TaxTMI 
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TaxTMI 
Rethinking Royalty in Customs Valuation - Lessons from the Owens Corning CESTAT Ruling
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....ethinking Royalty in Customs Valuation - Lessons from the Owens Corning CESTAT Ruling<br>By: - DrJoshua Ebenezer<br>Customs - Import - Export - SEZ<br>Dated:- 18-6-2025<br>In a significant decision that aligns Indian customs valuation practice with global standards, the CESTAT, Chennai, in M/S. OWENS CORNING INDUSTRIES (INDIA) PVT. LTD. VERSUS THE COMMISSIONER OF CUSTOMS (SEAPORT) CHENNAI - 2025 (2) TMI 640 - CESTAT CHENNAI, addressed whether running royalty payments on the net sales of manufactured goods should be included in the transaction value of imported goods under Rule 10(1)(c) of the Customs Valuation Rules, 2007 (CVR, 2007). The Issue at Stake The case centered around a 4% royalty paid by Owens Corning India to its....
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.... U.S.-based licensor on the net sales value of goods manufactured in India using proprietary know-how. The Revenue contended that such royalty should be added to the value of imported raw materials and components under Rule 10(1)(c), arguing that these inputs were used in the production of finished goods on which royalty was paid. This raised the crucial question, can a post-manufacture royalty linked to net domestic sales be considered "related to" imported goods, and can it be seen as a "condition of sale" of such goods? Legal Framework: Rule 10(1)(c), CVR 2007 The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, particularly Rule 10(1)(c), provides: "In determining the transaction value, there sh....
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....all be added to the price actually paid or payable for the imported goods, (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 valued..." The Explanation (inserted via Notification No. 102/2007-Cus(NT) dated 10.10.2007) further states: "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... notwithstanding the fact that such goods may be subjected to the said process after importation." Thus, the two-fold test remains: * Royalty must be related to the imported goods. * Royalty must be a conditio....
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....n of sale of such goods. CESTAT's Findings: Logic and Analysis The Tribunal rejected the inclusion of royalty in the transaction value, holding that the two key tests were not satisfied. Here is a deeper analysis: The royalty was computed based on net sales value of finished goods manufactured in India. These products were manufactured using both imported and domestically procured inputs. Many inputs like quartz, limestone, and chemicals were sourced locally or from unrelated global vendors. The licensing agreement did not stipulate that the royalty payment was a precondition to import goods. Nor was the importer contractually bound to buy raw materials from the licensor or group companies. The payment of royalty....
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.... was triggered by sales, not imports. The Explanation clarifies that royalty for a "process" may be includible, even if the process is post-import. However, CESTAT rightly held that this Explanation does not override the main clause, which requires the royalty to be related to the imported goods and be a condition of sale. Since the imported goods were not the object of the royalty, and the royalty was not a precondition for their sale, the Explanation could not apply. The use of net sales value as a base for royalty calculation-even if it includes the cost of imported goods, does not by itself establish a link to those goods. Eg: Let's say Company X India enters into a technology licensing agreement with&n....
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....bsp;Company Y USA to manufacture air purifiers. As per the agreement, Company X pays 5% royalty on all sales of the finished air purifiers made in India. Company X sources some parts locally and imports others from unrelated suppliers. Unless: * Company X is contractually obligated to import specific parts from Company Y; * And royalty payment is directly tied to such import transactions, then royalty is clearly for access to technology, not for the purchase of imported parts. Thus, under Rule 10(1)(c), the royalty cannot be added to the transaction value of the imports. A Comparative View CESTAT's decision aligns with international norms and is supported by the following: * WCO Commentary 25.1 (Techni....
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....cal Committee on Customs Valuation): Royalty/licence fees should be added only if they pertain directly to imported goods and are conditions of sale. * U.S. CBP Cross Rulings: * HQ 545361 (2000): Excluded royalty on domestic sales where royalty was not a sale condition for the imports. * HQ 548570 (2005): Royalty not related to imported goods was excluded from customs value. * EU Guidelines (DG TAXUD): Emphasize strict interpretation; royalty is added only when sale of the imported good is conditional on such payment. India's approach under this judgment is consistent with these standards, offering much-needed legal certainty to importers. Implications and Conclusion This judgment reaffirms a critical principle: royalty ....
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....payments must pass both the 'relatedness' and 'condition of sale' tests to be includible under Rule 10(1)(c). Businesses engaged in technology licensing and cross-border sourcing now have judicial clarity that a) Royalty on domestic sales does not automatically translate to customs duty liability. b) Agreements and commercial structures must be carefully analyzed to assess valuation risk. For Customs authorities, the ruling underscores the need to base additions to transaction value on firm evidence of contractual linkage, not assumptions based on royalty formulas. Overall, this is a welcome development that harmonizes Indian law with global best practices and reinforces fair valuation principles under the WTO Customs Valuation Agreement.....
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.... ---- Do share your feedback : joshua[at]nucov-facilitrade.com | 9004100779 Dr Joshua Ebenezer - Principal Consultant, NuCov Facili-Trade.<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....