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Petitioner: Messrs HONDA ATLAS CARS (PAKISTAN) LTD. LAHORE and others VS Respondent: COLLECTOR (APPEALS) CUSTOMS, FEDERAL EXCISE AND SALES TAX, LAHORE and others
Court Name: Customs, Excise and Sales Tax Appellate Tribunal Judge(s): Muhammad Arshad, Muhammad Arif Moton, Ziaullah Kayani Title:Messrs HONDA ATLAS CARS (PAKISTAN) LTD. LAHORE and others vs
COLLECTOR (APPEALS) CUSTOMS, FEDERAL EXCISE AND SALES TAX, LAHORE and others Case No.: Customs Appeals Nos.K-306 and K-330 of 2009 Date of Judgment:2011-02-02 Reported As: 2012 PTD (Trib.) 649 Result: Appeals dismissed Judgment ORDER ZIAULLAH KAYANI (CHAIRMAN).---By this common order, will intend to dispose of aforesaid (2) Customs Appeals, filed by the appellants against Order-in-Appeal 75-76 of 2009 dated 17-2-2009, , passed by the Collector of Customs, Sales Tax and Federal Excise (Appeals), Lahore. These appeals have identical issues of law and facts and are, therefore, being heard, dealt with and disposed of simultaneously through this order. 2. That brief facts of the case are that in the light of F.B.R.'s clarification C.No.1(29)S&R-2/90 dated 16-2-2005 read with the Directorate of Customs Valuation and PC A, Karachi's Letter No.1160/98- XV/524 dated 1-2-2005, the Directorate of Intelligence and Investigation (Customs and 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 WT.0 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 1-4-1994 (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
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and Rs.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. 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 1-4-1994 (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
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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 preconditions 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. (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. By a necessary corollary, if there are no imports then the issue of adding royalty does not arise. 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 12 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". 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 therefor, 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. 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 he 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 post-importation services or activities, would not, therefore, come within the purview of
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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. (1) 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. 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 towprovided 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 LTA 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 ail. 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 S.R.O. 203(1)/ 1995 dated 14-3-1995 and S.R.O.917(I)/2004 dated 11-11-2004. 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) S.R.O. 917(1)/2004 dated 11-11-2004 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',
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(b) S.R.O. 371(1)/2002 dated 15-6-2002, 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). 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 activiti 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 (along with 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 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 ate 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. The
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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 LTA Agreement and not otherwise. The Article 12 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(1)(a) and Article 12(1)(b). Article 12(1)(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 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 12, 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.
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(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 12 of the LTA 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)…
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