2016 (9) TMI 775 - AT - Customs

Valuation - Linkage between royalty paid for transfer of know-how and sale of capital goods - agreement for know-how licence and technical assistance agreement - sale and purchase agreement - holding-subsidiary relationship - is there any direct link between the two agreements linking the royalty paid to sale of capital goods? - Held that - there is no direct link between the two agreements although both the agreements have executed on the same day. A perusal of both the agreements show that there is nothing to link the two agreements. Nowhere in the agreement it can be seen that there is any link between the two. Under these circumstances, it cannot be said that the sale and purchase agreement has been executed subject to the execution of know-how licence and technical assistance agreement. In these circumstances it cannot be said that the royalty paid for transfer of know-how is linked to the sale of capital goods. The decision of the case Commissioner Of Customs Versus M/s. Essar Steel Ltd 2015 (4) TMI 486 - SUPREME COURT would apply as the activities covered under the know-how agreement are of post importation activities. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Whether two agreements for know-how license and technical assistance, and sale and purchase are independent and separate?
2. Whether the royalty paid for transfer of know-how is linked to the sale of capital goods?

Analysis:
1. The appellant imported machinery from a German company and entered into two agreements with them - one for know-how license and technical assistance, and the other for sale and purchase. The Revenue challenged the transaction value accepted by the GATT Valuation Cell. The Commissioner (Appeals) set aside the order, leading the appellants to appeal before the Tribunal. The appellant argued that the agreements are independent, citing precedents and distinguishing the cases of other companies. The AR contended that since the agreements were executed on the same day with common parties, the decision in Essar Gujarat Ltd. is applicable.

2. The Tribunal examined the submissions and found no direct link between the two agreements. Despite being executed on the same day, the agreements did not indicate any connection. It was observed that the sale and purchase agreement was not subject to the know-how license agreement. Therefore, the Tribunal concluded that the royalty paid for know-how transfer was not linked to the sale of capital goods, allowing the appeal in favor of the appellant.

The judgment emphasized the importance of analyzing the specific terms and conditions of agreements to determine their interrelation. It highlighted the need for a clear connection between agreements to establish any link between transactions. The decision provided clarity on the distinction between separate agreements and the implications of such arrangements on taxation and valuation matters.