement, the Appellants are provided technical information, know-how and data to enable the Appellants to utilize the licenses for manufacturing vehicles at their respective car plants. In other words, the essence of the LTA Agreement is the transfer of automotive manufacturing technology to Pakistan, and the use in Pakistan by the Appellants of the intellectual and industrial property and proprietary rights that inhere in their principals (which are leading car manufacturer) with regard to the manufacture of motor vehicles. Hence the royalty paid to Licensor is not related to the imports by any stretch of imagination rather it is against the intellectual Property rights of Honda Japan.
(u) It is also important to note that because the level of industrial development in the country is not yet sufficient to enable the 100% local manufacture of motor vehicles, the Appellants (alongwith other car manufacturers) find it necessary to import the components and parts required for manufacturer in CKD (completely knocked down) form. As the name implies, a CKD kit contains, in 'kit' form, the components and parts required for one motor vehicle. A 100% kit would contain all the parts and components so required. The Government of Pakistan however, has an official policy, enforced through an official body known as the Engineering Development Board ('EDB'), which requires all OEMS to have what is known as a 'deletion program.' The deletion programme has been notified by the Government under various notifications were issued from time to time under the Customs Act. The deletion program requires the progressive indigenization (or local manufacture) of parts and components and the parts and components so indigenized are deleted from the CKD kits. Thus, progressively over time, various parts and components continue to get 'deleted' from the CKD kits (i.e. Cease to be imported). Appellants have achieved a considerable degree of deletion.
12. The equipments which now are included in the CKD kits has decreased to a considerable level of the total equipments required for manufacturing a motor vehicle. If one goes on to understand the transaction as per the figment of department's imagination then the Appellants would not be paying anything to Licensor once it is able to make the complete components of CKD in Pakistan and Licensor will be at some leisure that a company has been earning profits in Pakistan by using its famed name and intellectual property for not paying anything to it.
(v) That as consideration for the technical assistance, know how and technology being provided to it, the Appellants have to make payments to the foreign car manufacturer. It these payments which the Department (wrongly) claims must be added to the value of the CKD kits under section 25(2). The Articles of the LTA Agreement binds the Appellants to make certain payments referred to as the Technical Know-How fee and Royalty payments. As is clear, these payments are in consideration for the technical assistance, data, etc. Being provided in terms of LT A Agreement and not otherwise. The Article l2 of the LTA Agreement provides for consideration to be paid by the Appellants to Licensor for the rights and license and technical assistance granted and provided by Licensor to the Appellants under the LTA Agreement. The consideration is divided into two heads i.e. Article 12(l)(a) and Article 12(l)(b). Article 12(l)(a) provides for an initial license fee for each model of the product and for each full model change of the product, to be assembled, manufactured, sold or otherwise disposed of by the Appellants under the LTA Agreement. Article 12(1) (b) provides for royalty to be paid on continuing basis in consideration of the Know How, technical assistance provided by the Licensor to the Appellants. The said royalty is to be calculated on the basis of a given formula which prior to amendment in LTA Agreement on August 1, 2000, was of price (of domestic parts incorporated in the products assembled, manufactured,/sold, etc. And subsequently 1.5% of the ex factory price of each of the products assembled, manufactured, sold etc. It is worth mentioning here that LTA Agreement is registered with the State Bank of Pakistan SBP and the fees under the LTA Agreement are remitted by the Appellants to Licensor in accordance with the permission of SBP.
(w) The crucial question, it is submitted, is simply this: what was the intention of the parties (i.e. Honda Japan and the Appellants) in providing for the payment of running royalty in terms of Articles of the LTA Agreement? It is submitted that the intention of the parties is clear and obvious on the face of the LTA Agreement. As expressly stated in Article l2, the payments are in respect of the technical know-how, information and data that is the intellectual and industrial property of Honda Japan and which is essential to enable the Appellants to manufacture Honda vehicles locally.
(x) The running royalty payment was (and is) inversely proportional to the goods being valued in terms of clause (d), i.e., the CKD kits. In other words, as the imported goods continue to decrease (because of progressive deletion), the amount of the running royalty continues to increase. Indeed, the running royalty will reach its maximum when the import of parts and components will reach its minimum (i.e., becomes zero once 100% localization has been achieved) and the royalty will continue to be paid thereafter, i.e., even there is no import at all.
(y) It is also a requirement of clause (d) that the payment of the royalty be a condition of sale of the CKD kits and be payable as such (whether directly or indirectly). It is pertinent to note that the LTA Agreement expressly provides that in respect of any CKD kits that may need to be used, the terms and conditions of such sale shall be agreed upon separately. In other words, the provisions of the LTA Agreement do not relate to any sale of the CKD at all. It necessarily follows that the payment of the running royalty under the LTA Agreement was (and is) not, and cannot be, a payment which is a condition of sale of the CKD kits.
(z) As regard Section 25(2)(e), it is submitted that it is applicable only if all of the following conditions are met:-
(a) there should be a subsequent (i.e., post importation) resale, disposal of use of the imported goods;
(b) the local importer should realize proceeds from such resale, disposal of use of the imported goods, i.e. Obtain some amount from a third party; and (c) a part of such proceeds so obtained should accrue directly or indirectly to the foreign seller.
(aa) A crucial concept and requirement of clause (e) is that of 'proceeds', since it is only if a part of the 'proceeds' accrue directly or indirectly to the foreign seller that such portion of the 'proceeds' can be added to the transaction value. In other words, if the local importer (such as Appellants) makes a subsequent (i.e., post-importation) resale, use or disposal of the imported goods (in this case, the CKD kits) and realizes any proceeds there from, and a part of such proceeds accrues directly or indirectly to the foreign seller (in this case, Honda Japan), then the part of the proceeds which accrues to the foreign seller can be added to the transaction value. As is obvious, the payments made under Article l2 of the LT A Agreement do not, and cannot, come within the meaning of 'proceeds'. The reason is that the 'proceeds', if any, which can come within the scope of clause (e) are the amounts received by the Appellants from its transactions with third party customers. The payments under Article l2 however, are being made directly by the Appellants to Honda Japan and do not relate to or involve any such transaction. By no stretch of the imagination can such payments be regarded as 'proceeds' and hence the entire case against the Appellants on this basis is wholly misconceived.
