2017 (4) TMI 423 - AT - Central Excise

Valuation - technical know-how fee - royalty fee - M/s Bharat Apex Industries prepares the drawings as per specification of customers and due to lack of manufacturing facilities place orders on their vendors including the Appellant for manufacture and supply of heat exchanger - whether the additional consideration would form part of assessable value? - Held that - the issue of inclusion of the value of cost of design and drawings in the assessable value is no longer res integra. In the Apex Court Judgment of Mysore Kirloskar Ltd. Vs. Commissioner of Central Excise, Belgaum 2002 (1) TMI 117 - CEGAT, BANGALORE , the Hon be Supreme Court has held that the design and drawings were not includible in the assessable value. The agreement is not merely for design and drawings but a complete contract for technical know-how, royalty, training, sales assistance, supplies and even accounting audit of M/s Bharat Apex Industries Ltd. by public accountant selected by the licensor - inclusion of consideration for design and drawings in the price of goods is proper and correct - demand with interest sustained. Royalty is payable by M/s Bharat Apex Industries Ltd. on the ex-factory sales price of the product and the same is granted to the M/s Bharat Apex Industries Ltd. for an exclusive but non-transferable license and same is being paid by M/s Bharat Apex Industries Ltd. in connection with the marketing and sale of the product as per Para 10.2 of the agreement. There is no evidence that the burden of royalty is to be borne by the appellants. Same is therefore not includible in the assessable value of the goods. The facts of the Pepsi case are entirely different as there was integral link between the obligation of the bottlers to purchase the concentrate exclusively from the assessee and use of trademark of assessee subject to payment of royalty - demand set aside for royalty. The penalty is reduced to ₹ 1,80,000/- on the basis of pro-rata value of the technical know-how and drawing and designs. Appeal disposed off - decided partly in favor of assessee.

Summary

Issues:
Inclusion of design and drawings cost in assessable value
Inclusion of royalty in assessable value

Inclusion of design and drawings cost in assessable value:
The appellants appealed against the demand for Central Excise duty based on additional consideration for design and drawings. The Licensing Agreement between the appellants and a foreign collaborator established a nexus between the technical know-how and the negotiated price of the product. The agreement included provisions for technical documentation, drawings, and various forms of assistance necessary for manufacturing the product. The statement by a company official confirmed that the technical know-how fee enabled them to secure orders and manufacture products as per the collaborator's designs. The Tribunal found the inclusion of consideration for design and drawings in the price of goods justified based on the established nexus, upholding the demand.

Inclusion of royalty in assessable value:
Regarding the royalty amount, the Tribunal noted a lack of basis provided in the Show Cause Notice or previous orders for adding royalty to the assessable value of the goods. The appellants argued that the royalty paid was for using goodwill in marketing products and did not impact the manufactured goods. The Tribunal found no evidence indicating the burden of royalty was on the appellants, unlike the case cited by the Adjudicating Authority. The Tribunal differentiated the present case from precedents where royalty was included in assessable value due to an integral link between purchase obligations and royalty payment. Consequently, the Tribunal set aside the demand for royalty inclusion in the assessable value.

Conclusion:
The Tribunal sustained the demand for design and drawings cost in the assessable value due to the established nexus, while setting aside the demand for royalty inclusion. The penalty imposed was reduced based on the pro-rata value of technical know-how and design costs. The appeal was disposed of accordingly, with the operative part pronounced in court.