Custom, Excise & Service Tax Tribunal
Foseco India Ltd vs Nhava Sheva on 23 January, 2014
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
APPEAL NO: C/87094/2013
[Arising out of Order-in-Appeal No: 140/MCH/AC/GVC/2013 dated 12/02/2013 passed by the Commissioner of Customs (Appeals), Mumbai Zone I.]
For approval and signature:
Honble Shri P.R. Chandrasekharan, Member (Technical)
Honble Shri Anil Choudhary, Member (Judicial)
1.
Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
:
No
2.
Whether it should be released under Rule 27 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
:
Yes
3.
Whether Their Lordships wish to see the fair copy of the Order?
:
Seen
4.
Whether Order is to be circulated to the Departmental authorities?
:
Yes
Foseco India Ltd.
Appellant
Vs
Commissioner of Customs (Import)
Nhava Sheva
Respondent
Appearance:
Shri Siladitya Sarkar, Advocate for the appellant Shri K.M. Mishra, Addl. Commissioner (AR) for the respondent CORAM:
Honble Shri P.R. Chandrasekharan, Member (Technical) Honble Shri Anil Choudhary, Member (Judicial) Date of hearing: 23/01/2014 Date of decision: 23/01/2014 ORDER NO: ____________________________ Per: P.R. Chandrasekharan:
The appeal is directed against Order-in-Appeal No: 140/MCH/AC/GVC/2013 dated 12/02/2013 passed by the Commissioner of Customs (Appeals), New Custom House, Mumbai Zone I. Vide the impugned order, the learned lower appellate authority has quashed the order passed by the assessing officer vide order dated 26/08/2011 and has held that the royalty paid by the appellant, M/s. Foseco India Ltd., is a consideration and condition of sale for their imports from the foreign collaborator/group entities and therefore, should be added to the declared value for determination of duty liability in terms of Rule 10(1)(e) of the Valuation Rules, 2007 (CVR in short). Aggrieved of the same, the appellant is before us.
2. The facts relevant to the case, briefly, are as follows.
2.1. The appellant, M/s. Foseco India Ltd. (Foseco for short) is a manufacturer of additives and consumables which are used in the iron and steel industry. They entered into an agreement dated 01/07/2004 whereby M/s. Foseco International Ltd. UK, granted to the Indian entity, namely, M/s. Foseco India Ltd., an exclusive right and licence under the industrial property rights to manufacture, use and sale of the products manufactured, in India as well as other countries. For the licence granted, the appellant were required to pay a consideration by way of royalty @ 5% of the net sale value of the products sold in India and @ 8% of the net sale value of the products exported from India. In the agreement the net sale value was defined in clause 1.1:
shall mean the gross sales value (the invoice value) of the product sold by the Licensee less agents/dealers commission, transport cost including ocean freight, insurance, duties, taxes and other charges and cost of raw materials, parts, components imported from the foreign Licensor or its subsidiary/affiliated company. 2.2. The question of inclusion of royalty paid by the appellant in the assessable value of the goods imported from the foreign collaborator and its affiliates were examined by the Special Valuation Branch of the Customs department from time-to-time. One such order was passed vide order dated 06/10/2005 wherein the adjudicating officer, after examining the provisions of the agreement came to the conclusion that:
the royalty payment is paid on net sales value of locally manufactured goods and is not related to imported products as per agreement in place. It has no relationship with the imported components imported from the related supplier. It is payable3 only on the products manufactured in India by using the technology from Foseco International Ltd. Apart from the royalty on indigenous value addition it is paid for having given them the right to manufacture the product in India. There is no condition of sale in the agreement. So the Royalty can not be related imported goods from the collaborator/supplier. 2.3. In view of the above finding, it was held that the royalty paid by the appellant is not includable in the assessable value of the goods imported. This decision of the assessing officer was also accepted by the Review authority. The agreement was once again a subject-matter of examination by the Customs authorities and vide order dated 13/08/2008, it was once again held that royalty payments made by the appellant to the foreign-licensor is not includable in the assessable value of the goods imported from abroad. This order was also accepted by the reviewing authority.
2.4. The matter once again came up for review in 2011 and vide order dated 16/08/2011 the assessing officer came to the very same conclusion and held that royalty payments made has no nexus with the imported goods. In addition, he also examined the consultancy agreement dated 01/01/2009 entered into between the appellant-importer and the foreign-licensor which provided for consultancy service in respect of sales, marketing, VIP supporting, human resources, manufacturing, engineering and technical developments for which the appellant was paying consultancy fees to the foreign service provider. This agreement nowhere spoke of any imports by the appellant-importer from the foreign-licensor or the group entities. Therefore, the assessing officer came to the conclusion that the foreign-consultancy service agreement also has no nexus with the imports undertaken by the appellant and thus, the fees paid for such services is not includable in the assessable value of the goods imported. However, the Revenue was aggrieved of this order passed by the assessing officer and, therefore, they preferred an appeal before the lower appellate authority.
