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TMI Blog2008 (2) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in Civil Appeal No. 8426/02 Commnr. of Customs v. M/s Ferodo India Pvt. Ltd. 3. The buyer is the manufacturer of brake liners and brake pads in India. On 8.9.1995, a technical assistance and trade mark agreement ("TAA" for short) was entered into between the respondent (buyer/licensee) and M/s T N International Ltd., UK (foreign collaborator/licensor). Under the said agreement, the licensor claimed to be in possession of certain secret processes, formula and information. Under the agreement, the licensor agreed to permit manufacture of brake liners and brake pads (licensed products) by the licensee. Under the agreement, the licensor agreed to disclose the relevant secret processes, formula and information to the licensee. Under the agreement, the licensee was required to import/buy raw material and capital goods from the licensor. Under the agreement, the licensee was obliged to pay a licence fee along with royalty, based on the net sales value of licensed products sold, consumed or otherwise disposed of. 4. Vide order dated 22.9.1999 the adjudicating authority held that, technical know-how fees and royalty were related to the imported goods and were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Goods) Rules, 1988 ("CVR, 1988" for short) recognises the fundamental principle of arm's length price while dealing with transaction value. The Rules provide for the determination of the correct price of goods that are imported in the country or exported out of the country uninfluenced by relationship between the transacting parties. 9. Transaction Value, Deductive Value, Computed Value and Residual Value Methods are the methods prescribed in the Rules, to be followed sequentially in that order in the matter of determination of arm's length pricing. 10. To determine the assessable value for the levy of customs duty on imported goods, Section 14 of the 1962 Act has to be read with the provisions of CVR, 1988 because under Section 14(1) there is reference to a deemed price of goods imported and under Section 14(1A) such deemed price is to be determined in accordance with the CVR, 1988. 11. Rule 3 of the CVR, 1988 inter alia provides for six methods of determination of the price of imported goods. The six methods are: Method 1 - Transaction Value (Rule 4) The primary basis for customs duty is "transaction value", as defined in rule 4(1) of CVR, 1988, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the country of importation in the greatest aggregate quantity. The starting point in calculating the deductive value is the same price in the country of importation. Various deductions are necessary to reduce that price to the relevant customs value. These deductions are: (i) commissions usually paid or agreed to be paid, profits and general expenses added in connection with sales; (ii) usual transport cost and corresponding insurance are to be deducted from the price of the goods when these costs are usually incurred within the country of importation; (iii) the customs duty and other national taxes payable in the country of importation by reason of importation; (iv) value added by further processing, wherever applicable. Method 5 - Computed Value (Rule 7A) Computed value determines the customs value on the basis of the cost of production of the goods being valued plus an amount for profit and general expenses usually reflected in sales from the country of exportation to the country of importation of goods of the same class or kind. It is, therefore, the total sum of production cost and profit and general expenses. Method 6 - Fall-Back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (including royalty and licence fee payments) to the price of the imported goods is provided for in rule 9 under situations mentioned in rule 9(1) and (2). In transfer pricing, the arm's length price is inferred from various methods to avoid profit-shift from one jurisdiction to another and it is here that principle of allocation of profits comes in (i.e. in the case of transfer pricing). 16. Under rule 9(1)(C), the cost of technical know-how and payment of royalty is includible in the price of the imported goods if the said payment constitutes a condition pre-requisite for the supply of the imported goods by the foreign supplier. If such a condition exists then the payment made towards technical know-how and royalties has to be included in the price of the imported goods. On the other hand, if such payment has no nexus with the working of the imported goods then such payment was not includible in the price of the imported goods. 17. In the case of Essar Gujarat Ltd. (supra) the condition pre-requisite, referred to above, had direct nexus with the functioning of the imported plant and, therefore, it had to be loaded to the price thereof. 18. Royalties and lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority had not examined the pricing arrangement between the foreign collaborator and the buyer. It has only examined the royalty/TAA. 20. Be that as it may, in the present case, on reading TAA we find that the payments of royalty/licence fees was entirely relatable to the manufacture of brake liners and brake pads (licensed products). The said payments were in no way related to the imported items. In the present case, no effort was made by the Department to examine the pricing arrangement. No effort was made by the Department to ascertain whether there exists a price adjustment between cost incurred by the buyer on account of royalty/licence fees payments and the price paid for imported items. No effort was made by the Department to ascertain enhancement of royalty/licence fees by reducing the price of the imported items. In the circumstances, we find no infirmity in the impugned judgment of the Tribunal. In this case, the Department has gone by TAA alone. On reading TAA in entirety, we are of the view that there was no nexus between royalty/licence fees payable for the know-how and the goods imported for the manufacture of licensed products. The Department itself has invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the imported goods. In that case, the appellant was a joint venture company of MEI, Japan and SIL for obtaining technical assistance and know-how. Under the agreement, the appellants were to pay MEI a royalty @ 3% on net ex-factory sale price of the colour TV receivers manufactured by the appellants for the technical assistance rendered by MEI. The appellants were to pay a lump-sum amount of U.S. $ 2 lakhs to MEI for transfer of technical know-how. It was the case of the appellant that payment of royalty was not related to imported goods as the said payment was made for supply of technical assistance and not as a condition pre-requisite for the sale of the components. 24. One of the questions which arises for determination in this civil appeal is whether reliance could be placed by the Department only on the Consideration Clause in the TAA for arriving at the conclusion that payment for royalty was includible in the price of the important components. 25. Rule 4(3)(b) of the CVR, 1988 provides for an opportunity for the importer to demonstrate that the transaction value closely approximates to a "test" value. A number of factors, therefore, have to be taken in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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