TaxTMI 
TaxTMI 
2024 (7) TMI 330
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.... Line, Height Checking Gauge, Jig, Cutter Mixer, Rocking Mixer, and Bimetal Strips from M/s. Daido Metal Company, Japan. As the Indian Company and the foreign suppliers are related whether the transaction values were influenced was originally examined in Special Valuation Branch, Custom House, Chennai in the year 2013. On completion of required investigation, the Competent Authority vide Order-in-Original No. 555/2003 dated, 14.05.2003, held that the Indian Company and the Foreign Suppliers are related to each other but ordered for acceptance of the declared invoice value as the Transaction Value in terms of Rule 4 of the erstwhile Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (CVR, 1988). 2.2 The said Order-in-Original was subjected to periodical renewal in the year 2007 and the Competent Authority after verification of documents furnished by the Importer renewed the said order vide Renewal Order-in-Original No. 6629/07 dated 31.08.2007 and subsequently vide 18752/2012 dated 02.05.2012. As the Renewal Order was to expire on 02.05.2015, the Importers have requested to renew the SVB Order. They have vide Letter dated 20.04.2015 submitted the following d....
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.... SVB order dated 02.05.2012 vide file no. S50/08/2003-SVB and wish to state the following facts. i. There is no change in the joint venture agreement. ii. There is no change in the Technical Knowhow license agreement. iii. There is no change in the pricing and invoicing procedures. iv. There is no change in the existing agreement and also the original LTAA agreement dated 17.04.2002, which has been renewed by agreement dt. 21.03.2008 and further renewed by agreement dated 01.10.2014 and v. What is stated above is true and correct." 2.6 The Respondent-Assessee has submitted the details of capital goods and Bimetal Strips imported from M/s. Daido Metal Company, Japan along with the price range details of the Bimetal Strips which are the raw-materials for the period from 2012-2013 to 2014-2015. The Assistant Commissioner in charge of Special Valuation Branch, Chennai Customs after examining all these details as submitted by the Respondent-Assessee and particularly the statements showing computation of royalty payments for the above period has come to the conclusion that the landed cost of imported components was not deducted from the Net Sales....
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....fined in the agreement, cost of imported components irrespective of source of procurement and cost of standard bought out components are to excluded, however from the facts and the manner of calculation of royalty amount it emerges that the value of the imported components is not excluded for the purpose of calculation of royalty amount. 6. As per the conditions of Rule 10 (1) (c) of CVR 2007, the addition of royalty can be made if the same is related to the imported goods and is a condition of the sale of the imported goods. Since the royalty amount has been calculated without excluding the value of imported raw material contained in the licensed product manufactured in India, it can be said that the same is related to the imported goods also. However, this is not sufficient for making the addition as it is to be seen whether payment of royalty is a condition of sale of the imported goods. On perusal of the agreement it is seen that there is no clause in the agreement making payment of royalty a condition for imported goods/raw material by the licensor i.e. foreign supplier. In fact in the earlier order passed by the Assistant Commissioner of Customs (SVB) dated 2.5.2012,....
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....ality of the foregoing, the Licensee acknowledges that the Technology & Know-how relating PTFE powder mix material is highly confidential and shall keep such Technology & Know-how strictly confidential in the following manners: 5.3.1....... 5.3.2. The licensee shall obtain the prior written consent of licensor as to the places where the licensee manufactures or uses PTFE powder mix material. The licensee shall not manufacture or use PTFE powder mix material in places other than those approved by the licensor." Thus, the foreign supplier implicitly controls the supply of materials, through the confidentiality clause stated above and thereby quality assurance is controlled by the supplier. iv. Thus, both the conditions to add royalty to transaction value under Rule 10 (c) of CVR 2007 are fulfilled. v. In view of the legal position stated above and in the background of laid down law by Apex Court in the case of Matsushita Electric Company [2007 (211) ELT 200 (SC)], the Committee of Commissioners is of the considered opinion that the order of the Commissioner of Customs (Appeal) may be set aside. 3.1 The Ld. Counsel Shri S. Muthuvenkatara....
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....omponents and pass through products, it would not mean that such payment of royalties / licence fee is related to imported goods. In support of this contention, the Ld. Counsel has relied upon the decision in the case of Commissioner of Customs Vs. BASF Strenics P. Ltd., [2006 (195) ELT 206 (Tri.)] wherein it was held that just because a particular formula was adopted or designed to calculate the royalty by including cost of raw-materials, it cannot be said that royalty payment is related to imported goods. The Ld. Counsel has also submitted that the conditions of valuation Rule 10(1)(c) are not as there is no nexus between the royalty payment and imported goods. iii. It is also submitted that the condition of sale has not been satisfied relying on the decision in the case of Commissioner of Customs Vs. Max Auto Tech Ltd. [2014 (301) ELT 531 (Tri.)], wherein the Tribunal held that the Department has to prove that import of goods was dependent on the payment of royalty by the importer. The term 'condition' means 'stipulation or something on fulfilment of which something else depends'. He had also adverted to the decision in the case of Ferroda India P. Ltd. [2008 (224) ELT ....
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.... findings of the Original Adjudicating Authority (Assistant Commissioner of Customs, SVB, Custom House, Chennai) has pointed out that as per the Licence and Technical Assistance Agreement royalty is calculated on the Net Sales Value, excluding the cost of imported components. Whereas a scrutiny of the Annexure-B statements evidencing payment of royalties indicate that no deduction was made towards the cost of imported components from the sale of their manufactured products. Thus, the royalty payment is made on the value of the imported components for the years 2012-2013, 2013-2014 and 2014-2015. Thus, there is an indirect payment of royalty on imported components / raw-materials and thus a nexus gets established, and it also becomes a condition of sale for imported goods as the imported raw-materials cater to the specific requirements of the Respondent-Assessee. When asked, the importer has failed to submit any international price list of the foreign supplier and also any cost construction statement of the raw-materials supplied. 4.2 He has adverted to the decision of the Hon'ble Supreme Court in the case of Matsushita Television & Audio (I) Ltd. Vs. Commissioner of Customs [200....
