Custom, Excise & Service Tax Tribunal
Commissioner Of Customs vs 3 M India Ltd on 8 March, 2016
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNALSOUTH ZONAL BENCH
CHENNAI
Appeal No.C/S/42377/2013 & C/42422/2013
[Arising out of Order-in-Appeal No.C.Cus.No.1209/2013 dt. 30.8.2013 passed by the Commissioner of Customs (Appeals), Chennai]
Commissioner of Customs
Bangalore Appellant
Versus
3 M India Ltd. Respondent
Appearance:
Ms. Indira Sisupal, AC (AR) For the Appellant Ms.Rukmani Menon, Advocate For the Respondent CORAM :
HonbleShriR. Periasami, Technical Member HonbleShriP.K. Choudhary, Judicial Member Date of Hearing : 03.11.2015 & 13.11.2015 Orders Reserved on : 13.11.2015 Order Pronounced on : 08.03.2016 FINAL ORDER No.40420/2016 Per R. Periasami Revenue filed appeal against Commissioner (Appeals) order dt.30.8.2013 with application for stay of operation of the impugned order. Since we are taking up the appeal itself for disposal, the stay application filed by Revenue is disposed of.
2. The brief facts of the case are that respondents M/s.3M India Ltd., Bangalore imported capital goods, raw materials, finished products from their principal company M/s.3M USA and their related subsidiaries located in other countries. Since the respondent and the supplier are related, the issue was dealt with by Special Valuation Branch by issue of Circular No.138/91 dt.23.10.91. Subsequently, the said circular was renewed / reviewed periodically vide OIO No.326/2001-SVB dt. 30.3.2001, OIO No.3349/2005 dt. 8.2.2005 and another OIO No.7171/2008 dt. 8.2.2008. From 1991 till 2008, renewal orders has been issued accepting the declared price for the purpose of transaction value. Subsequently, it was reviewed and the Deputy Commissioner of Customs, SVB, Seaport, Chennai in OIO No.14432/2011 dt. 4.2.2011 accepted the declared price and the said order was valid for a period of 3 years upto 8.2.2014.
3. Revenue reviewed the said DCs order dt.4.2.2011 and preferred appeal before Commissioner (Appeals) on the grounds that adjudicating authority has erred in accepting the declared price and also holding that royalty paid is not a condition of sale of imported goods. Revenue also in their grounds of appeal contended that royalty is addable in the imported goods under Rule 10 (1) (c) of Customs Valuation Rules, 2007. The LAA in his impugned order dt. 30.8.2013 upheld the OIO and rejected the Revenue's appeal. Hence the Revenue filed the present appeal before Tribunal.
4. The respondent filed writ petition before Honble High Court of Madras seeking writ of mandamus and the Honble High Court in their order dated 9/12/2014 in Writ Petition No. 29902/2014 directed this Tribunal to proceed with appeal independently without in any manner influenced by the pendency of writ petition before Honble High Court. Hence this is taken up for disposal.
5. Heard both sides.
6. Ld. A.R reiterates the grounds of appeal filed by Revenue and submits that from the beginning 1991 to 2008 the department has accepted the transaction value and periodically renewed the said orders. While renewing the orders for the period from 2011 to Feb'2014, there was a change in agreement by the respondent for paying royalty as per their amendment to the agreement. She drew our attention to page 17 at para 2 and findings at para-6 of the OIA and submits that amendment of the royalty agreement was renewed prospectively and the respondent did not inform that they paid royalty. She drew our attention to page 28 of the OIO wherein adjudicating authority clearly held that on examination of the balance sheet of the company for the year ended 2008-09 & 2009-10, flow back of money towards royalty was noticed. Adjudicating authority confirmed payment of royalty however held that same cannot be added to the import invoice on the ground that royalty payment is not a condition of sale.
7. Ld. A.R submits that after the issue of the order, the DRI initiated the investigation on the related party transactions between the respondent and M/s.3M USA and other related subsidiaries based on the specific intelligence that the transactions were not at arms length and the investigation is yet to complete. She submitted copy of DRI letter dt. 6.2.2014 and submits that DRI could not finalize investigation as the respondents were not co-operative, not submitted relevant agreements. She submits that SVB order has lapsed in Feb'2014 and produced copy of letter dt. 15.7.2015 issued by CC-III Customs House and submits that the delay of investigation is due to non-submission of required details by the respondent and it was submitted only on 13.7.2015. DRI is finalizing the investigation for issue of SCN.
8. On the merits, she reiterated the grounds of appeal as at page 13 & 14 and submits that flow back of money having established through receipt of royalty, both adjudicating and the appellate authority have not considered the facts. She relied the following case laws :-
(1) Matsushita Television & Audio India Ltd. Vs CC New Delhi 2001 (136) ELT 1093 (Tri.-Del.) (2) Matsushita Television & Audio (I) Ltd. Vs CC 2007 (211) ELT 200 (SC) (3) Excel Production Audio Visuals P. Ltd. Vs Commissioner 2015 (321) ELT A49 (SC) She pleaded to set aside the orders and to remand the matter to original authority in view of pending investigation.
