Custom, Excise & Service Tax Tribunal
Ericsson India Private Limited vs Additional Director General ... on 14 October, 2025
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH- COURT NO. I
CUSTOMS APPEAL NO. 50439 OF 2021
(Arising out of Order-in-Original No. 13/VKP(14)ADG(Adj.)/DRI/N. Delhi/2020-21
dated 27.11.2020 passed by the Additional Director General (Adjudication),
Directorate of Revenue Intelligence, New Delhi.)
M/s. Ericsson India Private Limited ...Appellant
Ericsson Forum, DLF Cyber City,
Sector-25A, Gurgaon,
Haryana-122002
versus
Additional Director General (Adjudication), ...Respondent
Directorate of Revenue Intelligence,
New Customs House,
New Delhi- 110037
WITH
CUSTOMS APPEAL NO. 50440 OF 2021
(Arising out of Order-in-Original No. 13/VKP(14)ADG(Adj.)/DRI/N. Delhi/2020-21
dated 27.11.2020 passed by the Additional Director General (Adjudication),
Directorate of Revenue Intelligence, New Delhi.)
Shri Tej Nirmal Singh, ....Appellant
M/s. Ericsson India Private Limited
Ericsson Forum, DLF Cyber City,
Sector-25A, Gurgaon,
Haryana-122002
versus
Additional Director General (Adjudication), ...Respondent
Directorate of Revenue Intelligence,
New Customs House,
New Delhi- 110037
AND
CUSTOMS APPEAL NO. 50441 OF 2021
(Arising out of Order-in-Original No. 13/VKP(14)ADG(Adj.)/DRI/N. Delhi/2020-21
dated 27.11.2020 passed by the Additional Director General (Adjudication),
Directorate of Revenue Intelligence, New Delhi.)
Shri Bharat Bandhu, ....Appellant
M/s. Ericsson India Private Limited
Ericsson Forum, DLF Cyber City,
Sector-25A, Gurgaon,
Haryana-122002
versus
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Additional Director General (Adjudication), ...Respondent
Directorate of Revenue Intelligence,
New Customs House,
New Delhi- 110037
APPEARANCE:
Mr. V. Lakshmikumaran, Mr. Anurag Kapur, Ms. Rubel Bareja and Ms. Anisha
Arya, Advocates for the appellant
Mr. Mihir Ranjan, Special Counsel of the Department
CORAM: HON‟BLE MR. JUSTICE DILIP GUPTA, PRESIDENT
HON‟BLE MS. HEMAMBIKA R. PRIYA, MEMBER (TECHNICAL)
DATE OF HEARING: 15.09.2025
DATE OF DECISION: 14.10.2025
FINAL ORDER NO‟s. 51568-51570/2025
JUSTICE DILIP GUPTA:
Customs Appeal No. 50439 of 2021 has been filed by M/s.
Ericsson India Private Limited1 to assail that portion of the order dated
27.11.2020 passed by the Additional Director General (Adjudication),
(DRI), New Delhi2 that holds that the amount of royalty paid by Ericsson
India to Telefonaktiebolaget LM Ericsson, Sweden3 towards knowhow for
the manufacture of Radio Base Station, Mobile Switching Centers and
Base Station Controllers is includible in the transaction value of the
components imported by Ericsson India from Ericsson AB, Sweden4 in
terms of rule 10(1)(c) of the Customs Valuation (Determination of the
Value of Imported Goods) Rules 20075. Accordingly, the demand of
customs duty has been confirmed and ordered to be recovered from
Ericsson India by invoking the extended period of limitation under
1. Ericsson India
2. the Additional Director General
3. LM Ericsson Sweden
4. Ericsson Sweden
5. the 2007 Valuation Rules
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section 28 of the Customs Act, 19626 with interest and penalty under
section 114A of the Customs Act.
2. Customs Appeal No. 50440 of 2021 has been filed by Tej
Nirmal Singh to assail that portion of the order dated 27.11.2020
passed by the Additional Director General that imposes penalty upon
him under section 112(a)(ii) of the Customs Act.
3. Customs Appeal No. 50441 of 2021 has been filed by Bharat
Bandhu to assail that portion of the order dated 27.11.2020 passed by
the Additional Director General that imposes penalty upon him under
section 112(a)(ii) of the Customs Act.
4. Ericsson India is a wholly owned subsidiary of LM Ericsson
Sweden. Ericsson India is engaged, since 2005, in the
manufacture/assembly and sale of Radio Base Station, Mobile Switching
Centers and Base Station Controllers (collectively referred to as „finished
goods‟), used in GSM networks and marketed under LM Ericsson
Sweden trademark. In relation to its business activities, Ericsson India
imported various components like screen covers, shield covers, cables,
tools, crimp tools, radio units, digital units, small and micro-electronic
chips and printed circuit boards (collectively referred to as „imported
goods‟) from its related foreign supplier i.e. Ericsson Sweden during the
Financial Years 2012-2014. It needs to be noted that the components
imported by Ericsson India from Ericsson Sweden were exempt from
basic customs duty levied under section 12 of the Customs Act as they
fell under the category of Information Technology Goods under the
Notification dated 01.03.2005. Ericsson India, however, paid CVD and
SAD on the import of components.
6. the Customs Act
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5. The imported goods were, therefore, cleared by Ericsson India
upon payment of additional duty of customs7 levied under section 3(1)
of the Customs Tariff Act, 19758, special additional duty of customs9
levied under section 3(5) of the Customs Tariff Act, and customs cess.
The transfer price for the imported goods was based on LM Ericsson
Sweden Global Transfer Pricing guidelines. In other cases, Ericsson India
procured components from local vendors or unrelated foreign suppliers
for use in manufacture of the finished goods. Such components included
cables, steel cabinets, power units, crimpers, cable connectors and high
carbon steel screws. According to Ericsson India, a rough ratio of the
components imported and indigenously procured for the manufacture of
finished goods was 80:20 i.e. about 20% of the value of final products
would comprise of locally procured items.
6. During the relevant period, the finished goods were
manufactured/assembled by Ericsson India at its factory located in
Jaipur by employing technical know-how, manufacturing, performance,
and quality specifications provided by LM Ericsson Sweden as per the
Global Standard Process of manufacturing. These finished goods were
subsequently cleared upon payment of the applicable central excise
duty. Ericsson India availed CENVAT credit in respect of the duties paid
on the imported goods and utilized such credit towards the discharge of
its excise duty liability on the finished goods.
7. In consideration of the grant of technical know-how and
intellectual property rights, Ericsson India remitted royalty payments to
7. CVD
8. the Customs Tariff Act
9. SAD
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LM Ericsson Sweden in accordance with the terms and conditions
stipulated in the Technical Co-Operation Agreement(s).
8. Additionally, Ericsson India also imported assembled goods like 3G
BSC, 3G Products and Mini links from Ericsson Sweden. The products
were then sold to customers on High Sea Sales basis. In such
transactions, the customers, being the High Sea Sales buyers,
undertook all customs compliances and cleared the goods from customs
at the transaction value, i.e., the selling price, and payments to Ericsson
Sweden were made by Ericsson India as per invoices raised in
accordance with the Transfer Pricing Agreement between Ericsson India
and Ericsson Sweden. The ratio of the high sea sales to domestic
manufacturing was 20:80.
9. The factual position leading up to the present dispute is as
follows:
Date Particulars
23.12.2008 Ericsson India entered into a Technical Co-
operation Agreement dated 23.12.2008 with LM
Ericsson Sweden for grant of non-exclusive rights and
licenses to manufacture, sell, repair, and service finished
goods using Ericsson knowhow and Ericsson IPR. Article
4.1 of this Agreement provided for payment of
royalty of 5% of the total net selling price of the
finished goods, spare and replacement parts and
accessories of the finished goods, and services. Net
selling price refers to the net sale value excluding
excise duties and sales tax of the licensed products
manufactured and shipped from the factory at
Jaipur after making deductions from the value of all
imported components.
