1. The respondents (hereinafter referred to as 'Maruti') are manufacturers of motor cars in India in collaboration with Suzuki Motor Company Limited, Japan (hereinafter referred to as 'Suzuki')- The two parties have enetered into three agreements : (1) Joint Venture Agreement :- Under this Agreement Suzuki acquired 26% equity shares in Maruti as also proportional representation on the Board of Directors of Maruti.
(2) Licence Agreement :- Under this Agreement, Maruti acquired the right and technical knowhow to manufacture cars and their components in India to the patents, designs and specifications of Suzuki on payment of lumpsum royalty of $ 24/- lakhs plus 3% running royalty.
(3) Purchase and Supply Agreement :- This Agreement related to import of SKD/CKD packs and complete vehicles from Suzuki, Japan.
In the background of royalty payments, the Assistant Collector loaded the invoice prices of SKD/CKD packs and complete vehicles imported by Maruti from Suzuki by 1%, for the purpose of assessment of customs duty. In appeal, the Collector (Appeals) held that the loading was not called for and that the invoice price was acceptable as the basis for assessment under Section 14(1)(a) of the Customs Act, 1962. The department is now in appeal before us with the prayer to set aside the impugned order passed by the Collector (Appeals) and to restore the Assistant Collector's order of 1% loading.
2. At the outset, we took up for consideration the two miscellaneous applications filed by Maruti for bringing on record certain additional evidence (invoice, Bills of Entry etc.). After hearing both sides, we allowed the applications and admitted these documents into evidence.
3. The merits of the appeal were heard thereafter. The department's case, in brief, is that since Maruti had a complex and inter-woven relationship with Suzuki, value under Section 14(1)(a) of the Act was not ascertain-able and, therefore, best judgment assessment under Rule 8 of the Valuation Rules was the only alternative. It was a common ground between- the department and Maruti that Rule 6 of the Valuation Rules was not applicable. Maruti countered the department's pleas stating that there was no mutuality of interest between Maruti and Suzuki, that the royalty payments were only for local manufacture of vehicles and parts under the indigenisation programme and had nothing to do with the price of the imported SKD/CKD packs and complete vehicles, that the invoice price paid by Maruti was a fully commercial price and that there was no other consideration for the sale of imported goods. We will examine the rival contentions in the succeeding paragraphs.
4. It is, no doubt, correct that Suzuki held 26% shares in Maruti and, for that reason, had a proportional representation on the Board of Directors of Maruti also. But Maruti had no share holding in Suzuki nor any representation on the Board of Directors of Suzuki. To rule out valuation under Section I4(1)(a), the seller and the buyer should have "interest in the business of each other". One-sided interet is therefore, not enough; there has to be a mutuality of interest and Maruti is right in pleading that such mutuality of interest did not exist [1984 (17) ELT 323 (SC) -Union of India and Ors. v. Atic Industries Ltd.]. Confronted with this situation, the learned representative of the department argued that Maruti had an indirect interest in the business of Suzuki since Maruti was interested in technical knowhow from Suzuki not only for the current models and their components but also for future models and their components. We do not agree with the department's plea. The transfer of technical knowhow from Suzuki to Maruti is a separate commercial transaction governed by the Licence Agreement and Suzuki charges a price for it. That does not create an interest of Maruti in the business of Suzuki, Japan.
5. The department next contended that the invoice price of the imported goods was not the only consideration for the sale and that the other consideration which flowed from Maruti to Suzuki was the payment of lumpsum royalty and running royalty. The learned representative of the department stated that though ostensibly the royalties related to manufacture in India of Suzuki's components, it could be an inducement for depressing the import price. Even if this was not so, the learned representative of the department continued, the expectation of a future pecuniary advantage to Suzuki under their long term tie-up with Maruti was certainly there. He further stated that under Article 5.02 of the Licence Agreement, Maruti acquired the right to use the allied trade mark "MARUTI-SUZUKI". The agreement did not indicate any fee for use of this trade mark but some consideration to use the trade mark had to be there. Here too, we find substance in the argument of Maruti that payment of royalty/fee under the Licence Agreement was relatable directly to indigenous manufacture of components and vehicles to Suzuki's patents, designs and specifications. Similarly, use of the trade mark "MARUTI-SUZUKI" was also for marketing of the indigenously manufactured goods in India. Neither the royalty nor the trade mark "MARUTI-SUZUKI" had anything to do with import of components, assemblies and vehicles from Japan. One can understand the logic behind payment of royalty. When Suzuki transferred the technical knowhow and permitted Maruti to use its patents and designs, Suzuki had naturally expected to be compensated for it. When the indigenisation programme of Maruti progressed, import of components from Suzuki would gradually go on decreasing. That would reduce Suzuki's profits which it would have earned in exporting components from Japan to Maruti. Naturally, Suzuki would expect to be compensated on that count also. These compensations, after negotiation between the two parties, resulted in the clause relating to payment of royalty under the Licence Agreement. But the essential point is that these payments were relatable directly to manufacture of goods in India and theyd had no nexus with import of goods from Japan, It is, therefore, not correct to load the import price on account of payment of royalties for local manufacture. No evidence has been laid before us to show that payment of royalty induced any extra -commercial reduction in the import price. Since the technical tie-up between Maruti and Suzuki is a long term one, future pecuniary advantage to both parties would certainly be a natural expectation. Without such expectation, no commercial dealings are possible. As indigenisation programme progresses, the payment of royalty would also increase but Suzuki's profit in export will decrease correspondingly. The department's argument that import invoice price was not the sole consideration for sale of the imported goods, therefore, does not impress us.
