2025 (2) TMI 640 - AT - Customs

Royalty on net sales of manufactured products cannot be included in customs valuation under Rule 10(1)(c) CVR 2007

M/s. Owens Corning Industries (India) Pvt. Ltd. Versus The Commissioner of Customs (Seaport) Chennai

CESTAT Chennai ruled that 4% running royalty paid on net sales value of manufactured products cannot be included in transaction value of imported goods ... Valuation of Customs duty - inclusion of 4% running royalty paid on the net sales value of the manufactured products in the transaction value of the good imported as per Rule 10 (1) (c) of CVR, 2007 - HELD THAT:- As long as the Royalty is not paid or payable on the imported goods and as long as there is no condition as to ‘sale of goods’ being valued, the same is not includable in the price. But it is only required to check the impact of Explanation in this context. Explanation refers, clearly, to ‘a process’ for which Royalty is paid, shall be added to the price actually paid or payable for the imported goods. The emphasis again, is on the ‘imported goods’ which would suffer Royalty when brought into India. Therefore, understanding is that the imported goods should undergo the ‘process’ for which ‘Royalty’ is paid, which is not even the case of the Revenue. The imported goods in this case are not procured from the Group Company and nor there are any condition to the effect that these goods shall be sold only upon payment of Royalty. In fact, the Agreement also provides a leverage to the appellant in case of any damage or the non--selling of goods, charging back, etc. and hence, the payment of Royalty is fixed at 4% of the Net sales. Conclusion - There was no requirement to add Royalty to the price of imported goods as done by the Commissioner in this case and hence, the impugned orders cannot sustain. Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:(i) Whether the 4% running royalty paid on the net sales value of manufactured products should be included in the transaction value of imported goods under Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR, 2007).(ii) Whether the royalty/license fee is related to the imported goods and constitutes a condition of sale of those goods.(iii) The applicability of the Explanation to Rule 10(1) concerning the inclusion of royalties in the transaction value of imported goods.2. ISSUE-WISE DETAILED ANALYSISIssue (i): Inclusion of Royalty in Transaction ValueRelevant legal framework and precedents: Rule 10(1)(c) of the CVR, 2007, mandates the inclusion of royalties and license fees related to imported goods in the transaction value if they are paid as a condition of sale. The Explanation to Rule 10(1) clarifies that such charges should be added to the price of imported goods, even if the goods undergo a process post-importation.Court's interpretation and reasoning: The Tribunal examined the agreement between the appellant and its US principal, concluding that the royalty was not related to the imported goods but rather to the sale of manufactured products in India. The Tribunal noted that the royalty was calculated on the net sales value of the final products, not on the imported goods themselves.Key evidence and findings: The Agreement specified the royalty payment for using technology to manufacture reinforcement glass fiber products and composite products. The Tribunal found no stipulation requiring the appellant to import raw materials or machinery from the licensor.Application of law to facts: The Tribunal held that the royalty was not a condition of sale for the imported goods, as it was paid on the net sales of manufactured goods, not on the importation of goods.Treatment of competing arguments: The appellant argued that the royalty was unrelated to the imported goods, while the Revenue contended that the royalty should be included in the transaction value as it related to the imported goods. The Tribunal sided with the appellant, emphasizing the absence of conditions linking royalty payments to the sale of imported goods.Conclusions: The Tribunal concluded that the royalty should not be included in the transaction value of imported goods, as it was unrelated to their sale.Issue (ii): Relationship of Royalty to Imported GoodsRelevant legal framework and precedents: The Tribunal referred to various precedents, including Union of India Vs Mahindra and Mahindra India Ltd., to assess the relationship between royalty payments and imported goods.Court's interpretation and reasoning: The Tribunal analyzed the Agreement and found that the royalty was for the use of technology in manufacturing, not for the imported goods themselves.Key evidence and findings: The Tribunal noted that the Agreement allowed the appellant to procure raw materials from unrelated suppliers, indicating that the royalty was not tied to the sale of imported goods.Application of law to facts: The Tribunal determined that the royalty was not related to the imported goods, as it was based on net sales of manufactured products, not on the importation of goods.Treatment of competing arguments: The Revenue argued that the royalty was related to the imported goods, while the appellant contended otherwise. The Tribunal found the appellant's arguments more persuasive.Conclusions: The Tribunal concluded that the royalty was not related to the imported goods and should not be included in their transaction value.Issue (iii): Applicability of Explanation to Rule 10(1)Relevant legal framework and precedents: The Explanation to Rule 10(1) specifies that royalties for a process should be added to the price of imported goods, even if the goods undergo a process post-importation.Court's interpretation and reasoning: The Tribunal interpreted the Explanation as applicable only when the imported goods undergo a process for which royalty is paid.Key evidence and findings: The Tribunal found no evidence that the imported goods were subject to a process for which royalty was paid.Application of law to facts: The Tribunal held that the Explanation did not apply, as the royalty was not related to a process involving the imported goods.Treatment of competing arguments: The Revenue argued for the applicability of the Explanation, while the appellant contended it did not apply. The Tribunal agreed with the appellant.Conclusions: The Tribunal concluded that the Explanation to Rule 10(1) did not apply to the appellant's case.3. SIGNIFICANT HOLDINGSThe Tribunal held that the 4% running royalty paid on the net sales value of manufactured products should not be included in the transaction value of imported goods under Rule 10(1)(c) of the CVR, 2007. The Tribunal emphasized that the royalty was not related to the imported goods and was not a condition of their sale. The Tribunal further clarified that the Explanation to Rule 10(1) did not alter this conclusion, as it was not applicable to the facts of the case.Core principles established: Royalties not directly related to the imported goods and not a condition of their sale should not be included in the transaction value. The applicability of the Explanation to Rule 10(1) depends on a direct relationship between the royalty and a process involving the imported goods.Final determinations on each issue: The Tribunal allowed the appeals, ruling that the royalty should not be included in the transaction value of the imported goods, and granted consequential benefits to the appellant as per law.