18.02.2011 Ericsson India entered into a supply contract dated
18.02.2011 with Ericsson Sweden for supply of
components for manufacture of finished goods („Supply
Agreement‟).
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02.07.2004 Special Valuation Branch10, by Order dated 02.07.2004,
accepted the declared import prices as „transaction value‟
under section 14 of Customs Act read with rule 3(1) of
the 2007 Valuation Rules.
05.07.2007 Ericsson India made an application to SVB for review of
18.05.2010 the SVB Order dated 02.07.2004, along with updated SVB
30.05.2013 questionnaires and copies of Financial Statements for the
year ending March 2007-2012.
It was held by the SVB orders dated 05.07.2007,
18.05.2010 and 30.05.2013 that the declared invoice
prices of the imported goods are not influenced by the
mutual relationship between Ericsson India and Ericsson
AB Sweden and are based on Transfer Pricing Policy.
Thus, the declared invoice prices were accepted in terms
of rule 4(3)(a) and 4(3)(b) read with section 14 of the
Customs Act.
27.06.2013 Ericsson India entered into a fresh Technical Co-
operation Agreement dated 27.06.2013 (effective
from 01.04.2012) with LM Ericsson Sweden for grant
of non-exclusive rights and licenses to manufacture, sell,
repair, and service finished goods using Ericsson
knowhow and Ericsson IPR. Article 5.1 of this
Agreement dated 27.06.2013 provided for payment
of royalty of 5.75% of the gross sales made by
Ericsson India of the finished goods assembled /
manufactured in the factory at Jaipur. Gross Sale
means the sale value excluding Excise Duties and
Sales Tax of the licensed products manufactured
and sold from their factory in Jaipur without
making any deduction for the value of imported
components. Both the Agreement are identical in
form and substance except the royalty clause.
21.01.2014 Investigations were initiated by Panchnama dated
to 21.01.2014. Statements of Shri Rajesh Gosain, General
01.08.2014 Manager (Taxation), Shri Tej Nirmal Singh, Director and
Head of Supply and Shri Bharat Bandhu, Head of
Company Control were recorded.
31.07.2014 As a matter of co-operation, Ericsson India by letters
04.08.2014 dated 31.07.2014, 04.08.2014 and 10.09.2014 paid the
10.09.2014 applicable duty (CVD, SAD and Customs Cess) on the
10. SVB
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royalty payments made to LM Ericsson Sweden during the
relevant period, while reserving its rights of remedies,
and submitted that royalty payment under Agreement
dated 27.06.2013 to LM Ericsson Sweden and import of
components from Ericsson Sweden under Supply
Agreement, are two separate transactions with two
separate entities, the former being a service transaction
and the latter being a sale (import of goods).
Ericsson India, upon the request of the Additional Director
General, by letter dated 06.04.2015, also submitted
details of apportioned royalty payments to the various
Bills of Entry during the relevant period.
03.08.2015 A show cause notice alleging that payment of royalty by
Ericsson India to LM Ericsson Sweden is includible in the
value of imported goods.
18.03.2016 Ericsson India submitted a detailed reply dated
18.03.2016 to the show cause notice.
04.08.2016 The Additional Director General (Adjudication), passed an
Order dated 04.08.2016 confirming the entire demand
with interest and penalty.
30.11.2016 Being aggrieved by the order dated 04.08.2016, Ericsson
India filed an appeal before this Tribunal.
14.08.2017 The Tribunal by Final Order dated 14.08.2017 remanded
the matter to the Adjudicating Authority to re-examine
the matter in view of the license agreement and the
supply contract, as was observed by the Supreme Court
in Commissioner of Customs vs. Ferodo India Pvt.
Ltd., 2008 (224) E.L.T.23 (S.C.).
03.12.2020 The Additional Director General, after remand, held that
the amount of royalty paid by Ericsson India to LM
Ericsson Sweden is includible in the value of goods
imported by Ericsson India from Ericsson Sweden in
terms of rule 10(1)(c) of the 2007 Valuation Rules.
10. It is this order dated 03.12.2020 passed by the Additional Director
General that has been assailed in this appeal.
11. The Additional Director General firstly held that prior to
01.04.2012, in terms of the Technical Co-Operation Agreement dated
23.12.2008, the value of imported raw materials had to be excluded for
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computation of royalty but not after that date. The relevant
observations are reproduced below:
"5.3 Prior to 01.04.2012, royalty was paid at the rate of
5% of Net Selling Price. Net Selling Price means the net
sale value excluding Excise Duties, Sales Tax of the
products manufactured and shipped from the factory of
EIL at Jaipur after making deduction there from the value
of all imported components. From 01.04.2012, the
rates of royalty payable were revised to 5.75%
calculated on gross sales made by EIL. Gross Sale
means the sale value excluding Excise Duties and
Sales Tax of the licensed products manufactured
and sold from their factory in Jaipur without making
any deduction for the value of imported
components. Thus, prior to 01.04.2012, value of
imported raw materials was being excluded for
computation of royalty, but not after that."
(emphasis supplied)
12. The Additional Director General then examined the subsequent
Technical Co-Operation Agreement dated 27.06.2013 that was effective
from 01.04.2012 and ultimately recorded the following findings in
paragraph 6.29 of the order:
"6.29. In this background, my findings are as follows;
(a) As discussed above, in the present case, the
royalty is paid on the Gross sale price of the goods
which includes the sale value and the cost of
imported goods excluding excise duties and sales
tax of the licensed products manufactured from the
factory. Further, it is an accepted fact that in the
absence of Ericsson knowhow and IPR, EIL would not
have been in a position to procure the impugned goods
and assemble the equipment out of these. As per the
terms of the Technical cooperation Agreement
dated 27.06.2013 (effective from 01.04.2012), LME
or its affiliates were to provide components, sub-
assemblies, parts, know-how etc. to EIL and EIL
was to purchase components in terms of a
purchase agreement. Thus, the supply of
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components in terms of the said purchase
agreement was a condition in the technical
cooperation agreement dated 27.06.2013. Thus,
payment of royalty to LME is a condition of sale of
goods from EAB to EIL.
(b) It has been discussed above that it is an admitted fact
that the procurement of indigenous and imported
component had to be of quality standards and technical
specifications set by Ericsson globally. It is also an
admitted fact that EAB is the only such manufacturer of
impugned goods i.e. the goods as per the raw material
specifications of Ericsson knowhow and the said
knowhow would work only with those components which
were being exclusively supplied by EAB, which is also a
subsidiary of LME. xxxxxxxxxxx.
(c) I find that the Noticee has tried to downplay the fact that
the technical cooperation agreement dated 27.06.2013
expressly stated that Licensor i.e. LME or its affiliates
would provide complex components, sub-assemblies,
parts, in addition to knowhow etc. and that the supply
contract dated 31.01.2011, in para 3.1 provides for
purchase by the Buyer and the sale by the Supplier of
the Components and Software etc. This is a crucial factor
in this case.
(d) It has also been discussed that the transfer price in the
case of import of components is based on a global
transfer price list which was to be fixed on the basis of
cost plus a margin of 5%, unlike in the case of imports of
assembled products from EAB, which were sold on high
sea sales basis. The manufacturing/ assembling process
is same in both the cases. In the case of import of
assembled products, sold on high sea sales basis, no
royalty is charged, whereas the knowhow and the IPR
are same in both the cases. It was noted that the
condition no. 6 of the supply contract, on Pricing
Adjustment, is very relevant which states that "the
Buyer's purchase price for the components covered
herein shall be established from time to time and shall
be in accordance with the internationally accepted arm's
length standard. The seller and the buyer shall, after
every six months or more frequently, if wanted, review
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the components prices to ensure that such prices are
consistent with the arm's length standard. "This
information have not been provided by the Noticee
during investigation.