2.5. The only ground urged before the lower appellate authority was that the royalty paid by the appellant for the manufacture of goods in India is includable value in view of the explanation given under Rule 10 (1)(e) of the Customs Valuation Rules, 2007 which read as 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. 2.6. Accordingly, it was contended that the royalty paid by the appellant would be includable in the assessable value of the goods imported inasmuch as they have been subject to various manufacturing processes in India. Similarly, it was urged that the consultancy service charge paid to the consultancy service provider is also relatable to the imported goods in terms of clause 5.2 of the agreement which read as follows:
At the time of payment, the Service Recipient has the right to deduct all applicable withholding taxes due on the Consultancy Service fees and remit them to the relevant local tax authorities on behalf of the Service Provider. 2.7. The learned appellate authority, after considering the appeal filed by the Revenue came to the conclusion that:
As far as the payment of Royalty is concerned, the same is made to the related supplier in terms of Agreement dated 01/07/2004 for patent right to manufacture the goods using raw material imported from the related supplier. . . . . Therefore, the expenses incurred toward Royalty could be includible in the invoice value of the goods imported from related supplier in terms of explanation provided under Rule 10(1)(e) of the CVR, 2007 if they were otherwise includable too. 2.8. As regards the consultancy fees paid by the appellant for the consultancy services provided by the foreign service provider, it was observed by the lower appellate authority that :
the lower authority has not called for the details of withholding taxes including service tax to justify that the payment towards services were not related to the imported goods and the impugned order has not discussed this aspect at all. There is no scrutiny of the pricing pattern which is relevant to the relationship. .. . The adjudicating authority should have verified the payment of service tax and withholding tax to confirm that the payments are towards services and not for imported goods. 2.9. In view of the above, the lower appellate authority came to the conclusion that the royalty and the consultancy fee paid are relatable to the imported goods and are in fact, a condition for sale and, therefore, these charges should be added to the value of the goods imported so as to arrive at the assessable value under Rule 10 of CVR, 2007.
3. The learned counsel for the appellant made the following submissions:
3.1. The Revenue had examined the agreement entered into by the appellant with the foreign licensor on a number of occasions and on all these occasions, they had come to the conclusion that the royalty payments made by the appellant-importer to the foreign licensor had nothing to do with the import of the goods nor such payments were a condition for sale of the imported goods and accordingly, it was held by the assessing officer that such payments need not form part of the value of the goods imported. The learned counsel further submits that, as against the total raw material consumed of the value of ` 104 crore and ` 130 crore approximately during the years 2010 and 2011, the imported raw materials accounted for ` 18.33 crores and `15.55 crores respectively. In other words, the value of the imported raw material as compared to the total raw material consumption is barely 10% for the year 2010 and 7% for the year 2011. In other words, bulk of the raw materials have been procured by the appellant from other sources, most of them indigenously and, therefore, it cannot be alleged that the import of few raw materials from the licensor or the group companies was a condition of sale for the import of the said goods.
3.2. The learned counsel also relies on the decision of this Tribunal in the case of Maruti Udyog Ltd. vs. Commissioner of Customs, Mumbai 2013 (295) ELT 628 and SGL Carbon India Pvt. Ltd. vs. Commissioner of Customs (Imports), Mumbai 2013 (290) ELT 723 wherein, a more or less identical issue was considered by this Tribunal and this Tribunal held that royalty payments for the use of the trade mark is not includable in the value of the goods imported, especially when the cost of the raw materials/components imported by the appellant from the foreign principal or their affiliated companies is excluded while computing the royalty. It was further held that the royalty paid has no nexus either with the price of the imported components nor it is a condition of sale of the imported components. In view of the above decisions, he submits that the impugned order is bad in law and therefore requires to be set aside and the order of the assessing officer should be restored.
4. The learned Additional Commissioner (AR) appearing for the Revenue reiterates the findings of the lower appellate authority.
5. We have carefully considered the submissions made by both the sides. We have also perused the collaboration agreement dated 01/07/2004 and the consultancy service agreement dated 01/01/2009. After going through the various provisions of these agreements, we do not find any single clause in these agreements which compels the appellant to procure the raw material from the foreign licensor or the group companies. In other words, there is no condition of sale incorporated in these agreements. Secondly, we notice that the royalty is computed excluding the cost of imported materials. In other words, royalty is based on the indigenous value addition, which clearly shows that the payments made by the appellant for the collaboration and the consultancy service have nothing to do with the imports undertaken by the appellant. It is further seen that the appellant is importing only a small portion of its raw material requirements and even if the appellant does not import any material, the royalty payments would be higher as the appellant has to compute the royalty on the net sale value minus cost of imported raw materials. This also clearly shows that the payments made by the appellant has no nexus or relationship either with the import of goods or with the value of imported goods. Therefore, the conclusion drawn by the lower appellate authority is completely misconceived and has no basis whatsoever.
5.1. As regards the reliance placed on the explanation in Rule 10(1)(e), that explanation is meant for a different purpose altogether. The said explanation applies to goods imported which require further processing before being put to use. It is in that context the payments, if any, made for such processing is deemed as a condition of sale and includable in the value of the goods imported. That has nothing to do with the manufacturing processes undertaken subsequent to the importation and sale in India. Therefore, the reliance placed on explanation given under Rule 10(1)(e) of CVR, 2007 also does not support Revenues case.
5.2. We find that in the case of SGL Carbon India Pvt. Ltd. and Maruti Udyog Ltd. (supra) this Tribunal has taken a view that if there is no nexus between the goods imported and the royalty payments made and if such payments are not a condition of sale, then royalty payments cannot be included in the assessable value of the goods imported.
5.3. In view of the above analysis, in the present case also, we conclude that the royalty payments made by the appellant to its foreign collaborator or the consultancy service charges paid are not addable to the value of the goods imported by the appellant from the foreign collaborator or the group entities. Therefore, we set aside the impugned order passed by the lower appellate authority and restore the order passed by the assessing officer vide order dated 16/08/2011.
6. The appeal is disposed of in the above terms.
(Dictated in Court) (Anil Choudhary) Member (Judicial) (P.R. Chandrasekharan) Member (Technical) */as 2