2025 (2) TMI 856 - AT - Customs

Royalty and technical fees excluded from customs valuation under Rule 10(1)(c) due to lack of nexus with imported goods

M/s. Sungwoo Stamping Pvt. Ltd. Versus Commissioner of Customs, Chennai III Commissionerate

CESTAT Chennai ruled that royalty and technical fees paid by the appellant to their foreign supplier should not be included in the transaction value of ... Valuation of Customs duty - inclusion of royalty and technical fees paid by the Appellant to their foreign supplier, 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) - HELD THAT:- Rule 10(1)(c) of the Valuation Rules provides for addition to the price actually paid or payable for imported goods if royalties and license fees related to the imported goods. However, the Rule 10(1)(c) also requires that such amounts are those that the buyer is required to pay, directly or indirectly as a condition of the sale of the goods. There has to be a nexus between the goods imported with the royalties or license fees. The payment of royalty and licence fees should be a condition of sale with respect to the goods imported. The Tribunal Mumbai in the case of BASF India Pvt. Ltd. Vs. Commissioner of Customs (Imports), Mumbai [2013 (4) TMI 712 - CESTAT MUMBAI], has held that royalty charges for technical-how paid are not to be added to the assessable value of imported goods as there is no restriction for procuring the raw-materials from any source of choice of the importer. In the case of Brembo Brake India Pvt. Ltd. Vs. Commissioner of Customs (Imports), Mumbai [2014 (11) TMI 22 - CESTAT MUMBAI], the Tribunal has held that royalty is not includable in assessable value when royalty or technical know-how was paid only for manufacture of sub-assembly of Disc Brake Systems and payment of royalty and other charges are not related for imported goods and not a condition of sale of goods. Even in this case, the entire Agreement is only for technical assistance and a detailed analysis made by the Ld. Adjudicating Authority indicated that only 9% of the value of the final products are from the import. The entire Agreement is only for sending technical personnel whose main function is to get the approval of the products manufactured by the Appellant from M/s. Hyundai Motor India Limited. There is no relation or connection between the technical assistance taken by the Appellant to the imported goods and how the condition of sale of goods is satisfied, no evidence is forthcoming. Conclusion - The payments for technical assistance is not includible in the transaction value of the imported raw materials to demand any differential customs duty. Appeal allowed. ISSUES PRESENTED and CONSIDEREDThe primary issue considered in this appeal was whether the royalty and technical fees paid by the Appellant to their foreign supplier 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). The Tribunal examined whether these payments were a condition of sale of the imported goods and if they were related to the imported goods.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsRule 10(1)(c) of the CVR mandates the addition of royalties and license fees to the transaction value of imported goods if they are related to the goods and are a condition of their sale. The Tribunal referred to several precedents, including decisions in the cases of M/s. Valeo Friction Materials India Ltd., Commissioner of Customs Vs. Ferrodo India Pvt. Ltd., and others, which illustrated that royalties and technical fees should not be included in the transaction value unless they are directly related to the imported goods and are a condition of sale.Court's Interpretation and ReasoningThe Tribunal noted that for Rule 10(1)(c) to apply, the royalty or license fee must be related to the imported goods, required to be paid by the buyer, and be a condition of sale. The Tribunal found that the technical assistance fees paid by the Appellant were for post-importation services related to the manufacture of final products and not directly linked to the imported goods. The Tribunal emphasized that the agreement between the Appellant and the foreign supplier was primarily for technical assistance, which did not influence the import prices.Key Evidence and FindingsThe Tribunal examined the Memorandum of Exchange of Technicians and the related agreement, which detailed the services provided by the foreign supplier. These services were related to post-importation activities such as preparation of documentation and coordination with a third party for product acceptance. The Tribunal found no evidence that these services were a condition of sale for the imported goods or that they influenced the transaction value.Application of Law to FactsThe Tribunal applied Rule 10(1)(c) by assessing whether the technical fees were a condition of sale. It concluded that the fees were for technical assistance unrelated to the sale of imported goods and thus should not be included in the transaction value. The Tribunal also noted that the Appellant's dependence on the foreign supplier for technical assistance did not equate to a condition of sale for the imported goods.Treatment of Competing ArgumentsThe Department argued that the technical fees should be included in the transaction value due to a nexus between the fees and the imported goods. However, the Tribunal found that the Department failed to demonstrate this nexus or that the fees were a condition of sale. The Tribunal rejected the Department's reliance on implicit conditions without evidence.ConclusionsThe Tribunal concluded that the payments for technical assistance were not related to the imported goods and were not a condition of sale. Therefore, they should not be included in the transaction value under Rule 10(1)(c) of the CVR.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Tribunal stated, 'The Agreement entered between the Appellant and the supplier was for technical assistance which does not have any relation to impact import prices. We could not find discussion as to how the condition of sale is satisfied.'Core Principles EstablishedThe Tribunal reaffirmed that for royalties and technical fees to be included in the transaction value, they must be directly related to the imported goods and a condition of their sale. Payments for technical assistance related to post-importation activities do not meet these criteria.Final Determinations on Each IssueThe Tribunal set aside the Order-in-Appeal, ruling that the inclusion of royalty and technical fees in the transaction value was erroneous. The appeal was allowed, and the Appellant was granted relief from the additional customs duty demand.