Royalty is not includible in the transaction value if there is no condition of sale for the Import under Rule 10(1)(c) of the CVR Rules

The Customs, Excise & Service Tax Appellate Tribunal ('CESTAT') Chennai in M/s. Valeo Friction Materials India Ltd. Versus The Commissioner of Customs, Chennai - 2026 (7) TMI 476 - CESTAT CHENNAI held that payment of royalty by the appellant to its parent company is not related to the import of raw materials as it does not create condition of sale for the importation.

Facts:

M/s. Valeo Friction Materials India Ltd ('The Appellant') imported raw materials viz textured yarn ('imported goods') from M/s. Valeo, France and its associate companies. In year 2000, the special investigation valuation branch after thorough investigation accepted the declared invoice value under Rule 4 of the Custom Valuation Rules, 2007('the CVR Rules') and also accepted that the royalty payment, not to be includible into the transaction value of the imported goods. Furthermore, this view of the department was reviewed periodically many times, whereby the declared truncation value was accepted.

The department noted that in terms of agreement between the supplier and importer, royalty should have been calculated on Net Sales Value without excluding the value of raw materials imported. Hence, transaction value must consist the royalty value. Thereafter Show Cause Notice ('SCN') was issued proposing the differential duty for the period of 2001 to 2013 under Section 28(4) of the Customs Act, 1962('the Act') along with applicable interest.

On January 14, 2014 the Deputy Commissioner of Customs (SVB) vide Order-in-Original ('OIO') upheld the demand of the SCN. Even the appeal filed against the OIO was also rejected through Commissioner (Appeals) ('impugned order'). Aggrieved, the Appellant filed the second appeal.

Issues:

• Whether the royalty paid to the supplier should be added to the transaction value of the imported goods?

Held:

The Customs, Excise & Service Tax Appellate Tribunal ('CESTAT') Chennai in M/s. Valeo Friction Materials India Ltd. Versus The Commissioner of Customs, Chennai - 2026 (7) TMI 476 - CESTAT CHENNAI held as under:

• Observed that the issue regarding the demand of differential duty by adding royalty has been considered in the same facts by the same bench in M/s. Valeo Friction Materials India Ltd. Versus Commissioner of Customs, Chennai - 2024 (6) TMI 61 - CESTAT CHENNAI. Hence, the rationale must be followed.
• By relying on Value Friction (Supra), observed that in Article 8 of the Agreement, it is clearly indicated that at the appellant's request, VALEO (supplier) shall supply the parts and raw materials necessary to the manufacture of the products on the basis of the terms to be determined by the appellant and VALEO. All this indicate that payment of royalty is not entirely related to the imports of raw materials.
• Noted that there is no such condition that emerges from the agreement between the appellant and the VALEO, France which provides that royalty payment is a pre-condition for the sale /import of raw materials. There is no evidence to establish as to how the royalty payment is linked to the import of raw materials.
• Observed that from 2000 to 2012, the department was of the view that that Royalty payments were not includible in the transaction value as held in four Orders-in-Original and, further, the Department never preferred to consider filing an appeal against the impugned orders. Having not done so, the department cannot invoke the extended period at a later date to demand duty on the grounds of suppression of facts by the Appellant.
• Relied on Value Friction (Supra) and held that the respondent has not showed any factual changes nor any new documents referred to show the change in law. Hence, the rationale to be followed in this instant case.

Hence, the tribunal set aside the impugned order.

Our Comments:

Rule 10 of the Customs Valuation Rules, 2007: Cost and services. -

(1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, -

(c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable;

Rule 4 of the CVR Rules, 2007: Transaction value of identical goods.

(1)(a) Subject to the provisions of rule 3, the value of imported goods shall be the transaction value of identical goods sold for export to India and imported at or about the same time as the goods being valued;

Provided that such transaction value shall not be the value of the goods provisionally assessed under section 18 of the Customs Act, 1962.

(b) In applying this rule, the transaction value of identical goods in a sale at the same commercial level and in substantially the same quantity as the goods being valued shall be used to determine the value of imported goods.

(c) Where no sale referred to in clause (b) of sub-rule (1), is found, the transaction value of identical goods sold at a different commercial level or in different quantities or both, adjusted to take account of the difference attributable to commercial level or to the quantity or both, shall be used, provided that such adjustments shall be made on the basis of demonstrated evidence which clearly establishes the reasonableness and accuracy of the adjustments, whether such adjustment leads to an increase or decrease in the value.

(2) Where the costs and charges referred to in sub-rule (2) of rule 10 of these rules are included in the transaction value of identical goods, an adjustment shall be made, if there are significant differences in such costs and charges between the goods being valued and the identical goods in question arising from differences in distances and means of transport.

(3) In applying this rule, if more than one transaction value of identical goods is found, the lowest such value shall be used to determine the value of imported goods.