TaxTMI 
TaxTMI 
2007 (5) TMI 20
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....Toyota Motor Corporation, royalty and know-how fees were to be paid 4. According to the Revenue such payments were to be added to the invoice value of the goods so as to arrive at a proper transaction value in terms of Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules 1988 (for short, 'the Rules') Payments of royalty, according to the Revenue, have a direct nexus to the imported goods as the same go into the manufacture of the licensed vehicles and spare parts. 5. Before embarking upon the rival contentions of the parties, we may notice the basic and undisputed facts of the matter. 6. A Technical Assistance Agreement was entered into by and between Toyota Motor Corporation and the respondent herein. Some of the payments were required to be made towards engineering services and for imparting training to its personnel at Japan. 7. In the said agreement, the terms 'licensed vehicles', 'local parts', and 'licensed products' have been defined. By reason of the said agreement, the respondent was given manufacturing licence for the licensed products of Toyota. The licence was to be given on non-exclusive, non-divisible, non-transferable and....
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.... other documents and assistance from time to time designated by the licenser. (b) In the event of the preceding Paragraph (a), the Licensee shall pay the Licenser all fees, and all costs and expenses incurred by the Licenser in developing and furnishing such know-how, information, documents and or assistance. (c) If the assistance rendered under Paragraph (a) hereof is technical assistance or engineering assistance concerning the licensed products, such assistance will be provided in accordance with the procedures and conditions set forth in Appendix E attached hereto" Appendix D provides for assistance to be furnished by the licensor to the licensee in terms of Article 4, which are separately designated by the licensor from amongst those specified therein, namely, for: (i) construction of plant, (ii) production and preparation, and (iii) pilot production and production model. Article 7 provides for basic requirements for manufacture of the licensed products. Article 11 provides for inspection thereof. Article 16 provides for payment of royalty in the following terms: "Article 16- Royalty (a) The Licensee shall pay the Licensor royalty on all of the licensed produ....
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....purchased by the Licensee from third parties and; (iii) Sales tax, excise tax, commodity tax or any other tax of similar nature (other than any of such taxes to be refunded to the licensee) imposed directly on the manufacture, sale or delivery by the Licensee of those unit Local Parts." Article 21 provides for patents. 8. Indisputably, in terms of the said agreement, the Respondent imported capital goods from Toyota Motor Corporation for manufacture of Passenger Utility Vehicles. Proceeding on the basis that the supplier is related to the respondent, the matter relating to valuation of the said capital goods was referred to the Special Valuation Branch for verification in regard to acceptance or otherwise of the declared invoice value. The Special Valuation Branch by reason of a Circular dated 6-4-1999 was directed to continue to assess the value of imports from the related supplier provisionally. 9. Another agreement known as 'TMSS Overseas Parts Export Agreement' was entered into by and between the respondent and the Toyota Motor Management Services Singapore Pvt. Ltd. The said agreement covered the seal of the TMSS. The Assessing Authority passed an Order-in-Original....
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....ollaborator receives the royalty on the sale proceeds of the finished products the value of the imported goods will naturally be influenced by the relationship as well as the collaboration agreement. 47. The very fact that royalty is paid to the supplier on locally manufactured products, makes it clear that the manufacture of such products is dependent upon the Technical know-how/Technology / Licence / Patent available with the supplier which may be transferred either in the collaboration agreement or which may be inherent in the goods supplied. Otherwise, there is no rationale for payment of royalty in a locally manufactured products which will not be the case if the transaction involves outright sale of equipment- machinery/component etc. 48. The logical conclusion is that the royalty is relatable to the imported goods as the royalty is nothing but an inherent condition to the transaction . Hence, the royalty payable by the importers to their collaborator/supplier is includible in the assessable value of the imported goods as per Rule 9(i)(c) of the CVR, 88." 11. An appeal preferred thereagainst by the respondent before the Commissioner of Customs was dismissed, holding:....
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....d to the imported goods" or being a condition of sale of the goods being value. Thus, there is no legal sanction for adding this payment also the price paid in order to arrive at the transaction value." 13. Mr. Gopal Subramanium, the learned Additional Solicitor General of India, would submit that the agreements entered into by and between the respondent and the said Toyota Motor Corporation must be read in their entirety, wherefrom it would be evident that the terms laid down therein are relevant for determining the conditions of import. According to the learned Counsel it must be held to be involving continuous exercise and in view of the fact that the patent was held by the respondent and furthermore grant of licence and know-how technology being sine qua non for running the automobile manufacturing plant set up by the respondent at Bangalore, Articles 3 and 4 of the Agreement have rightly been invoked for the purpose of determination of the transaction value of the capital goods. Strong reliance, in this behalf, has been placed by the learned Additional Solicitor General on Collector of Customs (Preventive), Ahmedabad v. Essar Gujarat Ltd, Surat [(1997) 9 SCC 738] 14. Mr.....
