2008 (2) TMI 12 - SC - Customs

Valuation of imported goods - whether payment of royalty is includible in the price merely on the basis of consideration clause in the agreement - held no. A number of factors, therefore, have to be taken into consideration in determining whether one value closely approximates to another value

Issues Involved:
1. Whether the royalties and license fees paid by the buyer to the foreign collaborator should be included in the assessable value of the imported goods under Rule 9(1)(C) and Rule 9(1)(e) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (CVR, 1988).

Issue-wise Detailed Analysis:

1. Scope of Rule 9(1)(C) and Rule 9(1)(e) of CVR, 1988:
The court had to determine the scope of Rule 9(1)(C) and Rule 9(1)(e) of the CVR, 1988. Rule 9(1)(C) stipulates that royalties and license fees related to the imported goods, which the buyer is required to pay as a condition of sale, must be added to the transaction value. Rule 9(1)(e) covers other payments made as a condition of sale of the imported goods. The court noted that these rules are based on the principle of attribution, where certain costs, including royalties and license fees, are added to the price of the imported goods.

2. Interpretation of Rule 9(1)(C):
The court emphasized that Rule 9(1)(C) should be read with the Interpretative Notes, which place the burden on the importer to prove the correctness of the price of the imported goods. The cost of technical know-how and payment of royalty is includible in the price of the imported goods if it is a condition pre-requisite for the supply of the imported goods by the foreign supplier. If there is no nexus between the payment and the imported goods, such payment is not includible.

3. Department's Examination of Pricing Arrangement:
The court found that the adjudicating authority had not examined the pricing arrangement between the foreign collaborator and the buyer. The Department had only examined the royalty/TAA. The court highlighted that the Department needs to look at both the TAA and the pricing arrangement to determine if there is any price adjustment between the cost incurred by the buyer on account of royalty/license fees payments and the price paid for imported items.

4. Application of Rule 9(1)(C) to the Present Case:
The court noted that the payments of royalty/license fees were entirely related to the manufacture of brake liners and brake pads and not to the imported items. The Department did not make any effort to examine the pricing arrangement or ascertain if there was any price adjustment. Therefore, the court found no infirmity in the Tribunal's judgment that there was no nexus between the royalty/license fees and the imported goods.

5. Rule 9(1)(e) as an Alternative:
The court stated that Rule 9(1)(e) cannot stand alone and is a corollary to Rule 4. The Department failed to prove that the royalty/license fee was some other payment made as a condition pre-requisite to the sale of the imported goods. The court emphasized that Rule 9 refers to cost and services, and the Department had accepted the transaction value of the imported goods.

6. Reliance on Previous Judgments:
The court referred to the case of Essar Gujarat Ltd., where the payment of license fees was a pre-condition for the sale of the imported plant. However, in the present case, there were no such stipulations in the TAA. The court also referred to the case of Matsushita Television & Audio India Ltd., where the consideration clause in the TAA was relevant in determining if the royalty payment was attributable to the price of the imported goods.

Conclusion:
The court concluded that there was no infirmity in the Tribunal's orders. The payments of royalty/license fees were related to the manufacture of brake liners and brake pads and not to the imported items. The Department had not examined the pricing arrangement or provided evidence of price adjustment. Therefore, the civil appeals filed by the Department were dismissed with no order as to costs.

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