The Hindu Business Line : Hi-tech hiccup

After a quick travel across the globe, there can always be a last mile hiccup, especially for high-tech. A recent example is of Prodelin India (P) Ltd or PIPL, which had to face a demanding taxman at the apex court.

First, the story. PIPL was set up under a joint venture (JV) agreement between Prodelin Corporation, US (or PC), and Ashok Mago of New Delhi. The company was to provide marketing facility `for promotion and selling VSAT (Very Small aperture Terminal) antennas, accessories and other communication equipment, assembly of equipment, testing, servicing and so on'. The text of the verdict dated August 31 says that the US company PC owned 75 per cent of equity shares in PIPL. The Indian company was to assemble and test feed components provided by PC and also service, test and install these products. According to a technical service agreement between the two companies, PIPL paid PC $25,000 per month as technical service fee, for the period from October 1, 1997 to September 30, 1998.

'Related' loading

In January 2001, the Deputy Commissioner of Customs, ICD, passed an order loading 10 per cent in the invoice value of the goods imported from PC. He said that PIPL and PC were `related persons' according to the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 and that the relationship had influenced the price of the imported goods. Aggrieved by the addition to invoice value, PIPL approached the Commissioner (Appeal). In March 2004, he passed an order upholding the Deputy Commissioner's order and dismissing the company's appeal. The relationship between PIPL and its foreign collaborator PC was a complex and interwoven one, said the Commissioner. In addition to the three-fourths stake in the Indian company, PC had its own `three of the four Directors' on PIPL's board. The two companies were, therefore, related persons, he said.

PIPL took up the issue before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi. The tribunal's order, given in December 2004, went in favour of the company.

Though the authorities were right in holding that the transaction was between related persons, inasmuch as the importer was a joint venture in which the foreign supplier was the partner, that by itself, was no ground to make addition to sale price, observed the tribunal.

The CESTAT held that the reference to raw material is for assistance in sourcing of supply. "A sourcing assistance can be required only when the sourcing is from a third party and not when it is from one of the partners," opined the tribunal. "It would be placing an artificial meaning to assistance for sourcing, if sale to each other were also treated as requiring assistance in sourcing i.e. locating the best source or supply." Such an artificial meaning was not justified, the tribunal ruled. "Transaction value between the parties cannot be treated as anything other than a commercial price. Such a price commends itself as assessable value," it said. It was the turn of the Department to be aggrieved, and so, the case moved to the Supreme Court.

At the apex court

There, Harish Chandra argued for Commissioner of Customs, New Delhi; and Shyam Divan, for Prodelin. The Department's stand was that the tribunal had `only half interpreted the clause of control of foreign partner regarding source of raw material from where the raw material was to be procured'. PIPL was under obligation to procure components only from the foreign collaborator or from Tata Advance Material Ltd (TAML), with whom the foreign collaborator had an agreement, said Chandra. He also argued that the technical fees paid had definitely influenced the price of the goods imported, justifying the loading of 10 per cent to the invoice value by the Deputy Commissioner. "The total value of import during the period 1997-98 to 2000-2001 (up to September 25, 2000) was $25,78,837 and the total amount of technical service paid by the respondents (PIPL) was $2,58,000, thus the loading factor was 10 per cent and adjudicating authority was correct in directing the same to be added in the valuation of the goods imported," reasoned Chandra. Technical fee was paid not only for post-operative function but also for pre-operative functions such as supply of design, drawing, fabrication drawing, detailed drawing design for the manufacture of dyes, assembly testing and alignment of feed etc, contended Chandra.

The tribunal had failed to consider that the imports made by PIPL were of finished goods, and components of different sizes of VSAT antennas requiring no post-operative function, said Chandra. He drew the attention of the court to the absence of any documentary proof from PIPL to substantiate their claim that the value of the imported goods was more than the indigenously procured goods. A crucial point, he said, before one could accept the declared value as full commercial value.

On the other side, it was Divan who argued that the fee paid by the Indian company to the US parent PC was for the following: training, both technical and mechanical, and in the field of electronic communication to PIPL staff; frequent visit of PC's technical experts to India to guide the PIPL staff and solve customer technical problems; supply of specialised fixtures free of cost for quality assurance of the material fabricated in India; supply of electronic test gear free of cost for assembly, testing and alignment of feeds in India; design drawings, fabrication drawings, assistance to modify design and fabrication drawings to suit the material available in India; approval of products manufactured in India in the initial stage; responding to day-to-day technical queries raised by PIPL; and providing detail design drawings for manufacture of dyes in India for ongoing indigenisation program and future exports. Divan drew the attention of the court to the tribunal's findings. "A perusal of the service agreement makes it clear that its area of coverage is mainly manufacturing, design, know-how specifications, drawings and all types of tooling equipment," the tribunal had observed.

Concurring with that view, Justices AR. Lakshmanan and Tarun Chatterjee of the Supreme Court said that there was nothing in the JV agreement to suggest that PC charged any technical fee for any pre-operative function of the antenna system. "There is no denial of the fact that some of the parts/components of the antenna system were being supplied by PC the price at which the said parts were supplied at full commercial value without having been influenced by the JV agreement." It was wrong on the part of the Department `to link the design, drawing, fabrication drawing, manufacture of dyes, assembly testing and alignment of feed etc. with the imported parts being supplied by PC,' observed the court. As a consequence, the taxman had `totally confused the issue' and `wrongly linked the price of the parts of antenna with that of the various functions which lead to the assembly/manufacture of complete antenna', the court said. TAML was manufacturing the components such as reflector and metal structure indigenously, and this had nothing to do with the imported material, stated the court. The mere fact that PC had an agreement with TAML had nothing to do with the price of the feed horn that was being supplied by PC to PIPL, ruled the court. The Department's reasoning was, therefore, `factually incorrect and baseless', pointed out the court. "The various contentions raised by the Department, in the present case, are wholly devoid of any merit," concludes the verdict. The taxman may perhaps need a VSAT antenna to receive the right reasoning!

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