13. Reliance for the above submissions is placed on the following two decision:-
(a) (2007) 213 EL T 4, a decision of the Supreme Court of India, where the Court considered in almost the same circumstances a technical assistance agreement between Toyota and an Indian manufacturer which was in terms identical to the LT A Agreement between Appellants and Honda Japan. The (Indian) CESTAT held (at para l2) that the royalty could not be added to the imported goods. This view was upheld by the Indian Supreme Court (at paras 31- 33). b.2004 PTD (Trib) 2712.
(cc) That the customs duties shall only be levied on goods imported into Pakistan under Section 18(1) of the Act, with the term 'goods' defined as all moveable goods under the Act. This is consistent, with the universally accepted meaning of the expression 'custom duty.
(dd) It is specifically averred that, royalty is being paid under the LT A Agreement by the Appellants on a continuing basis in consideration of the Know-How and technical assistance provided by Licensor to the Appellants and the said royalty is neither related to the goods being valued, i.e. Imported goods, nor is it a condition of sale of imported goods. The formula used for the calculation of royalty, has no relevance to the basis of payment of royalty which is material for the purposes of value addition under section 25(2)(d). Similarly, a fixed lump-sum license fee paid under the LTA Agreement is in consideration of right(s) and licensees) to assemble, manufacture, sell, etc. Each model of the Products and/or for each full model change of the Products. The license fee is neither related to the goods being valued, i.e., imported goods, nor is it a condition of sale of imported goods, as it is mandatory even if the Products were being 100% locally manufactured by the Appellants. The same is true for royalty which will still be payable under the LTA Agreement even if the Appellants were to manufacture the Products 100% locally in Pakistan, as the royalty is payable on the basis of continued provision of Know-How and technical assistance and not as a condition of sale of imported goods. Section 25(2)(e) is not applicable as none of the conditions precedent are fulfilled, and the baseless charging of this subsection shows an over-ambitiousness on part of the customs staff to support their otherwise illegal and baseless demands. Therefore, the payment of license fee and royalty by the Appellants to Honda Japan under the terms of the LTA Agreement are not dutiable and are outside the purview of section 18 and 25 of the Act, which only provide for custom duties on imported goods and value addition with regard to the same.
(ee) That Rule 113(3) of Customs Rules, 2001 states, inter alia, that the customs value of shall not include the charges or costs for construction, assembly or technical assistance undertaken after importation of goods such as industrial plant, machinery or equipment, provided that they are distinguished from the price actually paid or payable for the imported goods. Furthermore Rule 11(4) of the Customs Rules, 2001 states that the price actually paid or payable refers to the price of the imported goods and the flow of dividends or other payments from the buyer to the seller, which do not relate to the imported goods, shall not be part of the customs value. The submissions above make it sufficiently clear that the payment of royalty under Article 12(l)(b) of the LTA Agreement is for provision of Know-How and technical assistance and has no connection with imported goods and is clearly distinguishable from the price actually paid or payable for the imported parts/goods.
14. Moreover, it is submitted that the parts for the manufacture and assembly of the Products are infact imported from various sources and countries other than Honda Japan, thus negating any nexus with royalty paid to Honda Japan on the basis of imported parts.
(ff) That Article 4 of the LTA Agreement provides, inter alia, for supply of Parts (i.e. The component parts of the Products) at reasonable prices, and not at a discount. The Appellants pays the full price for the Parts imported from Honda Japan, or its affiliates and subsidiaries. Hence any allegation or contention on part of the Respondent that the payment of royalty or license fee under the terms of the LTA Agreement is a roundabout method of making additional payments to Licensor for the imported Parts is baseless and contrary to facts. There is no case for value addition on the basis of section 25(2)(e) of the Act, nor is it possible to read into the LTA Agreement any terms which would bring the royalty and license fee paid under it within the purview of section 25(2)(d) of the Act. Therefore, the allegations leveled in the Notice are baseless and contrary to facts and law, and the Notice as well as the Impugned Order is liable to be struck down.
(gg) That in order to better understand the concept of customs valuation and value addition under section 25 of the Act, the source from where the present section 25 has been directly borrowed may be looked into. With effect from January 1, 2000 the new system of valuation based on transaction value under the WTO Valuation Agreement was implemented. Section 25(1) has been taken from Article I of the WTO Valuation Agreement - Rules on Customs Valuation ("WTO Rules on Customs Valuation"), whereas section 25(2)(d) & (e) are the exact replicas of Article 8(1)( c) & (d) of the WTO Rules on Customs Valuation. The WTO Valuation Agreement has been implemented in numerous other countries in the world which are members of the WTO, including, India, China, Canada, USA etc. A good explanation of the WTO Rules on Customs Valuation can be found in WTO Valuation Agreement-Interpretive Notes ("WTO Interpretive Notes"). Under the heading 'Note to Article 8' in the WTO Interpretive Notes, paragraph 1(c) has been explained as follows (a) The royalties and license fees referred to in paragraph 1(c) of Article 8 may include, among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value.
(b) Payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for export to the country of importation of the imported goods.
15. The above notes in the WTO interpretive Notes make it absolutely clear that any payments made by the Appellants under Article 12(1) of the LT A Agreement for the rights and licenses to reproduce (i.e. Assemble and/or manufacture), distribute or sell the Products in Pakistan* and for Know-How and technical assistance provided by Honda Japan, shall not be added under section 25(2)(d) of the Act. The license fees and royalty under the LTA Agreement, as pointed out above, are being paid in consideration of the right and licenses and technical assistance granted and provided by Honda Japan to the Appellants under the LTA Agreement. Therefore, the payments for the rights and licenses under Article 12(l)(a) are not dutiable under note No. 1 above, and payments of royalty under Article 12(l)(b) for Know-How and technical assistance are not dutiable as these payments are either for the sale of imported parts (as pointed out above in detail) nor is it a condition for export of the imported parts from Honda Japan to Pakistan. This view is supported by the findings in similar matters before the courts in India, where WTO Rules on Customs Valuation were implemented through Customs Valuation (Determination of Price for Imported Goods) Rules, 1988 under Section 14(1) of the (Indian) Customs Act.
