Custom, Excise & Service Tax Tribunal
Kimberly Clark Lever Ltd vs Commissioner Of Customs (Import) on 16 February, 2016
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL, WEST ZONAL BENCH AT MUMBAI COURT No. I Appeal No. C/926/04 (Arising out of Order-in-Appeal No. 311/2004 MCH dated 2.7.2004 passed by Commissioner of Customs (Appeals), Mumbai I) For approval and signature: Honble Mr. M.V. Ravindran, Member (Judicial) Honble Mr. C.J. Mathew, Member (Technical) ================================================
1. Whether Press Reporters may be allowed to see : No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the : No CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy : Seen of the Order?
4. Whether Order is to be circulated to the Departmental : Yes authorities?
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Kimberly Clark Lever Ltd. Appellant
Vs.
Commissioner of Customs (import), Respondent
Mumbai
Appearance:
Ms. Padmavati Patil, Advocate for appellant
Shri Chatru Singh, Asst. Commissioner (AR) for respondent
CORAM:
Honble Mr. M.V. Ravindran, Member (Judicial)
Honble Mr. C.J. Mathew, Member (Technical)
Date of Hearing: 16.02.2016
Date of Decision: 16.02.2016
ORDER NO
Per : M.V. Ravindran
This appeal is directed against Order-in-Appeal No. 311/2004 MCH dated 2.7.2004.
2. The relevant facts that arise for consideration, after filtering out unnecessary details, are the appellant herein imported raw materials and components for the manufacturing of final products under Collaboration Agreement from their own unit situated at Philippines. When the appellant declared the transaction value of the goods imported the lower authorities are of the view that the transaction value declared needs to be rejected as the goods imported are from related party and as per the said collaboration agreement dated 19.01.1995 the appellant importer had agreed to pay lump sum amount as technical know-how fee and 5% of the net sale value as royalty. It is the case of the Revenue that this amount needs to be included in the value of the goods imported in order to discharge the appropriate customs duty. The adjudicating authority agreed with the contention raised by the appellant importer and set aside the show-cause notice for loading of the value. On an appeal, the first appellate authority set aside the impugned order and directed the value to be loaded by know-how fees and royalty paid as per the provisions of Rule 9(1)(c) of the Customs Valuation Rules, 1988.
3. Learned Counsel would take us through the agreement and the facts of the case and submit that the appellant had not paid any amount as royalty or technical assistance to their own company at Philippines for the imported goods that are components and raw materials. She would submit that the first appellate authority has only relied upon the judgement of the Honble Supreme Court in the case of Essar Gujarat Ltd. - 1996 (88) ELT 609 (SC) which has been distinguished by the Apex Court in the case of Essar Steel - 2015 (319) ELT 202 (SC). It is her submission that the Apex Court in the case of Commissioner of Customs vs. Ferodo India Pvt. Ltd. - 2008 (224) ELT 23 was considering the scope of the provisions of Rule 9(1)(c) of the Customs Valuation Rules, 1988 and held in favour of the assessee therein.
4. Learned D.R. after taking us through the same agreement would submit that the agreement records that the appellant importer submitted the samples of materials packing as well as the raw materials to their Philippines unit for their approval and was permitted to use the same. On such approval, as per clause 7.2 of the agreement which would amount the collaborator had strict control of the quality of the raw materials, components supplied, he would submit in an identical situation, the Honble Supreme Court in the case of Matsushita Television & Audio (I) Ltd. - 2007 (211) ELT 200(S.C.) has held that such payment of royalty as well as licence fee needs to be included in the value of the goods imported which is raw materials or components.
5. We have considered the submissions made at length by both sides and perused the records.
6. The issue that falls for our consideration is whether the lump sum amount paid as technical know-how fees and royalty paid by the appellant on the domestic sales needs to be included in the value of the goods imported which are components and raw materials as per the provisions of Rule 9(1)(c) of the Customs Valuation Rules, 1988. In order to appreciate the correct fact, relevant findings of the first appellate authority are reproduced.
I have gone through the records of the case. Admittedly, the importer is paying a lump sum know how fees of US$ 3,15,000/- & royalty of 3% on domestic sales and exports for 7 years. They are importing part components and raw materials from the collaborator, which as per their own submission made in the reply filed to the department appeal, are tailor made to their specification and not sold to any other person. They have not shown that the same goods can be procured by any other person in India or that they can procure the said goods from any other supplier other than the supplier. There is not a single averment, how the proprietary goods supplied by the collaborator are not related to the know how fees / royalty fees paid by them. I find the Apex Court decision in the case of Essar Gujarat Ltd., supports the case of the department and the ratio is squarely applicable to the present case. It appears the know how fees and royalty are includible in the value of the imported goods under Rule 9(1)(c) of CVR, 1988.
6.1 It can be seen from the above reproduced findings of the first appellate authority, he has placed reliance on the decision of Essar Gujarat Ltd. and provisions of Rule 9(1)(c) of Customs Valuation Rules, 1988.
6.2 We find that the learned Counsel was correct in bringing to our notice that the Apex Court in an identical/similar set of facts in the case of Ferodo India Pvt. Ltd. (supra) was considering the scope of the Rule 9(1)(c) and Rule 9(1)(e) of the Customs Valuation Rules, 1988, we reproduce the relevant paragraphs.
3.? The buyer is the manufacturer of brake liners and brake pads in India. On 8-9-1995, a technical assistance and trade mark agreement (TAA for short) was entered into between the respondent (buyer/licensee) and M/s. T & N International Ltd., U.K. (foreign collaborator/licensor). Under the said agreement, the licensor claimed to be in possession of certain secret processes, formula and information. Under the agreement, the licensor agreed to permit manufacture of brake liners and brake pads (licensed products) by the licensee. Under the agreement, the licensor agreed to disclose the relevant secret processes, formula and information to the licensee. Under the agreement, the licensee was required to import/buy raw material and capital goods from the licensor. Under the agreement, the licensee was obliged to pay a licence fee along with royalty, based on the net sales value of licensed products sold, consumed or otherwise disposed of.
