TaxTMI 
TaxTMI 
2024 (8) TMI 1691
X X X X Extracts X X X X
X X X X Extracts X X X X
....T HK'), Aoxin Apparel Company Limited ('Buying Agent Aoxin') and Other FN Group entities. Pursuant to agreement dated 1 July 2023, the Applicant is paying 5% License Fee to FN AU for grant of non-exclusive license to use or exploit Licensed IP in India which includes Forever New brand, retail and online store design, technical information and any improvements thereof. This fee is calculated as percentage of Retail Net Sales made by the Applicant in India subject to the Applicant's return on sales of 5% or more. Pursuant to agreement dated 1 July 2022, the Applicant is paying 5% Management Fee to FN AU for routine management services like accounting, marketing support, human resources, information technology support, legal support, store development and other non-product related back-office type services. This fee is calculated on cost (direct and indirect costs) plus 5% markup basis. The Applicant is implementing new operating model as a part of its global supply chain re-structuring to centralize sourcing and procurement process across FN Group. QUESTIONS BEFORE THE HON'BLE CUSTOMS AUTHORITY OF ADVANCE RULINGS Question 1: Whether transaction value propose....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... risk in relation to the transaction between the third party manufacturers and the buyer i.e., FN India and other members of the FN Group. The executed agreements between the Applicant and the buying agents have been produced herewith and marked for reference as Exhibit A. 1.5. The transactions under the new operating model can be undertaken under 3 different scenarios (which may operate in conjunction with each other): Scenario - I: Procurement of raw material directly by FN Int Procurement and sourcing of fabrics and other raw materials such as trims, buttons, zips etc. 1.6. Under this model, FN Int, a part of FN Group, located in Australia would be responsible for placing bulk orders and procuring raw materials i.e., fabrics, trims, buttons, etc., from unrelated third party vendors. FN Int shall procure these raw materials directly from third party vendors and would take title and ownership of the goods. These vendors would be paid by FN Int and FN Int, in turn would recharge the cost of the raw materials to FN Group entities including the Applicant at the third party cost. The title and ownership of the goods would be transferred by FN Int to FN Group entities inclu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment for the finished goods. The Buying Agent Fee would be calculated on a cost plus basis (being direct and indirect costs incurred in performing the services plus an agreed mark up of 5%). For the purpose of payment of Customs Duty on the import of the finished goods, it is proposed that the duty will be paid on the CMT charges paid in respect of such finished goods plus the cost associated with the free issue of the fabric and raw materials (being an assist cost) as per Section 14 Of the Customs Act. 1.11. The diagrammatic flow of scenario I is provided below: Scenario II: Procurement of raw material by FN Int through the buying agent Procurement and sourcing of fabrics and other raw materials such as trims, buttons, zips etc. 1.12. Under this scenario, FN Int would instruct Aoxin, who will act as a buying agent to place orders for procurement of raw materials i.e., fabrics, trims, buttons, etc., from unrelated third party vendors. FN Int would make payment to Aoxin and Aoxin would make the payments to the third party vendors as a buying agent of FN Int. FN Int would recharge the cost of the raw materials and Buying Agent Fee to FN Group entities including FN Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ured by third party manufacturers. ADT HK and/or Aoxin would receive funds from FN India and would make the corresponding payment to the third party manufacturers on behalf of FN India. In other words, the buying agents merely act as an agent to facilitate sourcing and procurement, but neither take title or ownership of the goods. 1.17. Buying Agent - ADT HK and Buying Agent - Aoxin would each be remunerated for the buying agency services performed by way of a Buying Agent Fee that would be paid by FN India separately from the payment for the finished goods. The fee would be calculated on a cost plus basis (being direct and indirect costs incurred in performing the services plus an agreed mark up of 5%). Buying Agent - ADT HK / Buying Agent - Aoxin would neither take title to the finished goods, fabric or any other materials nor would assume any financial risk in relation to the finished goods, fabric, or other materials. The legal title to the finished goods would pass directly from third party manufacturers to the Applicant, with the Applicant acting as the importer on record responsible for import clearances and paying any applicable local taxes or import duties and levies wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and as requested by the Principals; (f) as required, providing supplier liaison, ethical sourcing and quality control services, as directed by the Principals; and (g) making payments to Vendors for Vendor Invoices on behalf of and as directed by the Principals. * Clause 2.1 -Each Principal appoints the Procurement Entity and the Procurement Entity accepts the appointment to act as the agent of that Principal and to provide the Services to that Principal during the Term in accordance with this Agreement. * Clause 2.2 - In consideration for the Procurement Entity acting as an agent of each Principal and providing the Services to that Principal, that Principal must pay to the Procurement Entity the Remuneration Fee in accordance with this Agreement. * Clause 3.1 - Purchase Orders (a) Upon receipt of a completed Buying Requisition from a Principal, the Procurement Entity must: i. review the Buying Requisition and where appropriate, consolidate, Buying Requisitions from other Principals into Purchase Orders on a per Vendor basis; and ii. within 5 Business Days of receiving a Buying Requisition, pass the Purchase Or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s procured on its behalf; and (c) any such monies collected by the Procurement Entity will be paid by the Procurement Entity towards the Vendor Invoices based on allocations determined by the Procurement Entity acting reasonably. * Clause 3.7 - Obligation to purchase Nothing in this Agreement, amounts to an obligation on a Principal to purchase; (a) any Goods exclusively through the Procurement Entity's services or from any Vendor; or (b) any minimum quantities of any Goods through the Procurement Entity's services or from any Vendor. * Clause 4.1 - Remuneration Fee (a) In consideration of the Procurement Entity providing the Services under this Agreement, each Principal must pay their Remuneration Fee to the Procurement Entity in accordance with clause 4.1(c). (b) For the avoidance of doubt: i. the Remuneration Fee does not form part of the cost of the Goods, but rather is the fee for the Services provided to each Principal; and ii. none of the Remuneration Fee or any other amounts payable by each Principal to the Procurement Entity as compensation or reimbursement for the provision of the Ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....5. As is evident from the terms of the Agreement as reproduced above, namely, Schedule 2 and clauses 3.1, 3.4, 3.5, 3.6 and 6.2 of the Agreement, the buying agents merely act as agents to facilitate the orders, procurement and payment for the Goods, on behalf of the Applicant, on account of administrative and commercial convenience. The buying agents do not take any title or risk on their own account, instead, the title and risk of the goods transfers directly from the manufacturer to the Applicant. 