2024 (6) TMI 61 - AT - Customs

Valuation - Inclusion of Royalty - Import of raw material for manufacture and sale of finished products - Transaction value - Royalty payments made by the appellant to Valeo, France in terms of Technology Licence Agreement - Interest u/s 28AA - Suppression of fact - Wilful mis-statement to impose appropriate penalty - invocation of extended period. HELD THAT - From Article 8 of the Agreement, it can be safely inferred that payment of royalty is not completely relatable to import of raw materials as there is no condition of sale attached for their import. Distinction which exists between an amount payable as the condition of import and amount payable in respect of sale of manufactured goods using the brand name has to be understood properly. Rule 10(1)(c) of the Customs Valuation Rules, 2007 states that royalties and licence fees related to the import goods that the buyer is required to pay directly or indirectly as a condition of sale of the goods have to be added to the transaction value of the imported goods. We find that there is no such condition that emerges from the agreement between the appellant and the VALEO, France which provides that royalty payment is a pre-condition for sale / import of raw materials. There is no evidence to establish as to how the royalty payment is linked to the import of raw materials. After reading the entire agreement comprehensively, it is to be inferred that though the payment of royalty is tagged to net sales value of the licenced products with so many deductions excepting raw materials is linked to not only supply / importation of raw materials and other goods semi-finished clutch facings, etc., but also linked to provision of technical assistance, documentation, transfer of technology, training of the personnel of the appellant both in India and abroad and also permission to use the trade mark VALEO on the products manufactured by the appellant. We find that the issue of inclusion of Royalty in transaction value is no more Res Integra in view of the ratio of the decision in the case of Kruger Ventilation Industries (North India) Private Limited Vs. Commissioner of Customs, 2022 (5) TMI 496 - CESTAT NEW DELHI which was affirmed by the Hon ble Supreme Court, by the Ld. Counsel for the Appellant. Invocation of extended period - We note that the appellant has placed the same copy of Technology Assistance Agreement before the SVB authority from 1999-2000 onwards to 2013-2014. There was no change as to computation of Net Sales value but its interpretation. The Audit team of appellant s accounts has pointed out that for computation of royalty, the cost of imported raw materials was to be added in terms of correct interpretation of the same agreement. The appellant have produced evidence that VALEO, France has waived additional royalty payable if the cost of raw materials were to be included in the Net Sales Value for period from 2000-2001 to 2011-2012. We find that the Department was well aware of the issue all along and the Appellants have provided all documents and clarifications and nothing prevented the Department from launching an investigation against the appellant from 2000 to 2012. Instead, from 2000-2012, the department was of the view that that Royalty payments were not includible in the transaction value as held in four Orders-in-Original and further, the Department never preferred to consider filing an appeal against the impugned orders. Having not done so, the department cannot invoke the extended period at a later date to demand duty on the grounds of suppression of facts by the Appellant. Hence, we do not find it legally sustainable to invoke the extended period in this case. We find that the Original Adjudicating Authority has demanded differential customs duty by including the royalty payment in transaction value of imported raw materials for the period from 2000-2001 to 2012-2013 - The appellant s declared transaction values of various imported goods including raw materials have been accepted from time to time vide Orders-in-Original dated 14.12.2000, 23.11.2007 and 10.12.2010. Even by invoking the extended period, how the differential customs duty could be demanded for 13 years which is blatantly illegal and against the provisions of customs law. It is also on record that these Orders-in-Original have been accepted and not challenged in Review proceedings. On this account only, the differential duty demand has to be set aside. The Royalty is not includible in the transaction value of the imported raw materials to demand any differential customs duty. The impugned order is set aside as being legally unsustainable and the appeal filed by the party is allowed with consequential benefits, if any, as per the law.

Summary

Issues Involved:

1. Whether royalty payments made by the appellant to Valeo, France in terms of the Technology Licence Agreement are to be added to the value of imported raw materials in terms of Customs Valuation Rules, 2007.
2. Whether the demand for differential Customs duties by such addition of royalty payments from 2000-2013 to the value of imported raw materials is legal.

Summary:

Issue 1: Addition of Royalty Payments to Value of Imported Raw Materials

The Appellant entered into a Technology License Agreement with Valeo, France for the transfer of technology to manufacture and assemble products in India. The royalty was agreed at 3.75% of the "Net Sales Value" of the product manufactured and sold. The Appellant contended that the royalty or license fee is not includible in the transaction value of the imported goods as per Section 14 read with Rule 3 of CVR, 2007 adjusted in accordance with Rule 10 of CVR, 2007, as all the conditions specified under Rule 10(1)(c) of CVR, 2007 have not been fulfilled. The royalty payment pertains to post-import activity of manufacture and sale of finished products and is not related to the imported goods or a condition of sale of the imported goods.

The Tribunal observed that the royalty payment covers various aspects such as technical assistance, training, and usage of the brand name, and is not entirely related to the import of raw materials. There is no evidence to establish that the royalty payment is a pre-condition for the sale/import of raw materials. The Tribunal relied on several judicial precedents, including the decisions in the cases of Kruger Ventilation Industries (North India) Private Limited Vs. Commissioner of Customs, Commissioner of Customs Vs. Ferodo India Pvt. Ltd., and Commissioner of Customs (Port), Chennai Vs. Toyota Kirloskar Motor Pvt. Ltd., to conclude that the royalty payment is not includible in the transaction value of imported raw materials.

Issue 2: Legality of Demand for Differential Customs Duties

The Tribunal noted that the Appellant had consistently provided the same copy of the Technology Assistance Agreement to the SVB authority from 1999-2000 onwards, and there was no change in the computation of Net Sales Value but only its interpretation. The Department was aware of the issue all along, and the Appellant had provided all necessary documents and clarifications. The Tribunal held that the extended period for demanding differential customs duty could not be invoked as there was no suppression of facts by the Appellant. The Tribunal also found it illegal to demand differential customs duty for 13 years, which is against the provisions of customs law.

Conclusion:

The Tribunal concluded that the royalty payment is not includible in the transaction value of the imported raw materials to demand any differential customs duty. The impugned order was set aside as being legally unsustainable, and the appeal filed by the Appellant was allowed with consequential benefits as per the law.