TaxTMI 
TaxTMI 
2025 (10) TMI 827
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....Switching Centers and Base Station Controllers is includible in the transaction value of the components imported by Ericsson India from Ericsson AB, Sweden [Ericsson Sweden] in terms of rule 10(1) (c) of the Customs Valuation (Determination of the Value of Imported Goods) Rules 2007 [the 2007 Valuation Rules] . Accordingly, the demand of customs duty has been confirmed and ordered to be recovered from Ericsson India by invoking the extended period of limitation under section 28 of the Customs Act, 1962 [the Customs Act] with interest and penalty under section 114A of the Customs Act. 2. Customs Appeal No. 50440 of 2021 has been filed by Tej Nirmal Singh to assail that portion of the order dated 27.11.2020 passed by the Additional Director General that imposes penalty upon him under section 112(a)(ii) of the Customs Act. 3. Customs Appeal No. 50441 of 2021 has been filed by Bharat Bandhu to assail that portion of the order dated 27.11.2020 passed by the Additional Director General that imposes penalty upon him under section 112(a)(ii) of the Customs Act. 4. Ericsson India is a wholly owned subsidiary of LM Ericsson Sweden. Ericsson India is engaged, since 2005, in the manuf....
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.... its excise duty liability on the finished goods. 7. In consideration of the grant of technical know-how and intellectual property rights, Ericsson India remitted royalty payments to LM Ericsson Sweden in accordance with the terms and conditions stipulated in the Technical Co-Operation Agreement(s). 8. Additionally, Ericsson India also imported assembled goods like 3G BSC, 3G Products and Mini links from Ericsson Sweden. The products were then sold to customers on High Sea Sales basis. In such transactions, the customers, being the High Sea Sales buyers, undertook all customs compliances and cleared the goods from customs at the transaction value, i.e., the selling price, and payments to Ericsson Sweden were made by Ericsson India as per invoices raised in accordance with the Transfer Pricing Agreement between Ericsson India and Ericsson Sweden. The ratio of the high sea sales to domestic manufacturing was 20:80. 9. The factual position leading up to the present dispute is as follows: Date Particulars 23.12.2008 Ericsson India entered into a Technical Cooperation Agreement dated 23.12.2008 with LM Ericsson Sweden for grant of non-exclusive rights and licenses t....
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....ere initiated by Panchnama dated 21.01.2014. Statements of Shri Rajesh Gosain, General Manager (Taxation), Shri Tej Nirmal Singh, Director and Head of Supply and Shri Bharat Bandhu, Head of Company Control were recorded. 31.07.2014 04.08.2014 10.09.2014 As a matter of co-operation, Ericsson India by letters dated 31.07.2014, 04.08.2014 and 10.09.2014 paid the applicable duty (CVD, SAD and Customs Cess) on the royalty payments made to LM Ericsson Sweden during the relevant period, while reserving its rights of remedies, and submitted that royalty payment under Agreement dated 27.06.2013 to LM Ericsson Sweden and import of components from Ericsson Sweden under Supply Agreement, are two separate transactions with two separate entities, the former being a service transaction and the latter being a sale (import of goods). Ericsson India, upon the request of the Additional Director General, by letter dated 06.04.2015, also submitted details of apportioned royalty payments to the various Bills of Entry during the relevant period. 03.08.2015 A show cause notice alleging that payment of royalty by Ericsson India to LM Ericsson Sweden is includible in the value of imported goo....
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....f the order: "6.29. In this background, my findings are as follows; (a) As discussed above, in the present case, the royalty is paid on the Gross sale price of the goods which includes the sale value and the cost of imported goods excluding excise duties and sales tax of the licensed products manufactured from the factory. Further, it is an accepted fact that in the absence of Ericsson knowhow and IPR, EIL would not have been in a position to procure the impugned goods and assemble the equipment out of these. As per the terms of the Technical cooperation Agreement dated 27.06.2013 (effective from 01.04.2012), LME or its affiliates were to provide components, subassemblies, parts, know-how etc. to EIL and EIL was to purchase components in terms of a purchase agreement. Thus, the supply of components in terms of the said purchase agreement was a condition in the technical cooperation agreement dated 27.06.2013. Thus, payment of royalty to LME is a condition of sale of goods from EAB to EIL. (b) It has been discussed above that it is an admitted fact that the procurement of indigenous and imported component had to be of quality standards and technical specif....
