Custom, Excise & Service Tax Tribunal
Erbatech Machinery Pvt Ltd vs Chennai( Port Import) on 2 May, 2025
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
CHENNAI
REGIONAL BENCH - COURT No. I
Customs Appeal No. 41852 of 2015
with
Customs Miscellaneous Application No. 40446 of 2023
(Arising out of Order-in-Appeal C.Cus II No. 52/2014 dated 31.10.2014 passed by
Commissioner of Customs (Appeals II), Custom House, No. 60, Rajaji Salai, Chennai - 600
001)
M/s. Erbatech Machinery Private Limited ...Appellant
SF No. 41, Vadaputhur Village,
Yellur Post, Othakalmandapam,
Coimbatore - 641 032.
Versus
Commissioner of Customs ...Respondent
Chennai II Commissionerate,
Custom House, No. 60,
Rajaji Salai,
Chennai - 600 001.
APPEARANCE:
For the Appellant : Mr. N. Viswanathan, Advocate
For the Respondent : Mr. Harendra Singh Pal, Authorised Representative
CORAM:
HON'BLE MR. VASA SESHAGIRI RAO, MEMBER (TECHNICAL)
HON'BLE MR. AJAYAN T.V., MEMBER (JUDICIAL)
FINAL ORDER No. 40486 / 2025
DATE OF HEARING : 01.01.2025
DATE OF DECISION : 02.05.2025
Per Mr. VASA SESHAGIRI RAO
Customs Appeal No. C/41852/2015 has been filed
by M/s. Erbatech Machinery Private Limited (hereinafter
referred to as 'Appellant') assailing the Order-in-Appeal
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C.Cus II No. 52/2014 dated 31.10.2014 passed by the
Commissioner of Customs (Appeals-II), Chennai upholding
the Order-in-Original No. 20514/2013 dated 25.03.2013.
2.1 Facts culled out from material on record is that
the Appellants were engaged in the manufacture and supply
of customized wet processing machines used for the
manufacture of woven knitted fabrics as per the
requirements/specifications of their customers. As the
Appellant was not in possession of adequate expertise and
technology to produce the wet processing machines, they
have entered into a Licensing Agreement during 2008 with
their overseas parent company, as per which their parent
company agreed to provide the technology in the form of
designs and drawings to fabricate such wet processing
machines in India on onetime payment of EURO 78704. By
using the technology, they had fabricated / manufactured
their first wet processing textile machinery for their customer
at Bangladesh and exported the said machine to the said
customer. Subsequently, they had set up their own design
and drawing department for developing their own designs for
the fabrication of the various sheet metal components which
are the major components for the wet processing textile
machines, fabricated by them and which are custom
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designed to suit the needs of the individual Indian customers
keeping in view of Indian conditions and requirement of
standard parts. The Appellant was importing the SS sheets
and certain standard parts required for the fabrication of the
wet processing textile machines from M/s. ERBATECH GmbH,
Germany and the Department prima facie found that that the
Appellant and the supplier were related in terms of Section
14 of the Customs Act, 1962, hence the declared value for
assessment was subject to investigation by Special Valuation
Branch (SVB), Customs. The impugned Order-in-Original
held that the Appellant and Foreign Supplier were related in
terms of Rule 2(2) (iv) of Customs Valuation (Determination
of value of Imported Goods) Rules, 2007 (CVR) and accepted
the declared transaction value in terms of Rule 3(3)(a) ibid
but interalia ordered for addition of EURO 78704 towards
"Drawing and Design" charges in terms of Rule 10(1)(b)(iv)
ibid and addition of Royalty, if any paid towards imports to
the foreign supplier, in terms of Rule 10(1)(c) ibid. Being
aggrieved, the Appellant filed an appeal before the lower
appellate authority who upheld the impugned order by
observing that the provisions of Rule 10(i)(b)(iv) are not
applicable to the facts of the case and rather the design and
drawing charges and Royalty, if any, paid were includible in
terms of Rule 10(1) (e) of CVR, thereby dismissing the
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appeal filed by the Appellant. The Appellant has filed the
present appeal before this Forum assailing the impugned
Order-in-Appeal C.Cus. II No. 52/2014 dated 31.10.2014.
