TaxTMI 
TaxTMI 
2024 (6) TMI 61
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....he ACT ibid for suppression of fact / wilful mis-statement to impose appropriate penalty. 2.1 The brief facts are that the Appellant is engaged in the manufacture and clearance of clutch facings from raw materials, imported from various foreign suppliers which are group and associate companies of M/s. Valeo Materriaux De Friction, France which were held to be related to the Appellant vide Order-in-Original No. 1153/2000-SVB dated 14.12.2000 and was ordered for acceptance of Transaction value under Rule 4 of the Customs (Determination of Price of Imported Goods) Rules, 1988 (CVR, 1988) as the Royalty payable to the related supplier @ 3.75% on net sale value of finished goods was held to be not includible in the transaction value of the goods imported. The said order was periodically reviewed vide Orders-in-Original bearing Nos. 2931/2004 dated 28.09.2004, 6884/2007 dated 23.11.2007 and 13788/2010 dated 10.12.2010 wherein it was ordered to accept the Transaction Value under Rule 4(3)(a) of CVR in line with the Original Order. During the year 2012, the auditor of the Appellant pointed out the error in computation of Royalty and consequently from July 2012, the Appellant started inclu....
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....tion 14 read with Rule 3 of CVR, 2007 adjusted in accordance with Rule 10 of CVR, 2007, as all the conditions specified under Rule 10(1)(c) of CVR, 2007 have not been fulfilled Viz.:- a. The Royalty/ licence fee must be related to imported goods. b. It must be required to be paid. c. Such payment should be as a condition for sale of imported goods; and d. It is not already included in the price paid or payable for the imported goods. ii. It was averred that Transfer of Technology agreement pertained only to final goods manufactured by the Appellant and not to the goods imported by them. As such it becomes evident that the Royalty is payable on the sale of the product manufactured by the Appellant with respect to the value addition of the imported goods and there was no condition of sale on the imported goods. iii. It was submitted that the inclusion of Royalty in the transaction value of the goods imported by the Appellant is contrary to the Settled position of law and that the department could not adduce evidence to show that the Royalty includible in transaction value is a condition pre-requisite for sale and the assessable value is not a true transaction va....
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....lue only if the same is paid/ payable as a condition of sale of the imported goods and reliance was placed on the following case laws:- a. Faiveley Transport India Ltd. Vs. Commissioner of Customs, Chennai [2009 (238) ELT 312 (Tri.-Chennai)] b. India Japan Lighting Ltd. Vs. Commissioner of Customs, Chennai [2008 (23) ELT 172 (Tri.-Chennai)] c. Steel Authority of India Limited Vs. Commissioner of Customs, [2007 (210) ELT 150 (Tri.)] and affirmed by the Apex Court vide [2008 (225) ELT A130 (SC)] vi. It was averred that the observation in the impugned order that the raw materials imported by the Appellant forms part and parcel of the Technology/ Technical Knowhow supplied by the supplier warranting payment of Royalty is only an assumption, not supported by any evidence/ material. vii. It was submitted that the general terms of purchase and the Licence agreement are separate and pertain to two unrelated transactions and therefore, it was incorrect to consider the payment of the Royalty as a condition of sale of the imported goods especially in the absence of any such clause in the agreement to construe such payment as a condition of sale. viii. It was submitted that the inc....
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....2.2010, it was clearly observed that "The Annual reports submitted by the importer's for the last three years have been verified and confirmed that the importer statement supra on flow back of money. Hence, there is no need for addition under Rule 10(1)(c) of Customs Valuation Rules, 2007". Therefore, it was stressed that there is no reasonable ground for deviating from the stand taken previously by the Department. 4.1 The Ld. Advocate for the Appellant, Shri S. Ganesh Aravindh, submitted that the royalty payment pertains to post import activity of manufacture and sale of finished products and it is the settled law that Royalty paid for post-import activity of manufacture of finished products is not includible in the transaction value of the imported materials and in this regard placed reliance on the ratio of the decisions in the case of Commissioner of Customs Vs. GH Induction India Pvt. Ltd. [2023 (9) TMI 90-CESTAT, Chennai] and Commissioner of Customs (Sea), Chennai Vs. Remi Electricals India Ltd. [2017 (6) TMI 32- CESTAT, Chennai] wherein it was held as follows:- "6. The license agreement available in the appeal folder has been perused by us. Para 2 of the license agreement....
