TaxTMI 
TaxTMI 
2019 (2) TMI 1507
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....Commissioner (Appeals) vide Order dated 5.2.2002. In periodical review of SVB order dated 1.7.1997, the order of acceptance of value for further three years under Customs Valuation Rules, 1988/2007 was continued vide Order-in-Review dated 10.2.2009. Upon the expiry of the said Order-in- Review in the month of February, 2012, the Appellant vide its letter dated 8.2.2012 applied for periodical renewal of the last order and submitted requisite document. 3. The Adjudicating Authority while passing the Order-in- Original dated 26.6.2014 relied upon clause 8.1.3 of the agreement, and observed that the cost of components has only been excluded for the payment of royalty when the said components does not itself undergo any change, processing or treatment in the factory of the licensee and is physically removable from the assemble final product and therefore since the cost of raw material and the components imported from the related party which are not physically removable from the assemble final product are included in the payment of royalty, therefore the decision of the Hon'ble Apex Court in the matter of Matsushita Television & Audio India Ltd. Vs. CC; reported in 2007 (211) ELT 200(....
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....n of Rule 10(1)(c) of Customs Valuation Rules, 2007 are pari materia to Rule 9(1)(c) of the Customs Violation Rules, 1988. The said Rule 10(1)(c) of Customs Valuation Rules, 2007 is as under:- Customs Valuation Rules, 2007 Rule 10(1) - In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods,- (a) .......... (b) ......... (c) Royalties and license fees related to the imported goods, that the buyer is required to pay, directly or indirectly, as a condition of sale of the goods being values, to the extent that such royalties and fees are not included in the price actually paid or payable. Explanation. - Where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods. 7. On perusal of Rule 10(1) (c) ibid we find that the following two conditions are required to be satisfied for invoking the said Rule:- (i) Royalty is rel....
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....to case." As per this clause the Appellants are free to procure the material from other foreign suppliers or even locally. Cl. 8 of the said agreement i.e. Compensation clause and in particular clause 8.1.3 which has been relied upon by the authorities below in deciding against the Appellant, is extracted as under:- "8. COMPENSATION 8.1 LICENSEE shall pay to LICENSORS, in addition to the costs separately invoiced hereunder, the following compensation for the rights granted to it: 8.1.1 A lump sum payment ("entrance fee") amounting to EUR 400 000, -. This amount shall not be credited against royalties payable according to Article 8.1.2. LICENSEE shall pay Forty percent (40%) - EUR 160 000, - of the aggregate payment of the foregoing lump sum to Bosch, Thirty percent (30%) - EUR 120 000, - to RBJP. The lump sum shares shall be paid to each LICENSOR in two installments as follows: - First installment of EUR 200 000 of the above amount payable after this Agreement has been signed by the parties and - Second installment of EUR 200 000 next year ( within one year from the date of remittance of first installment) 8.1.2 a running royalty amounting to ....
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.... 98,67,915 17,76,230 80,91,685 Jul.13 to Sep.13 1,72,74,453 33,11,870 1,39,62,583 Sub-total 4,62,37,536 82,55,170 3,79,82,366 % 100 17.85 82.15 Total 252284904.3 55682852.08 196602052.2 % 100 22.07 77.93 9. According to Appellant, from the very beginning their case is that the royalty is paid only on the value addition achieved, after deducting the cost of imported components, be it imported from related or unrelated persons. Payment of royalty has nothing to do with the supply of components or on the price of the components and since as the foreign company had no controlling interest in the Indian buyer i.e. the Appellant, the royalty paid cannot form part of the price for the supply of components. In the absence of a specific clause indicating that the payment of royalty was connected with the supply of components, the royalty payment cannot be automatically added to the value of the goods imported. In the following decisions, it has been held that merely because the assessee has obtained th....