3. The Ld. Counsel Mr. N. Viswanathan for the
Appellant reiterated the grounds of appeal first and given his
submissions which are summarized as follows: -
i. That the impugned order was liable to be set aside on
the sole ground of want of jurisdiction and on account of
sheer bias and judicial impropriety as no appeal was
preferred against the order of the original authority by
the revenue invoking its review/revisionary jurisdiction
as contained in Sec. 129 E of the Customs Act relying
the judgment of the Madras High Court in the case of
Servo Packaging.
ii. That the Appellant had sourced the material from their
parent company and not from others. Without
considering the fact that they had made the said
payment for permanently acquiring the technical
knowhow [IPR] for the manufacture of the wet
processing machines and that the license agreement
does not also stipulate any condition of sale and that the
said payment also does not relate to the production of
the goods imported covered by Rule 10 [1] [b] [iv]
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and the same could not be alternatively considered for
inclusion under Rule 10 [1] [e] of the CVR.
iii. That the payment made towards IPR in respect of the
wet processing continuous machines has no nexus
whatsoever to the imported stainless sheets and
standard parts to be used for further manufacture in the
wet processing continuous machines, more particularly
when the license agreement do not provide any such
condition of sale and therefore the findings of the lower
appellate authority holding that the said payment is a
condition of sale for the only reason that the goods were
sourced from their parent company and not from others
could not be sustained in law.
iv. That it was on record that the payment toward the
drawing and design charges made in pursuance to the
Licensing Agreement entered into between the Appellant
and their parent company towards permanent acquiring
of the intangible asset [technology] and consequently
the cost of the same amortized as shown in their
financial statements for the three financial years namely
2009-10 to 2011-12 as per the accounting standards
rendering the impugned order devoid of any merits.
v. That once the declared value of imported goods has
been accepted as true and correct transaction value in
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terms of Rule 3 [3][a] of the CVR, then taking recourse
to Rule 10 to make further additions to the declared
value without rejecting the same under Rule 12 ibid is
unknown to law and for the reason the impugned order
could not be legally sustained.
vi. That the provisions of Rule 10 [1] [e] of the CVR read
with Interpretative Notes to Rule 10 [1][c] having
clearly provided that the license fees referred to in the
above rules includes payment made in respect of
patents, trademarks, and copy rights in respect of
imported goods and payments and 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
custom value, the license fees paid towards design and
drawing in this case which does not relate to the
imported goods but only related to the technical know-
how and design data required for the fabrication /
manufacturing of the wet finishing process of the textile
machines, adding the value of technical knowhow and
design charges on the imported goods in any case would
not arise.
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4. The Ld. Authorized Representative Mr. Harendra
Singh Pal representing the Department reiterated the
findings of the impugned order and submitted that the
Appellant being related to the foreign supplier, the amount
paid towards Drawings and Designs to the foreign supplier is
includible in the assessable value of imports in terms of Rule
10(1)(e) of CVR and the Appellant is liable to pay the
differential duty on the revised assessable value.
5. Heard both sides and carefully considered the
submissions and evidences on record.
6. The issue which arises for decision in this appeal
is whether Design and Drawing charges / Royalty paid to the
supplier are connected to the imported components and
whether these charges are includible in the transaction value
of imports in terms of Rule 10 [1] [b] [iv] of Customs
Valuation (Determination of Value of Imported Goods) Rules,
2007?
