Custom, Excise & Service Tax Tribunal
Sandvik Asia Pvt. Ltd vs Commissioner Of Customs (Import) ... on 26 February, 2015
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. Appeal No. C/87161/2013-Mum. (Arising out of Order-in-Appeal No. 247-248/MCH/DC/SVB/2013 dt.28.3.2013 passed by the Commissioner of Customs (Appeals) Mumbai ) For approval and signature: Honble Mr. Anil Choudhary, Member (Judicial) Honble Mr. P.S. Pruthi, Member (Technical) ============================================================
1. Whether Press Reporters may be allowed to see :
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 :
CESTAT (Procedure) Rules, 1982 for publication
in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy :
of the Order?
4. Whether Order is to be circulated to the Departmental :
authorities?
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Sandvik Asia Pvt. Ltd.
:
Appellant
VS
Commissioner of Customs (Import) Mumbai
:
Respondent
Appearance
Shri T. Viswanathan, Advocate for Appellant
Shri Ahibaran, Additional Commissioner (A.R) for respondent
CORAM:
Mr. Anil Choudhary, Member (Judicial)
Mr. P.S. Pruthi, Member (Technical)
Date of hearing : 26/02/2015
Date of pronouncement : /2015
ORDER NO.
Per : P.S. Pruthi
This is an appeal filed by the appellant Sandvik Asia Pvt. Ltd. against the impugned Order-in-Appeal in which the Commissioner (Appeals) upheld the order of the adjudicating authority who loaded the declared invoice values for the years 2008-2009 to 2011-2012 by varying percentages.
2. The appellant is engaged in the manufacture of machine tools and tool bits. They imported various raw materials/capital goods from M/s. Sandvik and their Associated Companies, namely Sandvik Materials Technology and Sandvik Mining and Construction who are related to them in terms of the definition of related persons under Rule 2(2) of the Customs Valuation Rules, 1988 and 2007. For many years starting from 1992, it was held by the Customs that the relationship between exporter and appellant has not influenced the price of the imported goods. Special Valuation Branch (SVB) orders of 1992, 2006, 2009 continued to hold this view. However, at the time of review of the preceding SVB order of 2009 which was expiring in April 2012, the Customs Authorities took the view that the royalty paid by them to their Associate Companies in terms of the Trade Mark License Agreement between the two is includible in the value of the imported goods in terms of Rule 10 (1) ( c) of the Valuation Rules. The Trademark License Agreement grants non-exclusive sub-licence and authorization to use the Trademark of the foreign entity by the appellant on the products manufactured and sold by the appellant. The appellant contended before the adjudicating authority i.e. Deputy Commissioner of Customs GATT Valuation Cell and submitted an affidavit to him stating that in the manufacture of the finished goods, they have used the raw materials imported from related persons as well as from unrelated persons. The Deputy Commissioner held that since royalty is determined on the net sale price of the goods manufactured and sold in India, without deducting the cost of raw materials, royalty is directly related to imported goods and is therefore includible in the value of the imported goods under Rule 10 (1) (c ). The Deputy Commissioner, however, extended the benefit of non-inclusion of royalty in the invoice value with effect from 1.4.2012 when the terms of royalty payment were changed and cost of imported material was excluded for calculation of royalty. The Commissioner (Appeals) upheld his order.
3. Heard both sides.
4. The grounds of appeal of the appellants are:
(i) The Order-in-Appeal is vague, cryptic and non-speaking.
(ii) The loading of value has been done in respect of royalty paid for use of the trademark only on the ground that the value of imported goods has been taken into account in determination of royalty, which is not correct.
(iii) Inclusion of royalty in the value of imported goods is subject to conditions in Rule 10(1) (c ) which reads as under:
Rule 10 (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 values, to the extent that such royalties and fees are not included in the price actually paid or payable;
According to the Ld. Counsel, the conditions required to be satisfied simultaneously are
(a) Royalty is relatable to the imported goods and
(b) Royalty is paid as a condition of sale of the imported goods.
In the present case, both conditions are not satisfied because royalty has nothing to do with the imported goods. It is only paid for using the trademark i.e. M/s. Sandvik brand on the products manufactured and sold in India. According to him, the royalty would be payable even if the goods were made exclusively from goods manufactured out of inputs procured from indigenous sources.
(iv) The Ld. Counsel relied on the decision of the Tribunal in the case of Commissioner of Customs, Vs. Ferodo India Pvt. Ltd. 2008 (224) E.L.T. 23 (S.C.). He also placed reliance on Tribunals decision in the case of CC (Import) Vs. Bridgestone India Pvt. Ltd. 2012-TIOL-166-CESTAT-MUM,
(v) Royalty has not been paid for know-how as no know-how has been supplied and therefore, the Explanation to Rule 10 (1) (c) of the Customs Valuation Rules is also not applicable.
(vi) According to Ld. Counsel, the decision of the Supreme Court in the case of Matsushita Television and Audio India Ltd. Vs. CC. 2007 (211) ELT 200 (SC) is not applicable because in that case Matsushita was also providing several other services in connection with the imported goods which led the Honble Apex court to conclude that royalty payment was a condition of the sale of the goods.
