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TMI Blog2019 (2) TMI 1507X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.2.2002. In periodical review of SVB order dated 1.7.1997, the order of acceptance of value for further three years under Customs Valuation Rules, 1988/2007 was continued vide Order-in-Review dated 10.2.2009. Upon the expiry of the said Order-in- Review in the month of February, 2012, the Appellant vide its letter dated 8.2.2012 applied for periodical renewal of the last order and submitted requisite document. 3. The Adjudicating Authority while passing the Order-in- Original dated 26.6.2014 relied upon clause 8.1.3 of the agreement, and observed that the cost of components has only been excluded for the payment of royalty when the said components does not itself undergo any change, processing or treatment in the factory of the licensee and is physically removable from the assemble final product and therefore since the cost of raw material and the components imported from the related party which are not physically removable from the assemble final product are included in the payment of royalty, therefore the decision of the Hon'ble Apex Court in the matter of Matsushita Television & Audio India Ltd. Vs. CC; reported in 2007 (211) ELT 200(SC) is applicable and therefore the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007 are pari materia to Rule 9(1)(c) of the Customs Violation Rules, 1988. The said Rule 10(1)(c) of Customs Valuation Rules, 2007 is as under:- Customs Valuation Rules, 2007 Rule 10(1) - In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods,- (a) .......... (b) ......... (c) Royalties and license fees related to the imported goods, that the buyer is required to pay, directly or indirectly, as a condition of sale of the goods being values, to the extent that such royalties and fees are not included in the price actually paid or payable. Explanation. - Where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods. 7. On perusal of Rule 10(1) (c) ibid we find that the following two conditions are required to be satisfied for invoking the said Rule:- (i) Royalty is related to the imported goods, and (ii) Royalty is paid as a cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l from other foreign suppliers or even locally. Cl. 8 of the said agreement i.e. Compensation clause and in particular clause 8.1.3 which has been relied upon by the authorities below in deciding against the Appellant, is extracted as under:- "8. COMPENSATION 8.1 LICENSEE shall pay to LICENSORS, in addition to the costs separately invoiced hereunder, the following compensation for the rights granted to it: 8.1.1 A lump sum payment ("entrance fee") amounting to EUR 400 000, -. This amount shall not be credited against royalties payable according to Article 8.1.2. LICENSEE shall pay Forty percent (40%) - EUR 160 000, - of the aggregate payment of the foregoing lump sum to Bosch, Thirty percent (30%) - EUR 120 000, - to RBJP. The lump sum shares shall be paid to each LICENSOR in two installments as follows: - First installment of EUR 200 000 of the above amount payable after this Agreement has been signed by the parties and - Second installment of EUR 200 000 next year ( within one year from the date of remittance of first installment) 8.1.2 a running royalty amounting to 3% of the net sales price of all Licensed Products manufactured by LICENSEE under this Agreement. LICEN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; Total 252284904.3 55682852.08 196602052.2 % 100 22.07 77.93 9. According to Appellant, from the very beginning their case is that the royalty is paid only on the value addition achieved, after deducting the cost of imported components, be it imported from related or unrelated persons. Payment of royalty has nothing to do with the supply of components or on the price of the components and since as the foreign company had no controlling interest in the Indian buyer i.e. the Appellant, the royalty paid cannot form part of the price for the supply of components. In the absence of a specific clause indicating that the payment of royalty was connected with the supply of components, the royalty payment cannot be automatically added to the value of the goods imported. In the following decisions, it has been held that merely because the assessee has obtained the technical know-how from the foreign principal and pays royalty, in the absence of any specific provisions relating such royalty payment with supply of goods, it cannot be held that the transaction price is influenced by the relationship:- (a) Commissioner of Custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval only, the Indian importer was free to use the components in the manufacture of Colour TV. In view of the facts of that case it was held that the payment of royalty was a condition of sale and therefore, it should be included in the cost of components imported. In the instant matter, no such condition exists in the agreement and, therefore, it can very well be said that the facts of the instant case and the facts in