9. Learned Advocate representing the respondent submitted two written synopsis and also copy of Profit & Loss Account, Annual Reports for the years 2008 to 2011 and the case laws and reiterated the same. She submits that both the original authority and the Commissioner (Appeals) correctly held and given their findings and rejected the Revenue appeal and reiterated the findings of LAA and the adjudicating authority which is in their favour. She submits that Revenue reviewed the DC order and filed appeal before Commissioner (Appeals). The Commissioner (Appeals) has discussed in detail and examined all the relevant clauses of the Intellectual Property Agreement including the Nature of Royalty Clause 5.3 of the agreement and accepted the transaction as there is no nexus between the royalty paid and the imported goods under Rule 10 (1) (c) of CVR. She further explained in detail the relevant clause of agreement dt. 1.7.2006 and referred to amendment to the IP Agreement dt. 1.7.2006. The Recital of the agreement is given in clauses A, B, C, D and the definitions has been recorded in Article I from para 1.1 onwards. She particularly emphasized clause 1.20 which defines "Intellectual Property". She drew our attention to clauses 1.31 (Software), 1.32 (User Documentation) and 1.33 (Development Documentation), though these are not relevant to respondent. On the grounds of appeal of Revenue, she submits that there was a flow back of royalty for the year 2008 and also for 2009-10 and for subsequent periods which is discussed at page 7 (internal page 28) of the OIO. She submits that as per clause 5.8 of the IP agreement, though there was a consideration, royalty was provided under Article V i.e. 5.1 to 5.4. As per clause 5.8 of Article V, she submits that their principal company viz. M/s.3M Company, USA has waived its right to receive royalty payments and the termination of this waiver shall constitute an amendment of this agreement. Ld. counsel submits that as per this agreement there was no payment of royalty till 30.6.2009. She further submits that there was an amendment to the said agreement which was made on 16.12.2009 between the respondent and the principal company. She submits that para 5.8 of the agreement was amended to the read "Agreement by terminating the waiver w.e.f. 1.7.2009 and the respondent shall henceforth be obligated to make royalty payments as per the terms of the agreement.' It is made retrospectively from 1.7.2009 though the agreement was made on 16.12.2009 and thereafter they have paid the royalty. She submits that there was no royalty payment made for the year 2008. In support of her contention, she submitted Profit & Loss Account and Annual Reports of the company for the year 2008 to 2011 and drew our attention to page 48 of the P&L Account and the Annual Report and submits that there is no mention of any royalty payment for the year 2008. She drew our attention that adjudicating authority mentioned in his order that there was flow back for the year 2008 onwards which is not correct. In support of her plea, they have submitted a copy of Chartered Accountant Certificate dt. 9.11.2015 reiterating the P&L for the year 2008 and for the subsequent period and he has certified that the company has not made any royalty payment to their parent company till 30.6.2009.
9.1. Ld. counsel further submits that after the termination of the waiver agreement, they started paying royalty and submitted P&L Account for the subsequent periods i.e. 2009-10, 2010-11, 2011-12 and also submitted an Abstract and the worksheet showing the royalty payments for each year and particularly for the year 2009 which clearly indicates royalty payments for July-Sep 2009, Oct-Dec 2009 and also for the period January to March 2010 showing a total payment of Rs.5,15,63,747 for all the three quarters which is as per the Profit & Loss Account indicated at page 52 of the Annual Report for 2009-10. The same worksheet was also provided for the subsequent periods. She further submits that for all these royalty payments they have paid service tax under reverse charge mechanism. She produced copy of invoice, T.R.6 challan showing proof of payment of service tax and R&D Cess. She also drew our attention to clause 5.3 of the agreement which was discussed by both the adjudicating authority and the LAA. She therefore, submits that Commissioner (Appeals) has correctly held that as per clause 5.3 which is annexed at page 26 of the agreement, clearly shows that as per sub-clause (a) of clause 5.3, royalty payment is not a condition for sale and as per sub-clause (c), there is no obligation for licensee to purchase any goods from licensor. She submits that though there was no obligation, they are importing 80% from their principal as well as from other related subsidiaries and 20% are purchased from unrelated buyers like grinding wheels, abrasives, adhesive hypo resins directly which are used in the manufacture of products for domestic and export. She further submits that as per the agreement Software has been clearly spelt out in Article III & IV but they have not imported any software so far. Regarding the consideration/compensation and payment of royalties referred to in clause 5.2 of the agreement specifying various percentages as set forth in Appendix B which relates to marketing and production intangibles for both domestic and export products. Intangibles are explained in the definition at para 1.4.8 and 1.4.9.
9.2 Regarding case laws, she relied on the Supreme Court decision in the case of CC Vs Ferodo India Pvt. Ltd. 2008 (224) ELT 23 (SC) and referred to para-20 of the judgement wherein the Hon'ble Apex Court taking into account the various clauses of the agreement has clearly held that there was no nexus between the royalty payable for the knowhow and the goods imported for manufacture of licensed products. She also relied on the following case laws :-
(1) Wep Peripherals Ltd. Vs CC Chennai 2008 (224) ELT 30 (SC) (2) ABB Ltd. Vs CC (Import) Mumbai 2013 (288) ELT 296 (Tri.-Mumbai) (3) Johnson & Johnson Ltd. Vs CC Mumbai 2013 (292) ELT 111 (Tri.-Mumbai) (4) CC (Import) Mumbai Vs Bridgestone India Pvt. Ltd.
