Custom, Excise & Service Tax Tribunal
Cc Sea Ch - Iii vs Bbl Daido Pvt Ltd on 4 July, 2024
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
CHENNAI
REGIONAL BENCH - COURT No. III
Customs Appeal No. 40724 of 2017
(Arising out of Order-in-Appeal C.Cus.II.No. 385/2016 dated 22.04.2016 passed by
Commissioner of Customs (Appeals-II), Custom House, No. 60, Rajaji Salai, Chennai - 600 001)
Commissioner of Customs ...Appellant
Chennai Import Commissionerate,
Custom House,
No. 60, Rajaji Salai,
Chennai - 600 001.
Versus
M/s. BBL Daido Pvt. Ltd. ...Respondent
R.S. No. 19, Vandalur-Kelambakkam Road, Pudupakkam Village, Kancheepuram - 603 103.
APPEARANCE:
For the Appellant : Mr. R. Rajaraman, Authorised Representative For the Respondent : Shri S. Muthuvenkataraman, Advocate Shri M.N. Bharathi, Advocate CORAM:
HON'BLE MS. SULEKHA BEEVI C.S., MEMBER (JUDICIAL) HON'BLE MR. VASA SESHAGIRI RAO, MEMBER (TECHNICAL) FINAL ORDER No. 40799 / 2024 DATE OF HEARING : 29.01.2024 DATE OF DECISION: 04.07.2024 Order :- Per Mr. VASA SESHAGIRI RAO Commissioner of Customs III, Custom House, Chennai has filed this Appeal No. 40724 of 2017 reviewing the order of the Commissioner of Customs (Appeals) vide Order-in-Appeal No. 385/2016 dated 22.04.2016 who have set aside the Order-in-Original (Review) No. 44582 dated 2 C/40724/2017 06.02.2016 passed by the Assistant Commissioner of Customs, Special Valuation Branch, Chennai.
2. Brief facts of the Departmental appeal are as follows:-
2.1 The Respondent-Assessee Viz., M/s. BBL Daido Private Limited, Chengalpattu have imported a Control Unit for Height Checking Machine, Wall Thickness Measuring Machine, 1A Line, Height Checking Gauge, Jig, Cutter Mixer, Rocking Mixer, and Bimetal Strips from M/s. Daido Metal Company, Japan. As the Indian Company and the foreign suppliers are related whether the transaction values were influenced was originally examined in Special Valuation Branch, Custom House, Chennai in the year 2013. On completion of required investigation, the Competent Authority vide Order-in-Original No. 555/2003 dated, 14.05.2003, held that the Indian Company and the Foreign Suppliers are related to each other but ordered for acceptance of the declared invoice value as the Transaction Value in terms of Rule 4 of the erstwhile Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (CVR, 1988).
2.2 The said Order-in-Original was subjected to periodical renewal in the year 2007 and the Competent Authority after verification of documents furnished by the Importer renewed the said order vide Renewal Order-in-
Original No. 6629/07 dated 31.08.2007 and subsequently vide 18752/2012 dated 02.05.2012. As the Renewal Order was to expire on 02.05.2015, the 3 C/40724/2017 Importers have requested to renew the SVB Order. They have vide Letter dated 20.04.2015 submitted the following documents:-
i. Details of last 3 years transactions and data such as Bill of Entry numbers, quantity, description and invoice value in JPY and in INR ii. Annual reports for the last 3 years (2011-12, 2012-13 & 2013-14) iii. License and technical assistance agreement and iv. Declaration showing that there is no change in pricing pattern 2.3 The Respondent-Assessee vide letter dated 22.06.2015 had also furnished the following:-
i. "We hereby submit the purchase orders, quotation and proof of remittance made for each invoice as sought by you.
ii. Regarding International Price list for India from our Supplier/Licensor M/s.
Daido Metal Co. Ltd., Japan, we wish to state that the items being imported from M/s. Daido Metal Co. Ltd., by us are specifically exported from Japan exclusively for us only. We are the sole and unique Importer and M/s. Daido Metal Co. Ltd., Japan is not exporting to any others in India. iii. Regarding cost construction statement of the Licensor M/s. Daido Metal Co.
Ltd., Japan, we could not provide as the Licensor is not in a position to divulge as these are their proprietary products. iv. We hereby attach an affidavit declaring that we are paying Royalty as per our License and Technical Assistance Agreement on "Net Sales Value" (ex. Factory sales price) and we have not paid any amount other than the above Royalty to M/s. Daido Metal Co. Ltd., Japan in any other manner and terminology.