1.26. The unrelated third party manufacturers would raise an invoice for the conversion charges at CMT price (where the raw materials are supplied on a free of cost basis to CMT manufacturers) or Free on Board price (where the raw materials are procured directly by the unrelated third party manufacturers on its own account), specifying the Applicant as the buying entity. However, for administrative convenience the invoice will be sent to ADT HK/ Aoxin, who would in turn would raise an invoice on the Applicant for the recovery of the charges from the Applicant. The invoices raised by the buying agents would have the supporting evidence i.e., the invoices raised by third party manufact....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e), effective from 1 July 2023, which outlines the arrangements in place for the grant of license to utilise the Group intellectual property by FN India in India. The agreement is produced herewith and marked for reference as Exhibit B. The relevant clauses of the agreement are reproduced below, for ease of reference: * Clause 1.1 - Definitions Brand Guidelines means the Forever New Group guidelines for use of the Forever New Branding as revised and replaced from time to time. Designs means the registered designs set out in Schedule 4. Exploit means advertising, marketing and sale of the Products within the Licensed Territory and the operation of Forever New Retail Sites. Forever New Brand means the Forever New Group's collective portfolio of retail brands, developed and operated by the Forever New Group from time to time. As at the Commencement Date, the Forever New Brand includes branding associated with "Forever New", "Ever New" and the Trade Marks. Forever New Retail Site means a store (physical or online) bearing the Forever New Brand and Image, with the concepts and presentation in compliance with the Store Manual and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (b) the retail and online store design, colour schemes, copyright, identify signs, equipment and know-how, Store Manual, Image, Brand Guidelines and POS System in respect of the set- up and operation of Forever New Retail Sites; (c) all other technical information which the Licensor has developed or which is used in the Forever New Group's in-store and online retail operations; and (d) any Improvements in respect of the items identified in clauses (a) - (c) above. Products means such range of products as approved by the Licensor from time to time. Store Manual means any manual (as amended from time to time) supplied by the Licensor to the Licensees for the conduct and operation of Forever New Retail Sites. * Clause 3.1 - Grant Subject to the terms of this Agreement, the Licensor grants to each Licensee a separate, non- exclusive license to Exploit the Licensed IP within the Licensed Territory and for the Term (License), * Clause 5.1 - Licence Fee (a) In consideration of the Licensor granting the Licence to each Licensee under this Agreement, that Licensee must pay the Licensor its Licence Fee in accor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ordance with the terms of this Agreement. Services Fee means, in respect of Services received by a Recipient, the amount payable to the Service Provider by that Recipient in consideration for the provision of those Services by the Service Provider, as calculated in accordance with Schedule 3. * Schedule 2 - Services The Services contemplated by this agreement are routine intercompany services undertaken by the Service Provider that provide a benefit to the Service Recipient and are not otherwise covered by other intercompany arrangements between the parties. The services include: (a) routine strategic management and oversight; (b) general administrative and management services (that is not a shareholder activity), including administration services as required for the operations of the Recipient's retail stores from time to time; (c) business development services; (d) marketing support; (e) tax and accounting support to ensure the Recipient's compliance; (f) financial management, accounting and treasury assistance and support, including: i. cash management; and ii. providing fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ustoms Act read with Rules 2 and 3 of the Valuation Rules. B. Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant, is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. C. Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. D. Whether the Management Fee paid by the Applicant to FN AU for routine management services is not includible in the transaction v....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ii. they are legally recognized partners in business; iii. they are employer and employee; iv. any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them; v. one of them directly or indirectly controls the other; vi. both of them are directly or indirectly controlled by a third person; vii. together they directly or indirectly control a third person: or viii. they are members of the same family. Explanation I - The term "person" also includes legal persons. Explanation II - Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other shall be deemed to be related for the purpose of these rules, if they fall within the criteria of this sub-rule. Rule 3 of the Valuation Rules: Determination of the method of valuation (1) Subject to rule 12, the value of imported goods shall be the transaction value adjusted in accordance with provisions of rule 10; (2) Value of imported goods under sub-rule (1) shall be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (c) royalties and license 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 the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments 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." Further, interpretative notes to Rule 10 (1)(a)(i) defines the terms ' buying c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nable consolidation of orders for the group, in order to meet minimum order quantities and to leverage better buying power in negotiating the pricing of goods. * The third party manufacturers will raise invoices specifying the Applicant as the buying entity, however, the invoices will be issued to the buying agents for administrative convenience. It is pertinent to note that the title and risk of the goods passes directly from the vendors to the Applicant and not to the buying agent. The buying agent will raise an invoice for the recovery of the price charged by the vendors at cost, along with supporting documentation, such as the invoices raised by the vendors. Upon collection of the amount from the Applicant, the buying agent will remit the amount to the vendors, against the invoices raised. In other words, the buying agents act as an agent and do not operate on a principal-to-principal basis. * Where the raw material is issued free of cost to the third party manufacturers, the vendors will raise an invoice for the conversion services undertaken i.e., the CMT price. Whereas, if the raw material is procured by the manufacturer on their own account, the vendors wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om the manufacturer. As submitted above, where the manufacturer is only undertaking a conversion activity, the transaction value proposed to be considered is the price paid to the CMT manufacturer and the cost associated with the free issue of the fabric (being an assist cost). 1.6.7 Where the manufacturer only undertakes the activity of conversion at the behest of the Applicant, FN India will effectively be making two payments towards the purchase of the finished goods i.e., payment for the raw material to FN Int and the conversion charges to the third party manufacturer through the buying agents. Therefore, in this regard, it is submitted that such payment is the only consideration paid towards the import of the finished goods and no other direct or indirect payment accrues to the seller, hence, such value should be accepted as the transaction value of the goods for the purpose of payment of Customs Duty. 1.6.8 As regards the scenario where the manufacturer procures the raw material on his own account and undertakes to sell the finished goods (and not merely undertake the service of conversion), the transaction value will be the FOB value of the goods being manufactured. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... control a third person The third party manufacturers and FN India do not directly or indirectly control a third party. They are members of the same family The third party manufacturers and FN India are not members of the same family / Forever New Group. 1.6.11 Additionally, it is submitted that while the payment for the finished goods will be made to the third party manufacturers through the buying agents (related party), the sale will be effected, invoice will be raised and risk and title will be transferred directly by the third party manufacturers to the Applicant. In other words, merely because the payment is routed through a related party, the buying agent does not act in the capacity of a seller (as is also provided under clause 6.2 of the agreement). The buying agents do not have any financial interest of ownership in the vendors of the goods or services in relation to the goods. Based on the commercial arrangement, supported by the agreement, the seller will be the third party manufacturer and the buyer, the Applicant. Therefore, there can be no question that the buyer and seller are unrelated. 1.6.12 Further, it is also relevant to note that the Applicant i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he design of the goods. * The buying agents do not have any financial interest of ownership in the vendors of the goods or services in relation to the goods. * The buying agents do not act as an agent or represent any vendors, suppliers or manufacturers in relation to the goods. * As and when required, the buying agents acts as a supplier liaison, undertakes ethical sourcing and quality control. * The risk and title to the goods passes from the vendor directly to the Applicant on the delivery of the goods. * The buying agents receive invoices raised by the third party manufacturer on the Applicant and makes payments to the vendors on behalf of and as directed by the Applicant. * The buying agents also act as a payment agent on behalf of the Applicant for settlement of the invoices raised by the vendor. The Applicant will remit the amount to be paid to the vendors through the buying agents. * The Buying Agent Fee does not form part of the cost of goods, and is not paid, either directly or indirectly, to any vendor or for the benefit of any vendor. * In consideration for acting as an agent for the Applicant and p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....apacity of a buying agent on behalf of the Applicant and the Buying Agent Fee is towards the services provided by the buying agents outside India for facilitating procurement of finished goods on behalf of the Applicant. Accordingly, it is submitted that the Buying Agent Fee paid by the Applicant will qualify as a buying commission as defined under the interpretative notes to Rule 10. Therefore, Buying Agent Fee should not be included in the transaction value for the purpose of payment of Customs Duty, as per Section 14 of the Customs Act read with Rule 3 and Rule 10 of the Valuation Rules. 1.7.6 To substantiate the above, reliance is placed on the following rulings: i. Ruling of the Hon'ble Supreme Court in case of Apollo Tyres Ltd. versus Collector of Customs [1996 (12) TMI 48] which is similar to the facts in the present case. As per the ruling, General Tyre International Company ('General') is procuring items or equipment, machinery, spares, accessories, and raw materials required by Apollo Tyres Ltd (ATL) and is arranging for obtaining quotations and for rendering of all the related services. Further, it is provided that in the case of items of equipmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... party manufacturers outside India, and makes payment to the manufacturers on behalf of the Applicant, it is submitted that the payment of Buying Agent Fee squarely qualifies as a buying commission defined in the interpretative notes to Rule 10. Accordingly, the Buying Agent Fee paid to buying agents falls within the exception of Rule 10(1)(a)(i) of the Valuation Rules and should be excluded from the transaction value of the imported goods, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. Question 3: 1.8 Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. 1.8.1 As provided above, valuation of goods imported into India is governed by Section 14 of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Forever New Retail Sites; c) all other technical information which the Licensor has developed, or which is used in the Forever New Group's in-store and online retail operations; and d) any improvements in respect of the items identified in clauses (a) - (c) above. 1.8.5 Based on the above definition of Licensed IP, it is submitted that the Licensed IP is in connection with the Forever New retail brand image and operation of retail stores (both physical and online store) bearing Forever New branding and the Forever New image (i.e., goodwill and reputation). In addition to the Forever New retail brand, the license fee is paid for the processes and operating procedures, designs etc. required for the operation of the retail stores in India. 1.8.6 In view of this, it is submitted that the license fee has no nexus with the finished goods being imported, instead is in relation to the retail brand image, and operating procedures, processes and designs for the retail outlets in India i.e., for activities post importation of the goods. Therefore, the License Fee does not fall within the purview of Rule 10(1)(c) of the Valuation Rules and accordingly, should not b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n value of the imported goods. 1.8.11 In order to substantiate this, the Applicant places reliance on the following rulings i. In the case of M/S. H & M Hennes & Mauritz Retail Private Limited Versus Commissioner of Customs [2016 (9) TMI 318], which is similar to the present case, the applicant has entered into foreign collaboration and sub-license agreement to exploit the 'H&M' brand for sale of goods into India and also into trademark license agreement for the use of the trademark rights with respect to the 'H&M concept' for distribution and retailing of the said goods in India. The Authority for Advance Ruling held that the license fee paid by the applicant are in relation to post importation activities and are not related to the sale of goods by the third party manufacturers to the applicant. The relevant extract from the AAR is produced below for your reference: "7. The applicant will pay the Trademark License fee in lieu of grant of right to exploit "H&M concept" in India and use of associated trademark for sale of said goods; that such Trademark License fee will be payable on the basis of the sales made by the applicant in India; that sai....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the import of goods. Once the goods have been cleared from the Customs area the same is not required to be treated as imported goods and all the activities of the management, consultation etc. is relatable to the goods which is ceased to be imported goods in terms of the Customs Act, 1962. We find that the learned Advocate, on behalf of the appellant has countered all the decisions relied upon by learned Authorised Representative in the facts and circumstances of the case which we also find that is appropriate and relevant to the case at hand. We find that in the case of Ferro Alloy, Bridgestone India Pvt. Ltd. and Max Atotech Ltd. (supra), the Hon'ble Supreme Court and Hon'ble Tribunal have held that if there is no nexus of royalty payment with that of the imported merchandise and which relate to the subsequent marketing thereof the same is not required to be included for the purpose of payment calculation of Customs duty on the imported goods, in terms of Customs Act and Valuation Rules." iii. Further, the Applicant refers to the Supreme Court judgement in the case of Commissioner of Customs vs M/s Ferodo India Private Limited [2008(2) TMI 12 - Supreme Court] wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stas Wind Technology India Pvt. Ltd. [2023 (7) TMI 589] * Commissioner Of Customs (I), Mumbai Versus Max Atotech Ltd [2013 (8) TMI 580] * M/s. Thyssenkrupp Elevator (India) Pvt. Ltd. Versus The Asstt. Commissioner of Customs (Import & General) New Delhi [2017 (4) TMI 204] * Foseco India Ltd. vs. Commissioner of Customs (Import) (TS-56-Tribunal-2014(Mum)- CUST) * Commr. Of Cus., Chennai vs. Bayer Indian Syntans Ltd. [2008 (232) ELT 474] * Johnson & Johnson Ltd. vs. Commissioner of Customs, Mumbai [2013 (292) ELT 111 (Tri .