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....f such goods shall be deemed to be - The price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation or exportation, as the case may be, in the course of international trade, where - (a) the seller and the buyer have no interest in the business of each other; or (b) one of them has no interest in the business of the other ,and the price is The sole consideration for the sale or offer for sale; Provided that such price shall be calculated with reference to the rate of exchange as in force on the date on which a bill of entry is presented under Section 46, or a shipping bill or bill of export, as the case may be, is presented under Section 50;" 18. The Central Government in exercise of its power conferred upon it under Section 156 of The Act, made rules known as "Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. Rule 3 provides for determination of the method of valuation, stating: "Determination of the method of valuation. - For the purpose of these rules, - (i) the value of imported goods shall be the transaction value; (ii) if the value cannot be determined under the p....
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....d party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable." 20. The issue before us is no longer res integra in view of the decision of this Court m Commissioner of Customs (Port), Kolkata v M/s J.K Corporation Limited [2007 (2) SCALE 459], wherein it is stated "9. The basic principle of levy of Customs duty, in view of the aforementioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of Customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of licence or technical know-how for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value ....
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....n Article 3 of the agreement under the heading Midrex Process Licence and Technical Services it was provided that in addition to the services being provided by V.A., Midrex will provide certain technical services to V.A. or to EGL in connection with transfer of technology covered under the process licence agreement attached to in Annexure 12 of the agreement. The services included: (a) basic engineering package for the hot discharge and hot briquetting system; (b) advice to Essar on optimum utilisation of iron oxide lump ore and iron oxide pellets; (c) provide information and documentation to allow Essar to implement improvements in plant design and/or operating procedures which have been developed by Midrex or other Midrex Process Licensees; (d) provide continuing information to Essar on operating results from other Midrex Plants to assist Essar in optimizing plant-operating efficiency including operating reports, operation bulletins and operation seminars. 8. Article 10 of the agreement is as under: Article 10: CONTRACT DHILL: In consideration of fulfillment by Collaborator of its obligations under this Agreement, Essar shall pay to COLLABORATOR as below: ....
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....alue of the goods which are being imported. The EGL in this case was purchasing a Midrex Reduction Plant in order to produce sponge iron. In order to produce sponge iron, it was essential to have technical know-how from Midrex. It was also essential to have an operating licence from them. Without these, the plant would be of no value. That is why the pre-condition of a process licence of Midrex was placed in the agreement with TIL. It will not be proper to view that agreement with TIL in isolation in this case. The plant would be of no value if it could not be made functional. EGL wanted to buy the plant in a working condition. This could only be achieved by paying not only the price of the plant, but also the fees for the licence and the technical know-how for making the plant operational. Therefore, the value of the plant will comprise not only the price paid for the plant but also the price payable for the operation licence and the technical know-how. Rule 9 should be construed bearing this in mind." 28. This Court noticed several curious aspects of the three agreements, but ultimately held that whereas the amounts payable in terms of clauses 10.1.1.1, 10.1.1.2 and 10.12.1 we....
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....e in respect of the matters specifically laid down therein. Technical assistance fees have a direct nexus with post-import activities and not with importation of goods. 33. It is also a matter of some significance that technical assistance and know-how were required to be given not as a condition precedent, but as and when the respondent makes a request therefor or and not otherwise. Appendix C of the agreement relates to manufacture of local parts which evidently has nothing to do with the import of the capital goods. Appendix D again is attributable to construction of plant; production preparation; and pilot production and production model, wherewith the import of capital goods did not have any nexus. 34. We may furthermore notice that Interpretative Note appended to Rule 4 also plays an important role in a case of this nature which reads as under "Note to Rule 4 Price actually paid or payable The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or ....
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....Note cannot be pressed into service for calculating the price of any drawings or technical documents though separately paid by including them in the price of imported equipments. Clause (a) in the third para of the Note to Rule 4 is suggestive of charges for services rendered by the seller in connection with construction, erection etc. of imported goods. The value of documents and drawings etc. cannot be charges for construction, erection, assembly etc. of imported goods. Alternatively, even on the view as taken by the Tribunal on this Note, the drawings and documents having been supplied to the buyer-importer for use during construction, erection, assembly, maintenance etc. of imported goods, they were relatable to post-import activity to be undertaken by the appellant..." 37. Yet again a three-Judge Bench of this Court in Union of India and Others v. Mahindra and Mahindra Ltd., Bombay [(1995) Supp. (2) SCC 372], opined: "...Ordinarily the Court should proceed on the basis that the apparent tenor of the agreements reflect the real State of affairs. it is, no doubt, open to the Revenue to allege and prove that the apparent is not the real and that the price for the sale of th....