TaxTMI 
TaxTMI 
2025 (4) TMI 656
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....er 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(SC) is applicable and therefore....
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....aluation 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) Roya....
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....utually agreed upon between the concerned parties from case 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 ....
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....,08,992 45,16,936 93,92,056 Oct.12 to Dec.12 2,02,04,355 61,40,847 1,40,63,507 Sub-total 7,56,33,934 2,37,13,826 5,19,20,109 % 100 31.35 68.65 Jan.13 to Mar.13 1,90,95,168 31,67,070 1,59,28,098 Apr.13 to Jun.13 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 ....
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....he transaction price cannot be loaded with payment of royalty. The Larger Bench of this Tribunal in the case of Hoerbiger India Pvt. Ltd. v. Commissioner of Customs - 2003 (156) E.L.T. 62 (T-Larger Bench) has held that since the licence fee or running royalty is not relatable to the goods imported, therefore they are not includible in the transaction value of the goods. 11. While going through the case Matsushita Television & Audio (I) Ltd. (supra), relied upon by the Revenue, we find that the facts in that matter were different. In that case, it was agreed between the foreign supplier and the Indian importer that the foreign supplier would assist the Indian importer in manufacturing the colour TV by selling the components and Indian importer/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 ....
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.... distinguished. Accordingly, we have no hesitation in setting aside the finding of the Commissioner (Appeals) to load the invoice value with royalty amount." 12. No evidence has been adduced by the Revenue to prove that the technical know-how supply and the payment of royalty is a condition of sale for the goods imported by the appellant from the foreign supplier. Nowhere in the agreement entered into by the appellants with the Licensors, it could be shown or is provided that the appellants have to import the goods from them only. The revenue has also accepted the transaction value in terms of Rule 3(3)(a) ibid. The payment of royalty is for the know-how received by the Appellants for manufacture of the finished goods and not related to the inputs imported. The only dispute in the instant 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....
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....lyzing the facts, we observe that ingredients of the aforesaid rule does not exist in the import transaction of components by the appellant from the overseas Licensors. From a reading of clauses 8.1, 8.1.1, 8.1.2 & 8.1.3 of the Agreement, it is abundantly clear that royalty is required to be paid only on the sale of the manufactured goods and royalty is not relevant to the import of the components. For arriving the value for calculation of royalty, amongst other elements, cost of standard bought out components and the landed cost of imported components are deducted. The above clauses also makes it clear that this method of deduction is adopted even if the procurement of components are made from any source other than the overseas Licensors or related foreign suppliers. Therefore from the 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 th....
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....rted by them. 2.0 Appellants are engaged in the manufacture of automobile components. For manufacture of the said components they procure about 45% of the inputs from their principals namely M/s Bosch Corporation Japan and remaining inputs are sourced indigenously. Undisputedly the inputs procured from the principal are subject to the Custom Duty on the value determined under Section 14 of Customs Act, 1962. Apart from the payments made by the appellant to their principals as a consideration for supply of goods, they also pay, fixed and running royalty to their principal. Issue is in respect of addition of royalty charges to the transaction value for determination of the assessable value. 3.1 As per the Technical Assistance Agreement dated 04.02.2011 between the appellant and Robert 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....
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....or licensed products or parts or components or sub assemblies thereof that are supplied to RBUS and RBJP and to other affiliated Companies of Bosch, for the purpose of manufacturing complete products corresponding to Licensed Products under their License Agreements with Bosch or with Licensor, at the request of said companies according to article 5.4. The same applies for the supply of complete Licensed Products to RBUS and to RBJP. However, for the supply of complete Licensed Products to other Affiliated Companies, Licensee shall pay royalties to Licensors as stipulated under this agreement." 3.2 From the reading of the said agreement adjudicating authority has concluded- "Now as per the present agreement, I find that the cost of components has only been excluded for the payment of royalty when the components suit the following conditions i.e. - when the component 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 i....
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....ovable from the assembled products. 10. The appellants has contended that the royalty and lump sum amount paid to overseas party is for providing technical assistance for manufacture of the final products and not the goods imported. In this regard, from the discussion in the foregoing para it is crystal clear that the net sale price on which 3% royalty is paid by the appellant is without deduction of the cost of components imported from their related party which are not physically removable from the final products. In other words the value of imported goods is included in the net sale price of appellants manufactured goods. I further find that Hon'ble Supreme Court of India in case of Mathushita Televisions & Audio India Ltd {2007 (2110 ELT 200 (SC)] has held that:- "6. On reading the above agreement, the following features emerge. Under Clause 1.03 the term "Net-factory 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 Claus....