Matsushita Television & Audio (I) Ltd. (supra) are totally different. This Tribunal in the matter of Thyssenkruppelevator (I) P.Ltd. vs. ACC (Import & General), New Delhi; 2017(356) ELT 249 (Tri-Del) while deciding the issue about Rule 10(1)(c) ibid after taking into consideration the decisions of the Hon'ble Supreme Court in the matters of Matsushita Television & Audio (I) Ltd. (supra) and Ferodo India Pvt. Ltd. (supra), has held as under:- "10. In the impugned order, Commissioner (Appeals) has cited the decision of the Hon'ble Supreme Court in the case of Matsushita Television & Audio (India) Ltd. (supra) to load the invoice value (page 31). However, we find that the Hon'ble Supreme Court in the case of Ferodo India P. Ltd. (supra) has distinguished the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale. From the records, it is clear that the running royalty and lump sum amount paid to Licensors relate only to the final products being manufactured by the Appellants and it has not relation, whatsoever, with the goods imported. The payment of running and lump sum amount is not a precondition for import of goods and hence the provisions of Rule 10(1)(c) ibid has no application. In terms of Rule 10(1)(c) ibid royalties can be added to the price of imported goods only if such royalties are related to the imported goods that the buyer is required to pay directly or indirectly, as a condition of the sale of goods being valued, to the extent that such royalties are not included in the price actually paid or payable. 13. Reliance has also been placed on the decision of the Tribunal in the case of Commissioner of Customs, Mumbai v. BASF Strenics Pvt. Ltd. - 2006 (195) E.L.T. 206 (Tri.-Mumbai) in which the Tribunal has held that "the applicant Commissioner himself has stated in the grounds of appeal that in effect the royalties are being paid on manufacturing cost plus profit plus the value of raw materials. Just because a particular formula has been designed to calculate the royalty a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed components procure irrespective of origin. In the present case there is no finding by Commissioner that the buyer had adjusted price of imported goods in the guise of enhanced royalty. Nor that the appellant was compelled to import raw material from the overseas Licensors. Nothing in the Agreements indicate any binding to buy raw material from the overseas Licensors or their Associate companies. Rather, the ld. Counsel had submitted a statement showing use of raw material sourced locally as well as from unidentified origin. As regard reliance placed by the ld. Authorised Representative on the case of Matsushita Television & Audio (I) Ltd. (supra), it was found that in the said judgment the fact was that the royalty payment to collaborator was 3% of sales turnover of final product, including the cost of imported component by which it became the condition of sale of finished goods. Whereas, in the present case the royalty is paid only on the value addition achieved, after deducting the cost of imported components, be it imported from related or un-related persons. Payment of royalty has nothing to do with the supply of components or on the price of components and since the foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Licensed Patents, and 2.1.2 to sell the Licensed Products thus manufactured in its Licensed Territory to original equipment manufacturers in India ("OEM") for the installation into their vehicles in the Licensed Territory and for the purpose of OES (sale of Licensed Products by OEM for replacement purpose) 8. Compensation 8.1 Licensee shall pay to Licensors, in addition to the costs separately invoiced hereunder, the following compensation for the rights granted to it: 8.1.1 A lump sum payment ("entrance fee") amounting to EUR 400,000, - This amount shall not be credited against royalties payable according to Article 8.1.2. Licensee shall pay Forty percent (40%) - EUR 160,000, of the aggregate payment of the foregoing lump sum to Bosch. Thirty percent (30%) - EUR 120,000 to RBUS and Thirty percent (30%) - EUR 120,000 to RBJP. The lump sum share shall be paid to each Licensor in two installments as follows: * First installment of EUR 200,000 of the above amount payable after this agreement has been signed by the parties and * Second installment of EUR 200,000 next year (within one year from the date of remittance of first installment) 8.1.2 a running royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of royalty, therefore I find that in the instant case also, the decision of the Hon'ble Apex Court in Mathushita Televisions & Audio India Ltd {2007 (2110 ELT 200 (SC)] is applicable because the cost of raw material and components imported from the related party which are not physically removable from the assemble final products are included in the payment of royalty. Hence I find that the lump sum and the running royalty paid under the present agreement is related to the imported goods and there is a condition of sale. Hence, I (find that thye payments made under the present agreement is includible in the assessable value of the imported goods under Rule 10(1)(c) of the Customs Valuation Rules, 2007." 