(hh) That the Impugned Order on part of the Respondent is an attempt to illegally and wrongfully collect customs duty on past clearances, allegedly due on account of departure from existing practice of the department in attempting to include all forms of royalty and licence fees, irrespective of their nature and terms of payment, as value addition under Section 25(2)(d) & (e) of the Act is not only contrary to section 6 of the General Clauses Act, 1897 and Article l2 of the Constitution of Pakistan, but is also contrary to Rule 74 of the Custom Rules 2002. Rule 74 of the Customs Rules 2002 states and confirms, inter alia, that 'where the Collector contemplates a change to a higher assessm ent than has been the practice, he should not take action upon his view until he has obtained orders, but such orders would not have retrospective effect. The law is not altered but the law has been acted upon in a particular manner through tariff rulings, and in light of such interpretation, certain duty is charged. The said interpretation shall continue till a period it is not altered. As soon as it is altered it shall be effective from the date of its dong so. In view of the above the custom duty allegedly due from the Appellants under the Impugned Order cannot be recovered from it as the same pertains to past clearances of five years and also because of the fact that the custom duty being claimed is in respect of past and closed transactions and the Appellants are not in a position to pass the: burden of such tax to the consumer. Hence, the Notice relates to past and closed transactions and is liable to be struck down on this ground alone.
(ii) That it is settled law that tax statues should be strictly construed, and where there are more than one possible interpretation to the provision of fiscal/ tax statute in question, the interpretation which is most favorable to the tax payer shall be preferred to be given effect to.
(jj) Lastly he prayed that the appeal may very kindly be accepted and the Impugned Order dated 17.02.2009 and the Order in Original No. 08/2009 dated 27.01.2009 be set aside.
3. The Deputy Collector filed parawise comments on grounds of appeal which are as under:-
(a) Denied. The impugned speaking order has been issued after detailed scrutiny/facts of the case and relevant provisions of law and is well within the four comers of law.
(b) as already stated in the preceeding paras.
(c) Denied. The adjudicating authority while deciding the case kept in consideration all circumstances and the international trade in perspective of WTO. In the under reference case, the seller and the buyer are related parties. Further there was contract between them by which the buyer has to pay a certain percentage of ex-factory price of each of the product assembled, manufactured^ sold or other-wise disposed of by them in Pakistan to their principal abroad in the form of running royalty. Accordingly in terms of clauses (d) and (e) of sub-section (2) of section 25 of the Customs Act, 1969 these amounts being paid to principal abroad as the condition of sale of goods being valued shall have to be added in the customs values of these goods for assessment of duty and taxes thereon.
16. That the article l2 of the agreement covers the subject consideration. According to which the licensee was to pay royalty equal to 3% of-price of domestic parts incorporated in the product manufactured, assembled, sold or otherwise disposed of by the licensee and for the purpose the price of domestic parts was to be taken same as the price of corresponding foreign parts quoted in the relevant price list of the licensor. As all the other assembler/manufacturer in view of valuation ruling dated 07.03.2005 are adding royalty @ 3% in the custom value, hence at par with other assemblers manufacturers the appellants are equal in the eye of law.
17. That in the light of FBR's clarification C.No. 1 (29)S&R-2/40 dated 16.02.2005 read with Directorate of Customs Valuation and PC A, Karachi letter No. 1/60/98-XV/524 dated 01.02.2005 and further read with paragraph 1(c) of WTO's interpretive note to article 8 of WTO rules on customs valuation and advisory opinion No. 4.1 of the WTO technical committee on customs valuation, the royalty and fees paid by the appellants to their foreign principals under the LTA agreement have lawfully been worked out.
18. That the appellants could never import the CKD kits/parts of Honda brand cars for their assembly and sales in Pakistan without having paid or agreed to pay such initial fees and royalty nor could they use the IPRs of their principals without the discharge or agree to discharge such payments.
19. Section 25 of the Customs Act, 1969 is much clear that the adjustments as prescribed under section 25(2) clause (d) and (e) of the Customs Act, 1969 be added to arriving at Customs Value.
20. "(d) there shall also be added to such price, royalties and license fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fee are not included in the price actually paid or payable; and "(e) there shall also be added to such price, the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller".
21. Hence all the conditions regarding inclusion of adjustments to arrive at actual customs value is as per law.
(g) Though WTO members formally adopted GATT yet there are several regimes where because of difference in economic exigencies, international practice is not uniform. The field of royalty license fees/technical fees as a cost/price of transfer of technology and IPRs is one of such fields where divergent practice is being followed. In under reference LT A Agreement, the scheme of charging initial fees and running royalty as a condition of sale of foreign parts is clearly evident. LT A 12(l)b provides that royalty to be paid on the ex-factory price of each of the product assembled manufactured, sold or otherwise disposed of by the appellants. Thus the royalty paid by the appellants are calculated on the retail price of vehicle for sale and includes all kind of components! Parts i.e. Imported or domestically purchased, as the appellants could not use the IPRs of their principal without discharge of such payments which the licensor had given to licensee to use for the purpose of manufacturing and sale of branded automobiles. Hence the royalty is precondition for manufacture/ sale.
(h) That as already detailed in the light of LTA agreement the licensee was to pay royalty equal to 3% price of domestic parts incorporated in the product assembled, manufactured, sold or otherwise disposed of by the licensee and for this purpose the price of domestic parts to be taken same as the price of corresponding foreign parts quoted in the relevant price list of the licensor. A complete mechanism has been provided in the articles of LTA agreement i.e. Licensee was barred from removing or altering any trade mark, trade name etc. The initial fees were linked to the model or change of models of the products which could not be undertaken without having been imported and used the foreign parts supplied by the principals. Similarly the use of domestic parts was conditional upon the use of foreign parts imported from the source determined by the principal and the principal for having sustained loss of business (lost of opportunity cost). The payment of initial fees and running royalty were undoubted prerequisite for the purchase, sale, import of foreign parts. In the instant case, license fees (initial fees) are being paid directly to the principal as a condition of sale and the amount of running royalty is being paid directly to the principal out of proceeds of sale of product incorporating the imported parts alongwith local parts which are covered for adjustment in custom value. The expression either directly or indirectly has perhaps been used by WTO with an understanding that there is a practice in the international trade to separate license fee and royalty from price invoiced for the trading of goods in the international market. Hence all such payments to be included in the Customs value.
