Royalty and technical know-how fees cannot be included in transaction value unless condition of sale for imported goods

CESTAT Chennai held that royalty and technical know-how fees paid to foreign suppliers cannot be included in transaction value unless they are a condition of sale for imported goods. The tribunal found no evidence that such payments were prerequisites for machinery import. The Commissioner (Appeals) order remanding the matter was deemed improper since the original authority erroneously rejected transaction value without proper grounds. The declared transaction value was upheld and the order to include royalty fees was set aside. Appeal allowed in favor of appellant.

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Issues Involved:
1. Inclusion of lump sum and periodical patent and technology know-how fee in the transaction value.
2. Legality of the remand order by Commissioner (Appeals) to reconsider the rejection of transaction value.

Summary:

Issue 1: Inclusion of Lump Sum and Periodical Patent and Technology Know-How Fee in the Transaction Value

The appellant, M/s. ABI Showatech India Ltd., engaged in manufacturing aluminum castings, entered into a Patent and Technology Agreement with M/s. Hitchiner Manufacturing Co., USA, which included a lump sum fee and running royalty based on the number of castings produced. The original authority rejected the declared value under Rule 12(1) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR, 2007) and added the royalty fees to the transaction value. The Commissioner (Appeals) upheld the addition of these fees but remanded the matter for reconsideration of the rejection of the transaction value.

The appellant contended that these payments were related to the manufacturing activity in India and not a condition of the sale of imported goods. They cited various judgments, including *Commissioner of Customs Vs. Ferodo India Pvt. Ltd.* and *Commissioner of Cus. (Port), Chennai Vs. Toyota Kirloskar Motor P. Ltd.*, to support their argument that such fees should not be added to the transaction value unless they are a condition of sale.

The Tribunal examined the agreement and found no stipulation that the payment of royalty and technical know-how fee was a condition of sale of the imported machinery. The Tribunal noted that as per Rule 10(1)(c) of CVR, 2007, such payments must be a condition for the sale of the goods to be included in the transaction value. The Tribunal concluded that the royalty and technology know-how fee were not conditions of sale and thus should not be included in the transaction value.

Issue 2: Legality of the Remand Order by Commissioner (Appeals) to Reconsider the Rejection of Transaction Value

The Commissioner (Appeals) remanded the matter to the adjudicating authority to reconsider the rejection of the transaction value. The Tribunal found that the original authority had erroneously assumed that the transaction value must be rejected to load the royalty and technology know-how fees. The Tribunal observed that the original authority did not provide specific reasons for rejecting the transaction value and noted that the department did not dispute the declared transaction value.

The Tribunal held that there was no need for remand as the only issue was whether the royalty and technology know-how fee should be added to the transaction value. The declared transaction value was upheld, and the order for loading the royalty and technology know-how fee to the transaction value was set aside.

Conclusion:

The appeal was allowed with consequential relief, and the impugned order was set aside and modified accordingly.

(Pronounced in court on 19.03.2024)

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