2018 (6) TMI 654 - AT - Customs

Valuation - Extra Duty Deposit (EDD) - import of material from related supplier - inclusion of lump sum charges and royalty fees in the assessable value of the impugned imports - Held that - Rule 10 (c) of the Valuation Rules provides for addition to the price actually paid or payable for imported goods royalties and license fees related to the imported goods. However, the Rule 10 (c) also requires that such amounts are those that the buyer is required to pay, directly or indirectly as a condition of the sale of the goods. Thus there has to be a nexus between the goods imported with the royalties or license fees. As already found the nexus is only with respect to manufacturer of the goods. The payment of royalty and licence fees are not a condition of sale with respect to the goods imported from the parent company. The addition of royalties and license fees cannot be related to the imported goods, ergo, these amounts cannot be then made part of the assessable value of such imported goods. The royalty and lump sum fees paid in relation to manufacture of goods in India cannot be padded on to the declared import value of the impugned goods. The portion of the order of the original authority accepting the declared value in terms of rule 3 (3) (b) of the Customs Valuation Rules restored - the upholding of addition of lump sum amount and royalty fees to the assessable value of the impugned imports set aside. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Whether the Commissioner (Appeals) went beyond the scope of the appeal.
2. Whether the royalty and lump sum payments should be included in the assessable value of the imported goods.

Detailed Analysis:

1. Scope of the Appeal:
The appellants contended that the Commissioner (Appeals) exceeded the scope of the appeal. They argued that the reliefs claimed in their appeal were limited to challenging the inclusion of royalty amounts and the 4% addition to the invoice value for future imports. The appellants highlighted that the Department did not appeal against the original authority's acceptance of the invoice value. The Tribunal found merit in this argument, noting that the Commissioner (Appeals) should not have set aside portions of the original order that were not contested by the Department. The Tribunal emphasized that specific procedures under Section 128A of the Customs Act, 1962, must be followed, which were not adhered to in this case. Consequently, the Tribunal set aside the lower appellate authority's order that went beyond the scope of the appeal.

2. Inclusion of Royalty and Lump Sum Payments:
The main issue was whether the lump sum payment of US$ 325,000 and the running royalty of 4% (later reduced to 2%) should be included in the assessable value of the imported goods. The Tribunal examined the License and Technical Assistance Agreements and found that the payments were related to the manufacture of products in India, not the import of raw materials. The agreements did not restrict the appellants to purchase raw materials only from related suppliers, and the appellants also imported similar goods from unrelated suppliers.

The Tribunal referred to Rule 10 (c) of the Valuation Rules, which allows the addition of royalties and license fees to the price of imported goods only if they are a condition of the sale of the goods. The Tribunal found no nexus between the imported goods and the royalty payments, as the payments were related to the manufacture of goods in India. Therefore, the royalties and lump sum payments could not be included in the assessable value of the imported goods.

The Tribunal supported its decision by citing several case laws, including Can-Pack (India) Pvt. Ltd. Vs CC (I) Mumbai and Rhone Poulenc (I) Ltd. Vs CC Mumbai, which held that technical know-how fees and royalties are not includable in the assessable value of goods if the agreements do not impose conditions on the source of procurement of raw materials. Additionally, the Tribunal cited Supreme Court judgments, such as CC Chennai Vs Same Engines India Pvt. Ltd. and CC (Imports) Mumbai Vs Hindalco Industries Ltd., which reinforced that post-importation services and technical know-how fees are not to be included in the assessable value.

Conclusion:
The Tribunal set aside the impugned order, restoring the original authority's acceptance of the declared value under Rule 3 (3) (b) of the Customs Valuation Rules and nullifying the addition of royalty and lump sum payments to the assessable value of the imported goods. The appeal was allowed with consequential relief as per law. The Tribunal also disposed of the miscellaneous application for a stay of the Commissioner (Appeals)' order.