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....ding the cost of imported components. In other words, the royalty payment was to be computed not only on the domestic element of the net sale price of the colour T.V. but also on the cost of imported components. A bare reading of the agreement shows that payment under the said agreement related not only to the production of the goods in India but also to imports. In some of the decisions cited on behalf of the assessee, we find that the net ex-factory sale price of the finished products expressly excluded the cost of imported components. On the other hand, in the present case, the cost of imported components was expressly included in the net ex-factory sale price of the colour T.V. Further, when payment to MEI was at the rate of 3% of the sales turn over of the final product, including cost of imported component, it became a condition of sale of the finished goods. Hence, in this case both the conditions of 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 deduct....
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....nts; and LCIC is the landed cost including ocean freight, insurance, customs duties, etc., of the imported components, if any. (Components shall be any part of Licensed Products which does not itself undergo any change, processing, or treatment in the factory of Licensee and is physically removable from the assembled final Product.) 4.5 From the above it is quite clear that the cost of standard brought out items which have been procured indigenously and the landed cost of imported goods is not to be included in the Net Sale Price for computing the royalty to be paid. However a rider has been added, which says that only cost of those components which do not undergo any change, processing or treatment in the factory of licensee and is physically removable from the assembled final product can be excluded. The said condition do not permit deduction of landed cost of each and every imported components. 4.6 Appellants 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....
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....very conditions, supplies of such a nature require separate agreements to be entered into from case to case." 5.5 It is in terms of this para that appellants have procured the imported components from the Licensor. 5.6 A combined reading of the above referred paras in the agreement, definitely point towards the connection between the imported goods procured by the appellants from the Licensor and royalty being paid by the Licensee for making use of the technical know-how to manufacture the finished goods using the said goods. In case the same goods are manufactured by the appellant themselves or through their supplier then in that case as per the agreement royalty charges are calculated without deducting the value of such self manufactured components. However when the same are procured from the Licensor the said royalty charges are calculated excluding the same. Thus in case where the imported components are procured from the Licensor, by the appellants, the 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....
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....goods is provided for in Rule 9 under situations mentioned in Rule 9(1) and (2). In transfer pricing, the arm's length price is inferred from various methods to avoid profit-shift from one jurisdiction to another and it is here that principle of allocation of profits comes in (i.e. in the case of transfer pricing). 16. Under Rule 9(1)(c), the cost of technical know-how and payment of royalty is includible in the price of the imported goods if the said payment constitutes a condition pre-requisite for the supply of the imported goods by the foreign supplier. If such a condition exists then the payment made towards technical know-how and royalties has to be included in the price of the imported goods. On the other hand, if such payment has no nexus with the wording of the imported goods then such payment was not includible in the price of the imported goods. 17. In the case of Essar Gujarat Ltd. (supra) the condition prerequisite, referred to above, had direct nexus with the functioning of the imported 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....
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....etween 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 arrangement. No effort was made by the Department to ascertain whether there exists a price adjustment between cost incurred by the buyer on account of royalty/licence fees payments and the price paid for imported items. No effort was made by the Department to ascertain enhancement of royalty/licence fees by reducing the price of the imported items. In the circumstances, we find no infirmity in the impugned judgment of the Tribunal. In this case, the Department has gone by TAA alone. On reading TAA in entirety, we are of the view that there was no nexus between royalty/licence fees payable for the know-how and the goods imported for the manufacture of licensed products. The Department itself has invoked Rule 9(l)(c). 21. In the a....
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....In that case, the appellant was a joint venture company of MEI, Japan and SIL for obtaining technical assistance and know-how. Under the agreement, the appellants were to pay MEI a royalty @ 3% on net ex-factory sale price of the colour TV receivers manufactured by the appellants for the technical assistance rendered by MEI. The appellants were to pay a lump-sum amount of U.S. $ 2 lakhs to MEI for transfer of technical knowhow. It was the case of the appellant that payment of royalty was not related to imported goods as the said payment was made for supply of technical assistance and not as a condition pre-requisite for the sale of the components. 24. One of the questions which arises for determination in this civil appeal is whether reliance could be placed by the Department only on the Consideration Clause in the TAA for arriving at the conclusion that payment for royalty was includible in the price of the important components. 25. Rule 4(3)(b) of the CVR, 1988 provides for an opportunity for the importer to demonstrate that the transaction value closely approximates to a "test" value. A number of factors, therefore, have to be taken into consideration....
