Custom, Excise & Service Tax Tribunal
M/S Abb Ltd vs Commissioner Of Customs (Import), ... on 30 October, 2012
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. II Application No. C/S/1406/11 in Appeals No. C/560/11 (Arising out of Order-in-Appeal No. 112/MCH/AC/SVB/2011 dated 25.03.2011 passed by the Commissioner of Customs (Appeals), Mumbai). For approval and signature: Honble Shri Ashok Jindal, Member (Judicial) Honble Shri P.R. Chandrasekharan, Member (Technical ======================================================
1. Whether Press Reporters may be allowed to see : No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it should be released under Rule 27 of the : Yes CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether their Lordships wish to see the fair copy : Seen of the order? 4. Whether order is to be circulated to the Departmental : Yes authorities? ====================================================== M/s ABB Ltd. Appellant Vs. Commissioner of Customs (Import), Mumbai Respondent Appearance: Shri T. Vishwanathan, Advocate for Appellant Shri Navneet, Addl. Commissioner (AR) for Respondent CORAM: SHRI ASHOK JINDAL, MEMBER (JUDICIAL) SHRI P.R. CHANDRASEKHARAN, MEMBER (TECHNICAL) Date of Hearing: 11.10.2012 Date of Decision: .2012 ORDER NO. Per: P.R. Chandrasekharan
The appeal and stay application are directed against Order-in-Appeal No. 112/MCH/AC/SVB/2011 dated 25.03.2011 passed by the Commissioner of Customs (Appeals), New Customs House, Mumbai.
2. The appellant M/s ABB Ltd. entered into 23 Technical Know-How agreements with collaborators abroad. The appellant pays royalty to the foreign collaborators towards transfer of Technical Know-How. The matter was examined by the Special Valuation Branch of the Mumbai Custom House and in respect of 13 agreements, the Assistant Commissioner held that the royalty is not includable in the value of the goods imported by the appellant from the foreign collaborators inasmuch as the value on which royalty is paid does not include the price of the imported components. However, in respect of 10 agreements, the said Assistant Commissioner held that the royalty paid is relatable to the goods imported by the appellant from the collaborator or related/un-related supplier inasmuch as the royalty payment is the condition for sale of the imported goods. Therefore, he ordered that the transaction value be loaded under Rule 4(3) read with Rule 9(1)(c) and Rule 9(1)(d) of the Customs Valuation Rules, 1988 prior to 2007 and under Rule 3 read with Rule 10(1)(c) and Rule 10(1)(d) of the Customs Valuation Rules, 2007. This order was challenged before the lower appellate authority, who rejected their appeal and hence the appellant is before us.
3. The learned Counsel for the appellant made the following submissions:-
The agreements related to engineering products and the collaborator granted the appellant the right to manufacture, sell or deal with the licensed products. The agreements allowed transfer of technical know-how in the form of technical documentation, data information etc. and the appellants are required to pay either a lump-sum royalty/licence fee or a running royalty or the combination of both for transfer of technical know-how and manufacture rights in India. The running royalty is payable on the net sale price and not on the value of the imported goods and the agreements also do not provide that the appellant should buy the goods only from the collaborator or from any group companies. In view of the above, the inclusion of royalty under Rule 9(1)(c)/10(1)(c) of the Customs Valuation Rules is not permissible, inasmuch as the said rule applies only when the royalty paid is related to the imported goods. In absence of these two conditions, the question of adding the royalty to the transaction value does not arise. He relies on the judgment of this Tribunal in the case of BASF Strenics Pvt. Ltd. reported in 2006 (195) ELT 206 (Tri-Mum), wherein it was held that Rule 9(1)(c) and Rule 9(1)(d) cannot have any application where the goods are used by the importer for further manufacture and such manufactured goods are sold subsequently. He also relied on the judgment of the Apex Court in the case of Ferodo India Pvt. Ltd. 2008 (224) ELT 23 (SC), wherein it was held that if the licence fee and royalty payment is not related to the imported goods or the material in addition to the declared value for the purpose of assessment of the goods is not required to include under Rule 9(1) of the Customs Valuation Rules, 1988. He also relied on the judgment of this Tribunal in the case of Bridgestone India Pvt. Ltd. 2012-TIOL-166-CESTAT-MUM, wherein a similar view was taken by this Tribunal.
4. The learned Addl. Commissioner (AR) appearing for the Revenue, on the other hand, contends that in respect of 3 agreements out of 10 namely the agreement with ABB Switzerland Ltd. for the manufacture of Higher Power Rectified System, agreement with ABB Italy Ltd. for the manufacture of Low Voltage Air Circuit Progress. There is a clause relating to purchases, which reads as follows: -
CLAUSE 8 PURCHASES Licensor is prepared to supply Licensee, within the scope of its manufacturing capacities and purchasing possibilities with Contract Products, components thereof and special equipment.
Licensee is obliged to purchase Product Modules according to Licensors instructions.
