Royalty and consultancy fees excluded from customs value absent a sale condition and direct nexus with imported goods.

Royalty and consultancy fees paid under collaboration and consultancy agreements were held not to form part of the assessable value of imported goods under Rule 10(1)(e) of the Customs Valuation Rules, 2007. The agreements contained no clause requiring procurement of raw materials from the foreign licensor or its group entities, so the payments were not a condition of sale of the imports. The royalty was linked to indigenous value addition rather than the imported materials, and the consultancy fee had no demonstrated nexus with the imports. The explanation to Rule 10(1)(e) was treated as applying to processing of imported goods before use, not post-import manufacturing and domestic sale. The addition to value was therefore set aside.

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Issues: Whether royalty and consultancy fees paid under the collaboration and consultancy agreements were includible in the assessable value of the imported goods under Rule 10(1)(e) of the Customs Valuation Rules, 2007.

Analysis: The agreements did not contain any clause compelling procurement of raw materials from the foreign licensor or its group entities, and therefore did not create any condition of sale for the imports. The royalty was computed after excluding the cost of imported materials, showing that it was linked to indigenous value addition and not to the imported goods. The consultancy fee also had no demonstrated nexus with the imports. The explanation to Rule 10(1)(e) was held to apply to processing of imported goods before use and not to manufacturing activity undertaken after importation and sale in India. In the absence of a nexus between the payments and the imported goods, the payments could not be added to the customs value.

Conclusion: Royalty and consultancy fees were not includible in the assessable value of the imported goods, and the order adding them to value was set aside.

Ratio Decidendi: Amounts payable as royalty or consultancy fee are includible in customs value only where they are shown to be a condition of sale of the imported goods and to have a direct nexus with those goods.

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