- Mumbai) 1.8.13 Drawing inference from the above, it is submitted that the payment of license fee towards exploitation of Licensed IP is not related to the imported goods nor is it a condition of sale of the imported goods being valued. Therefore, the payment of license fee should not be included in the transaction value of goods imported from unrelated third party manufacturers in India. 1.8.14 The Applicant also wishes to submit that as per interpretative notes to Rule 3 of the Customs Valuation rules 2017, the price actually paid or payable is the total payment made or to be made by the buyer to or for the bene....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the imported goods. Question 4: 1.9 Whether the Management Fee paid by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from another party i.e. an unrelated third party manufacturer, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules? 1.9.1 The Applicant has executed an agreement with FN AU for the provision of routine management services such as routine management, business development, tax and accounting support, information technology and other services as provided in Schedule 2 of the agreement. In order to determine whether the management fee payable for such services is to be included in the transaction value of the imported goods, it would be relevant to examine the provisions of the Valuation Rules. 1.9.2 Rule 3 of the Valuation Rules states that the transaction value should be adjusted with the costs and payments covered under Rule 10. Rule 10(1)(e) of the Valuation Rules states that 'all other payments actually made or to be made as a condition of sale of the imported goods, by the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the management services provided by FN AU with the goods imported from unrelated parties in India, the Management Fee payable provided by FN AU cannot be construed as a condition of sale of the imported goods. Payment of Management Fee is neither made to the seller or to a third party to fulfill the obligation of the seller 1.9.6 The management fee is independent of the supply of the finished goods by the manufacturers. At the outset, the payment of the Management Fee is not made to the seller but to FN AU. Additionally, such payment is not made to FN AU to fulfill any obligation of the seller. The manufacturer does not have any nexus with FN AU and the payment of the Management Fee payable to FN AU. 1.9.7 Given the above, it is submitted that the payment of management fee does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules and accordingly, would not be required to be included in the transaction value of the imported goods. 1.9.8 In order to substantiate this, the Applicant places reliance on the following rulings: i. The case of M/S. H & M Hennes & Mauritz Retail Private Limited Versus Commissioner of Customs [2016 (9) TMI 318], wherein th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oduct consultancy charge which has got nothing to do with the imported goods and is covered by a separate contract, hence, cannot be included in the assessable value. Therefore, it was held that the value of management fee should not be included in the transaction value of imported goods. 1.9.9 Drawing inference from the above, it is submitted that the management fee paid to FN AU by the Applicant is not a condition of sale of the goods imported from unrelated manufacturers and accordingly, does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules. Hence, such management fee will not be includible in the transaction value of the imported goods. 1.9.10 The judicial precedents referred in the application is attached as Exhibit D PRAYER In the light of the above, a Ruling is sought from the Hon'ble Authority as follows: A. It may please be ruled that the transaction value proposed to be adopted in respect of the import of finished goods by the Applicant from third party manufacturers, is acceptable and is consistent with the principles of valuation as provided under Section 14 of the Customs Act, read with Rules 2 and 3 of the Valuation Rules. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ged by CMT manufacturers. * No compulsion on Applicant to route procurements through Buying Agent. No adjustment to price required under Rule 10 * The Appellant makes payments of Buying Commission, License Fee and Management Fee. * These are not includible under Rule 10 for detailed submissions given below. A.2 Therefore, basis above, valuation proposed to be adopted must be accepted. B. Buying Agent Fee is to be excluded from value of imported goods B.1 Buying Agent Fee is paid to Buying Agents for sourcing / procurement of orders on behalf of the Applicant. Relevant clauses from agreements dated 1 July 2023 and 1 January 2024 with Buying Agents are reproduced as under: * Applicant appoints Buying Agents as their agents in consideration of commission agreed Clause 2.1, 2.2 and 4.1 * Applicant to create POs with Buying Agents which shall be forwarded to vendors Clause 3.1 * Buying Agents to separately prepare vendor invoices (commercial invoices) Clause 3.5 * Applicant to pay for goods to Buying Agents who shall pay such amounts to vendors Clause 3.6 * Buying Agents not to: - act as vendor in any transaction involving the App....
X X X X Extracts X X X X
X X X X Extracts X X X X
....licant rights to purchase products is not conditional on it paying License fee to FN Clause 5.1(b) C.3 Applicant can import goods despite non-payment of License Fee. License Fee is linked to performance of Applicant's retail business and not the imported goods. C.4 Interpretative Note 2 to Rule 10(1)(c) also provides that payments made for acquiring rights to distribute or resell imported goods shall not be added. C.5 License Fee paid to FN AU, an entity separate from CMT manufacturers, indicates that payment does not satisfy an obligation of the seller. Further, Applicant has been paying License Fee to FN AU much prior to proposed transaction which clearly evidences lack of nexus with proposed transaction. C.6 Following judgments also support the Applicant's case: * CC v. Feredo India Private Limited [2008 (2) TMI 12 - Supreme Court] * H&M Hennes & Mauritz Retail Private Limited v. CC [2016 (9) TMI 318 - AAR-Cus] * Quest Retail Private Limited v. CC [2019 (7) TMI 778 - CESTAT New Delhi] * CC v. Luxoticca India Eyewear Private Limited [2018 (1) TMI 1025 - CESTAT New Delhi] D. Management Fee is to be excluded from value o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egarding the question raised in the application: As per records available in the Section, no application for the advance ruling of the applicant is pending with any officer of the Customs, other Appellate Tribunal or any Court as per proviso of Section 28(D) (2) of Customs Act, 1962. 3(iii) Please specify whether the claim of the applicant regarding the nature of activity, i.e. it is ongoing/proposed is correct: As per available records, these items were not imported previously by this importer at this port. 3(iv) Comments on merit: The questions raised by the applicant in their application have been examined in view of the material evidences submitted by them. Subsequently, comments on merit are discussed in the below paras. 2.1 "Principles of valuation to be adopted in respect of transaction value of the import of finished goods from unrelated party in accordance with Section 14 of the Customs Act read with Rule-2 and 3 of the valuation Rules and that the Buying Agent Fee, License Fee and Management Fee paid to related parties should not be treated as costs and payments required to be included in the transaction value of the goods p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are sought to be made which are in the nature of instances given below, shall be examined with respect to the need for SVB investigations: a. 