4. Vide order dated 22-9-1999 the adjudicating authority held that, technical know-how fees and royalty were related to the imported goods and were a condition of sale for the import thereof and consequently, the adjudicating authority loaded the CIF value of the imported goods with the proportionate amount of know-how fees and royalty. In this connection, reliance was placed on the judgment of this Court in CoC v. Essar Gujarat Ltd. reported in 1996 (88) E.L.T. 609 (S.C.). This order was confirmed by the Commissioner (A). However, by the impugned order dated 12-2-2002, the Tribunal held that the know-how fees and the royalty payments stood related to the brake liners and brake pads to be produced in India and not to the imported goods. Hence, this civil appeal by the Department.
5.? In this case, we are required to lay down the scope of Rule 9(1)(c) and Rule 9(1)(e) of CVR, 1988, which are quoted hereinbelow :
9. Cost and services. - (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods,-
(a).
(b).....
(c) Royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.
(d)....
(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. After reproducing the entire Valuation Rules, their Lordships in paras 18, 19, 20, 21 and 25 laid down the law as to the applicability of the Rules 9(1)(c) and 9(1)(e) and we reproduce the same.
18.?Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and know-how in the manufacture of the licensed product in India. Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/licence fees which are also paid to the foreign supplier. Rule 9(1)(c) stipulates that payments made towards technical know-how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under Rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. At this stage, we would like to emphasis the word indirectly in Rule 9(1)(c). As stated above, the buyer/importer makes payment of the price of the imported goods. He also incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at TAA, it is also required to look at the pricing arrangement/agreement between the buyer and his foreign collaborator. For example if on examination of the pricing arrangement in juxtaposition with the TAA, the Department finds that the importer/buyer has misled the Department by adjusting the price of the imported item in guise of increased royalty/licence fees then the adjudicating authority would be right in including the cost of royalty/licence fees payment in the price of the imported goods. In such cases the principle of attribution of royalty/licence fees to the price of imported goods would apply. This is because every importer/buyer is obliged to pay not only the price for the imported goods but he also incurs the cost of technical know-how which is paid to the foreign supplier. Therefore, such adjustments would certainly attract Rule 9(l))(c).
Application of Rule 9(l)(c) to the facts of the present case
19.?Applying the above tests to the facts of the present case, we find that the adjudicating authority had not examined the pricing arrangement between the foreign collaborator and the buyer. It has only examined the royalty/TAA.
20.?Be that as it may, in the present case, on reading TAA we find that the payments of royalty/licence fees was entirely relatable to the manufacture of brake liners and brake pads (licensed products). The said payments were in no way related to the imported items. In the present case, no effort was made by the Department to examine the pricing arrangement. No effort was made by the Department to ascertain whether there exists a price adjustment between cost incurred by the buyer on account of royalty/licence fees payments and the price paid for imported items. No effort was made by the Department to ascertain enhancement of royalty/licence fees by reducing the price of the imported items. In the circumstances, we find no infirmity in the impugned judgment of the Tribunal. In this case, the Department has gone by TAA alone. On reading TAA in entirety, we are of the view that there was no nexus between royalty/licence fees payable for the know-how and the goods imported for the manufacture of licensed products. The Department itself has invoked Rule 9(l)(c).
21.? In the alternate, it has invoked Rule 9(1)(e). This Rule 9(e) cannot stand alone. It is a corollary to Rule 4. There is no finding in the present case that what was termed as royalty/licence fee was in fact not such royalty/licence fee but some other payment made or to be made as a condition pre-requisite to the sale of the imported goods. It is important to bear in mind that Rule 9 refer to cost and services. Under Rule 9(1), the price for the imported goods had to be enhanced/loaded by adding certain costs, royalties and licence fees and values mentioned in sub-rule 9(1)(a) to 9(1)(d). It refers to all other payments actually made or to be made as a condition of sale of the imported goods. In the present case, the Department invoked Rule 9(1)(c) on the ground that royalty was related to the imported goods, having failed it cannot fall back upon Rule 9(1)(e) because essentially we are concerned with the addition of royalty etc. to the price of the imported goods. Further, in the present case, the Department has accepted the transaction value of the imported goods.
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. 6.3 It can be seen from the above reproduced ratio, the Apex Court has considered the issue and laid down the law on such idential set of facts as the raw material and components when technical know-how and royalty payment to their own concerned/collaborator. The ratio laid down by the Apex Court as reproduced above covers the issue in favour of the appellant herein.
6.4 As regards the case law relied on by the learned D.R. in the case of Matsushita Television & Audio (I) Ltd. (supra), the apex Court, in the judgement of Ferodo India Pvt. Ltd. (supra), has noted the said judgement in para 23 and recorded as under:-
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. 6.5 After noting the judgement of Matsushita Television & Audio (I) Ltd. (supra), the Apex Court in the case of Ferodo India Pvt. Ltd. took a view that the transaction value cannot be loaded as technical know-how and the said ratio will be applicable in the present case.
6.6 It is also noted that the judgement in the case of Ferodo India Pvt. Ltd. is a later judgement.
6.7 In view of the foregoing we are of the considered view that the impugned order is unsustainable and liable to be set aside and we do so. The impugned order is set aside and the appeal is allowed.
(Dictated in Court) (C.J. Mathew) Member (Technical) (M.V. Ravindran) Member (Judicial) nsk ??
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1 12Appeal No. C/926/04