7. We find that the Appellant had entered in to a
Licensing agreement with their parent company to provide
the technology in the form of Designs and Drawings to
fabricate wet processing textile machines in India for which a
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onetime payment of EURO 78704 was made by the
Appellant. On their importing the SS sheets and certain
standard parts required for the fabrication of the wet
processing continuous textile machines from M/s. ERBATECH
GmbH, Germany for use at their unit located in Coimbatore,
the Appellant as per the SVB requirement filed the
questionnaire with answers with the SVB Branch of the
Chennai Sea Customs Commissionerate for approval of the
transaction value for the goods imported by them in as much
as their transactions fell within the ambit of related party
transactions under the Customs Valuation Rules 2007. As
required by the rules and procedures, the Appellant had
furnished copies of various documents and replies to the
questionnaire as detailed in para 4 of the order in original
dated 25.03.2013 and also deposited EDD @ 5% of the value
of imports as per required. After due scrutiny of the
documents and replies furnished by them and considering
their relationship with their parent company as evidenced
from the Licensing Agreement, the adjudicating authority
had fairly concluded that the price declared by them for their
imports was much on the higher side than the
contemporaneous price available for similar/identical goods
and accordingly held that "the activity of the Indian Company
is development oriented which is done as per the
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requirement of the customer, and the only further
manufacturing operations are carried out on the imported
goods and hence on that basis and considering all relevant
facts the value declared are reasonable and not influenced by
the relationship". The Original authority had in para 13 of
the order observed that the drawing and design charges to
the tune of EURO 78704 paid by the Appellant to their
parent company was to be added to the invoice value for the
financial year 2009-10 at the time of assessment of the
subject BOEs filed by them by giving the option to them to
make a onetime payment of the duty on the said value
invoking Rule 10 [1] b] [iv] of the CVR 2007. Such an order
for addition of value for the financial year 2009-10 was made
by the original authority after having recorded the finding in
para 8 of the order clearly stating that the payment of EURO
of Rs 78704 was towards design and drawing for the post
importation process without which the Indian company
cannot undertake manufacturing activity. The appellant
therefore challenged that portion of the order before the
lower appellate authority since the addition provided under
Rule 10 [1] [b] [iv] of the CVR was not intended to cover
such a situation involving post production but is only
intended to cover cost of services and expenses incurred by
the importer towards design, engineering development,
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artwork etc. undertaken elsewhere than in India which are
necessary for the production of the goods imported into
India. The Lower Appellate Authority had held that the
provisions of Rule 10(i)(b)(iv) is not applicable to the facts of
the case and rather the design and drawing charges /
Royalty paid to overseas supplier were includible as per Rule
10(1) (e) of CVR, thereby dismissing the appeal filed by the
Appellant.
8. From the appeal records, it is evident that the
Appellant has entered into a License Agreement dated
07.01.2008 which specifies the payment of Royalty at a
percent rate of the amounts invoiced to the customers for
the sale of licenced products. The relevant portions are
extracted herein below for ease of reference: -
"The licensee shall pay to the Licensor as Royalty a percent
rate of the amount invoiced to its customers for the sale of
the licensed products less any sales taxes (e.g. VAT) and
any discounts (including costs guarantee commitments),
excluding cash discounts"
9. The crucial point for determination is whether
the declared value of imported goods necessarily has to be
subjected to enhancement merely on the ground of payment
of design and drawing charges/Royalty to the overseas
supplier. It would appear that the original authority has
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presumed that addition is mandated by Rule 10(1)(b)(iv) of
CVR, 2007 while the lower authority felt that the charges are
includible in assessable value of the imported goods in terms
of Rule 10(1) (e) of CVR,2007. Neither in Section 14 of the
said Act nor in the Valuation Rules is there any provision
which provides that the cost of designs and drawings/Royalty
required for procurement or manufacture of goods in India
by the importer or which relates to post-importation
activities for assembly, construction, erection, operation and
maintenance of the plant are to be included in the price of
equipments for determining their transaction value and
consequently their assessable value for the purpose of levy
of customs duty under the said Act. Rule 10(1) of CVR,2007
reads as follows: -
"Rule 10 (1) In determining the transaction value, there
shall be added to the price actually paid or payable for the
imported goods, -
(a) the following to the extent they are incurred by the
buyer but are not included in the price actually paid or
payable for the imported goods, namely:- (i) commissions
and brokerage, except buying commissions; (ii) the cost of
containers which are treated as being one for customs
purposes with the goods in question; (iii) the cost of
packing whether for labour or materials;
(b) The value, apportioned as appropriate, of the
following goods and services where supplied directly or
indirectly by the buyer free of charge or at reduced cost
for use in connection with the production and sale for
export of imported goods, to the extent that such value
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has not been included in the price actually paid or
payable, namely: -
(i) materials, components, parts and similar items
incorporated in the imported goods;
(ii) tools, dies, moulds and similar items used in the
production of the Imported goods;
(iii) materials consumed in the production of the
imported goods;
(iv) engineering, development, art work, design work,
and plans and sketches undertaken elsewhere than in
India and necessary for the production of the
imported goods;
(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."
