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TMI Blog2024 (7) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... ido Metal Company, Japan is required to inspect the plants and other facilities of the Respondent-Assessee in India in order to ensure the quality of products being manufactured. The Respondent-Assessee is permitted to use the brand and trademarks for manufacture and sale of such licensed products. It is essential to examine whether the payment of royalty is anyway linked to the import of raw materials and whether sale of raw materials is a pre-condition in the present appeal. A reading of various clauses of Agreement indicate that the royalty is payable at 4% of the annual net sales of the products sold by the Respondent-Assessee. There is a clear formula regarding the method to arrive at the above net sales value of the products sold - The royalty payment covers transfer and use of technology providing information of technical knowledge, design formula, technical know-how, procedures for manufacturing and secret and confidential information which have been developed or acquired by M/s. Daido Metal Company, Japan which are used for the manufacture of the products viz., Half Bearings, Thrust Washers, PTFE Bearings and PTFE bimetal. In the case of BREMBO BRAKE INDIA PVT. LTD. VERSUS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rule 4 of the erstwhile Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (CVR, 1988). 2.2 The said Order-in-Original was subjected to periodical renewal in the year 2007 and the Competent Authority after verification of documents furnished by the Importer renewed the said order vide Renewal Order-in-Original No. 6629/07 dated 31.08.2007 and subsequently vide 18752/2012 dated 02.05.2012. As the Renewal Order was to expire on 02.05.2015, the Importers have requested to renew the SVB Order. They have vide Letter dated 20.04.2015 submitted the following documents:- i. Details of last 3 years transactions and data such as Bill of Entry numbers, quantity, description and invoice value in JPY and in INR ii. Annual reports for the last 3 years (2011-12, 2012-13 2013-14) iii. License and technical assistance agreement and iv. Declaration showing that there is no change in pricing pattern 2.3 The Respondent-Assessee vide letter dated 22.06.2015 had also furnished the following:- i. We hereby submit the purchase orders, quotation and proof of remittance made for each invoice as sought by you. ii. Regarding International Price list for India from our Supplier/Licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e raw-materials for the period from 2012-2013 to 2014-2015. The Assistant Commissioner in charge of Special Valuation Branch, Chennai Customs after examining all these details as submitted by the Respondent-Assessee and particularly the statements showing computation of royalty payments for the above period has come to the conclusion that the landed cost of imported components was not deducted from the Net Sales Value on which royalty is payable in terms of the Licence and Technical Assistance Agreement entered into by the Respondent-Assessee with their related foreign supplier. As the importer had paid royalty on the value of the imported components for the years 2012-2013 to 2014-2015 as evident from Form No. 15 CB statements submitted by the importer and in terms of provisions of Rule 10(1)(c) of Customs Valuation Rules, 2007, he arrived at the conclusion that the royalty paid is related to the imported goods and such payment is a condition of sale of the imported goods. As the royalty has been paid on the value of the imported raw-materials, the Original Authority has concluded that there is a nexus between the imported goods and the royalty payment. He has relied upon the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition as it is to be seen whether payment of royalty is a condition of sale of the imported goods. On perusal of the agreement it is seen that there is no clause in the agreement making payment of royalty a condition for imported goods/raw material by the licensor i.e. foreign supplier. In fact in the earlier order passed by the Assistant Commissioner of Customs (SVB) dated 2.5.2012, the Assistant Commissioner has given clear findings that there is nothing to suggest that the payment of royalty is a condition of sale of raw material, whereas the royalty payable is for the production of the licenced products and held that royalty is not addable to the value of the goods in terms of Rule 10(1) (c) of CVR 2007. In the impugned order passed for subsequent period, the LAA has simply mentioned that since royalty is related to the imported goods as value of imported goods is included in the value of the licensed product on which royalty is calculated, by implication it becomes a condition of sale for the imported goods and ordered for addition of royalty amount to the value of imported goods by relying upon the Hon'ble Supreme Court order in case of Appeal (civil) 526 of 2002 fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of laid down law by Apex Court in the case of Matsushita Electric Company [2007 (211) ELT 200 (SC)], the Committee of Commissioners is of the considered opinion that the order of the Commissioner of Customs (Appeal) may be set aside. 