(e) The Noticee has by placing reliance on
Commentary on the GATT Customs Valuation Code
by Saul L. Shermanhas, has contended that
provision of specification or detailed design to the
Exporter is only for the purpose of advising the
supplier of what the buyer wants and the cost of
such engineering and design are not includible in
the price of such goods. This general principle has
no application in the instant case as here both EIL
and supplier (EAB) are subsidiaries of LME and it is
an admitted position that the design, specification
etc. of the goods supplied by EAB are property of
LME. Further, if the EAB makes payment to LME for use
of such specification etc., it will recover the same from
EIL, as forming part of Consideration. In this case, the
EIL is making payments directly to the LME, and hence,
the same is includible in the Assessable Value.
(f) It is an accepted fact that in the absence of
Ericsson Knowhow and IPR, EIL would not have
been in a position to procure the impugned goods
and assemble the equipments out of these. Thus, it
appears that payment of royalty to LME is a
condition of sale of goods from EAB to EIL. As per
the terms of the agreement dated 27.06.2013
(effective from 01.04.2012), LME or its affiliate
were providing components, sub-assemblies, parts
etc. to EIL and EIL was to purchase components in
terms of a purchase agreement. Thus, it appears
that the supply of components in terms of the said
purchase agreement was a condition of sale in the
technical cooperation agreement dated
27.06.2013.
(g) As discussed earlier, the copy of TCA agreement
dated 23.12.2008 was not submitted by EIL to SVB
in any of the years for which applications had been
made for issuance and/or renewal of SVB orders.
EIL had knowingly and deliberately submitted only the
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copy of the supply agreement, which was entered into in
pursuance of the technical cooperation agreement (TCA),
which did not have any mention of the royalty payable to
LME in relation to such imported goods."
(emphasis supplied)
13. The Additional Director General then held that as all the
requirements of rule 10(1)(c) of the 2007 Valuation Rules were met the
royalty paid by Ericsson India to LM Ericsson Sweden would be included
in the transaction value of goods imported by Ericsson India from
Ericsson Sweden. The observations are:
"6.30. It clearly emerges that all the requirements
specified in Rule 10(1) of the valuation rules are met in
this case inasmuch as that;
a) Royalty paid by EIL to LME was in respect of
inter-alia complex components, sub-
assemblies, parts, know how etc. which were
provided by LME or its affiliates (Ericsson AB,
in this case);
b) Royalty was being paid directly to LME for the
components, knowhow and parts etc. which are to
be supplied by LME or its affiliates (Ericsson AB);
c) Payment of royalty to LME was a condition of
sale of goods from EAB to EIL. As per the terms
of the agreement dated 27.06.2013 (effective from
01.04.2012), LME or its affiliates were to provide
components, sub-assemblies, parts etc. to EIL and
EIL was to purchase components in terms of a
purchase agreement. Thus, the supply of
components in terms of the said purchase
agreement was a condition in the technical
cooperation agreement dated 27.06.2013."
14. The Additional Director General then concluded:
"6.31 I conclude that in the Ferodo case the Apex court
observed that in the case of Matsushita Television, the
pricing arrangement was not produced before the
department. Therefore, the view was taken that royalty
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payment had to be added to the price of the imported goods.
As discussed in above paras, in the instant case also the
Noticee misled the department by deliberately suppressing
the above discussed vital information etc. in order to avoid
payment of due customs duties. Therefore, even going by the
ratio of the Ferodo judgment, the amount of royalty is
justified to be added to the price of the imported goods."
15. The Additional Director General also held that the goods were
liable to confiscation in terms of section 111(m) of the Customs Act and,
therefore, penalty under section 114A of the Customs Act would be
leviable on the appellant. The Additional Director General also imposed
penalty upon Tej Nirmal Singh and Bharat Bandhu under section
112(a)(ii) of the Customs Act.
16. Shri V. Lakshmikumaran, learned counsel for the appellant
assisted by Shri Anurag Kapur, Ms. Rubel Bareja and Ms. Anisha Arya,
made the following submissions:
(i) Royalty paid under the Technical Co-Operation
Agreements is not includible in the assessable value of
imported components. Technical Co-Operation
Agreement dated 23.12.2008 and Technical Co-
Operation Agreement dated 27.06.2013 are indentical
in so far they relate to post importation activities;
(ii) Both the Technical Agreement do not stipulate that
payment of royalty is a sine qua non for import of
components. Therefore, royalty for technical know-how
does not automatically become a „condition of sale‟
merely because it is inclusive of the value of imported
goods;
(iii) It is a settled principle that where royalty payments
pertain to post-importation activities, such royalty is
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not includible in the assessable value of imported goods
under rule 10(1)(c) of the 2007 Valuation Rules. In this
connection reliance was placed on the following
decisions:
a) Toyota Kirloskar Motor Private Limited
vs. Commissioner of Cus., Chennai11;
b) Commissioner of Cus. (Port), Chennai vs.
Toyota Kirloskar Motor P. Ltd.12;
c) Commissioner of Customs, Chennai vs.
IBEX Gallegher Ltd.13;
d) The Commissioner of Customs (Import),
vs. Vestas Wind Technology India Pvt.
Ltd.14;
e) Commissioner of Customs (Sea),
Chennai vs. Remy Electricals India Ltd.15;
f) Commissioner of Cus. (Import), Mumbai
vs. Bridgestone India Pvt. Ltd.16;
g) The Commissioner of Customs vs. GH
Induction India Pvt. Ltd.17;
(iv) Thus, as payment of royalty is not a „condition of sale‟
of imported goods and relates to post-import activities,
it is not includible in the assessable value of imported
goods under rule 10(1)(c) of the 2007 Valuation Rules;
(v) Mere inclusion of value of imported goods cannot lead
to addition of royalty paid on finished goods in the
transaction value of imported goods. In this connection,
reliance has been placed on the following judgments:
(a) Ferodo India (P) Ltd. vs. Commissioner
of Customs, Mumbai18 affirmed by
11. 2006 (200) E.L.T. 289 (Tri. - Del.)
12. 2007 (213) E.L.T. 4 (S.C.)
13. 2005 (191) E.L.T. 967 (Tri. - Bang.)
14. Customs Appeal No. 40973 of 2023 decided on 11.07.2023
15. Customs Appeal No. 318 of 2007 decided on 08.05.2017
16. 2013 (292) E.L.T. 403 (Tri.- Mumbai)
17. Customs Appeal No. 42516 of 2013 decided on 31.08.2023
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Supreme Court in Commissioner of
Customs vs. Ferodo India Private
Limited, 2008 (224) E.L.T. 23 (S.C.);
(b) Commissioner of Customs, Mumbai vs.
BASF Strenics Pvt. Ltd.19;
(c) Sandvik Asia Pvt. Ltd. vs.
Commissioner of Customs (Import),
Mumbai20;
(d) Kruger Ventilation Indus. (North India)
Pvt. Ltd. vs. Commr. of Customs
(Import), New Delhi21, affirmed by
Supreme Court in (2023) 9 Centax 75
(S.C.);
(vi) The judgment of the Supreme Court in Matsushita
Television & Audio (I) Ltd. vs. Commissioner of
Customs22 would not be applicable to the facts of the
present case;
(vii) Technical Co-Operation Agreement does not stipulate
import of components under a purchase agreement
with LM Ericsson Sweden or its affiliates;
(viii) It is an admitted fact in the impugned order that
Ericsson India not only procures components from
Ericsson Sweden but also procures them from other
third parties, i.e., unrelated foreign suppliers and local
producers. This information was submitted as part of
additional submissions dated 07.08.2020 by Ericsson
India, but the same has not been taken into
consideration by the Additional Director General. The
same was also disclosed before SVB by way of
18. 2002 (142) E.L.T. 343 (Tri. - Del.)