We are fully aware that penal action can be initiated if these declarations are found to be incorrect.
In the light of the above, we request you to accept our transaction value under Rule 3(3)a of Customs Valuation Ruies-2007 and to renew our SVB order at the earliest please."
2.4 Further, the Importer vide their Letter dated 25.06.2015 submitted the following:-
"In connection to the letter submitted to your good office on 24.06.2015, towards renewal of SVB Order, we hereby declare that we are raising our purchase orders on the basis of Quotation dated 28.09.2007, received 4 C/40724/2017 from our supplier M/s Daido Metal Co.Ltd, Japan which is valid from 1"
Oct. 2007 to till date. It is not revised after that." 2.5 The Importer has also submitted an affidavit dated 20-04-2015 which reads as:-
"Our company M/s BBL Daido Private Limited have applied review of the SVB order dated 02.05.2012 vide file no. S50/08/2003-SVB and wish to state the following facts.
i. There is no change in the joint venture agreement. ii. There is no change in the Technical Knowhow license agreement. iii. There is no change in the pricing and invoicing procedures. iv. There is no change in the existing agreement and also the original LTAA agreement dated 17.04.2002, which has been renewed by agreement dt. 21.03.2008 and further renewed by agreement dated 01.10.2014 and v. What is stated above is true and correct."
2.6 The Respondent-Assessee has submitted the details of capital goods and Bimetal Strips imported from M/s. Daido Metal Company, Japan along with the price range details of the Bimetal Strips which are the raw- materials for the period from 2012-2013 to 2014-2015. The Assistant Commissioner in charge of Special Valuation Branch, Chennai Customs after examining all these details as submitted by the Respondent-Assessee and particularly the statements showing computation of royalty payments for the above period has come to the conclusion that the landed cost of imported components was not deducted from the Net Sales Value on which royalty is payable in terms of the Licence and Technical Assistance Agreement entered into by the Respondent-Assessee with their related foreign supplier. As the importer had paid royalty on the value of the imported components for the years 2012-2013 to 2014-2015 as evident from Form No. 15 CB statements submitted by the importer and in terms of provisions of Rule 10(1)(c) of 5 C/40724/2017 Customs Valuation Rules, 2007, he arrived at the conclusion that the royalty paid is related to the imported goods and such payment is a condition of sale of the imported goods. As the royalty has been paid on the value of the imported raw-materials, the Original Authority has concluded that there is a nexus between the imported goods and the royalty payment. He has relied upon the decision rendered in the case of M/s. Matsushita Television & Audio (I) Ltd. Vs. Commissioner of Customs wherein it was held that under Rule 9(1)(c) of Customs Valuation Rules, 1988, only such royalty which is relatable to the imported goods and which is a condition of sale of goods could be added to the declared price. Thus, the Original Adjudicating Authority has ordered for addition of royalty payments to arrive at the transaction value of imported goods for the above period. 2.7 On appeal being filed to the Commissioner (Appeals-II), Custom House, Chennai who have set aside the order of the Assistant Commissioner, Special Valuation Branch, Chennai ensuing the following discussion:-
"5. I have carefully gone through the facts of the case, Order-in-Original and the grounds of appeal. The appeal has been filed against the order of addition of royalty amount for the year 2012-13, 2013-14 and 2014-15 in terms of Rule 10(1)(c) of CVR 2007. To appreciate the issue the terms of Licence and Technical Assistance Agreement dated 1.10.2014 which provides for payment of royalty are seen. The agreement is for providing technology and know-how to manufacture licenced products viz., Half Bearings, thrust washers, PTFE Bearings and PTFE bimetal in India by Licensee i.e. the appellant. For the provision for know-how and technology by the licensor for the manufacture of licensed products in India, as per clause 3.1 of the agreement, the licensee i.e. the appellant is required to pay royalty as a percentage of the invoice value of manufactured products in India. Although as per net sales value defined in the agreement, cost of imported components irrespective of source of procurement and cost of standard bought out components are to excluded, however from the facts and the manner of calculation of royalty amount it emerges that the value of the imported components is not excluded for the purpose of calculation of royalty amount.6
C/40724/2017
6. As per the conditions of Rule 10 (1) (c) of CVR 2007, the addition of royalty can be made if the same is related to the imported goods and is a condition of the sale of the imported goods. Since the royalty amount has been calculated without excluding the value of imported raw material contained in the licensed product manufactured in India, it can be said that the same is related to the imported goods also. However, this is not sufficient for making the addition as it is to be seen whether payment of royalty is a condition of sale of the imported goods. On perusal of the agreement it is seen that there is no clause in the agreement making payment of royalty a condition for imported goods/raw material by the licensor i.e. foreign supplier. In fact in the earlier order passed by the Assistant Commissioner of Customs (SVB) dated 2.5.2012, the Assistant Commissioner has given clear findings that there is nothing to suggest that the payment of royalty is a condition of sale of raw material, whereas the royalty payable is for the production of the licenced products and held that royalty is not addable to the value of the goods in terms of Rule 10(1) (c) of CVR 2007. In the impugned order passed for subsequent period, the LAA has simply mentioned that since royalty is related to the imported goods as value of imported goods is included in the value of the licensed product on which royalty is calculated, by implication it becomes a condition of sale for the imported goods and ordered for addition of royalty amount to the value of imported goods by relying upon the Hon'ble Supreme Court order in case of Appeal (civil) 526 of 2002 filed by M/s. Matsushita Television & Audio (I) Ltd (Respondent: Commissioner of Customs). The LAA has erred in holding that condition of sale is met by implication just because royalty amount has been calculated on the sale value of the licensed product including the value of the imported raw material contained in such licensed product. In fact the payment of royalty as a condition of sale of imported goods is required to be established for such addition. The LAA in the impugned order did not refer to any clause of the agreement or any other documents providing such condition."