2013 (92) ELT 403 (Tri.-Mumbai) (5) SGL Carbon India Pvt. Ltd. Vs CC (Impots) Mumbai 2013 (290) ELT 723 (Tri.-Mumbai) (6) Foseco India Ltd. Vs Cc (Import) Nhava Sheva 2014 (310) ELT 540 (Tri.-Mumbai)
10. Ld. A.R in the rejoinder of the counter arguments of the learned counsel, again referred to page 27, 28 of the OIO wherein no amendment of the agreement has been discussed. She submits that the transaction is not at arms length. For this very reason, the DRI is investigating the entire issue. She also relied on the Supreme Court order relied by the respondent in the case of CC Vs Ferodo India Pvt. Ltd. (supra), particularly relied para-18 of the judgement and submits that Supreme Court also said that if the department finds that the importer/buyer has misled the department then the adjudicating authority would be right in including the cost of royalty/licence fees payment in the price of the imported goods. Ld. AR submits that in the present case this very aspect is under investigation.
11. Countering the argument of Ld. AR, the counsel submits that adjudicating authority has investigated in detail before finalizing the renewal order dt. 4.2.2011. She drew our attention to page 5 (internal page 26) of the OIO to show that documents, records submitted by the respondent were examined and showed comparison of prices of same products exported out of US to other subsidiaries including other related subsidiaries which is clearly brought out in the OIO and concluded that the appellant followed uniform price policy.
12. We have carefully considered the submissions of both sides and examined the records and the Honble High Court of Madras Order dated 9.12.2014. The issue for consideration in the Revenue Appeal is whether Commissioner (Appeals) Order is legal and proper in rejecting the Department appeal and upholding the Order-In-Original accepting the transaction value of imported goods from the related buyers.
13. This is the case of related party transactions and the Asst. Commissioner, Special Valuation Branch in his renewal/review order dated 4.2.2011accepted the invoice price of the imports made from their related foreign supplier for a further period of 3 years. The Department reviewed the said order and preferred appeal before Commissioner (Appeals) on the identical grounds as put forth in the present revenue appeal and the Lower Appellate Authority rejected the Department appeal.
14. On perusal of the impugned order dated 30.8.2013, we find that the Lower Appellate Authority has not discussed the issue as to how the revenue's contentions are not acceptable. Para.6 of his Order begins with his findings and in the said para he merely reproduced the Tribunals Order of ABB Ltd. cited by the respondents, and at Para 8, he concluded in view of the above discussions and facts and legal position there is no infirmity in the Assistant Commissioners order and rejected department's appeal. We do not see any discussions either on facts or on legal issues in his impugned order. Para 3 to 5 is only the counter submissions of respondents and citations relied by them. In the absence of any clear findings on each issues raised by the Revenue, prima facie, we hold that the impugned order is not a speaking order and on this ground alone the impugned order is liable to be set aside.
15. Be that case, we now proceed to discuss the merits of the case. The fact that the respondent is related subsidiary of 3M USA and its other subsidiaries located across the world is not in dispute and the respondents started importing 3M products since 1991, various products, capital goods, raw materials, finished goods for manufacture of excisable goods or for trading. On perusal of the respondent companys Annual Report 2008 submitted by them, we find at page 7 it is stated that 3M a company of 75000 people with a century old history produces / markets 50,000 products Globally and 5000 products for the Indian markets. As seen from the notes to accounts, Schedule 14 at Para 4 (pages 42,43, 44 of report) the quantitative information in respect of goods Manufactured and Traded by the respondent company are listed out as under :-
Manufactured Items :
1. Self Adhesive Labels
2. Epoxy Resin
3. Paper and Paper Tapes
4. Paint Polishes
5. Abrasives
6. Others (individually less than 10% of the total stock) Traded Items :
1. Self Adhesive Labels
2. Surgical and Dental Products
3. Paint Polishes
4. Abrasives
5. Others (individually less than 10% of the total stock)
16. As seen from para (9) of the Schedule 14 of the reports, the ratio of imported and indigenous raw materials is 83% and 17% respectively and majority of imports were sourced from their own related overseas suppliers and their associated subsidiaries. It is pertinent to see from the said Annual Report that their principal company 3M USA has more than 100 Related Fellow Subsidiary companies located across the world for carrying out sale of 3M products globally. The report also throws light on the foreign exchange earnings on exports. It is seen that majority of exports were made only to their own 3M Fellow Subsidiary companies (para-16 of report - Related party transactions). The range of products imported by the respondent relates to various sectors i.e. consumer goods, scrub pads, Health care products, Engineering products, Office use items i.e. "post it" pads, Road safety signs, graphics etc. This shows that the 3M USA controls the rights of 50,000 products, through its related subsidiaries and the transactions are within 3M Group.
17. Considering the above background of facts and the range of products vis-a-vis their relationship with principal company ie. 3M USA and their associated subsidiaries across the world, we examine the issue of whether the original authority & LAA are correct in accepting the declared price and holding the Royalty payment not includible in the value of imported goods and whether the transactions are at arms length or otherwise.