19. 2006 (195) E.L.T. 206 (Tri.-Mumbai)
20. 2015 (329) E.L.T. 493 (Tri.- Mumbai)
21. 2022 (382) E.L.T. 541 (Tri. - Del.)
22. 2007 (211) E.L.T. 200 (S.C.)
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submissions of TP Report for the Financial Years 2011,
2012 and 2013;
(ix) Ericsson know-how does not extend to „manufacturing‟
raw materials and components;
(x) In absence of substantive provisions under the Customs
Tariff Act, demand of interest, imposition of penalty and
confiscation on amount of CVD and SAD is not
sustainable;
(xi) The extended period of limitation could not have been
invoked in the present case;
(xii) Interest under section 28AA/28AB of the Customs Act is
not payable, imported goods are not liable to
confiscation under section 111(m) of the Customs Act
and penalty under section 114A is not sustainable; and
(xiii) Penalties on individuals under section 112A(ii) are not
imposable.
17. Shri Mihir Ranjan, learned special counsel of the respondent made
the following submissions:
(i) Royalty under the revised Technical Co-Operation
Agreement dated 27.06.2013 (effective 01.04.2012) is
5.75% of gross sales, which includes the cost of
imported components;
(ii) Without the know-how and IPR of LM Ericsson Sweden,
Ericsson India could not have procured/import
components or manufactured the finished goods. The
royalty is inseparable from imports. Bhaat Babdhu,
Head Company Control Hub, Ericsson India admitted
this fact in his statement;
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(iii) The supply of components by Ericsson Sweden was
contemplated in the Technical Co-Operation Agreement
itself, thereby linking royalties to imports;
(iv) The judgment of the Supreme Court in Matsushita
Television, where royalty was held includible because
the formula for royalty included imported components,
would be applicable in the present case;
(v) Reliance by the Ericsson India on Ferodo is misplaced;
(vi) The acceptance of the import price by SVB does not
preclude the addition of a royalty in the recovery
proceedings under section 28 of the Customs Act. SVB
examined transaction value under rule 3 and not
royalty liability under rule 10(1)(c) of the 2007
Valuation Rules;
(vii) The sourcing of Ericsson India from unrelated parties is
irrelevant because even if some components are
brought from others, royalty is payable on gross sales,
including those made using imported parts from
Ericsson Sweden;
(viii) To support the aforesaid contentions, learned special
counsel placed reliance on the following decisions:
(a) Matsushita Television;
(b) Agro Tech Foods P. Ltd. vs.
Commissioner of Customs (I), Nhava
Sheva23;
(c) Toyota Kirloskar; and
(d) Collector of Customs (Prev.)
Ahmedabad vs. Essar Gujarat Ltd24.
23. 2015 (330) E.L.T. 448 (Tri.-Bom.)
24. 1996 (88) E.L.T. 609 (S.C.)
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18. The submissions advanced by the learned counsel for the
appellant and the learned special counsel appearing for the department
have been considered.
19. The issue that arises for consideration in this appeal is as to
whether royalty paid by Ericsson India to LM Ericsson Sweden towards
know-how can be included in the transaction value of the components
imported by the Ericsson India from Ericsson Sweden under rule
10(1)(c) of the 2007 Valuation Rules.
20. The relevant portion of rule 10(1)(c), therefore, needs to be
examined and it is reproduced below:
"10. 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."
21. It would be seen that in determining the transaction value, rule
10(1)(c) of the 2007 Valuation Rules requires that there shall be
added to the price actually paid or payable for the imported
goods royalties related to the imported goods that the buyer is
required to pay as a condition of the sale of the goods being
valued, to the extent that such royalties are not included in the
price. Rule 10(1)(c) of the 2007 Valuation Rules, therefore, requires
that not only should the payment of royalty be related to the imported
goods but the buyer should have paid royalty as a condition of the sale
of goods. Only if these conditions are satisfied can royalty payment be
18
C/50439/2021 & 2 Others
added to the price actually paid for the imported goods, to the extent
that such royalties are not included in the price.
22. The Additional Director General has, in the order impugned, drawn
a distinction between the Technical Co-Operation Agreement dated
23.12.2008 and the Technical Co-Operation Agreement dated
27.06.2013 which was made effective from 01.04.2012. Such a
distinction has been drawn because prior to 01.04.2012 royalty was
paid at the rate of 5% of the Net Selling Price which price excluded the
value of all important components, but w.e.f. 01.04.2012 payment of
royalty was revised to 5.75% calculated on gross sales which included
the value of the imported components.
23. It would, therefore, be useful to reproduce the relevant clauses of
two Agreements.
Technical Co-Operation Agreement dated 23.12.2008
24. The preamble to the agreement provides that Ericsson India has
been provided access to Ericsson technical know-how and Ericsson IPR.
„Ericsson Know-how‟ is defined in Article 1.4 to mean information
relating to trade secrets, processes, product development, operations,
methods, manufacturing facilities and techniques of licensor or its
appropriate affiliate which is necessary for manufacture, sale and use of
licensed products or for the use or sale of Licensed Parts. „Ericsson
IPR‟ is defined in Article 1.5 to mean all patents and copyrights, and
trademarks which are owned or licensed to the extent sub-licensable by
licensor which are in existence and which are necessarily infringed by
the manufacture, sale and use of licensed products or for the use or sale
of licensed parts or otherwise by use of Ericsson know-how.
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C/50439/2021 & 2 Others
25. In consideration for the above, Article 4.1 of the Technical Co-
Operation Agreement provides for charge of royalty @5% of the total
Net Selling Price of Licensed Products, Licensed Parts and Services sold
by the licensee. The Net Selling Price of Licensed Products would be
calculated as gross sale price of Licensed Products minus excise duty,
sales tax and the cost of imported components used in manufacturing of
said licensed products. The Agreement also provided for royalty free
period prior to 31.03.2008 and royalty was to be paid w.e.f.
01.04.2008. Accordingly, Ericsson India paid royalty to LM Ericsson
Sweden for the years 2008-09 and 2009-10 as per the terms of the
Agreement. Royalties were not paid for the years 2010-11 and 2011-12
as the royalty payment worked out to NIL in terms of the applicable
formula.
Technical Co-Operation Agreement dated 27.06.2013 (effective
from 01.04.2012)
26. Royalty under Article 5.1 of this Agreement was agreed to be @
5.7% of the gross sale price of Licensed Products and Licensed Parts
assembled/manufactured and sold by Ericsson India. The gross sales
price of Licensed Products was calculated as local sale value of Licensed
Products manufactured by the licensee minus the excise duty and sales
tax on the manufacture and sale of said Licensed Products. Accordingly,
Ericsson India paid royalty to LM Ericsson Sweden under this revised
Technical Co-Operation Agreement dated 27.06.2013 for the years
2012-13 and 2013-14.
Discussion
20
C/50439/2021 & 2 Others
27. As noticed above, the Additional Director General in paragraph 5.3
of the order held that prior to 01.04.2012 royalty on the imported raw
materials had to be excluded, but from 01.04.2012 royalty had to be
included.
28. According to learned counsel for the appellant, both the Technical
Co-Operation Agreements relate to technical know-how namely (i)
Specification for Licensed Products, Including; (ii) Process details for
manufacturing Licensed Products; (iii) Details of established quality
control procedures for the Licensed Products; (iv) Specifications for
process consumables; (v) Training of the Licensee‟s executives; (vi)
Test facility, test, procedures and results, specifically; (vii)
Specifications for manufacturing consumables; (viii) Unique quality
assurance procedures; and (ix) Plant and Equipment layout. However,
all the terms and conditions of both the Agreements are identical except
for the mode of calculating royalty. Under the first Agreement, royalty is
calculated at the rate of 5% of the Net Selling Price after excluding the
value of imported components. Under the second Agreement, royalty is
calculated at the rate of 5.7% of the gross sales without deducting the
value of imported components from such sale price.