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....sidiaries of LME and it is an admitted position that the design, specification etc. of the goods supplied by EAB are property of LME. Further, if the EAB makes payment to LME for use of such specification etc., it will recover the same from EIL, as forming part of Consideration. In this case, the EIL is making payments directly to the LME, and hence, the same is includible in the Assessable Value. (f) It is an accepted fact that in the absence of Ericsson Knowhow and IPR, EIL would not have been in a position to procure the impugned goods and assemble the equipments out of these. Thus, it appears that payment of royalty to LME is a condition of sale of goods from EAB to EIL. As per the terms of the agreement dated 27.06.2013 (effective from 01.04.2012), LME or its affiliate were providing components, sub-assemblies, parts etc. to EIL and EIL was to purchase components in terms of a purchase agreement. Thus, it appears that the supply of components in terms of the said purchase agreement was a condition of sale in the technical cooperation agreement dated 27.06.2013. (g) As discussed earlier, the copy of TCA agreement dated 23.12.2008 was not submitted by EIL to SV....
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....eneral also held that the goods were liable to confiscation in terms of section 111(m) of the Customs Act and, therefore, penalty under section 114A of the Customs Act would be leviable on the appellant. The Additional Director General also imposed penalty upon Tej Nirmal Singh and Bharat Bandhu under section 112(a)(ii) of the Customs Act. 16. Shri V. Lakshmikumaran, learned counsel for the appellant assisted by Shri Anurag Kapur, Ms. Rubel Bareja and Ms. Anisha Arya, made the following submissions: (i) Royalty paid under the Technical Co-Operation Agreements is not includible in the assessable value of imported components. Technical Co-Operation Agreement dated 23.12.2008 and Technical CoOperation Agreement dated 27.06.2013 are indentical in so far they relate to post importation activities; (ii) Both the Technical Agreement do not stipulate that payment of royalty is a sine qua non for import of components. Therefore, royalty for technical know-how does not automatically become a 'condition of sale' merely because it is inclusive of the value of imported goods; (iii) It is a settled principle that where royalty payments pertain to post-importation ac....
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....to the facts of the present case; (vii) Technical Co-Operation Agreement does not stipulate import of components under a purchase agreement with LM Ericsson Sweden or its affiliates; (viii) It is an admitted fact in the impugned order that Ericsson India not only procures components from Ericsson Sweden but also procures them from other third parties, i.e., unrelated foreign suppliers and local producers. This information was submitted as part of additional submissions dated 07.08.2020 by Ericsson India, but the same has not been taken into consideration by the Additional Director General. The same was also disclosed before SVB by way of submissions of TP Report for the Financial Years 2011, 2012 and 2013; (ix) Ericsson know-how does not extend to 'manufacturing' raw materials and components; (x) In absence of substantive provisions under the Customs Tariff Act, demand of interest, imposition of penalty and confiscation on amount of CVD and SAD is not sustainable; (xi) The extended period of limitation could not have been invoked in the present case; (xii) Interest under section 28AA/28AB of the Customs Act is not payable, impor....
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....s to whether royalty paid by Ericsson India to LM Ericsson Sweden towards know-how can be included in the transaction value of the components imported by the Ericsson India from Ericsson Sweden under rule 10(1)(c) of the 2007 Valuation Rules. 20. The relevant portion of rule 10(1)(c), therefore, needs to be examined and it is reproduced below: "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." 21. It would be seen that in determining the transaction value, rule 10(1)(c) of the 2007 Valuation Rules requires that there shall be added to the price actually paid or payable for the imported goods royalties related to the imported goods that the buyer is required to pay as a condition of the sale of the goods being valued, to the extent that such royalties are....
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....of said licensed products. The Agreement also provided for royalty free period prior to 31.03.2008 and royalty was to be paid w.e.f. 01.04.2008. Accordingly, Ericsson India paid royalty to LM Ericsson Sweden for the years 2008-09 and 2009-10 as per the terms of the Agreement. Royalties were not paid for the years 2010-11 and 2011-12 as the royalty payment worked out to NIL in terms of the applicable formula. Technical Co-Operation Agreement dated 27.06.2013 (effective from 01.04.2012) 26. Royalty under Article 5.1 of this Agreement was agreed to be @ 5.7% of the gross sale price of Licensed Products and Licensed Parts assembled/manufactured and sold by Ericsson India. The gross sales price of Licensed Products was calculated as local sale value of Licensed Products manufactured by the licensee minus the excise duty and sales tax on the manufacture and sale of said Licensed Products. Accordingly, Ericsson India paid royalty to LM Ericsson Sweden under this revised Technical Co-Operation Agreement dated 27.06.2013 for the years 2012-13 and 2013-14. Discussion 27. As noticed above, the Additional Director General in paragraph 5.3 of the order held that prior to 01.04.2012 ....
