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TMI Blog2017 (3) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... technical knowhow would be includible in the cost, irrespective of the fact that the same are paid at the time of sale. The measure of the royalty on the basis of sale price is just a convenient mechanism to measure the royalty payable on account of transfer of technical knowhow. Penalty u/s 11 AC - Held that: - CAS 1 which was relevant for the said period clearly prescribed that royalty is paid in respect of technical know how is includible in the assessable value. I find that in the identical circumstances in case of Otis Elevator Co(I) Ltd(supra), [2012 (11) TMI 358 - CESTAT, MUMBAI], the Tribunal has upheld the penalty u/s 11AC. The appeal is partly allowed to the extent that revision of assessable value by inclusion of royalty in respect of product not covered by agreement is set aside - The matter is remitted to the Original adjudicating authority for re-quantification of the demand separately in each appeal - appeal allowed by way of remand. - E/1513/06, E/1450/06 & E/1611/06 - A/86069-86071/17/EB - Dated:- 27-2-2017 - Mr Ramesh Nair, Member ( Judicial ) And Mr. Raju, Member ( Technical ) Shri. Prakash Shah, Advocate for the Appellants Shri. Sanjay Hasija ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcise (Valuation) Rules, 1975, certain steps are to be taken. For convenience sake, we will reproduce this portion of the said circular as we are directly concerned therewith : It is hereby clarified that for calculation of value of the goods captively consumed under Rule 6(b)(ii) the following steps are to be followed :- (i)The cost of production of the goods has to be determined so as to include inter alia, the cost of material, labour cost and overheads including administrative cost, advertising expenses, depreciation, interest, etc. (ii)Profit before tax has to be taken from audited balance sheet of the previous year and the profit margin has to be calculated as a percentage of cost of production in the previous year as per the formula prescribed by the Cost Accounts Branch of Department of Expenditure (copy enclosed). (iii)The profit margin of the previous year as arrived at step (ii) as a percentage of cost of production has to be loaded to the cost of production of the impugned goods derived at (i) above for the current year to arrive at the assessable value of captively consumed goods. 9 . The clarification, as noted above, pertains to calculati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ld. Counsel further argued that in terms of agreement royalty is to be paid on net sale of the product @ 0.90 %. He argued that another plant transfer, there is no sale involved and therefore no royalty is payable. He further argued that royalty is payable in case of yarn however while computing demand royalty has been added even on clearances of chips made from one plant to another. 4. Ld. A.R. relied on the decision in case of Otis Elevator Co(I) Ltd Vs. Commissioner of C. Ex. Mumbai-V[2012(280) ELT 531(Tri. Mumbai)]. He argued that in terms of said decision royalty charges are includible in the value to be computed under CAS-4. 5. We have gone through rivals' submissions. 6. We find that first issue that needs to be decided is if the royalty is includible in value for the purpose of computation under CAS-4. In CAS 1 guidelines following has been provided: 6.3.11 Research Development Costs are the cost for undertaking research to improve quality of a present product or improve process of manufacture, develop a new product, market research etc and commercialization thereof. 6.3.12 Research Cost comprises the cost of development of new produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion has been made in respect to royalty paid for the product and royalty on sale. Royalty paid for the product would be royalty in respect of technical know how and the technology involved and drawing of the product whereas royalty on sale would be royalty in respect of brand name or trade name associated with the product. In terms of CAS-4 para 5.3. prescribed as under: Direct Expenses Direct expenses are the expenses other than direct material cost and direct employees costs which can be identified with the product. Direct expenses include: (i) Cost of utilities such as fuel, power, water, steam etc (i) Royalty based on production (ii) Technical Assistance / know how fees (iii) Amortized cost of moulds, patterns, patents etc (iv) Job charges (v) Hire charges for tools and equipment (vi) Charges for a particular product designing etc Thus in terms of CAS-4 royalty of the nature of the technical knowhow is includible in the assessable value, but royalty in the nature of brand or IPR value is not includible. Ld Counsel argued that royalty in the instant case is paid on the sale price of the goods. 7. Now we have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 5 and 7 reads as under : Article -5 TECHNICAL ASSISTANCE 5.1 On reasonable request of CE, AIF shall make available technicians for rending assistance, technical advice and training. Technical assistance may be provided by deputing AIF personnel to the facilities of CE or receiving CE personnel at manufacturing and research facilities of AIF or their affiliates or subsidies. The parties shall agree upon the number of technicians, the period of their stay, their activities, remuneration etceteras from case to case. Article-7 TRADE MARK During the Term of this agreement, CE shall be entitled to use AIFs registered trade marks for the products in the sale of the products, in accordance with the trade mark licence agreement entered into by the parties. On perusal of these clauses of the agreement clearly shows that royalty in the instant case is a consideration for the technology transferred by AIF Germany to the appellant. The consideration for the said royalty, however is paid on the sale price of goods. As part of the agreement the appellant are also allowed to use trade mark of AIF for sale of the product. In terms of article 7 of the said agreement, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and cannot be assumed. However issue before Hon ble Apex Court was limited to applicability of CAS-4 only. For claiming revenue neutrality, appellant have to establish that 100% of the product manufactured by the recipient plant was cleared on payment of duty and Cenvat credit was available to such clearances. In view of the above, decision of the of Glaxo Smithkline Cons. Healthcare Ltd.(supra) cannot be applied to the instant case. 11. Ld. A.R. has relied on the decision of this Tribunal in case of Otis Elevator Co(I) Ltd(supra). The said order observes as follows: 8. While going through the technical assistance agreement it is stated in the agreement as under : AND WHEREAS Otis-India has applied to the Reserve Bank of India for approval of the technical collaboration with Otis for the manufacture, sales, installation and service of the Product and has been granted a Registration for the collaboration vide No. FT 96 BYR0288 vide their letter No. EC.CO.FTTT.696/12.52.00/0-52/95-96 dated 21 May 1996. ................. ................. Under Clause THIRD (a) it is stated as under : In payment for the services to be performed by Otis pursuant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and 3.5% upto the manufacturing stage only required to be added to the cost of the components. In view of the above it is clear that royalty charges paid in respect of technical knowhow would be includible in the cost, irrespective of the fact that the same are paid at the time of sale. The measure of the royalty on the basis of sale price is just a convenient mechanism to measure the royalty payable on account of transfer of technical knowhow. 12. The next issue is regarding penalty under Section 11AC. It has been argued that penalty under Rule 25 has been dropped in the Appeal No. E/1611/06, it has been argued that there was no intention to evade payment of duty and it was appellants bonafide belief that the said royalty is not includible in the cost. It is seen that CAS 1 which was relevant for the said period clearly prescribed that royalty is paid in respect of technical know how is includible in the assessable value. I find that in the identical circumstances in case of Otis Elevator Co(I) Ltd(supra), Tribunal has upheld the penalty under Section 11AC by observing as follows: 11. We also find that appellant has not declared to the department that they were paying ..... X X X X Extracts X X X X X X X X Extracts X X X X
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