2.8 Relying on the decisions rendered in the cases of:-
i. M/s. Brembo Breaks India P. Ltd. [2007 (302) ELT 551 (Tri.)] ii. Commissioner of Customs, Chennai Vs. M/s. Ibex Gallegher Ltd.
[2005 (191) ELT 967 (Tribunal)] The Lower Appellate Authority has set aside the order of the Assistant Commissioner of Customs, SVB dated 06.02.2016 allowing the Assessee's Appeal.7
C/40724/2017 2.9 Hence, this appeal by the Revenue on the basis of the following grounds:-
i. Landed cost of imported components was not deducted to arrive at Net Sales Value on which royalty was computed.
ii. The importers have not honoured the Royalty clause of Licensee & Technical Assistance Agreement and have calculated the royalty on imported components also and hence the nexus has been established between royalty and imported goods.
iii. There is "condition of sale" implicitly built in the clause 5.3 of Licence & Technical Assistance agreement which reads as under:-
"5.3 Without limiting he generality of the foregoing, the Licensee acknowledges that the Technology & Know-how relating PTFE powder mix material is highly confidential and shall keep such Technology & Know-how strictly confidential in the following manners:
5.3.1.......
5.3.2. The licensee shall obtain the prior written consent of licensor as to the places where the licensee manufactures or uses PTFE powder mix material. The licensee shall not manufacture or use PTFE powder mix material in places other than those approved by the licensor."
Thus, the foreign supplier implicitly controls the supply of materials, through the confidentiality clause stated above and thereby quality assurance is controlled by the supplier. iv. Thus, both the conditions to add royalty to transaction value under Rule 10 (c) of CVR 2007 are fulfilled.
v. In view of the legal position stated above and in the background of laid down law by Apex Court in the case of Matsushita Electric 8 C/40724/2017 Company [2007 (211) ELT 200 (SC)], the Committee of Commissioners is of the considered opinion that the order of the Commissioner of Customs (Appeal) may be set aside.
3.1 The Ld. Counsel Shri S. Muthuvenkataraman appearing for the Respondent-Assessee has submitted that earlier orders of the SVB were not reviewed or appealed against where there was a clear finding that the value declared represented the transaction value and there was no precondition of sale in any payment of Licence fee or royalty.
3.2 As per the Customs Valuation Rule 10(3) and interpretative notes to the same, only when payment of royalty is based on the value of imported goods, Rule 10(1)(c) could be invoked whereas in the instant case the manufacturing cost, marketing cost, overheads etc., the factors like credit notes for price difference, excise duty, packing charges, freight. insurance and cost of rejections were also deducted to arrive at the sale price. Rule 10(3) of Customs Valuation Rules contemplates that objective and quantifiable data must be available for addition of elements in terms of Rule 10 and interpretative note to Rule 10(3) clearly states that if such objective and quantifiable data is not available and the royalty payment is not based on value of imported goods, addition to the value under Rule 10 is not possible. In this case the original authority has clearly stated that the statement of calculation of royalty is not on the addition of value of components and has also admitted that sale price of goods manufactured locally includes so many other elements which admission clearly establishes 9 C/40724/2017 that objective and quantifiable data is not available and hence Rule 10 cannot at all be invoked especially when sale price is not based only on the value of imported goods. Therefore, application of Rule 10(1)(c) itself is not correct by virtue of Rule 10(3) of Valuation Rules.