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....manufacturer was not free to procure the components from anybody else. It was also a condition therein that if the Indian manufacturer/importer wanted to buy components from elsewhere, first of all they should take prior approval from the technical know-how supplier and on such approval only, the Indian importer was free to use the components in the manufacture of Colour TV. In view of the facts of that case it was held that the payment of royalty was a condition of sale and therefore, it should be included in the cost of components imported. In the instant matter, no such condition exists in the agreement and, therefore, it can very well be said that the facts of the instant case and the facts in Matsushita Television & Audio (I) Ltd. (supra) are totally different. This Tribunal in the matter of Thyssenkruppelevator (I) P.Ltd. vs. ACC (Import & General), New Delhi; 2017(356) ELT 249 (Tri-Del) while deciding the issue about Rule 10(1)(c) ibid after taking into consideration the decisions of the Hon'ble Supreme Court in the matters of Matsushita Television & Audio (I) Ltd. (supra) and Ferodo India Pvt. Ltd. (supra), has held as under:- "10. In the impugned order, Commissioner (Ap....
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....tant case is relating to includibility of royalty in terms of Article 8.1.3 of the Licence and Technical Assistance Agreement dated 4.2.2011. It is the specific stand of the Appellants that while determining the quantum of royalty, value of imported inputs have been deducted from the Net Sale. From the records, it is clear that the running royalty and lump sum amount paid to Licensors relate only to the final products being manufactured by the Appellants and it has not relation, whatsoever, with the goods imported. The payment of running and lump sum amount is not a precondition for import of goods and hence the provisions of Rule 10(1)(c) ibid has no application. In terms of Rule 10(1)(c) ibid royalties can be added to the price of imported goods only if such royalties are related to the imported goods that the buyer is required to pay directly or indirectly, as a condition of the sale of goods being valued, to the extent that such royalties are not included in the price actually paid or payable. 13. Reliance has also been placed on the decision of the Tribunal in the case of Commissioner of Customs, Mumbai v. BASF Strenics Pvt. Ltd. - 2006 (195) E.L.T. 206 (Tri.-Mumbai) in whi....
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....clause referred above, it is amply clear that the royalty is not paid "as a condition of the sale of the goods being valued". Thus the royalty has nothing to do with the value of the imported raw-materials procured from the overseas Licensors or related foreign supplier or value of the imported components procure irrespective of origin. In the present case there is no finding by Commissioner that the buyer had adjusted price of imported goods in the guise of enhanced royalty. Nor that the appellant was compelled to import raw material from the overseas Licensors. Nothing in the Agreements indicate any binding to buy raw material from the overseas Licensors or their Associate companies. Rather, the ld. Counsel had submitted a statement showing use of raw material sourced locally as well as from unidentified origin. As regard reliance placed by the ld. Authorised Representative on the case of Matsushita Television & Audio (I) Ltd. (supra), it was found that in the said judgment the fact was that the royalty payment to collaborator was 3% of sales turnover of final product, including the cost of imported component by which it became the condition of sale of finished goods. Whereas, in....
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....t Bosch GmBH (Bosch), Robert Bosch LLC USA (RBUS) and Bosch Corporation Japan (RBJP)- "2. License Grant 2.1 Licensors hereby grant license to Licensee the non-transferable, non exclusive right. 2.1.1 to manufacture Licensed Products in its own factories in the Licensed Territory by the use of Knowhow of the Licensed Patents, and 2.1.2 to sell the Licensed Products thus manufactured in its Licensed Territory to original equipment manufacturers in India ("OEM") for the installation into their vehicles in the Licensed Territory and for the purpose of OES (sale of Licensed Products by OEM for replacement purpose) 8. Compensation 8.1 Licensee shall pay to Licensors, in addition to the costs separately invoiced hereunder, the following compensation for the rights granted to it: 8.1.1 A lump sum payment ("entrance fee") amounting to EUR 400,000, - This amount shall not be credited against royalties payable according to Article 8.1.2. Licensee shall pay Forty percent (40%) - EUR 160,000, of the aggregate payment of the foregoing lump sum to Bosch. Thirty percent (30%) - EUR 120,000 to RBUS and Thirty percent (30%) - EUR 120,000 to RBJP. The lump sum share shall b....
