2024 (3) TMI 874 - AT - Customs

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 ... Royalties and licence fees related to the imported goods - condition of the sale - transaction value - addition to transaction value under Rule 10(1)(c) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 - rejection and redetermination of transaction valueRoyalties and licence fees related to the imported goods - condition of the sale - addition to transaction value under Rule 10(1)(c) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 - Whether lump sum and periodical patent and technology know how fees paid to the foreign collaborator are includible in the transaction value - HELD THAT: - Rule 10(1)(c) requires inclusion of royalties and licence fees in the transaction value only where such payments are payable by the buyer as a condition of the sale of the imported goods. The Tribunal examined the licence and royalty provisions of the agreement and found no stipulation that payment of the lump sum fee or running royalties was a pre condition of importing or acquiring the machinery. The agreement demonstrates that the payments relate to the license to use technology and to manufacture licensed components (royalty payable on casting count and minimum annual guarantees), and are incurred in relation to post import manufacturing activities rather than as a prerequisite for the sale of the imported machinery. Absent contractual evidence that these payments were a condition of sale of the imported goods, the department failed to establish the necessary nexus to the import transaction. Applying the principle in Toyota Kirloskar and subsequent Tribunal decisions, the royalty and technical know how fees are not includible in the transaction value under Rule 10(1)(c). [Paras 13]Royalty and technical know how fees are not to be added to the transaction value.Transaction value - rejection and redetermination of transaction value - Whether remand to the adjudicating authority to redetermine the transaction value was necessary and lawful - HELD THAT: - The original order recorded that the 'transaction value is rejected' but contained no discussion or re determination of an alternate transaction value; the adjudicating authority proceeded to load royalties notwithstanding lack of reasons for rejecting the declared value. The Department's appeal on that procedural ground resulted in the Commissioner (Appeals) remanding the matter for redetermination. The Tribunal found the original finding of rejection to be patently erroneous and observed that when the sole question before SVB was whether royalties should be added, there was no basis to reject the declared transaction value. Because the department did not dispute the declared transaction value and no substantive grounds were stated to reject it, there was no requirement to remit for re determination. Consequently the declared transaction value is upheld and remand for this purpose was unnecessary. [Paras 14]No remand required; the declared transaction value is upheld and the remand to redetermine transaction value is unwarranted.Final Conclusion: The appeal is allowed: the additions of lump sum and running royalty/technical know how fees to the transaction value under Rule 10(1)(c) are set aside because such payments are not a condition of the sale of the imported machinery; the declared transaction value is upheld and remand for redetermination of transaction value is unnecessary. 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 ValueThe 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 ValueThe 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)