3.3 The Ld. Counsel for the Respondent-Assessee has further argued that:-
i. The lower authorities in all the past years had verified the documents related to pricing arrangement and technical assistance arrangement and found that in spite of relationship, transaction value could be accepted and there was no finding to the effect that royalty payments were intended to compensate depression in sale price.
ii. The question of deduction of value of any imported components could not arise in this case as they have imported only capital goods and raw-materials and not any components. Merely because, the royalty payment is based on sale price of finished goods in India less value of imported components and pass through products, it would not mean that such payment of royalties / licence fee is related to imported goods. In support of this contention, the Ld. Counsel has relied upon the decision in the case of Commissioner of Customs Vs. BASF Strenics P. Ltd., [2006 (195) ELT 206 (Tri.)] wherein it was held that just because a particular formula was adopted or designed to calculate the royalty by including cost of raw-materials, it cannot 10 C/40724/2017 be said that royalty payment is related to imported goods. The Ld. Counsel has also submitted that the conditions of valuation Rule 10(1)(c) are not as there is no nexus between the royalty payment and imported goods.
iii. It is also submitted that the condition of sale has not been satisfied relying on the decision in the case of Commissioner of Customs Vs. Max Auto Tech Ltd. [2014 (301) ELT 531 (Tri.)], wherein the Tribunal held that the Department has to prove that import of goods was dependent on the payment of royalty by the importer. The term 'condition' means 'stipulation or something on fulfilment of which something else depends'. He had also adverted to the decision in the case of Ferroda India P. Ltd.
[2008 (224) ELT 23 (SC)] wherein the Hon'ble Apex Court held that the Department must examine the pricing arrangement and to study full details of the case to determine whether there had been any pricing arrangement to decrease the duty liability.
iv. The Original Authority relying on non-deduction of value of imported components (though the imported goods were not components but raw-materials) from sale price for purposes of payment of royalty has concluded that there was nexus between the goods imported and royalty payments made.
v. Valuation Rule 10(1)(c) uses the expression 'required to pay' which clearly suggests that if the importer is contractually obliged to pay royalty to the exporter as a condition of sale and then only such amount payable as royalty can be added to the 11 C/40724/2017 transaction value as held in the case of Haver Iban India Pvt.
Ltd. Vs. Commissioner of Customs [2016 (341) ELT 410 (Tri.)].
vi. Further, reference was made to the decision in the case of Commissioner of Customs Vs. TATA HCL Set Ltd. [2006 (209) ELT 218 (Tri.)], where the Tribunal held that 'condition of sale' of the goods arises when the payment of royalty / licence fee is insisted on for supply of goods and that situation is not present in the instant case.
vii. Where sale of goods to be made is contingent upon the payment of royalty and licence fee, it shall constitute a condition of sale.
Referring to decision in the case of Commissioner of Customs Vs. Ibex Mallagher Ltd. [2005 (191) ELT 967 (Tri.)] wherein the Tribunal has held that Rule 10(1)(c) requires examination of the purpose for which royalty is paid. It is also submitted that even if royalty payable is required to be added, the addition is legally permissible only when there is a 'condition of sale' which has not been proved in this case and it is also submitted that they had paid appropriate service tax / GST on the payment of royalty which also indicates that royalty transaction is treated as separate transaction independent of sale of imported goods.
viii. The Respondent-Assessee has also relied on the following decisions:-
a. UOI Vs. Mahindra and Mahindra Ltd. [1995 (76) ELT 481 (SC)] b. Commissioner of Customs, Central Excise and Service Tax Vs. Suzlon Energy Ltd. [2023 (73) GSTL 298 (SC)] 12 C/40724/2017
4.1 The Ld. Authorized Representative Shri R. Rajaraman while reiterating the findings of the Original Adjudicating Authority (Assistant Commissioner of Customs, SVB, Custom House, Chennai) has pointed out that as per the Licence and Technical Assistance Agreement royalty is calculated on the Net Sales Value, excluding the cost of imported components. Whereas a scrutiny of the Annexure-B statements evidencing payment of royalties indicate that no deduction was made towards the cost of imported components from the sale of their manufactured products. Thus, the royalty payment is made on the value of the imported components for the years 2012-2013, 2013-2014 and 2014-2015. Thus, there is an indirect payment of royalty on imported components / raw-materials and thus a nexus gets established, and it also becomes a condition of sale for imported goods as the imported raw-materials cater to the specific requirements of the Respondent-Assessee. When asked, the importer has failed to submit any international price list of the foreign supplier and also any cost construction statement of the raw-materials supplied. 4.2 He has adverted to the decision of the Hon'ble Supreme Court in the case of Matsushita Television & Audio (I) Ltd. Vs. Commissioner of Customs [2007 (211) ELT 200 (SC)] which had observed that under Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, only such royalty which is relatable to the imported goods and which is a condition of sale of such goods could be added to the declared value. Relying on the above Apex Court's decision, the Ld. Authorised 13 C/40724/2017 Representative argued that addition of royalty payments to the transaction value of the imported goods is in conformity with the provisions of Section 14 of the Customs Act, 1962 read with Customs Valuation Rules, 2007. The Ld. Authorised Representative has prayed for allowing the appeal by setting aside the impugned order dated 22.04.2016 of the Lower Appellate Authority.