6. Finally, the learned representative of the department contended that since Maruti was the only buyer of Suzuki SKD/CKD Packs and complete vehicles, the price charged could not be said to be the one at which the goods were "ordinarily sold or offered for sale". The respondents contended that the same models of Suzuki cars were marketed in Japan also, though not in very large numbers. The learned representative of the department stated that even so it was a fact that there was no multiplicity of international buyers for the goods. We put the following Supreme Court judgments to the learned representative of the department in which the brand name owner was the sole buyer of the goods and yet the manufacturer's price to the brand name owner was accepted as the basis for assessment so long as the price was a fully commercial one and the dealings were at arm's length : The learned representative of the department stated that the above judgments, as also of the one in Atic Industries' case (paragraph-4 supra), were on valuation under Section 4 of the Central Excises and Salt Act, 1944 while in the present proceedings we are concerned with valuation under Section 14 of the Customs Act, 1962. We find, however, that on the material points : (a) Whether there was mutuality of interest between the buyer and the seller; (b) Whether the price was one at which the goods were ordinarily sold; and the provisions of Section 4 of the Central Excises and Salt Act, 1944 and Section 14 of the Customs Act, 1962 are similar. Both the Acts relate to commodity taxation. There is no reason why the interpretation placed by the Hon'ble Supreme Court on Section 4 of the Central Excises and Salt Act, 1944 should not apply to the materially identical provision of Section 14 of the Customs Act, 1962. For the price to be called the one at which the goods are ordinarily sold, it is not necessary that there should be more than one buyer, what is of essence is whether the dealings between the buyer and the seller are at arm's length and the price is a fully commercial price or not. There is nothing on record to show that dealings between Maruti and Suzuki are not at arm's length or that the price charged by Suzuki from Maruti is not a fully commercial price. Clause 4.03 of the Supply and Purchase Agreement between the two parties states that : "Prices of PARTS shall be the export prices thereof established by SUZUKI, which are subject to such changes or variations as may be made by SUZUKI from time to time by 'SUZUKI's written notice to MARUTI".
The learned representative of the department stated that export prices were settled after negotiations between the two parties. Even so, it does not mean that negotiated prices cease to be commercial prices.
Negotiations have been a part of commercial contracting since time immemorial. Since it has not been shown by the department that Maruti was given some extra - commercial treatment, the price charged has to be treated as the one at which the goods were ordinarily sold or offered for sale.
7. Summing up, we find that Suzuki's price to Maruti fulfilled all the tests laid down in Section 14(1)(a) of the Customs Act, 1962 and, therefore, resort to Section 14(1)(b) and Rule 8 of the Valuation Rules was uncalled for. The 1% loading on account of royalty payment was unjustified since the royalty had nexus with indigenous manufacture of goods and not with the imported goods.
9. While I agree with Brother Rekhi that the Appeal is to be dismissed, I hold that - (a) in the facts and circumstances of the case, Section 14(1)(a) of the Customs Act, 1962 is inapplicable for a determination of the assessable value of the goods in question. I adhere to my views upon interpretation of the aforesaid provision set forth in 1986 (24) ELT 429 -- 1986 (7) ECR 179 (Consolidated Coffee v. Collector of Customs) and the (b) it is only a best judgment assessment under Rule 8 of the Customs Valuation Rules that is possible; (c) even so, a best judgment assessment cannot be arbitrary. It has to take only relevant facts into consideration; (d) the royalty that may become payable for the components, if and when manufactured in India, under the licence agreement, has no nexus or relevance whatsoever to the determination of the assessable value of goods imported even in the case of a best judgment assessment in accordance with Rule 8.