TaxTMI 
TaxTMI 
2026 (9) TMI 1611
X X X X Extracts X X X X
X X X X Extracts X X X X
....iented Unit engaged in manufacture of power conversion and inverter systems, imports goods from its related foreign suppliers, namely M/s. CE+T SA, Belgium and M/s. Suzhou CE+T Power Solutions Co. Ltd., China. During Special Valuation Branch investigation, the Department entertained a view that royalty paid by the appellant under agreements with the foreign collaborator was liable to be added to assessable value under the Customs Valuation Rules, 2007. In the first round, Order-in-Original No 24406/2014 dated 14.03.2014 accepted the declared transaction value and held that royalty was not includible; however, on Revenue appeal, the matter was remanded for fresh examination. Pursuant thereto, de novo Order-in-Original dated 10.06.2015 held that royalty was includible in assessable value on the ground that imported components constituted integral raw materials for manufacture of CE+T branded products, which finding came to be affirmed by Order-in-Appeal dated 03.09.2015, against which the present appeal has been filed. 3. The Ld. Advocate Shri M. Karthikeyan appearing for the appellant, submitted that the impugned order proceeds on an erroneous interpretation of Rule 10(1)(c) of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d. According to Revenue, although royalty was quantified on net selling price, the finished goods could not have been manufactured without imported components sourced from the foreign collaborator and therefore the royalty payment had direct nexus with the imported goods. It was further argued that the appellant had failed to establish that imported component cost stood excluded while calculating royalty and once imported goods constituted as integral raw materials for manufacture of branded finished products, the requirement of nexus under Rule 10(1)(c) stood satisfied. Revenue therefore contended that the adjudicating authority had rightly added royalty to assessable value and prayed for upholding the impugned order. 5. We have carefully considered the rival submissions, examined the records placed before us including the Term Sheet dated 06.03.2008, Royalty Agreement dated 01.04.2010, Licence Agreement dated 01.04.2012, the first Order-in-Original dated 14.03.2014, Order-in-Appeal dated 26.08.2014 remanding the matter, de novo Order-in-Original dated 10.06.2015 and the impugned Order-in-Appeal dated 03.09.2015, and have also considered the judicial precedents relied upon by b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty in satisfaction of an obligation of the seller. The Explanation appended to Rule 10 further clarifies that where royalty, licence fee or any other payment for a process, whether patented or otherwise, is includible under clauses (c) and (e), such charges shall be added notwithstanding the fact that the imported goods may be subjected to such process after importation. In our considered opinion, neither Rule 10(1)(e) nor the Explanation advances the Revenue's case. The Explanation appended to Rule 10 cannot be read as creating an independent charging mechanism or enlarging the substantive scope of clauses (c) and (e); it merely clarifies that once the primary statutory conditions are satisfied, subsequent processing after importation would not exclude inclusion. In the present case, the Department has failed to establish that the royalty paid by the appellant under the contractual agreements was an obligation intrinsically linked to sale of the imported goods. The agreements demonstrate that the payments were made towards technology transfer, intellectual property rights and post-import manufacturing rights and not as consideration flowing from the import transaction itself. Cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....imported components constituted essential raw materials for manufacture of finished CE+T branded products and therefore royalty had sufficient nexus with imported goods. In our considered opinion, such reasoning impermissibly expands the scope of Rule 10 of Customs Valuation Rules, 2007. The statutory framework does not contemplate that every payment remotely connected with imported goods automatically becomes includible in assessable value. What the law requires is a direct and proximate relationship between royalty payment and imported goods coupled with proof that such payment constitutes a condition of sale. 15. We also take note of the specific contention advanced by the appellant, as reflected in Para 7.3 of the written submissions that the imported raw materials procured from the related foreign suppliers constituted only a limited portion of the overall raw material procurement undertaken by the appellant for its manufacturing operations in India. In support thereof, the appellant has furnished the year-wise procurement data, reproduced below: - Financial Year Total Raw Materials Purchased (INR) % Imported Raw Materials (Related + Unrelated) % Procured Indige....
X X X X Extracts X X X X
X X X X Extracts X X X X
....transaction value of imported goods unless Revenue establishes a clear nexus between the royalty payment and the imported goods and further demonstrates that such payment constituted a condition of sale of the imported goods. The ratio emerging consistently from these judgments fully supports the appellant's contention. 18. We also find merit in the appellant's reliance upon the decision of this Tribunal in M/s. Ajinomoto India Pvt. Ltd. v Commissioner of Customs Chennai II reported in 2024 (8) TMI 1063 (CESTAT Chennai). In that case, the Tribunal examined Rule 10(1)(c), Rule 10(1)(e) and the Explanation appended thereto in the context of royalty payable under a Trademark Licence Agreement. The Tribunal categorically held that the Explanation to Rule 10 does not expand the scope of the substantive provision and cannot create an independent basis for inclusion unless the primary statutory requirement of establishing that royalty constituted a condition of sale of imported goods is first satisfied. It was further held that royalty payable for post-import activities, including domestic repacking, use of trademark and commercial exploitation after customs clearance, cannot be added ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stinct from payments intrinsically connected with importation. Ultimately, the departmental appeal was rejected by holding that even though some nexus with imported raw materials may exist, absence of any contractual stipulation making royalty payment a pre-condition for import or supply of goods is fatal to Revenue's case. We find that the ratio laid down in the aforesaid decision squarely supports the appellant's contention in the present appeal. Here also, Revenue has proceeded substantially on the assumption that since imported components were utilized in manufacture of finished CE+T branded products, royalty automatically became includible in assessable value. Such reasoning, in our considered view, directly runs contrary to the legal principle reaffirmed by this Tribunal in BBL Daido Pvt. Ltd., which in turn follows the settled law laid down by the Hon'ble Supreme Court in Ferodo India and Toyota Kirloskar. 21. In view of the contractual framework and settled legal position, we hold that the royalty payments made by the appellant under the contractual agreements do not satisfy the statutory requirements contemplated under Rule 10(1)(c) or Rule 10(1)(e) of the Customs Valua....