5. We have heard both sides and carefully considered the submissions and evidences as available in the appeal records.
6. The main issue that arise for decision in this appeal is:-
• Whether the royalty payments made by the Respondent-
Assessee to M/s. Daido Metal Company, Japan in terms of Licence and Technical Assistance Agreement for the period from 2012-2013 to 2014-2015 are to be added or not to the value of imported raw-materials in terms of Rule 10(1)(c) of Customs Valuation Rules, 2007.
7.1 In order to decide the above issue, it is important to study various clauses of the Licence and Technical Assistance Agreement entered into by the Respondent-Assessee with M/s. Daido Metal Company, Japan. The Agreement is meant to provide Technology and know-how to manufacture licenced products viz., Half Bearings, Thrust Washers, PTFE Bearings and PTFE bimetal in India by the Respondent-Assessee by the 14 C/40724/2017 licensor. The Respondent-Assessee is required to pay royalty as a percentage of the invoice value of manufactured products in India in terms of Clause 3(1) of Licence and Technical Assistance Agreement. Some of the important clauses of the Licence and Technical Assistance Agreement (LTAA) are extracted here for ease of reference:-
"Licenced Products" shall mean Half Bearings, thrust washers, PTFE Bearings and PTFE bimetal manufactured by the Licensee in respect of which the Licensee is licensed to use under the terms of this Agreement.
"Net Sales Value" shall mean ex-factory sales price of the Licensed Products manufactured by the Licensee and paid by the customers, excluding cost of imported components irrespective of source of procurement (e.g. freight charges and insurance fees), cost of standard bought out components, packing charges, and statutory levies on the sale of the Licensed Products (e.g. excise duties, sales tax, and VAT).
"Royalty" shall mean fee payable by the Licensee to the Licensor (on Royalty Base).
"Royalty Base" shall mean an amount of Net Sales Values, less an actual sales amount of pass-through products (completed products which are not manufactured or processed by the Licensee) during the relevant period.
"Technology and Know-how" shall mean information, knowledge, experience, data and designs in the possession of the Licensor relating to the Licensed Products and/or the process for making it. Unless otherwise mutually agreed upon, the said information, date and designs will be made available to the Licensee in English without any charges other than the Royalty.
"Grant of License"
1. The Licensor hereby grants to the Licensee the exclusive right to use the Technology and Know-how to manufacture the Licensed Products (including PTFE bimetal) in the Territory. The Licensor grants to the Licensee the non-exclusive right to use the Technology and Know-how to use, supply and sell the Licensed Products in the Territory. The Licensee shall ensure that the Licensee's customers in the Territory (including but not limited to the Licensee's Affiliates) shall not sell the Licensed Products to customers or any third party outside of the Territory. Notwithstanding the foregoing, the Licensee may sell the Licensed Products to the Licensor and /or the Licensor's Affiliates. 15
C/40724/2017
2. This Agreement is identically addressed to the Licensee who has no power or authority to assign any rights granted or obligations incurred hereunder, nor to grant any sub-licenses of the rights licensed to it whether or not to its Affiliates or related companies, without the prior written consent of the Licensor.
"Brand and Trade Marks"
The Licensor will license the use of the Brand and Trade Marks to the Licensee for the manufacture and sale of the Licensed Products. Immediately upon expiry or earlier termination of this Agreement, the Licensee shall cease use of the Brand and Trade Marks forthwith. However, that in a case of the expiry or termination of the Agreement pursuant to Clause 14, the Brand and Trade Marks shall be allowed to be used by the Licensee on a non-exclusive basis until such time the Licensor ceases to be a shareholder of the Licensee.