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10. On detailed analysis of the above rule, it is
evident that as per sub-rule (1), value of certain costs of
goods and services are includible only if the same, as
provided in the further sub-rule (b) when such goods and
services are supplied by the buyer i.e., the importer, either
free or at reduced costs and such goods and services are
used for the production of import goods and in which case,
as provided in clause (iv), if such goods and services are in
the form of Designs and Development that are necessary for
the production of imported goods. However, in the present
case, no goods and services were supplied by the appellants
that are used in the form of Design and Development in the
production of import goods. On the other hand, the Design
and Drawings supplied by the foreign supplier are meant for
the production of customized wet processing textile machines
and not related to imported goods. The condition of sale too
is absent. As the design and Development charges were not
paid for production of standardized products but rather for
customer specific products it could not have been paid as a
condition of sale in any manner. Hence the addition of one
time payment towards design and drawing charges in the
assessable value in terms of Rule 10(1)(b)(iv) or 10(1)(e) is
not legally sustainable and thus the impugned order is liable
to be set aside. The facts do not warrant inclusion of one
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time drawing and design charges paid in the assessable
value of SS Sheets and other parts imported.
11. In this connection, we refer to the decision of the
Hon'ble Supreme Court in Commissioner of Customs,
Ahmedabad vs. M/s. Essar Steel Ltd. [2015 (319) E.L.T. 202
(S.C.)] wherein it was held as follows: -
"13. It is, therefore, unambiguously clear that Rule 9 of
the Rules supra does not confer a blanket mandate to add
the value of elements of a contract merely because the
supply of imported goods are covered in the same
contract. The nature of each element of the contract that
has a separate and distinct value, whether so segregated
at the specific request of the importer or not, must be
scrutinized for ascertainment as pre-importation
component for addition to the assessable value. Prima
facie, the value of 'engineering drawings' is a post-
importation cost. No evidence has been adduced to show
that the provision of these 'drawings' is conditional to
placing order for equipment or that it is a pre-importation
cost. Sans such a submission, we are unable to agree with
Revenue that we must interfere with the impugned order"
12. We find it relevant to examine whether the
payment of royalty is a pre-condition to the sale of the
imported goods or not. In the present case, there is no such
condition that emerges from the agreement which provides
that payment of royalty is a pre-condition to import of raw
materials. We find that the department has failed to establish
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as to how the royalty is related to the imported goods. 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. However, in the instant case, we find that as per the
Licensing Agreement, there is no such indication of price
adjustments against payments of enhanced royalty
warranting inclusion of Royalty in the Transaction value.
13. We find that the issue of inclusion of Royalty in
transaction value is no more Res Integra in view of the ratio
of the decisions in the case of Kruger Ventilation Industries
(North India) Private Limited Vs. Commissioner of Customs,
[2022 (5) TMI 496 - CESTAT NEW DELHI] and Commissioner
of Customs versus M/s. Ferodo India Pvt. Ltd. [2008 (2) TMI
12], both affirmed by the Hon'ble Supreme Court. On a
similar issue in the case of M/s. Valeo Friction Materials India
Ltd. Vs CCE, this Tribunal vide Final Order No. 40589 / 2024
dated 31.05.2024 has held as follows: -
"12. 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
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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.
13. As such, it is essential to examine whether the
payment of royalty is anyway linked to import of raw
materials and whether sale of raw materials is a pre-condition
in the present appeal. A reading of various clauses of
Agreement indicate that the royalty is payable at 3.75% of
the annual net sales of the product sold by the Company.
