9911796707
TMI Blog2025 (4) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 payments made under the agreement is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 condition of sale of import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 583 Sub-total 4,62,37,536 82,55,170 3,79,82,366 % 100 17.85 82.15 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian manufacturer/importer wanted to buy components from elsewhere, first of all they should take prior approval from the technical know-how supplier and on such 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 (Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement dated 4.2.2011. It is the specific stand of the Appellants that while determining the quantum of royalty, value of imported inputs have been deducted from the Net 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ". Thus the royalty has nothing to do with the value of the imported raw-materials procured from the overseas Licensors or related foreign supplier or value of the imported 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to Licensee the non-transferable, non exclusive right. 2.1.1 to manufacture Licensed Products in its own factories in the Licensed Territory by the use of Knowhow 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the cost of raw material and the components imported from the related party which are not physically removable from the final product are included in the payment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insurance, but including the cost of the bought-out components and the cost of the imported components. Under Clause 1.04 the term "Technical Know-how" was defined to mean technical 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation of Quantum of Royalty". In the said document, they have shown calculation of royalty by deducting the import content. The calculations as provided are reproduced in Table 1 below: 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 im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tively called Licensor. In terms of the agreement the appellants have been licensed by the licensor to manufacture in its factory by the use of know-how and Licensed Patents, and sell in licensed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus the connection between the royalty paid and the imported components is quite evident. 5.7 In terms of Rule 10(1)(c), those royalty charges which are connected with the imported goods and is 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and knowhow in the manufacture of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fee was in fact not such royalty/licence fee but some other payment made or to be made as a condition prerequisite to the sale of the imported goods. It is important to bear in mind that Rule 9 refer to cost and services. Under Rule 9(1), the 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, Rule 4(3)(a) and Rule 4(3)(b) of the CVR, 1988 provides for different means of establishing the acceptability of a transaction value. In the case of Matsushita Television (supra) the pricing arrangement was not produced before the Department. In our view, the 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 adde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not differed with the decision in the case of Matushita Television & Audio Ltd. Further there was no assertion by the Revenue in that case to the effect that royalty is collected on the price inclusive of the value of imported goods. 4.7 The decision of the Hon'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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of discussions as above and finding that there is nexus between the payment of royalty and imported goods I am of the view that there is no merit in the appeal, and same is dismissed. (Sanjiv Srivastava) Member (Technical) POINTS OF DIFFERENCE In view of the orders as above, 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). (Pronounced in court on 04.02.2019) (Ajay Sharma) Member (Judicial) (Sanjiv Srivastava) Member (Technical) ORDER ON DIFFERENCE OF OPINION INTERIM ORDER NO. 27/2024 Date of Hearing: 11.09.2023 Date of decision: 08.03.2024 PER: S.K. MOHANTY Brief facts of the case are that the appellants herein are engaged, inter alia, in the manufacture of automobile components. For carrying out such manufacturing activities, they import various inputs into India, apart from procuring components from indigenous sources. In the case in hand, the appellants had imported about 40% of the inputs and the remaining 60% were procured from the indigenous sources. Out of the total quantum of imports ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods imported into India by the appellants from the related persons. However, the issue involved in the present appeal relates to includability of royalty in the value of parts/components imported into India, in terms of Rule 10(1)(c) of the Rules of 2007. The said statutory provision is extracted herein below: "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." 5. On reading of the above valuation provisions, it would reveal that Rule 10(1)(c) ibid can only be invoked, if the conditions viz., (i) royalty is relatable to the imported goods; and (ii) royalty is paid as a condition of the sale of the imported goods, are satisfied cumulatively and simultaneously. In other words, if any one of the above conditions is not fulfilled, then Rule 10(1)(c) ibid cannot be invoked. Consequently, the royalty paid by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding the value of the imported goods (whether imported from related or un-related persons). For example, if the figures mentioned in the above table for the period October, 2011 to December, 2011 is considered, then it depicts that value of sales of Rs.145,365,008/-, after exclusion of value of imported goods of Rs.27,389,650/- is Rs.117,975,358/- and 3% royalty on such net value comes to Rs. 3,539,260/. Thus, it transpires from the above table that the actual running royalty amount paid at 3% is only on the value of sales, after excluding the value of imported goods. 7. On reading of the findings recorded by the learned Member (Technical) in the interim order dated 04.02.2019, I find that such factual aspect has been incorrectly recorded therein that while determining the net sale, value of all the components has not been deducted. Since, the royalty paid is not in relation to, or in connection with the sale of imported goods, and it is paid by the appellants for using the know-how in manufacture automotive components in India, the condition laid down under clause (c) of Rule 10(1) ibid, shall not be applicable for addition of royalty in the transaction value of imported goods ..... X X X X Extracts X X X X X X X X Extracts X X X X
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