29. Learned counsel submitted that there is no artificial price split to
pay higher royalty. Both the Technical Co-Operation Agreements are
identical in scope and substance and do not stipulate that payment of
royalty to LM Ericsson Sweden is a sine qua non for import of
components from Ericsson Sweden. Thus, royalty for technical knowhow
does not automatically become a „condition of sale‟ merely because it is
inclusive of the value of imported components. Learned counsel also
submitted that where royalty payments pertain to post-importation
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C/50439/2021 & 2 Others
activities, such royalty is not includible in the assessable value of
imported goods.
30. The contention of learned counsel for Ericsson India that royalty
for technical know-how does not automatically become a „condition of
sale‟ merely because it is inclusive of the value of imported components
and that where royalty payments pertain to post importation activities,
such royalty is not includible in the assessable value of imported goods
is supported by the decision of the Supreme Court in Commissioner of
Customs (Port), Kolkata vs. M/s. J.K. Corporation Limited25. The
relevant portion of the judgment is reproduced below:
"9. The basic principle of levy of Customs duty, in view
of the afore-mentioned provisions, is that the value of the
imported goods has to be determined at the time and
place of importation. The value to be determined for the
imported goods would be the payment required to be
made as a condition of sale. Assessment of Customs duty
must have a direct nexus with the value of goods which
was payable at the time of importation. If any amount is
to be paid after the importation of the goods is
complete, inter alia by way of transfer of licence or
technical know-how for the purpose of setting up of
a plant from the machinery imported or running
thereof, the same would not be computed for the
said purpose. Any amount paid for post-importation
service or activity, would not, therefore, come
within the purview of determination of assessable
value of the imported goods so as to enable the
authorities to levy Customs duty or otherwise. The
Rules have been framed for the purpose of carrying out
the provisions of the Act. The wordings of Sections 14 and
14(1A) are clear and explicit. The Rules and the Act,
therefore, must be construed, having regard to the basic
principles of interpretation in mind."
(emphasis supplied)
25. 2007 (2) SCALE 459
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C/50439/2021 & 2 Others
31. The submission advanced by the learned counsel for Ericsson
India that mere inclusion of value of imported goods cannot lead to
addition of royalty paid on finished goods in the transaction value of the
imported goods was also examined by the Tribunal in Ferodo India
and it was held that since royalty payment related to the goods to be
produced in India, it could not be added to the value of the imported
goods. The relevant portion of the decision of the Tribunal is reproduced
below:
"9. A perusal of the various clauses, and in
particular, clause 4.1 makes it clear that the royalty
and licence fees are not related to supply of materials
or capital goods. They only deal with selection of
material suppliers, assistance that would be available
in that area from the foreign shareholder etc. The
earlier clauses of the agreement under clause (1), clause (2)
and clause (3) etc. clearly show that the licence fees and
royalty are in relation to supply of know how and use of the
foreign shareholder‟s brand name on the products to be
manufactured by the appellant in India. Perusal of other
clauses of the agreement, in particular, clauses 11.1 and
11.2 also makes this position very clear. It is also noticed
that with regard to the imports in question the foreign
shareholder was only assisting the appellant with regard to
identification and procurement of goods abroad and they
made available the invoices of the original suppliers to
appellant. Those prices conformed to the sale price of the
appellant‟s foreign shareholder. Thus, the invoices covering
the import of capital goods, spares and raw materials
represented the full value of the goods under import. Viewed
from that angle also, there was no justification to load the
declared value of the goods.
8. The licence fee and royalty payment being
entirely related to the goods to be produced in India
and training the appellant‟s personnel by the foreign
shareholder, these payments are in no way related to
the imported capital goods or materials. Therefore, the
addition ordered in the impugned order is contrary to
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C/50439/2021 & 2 Others
the specific provisions contained in Rule 9(1)(e). It is
also contrary to the legal position stated in this Tribunal‟s
decision in the case of Vesta RRB India Ltd., Tata Timken
Ltd., etc. The judgment of the Apex Court in Essar Gujarat
Ltd. [1996 (88) E.L.T. 609 (S.C.)] has no application to the
present case. Rule 9(1)(e) also is not attracted as there was
no indirect payment also towards the cost of the goods under
import."
(emphasis supplied)
32. The department challenged the aforesaid order of the Tribunal
before the Supreme Court. The Supreme Court distinguished the
judgment of the Supreme Court in Matsushita Television, on which
reliance was placed by the department and on which reliance was also
has been placed by the learned special counsel appearing of the
department, and held that as there was no nexus between the royalty
paid for the know-how and the goods imported for manufacture of
Licensed Products, royalty could not be added to the value of the
imported goods. The judgment of the Supreme Court in Matsushita
Television was distinguished because of the consideration clause and
other surrounding circumstances in the matter. The relevant portion of
the judgment of the Supreme Court is reproduced below:
"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
24
C/50439/2021 & 2 Others
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).
xxxxxxxxxx
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.
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 important 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
25
C/50439/2021 & 2 Others
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."
(emphasis supplied)
33. The Tribunal in BASF Strenics also examined this issue and held
that since the payment of royalty was not related to the import of
goods, and neither was it a condition of sale of the goods, the royalty
payment could not be added to the value of the imported goods under
rule 9(1)(c) of the earlier Valuation Rules, which rule is similar to rule
10(1)(c) of the 2007 Valuation Rules. The Tribunal further held that
merely because a particular formula has been designed to calculate the
royalty amount, which also includes the raw material cost, it cannot be
said that royalty payment is related to the imported goods. The Tribunal
also found that royalty payment relates to the goods manufactured and
26
C/50439/2021 & 2 Others
sold indigenously. The relevant observations of the Tribunal are as
follows:
"9. As regards application of Rule 9(1)(c), we
note that only such royalty, payment of which is
related to the imported goods and is made as a
condition of sale of such goods can be added to the
declared price. In the instant case, the payment of
royalty is not related to imports of Ethyl Benzene and
Styrene Monomer. It appears, the respondents do not have
any obligation to import these goods only from their
collaborators abroad. It has been noted by the lower
authorities that they have in fact imported these goods from
non-related suppliers at comparable prices. As such, it
cannot be said that the royalties have been paid as a
condition of sale of the imported goods. On the other hand,
the agreement between the collaborators abroad and the
respondents requires payment of royalty on finished goods
manufactured and sold in India. The amount of royalty
specified under the agreement relates to sale price of
the goods less certain deductions. The applicant
Commissioner himself has stated in the grounds of appeal
that in effect the royalties are being paid on manufacturing
cost plus profit plus the value of raw materials. Just
because a particular formula has been designed to
calculate the royalty amount which also includes the
raw material cost, it cannot be said that the royalty
payment is related to the imported goods. In fact, the
royalty is payable on the "Net Selling Price" of all "Agreement
Products" under the agreement and such products have been
defined to mean "polystyrene polymers manufactured in
whole or in part according to existing technology or
improvement." Such payment of royalty is not therefore
restricted to polystyrene polymers manufactured using
impugned goods imported from the related suppliers only.
We find that the impugned agreement provides for
payment of running royalty under the know-how
agreement and relates to goods manufactured and
sold indigenously. Such payment of royalty to BASF,
Germany is for using BASF technology and has also been
approved by the R.B.I. In view of the foregoing, we are of
the view that the amount of royalty in question cannot be
27
C/50439/2021 & 2 Others
added to the declared value under the said sub-rule (c)
either.
10. Revenue‟s contention seeking addition of royalty
under Rule 9(1)(c) and Rule 9(1)(d) fails in view of our
findings above. As such, we dismiss the appeals filed by the
department. The cross objection filed by the respondents
also stands disposed off."