"Duration of the Agreement"
This agreement shall become effective from the 21st of September 2013 and shall continue in full force for a period of 5 (Five) years from the effective date. This agreement can be further extended the period of 5 (Five) years subject to mutual discussions and agreement on terms and conditions. In the event that either Party hereto determines that it is not desirable to continue this Agreement due to the occurrence of any event not predicted at the time of execution hereof, such Party shall terminate this Agreement by providing written notice to the other Party at least sixty (60) calendar days prior to the termination.
7.2 From the above, it can be seen that the Agreement provides a detailed framework for transfer of technology for the manufacture of their products under Article 2 of the Agreement. The said agreement was to be in force for a period of 10 years and the royalty is payable on Net Sales Value. In this context, Net Sales Value means ex-factory sales price of the Licensed Products manufactured by the Respondent-Assessee as paid by their customers, excluding the cost of imported components, cost of standard bought out components, packing charges, and statutory levies like excise duty, sales tax and VAT.
16
C/40724/2017 7.3 The Royalty is payable at 4% on Half Bearings, Bushes and thrust washers manufactured by the Respondent-Assessee. M/s. Daido Metal Company, Japan is required to inspect the plants and other facilities of the Respondent-Assessee in India in order to ensure the quality of products being manufactured. The Respondent-Assessee is permitted to use the brand and trademarks for manufacture and sale of such licensed products.
8. In order to decide the substantive issue in this appeal, the relevant statutory provisions read as follows:-
Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 reads as follows:-
"10.Cost and services. -
(1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, -
(a) .........
(b) .......
(c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable;
(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, licence 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. 17
C/40724/2017 Notes to Rule 10(1)(c)
1. The royalties and licence fees referred to in rule 10(l)(c) may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value.
2. Payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for export to the country of importation of the imported goods.
Notes to Rule 10(3) Where objective and quantifiable data do not exist with regard to the additions required to be made under the provisions of rule 10, the transaction value cannot be determined under the provisions of rule 3. As an illustration of this, a royalty is paid on the basis of the price in a sale in the importing country of a litre of a particular product that was imported by the kilogram and made up into a solution after importation. If the royalty is based partially on the imported goods and partially on other factors, which have nothing to do with the imported goods (such as when the imported goods are mixed with domestic ingredients and are no longer separately identifiable, or when the royalty cannot be distinguished from special financial arrangements between the buyer and the seller), it would be inappropriate to attempt to make an addition for the royalty. However, if the amount of this royalty is based only on the imported goods and can be readily quantified, an addition to the price actually paid or payable can be made."
9. We find that as per Rule 10(1)(c) of Customs Valuation Rules, 2007 ('CVR, 2007'), there are certain essential conditions, only on fulfilment of which the said rule can be invoked to arrive at the transaction value by including royalty / license fees payment.
a. The royalty/ license fee must be related to the imported goods; b. It must be required to be paid by the buyer; and, c. Such payment should be a condition of sale of the imported goods.
10. As such, it is essential to examine whether the payment of royalty is anyway linked to the import of raw materials and whether sale of 18 C/40724/2017 raw materials is a pre-condition in the present appeal. A reading of various clauses of Agreement indicate that the royalty is payable at 4% of the annual net sales of the products sold by the Respondent-Assessee. There is a clear formula regarding the method to arrive at the above net sales value of the products sold. The royalty payment covers transfer and use of technology providing information of technical knowledge, design formula, technical know-how, procedures for manufacturing and secret and confidential information which have been developed or acquired by M/s. Daido Metal Company, Japan which are used for the manufacture of the products viz., Half Bearings, Thrust Washers, PTFE Bearings and PTFE bimetal.
11. After perusal of the Licence and Technical Assistance Agreement, we are of the considered opinion that, it can be safely inferred that payment of royalty is not completely relatable to import of raw materials as there is no condition of sale attached for their import. Distinction which exists between an amount payable as the condition of import and amount payable in respect of sale of manufactured goods using the brand name has to be understood properly. Rule 10(1)(c) of the Customs Valuation Rules, 2007 states that royalties and licence fees related to the imported goods that the buyer is required to pay directly or indirectly as a condition of sale of the goods have to be added to the transaction value of the imported goods. We find that there is no such condition that emerges from the agreement between the Respondent-Assessee and the M/s. Daido Metal Company, Japan which provides that royalty payment is a pre-condition for sale / 19 C/40724/2017 import of raw materials. There is no evidence to establish as to how the royalty payment is linked to the import of raw materials.