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....on (foreign company) known as Vestas Wind Systems AS, Denmark had entered into Technical Assistance Agreement on 29.01.2000. Through the said agreement, the technological innovations made by NEG Micron were transferred to the respondent. For such transfer, the respondent would compensate NEG Micron by payment of license fee in respect of every WTG produced. ...... 18. Ld. A.R has relied upon the decision in the case of Essar Gujarat Ltd. (supra). The Hon'ble Apex Court in the case of Feroda India Pvt. Ltd. 2008 (2240 ELT 23 (SC) had occasion to analyse the very same issue and has held that the decision in Essar Gujarat Ltd. is not applicable. The Tribunal in the case of Remy Electricals India Ltd. (supra) has followed the decision of Hon'ble Apex Court in Ferodo India Pvt. Ltd. (supra) to hold that the licence fee cannot be included to the transaction value when the same is not a condition of sale." 4.3 He has argued that even if Royalty is calculated on the value including imported components / raw materials, the same is not addable to the Transaction Value of imported goods as there is no such condition that emerges from the agreement which provides that payment of royalty i....
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....oyalty is pre-condition to the sale of the imported goods. No such condition emerges from the agreement in the present case. The goods were also not imported under the agreement. In view of the above, we find that the royalty cannot be included in the assessable value." The said decision of the Tribunal has been affirmed by the Hon'ble Supreme Court [2023 (8) TMI 208-SC]. Further, the Ld. Counsel relied on the decision in the case of Commissioner of Customs, Mumbai Vs. BASF Strenics Pvt. Ltd [2006 (195) E.L.T 206 (Tri.-Mumbai)], wherein it was held that just because a particular formula has been designed to calculate the royalty amount which also includes the raw material cost, it cannot be said that the royalty payment is related to the imported goods. The relevant portion of the decision as follows:- "9. .... The applicant Commissioner himself has stated in the grounds of appeal that in effect the royalties are being paid on manufacturing cost plus profit plus the value of raw materials. Just because a particular formula has been designed to calculate the royalty amount which also includes the raw material cost, it cannot be said that the royalty payment is related to the i....
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....n the agreement for calculation of royalty to be paid to the supplier which does not mean that the royalty payment is related to the imported goods and is a condition of sale for the imported goods. Further, it was pointed out that the Department failed to show how the royalty is related to the imported goods. He has argued that it was a settled position of law that if royalty is not related to the imported goods but to the final goods manufactured, then such royalty is not addable to the value of imported goods relying on the following decisions:- a. Commissioner of Customs Vs. Ferodo India Pvt. Ltd. [2008 (224) ELT 23 (SC)] b. Commissioner of Customs (Port), Chennai Vs. Toyota Kirloskar Motor P. Ltd. [2007 (213) ELT 4 (SC)] Hence it was stressed that the Department failed to establish that the 'condition of sale' between the licensor and the licensee and the royalty payment is related to the imported goods. 5. The Ld. Authorised Representative Shri R. Rajaraman representing the Department reiterated the findings of the lower Adjudicating Authorities. He has submitted that value of imported raw materials constitute major portion of the clutch facings manufactured by the appe....
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....imported components and/or complete knocked-down parts and/or semi knocked-down parts, and/or standard bought-out components, regardless of the source of import (excepting raw materials). 1.7 "Products" shall mean the friction material products listed.in Appendix 2 hereto using the Technology (defined below) and designed and developed by VALEO. 1.10 "Technology" shall mean the technical knowledge (whether patented or unpatented), design formulae~ technical know-how, patents (listed in Appendix 1 hereto), procedures for manufacturing, secret and confidential information, which have been developed or acquired by VALEO and which are used for the manufacture of the Products. The Technology is embodied in the Technical Documentation and the Technological Documentation. Article 2 License VALEO hereby transfers the use of the Technology on an exclusive, non-transferable and non-assignable basis, in order to manufacture and assemble the Products in India and to sell the Products in India and in the Export Territory, for the duration of the Agreement. Article 3 Quality Control; Quality Certificate 3.1 The Company shall comply strictly with the Technical D....
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....t to Article 2 thereof, the Company shall pay to VALEO a royalty of three and three quarters percent (3.75%) of the annual Net Sales of Product sold by the Company during a 7- year period starting on 1st January 2000. 12.2 The value of fibre yarn and/or impregnated yarn to be supplied by VALEO to the Company shall be considered as a raw material for the purpose of calculating royalty payments to be made to VALEO under this Article 12. In the event that such characterisation of the fibre yarn and/or impregnated yarn is not possible for whatever reason, the parties hereby agree to adjust the royalty rate immediately in order to ensure an equivalent amount of quarterly of royalty payments to be made hereunder." From the above, it could be seen that the Technology Agreement provides for the framework for transfer of technology from Valeo, France to the Appellant for manufacture and sale of Finished "Products" defined under Article 1.7 of the Agreement. 9. We find that as per clause 12.1 of the agreement, the said agreement was to be in force for a period of 7 years from 01.07.2000 which was renewed periodically vide 3 Supplemental Agreements. From 01.08.1997 to 31.03.1999, roy....