18. The main crux of the document is the 'Tripartite' IPR Agreement signed by the respondents 3M India Ltd. with 3M Company (USA)and 3M Innovative Properties Company (3M IPC) (USA) its effective date being 1.7.2006." On perusal of the copy of the said agreement produced by the respondent, we find the said agreement does not even indicate the actual date of signing of the agreement by the parties which is normally shown in any agreement. [with a phrase: on this ____ day of the ______ month of the ____year]. Even the signature of the signatories do not show the date. Only the "Stamp paper" issued by Govt. of Karnataka reveals the date of issue as "16.1.2006" and we can only presume that the said agreement was signed after the date or later.
19. The scope of the Intellectual Property Agreement are set out in various clauses at Recitals clause A to clause G, in Article II various definitions, Rights and Obligations between the licencee and the licensor. Article III- Software, Article IV- Organization Changes to the Worldwide 3M Corporate Family, Article V - Compensation (consideration) Article VI - Disclosure and Use of Proprietary Information, Article VII Infringement of I.P. Article VIII Term, Termination, Default and Survival Article IX Miscellaneous.
20. The scope and the relevant extracts of the various Articles are reproduced as under :-
A. 3M is an innovative multinational company with its headquarters in the United States and affiliates in more than 60 countries around the world. Collectively referred to as the worldwide 3M corporate family, 3M and its affiliates sell 3M products in more than 180 countries. 3M manages the worldwide 3M corporate family on a global basis to maximize the overall benefit to that corporate family, and thus to shareholders of 3M. 3M has a long and established history of developing new and proprietary technologies, products and services, most of which are based on one or more technology platforms that have been developed by 3M following many years of investment in research and development. These technologies, products and services are continuously provided to the worldwide 3M corporate family under agreements similar to this Agreement.
B. 3M IPC is a wholly-owned subsidiary of 3M. 3M IPC owns or is exclusively licensed under an international portfolio of intellectual property rights that provide the worldwide 3 M corporate family with a substantial competitive advantage in manufacturing and selling products, and providing services, around the world. 3M IPC continuously obtains new intellectual property rights from 3M, other members of the worldwide 3M Corporate family, and third parties, and licenses those intellectual property rights to 3M, other members of the worldwide 3M corporate family, and third parties in exchange for royalties or other consideration. In this manner, 3M IPC coordinates the transfer and the management of these intellectual property rights around the world for the benefit of the worldwide 3M corporate family.
C. Affiliate is one member of the worldwide 3M corporate family. 3M and 3M IPC make and are willing to continue to make new technologies, products and services available to Affiliate on a continuous basis. 3M IPC is also willing to license intellectual property rights controlling by it to Affiliate to enable Affiliate to conduct and expand its business. Accordingly, the intellectual property rights licensed hereunder will enable Affiliate to conduct manufacturing operations and other general business operations normally conducted by members of the worldwide 3M corporate family.
D. 3M and Affiliate may have decided, or may decide, that it is in their best interest and in the best interest of the worldwide 3M corporate family or Affiliate to manufacture certain 3M products. To protect Affiliates investment in its manufacturing operations 3M IPC is willing to grant, and Affiliate wishes to obtain, a license to manufacture products and/or have products manufactured for it by third parties. Affiliate also requires the ability to conduct its business in a manner that is consistent with the rest of the worldwide 3M corporate family and appropriate to the principal country in which Affiliate is located. To protect Affiliates investment in its general business operations, 3M IPC is willing to grant, and Affiliate wishes to obtain, a license to conduct such operations. 3M and 3M IPC support Affiliates manufacturing and other general business operations by constantly expanding and refreshing the portfolio of intellectual property rights that are provided to Affiliate. In this manner, Affiliate will continue to receive 3Ms most current developments, information, research, systems and techniques as they relate to 3Ms administrative, engineering, information technology, laboratory, management, manufacturing, marketing, selling and other functions.
E. The global economy is continuously changing, and the operations of and the relationships among the individual members of the worldwide 3M corporate family must change accordingly. Consequently, 3M wishes to create and acquire new affiliates, modify its organizational structure as needed, minimize barriers between its affiliates in different countries, and enable its affiliates to grow and evolve in response to local and global business demands. To facilitate the transfer of technologies, products, services and intellectual property rights among the members of the worldwide 3M corporate family. 3M, 3M IPC, and Affiliate therefore wish to enter into this Agreement. This Agreement provides for the transfer of technologies, products and services, and for the licensing of intellectual property rights from 3M and 3M IPC to Affiliate. Other agreements among 3M, 3M IPC and Affiliate provide for the transfer to 3M and 3M IPC of intellectual property rights developed or obtained by Affiliate on behalf of 3M and 3M IPC. This enables these rights to be subsequently made available by 3M IPC to the worldwide 3M corporate family and to third parties, as appropriate. Because 3M IPC also receives intellectual property rights from other affiliated companies in the worldwide 3M corporate family and from third parties, Affiliate will continuously benefit from the creative efforts of those affiliates companies and third parties, and those affiliates companies will benefit from the corresponding efforts of Affiliate.