3.1 The Ld. Counsel Shri S. Muthuvenkataraman appearing for the Respondent-Assessee has submitted that earlier orders of the SVB were not reviewed or appealed against where there was a clear finding that the value declared represented the transaction value and there was no precondition of sale in any payment of Licence fee or royalty. 3.2 As per the Customs Valuation Rule 10(3) and interpretative notes to the same, only when payment of royalty is based on the value of imported goods, Rule 10(1)(c) could be invoked whereas in the instant case the manufacturing cost, marketing cost, overheads etc., the factors like credit notes for price difference, excise duty, packing charges, freight. insurance and cost of rejections were also deducted to arrive at the sale price. Rule 10(3) of Customs Valuation Rules contemplates that objective and quantifiable data must be available for addition of elements in terms of Rule 10 and interpretative note to Rule 10(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent on the payment of royalty by the importer. The term condition means stipulation or something on fulfilment of which something else depends . He had also adverted to the decision in the case of Ferroda India P. Ltd. [2008 (224) ELT 23 (SC)] wherein the Hon ble Apex Court held that the Department must examine the pricing arrangement and to study full details of the case to determine whether there had been any pricing arrangement to decrease the duty liability. iv. The Original Authority relying on non-deduction of value of imported components (though the imported goods were not components but raw-materials) from sale price for purposes of payment of royalty has concluded that there was nexus between the goods imported and royalty payments made. v. Valuation Rule 10(1)(c) uses the expression required to pay which clearly suggests that if the importer is contractually obliged to pay royalty to the exporter as a condition of sale and then only such amount payable as royalty can be added to the transaction value as held in the case of Haver Iban India Pvt. Ltd. Vs. Commissioner of Customs [2016 (341) ELT 410 (Tri.)]. vi. Further, reference was made to the decision in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rials supplied. 4.2 He has adverted to the decision of the Hon ble Supreme Court in the case of Matsushita Television Audio (I) Ltd. Vs. Commissioner of Customs [2007 (211) ELT 200 (SC)] which had observed that under Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, only such royalty which is relatable to the imported goods and which is a condition of sale of such goods could be added to the declared value. Relying on the above Apex Court s decision, the Ld. Authorised Representative argued that addition of royalty payments to the transaction value of the imported goods is in conformity with the provisions of Section 14 of the Customs Act, 1962 read with Customs Valuation Rules, 2007. The Ld. Authorised Representative has prayed for allowing the appeal by setting aside the impugned order dated 22.04.2016 of the Lower Appellate Authority. 5. We have heard both sides and carefully considered the submissions and evidences as available in the appeal records. 6. The main issue that arise for decision in this appeal is:- Whether the royalty payments made by the Respondent-Assessee to M/s. Daido Metal Company, Japan in terms of Licence and Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry. The Licensor grants to the Licensee the non-exclusive right to use the Technology and Know-how to use, supply and sell the Licensed Products in the Territory. The Licensee shall ensure that the Licensee's customers in the Territory (including but not limited to the Licensee's Affiliates) shall not sell the Licensed Products to customers or any third party outside of the Territory. Notwithstanding the foregoing, the Licensee may sell the Licensed Products to the Licensor and /or the Licensor's Affiliates. 2. This Agreement is identically addressed to the Licensee who has no power or authority to assign any rights granted or obligations incurred hereunder, nor to grant any sub-licenses of the rights licensed to it whether or not to its Affiliates or related companies, without the prior written consent of the Licensor. Brand and Trade Marks The Licensor will license the use of the Brand and Trade Marks to the Licensee for the manufacture and sale of the Licensed Products. Immediately upon expiry or earlier termination of this Agreement, the Licensee shall cease use of the Brand and Trade Marks forthwith. However, that in a case of the expiry or termination of the Agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable; (d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller; (e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. Explanation.