2017 (1) TMI 968 - AT - Customs

Valuation - addition of value of drawings, designs etc. in terms of Rule 9(1)(b)(iv) of Customs Valuation Rules, 1988 - inclusion of royalty in invoice - Know-How Agreement - Condition for sale - Held that - there is no express clause that the supply of technical knowhow against payment of technical knowhow fee and royalty is linked to sale. However, technical knowhow required to manufacture these products has been transferred to the appellant and it entitles them to manufacture the same. However, appellants are not free to disclose the technical knowhow to any other person in terms of clause 8 & 12 of the agreement. It is obvious that it is not open to the appellant to source the material from any person other than the foreign collaborator as it is not possible to part with the designs and drawings of the components to anyone else without concurrence of the collaborator - this aspect of the agreement has not been specifically examined by the original adjudicating authority. Appeal disposed off by way of remand.

Issues:
1. Interpretation of agreements for know-how agreements.
2. Inclusion of royalty payment in the value of imported goods under Customs Valuation Rules, 1988.
3. Examination of provisions of agreements by lower authorities.
4. Applicability of case law in similar circumstances.
5. Correctness of Commissioner (Appeals) decision.
6. Reconsideration of the issue by the original adjudicating authority.

Issue 1: Interpretation of agreements for know-how agreements

The appeals were filed against two different orders passed for two know-how agreements entered into by the appellant with a collaborator. The original adjudicating authority concluded that there was no condition of sale in the agreements, and the appellant had no obligation to import goods from the supplier. The orders stated that there was no relationship between the appellant and the foreign collaborator influencing the invoice value. The Commissioner (Appeals) observed that the lower authorities failed to examine the provisions of the agreement properly and set aside the original order. The Tribunal noted that the technical know-how provided under the agreements allowed the appellant to manufacture specific products, but they were not free to disclose this information to others without the collaborator's approval.

Issue 2: Inclusion of royalty payment in the value of imported goods under Customs Valuation Rules, 1988

The Order-in-Original correctly stated that the value of drawings and designs should not be added to the transaction value under Customs Valuation Rules, 1988. The royalty payment was deemed not addable to the invoice value as it was based on the net sale value of the product in India after deducting the value of parts and components. The agreement did not contain a condition of sale, and the technical know-how fee and royalty were not explicitly linked to the sale of products. The Tribunal concluded that the royalty payment was not includable in the value of the imported goods under the Customs Valuation Rules, 1988.

Issue 3: Examination of provisions of agreements by lower authorities

The lower authorities were criticized for not providing evidence to support their conclusion that there was no condition for sale in the agreements. The Commissioner (Appeals) correctly pointed out that the components imported by the appellant were proprietary and could not be sold at the quoted price. The Tribunal found that the original adjudicating authority did not specifically examine the clause restricting the appellant from sourcing materials from anyone other than the foreign collaborator, leading to the setting aside of the original order.

Issue 4: Applicability of case law in similar circumstances

The appellant argued that there was ample case law supporting the non-inclusion of royalty in the value of imported goods under the Customs Valuation Rules, 1988. The Tribunal acknowledged the appellant's reliance on the rules and interpretations but focused on the specific provisions of the agreements and the nature of the royalty payment to reach its decision.

Issue 5: Correctness of Commissioner (Appeals) decision

The Commissioner (Appeals) set aside the original order due to the failure of the lower authorities to properly examine the agreement provisions. The Tribunal agreed with this decision, emphasizing the need for a thorough analysis of all relevant clauses in the agreements to determine the obligations and restrictions imposed on the appellant regarding the sourcing of materials and the use of technical know-how.

Issue 6: Reconsideration of the issue by the original adjudicating authority

The Tribunal disposed of the appeal by setting aside the impugned order and remanding the matter to the original adjudicating authority for a fresh consideration of the issue. The original authority was instructed to reevaluate the case without being influenced by previous observations, ensuring a comprehensive review of the agreement provisions and their implications on the import valuation process.

This detailed analysis of the judgment highlights the key issues addressed by the Tribunal concerning the interpretation of agreements, inclusion of royalty payments, examination of agreement provisions, applicability of case law, correctness of decisions, and the need for a thorough reconsideration by the original adjudicating authority.

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