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2017 (9) TMI 1138 - AT - CustomsValuation - royalty - includibility - whether royalty paid by the Appellant to LME for grant of access to proprietary Ericsson knowhow and Ericson IPR for undertaking the manufacture/ assembly of Radio Base Station (RBS), Mobile Switching Centers (MSC) and Base Station Controllers (BSC) used in GSM (Global System for Mobile communication) networks is includible in the value of components imported from Ericsson AB, Sweden (hereinafter referred to as EAB)? Held that - in terms of the erstwhile license agreement dated 23/12/2008, royalty was to be paid at the rate of 5 per cent of the net selling price of the licensed products, from which cost of imported components were to be excluded along with taxes. However, in the new license agreement w.e.f. 01/04/2012 the royalty amount of 5.75 per cent was to be paid on the sale value of the licensed products after exclusion of taxes but including the cost of the imported components. Since the significant percentage of the imported components have been procured from EAB Sweden, revenue has taken the stand that such royalty is to be considered as the condition of sale of the components by EAB to the appellant. The issue is similar to the judgement of Hon ble Supreme Court in Matsushita Television & Audio (I) Limited v/s Commissioner of Customs 2007 (4) TMI 5 - SUPREME COURT OF INDIA , where it was held that royalty in relation to the sale only includible in assessable value. Before adding the royalty amounts to the value of imported components, it is necessary for the department to examine both the technical assistance agreement as well as the pricing agreement. Before taking the final view in the matter, it is necessary to re-examine the matter of both license agreement as well as supply contract simultaneously, to see if the enhanced royalty was in the guise of adjustment of the price of components. Appeal allowed by way of remand.
Issues Involved:
1. Includability of royalty paid to the parent company in the value of imported components. 2. Legitimacy of the demand for differential customs duty, interest, and penalties. 3. Examination of related party transactions and valuation by the Special Valuation Branch. 4. Applicability of precedents set by the Supreme Court in similar cases. Issue-wise Detailed Analysis: 1. Includability of Royalty in the Value of Imported Components: The central issue revolves around whether the royalty paid by the appellant to LME for access to proprietary knowhow and IPR should be included in the value of components imported from EAB. The appellant argued that the royalty was strictly for access to knowhow and IPR for manufacturing licensed products in India and not a condition of the sale of imported goods. The appellant cited Rule 10(1)(c) of the Customs Valuation Rules, 2007, emphasizing that royalties should be added to the price of imported goods only if they are related to the imported goods and are a condition of their sale. The appellant also argued that the royalty is a percentage of the sales value of products manufactured in India and has no nexus with the imported components. 2. Legitimacy of the Demand for Differential Customs Duty, Interest, and Penalties: The impugned order demanded differential customs duty amounting to ?19,03,87,636 along with an equal amount of penalty under Section 114A of the Customs Act. Additionally, penalties of ?1,86,00,000 each were imposed on Shri Bharat Bandhu and Shri Tej Nirmal Singh under Section 112. The appellant contended that the valuation of goods imported from the related supplier EAB had been repeatedly examined and accepted by the Special Valuation Branch (SVB), negating any allegation of suppression. The appellant relied on several case laws, including CC v/s Ferodo India Pvt. Ltd. and Sandvik Asia Pvt. Ltd. v/s CC (Import), Mumbai, to support their argument. 3. Examination of Related Party Transactions and Valuation by the Special Valuation Branch: The appellant highlighted that the import transactions from EAB had been scrutinized and accepted by the SVB in the years 2007, 2010, and 2013. The appellant argued that since the SVB had accepted the transaction values, there could be no suppression or misdeclaration. The Revenue, however, maintained that the royalty paid should be added to the value of imported components as per the new technical cooperation agreement effective from 01/04/2012, where the royalty was calculated on the gross sale price including the cost of imported components. 4. Applicability of Precedents Set by the Supreme Court in Similar Cases: The Revenue relied on the Supreme Court judgment in Matsushita Television & Audio (I) Limited v/s Commissioner of Customs, where it was held that royalty payments related to imported components and forming a condition of sale should be added to the declared price. On the other hand, the appellant cited the Supreme Court's decision in Ferodo India, arguing that the facts of their case were similar and the decision was in their favor. The Ferodo India case emphasized that royalties and license fees should be included in the price of imported goods only if they are a condition of the sale of those goods. Conclusion and Remand: The Tribunal noted that both the technical assistance agreement and the pricing agreement must be examined to determine if the royalty payments were a condition of the sale of imported components. The Tribunal set aside the impugned order and remanded the matter to the Adjudicating Authority for re-examination, ensuring that both agreements are considered simultaneously. The Tribunal emphasized that adequate opportunities for effective hearing should be provided to all appellants before passing a de novo decision. Order Pronounced in the open court on 14/08/2017.
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