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....ty, in view of the afore-mentioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of Customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of licence or technical know-how for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy Customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind." (emphasis supplied) 31. Th....
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....esent case. Rule 9(1)(e) also is not attracted as there was no indirect payment also towards the cost of the goods under import." (emphasis supplied) 32. The department challenged the aforesaid order of the Tribunal before the Supreme Court. The Supreme Court distinguished the judgment of the Supreme Court in Matsushita Television, on which reliance was placed by the department and on which reliance was also has been placed by the learned special counsel appearing of the department, and held that as there was no nexus between the royalty paid for the know-how and the goods imported for manufacture of Licensed Products, royalty could not be added to the value of the imported goods. The judgment of the Supreme Court in Matsushita Television was distinguished because of the consideration clause and other surrounding circumstances in the matter. The relevant portion of the judgment of the Supreme Court is reproduced below: "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 ....
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....ods, the nature of the industry itself, the difference in values etc. As stated above, Rule 4(3)(a) and Rule 4(3)(b) of the CVR, 1988 provides for different means of establishing the acceptability of a transaction value. In 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 M....
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....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 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. 10. Revenue's contention seeking addition of royalty under Rule 9(1)(c) and Rule 9(1)(d) fails in view of our findings above. As such, we dismiss the appeals filed by the department. The cross objection filed by the respondents also stands disposed off." (emphasis supplied) 34. In Sandvik Asia, the Tribunal also examined this issue and held that since payment of royalty does not relate to the imported raw material and is in fact related to the finished....
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....s provided by technology provider. A license fee @ 5% had to be paid on the total net turnover of the goods. We have gone through the agreement and do not find anything in it that it also provides import of the components. Therefore, the goods were not imported under the agreement and any royalty under the agreement cannot be related to it. Further, there is no condition that the importer has to obtain the approval of the technology provider either for import or for procuring components domestically. Therefore, the royalty paid by the appellant @ 5% on the final products under the technical aid agreement cannot be said to be a condition for sale and added to the assessable value of the imported goods. It is true that 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 agreemen....
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.... the VALEO trade mark. Thus, the right to use the name 'VALEO' shall be exercised by the appellant according to the terms and conditions flowing from the Technology Licence Agreement. xxxxxxxxxxx 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 agreement between the appellant and the VALEO, France which provides that royalty payment is a precondition for sale / import of raw materials. There is no evidence to establish as to how the royalty payment is linked to the import of raw materials. 20. Further, r....
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....., components of GSM Mobile Telephone System namely, RBS, BSC and MSC (finished goods) under the terms and conditions of a purchase agreement. However, the provisions of a Purchase Agreement under the said Technical Co-Operation Agreement dated 27.06.2013 does not extend to the imported goods i.e., components used in manufacture of finished goods. The finding in the impugned order is, therefore, factually incorrect. 40. It is not in dispute that Ericsson India not only procures components from Ericsson Sweden but also procures them from other third parties, i.e., unrelated foreign suppliers and local producers. A tabular representation of the procurement of imported goods by Ericsson India during the relevant period is as follows: 2012-13 2013-14 Scope of procurement CIF Value (in MINR.) % CIF Value (in MINR.) % Import from Ericsson Sweden 4007 42 2281 25 Import from foreign unrelated suppliers 3105 32 5872 63 Indigenous procurement 2463 26 1107 12 Total value of components 9,576 100 9,260 100 41. This information regarding procurement of components from unrelated foreign suppliers and/....