(i) That the Show Cause Notice is much elaborative and covers in its ambit all the factual/legal details.
22. 0) That under article l2 which covers the subject of consideration, the licensee was required to pay initial fee of US$ 500000/- for each model of products, to be assembled, manufactured, sold or otherwise disposed of by the licensee in such a way that 50% of the payment was to be made within five days after the relevant approval and authentication of Govt, of Pakistan and 5% was to be paid within one year from the commencement of commercial product of the relevant model.
23. Besides the licensee are required to pay US$200000/- for cash full model change of the products to be assembled manufactured, sold or others wise disposed of by the licensee within five days of the approval and authentication of aforesaid items category. Two categories of payments, have been specified in the agreement as initial fees; moreover the licensee was to pay royalty equal to 3% of the price of domestic parts incorporated in the products. Hence the view of LT A agreement that all such payments are to be adjusted while determine the customs value.
(k) That the LTA agreement covers production and sale of branded goods (Honda brand cars) and incorporation of domestic parts with foreign parts for the production and sale of branded goods under strict control of the principal and the purpose of import of foreign parts was the production of branded goods by consuming them for industrial purpose in conjunction with domestic parts of the specifications and quality approved by the principal under LTA agreement. Accordingly, the running royalty and technical fee (license fee) royalty are ipso facts liable to be. Added to DV (TV) of said CKD kits/parts.
(l) That as already detailed the purpose of the import of foreign parts was the production of branded goods by consuming them for industrial purpose in conjunction with domestic parts of the specifications and quality approved by the principal. It is not a case of re-production of imported goods and in-order to accommodate deletion programme approved by the Govt, of Pakistan permission for using domestic parts of the quality meeting the standard set by the principal along side foreign parts was granted and the running royalty with reference to domestic parts evaluated at par with their foreign substitutes as per price list determined by the principal can not be treated as a royalty payment on the production and use of domestic parts. This is only a scale used for the purpose of statistical convenience. Hence to be included in the customs value.
(m) That the adjustments of technical fee, licensee fee and royalty has been made in view of foreign goods and production, manufacturing and sale of Honda branded vehicles in view of LTA agreement and as per details provided by the appellants.
(n) That Show Cause Notice issued to the appellants were valid, legal and within time, which clearly fall under Section 32(2) of the Customs Act, 1969 because the appellants deliberately evaded payment of leviable Customs duty & taxes on technical fee, licensee factual royalty. Hence the Show Cause Notice is in accordance with the provision of law.
(o) That the detecting agency only made out contravention report and show cause notice validly/ legally as per provision of law in terms of section 32 has been issued by the Customs Collectorate of Adjudicating Authority i.e. The Additional Collector of Customs.
(p) That the detecting agency has not excersied the power of section 25 of the Customs Act, 1969 rather they have only calculated the evasion of duty/taxes while adjusting the payments made by the appellants to their principal and all such information was provided by the appellants read with LTA agreement.
(q) That in such circumstance, as all the custom duties/ sales tax is short levied which was due at import stage, hence it is the duty of the customs Collectorate to recover such short levied amount of sales tax as well in terms of section 36 of the Sales Tax Act, 1990 as well.
(r) That the appellants had not included the running royalty, technical fee and license fee etc. In the amount paid to their foreign principal in the customs value of their imported CKD kits/parts as required under the provisions of clause (d) and (e) of subsection (2) of section 25 of the Customs Act, 1969, which have correctly been invoked.
(s) That the LTA agreement in letter and sprit covers in its ambit all the required adjustment i.e. Initial fee/ license fee and royalty paid or payable by the buyer to the seller, hence in terms of Section 25(2)d & e it has to be adjusted for determining of customs value.
(t) As already stated in the preceding paras.
(u) That the issue is not EDB or deletion programe. The appellants in view of LTA agreement, have paid the technical fee/license fee and royalty to their principals which has been included in the customs value and the appellants had not included such payments in customs value, hence violated the provision of Section 25(2)d & e of the Customs Act, 1969.
24. That article l2 covers considerations regarding, initial fee and payment of royalty by licensee on the price of domestic parts incorporated in the products assembled, manufactured, sold or otherwise disposed of by the licensee and for this purpose, the price of domestic parts was to be taken same as the price of corresponding foreign parts quoted in the relevant price list of the licensor. Though every article has different language yet in view of LT A agreement read with the provisions of law, payment paid or payable by the buyer to the seller directly or indirectly were to be included while determining the customs value of imported goods.
(w) It is binding that the appellants shall purchase such kits/parts from the said collaborators only and required to produce given quantum of finished goods i.e. Vehicles and they are not allowed to sell such imported part/kits locally. LT A agreement is a part of the proceeds of subsequent sale.
25. The appellants and their principals are related parties and the said agreement has duly given protection to said business. The agreement covers branded goods (Honda Atlas Cars) and incorporations of domestic parts in specification and quality approved by their principals. The principals full control/authority over the appellants from installation/assemble of unit fall the sale of assembled/manufactured vehicle and the payments i.e. Technical fee license fee and royalty for the benefit of seller (principal) paid or payable by the buyer directly or indirectly can at best be termed to be added in the customs value.
(X) That such argument is utopian by character because the international scenario of trading in IPRs has traditionally been such that on major components, value is added on account of the charges for IPRs, the owner of such rights never transfers complete 100% technology to importing countries and customs duly is not the only national tax in any state. There are several other taxes like excise duty, vats, service taxes etc. Which can be alternatively imposed on forex remittances under franchise arrangements.
(y) That the words "patent and know how" have been defined in article 1(5 & 6) of the agreement, these words are to be read with royalty as define in article l2 of LT A agreement. Needless to mention that the royalty is an essential part of customs value/ transaction value of the goods imported even if it is subsequently paid to the principal abroad. Articles 12(1 )(b) provides the royalty to be paid on the ex- factory price of each of the products assemblers, manufactured, sold or other Wise disposed of by the appellants. Thus the royalty paid by the appellants are calculated on the retail price of vehicle. Hence the royalty paid shall be added in the value determined for the payment of custom duty and other taxes on (he imported kits/parts.
