2016 (3) TMI 510 - AT - Customs

Valuation - Related party transaction value - inclusion of royalty - whether royalty paid is for condition of sale or not - Legality of Commissioner (Appeals) order - Held that - the Lower Appellate Authority has not discussed the issue as to how the revenue s contentions are not acceptable nor it has considered the intricacies of the agreements and the subsequent amendment agreements, billing and pricing patterns, instead, merely relied on this Tribunal s decision of ABB Ltd. It was pertinent to see that the Tribunal in the above judgement relied on Hon ble Supreme Court s decision of Ferodo India Pvt. Ltd. and the Apex Court held that if on examination of the pricing agreement in juxtaposition in EAA and if the department proves that the importers/buyer has misled the department by adjusting the price of the imported item in the guise of increased royalty/licence, then the adjudicating authority would be right in including the cost of royalty/licence fees paid in the price of the imported goods but This ruling of the Apex Court has been overlooked by the lower authorities. There was no discussions either on facts or on legal issues in his impugned order and also it had not examined in detail the agreements and amendment agreements but merely endorses the respondent s view without any discussion. Therefore, the Commissioner (Appeals) order is set aside. - Matter remanded back to decide on merits

Summary

Issues Involved:
1. Legality of the Commissioner (Appeals) order rejecting the Department's appeal and upholding the Order-In-Original.
2. Whether the declared price of imported goods from related buyers should be accepted.
3. Inclusion of royalty payments in the value of imported goods.
4. Investigation into related party transactions and their compliance with arm's length principles.

Detailed Analysis:

1. Legality of the Commissioner (Appeals) Order:
The Tribunal found that the Commissioner (Appeals) failed to provide a detailed discussion on the issues raised by the Revenue. The order lacked clear findings on the facts or legal issues, merely reproducing the Tribunal's Order of ABB Ltd. and concluding without substantive discussion. The Tribunal held that the impugned order was not a speaking order and thus liable to be set aside.

2. Acceptance of Declared Price of Imported Goods:
The respondent, a subsidiary of 3M USA, imported various products from related companies. The Special Valuation Branch (SVB) had periodically accepted the declared prices from 1991 to 2008. However, the renewal order dated 4.2.2011 raised questions about the inclusion of royalty payments. The Tribunal noted discrepancies in the agreement and subsequent amendments, suggesting that the transactions might not be at arm's length. The Tribunal emphasized the need for a detailed investigation into the pricing and billing patterns.

3. Inclusion of Royalty Payments:
The central issue was whether royalty payments should be included in the transaction value of imported goods. The respondent argued that royalty payments were not a condition of sale and thus not includible. However, the Tribunal found that the original and appellate authorities did not thoroughly examine the intricacies of the agreements and the nature of royalty payments. The Tribunal highlighted that the royalty payments were termed as "partial consideration," raising doubts about the completeness and transparency of the transactions. The Tribunal directed a re-examination of whether the royalty payments should be included in the transaction value.

4. Investigation into Related Party Transactions:
The Tribunal noted ongoing investigations by the Directorate of Revenue Intelligence (DRI) into the related party transactions. The DRI had initiated investigations based on intelligence suggesting that the transactions were not at arm's length. The Tribunal observed that the original and appellate authorities had not adequately considered the findings of these investigations. The Tribunal directed the original authority to take into account the outcome of the DRI investigations while re-examining the issue.

Conclusion:
The Tribunal set aside both the Order-in-Original and the impugned order-in-appeal, remanding the matter to the original authority for a fresh examination. The original authority was directed to consider the findings of the DRI investigations and determine the issue in light of the Tribunal's observations. The Revenue's appeal was allowed by way of remand, and the stay application filed by the Revenue was disposed of. This order is subject to the outcome of the pending writ petitions before the Hon'ble High Court of Madras.