'royalty' and 'license fee' under Rule 10 (1)(c) of CVR, 2007 or b. where the value of any part of proceeds of any subsequent resale, disposal or use of imported goods accrues to the seller /i.e. Rule (10)(1)(d) of CVR, 2007 or c. Where any other payments are made or are contemplated to be made in future by buyer to seller as a condition of sale of imported goods etc., [i.e. Rule 10(1) (e) of CVR, 2007" Therefore, the admissibility/quantum of the payment made to the seller/related party is subject to the SVB investigation at the time of import in terms of the Circular 05/2016-Customs Dated 09.02.2016. 2.5 Further, the SVB section is the specialized section which examines the influence of relation between related parties on the transaction value. Further the decision taken by the advance ruling committee may have far reaching revenue implication. Therefore, comments may be sought from SVB section for more clarity 3. A personal hearing in the matter was conducted on 12.08.2024. During the pers....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Management Fee to related parties. These payments are related to the products that the applicant proposes to import from third party unrelated manufacturers. iii. As per the models represented in the application at Scenario I and Scenario II, the raw materials are being transferred to CMT on FOC (Free of cost) basis and invoice for the same is issued to FN Int which is related party to FN India. Further, CMT manufacturers are selling final goods to buying agents on order which is placed by buying agents on the behalf of FN India and ownership is also transferred to FN India. Therefore, it is difficult to arrive to the conclusion that the price quoted by the CMT manufacturers (unrelated party) should be accepted as fair transaction value and is not influenced by the relation among FN Int, FN India and buying agents. iv As per Rule 3(2)(c) of CVR 2007, value of the imported goods under sub rule (1) of Rule 3 shall be accepted provided no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of rule 10 of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid mechanism for verification of valuation of such cases in Customs, Circular No. 5/2016-Customs dated 09.02.2016 issued in F. No. 465/12/2010-Cus V may be referred to in this case. Accordingly, this case requires investigation by Special Valuation Branch (SVB) which will look into all the aspects before finalization as whether declared value is at arm's length cannot be decided at this stage. In relation to the above observation by the Revenue, the Applicant wishes to submit as follows: I. The proposed import transactions are between two unrelated parties I.1. The Applicant wishes to submit that in all the scenarios covered in the application, the seller of the goods is an unrelated third-party manufacturer. The unrelated third-party manufacturer will export the goods directly to the Applicant in India. While the payment for the finished goods will be made to the third-party manufacturers through the buying agents (related party), the sale will be effected, invoice will be raised and risk and title will be transferred directly by the unrelated third-party manufacturers to the Applicant. In other words, merely because the payment is routed through a related party, the bu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ualify under any of the scenarios mentioned above: Related party scenarios Remarks in the context of the FN Group model Officers or directors of one another's businesses The third-party manufacturers and FN India are not officers or directors of one another's businesses. Legally recognized partners in business The third-party manufacturers and FN India are not partners in business. Employer and employee The third party manufacturers and FN India are employer and employee. Any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them No party directly or indirectly owns, controls or holds 5% or more of the outstanding voting stock or shares of the third party manufacturers and FN India. One of them directly or indirectly controls the other The third party manufacturers and FN India do not directly or indirectly control the other. Both of them are directly or indirectly controlled by a third person The third party manufacturers and FN India are not directly or indirectly controlled by any person from the Forever New Group. Together they directly or indirect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions on the imports that has not been/being undertaken. II.3. Without admitting that the import transaction is between related parties, the Applicant wishes to submit that in case it is concluded that the transaction proposed to be undertaken by the Applicant qualifies as a related party transaction, the Applicant would disclose the transaction as a related party import at the time of filing the Bill of Entry for the first import and such transaction may be referred by the concerned port to SVB if they so deem fit. The Applicant would follow the procedure provided in Circular 5/2016- Customs dated 9 February 2016 if the case is referred for SVB investigation. II.4. Having said this, in the meantime, while the import is a proposed transaction, the Applicant submits that the file should not be referred to SVB in the present case and the ruling be pronounced by the Hon'ble Customs Authority for Advance Ruling. III. The questions on which the advance ruling is sought is in respect of the principles to be adopted for the purposes of determination of value of the goods as per Section 28H of the Customs Act, 1962 III. 1. The Applicant wishes to submit that as per Section ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e original submissions made by the applicant and the responses filed additionally with reference to the observations of the Port Commissionerate. 6.1 Forever New India is engaged in the business of trading in women's clothing and apparels which includes active wear, belts, handbags, sunglasses, pants, skirts, jackets, coats, etc. and is a subsidiary of FN AU. The present application is being filed for the purpose of determination of application of principles of valuation of the imported goods under the Customs Act and Valuation Rules, in the context of the transaction value of the imported goods, the Buying Agent Fee, License Fee and Management Fee paid by the Applicant under the proposed operating model. 6.2 As declared, FN Group is implementing a new operating model as part of its global supply chain which involves a change in its global sourcing and procurement arrangements. The purpose of the new operating model is to centralise the sourcing and procurement processes across the FN Group. The sourcing and procurement model to be implemented by the FN Group would involve wholly owned subsidiaries of ADT acting as 'buying agents' for the FN Group entities, includ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her FN Group entities in order to meet minimum order quantities and to leverage better buying power in negotiating the price of goods. Thereafter, the buying agents would place an order for finished goods with the unrelated third party CMT manufacturers on behalf of the Applicant and other FN Group entities. II. The CMT manufacturers would raise an invoice for the conversion of the raw materials into finished goods i.e., for the provision of a service at a CMT price specifying the Applicant as the buying entity, however, the invoice will be sent to Buying Agent - ADT HK/ Buying Agent - Aoxin, for administrative convenience. The buying agents would, in turn, raise an invoice to the Applicant, for recovery of the amount charged by the manufacturer, at cost. The invoices raised by Buying Agent- ADT HK and/or Buying Agent - Aoxin for the conversion charges on the Applicant, would refer to invoices raised by the third