2024 (8) TMI 1691 - AAR - Customs

Customs valuation excludes buying commissions, licence fees and routine management fees when they are not conditions of sale.

Customs valuation under Section 14 of the Customs Act and the Customs Valuation Rules permits adoption of the price actually paid or payable where the ... Determination of application of principles of valuation of the imported goods under the Customs Act and Valuation Rules - Transaction value - Imported finished goods from unrelated third-party manufacturers - royalties and licence fees - condition of sale - independent management services - Post-importation Services - advance ruling on principles of valuation - Whether transaction value proposed to be adopted is acceptable under Section 14 of the Customs Act, 1962 read with the Customs (Determination of Price of Imported Goods) Rules, 2007? Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers, is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules. - HELD THAT:- In the instant case, the Applicant procures the finished goods from a third party unrelated third party manufacturer. The price payable to the manufacturer will either be the CMT price i.e., the price for the conversion of the raw material to finished goods or free on board (FOB) price where the finished goods are procured from the manufacturer. As submitted above, where the manufacturer is only undertaking a conversion activity, the transaction value proposed to be considered is the price paid to the CMT manufacturer and the cost associated with the free issue of the fabric (being an assist cost). There is no other direct or indirect payment due to the third party manufacturer, hence, it is submitted that the price is the sole consideration for the goods being imported. Accordingly, such value should be accepted as the transaction value of the goods for the purpose of payment of Customs Duty. Merely because the payment is routed through a related party, the buying agent does not act in the capacity of a seller (as is also provided under clause 6.2 of the agreement). The buying agents do not have any financial interest of ownership in the vendors of the goods or services in relation to the goods. Based on the commercial arrangement, supported by the agreement, the seller will be the third party manufacturer and the buyer, the Applicant. Therefore, there can be no question that the buyer and seller are unrelated. Further, it is also relevant to note that the Applicant is under no obligation to necessarily purchase goods exclusively through the buying agents or from any vendor or to purchase a specified quantity of goods through the buying agent or vendor, as provided under clause 3.7 of the agreement. In other words, the Applicant has the prerogative to purchase through another vendor, other than through the buying agent or the vendors sourced by the buying agent. Accordingly, the price charged by the third party manufacturer cannot be said to be influenced by the relationship of the Applicant with the related party buying agents or any other group entity. It is ruled that the transaction value proposed to be adopted in respect of the import of finished goods by the Applicant from third party manufacturers, is acceptable and is consistent with the principles of valuation as provided under Section 14 of the Customs Act, read with Rules 2 and 3 of the Valuation Rules. Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant, is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. - HELD THAT:- As submitted above, Buying Agent - ADT HK and Buying Agent - Aoxin act as agents appointed for the purpose of sourcing vendors and purchasing finished goods on behalf of the Applicant. The details of the services provided by the buying agents are provided in Schedule 2 read with clause 6.2 of the agreement attached as Exhibit A to this application. Further, risk and title in goods would pass on directly from the manufacturers to the Applicant on delivery of the goods ordered. Further, the buying agents neither represent any other party as agent nor receive any compensation from any other party other than the Applicant and other members of the FN Group in connection with its performance under this arrangement. It is evident that ADT HK/ Aoxin act in the capacity of a buying agent on behalf of the Applicant and the Buying Agent Fee is towards the services provided by the buying agents outside India for facilitating procurement of finished goods on behalf of the Applicant. Accordingly, it is submitted that the Buying Agent Fee paid by the Applicant will qualify as a buying commission as defined under the interpretative notes to Rule 10. Therefore, Buying Agent Fee should not be included in the transaction value for the purpose of payment of Customs Duty, as per Section 14 of the Customs Act read with Rule 3 and Rule 10 of the Valuation Rules. It is ruled that the Buying Agent Fee payable by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the applicant is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. - HELD THAT:- As provided, valuation of goods imported into India is governed by Section 14 of the Customs Act read with the Valuation Rules. Rule 3 of the Valuation Rules states that the transaction value should be adjusted with the costs and payments covered under Rule 10. Therefore, to examine whether the License Fee paid by the applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e., portfolio of retail brands) and the Forever New brand image is to be included in the transaction value for Customs Valuation, the Applicant refers to Rule 10 (1)( c) and Rule 10 (1)( d) of the Valuation Rules. The license fee has no nexus with the finished goods being imported, instead is in relation to the retail brand image, and operating procedures, processes and designs for the retail outlets in India i.e., for activities post importation of the goods. Therefore, the License Fee does not fall within the purview of Rule 10(1)(c) of the Valuation Rules and accordingly, should not be included in the transaction value of goods. The payment of license fee is not a condition of sale of the imported goods. Additionally, the payment is made to FN AU, and not to the seller of goods. Further, by virtue of such payment being made to FN AU, there is no obligation of the seller being fulfilled by such payment. Accordingly, it is submitted that the payment of the license fee does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules, therefore, would not be required to be included in the transaction value of the goods. Therefore, to summarise, the payment of