TaxTMI 
TaxTMI 
2024 (7) TMI 330
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....r, 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 documents:- i. Details of last 3 years transact....
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....ure 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 Value on which royalty is payable in terms of the Licence and Technical Assistance Agreement entered into by the Respondent-Assessee with their related foreign supplier.....
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....e 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, the Assistant Commissioner has given clear findings that there is nothing to suggest that the payment of royalty is a condition of sale of raw material, whereas the royalty payable is f....
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....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. Muthuvenkataraman appearing for the Respondent-Assessee has submitted that earlier orders of the SVB were not reviewed or appealed against where there was a clear finding that the value declared represented the transaction value and there was no precondition of sale in ....
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....006 (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 23 (SC)] wherein the Hon'ble Apex Court held that the Department must examine the pricing arrangement and to study full details of the case to determine whether there had been any pricing arrangement to decrease the duty liability. iv. The Original Authority relying on non-deduc....
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....ing 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 [2007 (211) ELT 200 (SC)] which had observed that under Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, only such royalty which is relatable to the imported goods and which is a condition of sale of such goods could be added to the declared value. Relying on the above Apex Court's decision, ....
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....s 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 the Technology and Know-how to use, supply and sell the Licensed Products in the Territory. The Licensee shall ensure that the Licensee's customers in the Territory (including but not limited to the Licensee's Affiliates) shall not sell the Licensed Products to customers or any third party outside of the Territory. Notwithstanding the foregoing, the Licensee may sell the Licensed Prod....
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....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 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; (d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller; (e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to th....
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....nly 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 products sold by the Respondent-Assessee. There is a clear formula regarding the method to arrive at the above net sales value of the products sold. The royalty payment covers transfer and use of technology providing information of technical knowledge, design formula, technical know-how, procedures for manufacturing and secret and confidential information which have been developed or acquired by M/s. Daido Metal Company, Japan which are used for the manufacture of the products viz., Half Bearings, Thrust Washers, PTFE Bearings and PTFE bimetal. 11. A....
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.... 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 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 s....
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....ported 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). Application of Rule 9(l)(c) to the facts of the present case 19. Applying the above tests to the facts of the present case, we find that the adjudicating authority had not examined the pricing arrangement between the foreign collaborator and the buyer. It has only examined the royalty/TAA. 20. Be that as it may, in the present case, on reading TAA we find that the payments of royalty/licence fees was entirely relatable to the manufacture of brake liners and brake pads (licensed products). The said payments were in no way related to the imported items. In the present case, no effort was made by the Department to examine the pricing....
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....ted 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 Ventilation Industries Pvt. Ltd., Singapore was a technical aid agreement on a non-exclusive basis to manufacture and assemble centrifugal fans, axial fans, in-line fans, roof exhaust fans and mixed flow fans (goods) and to instruct the licensee in the methods of working the processes relating to or in respect of or for the manufacture of the goods and to provide total management. The restrictions in the agreement are with respect to import or export of final products by the appellant but not with respect to imports. It is also mandated that the goods were to be manufactured strictly in accordance with the specifications provided by technology provider. A license fee....
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.... 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 and has also been approved by the R.B.I. In view of the foregoing, we are of the view that the amount of royalty in question cannot be added to the declared value under the said sub-rule (c) either." It was submitted that the Hon'ble Supreme Court in the case of Commissioner of Customs Vs. M/s. Ferodo India Pvt. Ltd [2008 (2) TMI 12-SUPREME COURT] upheld the decision in BASF Strenics (supra) and held that whether payment of royalty is includible in the price or not cannot be merely on the basis of consideration clause in the agreement. 17. In this appeal, the imported raw-materials are specifically manufactured and supplied to the Respondent-Assessee's requirements. The goods were supplied a....