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.... of source of procurement (e.g. freight charges and insurance fees), cost of standard bought out components, packing charges, and statutory levies on the sale of the Licensed Products (e.g. excise duties, sales tax, and VAT). "Royalty" shall mean fee payable by the Licensee to the Licensor (on Royalty Base). "Royalty Base" shall mean an amount of Net Sales Values, less an actual sales amount of pass-through products (completed products which are not manufactured or processed by the Licensee) during the relevant period. "Technology and Know-how" shall mean information, knowledge, experience, data and designs in the possession of the Licensor relating to the Licensed Products and/or the process for making it. Unless otherwise mutually agreed upon, the said information, date and designs will be made available to the Licensee in English without any charges other than the Royalty. "Grant of License" 1. The Licensor hereby grants to the Licensee the exclusive right to use the Technology and Know-how to manufacture the Licensed Products (including PTFE bimetal) in the Territory. The Licensor grants to the Licensee the non-exclusive right to use....
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....ed Products manufactured by the Respondent-Assessee as paid by their customers, excluding the cost of imported components, cost of standard bought out components, packing charges, and statutory levies like excise duty, sales tax and VAT. 7.3 The Royalty is payable at 4% on Half Bearings, Bushes and thrust washers manufactured by the Respondent-Assessee. M/s. Daido Metal Company, Japan is required to inspect the plants and other facilities of the Respondent-Assessee in India in order to ensure the quality of products being manufactured. The Respondent-Assessee is permitted to use the brand and trademarks for manufacture and sale of such licensed products. 8. In order to decide the substantive issue in this appeal, the relevant statutory provisions read as follows : - Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 reads as follows:- "10. Cost and services. - (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 licence fees related to the imported goods that the buyer i....
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.... and are no longer separately identifiable, or when the royalty cannot be distinguished from special financial arrangements between the buyer and the seller), it would be inappropriate to attempt to make an addition for the royalty. However, if the amount of this royalty is based only on the imported goods and can be readily quantified, an addition to the price actually paid or payable can be made." 9. 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. 10. As such, it is essential to examine whether the payment of royalty is anyway linked to the import of raw materials and whether sale of raw materials is a pre-condition in the present appeal. A reading of various clauses of Agreement indicate that the royalty is payable at 4% of the annual net sales of the pr....
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.... of Brembo Brake India Pvt. Ltd. Vs. Commissioner of Customs [2014 (302) E.L.T. 551 (Tri.-Mumbai)], it was held that royalty and other charges are not includible in assessable value if payment of royalty and other charges are not for imported goods and not a condition of sale of goods . The relevant extract of the above decision has been reproduced below:- "7. We have carefully considered the submissions and perused the records. The department has sought to load royalty relating to the technical know-how as per Rule 10(l)(c). Undisputedly the appellants have imported components for the manufacture of Disc Brake Systems for two wheelers. The department has sought to load the assessable value as per Rule 10(l)(c) which is reproduced for convenience of the reference :- Rule 10(1)(c). - 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 that such royalties and fees are not included in the price actually paid or payable; The following explanation has been added to Rule 10(l)(c). "Where the royalty, licence fee or any oth....
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....tion of the sale of imported goods. At this stage, we would like to emphasis the word indirectly in Rule 9(1)(c). As stated above, the buyer/importer makes payment of the price of the imported goods. He also incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at TAA, it is also required to look at the pricing arrangement/agreement between the buyer and his foreign collaborator. For example if on examination of the pricing arrangement in juxtaposition with the TAA, the Department finds that the importer/buyer has misled the Department by adjusting the price of the imported item in guise of increased royalty/licence fees then the adjudicating authority would be right in including the cost of royalty/licence fees payment in the price of the imported goods. In such cases the principle of attribution of royalty/licence fees to the price of imported goods would apply. This is because every importer/buyer is obliged to pay not only the price for the imported goods but he also incurs the cost of technical know-how which is paid to the foreign supplier. Therefore, such adjustments would certainly attract Rule 9(l))(c). Applica....
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....xists 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." 16. We find that even if royalty is calculated including the value of imported raw-materials, the same is not addable to the transaction value of imported goods as there is no such condition that is evident from the Licence and Technical Assistance Agreement mandating payment of royalty as a pre-condition for sale of imported materials. In this regard reliance is placed on the decision of Kruger Ventilation Industries (North India) Private Limited Vs. Commissioner of Customs [2022 (5) TMI 496-CESTAT NEW DELHI] wherein it was held that royalty would not be addable even if royalty is paid as a 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. The relevant portion of the decision reads as under:- "22. In the present case, we find that the Technical Aid Agreement entered into between the appellant and M/s. Kruger....
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....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 imported goods. In fact, the royalty is payable on the "Net Selling Price" of all "Agreement Products" under the agreement and such products have been defined to mean "polystyrene polymers manufactured in whole or in part according to existing technology or improvement." Such payment of royalty is not therefore restricted to polystyrene polymers manufactured using impugned goods imported from the related suppliers only. We find that the impugned agreement provides for payment of running royalty under the know-how agreement and relates to goods manufactured and sold indigenously. Such payment of royalty to BASF, Germany is for using BASF technology a....