2024 (8) TMI 1063 - AT - Customs

Royalty payments to trademark owners cannot be added to import value unless paid as condition of sale

CESTAT Chennai held that royalty payments to a trademark owner cannot be added to the transaction value of imported goods unless the royalty is paid as a ... Valuation - Inclusion of royalty to determine the value of the imported MSG, involving related parties - rejection of transaction value but the addition of certain charges to the price actually paid or payable - Rule 10(1)(c) & (e) of the Customs Valuation Rules, 2007 (CVR 2007) - HELD THAT:- It is made clear that the royalties and licence fees should relate to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods. Hence the fact that the trademark belongs to a group company (Ajinomoto Japan) will not matter so long as there is no evidence adduced to establish that royalty is paid as a condition of sale of the impugned goods. Moreover as per the order of the Ld. Original Authority the value declared by the importer is acceptable under rule 3(3)(a) of CVR 2007. The appellant states that the payment of royalty by them is purely for the license to use trademark and is paid to Ajinomoto Japan. It is not a condition of sale by Ajinomoto Thailand. The Hon’ble Supreme Court in Commissioner Of Customs vs M/S Ferodo India Pvt. Ltd. [2008 (2) TMI 12 - SUPREME COURT], examined a similar issue involving Rule 9 of CVR 1988 which is in pari materia with Rule 10 of CVR 2007. The Hon’ble Court held 'In such cases the principle of attribution of royalty/licence fees to the price of imported goods would apply. This is because every importer/buyer is obliged to pay not only the price for the imported goods but he also incurs the cost of technical know- how which is paid to the foreign supplier. Therefore, such adjustments would certainly attract rule 9(1))(c).' Prima facie the reasoning of the Ld. Commissioner is not valid as he does not have the jurisdiction to determine whether the process amounts to manufacture or not under the Central Excise Act - postponing the collection of duty to the time of domestic sale of the goods after being repacked under a trademark, amounting to manufacture, appears far too remote to retain the character of a Customs impost. The nexus between the imported goods and those being sold cannot be said to exist. As per the impugned order, the royalty is ordered to be paid for activities post customs clearance after the goods no longer retain the identity of the imported goods and are worked upon for sale domestically containing the trademark. Payment of royalty is not a condition of sale. Even the royalty paid to Ajinomoto Japan is not to be paid on the process of packing/ manufacture but only on the use of trademark. In such a situation Ajinomoto India is free to sell the goods domestically after it crosses the Customs barrier. If the domestic buyer of the goods has an independent agreement with Ajinomoto Japan to pay royalty on use of trademark on repacked goods for domestic sale, surely Ajinomoto India would not have been saddled with the additional cost of the royalty to its transaction value. There is nothing to show the appellant had adjusted the price of the imported goods in guise of enhanced royalty. Royalty is not paid to Ajinomoto Thailand from whom the appellant procures its goods. Revenue has not been able to establish the payment of royalty is a ‘condition of sale' of the imported goods nor has any flow back or direct / indirect payment from Ajinomoto India to Japan or Thailand been established. In such circumstances postponing the collection of duty on the imported goods, on an uncertain quantity, to the time of domestic sale after being repacked under a trademark, appears far too remote to retain the character of a Customs impost. The question Revenue should have addressed / investigated is whether the import would have taken place from Ajinomoto Thailand if the appellant declined to pay royalty to Ajinomoto Japan or whether it would only lead to a denial of repacking of goods using the trademark. However, as it stands Revenue has failed to establish its allegations and hence the impugned order merits to be set aside. The impugned order is set aside - appeal allowed. Issues Involved:1. Inclusion of royalty in the invoice price of imported goods under Rule 10(1)(c) & (e) of the Customs Valuation Rules, 2007.2. Admission of additional evidence at the appellate level.3. Determination of whether the repacking of MSG constitutes manufacturing under the Central Excise Act.4. Examination of the Trademark License Agreement and its impact on the valuation of imported goods.5. Consideration of related parties and their financial arrangements.Issue-wise Detailed Analysis:1. Inclusion of Royalty in Invoice Price:The adjudicating authority held that royalty payments should be added to the invoice price of the imported MSG under Rule 10(1)(c) & (e) of the Customs Valuation Rules, 2007. The appellant argued that the royalty is paid for the use of the trademark on repacked goods sold in retail and not as a condition of the sale of the imported goods. The Tribunal found that the royalty is paid for the use of the trademark and not as a condition of sale by Ajinomoto Thailand. The Hon'ble Supreme Court in Commissioner Of Customs vs M/S Ferodo India Pvt. Ltd. clarified that royalties and license fees must be a condition prerequisite for the supply of imported goods to be included in the price. Since no such condition was established, the Tribunal ruled that the royalty cannot be added to the price actually paid or payable for the imported goods.2. Admission of Additional Evidence:The appellant requested the admission of additional grounds of appeal, citing an inadvertent annexation of the wrong Trademark License Agreement. The Tribunal allowed the additional evidence, noting that it is discretionary and permissible if it is material for deciding the rights of the parties. The Tribunal referenced the Hon'ble Supreme Court in Chittoori Subbanna Vs Kudappa Subbanna, which recognized the possibility of including additional grounds in the grounds of appeal.3. Determination of Manufacturing under Central Excise Act:The Commissioner (Appeals) argued that the repacking and relabeling of MSG do not constitute manufacturing under the Central Excise Act. The Tribunal disagreed, stating that the Commissioner does not have the jurisdiction to determine whether the process amounts to manufacture under the Central Excise Act. The Tribunal emphasized that manufacture can also occur when a process is deemed to be manufacturing as included under Section 2(f)(iii) of the Central Excise Act, 1944.4. Examination of Trademark License Agreement:The Tribunal examined the Trademark License Agreement dated 28 November 2003, which stipulated that Ajinomoto India would pay a royalty of 1% of the Net Sales of the product bearing the trademark. The Tribunal found that the royalty is paid for the use of the trademark and not as a condition of sale by Ajinomoto Thailand. The Tribunal also noted that the payment of royalty is not related to a process but purely for the use of the trademark.5. Consideration of Related Parties:The respondent argued that Ajinomoto India, Thailand, and Japan are related parties, making the royalty payment relevant to the imported goods. The Tribunal found that the transaction value declared by the importer was accepted under Rule 3(3)(a) of CVR 2007. The Tribunal ruled that there was no evidence of financial flow back between Ajinomoto India and Japan or Thailand that would influence the transaction value of the imported MSG. The Tribunal concluded that the royalty payment was not a condition of sale for the imported goods.Conclusion:The Tribunal set aside the impugned order, ruling that the inclusion of royalty in the invoice price of imported goods was not justified as it was not a condition of sale. The appeal was allowed, and the appellant was deemed eligible for consequential relief as per law. The Tribunal emphasized the importance of examining the correct Trademark License Agreement and the conditions under which royalties are paid.