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.... rate of 3% of the net ex-factory sale price of the colour T.V. exclusive of taxes, freight and insurance but including the cost of imported components. In other words, the royalty payment was to be computed not only on the domestic element of the net sale price of the colour T.V. but also on the cost of imported components. A bare reading of the agreement shows that payment under the said agreement related not only to the production of the goods in India but also to imports. In some of the decisions cited on behalf of the assessee, we find that the net ex-factory sale price of the finished products expressly excluded the cost of imported components. On the other hand, in the present case, the cost of imported components was expressly included in the net ex-factory sale price of the colour T.V. Further, when payment to MEI was at the rate of 3% of the sales turn over of the final product, including cost of imported component, it became a condition of sale of the finished goods. Hence, in this case both the conditions of Rule 9(1)(c) of the Valuation Rules, 1988, are satisfied. 4.6 It is clear that the Hon'ble Apex Court has considered that if royalty is paid on the value i....
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.... The licensee agrees to pay to HUSCO a quarterly payment for royalty and technical assistance at a rate equal to three per cent (3%) of the licensee's Selling Price for any and all the Licensed Products made or assembled, and used, sold, or shipped by the Licensee coming within the definition of the Licensed Products or equivalents or improvements thereof, and/or merchandised in association with any of the Trademarks and/or coming within any of the patents, or copyrights, and/or utilizing any of the said Technical Information. The obligation to make payments shall accrue upon sale, invoice, or first date of internal use of shipment, whichever is earlier and shall be due regardless of the fact that the receipt of payment by the Licensee from the Licensee's customer may be at a later date and shall be paid within a period of thirty (30) days from the month end of the date of accrual." 5. From the above Clause 5 of the agreement, it is crystal clear that the net sale price on which 3% royalty is paid by the appellant is without deduction for components imported from HUSCO, in other words the value of imported goods is included in the net sale price of appellant's manufac....
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....11 are includible in the value of the imported goods, in terms of Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (for short, referred to as 'the Rules of 2007'). On appeal against the said original order dated 26.06.2014, the learned Commissioner of Customs (Appeals), Mumbai-I vide the Order-in-Appeal dated 18.07.2017 (for short, referred to as 'the impugned order') has upheld the original order and rejected the appeal filed by the appellants. Feeling aggrieved with the impugned order, the appellants have preferred this appeal before the Tribunal. 2. The appeal was placed before the Division Bench of this Tribunal, comprising of Shri Ajay Sharma, learned Member (Judicial) and Shri Sanjiv Srivastava, learned Member (Technical). Upon hearing both sides, the learned Members in the Bench had differed in their opinion on the issue whether the royalty amount is includable in the value of components imported by the appellants into India, in terms of Rule 10(1)(c) of the Rules of 2007 or otherwise. Accordingly, the matter was placed before the Third Member to determine, 'whether the appeal should be allowed as held by the Member (Judicial) ....
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.... royalty in INR) USA (amt. of royalty in INR) Japan (amt. of royalty in INR) Oct.11 to Dec. 11 145,365,008 27,389,650 117,975,358 3,539,260 1,415,704 1,061,778 1,061,778 Jan. 12 to March.12 125,090,638 21,233,148 103,857,491 3,115,724 1,246,290 934,717 934,717 Apr.12 t o Jun.12 135,566,826 20,287,440 115,279,386 3,458,381 1,383,353 1,037,514 1,037,514 Jul.12 to Sep. 12 70,621,892 13,908,992 56,712,900 1,701,387 680,555 510,416 510,416 Oct.12 to Dec. 12 125,642,730 20,204,355 105,438,376 3,163,151 1,265,261 948,945 948,945 Jan.13 to Mar.13 172,315,515 19,095,168 153,220,346 4,596,610 1,838,644 1,378,983 1,378,983 Apr. ....