5. The Ld. AR reiterated the findings of the Commissioner. He drew our attention to Article 4.1 of the Agreement with M/s. Sandvik Mining and Construction which lays down that Royalty is expressed as a percentage of the invoice price to external customer net of any discount. Hence, according to him, the determination of royalty takes into account the cost of imported raw material and is therefore includible in value for assessment of duty. He placed reliance on the Supreme Court judgement in the case of Matsushita (Supra).
6. We have carefully considered the contentions of both sides. We are constrained to point out that the order of Commissioner (Appeals) does not analyse the facts viz-a-viz the provisions of law. It does not refer to the Agreements at all. It also fails to consider all the relevant judicial pronouncements in the matter especially those of the Honble Supreme Court. The order is passed in a very casual manner. However, it would serve no purpose to remand the case because the issue can be decided in view of the facts on record.
7. During arguments the Ld. Counsel pointed to an order passed by the same Commissioner (Appeals) in the case of M/s. Seco Tools India (Pvt.) Ltd. vide Order S/49-28/Cus/Mum/2011/NCH dt. 13.2.2012 in which it was held that payment of royalty for use of trademark was not towards import of goods and had no nexus whatsoever. We have seen that Order of Commissioner (Appeals) and note that despite similar circumstances, the Commissioner has chosen to take a different view in the present case.
8. Coming to the merits of the present case, we may straight away refer to the relevant provisions of the Customs Valuation Rules 2007 i.e Rule 10(1) (c ) under which it is to be decided to whether the royalty paid is includible in the value of imported goods for assessment to duty. As pointed out by the Ld. Counsel, we find that the two conditions required to be satisfied for invoking Rule 10(1) (c) are :-
(i) Royalty is related to the imported goods; and
(ii) Royalty is paid as a condition of sale of imported goods.
From the facts it is clear us that the royalty is not related to the imported raw material; the royalty is related to the finished goods. Only because imported goods are contained in the finished goods, it cannot be said that royalty is related to the imported goods. The royalty is only paid for using the Trademark i.e. Sandvik on the products manufactured and sold in India. Therefore, we are of the view that the first condition of Rule 10 (1) (c) is not satisfied because the royalty is not related to the imported goods.
8.1. The Agreements with Sandvik Materials Technology and Sandvik Mining and Construction to whom the royalty is paid do not require the import of material from them only. The material may be procured other foreign suppliers or even locally. There is no condition that the Trademark can be used only if the appellant imports the raw materials from Sandvik. The appellants have made a statement that they have imported the goods from other suppliers and sourced locally too. This establishes that even the second condition under Rule 10 (1) (c), that royalty is paid as a condition of the sale of imported goods, is not met. In any case it is not as if the imported raw materials were sold by the appellant under the brand name Sandvik.
8.2. Reliance is placed on the decision of Tribunal in the case of Commissioner of Customs, Mumbai Vs. BASF Strenics Pvt. Ltd. 2006 (195) E.L.T. 206 (Tri.-Mumbai) in which the Tribunal held that 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 materials cost, it cannot be said that the royalty payment is related to the imported goods. Therefore, the Tribunal in this case held that even if royalty is paid on a basis that is inclusive of raw material value, it cannot be said that the royalty payment is related to the imported goods. The case of BASF (supra) was affirmed by the Honble Supreme Court in the case of Ferodo India Pvt. Ltd. (supra), in which BASF were also a party. In this case, the Apex Court also distinguished the case of Matsushita (supra) relied upon by Revenue. It was held by the Supreme Court that In the case of Matsushita Television (supra) the pricing arrangement was not produced before the Department. In our view, the consideration Clause in such circumstances is relevance. As stated above, pricing arrangement and TAA are both to be seen by the Department. As stated above, in a given case, if the Consideration Clause indicates that the importer/buyer had adjusted the price of the imported goods in guise of enhanced royalty or if the Department finds that the buyer had misled the Department by such pricing adjustments then the adjudicating authority would be justified in adding the royalty/licence fees payment to the price of the imported goods. Therefore, it cannot be said that the Consideration Clause in TAA is not relevant. Ultimately, the test of close approximation of values require all circumstances to be taken into account. It is keeping in mind the Consideration Clause along with other surrounding circumstances that the Tribunal in the case of Matsushita Television (supra) had taken the view that royalty payment had to be added to the price of the imported goods.
A reading of the judgment in the case of Ferodo (para 3) shows that in that case the Licensee was required to import raw material form the Licensor. This is not so in the present case. In the present case there is no finding by Commissioner that the buyer had adjusted price of imported goods in the guise of enhanced royalty. Nor that the appellant was compelled to import raw material from Associate companies. Nothing in the Agreements indicate any binding to buy raw material from Associate companies. Rather, the Ld. Counsel submitted a statement showing use of raw material sourced locally as well as from unidentified origin. Therefore in the circumstances, the judgment of the Apex Court in the Ferodo case is applicable in the present case.
9. In view of the above, we hold that the invoice value is not required to be loaded by including the royalty. The appeal is allowed and the impugned order is set aside.
(Pronounced in court on 03/2015)
(Anil Choudhary)
Member (Judicial)
(P. S. Pruthi)
Member (Technical)
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