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....se. According to the appellant the royalty amount supposed to have been paid (though actually not paid or to put it other words, payable) worked out to Rs.3,88,01,446/- for the period from 2000-01 to 2012-2013. The department arrived at the same as Rs.15,02,08,325/-. Prima facie it appears that if at all the royalty amount that was payable to be included in the Transaction Value, the Appellant's calculation needs to be given due weightage. In other words the percentage of royalty (3.75%) on the raw material, which was paid by the appellant to the foreign supplier but not actually included in the declared invoice price, should be included in the transaction value for the purpose of calculation of duty." 12. We find that as per Rule 10(1)(c) of Customs Valuation Rules, 2007 ('CVR, 2007'), there are certain essential conditions, only on fulfilment of which the said rule can be invoked to arrive at the transaction value by including royalty / license fees payment. a. The royalty/ license fee must be related to the imported goods; b. It must be required to be paid by the buyer; and, c. Such payment should be a condition of sale of the imported goods. 13. As such, ....
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....nction which exists between an amount payable as the condition of import and amount payable in respect of sale of manufactured goods using the brand name has to be understood properly. Rule 10(1)(c) of the Customs Valuation Rules, 2007 states that royalties and licence fees related to the import goods that the buyer is required to pay directly or indirectly as a condition of sale of the goods have to be added to the transaction value of the imported goods. We find that there is no such condition that emerges from the agreement between the appellant and the VALEO, France which provides that royalty payment is a pre-condition for sale / import of raw materials. There is no evidence to establish as to how the royalty payment is linked to the import of raw materials. 16. Article 12 of the agreement relating to consideration and payment states that the appellant shall pay to VALEO a royalty of 3.75% of the annual Net Sales Value of products sold and value of fibre yarn and impregnated yarn to be supplied by VALEO shall be considered as a raw material for the purpose of calculating royalty payments and in the event that such characterization of the fibre yarn is not possible for whateve....
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....oyalty payment is not legal and cannot be accepted. 18. We find that the issue of inclusion of Royalty in transaction value is no more Res Integra in view of the ratio of the decision in the case of Kruger Ventilation Industries (North India) Private Limited Vs. Commissioner of Customs, [2022 (5) TMI 496-CESTAT NEW DELHI] which was affirmed by the Hon'ble Supreme Court, as relied upon by the Ld. Counsel for the Appellant. We also find that the ratio of the following decisions supports the cause of the Appellant:- i. Commissioner of Customs, Chennai Vs. M/s. GH Induction, India Pvt. Ltd. [2023 (9) TMI 90-CESTAT CHENNAI] wherein it was held that Royalty is not addable to the Transaction Value of the imported goods as the technical knowhow was for the post import (manufacturing) activity. ii. Commissioner of Customs (Sea), Chennai Vs. M/s. Remy Electricals India Ltd. [2017 (6) TMI 32-CESTAT CHENNAI ] iii. Commissioner of Customs (Imports), Chennai Vs. M/s. Vestas Wind Technology India Pvt. Ltd. [2023 (7) TMI 589-CESTAT CHENNAI] wherein it was held that royalty is not includible in the Transaction Value as there is no evidence to establish that the licen....
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.... such goods. The department could not show that the royalty and other charges were for the imported goods and they were as a condition of sale of such imported goods. Undisputedly the royalty on technical know-how was paid only for the manufacture sub-assembly of Dis Brake Systems. Therefore the royalty and other charges are not includible and the impugned order is not sustainable and is set aside. The appeal is allowed." 20. Further, relying on the following decision of higher judicial fora, the appellant has argued that the royalty payment is only for providing technical assistance for manufacture and sale of licenced products and import of raw materials is incidental to such manufacture and sale. There is no condition of sale attached to importation of raw materials and having not met the required conditions of Rule 10(1)(c), payment of royalty amounts cannot be added to the transaction value of import of raw materials. In the case of Commissioner of Customs Vs. Ferrodo India Pvt. Ltd. [2008 (224) ELT 23 (SC)], it was held as follows:- " 23. In the case of Matsushita Television & Audio India Ltd. v. CoC reported in 2007 (211) E.L.T. 200 (S.C.) the question which arose fo....
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....proximation of values require all circumstances to be taken into account. It is keeping in mind the Consideration Clause along with other surrounding circumstances that the Tribunal in the case of Matsushita Television (supra) had taken the view that royalty payment had to be added to the price of the imported goods. 26. For the aforestated reasons, we find no infirmity in the impugned orders of the Tribunals. Accordingly, the civil appeals filed by the Department are hereby dismissed with no order as to costs" Further, we find that in the case of Commissioner of Customs (Port), Chennai Vs. Toyota Kirloskart Motor Pvt. Ltd. [2007 (213) ELT 4 (SC)], it was held as follows:- "31. The transaction value must be relatable to import of goods which a fortiori would mean that the amounts must be payable as a condition of import. A distinction, therefore, clearly exists between an amount payable as a condition of import and an amount payable in respect of the matters governing the manufacturing activities, which may not have anything to do with the import of the capital goods." 21. In view of aforesaid discussions and the judicial precedents cited above, we are inclined to hold that R....