TaxTMI 
TaxTMI 
2024 (6) TMI 61
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....penal provisions under Section 114A of the 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 f....
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....n the transaction value of the imported goods, as per Section 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 transactio....
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....of the goods being valued or the imported components but only for the technical knowhow. It was further submitted that it was a settled position of law that the royalty / license fee is includible in the transaction value 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 therefo....
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....ted 14.12.2000 has considered the Royalty clause under the agreement and clearly observed that Royalty payment under the said clause is not includible in the Transaction Value. Even when CVR, 1998 was replaced by CVR, 2007, department maintained the above view consistently. In the SVB order dated 10.12.2010, 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 Ind....
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....no evidence to establish that the licence fee paid is a condition of sale of the imported goods. The relevant extract of the above decision has been reproduced below:- "6. It is submitted that for the purpose of manufacturing WTGs, the respondent imports various parts from various foreign suppliers. The respondent and M/s. NEG Micon (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 inclu....
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....the royalty is paid is as percentage of the net turnover of goods manufactured, which includes not only the component which are domestically procured but also which are imported as well as any value addition by the appellant. However, this in itself, is not sufficient to add royalty to the assessable value. 23. It needs to be seen whether the payment of such royalty 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:- ....
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....rom the supplier in a given period which shows that the royalty payment is not related to and is not the condition of sale for the imported goods and therefore, Rule 10(1)(c) conditions are not satisfied. Hence, royalty is not addable to the value of the imported goods. 4.5 The Ld. Counsel also submitted that the inclusion of imported raw materials in the Net Sales Value is only a methodology enumerated in 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 D....
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....ference: "Article 1 Definitions 1.6 "Net Sales Value" shall mean gross sales value of the Products (defined below) as per invoice to Company customers less the usual trade discounts, refunds for returned goods, taxes including excise duties, packaging costs, transportation costs, FOB an European airport or port of shipment (as defined in the 1990 Incoterms, import customs duties, as amended from time to time), insurance, cost of 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 Techn....
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....cle 7.1 hereof shall be exercised by the Company according to the terms and conditions set forth in the VALEO Trademark License Agreement entered into between the Parties on February 11, 1998. Article 8 Purchase of Parts and Materials At the Company's reasonable request, VALEO shall supply the Company with parts and raw materials necessary to the manufacture of the Products on terms to be determined by the Company and VALEO. Article 12 Consideration and Payment Conditions 12.1 In consideration for the transfer of the Technology pursuant 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 royal....
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....erial'. It is not known whether the LAA had considered only the above mentioned 'raw material' or all the imported material to arrive at the percentage. Moreover, the method of calculating the royalty amount to be included in the Transaction Value from the already paid total royalty amount is not correct. 18. Appellant though not agreed to the fact that the royalty to be included in the Transaction Value, to prove the LAA's method of calculation of royalty was wrong, appended with the grounds of appeal a chart showing the value of 'raw material' only year wise and the actual amount supposed to be paid as royalty also year wise. 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 foreig....
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....o the manufacture of the products on the basis of the terms to be determined by the appellant and VALEO. All this indicate that payment of royalty is not entirely related to import of raw materials. Even, the value of other products like copper wire, resins, semi-finished clutch facings, etc., required for manufacture of finished goods i.e., Clutch Facings from the associate companies of M/s. VALEO Materiaux De friction, France are to be deducted from the net sales value. 15. From the above, it can be safely inferred that payment of royalty is not completely relatable to import of raw materials as there is no condition of sale attached for their import. Distinction 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 agreeme....
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....gainst the prescribed procedures and rules. The above computation assumes that the entire royalty payment is related to import of raw materials. Even the Lower Appellate Authority has found fault with such a quantification though upheld that the royalty paid is having a nexus with the importation of raw materials and as such royalty paid has to be included in the value of the imported raw materials. The appellant has not only imported the raw materials like fibre yarn and impregnated yarn but also various other raw materials like textured yarn, technical yarn, copper wire, resins even semi-finished clutch facings. So, linking the raw materials imported entirely to royalty 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:- ....
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....following explanation has been added to Rule 10(l)(c). "Where the royalty, licence 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 good, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods". From the above it is clear that the royalty and the other charges can be included: (i) In case of imported goods (ii) As condition sale of goods And the explanation only added that such royalty would be includable' in the case even if the imported goods have undergone the said process after importation of 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, rel....
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....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 approximation 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.....