(z) The appellants advocate has admitted all the requirements of section 25(2)(e) as well as detailed earlier, royalty is calculated on retail price of the vehicle, which covers (i) use of imported parts, in conjunction with the domestic parts and benefit of proceeds directly in the shape of royalty accrue to the foreign seller-(principal).
(aa) That the appellants advocate has misconceived/mis- constructed article l2 which clearly reads that article 12(l)a of LT A agreement mentions, the initial fee for each model of product and article 12(1 )(b) provides the royalty to be paid on ex- factory price of each model i.e. Retail price, less sales tax commission which has to be added in determining the customs value of goods.
(bb) That India precedent (civil appeal No. 3635 of 2006, decided by Supreme Court of India on 17.05.2007) is entirely different in facts and circumstances from the one implied in the present appeal. In the Indian case, plant and machinery (Capital goods) were imported and royalty was agreed in the relevant contract between the foreign principal and Indian manufacturer for payment offer installation of the capital goods and for the manufacture of licensed goods with such capital goods. The Indian Supreme Court accepted this royalty payment arrangement as a condition subsequent to import, not a condition precedent to the import of plant and machinery and ruled that amount was not includible in the customs value of capital goods but did not bar its inclusion in the value of goods imported by the Indian licensee for use in the subsequent manufacturing activities. Thus Indian precedent is not applicable in this case.
(cc) That Section 18 of the Customs Act, 1969 not only deals with the customs duties to be levied on goods imported into Pakistan, it rather deals with the value of such goods as determined under Section 25 or as the case may be Section 25A. In the instant case levy of duties is not the issue, rather determination of customs value of imported goods as embedded in terms of Section 25(2)d & e as the technical fee license fee and royalty was not included in the customs value by the appellants.
(dd) As already explained in the preceding paras.
(ee) That application of rule 113(3) & 4 of the Customs Rules, 2001 para 74 of the Customs General Order under 12/2002 dated 15.06.2002 and Section 6 o the General Clauses Act, 1897 reveals that Rule 113 (3) & (4) is not tenable in the instant case because it excludes from the price paid or payable, charges and other payments related to the activities carrie out by the licensee, which are not covered in th LTA agreement dated 01.04.1994 nor the payment, particularly running royalty by the licensee under the said LTA agreement is a result of any dividend accruable to the licensee by using domestic parts/ foreign parts in the manufacture and sales of branded cars.
(ff) That article 4 deals with the supply of parts at manufacturing facilities.
26. 4.1. Upon the request of the licensee, licensor shall sell, at reasonable price and subject to the terms and conditions separately decided from time to time between the parties parts and the manufacturing facilities to licensee or any purchasing agency designated by it.
27. 4.2. Licensee shall not remove or alter any trade mark, trade name, service mark or other identification affixed or indicated on the parts or manufacturing facilities supplied by Licensor.
28. Article 4 has to be read with articles l2 regarding payment of technical fee/license fee and royalty by the buyer to the seller the inclusion/adjustment of which is covered under Section 25(2)(d) & (e) of the Customs Act, 1969.
(gg) That since January, 2000, the new system of WTO valuation based on transaction value has been implemented. Section 25 of the Customs Act, 1969 has peculiar features. Transactional value is a ground value on the basis of which customs value is worked out. The additions and charges in the transactional value made for transforming it into customs value are legally known as adjustments. These adjustments are prescribed in sub-section (2) of Section 25. Clauses (d) and
(e) of the said subsection are reproduced below:- "(d) there shall also be added to such price, royalties and license fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fee are not included in the price actually paid or payable; and "(e) there shall also be added to such price, the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller".
(hh) In the provisions of clause (d), the words "related to" "either directly or indirectly" "as a condition of sale of the goods being valued" and "to the extent that such royalties and fees are not included in the price actually paid or payable" are important. Similarly the words "the value of any part of the proceeds are use of the imported goods that accrues directly or indirectly to the seller" are important. In the instant case, license fees (initial fees) are being paid directly to the principal as a condition of sale and the amount or running royalty is being paid directly to the principal out of the proceeds of sale of products incorporating the imported foreign parts alongwith local parts.
29. The use of the expression "either directly or indirectly" carries a very- wide interpretation and is generally taken to mean that all payments on the relevant accounts whether made as a part of invoice price or separately and whether made directly to the licensor by the licensee directly or indirectly to the licensor by the licensees indirectly are covered for adjustment in customs value.
30. This expression has perhaps been used by WTO under with an understanding that there is practice in the international trade to separate license fees and royalties from price invoiced for the trading of goods in the international marked and this understanding appears to be a reasons that a clear cut clause has been used in the aforesaid legislation that license fee and royalties are addable to the customs value" to the extent that such royalties and fees are not included in the price actually paid or payable". The customs valuation law does honor genuine business practices but carries no care for diversions aimed at undermining the legitimacy of demand by the customs administrations for due border tax liabilities. The words "related to" include direct and indirect relation as well as near remote relation.
(ii) That the deliberately evasion/short levy of duty is not hit by the doctrine of closed and past transaction as the sub-section (2) of section 32 have time limitation of five years for realization of duty amounts not levied, short levied or erroneously refunded. In such cases and such doctrine can be invoked only if the time limitation have expired and no action for the realization of payable duty amounts has been initiated otherwise than appears to be no justification for prescribing time limitation in section 32. In fact, time limitation of section 32 themselves determines the actionable status of the transactions subject to cognizance under that particular section. Hence the notice is within time and order, passed by the authority is valid and lawful.
(jj) Lastly he prayed to dismiss the appeal.
4. At the time of hearing the Advocate of the appellants emphasized on the following points
(i) That in terms of section 25(1 )(d) of the Customs Act, 1969 royalty is payable in respect of imported goods which are the subject matter of valuation before the Customs authorities and which the buyer is under the mandatory legislative obligation to pay either directly and indirectly as a condition of sale and if such royalty is not included in the price actually paid or payable.
(ii) That royalty is paid on vehicle parts (CKD Kits) from various sources excluding Japan and has thus no nexus with the royalty and fees being paid by the appellants.
