2024 (7) TMI 330 - AT - Customs

Royalty payments for technology transfer not includible in transaction value of imported goods under Section 14

Commissioner of Customs, Chennai Versus M/s. BBL Daido Pvt. Ltd.

CESTAT Chennai ruled that royalty payments under a Licence and Technical Assistance Agreement (2012-2015) were not includible in the transaction value of ... Valuation - royalty payments to arrive at the transaction value of imported goods - Licence and Technical Assistance Agreement for the period from 2012-2013 to 2014-2015 - Rule 10(1)(c) of Customs Valuation Rules, 2007 - nexus between royalty and imported goods - HELD THAT:- The Agreement provides a detailed framework for transfer of technology for the manufacture of their products under Article 2 of the Agreement. The said agreement was to be in force for a period of 10 years and the royalty is payable on Net Sales Value. In this context, Net Sales Value means ex-factory sales price of the Licensed Products manufactured by the Respondent-Assessee as paid by their customers, excluding the cost of imported components, cost of standard bought out components, packing charges, and statutory levies like excise duty, sales tax and VAT. The Royalty is payable at 4% on Half Bearings, Bushes and thrust washers manufactured by the Respondent-Assessee. M/s. Daido Metal Company, Japan is required to inspect the plants and other facilities of the Respondent-Assessee in India in order to ensure the quality of products being manufactured. The Respondent-Assessee is permitted to use the brand and trademarks for manufacture and sale of such licensed products. It is essential to examine whether the payment of royalty is anyway linked to the import of raw materials and whether sale of raw materials is a pre-condition in the present appeal. A reading of various clauses of Agreement indicate that the royalty is payable at 4% of the annual net sales of the products sold by the Respondent-Assessee. There is a clear formula regarding the method to arrive at the above net sales value of the products sold - The royalty payment covers transfer and use of technology providing information of technical knowledge, design formula, technical know-how, procedures for manufacturing and secret and confidential information which have been developed or acquired by M/s. Daido Metal Company, Japan which are used for the manufacture of the products viz., Half Bearings, Thrust Washers, PTFE Bearings and PTFE bimetal. In the case of BREMBO BRAKE INDIA PVT. LTD. VERSUS COMMR. OF CUS. (IMPORTS), MUMBAI [2014 (11) TMI 22 - CESTAT MUMBAI], it was held that royalty and other charges are not includible in assessable value if payment of royalty and other charges are not for imported goods and not a condition of sale of goods. Even if royalty is calculated including the value of imported raw-materials, the same is not addable to the transaction value of imported goods as there is no such condition that is evident from the Licence and Technical Assistance Agreement mandating payment of royalty as a pre-condition for sale of imported materials. The royalty payments made are not addable to the transaction value of imported goods for the period from 2012-13 to 2014-15 in this appeal, in terms of provisions of Section 14 of the Customs Act, 1962 read with Rule 10(1)(c) of the Customs Valuation Rules, 2007 - appeal filed by Revenue rejected. Issues Involved:1. Whether the royalty payments made by the Respondent-Assessee to M/s. Daido Metal Company, Japan, are to be added to the value of imported raw materials in terms of Rule 10(1)(c) of Customs Valuation Rules, 2007.Detailed Analysis:1. Background and Procedural History:The Commissioner of Customs III, Chennai, filed an appeal reviewing the order of the Commissioner of Customs (Appeals), which had set aside the Order-in-Original passed by the Assistant Commissioner of Customs, Special Valuation Branch, Chennai. The Respondent-Assessee, M/s. BBL Daido Private Limited, imported various machinery and raw materials from M/s. Daido Metal Company, Japan. The relationship between the Indian company and the foreign supplier was established, and the declared invoice value was initially accepted as the transaction value under Rule 4 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.2. Documents and Evidence Submitted:The Respondent-Assessee submitted various documents, including details of transactions, annual reports, license and technical assistance agreements, and declarations affirming no change in pricing patterns. These documents were periodically renewed and reviewed by the competent authority.3. Assistant Commissioner's Findings:The Assistant Commissioner concluded that the royalty paid by the importer was related to the imported goods and constituted a condition of sale. This conclusion was based on the non-deduction of the landed cost of imported components from the Net Sales Value on which royalty was computed. The Original Authority relied on the decision in M/s. Matsushita Television & Audio (I) Ltd. Vs. Commissioner of Customs, which held that royalty related to imported goods and a condition of sale could be added to the declared price.4. Commissioner (Appeals) Findings:The Commissioner (Appeals) set aside the Assistant Commissioner's order, stating that the payment of royalty was not a condition of sale for the imported goods. The agreement did not make royalty payment a precondition for the sale of raw materials. The Commissioner (Appeals) relied on decisions in M/s. Brembo Breaks India P. Ltd. and Commissioner of Customs, Chennai Vs. M/s. Ibex Gallegher Ltd., which supported the non-addition of royalty to the transaction value.5. Revenue's Grounds of Appeal:The Revenue argued that the landed cost of imported components was not deducted to arrive at the Net Sales Value on which royalty was computed, establishing a nexus between royalty and imported goods. They contended that the conditions of Rule 10(1)(c) of CVR 2007 were fulfilled, warranting the addition of royalty to the transaction value.6. Respondent-Assessee's Arguments:The Respondent-Assessee argued that previous orders did not find royalty payments as a condition of sale. They emphasized that the royalty was calculated on the sale price of finished goods, not solely on the value of imported goods. They cited various judicial precedents, including Commissioner of Customs Vs. BASF Strenics P. Ltd., which held that royalty payments based on the sale price of finished goods do not relate to imported goods.7. Tribunal's Analysis and Decision:The Tribunal examined the Licence and Technical Assistance Agreement, noting that the royalty payment was based on the Net Sales Value, excluding the cost of imported components. The Tribunal found no clause in the agreement making royalty payment a condition of sale for imported goods. They relied on judicial precedents, including Commissioner of Customs Vs. Ferodo India Pvt. Ltd. and Commissioner of Customs Vs. Toyota Kirloskart Motor Pvt. Ltd., which emphasized the need for a clear condition of sale for adding royalty to the transaction value.The Tribunal concluded that the royalty payments were not addable to the transaction value of imported goods, as there was no condition of sale attached to the imports. They upheld the order of the Commissioner (Appeals) and rejected the Revenue's appeal.8. Conclusion:The Tribunal held that royalty payments made by the Respondent-Assessee to M/s. Daido Metal Company, Japan, are not to be added to the value of imported raw materials in terms of Rule 10(1)(c) of Customs Valuation Rules, 2007. The appeal filed by the Revenue was rejected, affirming the decision of the Commissioner (Appeals).