(emphasis supplied)
34. In Sandvik Asia, the Tribunal also examined this issue and held
that since payment of royalty does not relate to the imported raw
material and is in fact related to the finished goods, royalty payment
cannot be added at the value of the imported goods under rule 10(1)(c)
of the 2007 Valuation Rules. The observations are as follows:
"8. Coming to the merits of the present case, we may
straight away refer to the relevant provisions of the Customs
Valuation Rules, 2007, i.e., Rule 10(1)(c) under which it is to
be decided to whether the royalty paid is includible in the
value of imported goods for assessment to duty. As pointed
out by the ld. Counsel, we find that the two conditions
required to be satisfied for invoking Rule 10(1)(c)
are:-
(i) Royalty is related to the imported goods; and
(ii) Royalty is paid as a condition of sale of imported
goods.
From the facts it is clear to us that the royalty is not
related to the imported raw material the royalty is
related to the finished goods. Only because imported goods
are contained in the finished goods, it cannot be said that
royalty is related to the imported goods. The royalty is only
paid for using the Trademark, i.e., Sandvik on the products
manufactured and sold in India. Therefore, we are of the
view that the first condition of Rule 10(1)(c) is not satisfied
because the royalty is not related to the imported goods."
(emphasis supplied)
28
C/50439/2021 & 2 Others
35. In Kruger Ventilation, the Tribunal again observed, in respect of
a similar Technical Agreement, that merely because the value of the
goods imported was also included would not be sufficient to add royalty
to the assessable value. The Tribunal also held that payment of royalty
was not a condition of sale of the imported goods. The observations are
as follows:
"22. In the present case, we find that the
Technical Aid Agreement entered into between the
appellant and M/s. Kruger Ventilation Industries Pvt.
Ltd., Singapore was a technical aid agreement on a
non-exclusive basis to manufacture and assemble
centrifugal fans, axial fans, in-line fans, roof exhaust
fans and mixed flow fans (goods) and to instruct the
licensee in the methods of working the processes
relating to or in respect of or for the manufacture of
the goods and to provide total management. The
restrictions in the agreement are with respect to import or
export of final products by the appellant but not with respect
to imports. It is also mandated that the goods were to be
manufactured strictly in accordance with the specifications
provided by technology provider. A license fee @ 5% had to
be paid on the total net turnover of the goods. We have gone
through the agreement and do not find anything in it that it
also provides import of the components. Therefore, the
goods were not imported under the agreement and any
royalty under the agreement cannot be related to it.
Further, there is no condition that the importer has to
obtain the approval of the technology provider either
for import or for procuring components domestically.
Therefore, the royalty paid by the appellant @ 5% on
the final products under the technical aid agreement
cannot be said to be a condition for sale and added to
the assessable value of the imported goods. It is true
that the royalty is paid is as percentage of the net
turnover of goods manufactured, which includes not
only the component which are domestically procured
but also which are imported as well as any value
addition by the appellant. However, this in itself, is not
sufficient to add royalty to the assessable value.
29
C/50439/2021 & 2 Others
23. It needs to be seen whether the payment of
such royalty is pre-condition to the sale of the
imported goods. No such condition emerges from the
agreement in the present case. The goods were also
not imported under the agreement. In view of the
above, we find that the royalty cannot be included in
the assessable value."
(emphasis supplied)
36. This issue was also extensively examined by a division bench of
the Tribunal in M/s. Valeo Friction Materials India Ltd. vs.
Commissioner of Customs26. The issue that arose for consideration
before the Tribunal was whether royalty payment can be included in the
transaction value of the imported goods under rules 3 and 10 of the
2007 Valuation Rules. The Tribunal held that they could not be included
and the relevant observations are as follows:-
"8. From the appeal records, it is evident that the
Appellant has entered into a Technology License
Agreement dated 11.02.1998 ("agreement") with
M/s. Valeo, France for transfer of technology to the
Appellant for the purpose of manufacturing and
assembling of "products" in India for a consideration
of payment of royalty which was agreed at 3.75% of
the "Net Sales Value" of the product manufactured
and sold.
xxxxxxxxxxx
13. xxxxxxxxx. 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
26. Customs Appeal No. 42211 of 2014 decided on 31.05.2024
30
C/50439/2021 & 2 Others
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
appellant according to the terms and conditions flowing
from the Technology Licence Agreement.
xxxxxxxxxxx
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.
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
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C/50439/2021 & 2 Others
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."
(emphasis supplied)
37. The contention advanced by the learned counsel for Ericsson India
that since both the Technical Agreements do not stipulate that payment
of royalty to LM Ericsson Sweden is a sine qua non for import of
components from Ericsson Sweden, royalty for Technical Know-how will
not automatically become a „condition of sale‟ merely because it is
inclusive of the value of imported components, therefore, deserves to
be accepted. This apart, the payment of royalty pertains to post
importation activities and as such cannot be included to the value of the
assessable goods.
38. It is reiterated that both the Technical Agreements relate to
transfer of technical know-how, amongst others, in the form of design
sheets detailing manufacturing methods and specifications of raw
materials for all the components used in the manufacture/assemble or
the products and the payment on royalty is not a condition of sale of
imported goods and in fact relates to post import activities. The
Additional Director General committed an error in observing that the
Technical Co-Operation Agreement stipulates import of components
under a purchase agreement with LM Ericsson Sweden. In this
connection, it would be relevant to examine Article 1.7 of the Technical
Co-Operation Agreement dated 27.06.2013. The Article is reproduced
below:
"1.7. "System Components" shall mean the components of
the GSM Mobile Telephone System which shall be
32
C/50439/2021 & 2 Others
purchased by EIL under the terms and conditions of a
Purchase Agreement. Without limiting the foregoing,
the System Components shall Include base station
transceivers ("RBS"), and Mobile Switching Center
("MSC"), and Base Stations Controllers ("BSC") that
control radio traffic."
39. A perusal of the said Article makes it abundantly clear that the
Agreement merely stipulates that Ericsson India shall purchase „System
Components‟, i.e., components of GSM Mobile Telephone System
namely, RBS, BSC and MSC (finished goods) under the terms and
conditions of a purchase agreement. However, the provisions of a
Purchase Agreement under the said Technical Co-Operation Agreement
dated 27.06.2013 does not extend to the imported goods i.e.,
components used in manufacture of finished goods. The finding in the
impugned order is, therefore, factually incorrect.
40. It is not in dispute that Ericsson India not only procures
components from Ericsson Sweden but also procures them from other
third parties, i.e., unrelated foreign suppliers and local producers. A
tabular representation of the procurement of imported goods by
Ericsson India during the relevant period is as follows:
2012-13 2013-14
Scope of CIF Value % CIF Value %
procurement (in MINR.) (in MINR.)
Import from Ericsson 4007 42 2281 25
Sweden
Import from foreign 3105 32 5872 63
unrelated suppliers
Indigenous 2463 26 1107 12
procurement
Total value of 9,576 100 9,260 100
components
41. This information regarding procurement of components from
unrelated foreign suppliers and/or ingenious producers was placed by
33
C/50439/2021 & 2 Others
Ericsson India as part of additional submissions dated 07.08.2020 but
the same has not been taken into consideration by Additional Director
General. The same was also disclosed before SVB in the TP Report for
the Financial Years 2011, 2012 and 2013.
42. The impugned order also holds that since LM Ericsson Sweden is
providing technical know-how to Ericsson India through the provision of
specifications for both imported and indigenously procured components
in the form of detailed performance specifications, royalty paid by
Ericsson India to LM Ericsson Sweden for the goods imported from
Ericsson Sweden is required to be included in the transaction value of
the imported goods.
43. This finding is factually incorrect in view of the provisions of
Article 2.1.2 of Technical Co-Operation Agreement dated 27.06.2013.
The said Article is reproduced below:
"2.1 Limited License to use Ericsson Know-How
2.1.1 Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee a
non-transferable, non-exclusive license to use or
otherwise practice Ericsson Know-How solely within
the Territory during the Term of this Agreement for
the limited purposes of.