F. Instead of negotiating separate license agreements for different technologies, products, services and intellectual property rights, the Parties wish to negotiate a single agreement that will grant a license to Affiliate under the entire portfolio of 3M IPCs intellectual property rights. The compensation to be paid under this Agreement takes into account the licenses received by Affiliate under the intellectual property rights of 3M IPC, that 3M IPC is responsible for managing these intellectual property rights, and the royalties received by 3M IPC from Affiliate. The compensation to be paid also takes into account other agreements among 3M, 3M IPC and Affiliate relating to intellectual property rights developed or obtained by Affiliate on behalf of 3M and 3M IPC and then transferred to 3M IPC, as well as the reimbursement received by Affiliate from 3M for certain laboratory work that Affiliate undertakes pursuant to these other agreements. In total, fair compensation will be paid by the Parties in exchange for the benefits that each receives under this Agreement and the other agreements.
G. 3M, 3M IPC and Affiliate operate as separate companies. The Parties understand, however, that 3M IPC and Affiliate are controlled by 3M, and thus are members of the worldwide 3M corporate family. As such, the Parties intend that this Agreement further the interests of the worldwide 3M corporate family, and in all cases do no harm to those interests ......
The relevant definitions are reproduced as under :
Article I DEFINITIONS ... ... ...
1.2 "3M" shall mean 3M company, a Delaware corporation having a principal place of business at 3M Center, St. Paul, Minnesota, U.S.A. 1.3 "3M IPC" shall mean 3m Innovative Properties Company, a Delaware Corporation having its place of business at 3M Center, St.Paul, Minnesota, U.S.A. 1.4 "Licensor" shall mean 3M and 3M IPC, individually and collectively. 1.5 "Affiliate" shall mean 3M India Limited, a corporation organized under the laws of India and having a registered office at Raheja Paramount, 138, Residency Road, Bangalore 560 025, India.
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1.9. "Effective Date" shall mean July 1, 2006, unless the approval of the government of the Primary Territory is required before this Agreement may become effective, in which event the Effective Date shall mean the date on which such approval is obtained.
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1.11 "3M Related Company" shall mean any entity in which a controlling (50% or greater) interest is owned by Licensor, either directly or indirectly, by stock ownership or otherwise, but excluding 3M IPC.
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1.20 "Intellectual Property" shall mean Patents, Trademarks, Domain Names, Copyrights, Proprietary Information and Other Intellectual Property.
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1.43 "Net Selling Value (Domestic 3M Products)" shall mean the amount invoiced by Licensee to any entity other than Licensor or a 3M Related Company for 3M Products intended for consumption in the Primary Territory, but excluding: (A) sales, value-added and other transaction taxes, where applied; and (B) transportation costs to customers, if invoiced separately.
Article II 2.1(e) Responsibility of the Licensor Intellectual Property
(i) As noted previously, 3M IPC coordinates the transfer and management of Licensor Intellectual Property for the benefit of the worldwide 3M corporate family. Accordingly, 3M IPC, after taking into account the interests of the worldwide 3M corporate family, shall have the sole and exclusive right (but not the obligation) to take any action it deems necessary or desirable in regard to Licensor Intellectual Property, including, but not limited to, obtaining, issuing, maintaining, renewing, abandoning, dedicating, donating, terminating, enforcing, defending, licensing, acquiring, divesting, settling any disputes related to, or registering the transfer of such Licensor Intellectual Property. Licensee shall, when requested by Licensor and without cost to Licensor, do all things necessary to assist Licensor in these activities.
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2.2 (a) Licensee's Use of Licensor Trademarks. Licensee shall take all necessary measures to ensure that its use of Licensor Trademarks always conforms to the laws of the territory in which Licensee is using Licensor Trademarks.
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(c) Restrictions on Licensee's Use of Licensor Trademarks Licensee shall not at any time either during or after the term of this Agreement :
(i) put Licensor rights in Licensor Trademarks in issue;
(ii) claim for itself any rights in Licensor Trademarks; or
(iii) do anything that might, in the opinion of Licensor, tend to disparage or lessen the significance of the Licensor Trademarks or otherwise injure Licensor property rights in Licensor Trademarks.
