Royalty inclusion in customs value fails where payment is linked to finished goods sales, not import of components.

Royalty and lump-sum payments under a licence and technical assistance agreement were examined for inclusion in the assessable value of imported components under Rule 10(1)(c) of the Customs Valuation Rules, 2007. The controlling test was whether the payment was related to the imported goods and made as a condition of sale. On the stated facts, the royalty was linked to net sales of finished products manufactured in India, the agreement allowed sourcing components from non-licensor suppliers, and there was no contractual requirement to import only from the licensors or evidence of price adjustment for imports. The royalty was therefore held not includible, and the assessee's appeal succeeded. A dissenting member considered the royalty sufficiently connected to the imported inputs and would have dismissed the appeal.

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Issues: (i) Whether royalty and lump sum paid under the licence and technical assistance agreement were includible in the assessable value of imported components under Rule 10(1)(c) of the Customs Valuation Rules, 2007.

Analysis: The relevant test under Rule 10(1)(c) is whether the royalty is related to the imported goods and payable as a condition of sale. The agreement permitted procurement of components from sources other than the licensors, and the royalty was calculated on net sales of manufactured products after deduction of imported components. The payment was thus linked to manufacture and sale of finished goods in India, not to the import of components. The record did not show any adjustment of import price in the guise of royalty or any contractual requirement to import only from the licensors.

Conclusion: The royalty was not includible in the value of the imported goods and the addition under Rule 10(1)(c) was unsustainable; the appeal succeeded in favour of the assessee.

Dissenting Opinion: The Member (Technical) held that the agreement showed a sufficient connection between the imported components and the royalty, and that the royalty was payable on a value derived from sales of licensed products using imported inputs. On that view, Rule 10(1)(c) was satisfied and the appeal was liable to be dismissed.

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