party CMT manufacturers. The buying agents would receive funds from the Applicant and would make the corresponding payment to the CMT manufacturers on behalf of the Applicant III. Buying Agent - ADT HK / Buying Agent - Aoxin would neither take title to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acturers would be recovered through the price charged for the finished goods. Similar to Scenario I and II, FN India would place the order through buying agents, who in turn would place the order for finished goods with the unrelated third party manufacturers on behalf of FN India and other FN Group entities. The third party manufacturers would invoice for the finished goods to ADT HK/ Aoxin. Given that the buying agents act as central procurement agents for the FN Group to facilitate bargaining power for the group, the third party manufacturers raise an invoice to the buying agents, however, specifying, the Applicant as the buying entity. I. The invoice will merely be sent to Buying Agent - ADT HK/ Buying Agent - Aoxin, for administrative convenience. The buying agents would, in turn, raise an invoice to the Applicant, for recovery of the amount charged by the third party manufacturers, at cost, with supporting evidence of the invoices raised by the manufacturers. The invoices raised by Buying Agent- ADT HK and/or Buying Agent - Aoxin for the finished goods, would refer to invoices raised by the third party manufacturers. In this scenario, the third party manufacturers di....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s through Buying Agent or FN Int. * Import of goods in India (finished goods) are made from CMT manufacturers (unrelated parties). * Buying Agents do not have control over goods, price etc. * Amount payable by Applicant to Buying Agent is equal to amount charged by CMT manufacturers. * No compulsion on Applicant to route procurements through Buying Agent. No adjustment to price required under Rule 10 * The Appellant makes payments of Buying Commission, License Fee and Management Fee. * These are not includible under Rule 10 for detailed submissions given below. Therefore, basis above, the valuation proposed may be accepted. 6.4.1 Payments to be made by FN India under the proposed model and corresponding terms of the agreement: As stated in the above scenarios, FN Int facilitates the payments for the FN Group with respect to raw materials. Based on the requirements of the group entities, it places orders for raw material on third party vendors and makes the payment for such vendors on behalf of the group entities. In order to recover the cost of the raw material. FN Int raises an invoice on the respective group entities, including the Applicant. FN I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid, directly or indirectly, to any Vendor or for the benefit of any Vendor. (c) The Remuneration Fee will be calculated in accordance with Schedule 3. * Clause 6.2 - Performance In performing its obligations under this Agreement, the Procurement Entity will not under any circumstances: (a) act as a Vendor in any transactions with the Principals; (b) produce (in whole or in part) or control the production (in whole or in part) of the Goods or any other goods of the same class of goods as the Goods, purchase, exchange, sell or trade in the Goods other than as agent of the Principals; (c) sell, for its own account, any raw materials to any Vendors; (d) be involved in the design of the Goods or facilitate product development; (e) supply, or control the supply of, any services in relation to Goods; (f) have a financial interest or any ownership in the Vendors or any other suppliers that provide any services in relation to the Goods; (g) transport the Goods; (h) act as agent for, or in any other way represent, any Vendor, supplier or manufacturer or otherwise be associated with any Vendor,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ded by the buying agent as captured in Schedule 2 of the agreement, the Applicant will be obligated to pay the Buying Agent Fee. Such Buying Agent Fee will be paid on a cost plus basis, in accordance with the clause 4.1 read with Schedule 3 of the agreement. The payment of the price of the finished goods / conversion charges is separate from the payment of the Buying Agent Fee to the buying agents, by the Applicant. 6.6 License Fee for brand intellectual property: FN AU is the owner of FN Group intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e., portfolio of retail brands) and the Forever New image (i.e. goodwill and reputation). The FN Group IP owned by FN AU consists of intellectual property, including brand, store related intellectual property such as store designs, know-how, manuals and guidelines, systems and technical information for retail operations. 6.6.1 For the grant of such license, FN India pays a License Fee to FN AU. The License Fee is calculated as 5% of Retail Net Sales of the Goods by FN India within India, however, may be reduced (including to nil if necessary) where the Return on Sales achieved by FN India is l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he agreement. FN India pays a Management Fee to FN AU on a cost plus mark-up basis which is calculated as the total of direct and indirect costs (as defined in the Master Services Agreement) incurred by FN AU for the provision of the services, plus a markup of 5%. Further, FN India also pays FN AU for any disbursements, expenses or charges incurred in performing the management services that are not considered in direct or indirect costs. 6.7.2 The management fee paid by FN India to FN AU is completely independent of the importation of finished goods by FN India. Further, the management fee paid to overseas entity does not form a condition to import of goods by FN India. The relevant clauses of the Master Agreement are reproduced below, for ease of reference: * Clause 1.1 - Definitions Services means, in respect of a Recipient: (a) the services set out in Schedule 2; and (b) any incidental services under clause 3.4 to the Services, provided by the Service Provider to that Recipient from time to time in accordance with the terms of this Agreement. Services Fee means, in respect of Services received by a Recipient, the amount pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... stock/product/ inventory; (q) customer services and support; (r) real-estate leasing; (s) such other manage services required for day-to-day operations of the Recipient's business; and (t) such other corporate support services as agreed between a Service Provider and Recipient from time to time. 6.8 QUESTIONS FOR DETERMINATION The questions before this Hon'ble Customs Authority for Advance Ruling are: A. Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers, is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules. B. Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HK/Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant, is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation of value in respect of goods when there is no sale, or the buyer and the seller are related, or price is not the sole consideration for the sale or in any other case ..., B. Rule 3 of the Valuation Rules: Determination of the method of valuation (1) Subject to rule 12, the value of imported goods shall be the transaction value adjusted in accordance with provisions of rule 10; (2) Value of imported goods under sub-rule (1) shall be accepted: Provided that - (a) (b) the sale or price is not subject to some condition or consideration for which a value cannot be determined in respect of the goods being valued; (c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of rule 10 of these rules; and (d) the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purposes under the provisions of sub-rule(3) below. (3) (a) Where the buyer and seller are related, the t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere 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." Further, interpretative notes to Rule 10 (1)(a)(i) defines the terms ' buying commissions' as "fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued." 6.9 Let us take up each of the four questions sought to be answered. 