ARTICLE V COMPENSATION 5.1 General. In exchange for the licenses granted by Licensor to Licensee under Article II and Article III hereof and other benefits received by Licensor and Licensee hereunder, the Parties have agreed to the payment of reasonable compensation, as provided for in this Article V. 5.2 Royalties. In partial consideration for the rights received hereunder and to the extent permitted under applicable regulations of the Primary Territory, Licensee shall pay 3M IPC a royalty equal to :
(a) five percent (5%) of the Net Selling Value (Domestic Manufactured Products) as partial consideration for Licensees use of Production Intangibles in the production of Manufactured Products; plus
(b) eight percent (8%) of the Net Selling Value (Exported Manufactured Products) as partial consideration for Licensees use of Production Intangibles in the production of Manufactured Products; plus
(c) six percent (6%) of the Net Selling Value (3M Services) as partial consideration for Licensees use of Production Intangibles in the provision of 3M Services; plus
(d) one percent (1%) of the Net Selling Value (Domestic 3M Products) as partial consideration for Licensees use of Marketing Intangibles in conducting Licensees general business operations other than producing Manufactured Products, providing 3M Services, or relating to Software or Special Value Products; plus
(e) two percent (2%) of the Net Selling Value Exported 3M Products) as partial consideration for Licensees use of Marketing Intangibles in conducting Licensees general business operations other than producing Manufactured Products, providing 3M Services, or relating to Software or Special Value Products; plus
(f) a percentage of the Net Selling Value (Software), as set forth in Appendix C hereto, in a separate agreement among the parties, or in a notice from Licensor to Licensee, the terms of which notice shall be deemed to have been accepted by Licensee upon the sale, license, lease or other disposal of the Stand-alone Software, User Documentation or Modified Works, and as partial consideration for Licensees use of Production Intangibles and Marketing Intangibles in conjunction with Licensees business operations relating to Software; plus
(g) compensation for Special Value Product(s), as set forth in Appendix B hereto, in a separate agreement among the Parties, or in a notice from Licensor to Licensee, the terms of which notice shall be deemed to have been accepted by License upon the sale, license, lease or other disposal of the Special Value Product(s) by Licensee, and as partial consideration for Licensees use of Production Intangibles and Marketing Intangibles in conjunction with Licensees business operations relating to Special Value Products.
5.3 Nature of Royalties
(a) The royalties payable to 3M IPC hereunder are not a condition for the sale of any product from Licensor to Licensee.
(b) The royalties payable to 3M IPC hereunder do not compensate Licensor for any Licensor Intellectual Property that is inherent in any product sold by Licensor or 3M Related Company to Licensee (including, but not limited to, Licensor Trademarks applied to that product by Licensor or a 3M Related Company), the compensation for which shall be reflected in the purchase price of that product.
(c) There is no obligation hereunder for Licensee to purchase any goods from Licensor.
5.4 Royalty Payments. All royalty payments due hereunder shall be made by Licensee monthly not later than the last day of the succeeding month, or such other schedule as may be agreed to by the Parties. Paragraph 9.8 notwithstanding, the payments are subject to the applicable financial regulations of the Primary Territory. The payments shall be made or credited to the account of 3M IPC, or made in such other manner as may be directed by 3M IPC. If Licensee does not make any royalty payment due hereunder 3M IPC may, in its sole discretion, waive its right to receive any such royalty payment or defer its receipt of any such royalty payment (with or without interest).
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5.8 Waiver. Licensor waives its right to receive royalty payments and royalty reports pursuant to Paragraphs 5.2 to 5.5 and termination of this waiver shall constitute an amendment of this Agreement under Paragraph 9.2.
As seen from the scope of the agreement, the agreement is effective from 1.7.2006. 3M Company, U.S.A, which is a principal company through their affiliates sell their products in more than 180 countries and it manages and controls worldwide 3M corporate family on global basis. Whereas 3M IPC (USA) is wholly owned subsidiary of 3M who co-ordinates the transfer and management of I.P.R rights around the world for the benefit of 3M family.
21. As set out in recitals at clause (A) to (G) of the agreement, both 3M company, U.S.A and 3M IPC, grant licence IPR rights to the affiliate companies to conduct and expand its business. As set out in clause (E) of the Agreement , 3M USA, and 3M IPC (USA) and the respondent-company entered this agreement for transfer of technologies, products and services, and for the licensing of Intellectual Property Rights for 3M, 3M IPC (USA) to the respondent. Clause (F) of the agreement explains that instead of negotiating separate licence agreements for different technologies, products, services and I.P.R rights they decided to negotiate a single agreement that will grant licence to the respondent under entire portfolio of 3M IPCs Intellectual Property Rights. Clause (G) of the agreement while stating that though 3M and 3M IPC (USA) and the respondent operate as separate companies, it clearly stipulates that 3M, IPC and the respondents are controlled by 3M and thus or members of the worldwide 3M corporate family. This negates their very first sentence on independency. Under Article III of the said agreement, the licensor also grants rights to use of software as set out in the said article.
22. As a consideration for I.P.R. for the licence granted to the respondent, under Article II & Article III, the consideration of payment has been termed as Compensation which is set out above in clause 5.2 of the agreement and the percentage of consideration for each category has been specified of 5%, 8%, 1% etc. It is pertinent to refer Para 5.8 of the Article V of the agreement wherein the licensor waived his right to receive the royalty payments. Subsequently, amendment to the above agreement was signed on 16.12.2009 between the overseas companies and the respondent where they have terminated the waiver of payment of royalty by amending the paragraph 5.8 of the agreement to read as under :
Amendment to the Intellectual Property Agreement Effective July 1, 2006 This agreement is made as of December 16, 2009 by and among 3M Company, a Delaware corporation having a principal place of business at 3M Center, St. Paul, Minnesota US.A ("3M"), 3M Innovative Properties Company, a Delaware corporation having is place of business at 3M Center, St. Paul, Minnesota, U.S.A. ("3M IPC"), and 3M India Limited, a corporation organized under the laws of India having a registered office at Plot Nos. 48-51, Electronics City, Hosur Road, Bangalore 560 100, India ("Affiliate") Recitals A. 3M Innovative Properties Company, 3M Company and 3M India Limited entered into an intellectual Property Agreement effective July 1, 2006 (the "Agreement").