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....nent does not itself undergo any change, processing or treatment in the factory of the Licensee and is physically removable from the assemble final product. Therefore IO find that the cost of raw material and the components imported from the related party which are not physically removable from the final product are included in the payment of royalty, therefore I find that in the instant case also, the decision of the Hon'ble Apex Court in Mathushita Televisions & Audio India Ltd {2007 (2110 ELT 200 (SC)] is applicable because the cost of raw material and components imported from the related party which are not physically removable from the assemble final products are included in the payment of royalty. Hence I find that the lump sum and the running royalty paid under the present agreement is related to the imported goods and there is a condition of sale. Hence, I (find that thye payments made under the present agreement is includible in the assessable value of the imported goods under Rule 10(1)(c) of the Customs Valuation Rules, 2007." 3.3 On the basis of the above finding, adjudicating Authority ordered for making additions in the CIF value in following manner;- % addition....
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....ry sale price" has been defined to mean the sale price billed by the appellants for its products to its customers in normal arm's length transaction exclusive of taxes, freight and insurance, but including the cost of the bought-out components and the cost of the imported components. Under Clause 1.04 the term "Technical Know-how" was defined to mean technical information required for the manufacture of colour T.V. as specified in Clause 3.01. The technical know-how which was agreed to be furnished to the appellants was to consist of quality control standard and specification of the components to be used in the manufacture of T.V. sets. Further, under Clause 2.01 it was agreed that MEI shall render to the appellants the technical assistance regarding the manufacture of the T.V. sets in the manner provided in the said clause. Under the said Clause 2.02(C), all costs, charges and expenses, incurred by the appellants for technical assistance, was to be paid by the appellants in U.S. Dollars. Further, under Clause 4.01, MEI agreed to grant to the appellants a licence to use the technical assistance and the technical know-how for the manufacture of the colour T.V. at the appellants' fac....
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.... Rule 9(1)(c) of the Valuation Rules, 1988, are satisfied."" 4.1 Appellants have along with the appeal memo at page 123 of paper book submitted the "Annexure: Determination of Quantum of Royalty". In the said document, they have shown calculation of royalty by deducting the import content. The calculations as provided are reproduced in Table 1 below: Table 1 Royalty Calculations as per page 123 of Paper Book Amount 'Rs Period Total Sales Import Content Net Sale/ Royalty Bearing Value Total Royalty From To Oct-11 Dec-11 14,53,65,008 2,73,89,650 11,79,75,358 35,39,261 Jan-12 Mar-12 12,50,90,638 2,12,33,148 10,38,57,490 31,15,725 Apr-12 Jun-12 13,55,66,826 2,02,87,440 11,52,79,386 34,58,382 Jul-12 Sep-12 7,06,21,892 1,39,08,992 5,67,12,900 17,01,387 Oct-12 Dec-12 12,56,42,730 2,02,04,355 10,54,38,375 31,63,151 Jan-13 Mar-13 17,23,15,515 1,90,95,168 15,32,20,347 45,96,610 Apr-13 Jun-13 14,82,90,377 98,67,915 13,84,22,462 41,52,674 Jul-13 Sep-13 16,18,78,601 1,72,74,453 14,46,04,148 43,38,124 4.2 On the basis ....
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....ants have thus not been able to demonstrate that there is no connection between the imported goods and the royalties being paid. 5.1 From the facts of case in hand, it is quite evident that appellants have entered into "License and Technical Assistance Agreement" with Bosch, RBUS and RBJP collectively called Licensor. In terms of the agreement the appellants have been licensed by the licensor to manufacture in its factory by the use of know-how and Licensed Patents, and sell in licensed territory (India). Licensed Products as per the agreement shall mean vacuum boosters of the type NOAH and reservoirs and tandem master cylinders of type TMCB. 5.2 As per para 2.2 and 2.3 of the agreement- "2.2 It is expressly understood that this License does not include the manufacture of 2.2.1 semi-finished goods e.g. castings, forgings, plastic parts, 2.2.2 commercially available parts, e.g. screw, rivets, resistors, seals, springs, ball bearings, cables, 2.2.3 materials and processes that refer to the composition or manufacture of material. The license includes, however, processes used in the further treatment of materials during the manufacture of Licensed Products. 2.3 ....
