2019 (2) TMI 1507 - AT - Customs

Valuation of imported goods - inclusion of royalty paid to the overseas Licensors/foreign suppliers in assessable bvalue - Rule 10(1)(c) of the Customs Valuation Rules 2007 - difference of opinion - Held that - As there is difference of opinion the matter is referred to Hon ble President to refer the matter to Third Member to determine Whether the appeal should be allowed as held by Member (Judicial) or it should be dismissed as held by Member (Technical)?

Summary

Issues Involved:
1. Whether the royalty paid by the Appellant to the overseas Licensors/foreign suppliers is includible in the value of imported goods for assessment to duty as per Rule 10(1)(c) of the Customs Valuation Rules, 2007.

Issue-Wise Detailed Analysis:

1. Inclusion of Royalty in the Assessable Value:
The primary issue in the appeal is whether the royalty paid by the appellant to overseas licensors should be included in the value of imported goods under Rule 10(1)(c) of the Customs Valuation Rules, 2007. The adjudicating authority and Commissioner (Appeals) concluded that the royalty should be included based on the agreement clauses and the decision in Matsushita Television & Audio India Ltd. vs. CC. The appellant argued that the royalty was paid for technical know-how to manufacture automotive components in India, not as a condition of sale for the imported goods. They contended that the royalty was calculated on the net value addition in India, excluding the cost of imported components.

2. Conditions for Including Royalty under Rule 10(1)(c):
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 transaction value. The tribunal noted that two conditions must be met: (i) the royalty must be related to the imported goods, and (ii) it must be paid as a condition of sale. The tribunal found that the agreement did not mandate the import of materials from the licensors only and allowed procurement from other suppliers.

3. Analysis of the Agreement:
The tribunal examined the 'License and Technical Assistance Agreement' dated 4.2.2011, which did not require the appellant to import materials exclusively from the licensors. The agreement allowed the appellant to procure components from other suppliers. The tribunal observed that the royalty was paid on the net sales price of the manufactured products, excluding the cost of imported components. The tribunal concluded that the royalty was not a condition of sale for the imported goods and was related to the final products manufactured in India.

4. Comparison with Matsushita Television & Audio India Ltd. Case:
The tribunal distinguished the present case from the Matsushita case, where the royalty payment was a condition of sale for the imported components. In Matsushita, the agreement required the Indian importer to procure components from the foreign supplier, and the royalty was calculated on the net ex-factory sale price, including the cost of imported components. In the present case, the agreement did not have such conditions, and the royalty was paid only on the value addition in India.

5. Precedents and Tribunal's Findings:
The tribunal referred to several precedents, including Ferodo India Pvt. Ltd., Bridgestone India Pvt. Ltd., and others, where it was held that royalty payments not related to the imported goods or not a condition of sale should not be included in the transaction value. The tribunal concluded that the royalty paid by the appellant was for technical know-how and not related to the imported components. The payment of royalty was not a precondition for the import of goods, and the provisions of Rule 10(1)(c) were not applicable.

6. Separate Judgment by Member (Technical):
The Member (Technical) disagreed with the Member (Judicial) and held that the royalty should be included in the assessable value. He argued that the agreement indicated a connection between the imported goods and the royalty paid. The Member (Technical) relied on the Matsushita case and concluded that the royalty payment was related to the imported goods and should be added to the transaction value.

Conclusion:
The tribunal, by majority, held that the royalty paid by the appellant was not includible in the value of imported goods under Rule 10(1)(c) of the Customs Valuation Rules, 2007. The appeal was allowed with consequential relief. The matter was referred to the Hon'ble President to determine whether the appeal should be allowed as held by the Member (Judicial) or dismissed as held by the Member (Technical).