Customs, Excise and Gold Tribunal - Delhi
Panalfa Dongwon India Ltd. vs Cc on 6 June, 2003
Equivalent citations: 2003(88)ECC824, 2002ECR354(TRI.-DELHI), 2003(155)ELT287(TRI-DEL)
ORDER
K. K. Usha, J. (President)
1. The appeal is at the instance of the importer M/s. Panalfa Dongwon India Ltd. The challenge is against the order passed by the Commissioner (Appeals) dated 29.8.2002. The issue arising for consideration is whether lump sum royalty of US$ 6,50,000 payable as consideration for (i) training of personnel, (ii) furnishing of technical information and (iii) utilisationn of intellectual property rights and royalty of 2.5% on the net selling price of each licensed product manufactured and sold are required to be added to the invoice value of the capital goods, raw materials etc. imported by the appellant under Rule 9(1)(c) of the Customs Valuation Rules, 1988.
2. The appellant company was formed on a joint venture agreement dated 3.2.1996 between M/s. Panalfa Investment Pvt. Ltd. New Delhi, M/s. DCM Daewoo Motors Ltd. New Delhi and M/s. Dongwon Metals Industries Co. Ltd. Korea. Pursuant to the joint venture agreement the appellant was set up to manufacture, assemble and sell complete exhaust systems, including catalytic converter. The parties have entered into an agreement of Cooperation and Technical Licence. Under the terms of the agreement the appellant was licensed to design, manufacture, quality control and sell exhaust systems of Cielo model car and components and parts thereof. M/s. Dongwon, party to the agreement, had granted the right and licence to design, manufacture, use and sell the licensed product. Technical assistance was in the form of technical knowledge, know-how etc. used by Dongwon pertaining to the manufacture, use and sale of the licensed product. The agreement provides for payment of lump sum royalty of 6,50,000 US$ as consideration by the appellant for (i) training of personnel, (ii) furnishing of technical information and (iii) utilisation of the intellectual property rights. Running royalty @ 2.5% on the net selling price of each licensed product sold was also payable.
3. Appellant had imported one capital item of equipment, i.e. break strength test machine valued at US$ 931.21 from the collaborator. All other imported capital goods have been procured from other unrelated parties. Raw materials such as aluminised steel sheets, aluminised steel pipes, bellows etc. were imported from Daewoo Corporation, Dongbu Steel Co. Ltd. and Dongwon Metal Industries Co. Ltd. Under an ex parte order dated 25.8.2000 the Deputy Commissioner of Customs accepted the invoice value of the imported capital goods and raw materials after enhancing it by 20 %. On appeal this order was set aside by the Commissioner (Appeals) and the matter was remanded back to the Deputy Commissioner of Customs for re-adjudication on the ground of violation of principles of natural justice.
4. On re-adjudication the Deputy Commissioner of Customs held that the appellant company and Dongwon Metal Industries Co. Ltd. are related in terms of Rule 2(2) of the Customs Valuation Rules. He held that the lump sum technical know-how fee of US$ 6,50,000 was not liable to be added to the value of the imported goods either under Rule 9(1)(b)(iv) or Rule 9(1)(c). He took the view that the lump sum payment was not related to the imported goods and that the payment of royalty was not a condition of sale of the goods. He ordered to accept the transaction value. The above order of the Deputy Commissioner was reviewed by the Commissioner of Customs (Import), Mumbai. And an appeal was filed before the Commissioner (Appeals). The Commissioner (Appeals) took the view that the appellant had imported capital goods from the foreign collaborator and that the technical know-how was related to imported goods. According to the Commissioner (Appeal) the ratio of the decision of the Supreme Court in Essar Gujarat 1996 (88) (SC) would be applicable to the facts of the case. Aggrieved by the above order the importer has come up in appeal.