B. Under Paragraph 5.8 of the Agreement, Licensor (3M Company and 3M Innovative Properties Company) waived its right to receive royalty payments and royalty reports for the period July 1, 2006 to June 30, 2009, pursuant to Paragraphs 5.2 to 5.5 of the Agreement.
C. 3M Innovative Properties Company, 3M Company and 3M India Limited (the "Parties") have agreed that waiver should be terminated.
D. 3M Company and 3m Innovative Properties Company are now wanting to reinstate the payment of royalty by 3M India Limited as per the provisions of Paragraph 5.2 In consideration of these premises, and of the mutual premises made by the Parties herein, the Parties agree as follows :-
1. This letter agreement hereby amends Paragraph 5.8 of the Agreement by terminating the waiver effective July 1, 2009. With effect from July 1,2009, Affiliate shall henceforth be obligated to make royalty payments as per the terms of the Agreement.
2. Any obligation to provide royalty reports that arose after July 1, 2009 and before the date first appearing above shall be satisfied by delivery of a single royalty report within sixty (60) days of the date of this agreement.
3. Any obligation to pay royalties that arose after July 1, 2009 and before the date of first appearing above shall be satisfied by payment of such royalties within sixty (60) days of the date of this agreement.
4. All other terms and conditions of the Agreement shall remain the same.
The parties hereto have caused this agreement to be executed in triplicate each of which shall be considered an original, as of the date first appearing above.
By virtue of the amendment of the said I.P.R Agreement made on 16th December 2009, royalty is payable with effect from 1.7.2009. On perusal of the original order passed by AC, SVB and the impugned order, the original authority in his order mentioned this royalty payment. It is pertinent to see that the department has renewed the SVB order accepting the transaction value imported from parent company and from their subsidiaries and associates vide order dt. 8.2.2008. It is seen that though the respondents were importing and carrying out the business transaction with the principle companies from 1991, the I.P.R agreement referred above which was signed by the 3 parties in 2006 comes into effect 1.7.2006. Whereas we find the respondent has informed the department on 16.6.2010 i.e. after a lapse of nearly 4 years. We find from the adjudication order, there was also an another agreement titled Supports Service Agreement entered on 18.12.2009 with a separate royalty payment. The I.P.R Agreement signed with effect from 1.7.2006, which is the Master Agreement on licensing the products, know how, software etc. The purpose of the said agreement is to license the knowhow and the products to the respondent and the consideration is the Royalty payment as set out at Clause 5.2. It is pertinent to see the Clause 5.2 of Article V of the said Intellectual Property Agreement the word used in para 5 (a) to 5 (f) is In partial consideration for the rights received or In partial consideration for the licensee's use of production intangibles etc. Normally when any agreement is entered to grant licenses to Intellectual Property Rights to the user, this consideration of payment is full consideration for the transfer of know how etc. whereas the percentage of royalty payment set out in Clause 5.2 is only a partial consideration which means that there is something more to it. This itself raises serious doubt on the transactions which are not at arms length.
23. Further, it is seen that, having set out the payment of Royalty at Clause 5.2, the same agreement at Clause 5.8 says that the Licensor waives its rights to receive the Royalty payment from the respondent company. If the overseas company wants to waive Royalty payment from respondent, it raises serious questions why the IPR agreement was signed with effect from 1.7.2006 under the terms and conditions of rights and liabilities and considerations made between the related parties. This indicates that there is a special consideration and the transactions are not at arms length as claimed by the respondents.
24. Further, it is pertinent to state that while terminating the waiver of royalty payment on 16.12.2009 by amendment to the original agreement, the payment of royalty takes effect only from 1.7.2009 and not from 1.7.2006 when the original agreement came into effect. If the transactions are at arms length and when the parties decided to make royalty payments either it should be from the date of termination i.e. 16.12.2009 or from the original effective date of agreement dt.1.7.2006, whereas we find that the payments of royalty was made retrospectively only from 1.7.2009. All these facts establishes that the entire related party transactions are not at arms length or on principal to principal basis. This clearly shows that the principal company is compensated indirectly or directly in some other means either by way of pricing of the goods or other method of payments or the principal company absorbs the royalty payments by adjustment which can be brought out only in detailed investigation.
25. Further, we also find that the original agreement effective from 1.7.2006 also grants rights to the respondent for use of software licence of various softwares for which consideration has also been set out at para 5.2. Whereas the respondent states that the software licence agreement is not relevant to them. This also raises a serious doubt on the respondents claim, on the one side they have entered into an agreement on 1.7.2006 but claims that it is not relevant. If that be the case, the very purpose of entering into agreement, with effect from 1.7.2006 has no meaning. Even the termination of waiver agreement made on 16.12.2009 also covers payments towards electronic office software, health care software etc. and the payment of royalty starts w.e.f. 1.7.2009. All these aspects have not been examined either by the original authority or by L.A.A.
