2025 (9) TMI 1099 - AT - Customs

Technical service fees to overseas affiliate not includible in assessable value under Rule 10(1)(c) CVR 2007

CESTAT held that technical assistance/service fees paid to an overseas related entity for setting up and assisting production do not qualify for addition ... Calculation of Customs Duty - Technical Assistance Fees paid by the appellant under the Agreement dated 01.04.2013 to the overseas related parties be added to the value of the imported capital goods under Rule 10(1)(c) of CVR, 2007, which are tools and other spares for the machineries meant for installation of the plant and machinery in the factory for trial purpose - HELD THAT:- The Hon’ble Supreme Court in the case of CC(Port), Chennai Vs. Toyota Kirloskar Motor P. Ltd. [2007 (5) TMI 20 - SUPREME COURT] has addressed the issue and observed the circumstances in which the technical assistance fees and royalty charges be added to the value of the imported goods. In the said case, M/s. Kirloskar Systems Limited entered into an agreement with M/s. Toyota Motor Corporation, Japan, a major shareholder in the Indian company for the purpose of establishing an automobile manufacturing plant in India. Under the agreement entered into between the Indian company and the overseas related entity, royalty and know-how fees were required to be paid. Revenue proposed to add these royalty and know-how fees in terms of Rule 9(1)(c) of the CVR, 1988 alleging that there is a direct nexus between the fees paid and the goods imported as the same go into the manufacture of licensed vehicles and spare parts. The Technical Assistance Agreement (TAA) was entered into between M/s. Toyota Motor Corporation, Japan and the Indian company under which the payments were required to be made towards engineering services and for imparting training to its personnel at Japan. More or less, similar principle has later been laid down by the Hon’ble Supreme Court in the case of CC Vs. Ferodo India Pvt. Ltd. [2008 (2) TMI 12 - SUPREME COURT]. In the said case, the Indian company is a manufacturer of brake liners and brake pads in India. A technical assistance and trade mark agreement (TAA) was entered into between Indian company and M/s. T&N International Ltd., UK. Under the said agreement, the Indian company was required to import raw materials and capital goods from the overseas suppliers and the Indian company was obliged to pay a licence fee along with royalty based on the net sales value of the products sold, consumed or otherwise disposed of. The Assistance and Service Agreement dated 01.04.2013 between the appellant and the overseas entity is in connection with rendering various assistances to setting up plant and subsequent production and marketing of the goods so manufactured. Nowhere it is stipulated nor from a plain reading of the same, it is coming forth that the payments made against the said agreement is as a condition of import of capital goods (tools) meant for setting up installation of machineries purchased from unrelated parties. Therefore, addition of the amount paid towards Assistance and Service fees to the value of imported goods under Rule 10(1)(c) of CVR, 2007 is not sustainable in law. The impugned order is set aside and the appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether Technical Assistance Fees paid to related overseas entities under an Assistance and Service Agreement are 'royalties and licence fees related to the imported goods' and thus includible in the transaction value under Rule 10(1)(c) of the Customs Valuation Rules, 2007. 2. Whether payments for technical assistance that pertain to setting up a plant, production process, quality control, product development and marketing constitute a condition of sale of imported capital goods (tools and spares) so as to attract addition under Rule 10(1)(c). 3. Whether a finding of relatedness between supplier and buyer alone suffices to treat technical assistance fees as part of assessable value, or whether a direct/indirect pricing nexus or condition of sale must be shown. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework: inclusion under Rule 10(1)(c) Legal framework: Rule 10(1)(c) of the Customs Valuation Rules, 2007 requires addition to the transaction value of 'royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued' to the extent such charges are not included in the price actually paid or payable. The Rule's Explanation clarifies that such charges shall be added notwithstanding that the process may be carried out after importation. Precedent treatment: The Court relies on Supreme Court precedents interpreting the equivalent earlier rule: the distinction between payments that are a condition of import/sale and payments relating to manufacturing/post-import activities, as articulated in decisions such as Toyota Kirloskar Motor and Ferodo, and later endorsed in Essar Steel. Interpretation and reasoning: The Rule is to be applied only where (i) the royalties/licence fees are related to the imported goods and (ii) they are payable as a condition of sale of those goods (directly or indirectly). Mere relatedness of parties is insufficient; the Department must demonstrate that the payment is attributable to the imported goods either because it is contractually required