3.3 On the basis of the above finding, adjudicating Authority ordered for making additions in the CIF value in following manner;- % addition to the CIP value =Total royalty payment (lumpsum + running royalty) in the year (in Rs) X 100 Total Assessable value of imported goods (in Rs) 3.4 Commissioner (Appeal) has concurred with the findings of the adjudicating authority stating- "9 I further find that the adjudicating authority, in the impugned order has found that the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical information required for the manufacture of colour T.V. as specified in Clause 3.01. The technical know-how which was agreed to be furnished to the appellants was to consist of quality control standard and specification of the components to be used in the manufacture of T.V. sets. Further, under Clause 2.01 it was agreed that MEI shall render to the appellants the technical assistance regarding the manufacture of the T.V. sets in the manner provided in the said clause. Under the said Clause 2.02(C), all costs, charges and expenses, incurred by the appellants for technical assistance, was to be paid by the appellants in U.S. Dollars. Further, under Clause 4.01, MEI agreed to grant to the appellants a licence to use the technical assistance and the technical know-how for the manufacture of the colour T.V. at the appellants' factory in India and also for sale of such products throughout India. Under Clause 6.01, in consideration of the technical assistance to be rendered by MEI and in consideration of the licence to be granted by MEI to the appellants it was agreed that the appellants shall pay to MEI the royalty at the rate of 3% on the net ex-factory sale price of the colou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Table 1 Royalty Calculations as per page 123 of Paper Book Amount 'Rs Period Total Sales Import Content Net Sale/ Royalty Bearing Value Total Royalty From To Oct-11 Dec-11 14,53,65,008 2,73,89,650 11,79,75,358 35,39,261 Jan-12 Mar-12 12,50,90,638 2,12,33,148 10,38,57,490 31,15,725 Apr-12 Jun-12 13,55,66,826 2,02,87,440 11,52,79,386 34,58,382 Jul-12 Sep-12 7,06,21,892 1,39,08,992 5,67,12,900 17,01,387 Oct-12 Dec-12 12,56,42,730 2,02,04,355 10,54,38,375 31,63,151 Jan-13 Mar-13 17,23,15,515 1,90,95,168 15,32,20,347 45,96,610 Apr-13 Jun-13 14,82,90,377 98,67,915 13,84,22,462 41,52,674 Jul-13 Sep-13 16,18,78,601 1,72,74,453 14,46,04,148 43,38,124 4.2 On the basis of the above calculation appellants have submitted that for determination of sale value while computing the royalty, the value of imported goods is deducted i.e. the royalty has been paid on net value addition occurred in India after importation and not on the value of the goods imported into India. Thus the royalty is not includible in the value of imported goods. 4.3 On the basis of the information furnished by the appellant, (refer para 8) of the order proposed by L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... territory (India). Licensed Products as per the agreement shall mean vacuum boosters of the type NOAH and reservoirs and tandem master cylinders of type TMCB. 5.2 As per para 2.2 and 2.3 of the agreement- "2.2 It is expressly understood that this License does not include the manufacture of 2.2.1 semi-finished goods e.g. castings, forgings, plastic parts, 2.2.2 commercially available parts, e.g. screw, rivets, resistors, seals, springs, ball bearings, cables, 2.2.3 materials and processes that refer to the composition or manufacture of material. The license includes, however, processes used in the further treatment of materials during the manufacture of Licensed Products. 2.3 Licensee shall manufacture Licensed Products and Parts therefor in its own factories only. The manufacture of parts by suppliers of Licensee requires the prior explicit written consent of Licensors in each individual case. Excluded here from are commercially available parts such as screw, rivets, resistors, seals, springs, ball bearings, cables. In case the Licensors have granted their consent, Licensee shall see to it that the supplier does not supply such parts to any third party without the conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a condition for the sale of said goods need to be added for determining the assessable value. 6.1 Appellants have heavily relied upon the decision of the Apex Court in case of Ferodo India [2008 (224) ELT 23 (SC)] while the revenue has relied upon the decision in case of Matsushita Television referred above. In my view Hon'ble Supreme Court has in case of Ferodo India clearly laid down the scope of rule 9(1)(c) and also explained its decision in the case of Matsushita. The relevant excerpts are reproduced below: "Role of Interpretative Notes to CVR, 1988 13. At the outset, it may be stated that Rule 9(1)(c) has to be read with the Interpretative Notes and when so read it authorises the Customs to add the royalties/licence fees to the assessable value only in certain conditions, namely, when the royalties/licence fees are related to imported goods; that, when the buyer is required to pay to the seller, directly or indirectly, as the condition of the sale of the goods being valued, such royalties and licence fees are not included in the transaction value. 