(iii) That the provisions of Section 25(d) of the Customs Act are complemented by the provisions enumerated in Article 8(l),(c),(d) of WTO Customs Valuation Agreement.
(iv) That the import in respect of which royalty has been demanded under post clearance are past and closed transactions.
(v) That identical matter pertaining to other assemblers of Toyota Suzuki Motor Car stand decided against revenue by a Division Bench of Customs, Excise & Sales Tax Appellate Tribunal Karachi Bench-I, in Appeal No. Custom ANK-512/6/K-80/06 and H- 161/2008 order dated 6.4.2008.
(vi) That the matter of payment of royalty in an identical case of a Motor Car Assembler in India stood decided in favour of the Assembler by Supreme Court of India vide their judgment reported as (2007) 213 ELT 4.
(vii) That in terms of Rule 113(3) of Customs Rules, 2001, the customs value of the imported goods shall not include the charges or costs for construction, assembly or technical assistance under taken after importation of goods such as Industrial Plant, machinery or equipments, provided that they are distinguished from the price actually paid or payable for imported goods.
(viii) That Rule 113(4) of the Customs Rules, 2001 supports the appellant's contention that the price actually paid or payable refers to the prices of the imported goods and the flow of dividends or other payments from the buyer to the seller which do not relate to the imported goods, shall not constitute a portion of the customs value.
(ix) That Article 12(F)(b) of the license and technical assistance agreement is in conformity with the provisions of above rules.
(x) That the payment of the running royalty has always been inversely proportional to the imported goods (CKD Kits) in terms of clause (d). Even if the maximum deletion is achieved and there are zero imports the royalty will continue to be paid.
(xi) That in terms of section 25(2)(e) that value of any part of the proceeds of any subsequent resale disposal or use of imported goods which accrues directly or indirectly to the foreign seller necessarily needs to be included in the dutiable price of the imported goods.
(xii) That the payment made by the appellants under Article l2 of LT A Agreement are not hit by the meaning of the word proceeds as used in section 25(2)(e) of the Customs Act, 1969 since these payments are being made directly by the appellants Honda Japan and are not related to the imported goods. ) (xiii) That the payment of royalty in terms of the judgment of the Honourable Supreme Court of India and judgments delivered by the Appellate Tribunal Karachi Bench-I in an identical case is an academic issue and as such does not necessarily invoke the mischief of misdeclaration as enumerated in section 32 of the Customs Act, 1969. The Departmental Representatives argued as under:-
(i) That seller and buyer are related parties are governed by LTA Agreement under which the appellants is obliged to pay certain percentage of ex- factory price of the every product assembled, manufactured, sold or otherwise disposed off the following principals in the form of running royalty by the appellants in Pakistan.
(ii) That in term of Article l2 of the LTA Agreement the appellants are obliged to pay an amount of royalty equal to 3% of the price of domestic part incorporated in the product manufactured, assembled sold or otherwise disposed off by the appellant to the their foreign principal. The value of the domestic parts is to be taken at par with the price of corresponding foreign part quoted in the relevant price of the foreign principal.
(iii) That the subject amount worked out and demanded by the Department from the appellants are in conformity with para 1(c) of WTOs Interpretative Note of Article 8 or WTO rules on Customs valuation and advisory opinion No, 4.1 of the WTO Technical Committee on Customs Valuation.
(iv) That apart from all other considerations as per General Clauses incorporated in LTAs concluded between Car Assembles and their foreign Principal at large in identical cases. The licencee can never import the CKB Kits/parts of any international brand vehicles for their assembly and sales in Pakistan without having paid or agreed to pay such initial fees and royalty nor could they use intellectual property rights of their principals without discharging or agreed to discharge such payments. In a nut shall the royalty is a precondition for manufacture/sale of any famous branded products in another country. In other words the payment of initial fees and running royalty are a universal inbuilt contractual pre-requisite for the purchase/sale/import of foreign parts. As such these payments are bound to be invariably included in the customs value.
(v) That all the computation of amounts of payable technical fees and royalty has been worked out by the department after necessary adjustment period- wise in view of import manufacture of sale of Honda Branded vehicles in terms of LTA Agreement and data submitted by the appellants.
(vi) That show cause notice is valid legal and within time since the act of deliberate evasion of payment of customs duty and taxes, technical fees, license fees and royalty is a patently established.
(vii) That the amount paid by the appellants by way of running royalty, technical fee, license fee paid to the principal has not been included in the customs values of the imported CKD Kits /parts in terms of provisions of clauses (d) & (e) of sub-section (2) of Section 25 of the Customs Act, 1969 and which the appellants are under an statutory obligation to pay.
(viii) That deletion, program has no direct bearing on the payment of technical fee, license fee, royalty remitted to their principals by the appellants.
(ix) That the facts and circumstances of the present case are different from those of the quoted precedent decided by Supreme Court of India on 17.5.2007.
(x) That the judgment of the Customs Appellate Tribunal Bench-I Karachi relied upon by the appellant's advocate is based upon the Indian Supreme Court judgment which is not relevant in the facts and circumstances of die present case.
(xi) That the interpretation of Rule 113(3) & (4) of the Customs Rules read with para 74 of the Customs General Order 12/2001 dated 15.6.2002 is Section 6 of the General Clauses Act, 1897 as given by the appellants advocate supporting their interpretation in respect of the royalty and license fee is based on misconception.
31. 6., Rival submissions heard. Case record examined^ Following observations are made by this forum.
32. According to clause (d) of sub-section (2) of section 25 of the Customs Act, 1969, there shall also be added to the price, royalties and license fees related to the goods being valued that the buyer must pay either directly or indirectly as a condition of sale of the goods being valued to the extent that such royalties and fees are not included in the price actually paid or payable. In this case the buyer is paying 3% royalty charges directly and it is a condition of sale also. Hence this payment attracts the aforesaid provisions of law.
33. The concept of transaction value clearly says that the transaction value is the one which is actually paid or payable. Provisions of clause (e) of subsection (2) of section 25 of the Customs Act, 1969, further provide that there shall also be added to the price the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller. If for argument sake it is accepted that since the royalty paid by the appellants are not related to imported goods, even then the amount so paid is a payment which accrues indirectly to the seller as a condition of sale and hence needs to be added to the price actually paid or payable.