as a condition of the sale/import or because a pricing adjustment links the fee to the import price. Ratio vs. Obiter: Ratio - Rule 10(1)(c) requires a condition-of-sale/pricing nexus to include royalties/licence fees in assessable value. Obiter - none additional on this point beyond established ratio. Conclusion: The legal test under Rule 10(1)(c) mandates demonstrable nexus/condition of sale between the payments and the imported goods before addition can be made. Issue 2 - Application to technical assistance fees for plant setup and post-import activities Legal framework: Payments for services that are for setting up a plant, production technology, quality control, production planning, product development and marketing are ordinarily post-importation inputs to manufacture and sale; Rule 10(1)(c) applies only if they are shown to be a condition of sale or otherwise related to the imported goods in the specified manner. Precedent treatment: In Toyota Kirloskar Motor the Supreme Court held that technical assistance and know-how were connected with post-import manufacturing activities and were not payable as a condition of import; in Ferodo the Court emphasized examining both the technical assistance agreement and the pricing arrangement to detect any indirect condition/pricing nexus; Essar Steel endorsed the distinguishing principle. Interpretation and reasoning: The Assistance and Service Agreement and annexures in the present matter show the services relate to production technology/information, quality control, production control/technology, product development and marketing. The agreement provides assistance 'as and when requested' and contains an option to purchase products/components but does not make payment of the technical assistance fee a precondition to purchase or import. Annexure-A permits procurement of raw materials inside/outside India. The chartered accountant certificates show capital goods for installation/trial runs and unrelated third-party imports. No contractual or pricing mechanism was shown that ties the assistance fee to the price of imported tools or otherwise treats it as a condition of sale/import. Ratio vs. Obiter: Ratio - Technical assistance fees that relate to post-import manufacturing/marketing and which are not payable as a condition of sale/import are not includible under Rule 10(1)(c). Obiter - factual indicia (e.g., whether assistance is 'on request', option to procure from others, pricing comparisons) are relevant to determine nexus. Conclusion: The Technical Assistance Fees in issue are payments for post-import assistance and not conditions of sale of the imported capital goods; therefore they are not includible under Rule 10(1)(c). Issue 3 - Sufficiency of related-party status and role of pricing arrangement/pricing nexus Legal framework: Rule 10(1)(c) contemplates addition where royalties/licence fees are related to the imported goods and are payable as a condition of sale; related-party relationship alone does not satisfy this test. Where potential manipulation of pricing is suspected, the Department must examine commercial/pricing arrangements to determine if royalty/licence payments have been adjusted to disguise import price reductions. Precedent treatment: Ferodo underscores the requirement that the Department examine pricing arrangements in addition to technical assistance agreements; absent such examination establishing an indirect condition of sale or price adjustment, addition is unsustainable. The Court follows that approach and the earlier Supreme Court authority. Interpretation and reasoning: Authorities below compared list/global prices and accepted transaction value under Rule 3, but proceeded to add the one-time loading or full fee by treating the assistance fees as related to manufacture of the imported items. The Court finds no evidence that pricing was adjusted or that the assistance fee was contractually a term/condition of sale of the imported items. The Agreement's clauses permitting procurement from other sources and assistance 'on request' negate an automatic or requisite link to imports from the related suppliers. Ratio vs. Obiter: Ratio - Related-party status does not, without more, justify adding technical assistance fees to assessable value; proof of pricing nexus or contractual condition of sale is necessary. Obiter - comparisons of declared import prices to list prices are relevant but not determinative absent proof of condition/pricing linkage. Conclusion: Related-party transactions require closer scrutiny, but in absence of evidence of price adjustment or contractual condition tying the assistance fee to sale/import, addition under Rule 10(1)(c) is not warranted. Final Conclusion and Disposition The Court holds that the Technical Assistance Fees paid under the Assistance and Service Agreement, being for plant setup, production process, quality control, product development and marketing (post-import activities) and not payable as a condition of sale or shown to have an indirect pricing nexus with the imported capital goods, are not includible in the assessable value under Rule 10(1)(c) of the Customs Valuation Rules, 2007. The addition made by the authorities is unsustainable and is set aside; the appeal is allowed with consequential relief as per law.