2013 (9) TMI 462 - AT - Customs

Tribunal rules royalty payments not condition of sale

JOHNSON & JOHNSON LTD. Versus COMMISSIONER OF CUSTOMS, MUMBAI

The Tribunal set aside the lower appellate authority's order, ruling that the royalty payments were for post-importation activities and not a condition of ... Valuation of imported goods - inclusion of Technical Know-how - Assesse entered into a technical know-how agreement with their principal in USA – The value of the imported goods including customs duties were clearly excluded – Held that:- In the absence of any evidence showing existence of a price adjustment between the cost incurred by the buyer on account of royalty/licensee fees by reducing price of imported items - it can- not be that such royalty payments were includible in the assessable value of the imported goods under Rule 9(1)(c)/10(1)(c) of the Customs Valuations Rules, 1988/2007. - Decision in Commissioner of Customs Versus M/s Ferodo India Pvt. Ltd [2008 (2) TMI 12 - Supreme Court] followed. It was seen that the assesse does not import any goods from the licensor/supplier of technical know-how at all – the assessing authority had recorded a clear finding that the assesse had submitted competitive quotations which revealed that the prices were based on commercial considerations and were comparable and the invoice values were not influenced by the assesse’s relationship with the principal - In view of such a clear and categorical finding by the assessing authority. Royalty and License Fee - The acceptance of the transaction value, the Customs authorities could not add the technical know-how fee in respect of the post-importation activities to the assessable value of the imported goods – COMMISSIONER OF CUSTOMS, NEW DELHI Versus PRODELIN INDIA (P) LTD. [2006 (8) TMI 186 - SUPREME COURT OF INDIA] - royalty and licence fee payments made, in respect of the goods manufactured and sold in India and not in respect of the raw materials/components imported and such payments being not a condition of sale of items to be imported, cannot be included in the assessable value of the imported goods under the Customs Valuation Rules – order set aside – Decided in favor of assesse. Issues Involved:1. Inclusion of royalty payments in the assessable value of imported goods.2. Relationship between the technical know-how agreement and the procurement of raw materials.3. Validity of the lower appellate authority's order.Issue-wise Detailed Analysis:1. Inclusion of Royalty Payments in the Assessable Value of Imported Goods:The primary issue revolves around whether the royalty payments made by the appellant to their foreign principal should be included in the assessable value of the imported goods under Rule 9(1) of the Customs Valuation Rules, 1988. The appellant argued that the royalty payments are for post-importation activities and are not a condition of sale for the imported goods. The lower appellate authority, however, concluded that since the royalty payments are related to the technical know-how used in the manufacturing process, they should be included in the assessable value. The Tribunal disagreed, noting that the royalty payments are calculated based on the net ex-factory sales price, excluding the cost of imported components, and thus are linked to value addition in India, not to the imported goods themselves.2. Relationship Between the Technical Know-How Agreement and the Procurement of Raw Materials:The appellant contended that the technical know-how agreement did not mandate the procurement of raw materials from the licensor or its approved vendors. The lower appellate authority, however, believed that the technical know-how agreement indirectly influenced the procurement of raw materials, making the royalty payments a condition of sale. The Tribunal found that the agreement allowed the appellant to procure raw materials either by producing them in India according to the licensor's specifications or purchasing them from approved vendors, thus not making the royalty payments a condition of sale for the imported goods.3. Validity of the Lower Appellate Authority's Order:The appellant argued that the lower appellate authority's order lacked proper reasoning and did not consider their submissions. The Tribunal observed that the lower appellate authority's order was not a speaking order and failed to address the appellant's evidence showing that the procurement prices were based on commercial considerations and were not influenced by their relationship with the principal. The Tribunal also noted that the lower appellate authority did not provide any evidence to contradict the assessing authority's findings that the transaction values were acceptable.Conclusion:The Tribunal set aside the lower appellate authority's order, holding that the royalty payments made by the appellant were for post-importation activities and not a condition of sale for the imported goods. The Tribunal emphasized that the onus to prove that the declared price did not reflect the true transaction value was on the department, which failed to provide any such evidence. Consequently, the appeals were allowed with consequential relief.