34. The Directorate General of Customs Valuation & PCA after thorough examination of the matter communicated its opinion to the Board vide its letter No. 1/60/98-XV/524 dated 01.02.2005, wherein it has been concluded that the royalty @3% paid by appellants are to be added to the price of imported CKD kits. The Board vide its letter C.No.1 (29)S&R-2/90 dated 16.02.2005 concurred with the action initiated by the Collectorates for the recovery of customs duty and other taxes on account of non inclusion of royalties/technical assistance fees in the import value of CKD kits on past clearance and future imports of the concerned car assemblers.
35. The appellants have taken the plea that the Running Royalty is being remitted in respect of the deleted components only and as such the remitted amount is not related to the imported CKD kits.
36. Hence, clause (d) and (e) of sub-section (2) of section 25 of the Customs Act, 1969 cannot be invoked for including the royalty amount in the assessable value of the imported CKD kits. However, the thorough scrutiny of the relevant contract reveals that royalty only accrues at the time of sale of a licensed product which is a combination of both the deleted and imported kits. Hence the sale of imported CKD kits is subject to payment of Running Royalty by the importer. In fact only $or the purpose of proper quantification of Running Royalty, its amount for each product has been linked to the C&F value of the deleted component used in that product. The rationale behind this arrangement is that under a progressive deletion programme, the value of the imported CKD kits gradually decreases and to offset the opportunity lost by the principals due to decreasing components imported from them, the amount of Running Royalty in their technical agreements, other assemblers like M/s. Hino Pak Motor, M/s. Pak Suzuki, M/s. Dawood Yamaha Ltd., M/s. Atlas Honda Motorcycles Ltd., and M/s. Pak Suzuki Motorcycle (Pak.) Ltd., are including the royalty and technical fee amounts in declared customs value of their CKD kits and paying customs duty and other taxes accordingly.
37. The entire project of assembly of Honda Motor Vehicle in Pakistan is primarily based upon the conclusion of agreements signed between Honda Japan and domestic assembler Honda Atlas Car Pakistan Limited. The agreement concluded between the foreign principals and the local counterparts is in respect of grant of licence and transmission of technical assistance for assembly and sale of branded products of the principals. The licensee is basically meant to govern the import of the CKD Kits, subsequent technical assistance, know how, usage of patent design brand and sale of the finished products in Pakistan. No doubt that the agreements are construed in between the foreign principals and the local counterparts by the terms and conditions originally agreed between the both the signatories, however, specialized features are patently or latently embedded into the charter of these agreements which the relevant revenue authorities of the importing country have to detect and decipher in the light of the relevant WTO Valuation Agreement, Customs Act, 1969 and Customs Valuation Rules, 2001. This is so because a lot of Government revenue is at stake which is payable by way of royalty and Licence fee as per conditions set forth in the Licence and Technical Agreement. It has been observed while studying some of the case laws pertaining to other jurisdiction than Pakistan that generally certain clauses of convenience are incorporated into the body fabric of the agreement in order to save the local counterparts from payment of customs duty and taxes on the import of parts and sale of products which are otherwise payable on the import of the foreign parts directly or indirectly and as such are mandatorily required to be included in the dutiable value of the product concerned. The term "product" has been defined in the agreement and Article 1 of the LT A Agreement as the automobile of specific model and types of Honda make as specified in the Appendix attached to the agreement. The term "parts" denotes the component parts of the product, inter alia, including the parts of the products for repair and replacement. The supply of foreign parts from non-Japanese sources is also covered under the term of the agreement concluded between the foreign principal and local counterpart. The term technical assistance has not been defined in the LTA.
38. The term know how has been defined to mean any and all secret technical information, know how, formulae, knowledge relating the product (Except for the patience) including but not limited to designs, drawing, standards, specification, technical record, material list, process manuals, and direction maps which licensor from time to time owns or for which licensor is entitled to grant a licence to the licensee, and which are necessary for (i) the manufacture, test, inspection, sale, maintenance, repair and servicing of the product (ii) the construction and operation of the plant for the manufacture of the plant (for ordering through shipment) and (iii) the installation and operation of the manufacturing facilities; and all materials and documents, whether originals or reproduced copy thereof, containing any such information, know how, data, formulae or knowledge. Some category of payment as per terms of agreement has been named "initial fees".
39. However, the royalty equivalent 3% of the price of the domestic product incorporated in the products assembled, manufactured, sold or otherwise disposed off by the licensee and for which price of the domestic parts was taken to be at par with the price of the correspondence foreign parts quoted in the relevant price of the foreign principal. Quality control is the sole privilege of the licensee.
40. A scrutiny of LTA Agreement revealed the following major factors which enabled this forum to arrive at its considered opinion in respect of the principal issue for determination as to whether the royalty has paid by the appellants are to be included in the Customs value of the goods for the purpose of calculation of customs duty etc. Or not.
(viii) Section 25(2)(d) & (e) of the Customs Act, 1969 read with rule 113(3)(4) of the Customs Rules, 2001 are unequivocal and unambiguous in so far as they necessitate inclusion of the royalty in the transaction value of the imported goods either directly or indirectly and also inter alia includes value of any part of the proceeds of any subsequent resale disposal or use of the imported goods that accrue directly or indirectly to the foreign seller. The appellants have tried to circumvent the meaning of the payment of royalty with reference to its inclusion only at the import level. They have also tried to contuse the meaning of the word 'proceeds'. However, the term indirectly used both in clauses (d) and (e) of subsection 2 of Section 25 of the Customs Act, 1969 has made the situation quite clear in favour of the revenue.
(ix) The LTA covers assembly, manufacture and sale of Honda brand Motorcycle. It also, inter alia, includes domestic parts (as per Deletion program) with imported parts for the assembly, manufacture and sale of Honda Cars under supervision and quality control of foreign principals.