5. Learned Counsel for the appellant took us through the terms of the agreement of cooperation and technical licence and contended that the payment of lump sum royalty as well as running royalty had no relation whatsoever to the goods imported and, therefore, it should not have been added to the invoice value of the goods. He submitted that the ratio of the decision in Essar Gujarat has no application in the facts of the case. On the other hand, the issue involved herein is directly covered by another decision of this Tribunal in Ferodo India (PO Ltd. vs. CC, Mumbai 2002 (142) ELT 343. Appellant further submitted that only one item of capital goods was imported from connected party. All other items are from unconnected parties. It is also pointed out that during the year 1996 the entire import of raw material was from unconnected party. Chart showing price of imports from foreign collaborator and other parties would show that the price was also comparable. Learned Counsel for the appellant further submitted that due to financial difficulty the appellant has not yet paid royalty as per the agreement with the foreign collaborator which would clearly show that payment of royalty is not a condition for sale of the goods imported.
6. Learned Departmental Representative on the other hand pointed out that the agreement as a whole has to be considered and if the conditions of different Article are put together it can be seen that the royalty payable would cover the imported goods.
7. We find merit in the contention raised by the appellant. Preamble of the agreement of cooperation and technical licence states as follows:
"Whereas, PDIPL desires to obtain and Dongwon is willing to grant to the right and licence to design, manufacture, use and sell the licensed products utilizing the training of PDIPL/Esx personnel and the technical information furnished by Dongwon."
Under the definition clause licensed product is defined as follows:
"Licensed Products means the exhaust system of Cielo Model, components and parts thereof."
Under the heading 'Payments' regarding lump sum royalty it is provided, as follows:
"In consideration for the training of personnel and furnishing of technical information as well as utilization of the intellectual property rights which are granted herewith to the PDIPL by Dongwon, PDIPL shall pay to Dongwon the following royalties in the amount specified below."
Thereafter provisions are made for lump sum royalty payment as well as running royalty payment. The above would show that the licence has been granted only in respect of manufacturing process and not in respect of import of goods. Learned Departmental Representative pointed out that under heading 'Consulting' it is stated that the foreign collaborator has to assist in selection, procurement, and installation of machine and tools necessary for manufacturing an exhaust system according to the requirements of DCM Daewoo and that Dongwon shall supply PDIPL with information and technology so that PDIPL ca manufacture the licensed products in the best possible way without delay. One such item is 'Material Lists'. He further pointed out that under Article 7 referring to liability for manufacture and usage, clause (4) provides as follows:
"During the terms of this agreement, Dongwon is responsible to furnish accurate and complete technical information and parts to PDIPL in that form and with that contents as they are being used by the Dongwon for the manufacture of the licensed products."
According to the Departmental Representative, the above clause would show that Dongwon is responsible to make available parts to PDIL. Learned Counsel for the appellant clarified that the word 'and' in between information and parts seems to be a mistake for the word 'on'. It will be clear by the subsequent clause (7) which would show that PDIPL is free to modify or substitute different parts but they should notify Dongwon.
8. On going through the entire agreement we come to the conclusion that royalty is payable in connection with the manufacturing process and not in connection with the import of the goods. The ratio of the decision of Essar Gujarat has no application in the facts of the case. In Essar Gujarat the condition of obtaining a licence from Midrex who was having the patent of the plant was treated as a pre-condition for sale of the plant since the plant will not be workable without obtaining the patent from Midrex. According in the facts in the present case the ratio of the decision of the Tribunal in Ferodo India (P) Ltd. Vs. CC, Mumbai would be directly applicable. In the above decision it was held that the licence fee and royalty payment being entirely related to the production in India and training the personnel by the foreign shareholder, these payments are in no way related to the imported goods or materials.
9. The Commissioner (Appeals) has erred in holding that the appellant was bound to purchase from their foreign collaborator in view of the terms of the agreement. He also committed a factual error in holding that the appellant had purchased capital goods or raw materials only from the collaborator. Commissioner's finding that the amount payable as royalty is liable to be included in the voice value cannot be sustained. We, therefore, set aside the order impugned and allow the appeal. Appellant will be entitled to all consequential relief.