2019 (7) TMI 778 - AT - Customs

Valuation of imported goods - inclusion of royalty charge and franchisee fees paid to the foreign supplier in assessable value - Rule 10(1) and Rule 10(1)(e) of the Customs Valuation (Determination of Value Imported Goods) Rules, 2007 - HELD THAT - From the perusal of the Customs Act and the Valuation rules, it is evident that only if royalty payable is for pre-importation activity, as a condition of sale from the supplier to buyer then only it is to be added for the purpose of calculation of Customs duty in terms of Rule 10(1)(c ) of the Customs Valuation Rules read with Section 14 of the Customs Act. A perusal of the agreement along with side letter indicate that the franchise/royalty fee is paid for provisions of management, consultation, advice service and training provided to the appellant in connection with use of Body shop products and the proprietary Marks of M/s Body shop. The condition of payment of the royalty, which is contingent upon the volume of sale in the domestic market after importation of the goods has no connection with the import of goods. Once the goods have been cleared from the Customs area the same is not required to be treated as imported goods and all the activities of the management, consultation etc. is relatable to the goods which is ceased to be imported goods in terms of the Customs Act, 1962. While a large number of consignments which has been adjudicated upon in the impugned order, is provisionally assessed and the Commissioner has ordered the finalization thereof in terms of Section 18 of the Customs Act, but also imposed a penalty of equivalent amount under Section 28(4) of the Customs Act. This is clearly not permissible as per Section 18 of the Customs Act, on the ground that the relevant date for payment of duty has yet to arrive after finalization of the assessment by the proper officer in terms of the impugned order. Similarly, in case of demand pertaining to the Bills of Entry which has been finally assessed has not been re-determined by any assessment and also not permissible without filing appeal against the assessment order. Time Limitation - HELD THAT - It is on record that earlier show cause notice has been issued to the appellant on the similar set of facts and circumstances and in respect of same agreement and side letters. The case was adjudicated upon and the same was settled by the order of Settlement Commission dated June 2014. This indicates the fact that both the department and the appellant were aware of the entire fact regarding non-inclusion of royalty/franchise fee in the assessable value for the purpose of payment of customs duty - when the facts are known to both the parties there cannot be any suppression of facts requiring invocation of extended period of limitation. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Inclusion of royalty charge and franchisee fees in the assessable value of imported goods.
2. Jurisdiction of DRI to issue the Show Cause Notice.
3. Nature and applicability of royalty payments.
4. Impact of previous Settlement Commission order.
5. Provisional assessment and finalization of Bills of Entry.
6. Invocation of extended period for demand.
7. Imposition of penalties on appellants.

Detailed Analysis:

1. Inclusion of Royalty Charge and Franchisee Fees in the Assessable Value:
The primary issue is whether the royalty charge and franchisee fees paid to the foreign supplier should be included in the assessable value of imported goods for customs duty under Rule 10(1) and Rule 10(1)(e) of the Customs Valuation (Determination of Value Imported Goods) Rules, 2007. The appellant argued that these payments were for post-importation activities and not related to the sale of imported goods, relying on precedents such as Commissioner of Customs Vs. Ferodo India Pvt. Ltd. and Commissioner of Cus. (Import), Mumbai Vs. Bridgestone India Pvt. Ltd. The Department contended that these payments were a condition of sale and should be included in the assessable value, citing decisions like Matushita Television and Audio Ltd. and Indo Overseas Films.

2. Jurisdiction of DRI to Issue the Show Cause Notice:
The appellant did not dispute the jurisdiction of the DRI to issue the Show Cause Notice under Section 28(2) of the Customs Act post the 2011 amendment.

3. Nature and Applicability of Royalty Payments:
The appellant maintained that the royalty was paid for services received under the franchise agreement, unrelated to the import of goods. The Department argued that the royalty was linked to the imported goods and a condition of sale. The Tribunal found that the royalty payments were for post-importation activities, such as management and training, and not directly related to the importation of goods.

4. Impact of Previous Settlement Commission Order:
The appellant's previous settlement with the Settlement Commission did not amount to an admission of guilt. The Tribunal noted that the Settlement Commission's order did not address the inclusion of royalty/franchise fees in the assessable value for customs duty.

5. Provisional Assessment and Finalization of Bills of Entry:
The Tribunal observed that many consignments were provisionally assessed, and the Commissioner ordered their finalization under Section 18 of the Customs Act. The imposition of penalties under Section 28(4) was deemed impermissible as the relevant date for duty payment had not arrived post-finalization.

6. Invocation of Extended Period for Demand:
The Tribunal found the demand to be time-barred, as the Department was aware of the appellant's business model and royalty payments from a previous Show Cause Notice issued in 2012. There was no suppression of facts justifying the extended period of limitation.

7. Imposition of Penalties on Appellants:
The Tribunal held that penalties on the appellants were not sustainable, as the royalty payments were for services and not related to the importation of goods. The penalties imposed under Section 112(a)(ii) were set aside.

Conclusion:
The Tribunal concluded that the royalty and franchisee fees were not includible in the assessable value for customs duty, as they were related to post-importation activities. The demand was also time-barred, and penalties were unjustified. The appeals were allowed with consequential benefits as per law.