(x) The initial fees based upon a number of conditions are interlinked with the import and use of the foreign parts. Also the use of indigenous parts is condition upon the use of foreign parts imported from sources chosen by the principal, inter alia, the principal is duly compensated to the quantum of 3% of the value of domestic parts assessed at par with the foreign substitutes in wake of the deletion program compulsory formulated by the country of importation. This mechanism as highlighted by both the parties in the Agreement provides an alternative compensation to the foreign supplier to recoup business losses incurred to the foreign supplier on account of unavoidable deletion program. The payment of initial fee and running royalty is a condition precedent for importation use and sale of the foreign parts. The making of the payment of royalty piece-meal or in phases has been cleverly devised in the agreement to keep their inclusion at the importation stage in one go.
41. The achievement of the 100% deletion program in Pakistan is though highly desirable is purely utopian in character. Every other factor remaining equal, the fulfillment of the aforesaid desire seems to be a far cry from reality. Even otherwise fees on account of intellectual property' rights remain intact throughout and complete transfer of technologies never takes place as a policy measure of the foreign principals.
42. The appellant's plea that their cases are not covered within the ambit of mischief of misdeclaration as incorporated in Section 32(2) of the Customs Act, 1969 and are fairly hit by provisions of sub- section (3) ibid, is legally untenable and not justified. The appellants have from the very outset acted with malafides through concealment and exclusion of fees and royalty in customs declaration by resorting to insertion of tailor-made clauses into their agreement. This is undoubtedly a deliberate, advertent, intentional and willful act on the part of the appellants. The limitation undoubtedly runs in favour of the revenue for the provision invoked by the respondent in the show cause notice. The Court judgments referred to by the appellants particularly the judgment of the Indian Supreme Court on the basis of which some cases by Customs Appellate Tribunal have been decided in favour of the Motor vehicle Assemblers are not relevant to the facts and circumstances of this case. In addition the judgment of the Customs Appellate Tribunal, Karachi has been delivered by Division Bench Karachi and is not applicable to the Larger Bench by rule of binding precedent (Staire Decisis). The Indian case involved the importation of capital goods in the form of plant and machinery as against CKD kits in the present case. The royalty was agreed in the relevant agreement after the installation of the capital goods and for production of licence goods with such capital goods. The Indian Supreme Court accepted the above referred royalty payment arrangement as a condition subsequent to import and not as a condition precedent to import of plant and machinery. As such the Indian Supreme Court adjudged the non inclusion of the amount of royalty in the customs value of the capital goods but altogether did not bar its inclusion in the value of goods imported by the Indian local counterpart for use in the subsequent manufacturing activity. Thus on the contrary the Indian Supreme Court judgment supports the revenue stance in so far as relevancy of initial fees and royalty paid by the local assemblers on sale and import as a condition of sale is involved.
(xiii) Application of Rule 113(3) & (4) of Customs Rules, 2001 is not tenable in the instant case because it excludes from the price paid or payable, charges and other payments related to the activities carried out by the licensee, which are not covered in the LTA agreement dated 01.04.1994, nor the payments particularly running royalty by the licnesee under the said LTA agreement is a result of any dividend accruable to the licensee by using domestic parts in the manufacture and sale of branded cars. The very mode of calculation of running royalty indicates that it is not a royalty payment in respect of domestic parts; rather reference to the use and value of domestic parts has been made simply to determine the extent of royalty to which the licensor would be entitled for payment from the licensee on the import and use of foreign parts in the manufacture and sale of cars whose IPRs are owned by the licensor. The payments of initial fees and running royalty are the payments for the IPRs which the licensor had mandated to the licensee to use for the purpose of manufacturing and sale of branded automobiles after having imported and used foreign parts in the manufacture of such automobiles. As regards section 6 of the General Clauses Act, 1897 or para 74 of the Customs General Order No. 12/2002 dated 15.06.2002, are not relevant because section 6 deals with the effect of repeal central enactments and regulations,' while the later deals with the management of tariff classification rulings.
43. The non-payment of taxes through manipulation of LT A Agreements by putting tailor-made clauses therein is a premeditated affair on the part of the appellants for evading Government's legitimate revenue. As such the charge of mis-declaration under relevant clauses of Customs Act, 1969, by the respondent is appropriate and within four comers of law.
44. The arguments of the appellants regarding recovery of Sales Tax by the respondents are based upon misconception. The customs officers recover this amount under a legislature mandate and have also been declared sales tax officers by the Federal Board of Revenue for this purpose. This is also supported by Courts judgments where concurrent jurisdiction of both these authorities have been upheld.
(xvi) As regards recovery of escaped amount of income tax, the appellants have argued that in view of the fact that the appellants are in possession of an exempt certification from Income Tax Department in respect of withholding tax the same may be considered by the respondent department in consultation with concerned Income Tax authorities and adjustment to this effect to be made by the competent authority.
7. Both the parties were directed to reply to specific querry as raised at the time of hearing as to "whether royalty as paid by the appellant is to be included in customs value of goods for the purpose of calculation of customs duty etc. Or not". In response, reply was submitted by the A.R. Of the appellant repeating the arguments as put-forth in the grounds of appeal and thereafter, at the time of arguments. The departmental representative has not added any further to the earlier submissions as made and recorded.
8. M/s. Pak Suzuki, M/s. Dawood Yamaha Ltd, M/s. Atlas Honda Motorcycle Ltd. & M/s. Pak Suzuki Motorcycle Ltd., are including the royalty and technical fee amounts in declared customs value of the CKD Kits and are paying customs duty & taxes accordingly. Royalty and technical fee as included for customs valuation are fully covered U/s 25(2)(d) & (e) of the Customs Act, 1969. Duty and taxes as correctly payable are to be ascertained. Consistency and uniformity are the touchstones of revenue laws and are to be strictly followed by the tax authorities. It is a clear cut position of wrong calculation of amount on which duty and taxes are payable by the appellant.
45. This royalty is merely an adjustment for the purposes of determining transaction value in unambiguous terms. Findings of fact have already been given by Federal Board of Revenue as well where royalty has been made a part of assessable value in conformity with International Customs Conventions. The appellants cannot be allowed to put tailor-made clauses of their convenience into their mutual license and Technical Assistance Agreements to give a different colour and interpretation to Customs statutes and Valuation Conventions to evade government's legitimate revenue which is otherwise payable and also being regularly paid by their contemporaries. As such, there is no reason to interfere by this forum in the orders already passed by the authorities below. The same are hereby upheld and the subject appeals are disposed off in the above term.