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....e cost of imported component in the manufacture of finished goods as per the appellants is {CIF value + Custom Duties} and in case if the same goods are manufactured indigenously using the technical know-how the cost of the same component will be {Landed Cost of the said components + Royalty Paid to the Licensor}. Thus the connection between the royalty paid and the imported components is quite evident. 5.7 In terms of Rule 10(1)(c), those royalty charges which are connected with the imported goods and is a condition for the sale of said goods need to be added for determining the assessable value. 6.1 Appellants have heavily relied upon the decision of the Apex Court in case of Ferodo India [2008 (224) ELT 23 (SC)] while the revenue has relied upon the decision in case of Matsushita Television referred above. In my view Hon'ble Supreme Court has in case of Ferodo India clearly laid down the scope of rule 9(1)(c) and also explained its decision in the case of Matsushita. The relevant excerpts are reproduced below: "Role of Interpretative Notes to CVR, 1988 13. At the outset, it may be stated that Rule 9(1)(c) has to be read with the Interpretative Notes and when so read ....
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....plant and, therefore, it had to be loaded to the price thereof. 18. Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and knowhow in the manufacture of the licensed product in India. Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/licence fees which are also paid to the foreign supplier. Rule 9(1)(c) stipulates that payments made towards technical know-how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under Rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. At this stage, we would like to ....
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.... for the manufacture of licensed products. The Department itself has invoked Rule 9(l)(c). 21. In the alternate, it has invoked Rule 9(1)(e). This Rule 9(e) cannot stand alone. It is a corollary to Rule 4. There is no finding in the present case that what was termed as royalty/licence fee was in fact not such royalty/licence fee but some other payment made or to be made as a condition prerequisite to the sale of the imported goods. It is important to bear in mind that Rule 9 refer to cost and services. Under Rule 9(1), the price for the imported goods had to be enhanced/loaded by adding certain costs, royalties and licence fees and values mentioned in sub-rule 9(1)(a) to 9(1)(d). It refers to "all other payments actually made or to be made as a condition of sale of the imported goods." In the present case, the Department invoked Rule 9(1)(c) on the ground that royalty was related to the imported goods, having failed it cannot fall back upon Rule 9(1)(e) because essentially we are concerned with the addition of royalty etc. to the price of the imported goods. Further, in the present case, the Department has accepted the transaction value of the imported goods. 22. In the case ....
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....ber of factors, therefore, have to be taken into consideration in determining whether one value "closely approximates" to another value. These factors include the nature of the imported goods, the nature of the industry itself, the difference in values etc. As stated above, Rule 4(3)(a) and Rule 4(3)(b) of the CVR, 1988 provides for different means of establishing the acceptability of a transaction value. In the case of Matsushita Television (supra) the pricing arrangement was not produced before the Department. In our view, the Consideration Clause in such circumstances is of relevance. As stated above, pricing arrangement and TAA are both to be seen by the Department. As stated above, in a given case, if the Consideration Clause indicates that the importer/buyer had adjusted the price of the imported goods in guise of enhanced royalty or if the Department finds that the buyer had misled the Department by such pricing adjustments then the adjudicating authority would be justified in adding the royalty/licence fees payment to the price of the imported goods. Therefore, it cannot be said that the Consideration Clause in TAA is not relevant. Ultimately, the test of close approximatio....
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.... that if royalty is paid on the value inclusive of the value of imported goods then it becomes a condition of sale. The learned Counsel has relied on the decision of the Hon'ble Apex Court in the case of Ferodo India (supra). However, it is seen that Hon'ble Apex Court has not differed with the decision in the case of Matushita Television & Audio Ltd. Further there was no assertion by the Revenue in that case to the effect that royalty is collected on the price inclusive of the value of imported goods. 4.7 The decision of the Hon'ble Apex Court in the case of J.K. Corporation - 2007 (208) E.L.T. 485, is not relevant as in that case the one time know-how fee was paid for the installation of plant and machinery. The facts were substantially different from the facts in the case of Matushita Television & Audio Ltd. (supra). 4.8 In the instant case it is undisputed that the royalty is paid on a value inclusive of the value of the imported goods. Clause 5 of the Article of definition section of the licence agreement defines net sale as follows : "This agreement is made and entered into as of this first day of April, 2007, by and between Husco International, Inc. a Delaware Corpo....