2.1.1.1. Assembling/ manufacturing of the Licensed Products
and Licensed Parts;
2.1.1.2. Management of the manufacturing facility belonging
to and operated by Licensee;
2.1.1.3. ordering of the Licensed Products, Licensed Parts,
System Components and the GSM, CDMA and
WCDMA Mobile Telephone System, and
2.1.1.4. conducting Services for the Licensed Products
manufactured by the Licensee."
34
C/50439/2021 & 2 Others
44. A perusal of the said Article shows that Ericsson know-how does
not extend to „manufacturing‟ raw materials and other components of
Licensed Parts and Licensed Products. Thus, the assumption that if
Ericsson Sweden makes payment for use of such specification, it will
recover the same from Ericsson India is not correct.
45. Co-ordination and advice provided post importation activities
cannot lead to a conclusion that technical services are a precondition for
the sale of imported goods.
46. In this connection, it would be pertinent to refer to the relevant
observations made by the Supreme Court in Essar Steel Ltd. vs.
Commissioner of Customs, Ahmedabad27 and they are:
"9. What is clear is that technical services to be
provided by Met Chem Canada Inc., is basically to
coordinate and advise the respondent so that the
respondent can successfully set up, commission and
operate the plant in India. It will be noticed that
coordination and advice is to take place post-
importation in order that the plant be set up and
commissioned in India. In fact, all the clauses of
this agreement make it clear that such services are
only post-importation.
11. Another thing to be noticed is that a conjoint
reading of the technical services agreement and the
purchase order do not lead to the conclusion that
the technical services agreement is in any way a
pre-condition for the sale of the plant itself. On the
contrary, as has been pointed out above, the technical
services agreement read as a whole is really only to
successfully set up, commission and operate the plant
after it has been imported into India. It is clear, therefore,
that clause 9(1)(e) would not be attracted on the facts of
this case and consequently the consideration for the
technical services to be provided by Met Chem Canada
27. 2015 (319) E.L.T. 202 (S.C.)
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C/50439/2021 & 2 Others
Inc., cannot be added to the value of the equipment
imported to set up the plant in India."
(emphasis supplied)
47. Thus, for all the reasons stated above, the order dated
27.11.2020 passed by the Additional Director General holding that the
royalty paid by the appellant to LM Ericsson Sweden would be includible
in the transaction value of the components imported by Ericsson India
from Ericsson Sweden in terms rule 10(1)(c) of the 2007 Valuation
Rules, therefore, cannot be sustained would have to be set aside.
48. This would also mean that penalty could not have been imposed
upon Ericsson India under section 114A of the Customs Act.
Invocation of extended period of limitation
49. During the relevant period the normal period of demand under
section 28(1) of the Customs Act was one year. The show cause notice
dated 03.08.2015 covers imports from 29.03.2016 to 26.02.2014. The
entire period is, therefore, covered by the extended period of limitation
and that is why the show cause notice has invoked the provisions of
section 28(4) of the Customs Act.
50. The impugned order has holds that the extended period of
limitation was correctly invoked. The relevant paragraphs of the order
dealing with the invocation of the extended period of limitation are
reproduced below:
"7.1 The present notice has been issued under
Section 28 of the Customs Act, 1962 by invoking the
extended period of limitation. It has been alleged
that the Noticee had not disclosed the fact of
royalty payment before the SVB authorities and
obtained favourable SVB orders by mis-
declaration and suppression of facts. The Noticee
36
C/50439/2021 & 2 Others
has claimed that they had not paid any royalty to
the supplier, but to its parent company and had
therefore, rightly declared before the SVB that
there was no royalty payment to the supplier of
the goods.
7.2 I find that the Noticee is a 100% owned
subsidiary of LME and the supplier company was also a
subsidiary of LME. In Rule 10(1)(c) of the Valuation
Rules, the term used is "royalties and licence fees
related to the imported goods that the buyer is required
to pay, directly or indirectly". It is also an admitted
position that the Annexures were filed after due
deliberations, in Taxation and Legal departments of the
Noticee Co.
7.3 Therefore, it cannot be accepted that they
were not aware about the legal provisions that
even the indirect payment of royalty and License
fee has to be declared.
7.4 The copies of Annexures filed by the Noticee
before the SVB authorities in year 2013 clearly shows
that the Noticee has deliberately suppressed the
existence of Technical Co-operation Agreement, while
filing the said Questionnaire e.g. in reply to a question,
it is stated that "Ericsson' brand is owned by Supplier,
whereas, the Noticee was well aware that the said
brand was owned by their parent Company i.e. LME.
7.5 The Noticee has argued that in fact the
payment of royalty was disclosed before the SVB
authorities, as the royalty payments were
reflected in their Annual Financial Statements,
the copies of which were supplied to SVB. The
Noticee has further contended that they were
under the bona-fide belief that the payment of
royalty was liable to Service Tax and hence failed
to pay Customs Duty on the same.
7.6 The Noticee has also contended that the
issue involved is pure question of law and hence
mala-fide cannot be alleged and hence, extended
period of limitation cannot be invoked. In support
of the aforesaid contentions, the Noticee has placed
37
C/50439/2021 & 2 Others
reliance on many judicial pronouncements such as
Uniworth Textiles Ltd. Versus Commissioner Of Central
Excise, Raipur 2013 (288) E.L.T. 161 (S.C.), Collector
of Central Excise v. H.M.M. Ltd. 1995 (76) E.L.T. 497
(S.C.), Easland Combines Vs Collector of Central Excise,
Coimbatore 2003 (152) E.L.T. 39 (S.C.), Shahnaz
Ayurvedics Vs Commissioner of Central Excise, Noida
2004 (173) E.L.T. 337 (All.). I find that the facts and
circumstances in these citations are different from that
of the present case. In the present case there is
clear evidence of wilful misstatement or
suppression of facts with the intention to evade
payment of duty whereas none of the said cases
have such facts.
7.7 It is a settled law that when the deceitful
intention of the party to defraud Revenue is
manifested then the plea of bona-fide belief
cannot come to its rescue. xxxxxxxxxx.
7.8 I, therefore hold that keeping in view the facts
of the case, the invocation of extended period of
limitation in the SCN is justified."
(emphasis supplied)
51. The contention of Ericsson India that payment of royalty was
disclosed before the SVB, as the royalty payments were reflected in the
Annual Financial Statements, copies of which were supplied to SVB, and
that it was under a bona fide belief that since payment of royalty was
liable to service tax, customs duty was not payable has not been
considered in the impugned order.
52. The contention of Ericsson India that the issue involved is a pure
question of law and, therefore, no mala fide can be alleged was rejected
by the Additional Director General merely because there was clear
evidence of willful mis-statement for suppression of facts with intention
to evade payment of duty.
38
C/50439/2021 & 2 Others
53. The issue that arises for consideration is when the Technical
Know-how is in relation to the manufacture/assembly of the Licensed
Products and pertains to post-importation activities, then can royalty be
included in the assessable value of goods.
54. This issue has examined by the Tribunal time and again and in
view of the decisions referred to above, payment of royalty has not to
be included in the price of the imported goods.
55. Two Special Valuation Branch proceedings were also conducted in
the year 2010 and 2013.
56. In May 2010, Ericsson India made an application to the Special
Valuation Branch for review of order passed in 2007. Ericsson India filed
the Special Valuation Branch questionnaire and other documents with
the Special Valuation Branch, including three years Annual Financial
Statements and TP studies for the year ending March 2007, 2008 and
2009. After scrutiny of the submitted documents, which included the
Financial Statements and transfer pricing studies of Ericsson India, the
Special Valuation Branch accepted the declared import prices as
transaction value under section 14 of the Customs Act by order dated
18.05.2010.