- Where the royalty, licence 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. Notes to Rule 10(1)(c) 1. The royalties and licence fees referred to in rule 10(l)(c) may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment covers transfer and use of technology providing information of technical knowledge, design formula, technical know-how, procedures for manufacturing and secret and confidential information which have been developed or acquired by M/s. Daido Metal Company, Japan which are used for the manufacture of the products viz., Half Bearings, Thrust Washers, PTFE Bearings and PTFE bimetal. 11. After perusal of the Licence and Technical Assistance Agreement, we are of the considered opinion that, it can be safely inferred that payment of royalty is not completely relatable to import of raw materials as there is no condition of sale attached for their import. Distinction which exists between an amount payable as the condition of import and amount payable in respect of sale of manufactured goods using the brand name has to be understood properly. Rule 10(1)(c) of the Customs Valuation Rules, 2007 states that royalties and licence fees related to the imported goods that the buyer is required to pay directly or indirectly as a condition of sale of the goods have to be added to the transaction value of the imported goods. We find that there is no such condition that emerges from the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the fact that such goods may be subjected to the said process after importation of such goods . From the above it is clear that the royalty and the other charges can be included: (i) In case of imported goods (ii) As condition sale of goods And the explanation only added that such royalty would be includable in the case even if the imported goods have undergone the said process after importation of such goods. The department could not show that the royalty and other charges were for the imported goods and they were as a condition of sale of such imported goods. Undisputedly the royalty on technical know-how was paid only for the manufacture sub-assembly of Dis Brake Systems. Therefore the royalty and other charges are not includible and the impugned order is not sustainable and is set aside. The appeal is allowed. 14. At this juncture, we like to refer to the decision in the case of Commissioner of Customs Vs. Ferodo India Pvt. Ltd. [2008 (224) ELT 23 (SC)] wherein the Hon ble Apex court has held that:- i. Regarding payment of royalty and licence fee:- 18. Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 invoked Rule 9(l)(c). ii. Regarding the condition pre-requisite for supply of imported goods by foreign supplier:- 16. Under Rule 9(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facture of the goods and to provide total management. The restrictions in the agreement are with respect to import or export of final products by the appellant but not with respect to imports. It is also mandated that the goods were to be manufactured strictly in accordance with the specifications provided by technology provider. A license fee @ 5% had to be paid on the total net turnover of the goods. We have gone through the agreement and do not find anything in it that it also provides import of the components. Therefore, the goods were not imported under the agreement and any royalty under the agreement cannot be related to it. Further, there is no condition that the importer has to obtain the approval of the technology provider either for import or for procuring components domestically. Therefore, the royalty paid by the appellant @ 5% on the final products under the technical aid agreement cannot be said to be a condition for sale and added to the assessable value of the imported goods. It is true that the royalty is paid is as percentage of the net turnover of goods manufactured, which includes not only the component which are domestically procured but also which are importe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Strenics (supra) and held that whether payment of royalty is includible in the price or not cannot be merely on the basis of consideration clause in the agreement. 17. In this appeal, the imported raw-materials are specifically manufactured and supplied to the Respondent-Assessee s requirements. The goods were supplied at the rates quoted in 2007 and the importer has failed to supply any international price list of M/s. Daido Metal Co. Ltd., Japan. Neither he could provide any details as to costs incurred in the manufacture of imported goods. As these goods are made to the specific requirements of the Respondent-Assessee, contemporary prices of identical or similar goods are not available. As the cost of these raw-materials was included in computation for payment of royalty it can be said that there is some direct or indirect nexus between the cost of imports and the royalty payment. However, we could not find any condition of sale in these imports. 18. In view of aforesaid discussion and appreciating the ratio decidendi of judicial precedents as above, we hold that royalty payments made are not addable to the transaction value of imported goods for the period from 2012-13 to 2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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