6.9.1 Question 1: Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers, is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules. 6.9.2 As submitted above, the FN Group proposes to implement a new operating model to facilitate centralized procurement of raw material and finished goods. A summary of the new operating mo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Whereas, if the raw material is procured by the manufacturer on their own account, the vendors will raise an invoice for the finished goods, which would include the cost of the raw materials procured as well as any margin for the manufacture of the finished goods. * For the purpose of determination of the transaction value for the payment of Customs Duty on the import of finished goods, it is proposed that: ○ Where the raw material is free issued to the CMT manufacturers and an invoice is raised for the conversion charges, the transaction value will be determined as the sum of the price paid to the CMT manufacturer and the cost associated with the free issue of the fabric (being. an assist cost). ○ Where the raw material is procured directly by the manufacturers, the transaction value will be determined as the value of the finished goods charged by the manufacturers. 6.9.3 As per Section 14 of the Customs Act, the value of the imported goods shall be the transaction value of such goods i.e. the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, where the buyer and s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e goods for the purpose of payment of Customs Duty. 6.9.8 The seller of the goods in the instant case, is a third party manufacturer. As per Rule 2 of the Valuation Rules, a person will be deemed to be related only if: i. they are officers or directors of one another's businesses; ii. they are legally recognized partners in business; iii. they are employer and employee; iv. any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them; v one of them directly or indirectly controls the other; vi both of them are directly or indirectly controlled by a third person; vii. together they directly or indirectly control a third person: or viii. they are members of the same family. 6.9.9 In the instant case, the third party manufacturers do not qualify under any of the scenarios mentioned above: Related party scenarios Remarks in the context of the FN Group model Officers or directors of one another's businesses The third party manufacturers and FN India are not officers or directors of one another's businesses. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s sourced by the buying agent. Accordingly, the price charged by the third-party manufacturer cannot be said to be influenced by the relationship of the Applicant with the related party buying agents or any other group entity. 6.9.12 Given the price is the sole consideration and the parties are not related, the transaction value as submitted above may be accepted as the value on which Customs Duty should be paid, in accordance with the principles as laid down in Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules. 6.10 Question 2: Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HK/Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant. is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third-party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. 6.10.1 The relevant terms of the service agreement executed between the buying agents and the Applicant has been summarized earlier highlights the rel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ively through ADT HK/Aoxin or from any manufacturers selected ADT HK/Aoxin. FN India, being the principal, can procure finished goods from any independent third-party manufacturers without involvement of the buying agents. 6.10.5 Thus, in light of the above, it is evident that ADT HK/Aoxin act in the capacity of a buying agent on behalf of the Applicant and the Buying Agent Fee is towards the services provided by the buying agents outside India for facilitating procurement of finished goods on behalf of the Applicant. Accordingly, it is submitted that the Buying Agent Fee paid by the Applicant will qualify as a buying commission as defined under the interpretative notes to Rule 10. Therefore, Buying Agent Fee should not be included in the transaction value for the purpose of payment of Customs Duty, as per Section 14 of the Customs Act read with Rule 3 and Rule 10 of the Valuation Rules. 6.10.6 To substantiate the above, reliance is placed on the following rulings: i. Ruling of the Hon'ble Supreme Court in case of Apollo Tyres Ltd. versus Collector of Customs [1996 (12) TMI 48] which is similar to the facts in the present case. As per the ruling, General Tyre Int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e imported goods in terms of Rule 9(1)(a)(i) of the Customs Valuations Rules 1988 (which is pari materia to Rule 10 of the Valuation Rules). 6.10.7 Drawing inference from the above, given that the buying agents represent the Applicant in the context of the procurement of the finished goods from the third party manufacturers outside India, and makes payment to the manufacturers on behalf of the Applicant, it is submitted that the payment of Buying Agent Fee squarely qualifies as a buying commission defined in the interpretative notes to Rule 10. Accordingly, the Buying Agent Fee paid to buying agents falls within the exception of Rule 10(1)(a)(i) of the Valuation Rules and should be excluded from the transaction value of the imported goods, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. 6.11 Question 3: Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o time); b) the retail and online store design, colour schemes, copyright, identity, signs, equipment and know-how, store manual, image, brand guidelines and POS System in respect of the set-up and operation of Forever New Retail Sites; c) all other technical information which the Licensor has developed, or which is used in the Forever New Group's in-store and online retail operations; and d) any improvements in respect of the items identified in clauses (a) - (c) above. 6.11.5 Based on the above definition of Licensed IP, it is submitted that the Licensed IP is in connection with the Forever New retail brand image and operation of retail stores (both physical and online store) bearing Forever New branding and the Forever New image (i.e., goodwill and reputation). In addition to the Forever New retail brand, the license fee is paid for the processes and operating procedures, designs etc. required for the operation of the retail stores in India. 6.11.6 In view of this, it is submitted that the license fee has no nexus with the finished goods being imported, instead is in relation to the retail brand image, and operating procedures, processes and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icense fee does not qualify as a payment of royalty or license fee under Rule 10(1)(c) of the Valuation Rules and is not required to be included in the transaction value of the imported goods. 6.11.11 In order to substantiate this, the Applicant places reliance on the following rulings: i. In the case of M/S. H & M Hennes & Mauritz Retail Private Limited Versus Commissioner of Customs [2016 (9) TMI 318], which is similar to the present case, the applicant has entered into foreign collaboration and sub-license agreement to exploit the 'H&M' brand for sale of goods into India and also into trademark license agreement for the use of the trademark rights with respect to the 'H&M concept' for distribution and retailing of the said goods in India. The Authority for Advance Ruling held that the license fee paid by the applicant are in relation to post importation activities and are not related to the sale of goods by the third-party manufacturers to the applicant. The relevant extract from the AAR is produced below for your reference: "7. The applicant will pay the Trademark License fee in lieu of grant of right to exploit "H&M concept" in India and us....