Licensee shall give Licensor preference when purchasing any parts and components of the Contract Products not manufactured by Licensee provided that Licensor can offer such parts and components as meet the technical specification required by Licensee and at competitive prices and conditions. From this clause, it is evident that the appellant is obliged to purchase the imported components from the foreign collaborator and, therefore, it is the condition of sale and, therefore, Rule 9(1)(c) and Rule 9(1)(d) of the Customs Valuation Rules are attracted. He also relied on the judgment of the Hon'ble Apex Court in the case of Matsushita Television & Audio (India) Ltd. Vs. CC 2007 (211) ELT 200 (SC), wherein it was held that when royalty payment was made not only on the domestic element of net sale price of colour T.V. but also on the cost of imported components then it become a condition of sale of its goods and such royalty payment is includable in the assessable value under Rule 9(1)(c) of the Customs Valuation Rules, 1988. In the light of these submissions, he argues that the orders of the lower authorities are correct in law and has to be sustained.
5. We are of the view that appeal itself can be disposed of at this stage, as the issue lies in a narrow compass. Therefore, after dispensing with the requirement of pre-deposit of dues adjudged, we take up the appeal itself for consideration.
6. We have carefully considered the rival submissions. We have also perused the licence agreement entered into by the appellant with the foreign collaborator. From the agreement, it is seen that the foreign collaborator (Licensor) grants the Licensee (the appellant) a non-exclusive, non-permissible license technology to manufacture/have manufactured and to sell or otherwise to supply the licenced products. The licenced products have been defined as products and any other articles manufactured making use of any of the licence technology identified in the agreements. In consideration thereof the appellant has to pay the royalty to the Licensor as the percentage of the net sale price of the licence products in the Indian market. Nowhere in the agreement is there any condition that the appellant is required to import any components from the licensor. In fact, in 7 of the agreements, we find that there is no condition at all with respect to import/purchase of any components from the foreign collaborator. The appellant is free to import the components either from the collaborator or from anybody else. If that be so, the condition that the payment of royalty is relatable to the imported goods and is a condition for sale of goods cannot be sustained in law. The appellant is liable to pay royalty to the foreign collaborator even when the appellant imports the components from anybody else and do not at all import the components from the foreign collaborator. Thus there is no nexus between the royalty payment and the import of components.
6.1 In respect of only 3 agreements, we find that there is a clause relating to purchases which has been reproduced above. As per the said clause, there is no condition that the appellant should purchase the components from the collaborator. The said agreement merely says that the licensee should give preference when purchasing any parts or components of the Contract Products not manufactured by the licensee, if the same meets all the specification required by the licensee and at competitive price and conditions. In other words, the clause does not specifically say that licensee should necessarily purchase the components from the licensor at all. In the absence of such a clause in these agreements, we do not find any nexus between the import of components and the payment of royalty for the technical know-how.
6.2 This Tribunal in the case of BASF Strenics Pvt. Ltd. (supra) held as follows: -
9. As regards?application of Rule 9(1)(c), we note that only such royalty, payment of which is related to the imported goods and is made as a condition of sale of such goods can be added to the declared price. In the instant case, the payment of royalty is not related to imports of Ethyl Benzene and Styrene Monomer. It appears, the respondents do not have any obligation to import these goods only from their collaborators abroad. It has been noted by the lower authorities that they have in fact imported these goods from non-related suppliers at comparable prices. As such, it cannot be said that the royalties have been paid as a condition of sale of the imported goods. On the other hand, the agreement between the collaborators abroad and the respondents requires payment of royalty on finished goods manufactured and sold in India. The amount of royalty specified under the agreement relates to sale price of the goods less certain deductions. The applicant Commissioner himself has stated in the grounds of appeal that in effect the royalties are being paid on manufacturing cost plus profit plus the value of raw materials. Just because a particular formula has been designed to calculate the royalty amount which also includes the raw material cost, it cannot be said that the royalty payment is related to the imported goods. In fact, the royalty is payable on the Net Selling Price of all Agreement Products under the agreement and such 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. 6.3 Similarly in the case of Ferodo India (P) Ltd. (supra), the Hon'ble Apex Court held as follows: -
18.?Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and know-how in the manufacture of the licensed product in India. Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/licence fees which are also paid to the foreign supplier. Rule 9(1)(c) stipulates that payments made towards technical know-how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under Rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. At this stage, we would like to emphasis the word indirectly in Rule 9(1)(c). As stated above, the buyer/importer makes payment of the price of the imported goods. He also incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at TAA, it is also required to look at the pricing arrangement/agreement between the buyer and his foreign collaborator. For example if on examination of the pricing arrangement in juxtaposition with the TAA, the Department finds that the importer/buyer has misled the Department by adjusting the price of the imported item in guise of increased royalty/licence fees then the adjudicating authority would be right in including the cost of royalty/licence fees payment in the price of the imported goods. In such cases the principle of attribution of royalty/licence fees to the price of imported goods would apply. This is because every importer/buyer is obliged to pay not only the price for the imported goods but he also incurs the cost of technical know-how which is paid to the foreign supplier. Therefore, such adjustments would certainly attract Rule 9(l))(c). These decisions clearly support the case of the appellant that the terms and conditions of the agreement do not stipulate any condition relating to sale of the imported components nor the payment of royalty is relatable to the imported components.
7. In the case before us, there is no evidence which has been produced before us by the department indicating that the payment of royalty is a condition for the sale of imported components or it is relatable to the imported components. In the absence of such a nexus, we are unable to agree with the contention of the Revenue that the royalty amount is to be added with the transaction value to arrive at the assessable value of the goods in importation.
8. Accordingly, we allow the appeal with consequential relief, if any.
(Pronounced in Court on .)
(Ashok Jindal) (P.R. Chandrasekharan)
Member (Judicial) Member (Technical)
Sinha
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