Royalty not added to import value where no sale condition or nexus with imported goods was proved

Royalty paid under a licence agreement is includible in the transaction value of imported goods only if it is a condition of sale and has a direct nexus with the imports under Rule 10(1)(c) of the Customs Valuation Rules, 2007. The Tribunal found that the imports had earlier been accepted at arm's length between the same parties and that the royalty was payable on net sales of finished goods under the licence arrangement. As the department failed to establish that the royalty was a condition precedent for supply of the imported goods, it held that the royalty was not to be added to assessable value.

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Issues: Whether royalty paid under the licence agreement was required to be added to the transaction value of imported goods under Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.

Analysis: The decisive test was whether the royalty payment constituted a condition of sale of the imported goods and whether the relationship between the parties had influenced the declared import value. The record showed that the imports had consistently been accepted at arm's length in earlier transactions between the same parties, and the royalty was payable on net sales of finished goods under the licence arrangement. Applying the principle that royalty is includible only when it is a condition precedent for supply of imported goods, the Tribunal held that the department had not established the requisite nexus between the royalty and the imported goods.

Conclusion: Royalty was not liable to be added to the assessable value of the imported goods, and the Revenue's challenge failed.

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