There is a clear formula regarding the method to arrive at the
above net sales value of the product 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 VALEO which are used for the manufacture of the
products viz., clutch facings. Even initially the products
manufactured by the Indian Company would be evaluated by
VALEO, France in order to ensure the products confirmed to
the quality specifications and accepted procedures prescribed
by VALEO. Such royalty payment also covers technical
assistance in sending industrialization specialists to the
appellant's plant in India for imparting training to the
employees of the appellant. It also covers training of the
appellant's personnel at VALEO's plants located abroad. From
the Technology Licence Agreement, it is also evident that the
products manufactured by the appellant and even their
packing will be utilizing the VALEO trade mark. Thus, the
right to use the name 'VALEO' shall be exercised by the
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appellant according to the terms and conditions flowing from
the Technology Licence Agreement.
14. In Article 8 of the Agreement, it is clearly indicated
that at the appellant's request, VALEO shall supply the parts
and raw materials necessary to the manufacture of the
products on the basis of the terms to be determined by the
appellant and VALEO. All this indicate that payment of
royalty is not entirely related to import of raw materials.
Even, the value of other products like copper wire, resins,
semi-finished clutch facings, etc., required for manufacture of
finished goods i.e., Clutch Facings from the associate
companies of M/s. VALEO Materiaux De friction, France are to
be deducted from the net sales value.
15. From the above, 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 import 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 appellant and the VALEO, France
which provides that royalty payment is a pre-condition for
sale / import of raw materials. There is no evidence to
establish as to how the royalty payment is linked to the
import of raw materials.
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...
...
17. The Order-in-Original dated 17.01.2014, had quantified the differential duty payable to be Rs.15,02,08,325/- for the period from 2000-2013 on the basis of percentage of imported raw materials used for manufacture of finished goods and the amount of royalty paid. The above method of computation of royalty is clearly against the prescribed procedures and rules. The above computation assumes that the entire royalty payment is related to import of raw materials. Even the Lower Appellate Authority has found fault with such a quantification though upheld that the royalty paid is having a nexus with the importation of raw materials and as such royalty paid has to be included in the value of the imported raw materials. The appellant has not only imported the raw materials like fibre yarn and impregnated yarn but also various other raw materials like textured yarn, technical yarn, copper wire, resins even semi-finished clutch facings. So, linking the raw materials imported entirely to royalty payment is not legal and cannot be accepted.
18. We find that the issue of inclusion of Royalty in transaction value is no more Res Integra in view of the ratio of the decision in the case of Kruger Ventilation Industries (North India) Private Limited Vs. Commissioner of Customs, [2022 (5) TMI 496-CESTAT NEW DELHI] which was affirmed by the Hon'ble Supreme Court, as relied upon by the Ld. Counsel for the Appellant. We also find that the ratio of the following decisions supports the cause of the Appellant:-
19C/41852/2015 i. Commissioner of Customs, Chennai Vs. M/s. GH Induction, India Pvt. Ltd. [2023 (9) TMI 90-CESTAT CHENNAI] wherein it was held that Royalty is not addable to the Transaction Value of the imported goods as the technical knowhow was for the post import (manufacturing) activity.
ii. Commissioner of Customs (Sea), Chennai Vs. M/s. Remy Electricals India Ltd. [2017 (6) TMI 32- CESTAT CHENNAI ] iii. Commissioner of Customs (Imports), Chennai Vs. M/s. Vestas Wind Technology India Pvt. Ltd. [2023 (7) TMI 589-CESTAT CHENNAI] wherein it was held that royalty is not includible in the Transaction Value as there is no evidence to establish that the licence fee paid is a condition of sale of the imported goods.
19. It is pertinent to note that in terms of the cited clauses 8 and 12 of the agreement, the Appellant has a discretion not to buy raw materials from Valeo, France and will have to pay royalty on manufactured goods whether or not there are imports from the supplier in a given period. This shows that the royalty payment is not related to and is not the condition of sale for the imported goods and therefore, Rule 10(1)(c) conditions are not satisfied. Hence, royalty is not includible in the value of the imported goods. We find that 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 not for imported goods and not a condition of sale of goods . The relevant extracts of the above decision have been reproduced below:-
"We have carefully considered the submissions and perused the records. The department has sought to 20 C/41852/2015 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 :-
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 21 C/41852/2015 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."
