2025 (4) TMI 656 - AT - Customs

Inclusion of royalty paid by the Appellant to the overseas Licensors/foreign suppliers in the value of imported goods for assessment to duty as per Rule 10(1)(c) of the Customs Valuation Rules 2007 - difference of opinion - the Member (Technical) dissented believing the royalty should be included in the assessable value - majority order - HELD THAT - It is an admitted fact on record that both the authorities below have accepted the transaction value under Rule 3(3)(a) of the Rules of 2007. In other words there is no dispute with respect to the declared value of the goods imported into India by the appellants from the related persons. However the issue involved in the present appeal relates to includability of royalty in the value of parts/components imported into India in terms of Rule 10(1)(c) of the Rules of 2007. Rule 10(1)(c) ibid can only be invoked if the conditions viz. (i) royalty is relatable to the imported goods; and (ii) royalty is paid as a condition of the sale of the imported goods are satisfied cumulatively and simultaneously. In other words if any one of the above conditions is not fulfilled then Rule 10(1)(c) ibid cannot be invoked. Consequently the royalty paid by the importer-buyer cannot be included in the value of the imported goods - In the present case running royalty @3% of net sales had been paid by the appellants to three numbers of licence holders as per the Licence and Technical Assistance Agreement. Further while determining the net sales value of all components (imported from related as well as unrelated persons) had been deducted. The royalty paid as indicated in column (5) is only on the value of the finished goods excluding the value of the imported goods (whether imported from related or un-related persons). For example if the figures mentioned in the above table for the period October 2011 to December 2011 is considered then it depicts that value of sales of Rs.145, 365, 008/- after exclusion of value of imported goods of Rs.27, 389, 650/- is Rs.117, 975, 358/- and 3% royalty on such net value comes to Rs. 3, 539, 260/. Thus it transpires from the above table that the actual running royalty amount paid at 3% is only on the value of sales after excluding the value of imported goods. Since the royalty paid is not in relation to or in connection with the sale of imported goods and it is paid by the appellants for using the know-how in manufacture automotive components in India the condition laid down under clause (c) of Rule 10(1) ibid shall not be applicable for addition of royalty in the transaction value of imported goods for the purpose of levy of customs duty. Further on examination of the License Agreement dated 04.02.2011 available in the case file no conditions have been prescribed for sale of the imported components. Further the technical license agreement does not stipulate import of goods from related person only. The issue arising out of the present dispute has been dealt with by the Co-ordinate Bench of this Tribunal in the case of Kruger Ventilation Indus. (North India) Pvt. Ltd. Vs. Commr. Of Customs (Import) New Delhi 2022 (5) TMI 496 - CESTAT NEW DELHI . It has been held that if the importer is free to procure the inputs from any source then it does not constitute as a condition for sale of the imported goods and does not warrant inclusion of royalty in the assessable value. Conclusion - The royalty payments should not be included in the assessable value of the imported goods. In view of the majority opinion the impugned order is set aside and the appeal is allowed in favour of the appellants.

Summary

The core legal question in this case is whether the royalty paid by the appellant to overseas licensors/foreign suppliers should be included in the value of imported goods for the purpose of duty assessment under Rule 10(1)(c) of the Customs Valuation Rules, 2007. The Tribunal was tasked with determining if the royalty payments were related to the imported goods and if they were a condition of sale for those goods.

Rule 10(1)(c) of the Customs Valuation Rules, 2007 states that royalties and license fees related to the imported goods, which the buyer is required to pay as a condition of sale, should be added to the price actually paid or payable for the imported goods, provided they are not already included in the price.

The Tribunal examined the License and Technical Assistance Agreement dated 04.02.2011 between the appellant and the licensors, which included Bosch Corporation, Japan. The agreement allowed the appellant to manufacture licensed products using the licensors' know-how. The royalty was calculated as 3% of the net sales price, excluding the cost of standard bought-out components and the landed cost of imported components that do not undergo any change during manufacturing and are physically removable from the final product.

The Tribunal noted that the appellant was free to procure components from any supplier, and in practice, the appellant imported only 22% of components from the licensors, with the remaining 78% sourced from other suppliers. The royalty was paid on the net value addition in India, excluding the value of imported components.

The Tribunal considered precedents, including the Supreme Court's decision in Matsushita Television & Audio India Ltd., which held that royalty payments related to imported goods and forming a condition of sale should be included in the assessable value. However, the Tribunal distinguished the present case from Matsushita, as there was no stipulation in the agreement requiring the appellant to import components exclusively from the licensors, nor was there any evidence that the royalty payments were a condition of sale for the imported goods.

In the present case, the Tribunal found that the royalty payments were not related to the imported goods but were for the know-how used in manufacturing the final products. The payment of royalty was not a precondition for importing goods, and the agreement did not mandate the procurement of components from the licensors. The Tribunal concluded that Rule 10(1)(c) was not applicable, as the conditions required for its invocation were not met.

Ultimately, the Tribunal set aside the impugned order and allowed the appeal, determining that the royalty payments should not be included in the assessable value of the imported goods. The decision was made by a majority, with the Member (Judicial) and the Third Member agreeing that the appeal should be allowed, while the Member (Technical) dissented, believing the royalty should be included in the assessable value.