2023 (11) TMI 225 - AT - Customs

5% royalty on carbon brushes cannot be added to transaction value under Rule 10(1)(c) when imports are at arm's length pricing

M/s. Schunk Metal and Carbon (India) Private Limited Versus Commissioner of Customs, Bangalore

M/s. Schunk Metal and Carbon (India) Private Limited Versus Commissioner of Customs, Bangalore - 2024 (387) E.L.T. 197 (Tri. - Bang.) Issues:The judgment involves the addition of royalty to the transaction value of imported goods under Rule 10(1)(c) of the Customs Valuation Rules, 2007, based on the relationship between the importer and the supplier.Summary:Issue 1: Addition of Royalty on Imported GoodsThe appellant, an importer, had imported materials from related suppliers, leading to the question of whether royalty should be added to the transaction value. The authorities accepted the transaction value under Rule 3(3)(a) of the Customs Valuation Rules, 2007, but added 5% royalty on imports other than carbon brushes. The Commissioner (A) held that since the imports were only from related suppliers, royalty becomes part of the value under Rule 10(1)(c).Issue 2: Impact of Royalty on Transaction ValueThe appellant argued that once the transaction value is accepted, adding royalty is not sustainable in law. Citing legal precedents, they contended that royalty for technical know-how is a post-import activity and should not influence the transaction value of imported goods. The appellant emphasized that the relationship with suppliers did not affect pricing, as accepted by the authorities.Issue 3: Arm's Length Pricing and RoyaltyThe appellant demonstrated that the pricing was at arm's length, and the relationship did not impact prices, as per transfer pricing study analysis. The original authority found that the relationship did not influence prices, and the declared price matched the supplier's price list. Therefore, the question of adding royalty did not arise.Issue 4: Legal PrecedentsLegal precedents, including decisions by the Hon'ble Supreme Court, were cited to support the appellant's argument that adding royalty to the transaction value is not justified when the relationship between importer and supplier does not impact pricing. The judgments emphasized the need to consider arm's length pricing and the absence of nexus between royalty payments and pricing of imported goods.Conclusion:The Tribunal set aside the impugned order, ruling in favor of the appellant. The judgment highlighted that the relationship between the importer and supplier did not influence pricing, and therefore, adding royalty to the transaction value was not warranted. The decision was based on the principles of arm's length pricing and legal precedents supporting the appellant's position.