License Fee neither qualifies as a payment under Rule 10(1)(c) nor qualifies as a payment under Rule 10(1)(e) of the Valuation Rules and as a result, would not be required to be included in the transaction value of the imported goods. It is ruled that the License Fee payable by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. Whether the Management Fee paid by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from another party i.e. an unrelated third party manufacturer, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules? - HELD THAT:- Rule 3 of the Valuation Rules states that the transaction value should be adjusted with the costs and payments covered under Rule 10. Rule 10(1)(e) of the Valuation Rules states that 'all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable' should be added to the price actually paid or payable for the imported goods. Applicant has entered into a Master Service Agreement with FN AU, wherein FN AU agrees to provide routine management services in relation to the business operations in India. These management services relate to the back-office services for the operation of retail stores (being physical and online stores) by FN India and include accounting, marketing support, human resources, information technology support, legal support, store development and other non-product related back-office type services. Schedule 2 of the agreement provides the list of services that will be provided by FN AU to FN India under the said agreement. The agreement is produced herewith and marked for reference as Exhibit C. The management fee for such services will be charged on a cost plus mark up basis, i.e., total of direct and indirect cost plus a markup of 5% to reflect an arm's length markup and any disbursements, expenses or charges (including payments to third party fees) incurred by FN AU in relation to providing these services to FN India (Schedule 3 of the agreement). It is submitted that the management fee paid to FN AU by the Applicant is not a condition of sale of the goods imported from unrelated manufacturers and accordingly, does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules. Hence, such management fee will not be includible in the transaction value of the imported goods. It is ruled that the Management Fee payable by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from unrelated third-party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. Final Conclusion: The Authority answered all four valuation questions in favour of the applicant. It held that the proposed transaction value of imports from unrelated third-party manufacturers was acceptable, and that the buying agent fee, licence fee and management fee were not includible in the transaction value on the facts stated in the application. Issues: (i) whether the proposed transaction value for imported finished goods from unrelated third-party manufacturers is acceptable under the customs valuation framework; (ii) whether the buying agent fee paid to overseas procurement agents is includible in the transaction value; (iii) whether the license fee paid for brand and intellectual property rights is includible in the transaction value; (iv) whether the management fee paid for routine inter-company services is includible in the transaction value.Issue (i): Whether the proposed transaction value for imported finished goods from unrelated third-party manufacturers is acceptable under the customs valuation framework.Analysis: The valuation scheme under Section 14 of the Customs Act, 1962 and Rules 2 and 3 of the Customs Valuation Rules, 2007 accepts the price actually paid or payable where the buyer and seller are not related and price is the sole consideration. The imported goods were sourced from third-party manufacturers, the title and risk passed directly to the importer, and the record did not show that the sellers were related persons within Rule 2. The proposed value for conversion-based imports and FOB-based imports was found to represent the actual consideration for the goods.Conclusion: The proposed transaction value is acceptable and may be adopted for customs valuation.Issue (ii): Whether the buying agent fee paid to overseas procurement agents is includible in the transaction value.Analysis: Rule 10 adds commissions and brokerage to the transaction value, but expressly excludes buying commissions. The service arrangement showed that the agents sourced vendors, placed purchase orders, facilitated payments, did not take title, did not bear risk, and were compensated separately for procurement services. The fee was for representing the importer abroad in purchasing the goods and was not part of the price paid to the seller.Conclusion: The buying agent fee is a buying commission and is not includible in the transaction value.Issue (iii): Whether the license fee paid for brand and intellectual property rights is includible in the transaction value.Analysis: Royalty or license fee is includible only when it relates to the imported goods and is payable as a condition of the sale. The license arrangement concerned brand exploitation, store design, know-how, and retail operations after importation, and the importer's right to purchase the goods was not conditional on payment of the fee. The fee was linked to domestic retail sales, not to the import transaction, and had no nexus with the price charged by the foreign manufacturers.Conclusion: The license fee is not includible in the transaction value.Issue (iv): Whether the management fee paid for routine inter-company services is includible in the transaction value.Analysis: Payments are added under Rule 10 only when they are made as a condition of sale or to satisfy the seller's obligation. The management services were ordinary back-office and business-support services, independent of the import of goods, and the fee was payable irrespective of whether imports were made. It was not payable to the seller and had no nexus with the imported merchandise.Conclusion: The management fee is not includible in the transaction value.Final Conclusion: The customs valuation proposed by the applicant was accepted, and the impugned ancillary payments were held to be outside the assessable value of the imported goods.Ratio Decidendi: Under Section 14 and Rules 3 and 10 of the Customs Valuation Rules, only payments forming part of the price for the imported goods, or made as a condition of sale and having a direct nexus with the imported goods, are includible in transaction value; buying commissions and post-importation or independent service fees are excluded.