12. The Lower Appellate Authority has set aside the order of the Assistant of Commissioner, SVB, after analyzing the above Licence and Technical Assistance Agreement arriving at the conclusion that in respect of royalty payment, the condition of sale is not satisfied. There is no clause in Agreement for making payment of royalty, a condition of sale for imported goods from the foreign supplier. Relying on the decision of the Tribunal in the case of M/s. Brembo Breaks India P. Ltd. [2007 (302) ELT 551 (Tri.)] and also in the case of Commissioner of Customs, Chennai Vs. M/s. Ibex Gallegher Ltd. [2005 (191) ELT 967 (Tri.)], he has arrived at the finding that royalty payments are not to be added to the transaction value of imported goods.
13. In the case of Brembo Brake India Pvt. Ltd. Vs. Commissioner of Customs [2014 (302) E.L.T. 551 (Tri.-Mumbai)], it was held that royalty and other charges are not includible in assessable value if payment of royalty and other charges are not for imported goods and not a condition of sale of goods . The relevant extract of the above decision has been reproduced below:-
"7. We have carefully considered the submissions and perused the records. The department has sought to load royalty relating to the technical know-how as per Rule 10(l)(c). Undisputedly the appellants have imported components for the manufacture of Disc Brake Systems for two wheelers. The department has sought to load the assessable value as per Rule 10(l)(c) which is reproduced for convenience of the reference :-20
C/40724/2017 Rule 10(1)(c). - Royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable;
The following explanation has been added to Rule 10(l)(c).
"Where the royalty, licence 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 good, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods".
From the above it is clear that the royalty and the other charges can be included:
(i) In case of imported goods
(ii) As condition sale of goods And the explanation only added that such royalty would be includable' in the case even if the imported goods have undergone the said process after importation of such goods. The department could not show that the royalty and other charges were for the imported goods and they were as a condition of sale of such imported goods. Undisputedly the royalty on technical know-how was paid only for the manufacture sub-assembly of Dis Brake Systems. Therefore the royalty and other charges are not includible and the impugned order is not sustainable and is set aside. The appeal is allowed."
14. At this juncture, we like to refer to the decision in the case of Commissioner of Customs Vs. Ferodo India Pvt. Ltd. [2008 (224) ELT 23 (SC)] wherein the Hon'ble Apex court has held that:-
i. Regarding payment of royalty and licence fee:-
"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 21 C/40724/2017 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).
Application of Rule 9(l)(c) to the facts of the present case
19. Applying the above tests to the facts of the present case, we find that the adjudicating authority had not examined the pricing arrangement between the foreign collaborator and the buyer. It has only examined the royalty/TAA.
20. Be that as it may, in the present case, on reading TAA we find that the payments of royalty/licence fees was entirely relatable to the manufacture of brake liners and brake pads (licensed products). The said payments were in no way related to the imported items. In the present case, no effort was made by the Department to examine the pricing arrangement. No effort was made by the Department to ascertain whether there exists a price adjustment between cost incurred by the buyer on account of royalty/licence fees payments and the price paid for imported items. No effort was made by the Department to ascertain enhancement of royalty/licence fees by reducing the price of the imported items. In the circumstances, we find no infirmity in the impugned judgment of the Tribunal. In this case, the Department has gone by TAA alone. On reading TAA in entirety, we are of the view that there was no nexus between royalty/licence fees payable for the know-how and the goods imported for the manufacture of licensed products. The Department itself has invoked Rule 9(l)(c)."
ii. Regarding the condition pre-requisite for supply of imported goods by foreign supplier:-
"16. Under Rule 9(1)(c), the cost of technical know-how and payment of royalty is includible in the price of the imported goods if the said payment constitutes a condition pre-requisite for the supply of the imported goods by the foreign supplier. If such a condition exists then the payment made 22 C/40724/2017 towards technical know-how and royalties has to be included in the price of the imported goods. On the other hand, if such payment has no nexus with the wording of the imported goods then such payment was not includible in the price of the imported goods."
15. We also find that in the case of Commissioner of Customs (Port), Chennai Vs. Toyota Kirloskart Motor Pvt. Ltd. [2007 (213) ELT 4 (SC)], it was held as follows:-
"31. The transaction value must be relatable to import of goods which a fortiori would mean that the amounts must be payable as a condition of import. A distinction, therefore, clearly exists between an amount payable as a condition of import and an amount payable in respect of the matters governing the manufacturing activities, which may not have anything to do with the import of the capital goods."
