2014 (5) TMI 203 - AT - Customs

Includility of Royalty paid in assessable value of goods imported - Determination of duty Liability - Collaboration agreement and consultancy service agreement No condition of sale - Nexus of Payment either with import of goods or with value of imported goods Rule 10(1)(e) of Valuation Rules, 2007 - Held that - Not a single clause in collaboration agreement dated 01/07/2004 and consultancy service agreement dated 01/01/2009, is found which compels assessee to procure the raw material from the foreign licensor or the group companies - There is no condition of sale incorporated in these agreements - Secondly, the royalty is computed excluding the cost of imported materials - Royalty is based on the indigenous value addition, which clearly shows that the payments made by assessee for the collaboration and the consultancy service have nothing to do with the imports undertaken by assessee - Assessee is importing only a small portion of its raw material requirements and even if he does not import any material, the royalty payments would be higher as assessee has to compute the royalty on the net sale value minus cost of imported raw materials -Thus, the payments made by the appellant has no nexus or relationship either with the import of goods or with the value of imported goods - Therefore, the conclusion drawn by the lower appellate authority is completely misconceived and has no basis whatsoever. Explanation in Rule 10(1)(e) is meant for different purpose altogether - The said explanation applies to goods imported which require further processing before being put to use - It is in that context the payments, if any, made for such processing is deemed as a condition of sale and includable in the value of the goods imported - That has nothing to do with the manufacturing processes undertaken subsequent to the importation and sale in India - Relying upon SGL Carbon India Pvt. Ltd. vs. Commissioner of Customs (Imports), Mumbai 2013 (11) TMI 885 - CESTAT MUMBAI and Maruti Udyog Ltd. vs. Commissioner of Customs, Mumbai 2013 (12) TMI 90 - CESTAT MUMBAI - If there is no nexus between the goods imported and the royalty payments made and if such payments are not a condition of sale, then royalty payments cannot be included in the assessable value of the goods imported - The royalty payments made to foreign collaborator or the consultancy service charges paid are not addable to the value of the goods imported by assessee from the foreign collaborator or the group entities - Therefore, impugned order passed by the lower appellate authority is set aside and order passed by AO dated 16/08/2011 is restored Decided in favour of assesse.

Summary

Issues:
1. Inclusion of royalty payments in the assessable value of imported goods.
2. Relatability of consultancy service charges to imported goods.

Issue 1: Inclusion of Royalty Payments

The appellant, a manufacturer of additives and consumables, entered into an agreement with a foreign entity for the license to manufacture products using industrial property rights. The agreement required the appellant to pay royalty based on the net sale value of products. Customs authorities examined the inclusion of royalty in the assessable value of imported goods multiple times, with varying conclusions. The lower appellate authority held that royalty payments were a condition for sale and should be added to the value of imported goods. The appellant argued that the majority of raw materials were procured domestically, and royalty payments were not related to imported goods. Citing previous tribunal decisions, the appellant contended that royalty payments were not includable in the value of imported goods. The Tribunal agreed, noting that royalty was based on indigenous value addition and had no nexus with imported goods. The Tribunal set aside the lower appellate authority's decision and restored the assessing officer's order.

Issue 2: Relatability of Consultancy Service Charges

The appellant also paid consultancy fees to a foreign service provider for various services. The lower appellate authority considered these charges as relatable to imported goods and a condition for sale, thus adding them to the assessable value of imported goods. The appellant argued that the consultancy services were not related to imported goods, emphasizing the lack of scrutiny on service tax payments. The Tribunal observed that the agreements did not compel the appellant to procure raw materials from the foreign entity, and royalty was calculated excluding the cost of imported materials. The Tribunal concluded that the consultancy service charges were not addable to the value of imported goods. Citing previous tribunal decisions, the Tribunal held that if there was no nexus between the imported goods and the payments, they could not be included in the assessable value. Consequently, the Tribunal set aside the lower appellate authority's decision and restored the assessing officer's order.

This judgment addressed the issues of including royalty payments and consultancy service charges in the assessable value of imported goods. The Tribunal ruled in favor of the appellant, emphasizing the lack of nexus between the payments and the imported goods, ultimately setting aside the lower appellate authority's decision and restoring the assessing officer's order.