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

CESTAT Bangalore held that 5% royalty on carbon brushes cannot be added to transaction value under Rule 10(1)(c) of Customs Valuation Rules, 2007 when ... Valuation of imported goods - related party transactions - addition of 5% royalty on carbon brushes under Rule 10(1)(c) of the Customs Valuation Rules, 2007 - whether royalty paid by the appellant needs to be added to the transaction value of the imported goods? - HELD THAT:- Once the fact that the pricing pattern has been examined from various angles as discussed supra and the fact that it was factually found that the prices declared by the importer was as per the price list of the supplier, the question of adding royalty of 5% does not arise. The Commissioner (A) in the impugned order has held that the appellants have not shown any imports from unrelated suppliers and therefore, it can be inferred that the import is made only from the related suppliers without substantiating the fact that when the transaction value was accepted as to how the royalty paid on the technical know-how influenced the price of the imported goods. The appellant’s submission that once the transaction value of the goods imported from the associated companies are at “arm’s length price” under Rule 3(3)(a) of the Customs Valuation Rules, 2007 is accepted, the Department cannot load 5% royalty to the transaction value under Rule 10(1)(c) of the Customs Valuation Rules, 2007 is absolutely valid and sustainable in law as has been held by the Hon’ble Supreme Court in the case of COMMISSIONER OF CUSTOMS VERSUS M/S FERODO INDIA PVT. LTD [2008 (2) TMI 12 - SUPREME COURT] wherein it had held that in a given case, if the Consideration Clause indicates that the importer/buyer had adjusted the price of the imported goods in guise of enhanced royalty or if the Department finds that the buyer had misled the Department by such pricing adjustments then the adjudicating authority would be justified in adding the royalty/licence fees payment to the price of the imported goods. In the present appeal, the facts have clearly proved that the pricing was at arm’s length and the relationship had not influenced the price, which has been accepted by the department hence there is no question of adding the royalty to the transaction value as held by the apex court in the judgement referred above. The impugned order is set aside - appeal is allowed. 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.