20. Further, relying on the following decision of higher judicial fora, the appellant has argued that the royalty payment is only for providing technical assistance for manufacture and sale of licenced products and import of raw materials is incidental to such manufacture and sale. There is no condition of sale attached to importation of raw materials and having not met the required conditions of Rule 10(1)(c), payment of royalty amounts cannot be added to the transaction value of import of raw materials. In the case of Commissioner of Customs Vs. Ferrodo India Pvt. Ltd. [2008 (224) ELT 23 (SC)], it was held as follows:-
" 23. In the case of Matsushita Television & Audio India Ltd. v. CoC reported in 2007 (211) E.L.T. 200 (S.C.) the question which arose for determination was whether royalty amount was attributable to the price of the imported goods. In that case, the appellant was a joint venture company of MEI, Japan and SIL for obtaining technical assistance and know-how. Under the agreement, the appellants were to pay MEI a royalty @ 3% on net ex- factory sale price of the colour TV receivers manufactured by the appellants for the technical assistance rendered by MEI. The appellants were to pay a lump-sum amount of U.S. $ 2 lakhs to MEI for transfer of technical know-how. It was the case of the appellant that payment of royalty was not related to imported goods as the said payment was made for supply of technical assistance and not as a condition pre-requisite for the sale of the components.22
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24. One of the questions which arises for determination in this civil appeal is whether reliance could be placed by the Department only on the Consideration Clause in the TAA for arriving at the conclusion that payment for royalty was includible in the price of the imported components.
25. Rule 4(3)(b) of the CVR, 1988 provides for an opportunity for the importer to demonstrate that the transaction value closely approximates to a "test" value. A number of factors, therefore, have to be taken into consideration in determining whether one value "closely approximates" to another value. These factors include the nature of the imported goods, the nature of the industry itself, the difference in values etc. As stated above, Rule 4(3)(a) and Rule 4(3)(b) of the CVR, 1988 provides for different means of establishing the acceptability of a transaction value. 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 of 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.23
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26. For the aforestated reasons, we find no infirmity in the impugned orders of the Tribunals. Accordingly, the civil appeals filed by the Department are hereby dismissed with no order as to costs"
Further, we 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."
21. In view of aforesaid discussions and the judicial precedents cited above, we are inclined to hold that Royalty payment is not includible in the transaction value of imported raw materials. Thus, the issue of inclusion of Royalty payment in the transaction value of the imported raw materials is decided in favour of the Appellant and we order so accordingly."
14. 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: -
24C/41852/2015
a) The royalty / license fee must be related to the imported goods;
b) It must be required to be paid by the buyer;
c) Such payment should be a condition of sale of the imported goods, and It is pertinent to note that in terms of the cited clauses 8 and 12 of the agreement, the Appellant has a discretion not to buy certain raw materials from their parent company and will have to pay royalty on manufactured goods whether or not there are imports from the overseas supplier in a given period. This shows that the royalty payment is not related to and is not the condition of sale for the imported goods and therefore, Rule 10(1)(c) conditions are not satisfied. Hence, royalty is not includible in the value of the imported goods.
We find that in the case of Brembo Brake India Pvt. Ltd. vs. CC, [2014 (302) E.L.T. 551 (Tri. - Mumbai)], it was held that royalty and other charges not includible in assessable value if Payment of royalty and other charges not for imported goods and not a condition of sale of goods. The relevant extracts of the above decision have been reproduced below: -
"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 25 C/41852/2015 components for the manufacture of Dis 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 :-
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 to 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 26 C/41852/2015 includible and the impugned order is not sustainable and is set aside. The appeal is allowed. "
15. In view of the above discussions and the judicial precedents cited above, we have to hold that Design and Drawing Charges / Royalty, is not includible in the transaction values of imported goods in terms of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. As such, the impugned Order-in-Appeal C.Cus II No. 52/2014 dated 31.10.2014 of the Commissioner of Customs (Appeals), Chennai cannot be sustained and so, ordered to be aside.
16. Thus, the appeal filed by the appellant is allowed with consequential benefits, if any, as per law. Miscellaneous application filed is also disposed of.
(Order pronounced in open court on 02.05.2025) Sd/- Sd/-
(AJAYAN T.V.) (VASA SESHAGIRI RAO) MEMBER (JUDICIAL) MEMBER (TECHNICAL) MK