16. We find that even if royalty is calculated including the value of imported raw-materials, the same is not addable to the transaction value of imported goods as there is no such condition that is evident from the Licence and Technical Assistance Agreement mandating payment of royalty as a pre- condition for sale of imported materials. In this regard reliance is placed on the decision of Kruger Ventilation Industries (North India) Private Limited Vs. Commissioner of Customs [2022 (5) TMI 496-CESTAT NEW DELHI] wherein it was held that royalty would not be addable even if royalty is paid as a percentage of the net turnover of goods manufactured, which includes not only the component which are domestically procured but also which are imported as well as any value addition by the appellant. The relevant portion of the decision reads as under:-
"22. In the present case, we find that the Technical Aid Agreement entered into between the appellant and M/s. Kruger Ventilation Industries Pvt. Ltd., Singapore was a technical aid agreement on a non-exclusive basis to manufacture and assemble centrifugal fans, axial fans, in-line fans, roof exhaust fans and mixed flow fans (goods) and to instruct the 23 C/40724/2017 licensee in the methods of working the processes relating to or in respect of or for the manufacture of the goods and to provide total management. The restrictions in the agreement are with respect to import or export of final products by the appellant but not with respect to imports. It is also mandated that the goods were to be manufactured strictly in accordance with the specifications provided by technology provider. A license fee @ 5% had to be paid on the total net turnover of the goods. We have gone through the agreement and do not find anything in it that it also provides import of the components. Therefore, the goods were not imported under the agreement and any royalty under the agreement cannot be related to it. Further, there is no condition that the importer has to obtain the approval of the technology provider either for import or for procuring components domestically. Therefore, the royalty paid by the appellant @ 5% on the final products under the technical aid agreement cannot be said to be a condition for sale and added to the assessable value of the imported goods. It is true that the royalty is paid is as percentage of the net turnover of goods manufactured, which includes not only the component which are domestically procured but also which are imported as well as any value addition by the appellant. However, this in itself, is not sufficient to add royalty to the assessable value.
23. It needs to be seen whether the payment of such royalty is pre- condition to the sale of the imported goods. No such condition emerges from the agreement in the present case. The goods were also not imported under the agreement. In view of the above, we find that the royalty cannot be included in the assessable value."
The said decision of the Tribunal has been affirmed by the Hon'ble Supreme Court [2023 (8) TMI 208-SC].
Further, the Ld. Counsel relied on the decision in the case of Commissioner of Customs, Mumbai Vs. BASF Strenics Pvt. Ltd [2006 (195) E.L.T 206 (Tri.- Mumbai)], wherein it was held that 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. The relevant portion of the decision as follows:-
"9. ....
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 24 C/40724/2017 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."
It was submitted that the Hon'ble Supreme Court in the case of Commissioner of Customs Vs. M/s. Ferodo India Pvt. Ltd [2008 (2) TMI 12- SUPREME COURT] upheld the decision in BASF Strenics (supra) and held that whether payment of royalty is includible in the price or not cannot be merely on the basis of consideration clause in the agreement.
17. In this appeal, the imported raw-materials are specifically manufactured and supplied to the Respondent-Assessee's requirements. The goods were supplied at the rates quoted in 2007 and the importer has failed to supply any international price list of M/s. Daido Metal Co. Ltd., Japan. Neither he could provide any details as to costs incurred in the manufacture of imported goods. As these goods are made to the specific requirements of the Respondent-Assessee, contemporary prices of identical or similar goods are not available. As the cost of these raw-materials was included in computation for payment of royalty it can be said that there is some direct or indirect nexus between the cost of imports and the royalty payment. However, we could not find any condition of sale in these imports. 25
C/40724/2017
18. In view of aforesaid discussion and appreciating the ratio decidendi of judicial precedents as above, we hold that royalty payments made are not addable to the transaction value of imported goods for the period from 2012-13 to 2014-15 in this appeal, in terms of provisions of Section 14 of the Customs Act, 1962 read with Rule 10(1)(c) of the Customs Valuation Rules, 2007. We uphold the impugned Order-in-Appeal No. 385/2016 dated 22.04.2016 of Commissioner of Customs (Appeals), Custom House, Chennai and reject the appeal filed by the Revenue being not legally maintainable. Thus, the appeal of the Department is rejected.
(Order pronounced in open court on 04.07.2024)
Sd/- Sd/-
(VASA SESHAGIRI RAO) (SULEKHA BEEVI C.S.)
MEMBER (TECHNICAL) MEMBER (JUDICIAL)
MK