57. Ericsson India contends that Schedule 19 of the Financial
Statements i.e. „Administrative, selling and distribution expenses‟ and
Schedule 22 i.e. „Notes to accounts‟ under serial no 15 disclosed the
„related party transactions‟. Both these Schedules disclosed payment of
royalty payment to the parent company in the year 2008-09 as a
separate line items under the head „royalty‟. The Special Valuation
Branch order of 2010 notes in paragraph 3 that importer has filed the
financials for the year 2009.
39
C/50439/2021 & 2 Others
58. Again in the year 2013, when the Special Valuation Branch order
of 2010 came up for review, Ericsson India filed the Special Valuation
Branch questionnaire, written submissions dated 29.05.2013 with the
copies of Financial Statements for the years ending March 2010, 2011
and 2012 along with TP studies. After scrutiny, the import values were
accepted as „transaction value‟ under section 14 of the Customs Act by
Special Valuation Branch order dated 30.05.2013.
59. The Financial Statements for the year ending March 2010 and
March 2011 disclosed the payment of the royalty to parent company
under the „Administrative, selling and distribution expenses‟ Schedule
and also under the related party transactions in Notes to Accounts.
60. It cannot, therefore, be urged by the department that it had no
knowledge of the fact that royalty was paid by the appellant to LM
Ericsson Sweden.
61. In any view of the matter, the finding recorded in the impugned
order that the appellant had suppressed relevant facts with an intent to
evade payment of duty is a bald statement without any supporting
evidence of factual position.
62. It has repeatedly been held that there should not only be
suppression of facts but such suppression should be with an intent to
evade payment of duty.
63. The provisions of section 11A (4) of the Central Excise Act came
up for interpretation before the Supreme Court in Pushpam
Pharmaceuticals Company vs. Collector of Central Excise,
Bombay28. The Supreme Court observed that section 11A(4) of the
Central Excise Act empowers the Department to reopen the proceedings
28. 1995 (78) E.L.T. 401 (S.C.)
40
C/50439/2021 & 2 Others
if levy has been short levied or not levied within six months from the
relevant date but the proviso carves out an exception and permits the
authority to exercise this power within five years from the relevant date
in the circumstances mentioned in the proviso, one of it being
suppression of facts. It is in this context that the Supreme Court
observed that the act must be deliberate to escape payment of duty.
The relevant observations are:
"2. ***** The Department invoked extended period of
limitation of five years as according to it the duty was
shortlevied due to suppression of the fact that if the
turnover was clubbed then it exceeded Rupees Five lakhs.
*****
4. A perusal of the proviso indicates that it has been used in company of such strong works as fraud, collusion or willful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression."
(emphasis supplied)
64. This decision of the Supreme Court in Pushpam Pharmaceuticals was followed by the Supreme Court in Anand Nishikawa Co. Ltd. vs. Commissioner of Central Excise, Meerut29 and the relevant paragraph is as follows:
"27. Relying on the aforesaid observations of this Court in the case of Pushpam Pharmaceuticals Co. v. CCE we find that "suppression of facts" can have only
29. (2005) 7 SCC 749 41 C/50439/2021 & 2 Others one meaning that the correct information was not disclosed deliberately to evade payment of duty. When facts were known to both the parties, the omission by one to do what he might have done and not that he must have done, would not render it suppression. It is settled law that mere failure to declare does not amount to wilful suppression. There must be some positive act from the side of the assessee to find willful suppression. Therefore, in view of our findings made hereinabove that there was no deliberate intention on the part of the appellant not to disclose the correct information or to evade payment of duty, it was not open to the Central Excise Officer to proceed to recover duties in the manner indicated in the proviso to Section 11-A of the Act. We are, therefore, of the firm opinion that where facts were known to both the parties, as in the instant case, it was 7 (2005) 7 SCC 749 11 E/52953/2018 not open to CEGAT to come to a conclusion that the appellant was guilty of "suppression of facts."
(emphasis supplied)
65. It would also be appropriate to refer the decision of the Delhi High Court in Mahanagar Telephone Nigam Ltd. vs. Union of India and others30. The Delhi High Court observed that merely because MTNL had not declared the receipt of compensation as payment for taxable service, does not establish that it had wilfully suppressed any material fact. The Delhi High Court further observed that the contention of MTNL that receipt was not taxable under the Act is a substantial one and no intent to evade tax can be inferred by non-disclosure of the receipt in the service tax return. The relevant portion of the observations are:
"28. In terms of the proviso to Section 73(1) of the Act, the extended period of limitation is applicable only in cases where service tax has not been levied or paid or has been short-levied or short-paid or erroneously
30. W.P. (C) 7542 of 2018 decided on 06.04.2023 42 C/50439/2021 & 2 Others refunded by reason of fraud, or collusion, or wilful misstatement, or suppression of facts, or contravention of any provisions of the Act or the Rules made thereunder with an intent to evade payment of service tax. However, the impugned show cause notice does not contain any allegation of fraud, collusion, or wilful misstatement on the part of MTNL. The impugned show cause notice alleges that the extended period of limitation is applicable as MTNL had suppressed the material facts and had contravened the provisions of the Act with an intent to evade service tax. Thus, the main question to be addressed is whether the allegation that MTNL had suppressed material facts for evading its tax liability, is sustainable.
*****
41. In the facts of this case, the impugned show cause notice does not disclose any material that could suggest that MTNL had knowingly and with a deliberate intent to evade the service tax, which it was aware would be leviable, suppressed the fact of receipt of consideration for rendering any taxable service. On the contrary, the statements of the officials of MTNL, relied upon by the respondents, clearly indicate that they were under the belief that the receipt of compensation/financial support from the Government of India was not taxable. Absent any intention to evade tax, which may be evident from any material on record or from the conduct of an assessee, the extended period of limitation under the proviso to Section 73(1) of the Act is not applicable. The facts of the present case indicate that MTNL had made the receipt of compensation public by reflecting it in its final accounts as income. As stated above, merely because MTNL had not declared the receipt of compensation as payment for taxable service does not establish that it had willfully suppressed any material fact. MTNL‟s contention that the receipt is not taxable under the Act is a substantial one. No intent to evade tax can be 43 C/50439/2021 & 2 Others inferred by non-disclosure of the receipt in the service tax return."
(emphasis supplied)
66. It is, therefore, clear from the aforesaid discussion that the extended period of limitation could not have been invoked as facts had not been suppressed, much less with an intent to evade payment of customs duty.
67. The contention of the appellant that it bona fide believed that it was not liable to pay duty on the payment of royalty also deserves to be accepted. It cannot be urged by the department that merely because the belief is subsequently found to be wrong, there would be a mala fide intention in not paying customs duty. If a dispute relates to interpretation of legal provisions, it would be totally unjustified to invoke the extended period of limitation. This is what was observed by the Supreme Court in Commissioner of C. Ex. & Customs vs. Reliance Industries Ltd.31.
68. The extended period of limitation, therefore, could not have been invoked in the facts and circumstances of the case.
69. As the entire period of dispute is for the extended period of limitation, the impugned order confirming the demand by invoking the extended period of limitation cannot be sustained for this reason also.
70. The imposition of penalty upon Tej Nirmal Singh and Bharat Bandhu under section 112 (a)(ii) of the Customs Act cannot, for the reasons stated above, be sustained.
71. In view of the aforesaid discussion, the order dated 27.11.2020 passed by the Additional Director General deserves to be set aside and
31. 2023 (385) E.L.T. 481 (S.C.) 44 C/50439/2021 & 2 Others is set aside. Customs Appeal No. 50439 of 2021, Customs Appeal No. 50440 of 2021 and Customs Appeal No. 50441 of 2021 are, accordingly, allowed.
(Order pronounced on 14.10.2025) (JUSTICE DILIP GUPTA) PRESIDENT (HEMAMBIKA R. PRIYA) MEMBER (TECHNICAL) Jyoti