X X X X Extracts X X X X
X X X X Extracts X X X X
...... The condition of payment of the royalty, which is contingent upon the volume of sale in the domestic market after importation of the goods has no connection with the import of goods. Once the goods have been cleared from the Customs area the same is not required to be treated as imported goods and all the activities of the management, consultation etc. is relatable to the goods which is ceased to be imported goods in terms of the Customs Act, 1962. We find that the learned Advocate, on behalf of the appellant has countered all the decisions relied upon by learned Authorised Representative in the facts and circumstances of the case which we also find that is appropriate and relevant to the case at hand. We find that in the case of Ferro Alloy, Bridgestone India Pvt. Ltd. and Max Atotech Ltd. (supra), the Hon'ble Supreme Court and Hon'ble Tribunal have held that if there is no nexus of royalty payment with that of the imported merchandise and which relate to the subsequent marketing thereof the same is not required to be included for the purpose of payment calculation of Customs duty on the imported goods, in terms of Customs Act and Valuation Rules." iii. Further....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is not related to the imported goods nor is it a condition of sale of the imported goods being valued. Therefore, the payment of license fee may not be included in the transaction value of goods imported from unrelated third party manufacturers in India. 6.11.13 The Applicant also submitted that as per interpretative notes to Rule 3 of the Customs Valuation rules 2017, the price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. Therefore, it can be said that for royalties and license fee to be included in the transaction value, it's essential that the buyer of the goods pays such royalties and license fee to the seller of the goods. In the present case, while the goods are being imported by the Applicant from an unrelated third-party manufacturer, the license fee is being paid to FN AU, a related party. Therefore, based on the above discussion since the consideration for finished products and the license fee are paid to different entities, the license fee paid to FN AU may not be included in the transaction value of goods imported from unrelated third-party manufacturers. 6.11.14 License F....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he management fee payable for such services is to be included in the transaction value of the imported goods, it would be relevant to examine the provisions of the Valuation Rules. 6.12.2 Rule 3 of the Valuation Rules states that the transaction value should be adjusted with the costs and payments covered under Rule 10. Rule 10(1)(e) of the Valuation Rules states that 'all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable' should be added to the price actually paid or payable for the imported goods. 6.12.3 Drawing inference from the above, it is submitted that any other payments not included in the price actually paid or payable, shall be included in the transaction value only in cases where: * payments actually made or to be made as a condition of sale of the imported goods . payments are made by the buyer to the seller or to a third party to satisfy an obligation of the seller. 6.12.4 In the present case, the Applicant has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d goods. 6.12.8 In order to substantiate this, the Applicant places reliance on the following rulings: i. The case of M/S. H & M Hennes & Mauritz Retail Private Limited Versus Commissioner of Customs [2016 (9) TMI 318], wherein the applicant had entered into sales and business support agreement with H&M GBC to provide overall market strategy, store location, store design and concept and other services for which sales and business support fee was payable to H&M GBC. The Authority for Advance Ruling held that the payment of sales support and business development fee is not payable by the applicant as a condition to sale of imported goods by overseas third party manufacturers to the applicant. Therefore, such payments are not required to be included in transaction value of the imported goods. ii. The case of Alcan India Private Limited vs Commissioner of Customs (Import), Mumbai [2014(12) TMI 899], wherein the Revenue authorities alleged inclusion of BU fees, legal and professional fees and secondment payments paid by the appellant to the related party in the transaction value of goods imported from such related party. The Tribunal held that a crucial factor for a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith Rules 2 and 3 of the Valuation Rules. B It is be ruled that the Buying Agent Fee payable by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the applicant is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. C. Further, it is ruled that the License Fee payable by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. D. Further, it is ruled that the Management Fee payable by the Applicant to FN AU for routine management services is not includible in the transaction v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s behalf may provide for, - (i) the circumstances in which the buyer and the seller shall be deemed to be related; (ii) the manner of determination of value in respected of goods when the buyer and the sellers are not related or the price is not the sole consideration for the sale or any other case ;..." 7.2 In both the responses of the Port Commissionerates of (Import) New Delhi and Chennai had indicated that as per the application, the Applicant proposed to undertake transaction from a related party as the payments like remuneration fee, license fee, management fee and reimbursement of cost of raw materials to their related parties. Since there is already a well laid mechanism for verification of valuation of such cases in Customs, Circular No. 5/2016-Customs dated 09.02.2016 issued in F. No. 465/12/2010-Cus V may be referred to in this case. Accordingly, this case requires investigation by Special Valuation Branch (SVB) which will look into all the aspects before finalization as whether declared value is at arm's length cannot be decided at this stage. A. It may be important to see whether the proposed import transactions are between two unrelat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nstant case, the third-party manufacturers do not qualify under any of the scenarios mentioned earlier. Based on the above submissions, since the Applicant and third-party manufacturer are not related, it cannot be recommended to refer the file to SVB to determine the principles of valuation to be adopted in this case. B. As far as SVB investigations are concerned, they can only be initiated at the time of first import from a related party and not for proposed transactions- Notwithstanding the fact that the Applicant and third party manufacturer are unrelated, without admitting even if its argued that the transaction is being undertaken between two related parties and price is not the sole consideration, the Applicant wishes to submit that the SVB investigation can be initiated only while filing the first bill of entry by the Applicant whereas in the present case, the question before AAR is sought for a proposed transaction. Attention is drawn to para 4.0 of the Circular 5/2016- Customs dated 9 February 2016 which necessitates the initiation of SVB proceedings at the time of import. B.1 'Cases, which may be considered for SVB Investigations- 4.0 While filing a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Authority for Advance Ruling in the context of principles to be adopted for the purposes of determination of value of the goods and rulings was pronounced in this regard are: (i) M/S. H & M HENNES & MAURITZ RETAIL PRIVATE LIMITED VERSUS COMMISSIONER OF CUSTOMS [Ruling No. AAR/Cus/21 /2016, Application No. AAR/44/CUS/08/2014]; (ii) M/S. SICK INDIA PVT. LTD. VERSUS THE COMMISSIONER OF CUSTOMS (III), MUMBAI [Ruling No. CAAR/Mum/ARC/47/2022 In Application No. CAAR/CUS/APPL/69/2022]; (iii) M/S FOXCONN TECHNOLOGY (INDIA) PVT. LTD. VERSUS COMMISSIONER OF CUSTOMS, MUMBAI [Ruling Nos. CAAR/Mum/ARC/18/2023 IN Application No. CAAR/CUS/APPL/79/2022] 8. The answers to the questions raised by the applicant are as follows: (a) Question 1: Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers, is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules. Answer: It is ruled that the transaction value proposed to be adopted in respect o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the transaction value of the goods proposed to be imported from another party i.e. an unrelated third-party manufacturer, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules? Answer: It is ruled that the Management Fee payable by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from unrelated third-party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules. 9. I rule accordingly. ============= Document 1 Payment for buying agent fee Issues invoice for buying agent fee Payment for CMT (at cost) ADT HK/ Aoxin (Buying agents) FN India Reimbursement Invoice for CMT (at cost) Payment for RM FN Int Issues invoice to recharge RM cost Places order for FG and makes payment on behalf of FN India Invoice for CMT Finished goods are directly shipped by CMT manufacturers to FN India transferring the risks, ownership rights and title of goods directly to FN India. Places bulk o....