14. One more significance of the Interpretative Notes is that it has placed the burden on the importer/buyer to prove the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the licensed product in India. Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/licence fees which are also paid to the foreign supplier. Rule 9(1)(c) stipulates that payments made towards technical know-how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under Rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. At this stage, we would like to emphasis the word indirectly in Rule 9(1)(c). As stated above, the buyer/importer makes payment of the price of the imported goods. He also incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at TAA, it is also required to look at the pricing arrangement/agreement between the buyer and his foreign collaborator. For example if on examination of the pricing arrangement in juxtaposition with the TAA, the Department finds that the importer/buyer has misled the Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he price for the imported goods had to be enhanced/loaded by adding certain costs, royalties and licence fees and values mentioned in sub-rule 9(1)(a) to 9(1)(d). It refers to "all other payments actually made or to be made as a condition of sale of the imported goods." In the present case, the Department invoked Rule 9(1)(c) on the ground that royalty was related to the imported goods, having failed it cannot fall back upon Rule 9(1)(e) because essentially we are concerned with the addition of royalty etc. to the price of the imported goods. Further, in the present case, the Department has accepted the transaction value of the imported goods. 22. In the case of Essar Gujarat Ltd. (supra), the buyer had entered into a contract with TIL for purchase of Direct Reduction Iron Plant ("the plant"). The entire agreement was for import of the plant. The agreement was subject to two conditions- (a) approval of G.O.I. and (b) obtaining transfer of licence from M/s. Midrex, USA. Without the licence from Midrex, the imported plant was of no use to the buyer. Therefore, it was essential to have the licence from Midrex to operate the plant. Therefore, it was held by this Court that procuremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Consideration Clause in such circumstances is of relevance. As stated above, pricing arrangement and TAA are both to be seen by the Department. As stated above, in a given case, if the Consideration Clause indicates that the importer/buyer had adjusted the price of the imported goods in guise of enhanced royalty or if the Department finds that the buyer had misled the Department by such pricing adjustments then the adjudicating authority would be justified in adding the royalty/licence fees payment to the price of the imported goods. Therefore, it cannot be said that the Consideration Clause in TAA is not relevant. Ultimately, the test of close approximation of values require all circumstances to be taken into account. It is keeping in mind the Consideration Clause along with other surrounding circumstances that the Tribunal in the case of Matsushita Television (supra) had taken the view that royalty payment had to be added to the price of the imported goods." 6.2 In case of Husco Hydraulics Pvt Ltd [2016 (341) ELT 113 (T-MUM)] in has after taking into account both the decisions in case of Matsushita and Ferodo concluded in favour of addition of royalty paid. The relevant excer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Apex Court in the case of J.K. Corporation - 2007 (208) E.L.T. 485, is not relevant as in that case the one time know-how fee was paid for the installation of plant and machinery. The facts were substantially different from the facts in the case of Matushita Television & Audio Ltd. (supra). 4.8 In the instant case it is undisputed that the royalty is paid on a value inclusive of the value of the imported goods. Clause 5 of the Article of definition section of the licence agreement defines net sale as follows : "This agreement is made and entered into as of this first day of April, 2007, by and between Husco International, Inc. a Delaware Corporation having offices in Waukesha, Wisconsin, USA (hereafter called "HUSCO") and HUSCO Hydraulics Private Ltd. Having its registered office at MIDC, Talegaon, Pune, Maharashtra, India (hereinafter called "the Licensee"). 1. Licensed Products shall be defined as all control valves, components and accessories manufactured or designed by HUSCO. 2. Patents shall be defined as any and all patents owned by HUSCO covering the Licensed Products in any of the countries of the Territory as hereinafter defined. 3. Trademarks shall be "HU ..... X X X X Extracts X X X X X X X X Extracts X X X X
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