26. On perusal of a copy of the letter 6.2.2014 (F.No.S/IV/34/2012/BZU) signed by ADG, DRI Bangalore and letter dt. 15.7.2015 signed by Commissioner of Customs, III, Custom House, Chennai, the DRI initiated investigations against respondent company based on specific intelligence and based on the preliminary investigations, it is stated that respondent has suppressed certain vital information regarding pricing adopted for inter-company billings and their applications made before SVB Chennai and Bangalore. The very nature of agreement as discussed in the preceding paragraphs supports our view that the detailed investigations of transactions between the related parties will throw light which is not done by the Lower Appellate Authority.
27. Considering the above facts, we hold that neither the original authority nor the lower appellate authority has considered the intricacies of the agreements and the subsequent amendment agreements, billing and pricing patterns. Instead, merely relied on this Tribunals decision of ABB Ltd. (supra). It is pertinent to see that the Tribunal in the above judgement relied on Honble Supreme Court's decision of Ferodo India Pvt. Ltd. (supra) and the Apex Court held at para 18 that if on examination of the pricing agreement in juxtaposition in EAA and if the department proves that the importers/buyer has misled the department by adjusting the price of the imported item in the guise of increased royalty/licence, then the adjudicating authority would be right in including the cost of royalty/licence fees paid in the price of the imported goods. This ruling of the Apex Court has been overlooked by the lower authorities. We find that the investigation proceedings already initiated by the D.R.I is on this very aspect.
28. In view of the above facts, we hold that both the original authority and the L.A.A. have not examined in detail, viz. agreements, amendment agreements but merely endorses the respondents view without any discussion. Therefore, there is enough justification on the Revenues contention and the Order-in-Original and the impugned order are liable to be set aside and to be remanded to the original authority.
29. Notwithstanding our findings recorded at preceding paragraphs, we are obliged to put our observations on the respondents anxiety to implement the order dt. 30.8.2013 of Commissioner (Appeals).
(i) Importer-respondent filed a writ petition against the impugned order in W.P.No.2887/2014 wherein they sought direction from Hon'ble Madras High Court to the Deputy Commissioner of Customs to comply with the OIO dt.4.2.2011 as confirmed in OIA dt. 30.8.2013. The Hon'ble High Court, Madras in their interim order dt.7.4.2014 granted interim injunction against deposit of 1% EDD with condition that the importer to furnish a bank guarantee for Rs.10 crores till the disposal of writ petition. The said writ petition is still pending.
(ii) Importer filed second W.P.No.3565/2014 before Hon'ble High Court of Madras seeking to transfer the entire case to DC (SVB) Bangalore Customs, Air Cargo and to finalise the assessments as per OIO of DC SVB Chennai & OIA of Commissioner (Appeals) Chennai. This writ petition is still pending before the High Court.
(iii) Not satisfied with the above, the respondent again filed the third writ petition before the High Court of Madras in W.P.No.29902/2014 seeking for issue of writ of mandamus to this Tribunal to decide the Revenue's appeal. The Hon'ble High Court in their final order dt. 9.12.2014 directed this Tribunal to proceed with appeal independently without in any manner being influenced by the pendency of writ petition before High Court.
(iv) It is interesting to note that since 1991 the importer's transactions were accepted as per invoice price and all the orders in the past from 1991 till the last order dt. 4.2.2011 are in favour of importer-respondent and the Revenue appeal before Commissioner (Appeals) was also rejected and OIO was upheld by LAA and the entire proceedings were in favour of the assessee. Under normal circumstances when both OIO and OIA was in favour of the respondent, it is the Revenue who is aggrieved by the original order & LAA's order, ought to have sought any remedy before Higher Judicial Forum.
(v) The above acts of respondent to implement the OIO dt. 4.2.2011 and impugned OIA dt. 30.8.2013 and also to see the Revenue appeal before Tribunal get disposed immediately in spite of two of their writ petitions still pending before the High Court is something more than meets the eye. Is it that the respondent worried that certain vital intelligence and data are secured by the investigation officers of DRI who are investigating the case on all India basis against respondent's transactions with related persons 3M, 3M IPC & other subsidiaries or is it they are anxious that DRI investigation will prove against their related party transaction or something else which is best known to the respondents. All these lead to raise serious doubt about the transactions shown on paper between respondent and their related 3M & 3M IPC & subsidiaries, are not normal transaction but special consideration which is being currently probed/investigated by DRI. What is expressed in this para-29 above is purely our personal views based on the events and circumstances presented before us.
30. In view of the foregoing discussions and our findings as above, we set aside both the Order-in-Original and the impugned order-in-appeal and remand the matter to the original authority with a direction to examine the issue afresh in the light of our findings contained in this order and to proceed to determine the issue. The original authority is also directed to take into consideration the outcome of the investigation proceedings initiated by D.R.I while deciding the issue.
31. In the result, the Revenue appeal is allowed by way of remand in the above terms. Stay application filed by Revenue also gets disposed. This order is subject to the outcome of two writ petitions pending before the Hon'ble High Court of Madras.
(Proceedings dictated in court on 13.11.2015
and order pronounced in open court on 08.03.2016)
(P.K. CHOUDHARY) (R. PERIASAMI)
JUDICIAL MEMBER TECHNICAL MEMBER
gs
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