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.... "9. What is clear is that technical services to be provided by Met Chem Canada Inc., is basically to coordinate and advise the respondent so that the respondent can successfully set up, commission and operate the plant in India. It will be noticed that coordination and advice is to take place post importation in order that the plant be set up and commissioned in India. In fact, all the clauses of this agreement make it clear that such services are only post-importation. 11. Another thing to be noticed is that a conjoint reading of the technical services agreement and the purchase order do not lead to the conclusion that the technical services agreement is in any way a pre-condition for the sale of the plant itself. On the contrary, as has been pointed out above, the technical services agreement read as a whole is really only to successfully set up, commission and operate the plant after it has been imported into India. It is clear, therefore, that clause 9(1)(e) would not be attracted on the facts of this case and consequently the consideration for the technical services to be provided by Met Chem Canada Inc., cannot be added to the value of the equipment imported to set ....
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.... 7.4 The copies of Annexures filed by the Noticee before the SVB authorities in year 2013 clearly shows that the Noticee has deliberately suppressed the existence of Technical Co-operation Agreement, while filing the said Questionnaire e.g. in reply to a question, it is stated that "Ericsson' brand is owned by Supplier, whereas, the Noticee was well aware that the said brand was owned by their parent Company i.e. LME. 7.5 The Noticee has argued that in fact the payment of royalty was disclosed before the SVB authorities, as the royalty payments were reflected in their Annual Financial Statements, the copies of which were supplied to SVB. The Noticee has further contended that they were under the bona-fide belief that the payment of royalty was liable to Service Tax and hence failed to pay Customs Duty on the same. 7.6 The Noticee has also contended that the issue involved is pure question of law and hence mala-fide cannot be alleged and hence, extended period of limitation cannot be invoked. In support of the aforesaid contentions, the Noticee has placed reliance on many judicial pronouncements such as Uniworth Textiles Ltd. Versus Commissioner Of Cent....
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....ecial Valuation Branch, including three years Annual Financial Statements and TP studies for the year ending March 2007, 2008 and 2009. After scrutiny of the submitted documents, which included the Financial Statements and transfer pricing studies of Ericsson India, the Special Valuation Branch accepted the declared import prices as transaction value under section 14 of the Customs Act by order dated 18.05.2010. 57. Ericsson India contends that Schedule 19 of the Financial Statements i.e. 'Administrative, selling and distribution expenses' and Schedule 22 i.e. 'Notes to accounts' under serial no 15 disclosed the 'related party transactions'. Both these Schedules disclosed payment of royalty payment to the parent company in the year 2008-09 as a separate line items under the head 'royalty'. The Special Valuation Branch order of 2010 notes in paragraph 3 that importer has filed the financials for the year 2009. 58. Again in the year 2013, when the Special Valuation Branch order of 2010 came up for review, Ericsson India filed the Special Valuation Branch questionnaire, written submissions dated 29.05.2013 with the copies of Financial Statements for the years ending March 2010, ....
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....axation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression." (emphasis supplied) 64. This decision of the Supreme Court in Pushpam Pharmaceuticals was followed by the Supreme Court in Anand Nishikawa Co. Ltd. vs. Commissioner of Central Excise, Meerut [(2005) 7 SCC 749] and the relevant paragraph is as follows: "27. Relying on the aforesaid observations of this Court in the case of Pushpam Pharmaceuticals Co. v. CCE we find that "suppression of facts" can have only one meaning that the correct information was not disclosed deliberately to evade payment of duty. When facts were known to both the parties, the omission by one to do what he might have done and not that he must have done, would not render it suppression. It is settled law that mere failure to declare does not amount to wilful suppression. There must be some positive act from the side of the assessee to find willful suppression. Therefore, in view of our findings made hereinabov....
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....ax, which it was aware would be leviable, suppressed the fact of receipt of consideration for rendering any taxable service. On the contrary, the statements of the officials of MTNL, relied upon by the respondents, clearly indicate that they were under the belief that the receipt of compensation/financial support from the Government of India was not taxable. Absent any intention to evade tax, which may be evident from any material on record or from the conduct of an assessee, the extended period of limitation under the proviso to Section 73(1) of the Act is not applicable. The facts of the present case indicate that MTNL had made the receipt of compensation public by reflecting it in its final accounts as income. As stated above, merely because MTNL had not declared the receipt of compensation as payment for taxable service does not establish that it had willfully suppressed any material fact. MTNL's contention that the receipt is not taxable under the Act is a substantial one. No intent to evade tax can be inferred by non-disclosure of the receipt in the service tax return." (emphasis supplied) 66. It is, therefore, clear from the aforesaid discussion that the extended perio....