2025 (5) TMI 586 - AT - Customs

Valuation - Calculation of Customs duty - Inclusion of Design and Drawing charges / Royalty paid to the supplier are connected to the imported components in the transaction value of imports - Rule 10 1 b iv of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 - HELD THAT - It would appear that the original authority has presumed that addition is mandated by Rule 10(1)(b)(iv) of CVR 2007 while the lower authority felt that the charges are includible in assessable value of the imported goods in terms of Rule 10(1) (e) of CVR, 2007. Neither in Section 14 of the said Act nor in the Valuation Rules is there any provision which provides that the cost of designs and drawings/Royalty required for procurement or manufacture of goods in India by the importer or which relates to post-importation activities for assembly construction erection operation and maintenance of the plant are to be included in the price of equipments for determining their transaction value and consequently their assessable value for the purpose of levy of customs duty under the said Act. As per sub-rule (1) value of certain costs of goods and services are includible only if the same as provided in the further sub-rule (b) when such goods and services are supplied by the buyer i.e. the importer either free or at reduced costs and such goods and services are used for the production of import goods and in which case as provided in clause (iv) if such goods and services are in the form of Designs and Development that are necessary for the production of imported goods. However in the present case no goods and services were supplied by the appellants that are used in the form of Design and Development in the production of import goods. On the other hand the Design and Drawings supplied by the foreign supplier are meant for the production of customized wet processing textile machines and not related to imported goods. The condition of sale too is absent. As the design and Development charges were not paid for production of standardized products but rather for customer specific products it could not have been paid as a condition of sale in any manner. It is pertinent to note that in terms of the cited clauses 8 and 12 of the agreement the Appellant has a discretion not to buy certain raw materials from their parent company and will have to pay royalty on manufactured goods whether or not there are imports from the overseas supplier in a given period. This shows that the royalty payment is not related to and is not the condition of sale for the imported goods and therefore Rule 10(1)(c) conditions are not satisfied. Hence royalty is not includible in the value of the imported goods. In the case of Brembo Brake India Pvt. Ltd. vs. CC 2014 (11) TMI 22 - CESTAT MUMBAI it was held that royalty and other charges not includible in assessable value if Payment of royalty and other charges not for imported goods and not a condition of sale of goods. Conclusion - Design and Drawing Charges / Royalty is not includible in the transaction values of imported goods in terms of Customs Valuation (Determination of Value of Imported Goods) Rules 2007. Appeal allowed.

The primary legal issues considered by the Tribunal revolve around the proper customs valuation of imported goods, specifically whether payments made for design and drawing charges and royalty fees to a related overseas supplier must be included in the assessable value of imported components under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR). The core questions include:

1. Whether the Licensing Agreement payment for design and drawing charges constitutes a condition of sale of the imported goods and is thus includible in the transaction value under Rule 10(1)(b)(iv) or Rule 10(1)(e) of the CVR.

2. Whether royalty payments made to the foreign parent company are related to the imported goods and are a condition of sale, thereby mandating inclusion in the customs assessable value under Rule 10(1)(c) of the CVR.

3. Whether the Customs authorities had jurisdiction and followed due process in adding these charges to the assessable value, and whether the principles of fair valuation and procedural propriety were observed.

Issue-wise detailed analysis:

1. Inclusion of Design and Drawing Charges in Transaction Value

Legal framework and precedents: Rule 10(1)(b)(iv) of the CVR provides for addition to the transaction value of the value of engineering, development, artwork, design work, and plans undertaken outside India and necessary for the production of the imported goods. Rule 10(1)(e) covers "all other payments" made as a condition of sale of the imported goods. The Supreme Court in a precedent clarified that additions under Rule 10 must relate to pre-importation costs and be a condition of sale.

Court's interpretation and reasoning: The Tribunal found that the design and drawing charges were paid under a Licensing Agreement to acquire technology for manufacturing customized wet processing textile machines in India. These charges related to post-importation activities, i.e., fabrication and manufacture of machines using imported stainless steel sheets and parts, rather than to the imported goods themselves. The design and drawings were not supplied by the buyer (importer) for production of the imported goods and were not a condition of sale of the imported components.

Key evidence and findings: The Licensing Agreement and related documents showed a one-time payment for technology transfer. The imported goods were raw materials (SS sheets and standard parts), and the design charges pertained to the manufacture of finished machines, not the imported components. There was no contractual condition linking payment of design charges to the importation of goods.

Application of law to facts: Since the design and drawing charges were for post-import manufacturing processes and not a precondition of sale or import of the goods, the Tribunal held that these charges cannot be included in the transaction value under Rule 10(1)(b)(iv) or Rule 10(1)(e). The original and lower appellate authorities' addition of these charges to the assessable value was therefore unsustainable.

Treatment of competing arguments: The Department argued that the importer and supplier were related parties and that the design and drawing charges were necessary for production, warranting inclusion under Rule 10. The Tribunal rejected this, emphasizing the absence of a condition of sale and the distinction between costs related to imported goods and those related to post-import manufacturing activities.

Conclusion: Design and drawing charges paid under the Licensing Agreement are not includible in the customs value of imported goods.

2. Inclusion of Royalty Payments in Transaction Value

Legal framework and precedents: Rule 10(1)(c) of the CVR mandates inclusion of royalties and license fees in the transaction value only if (a) they relate to the imported goods, (b) are required to be paid by the buyer, and (c) are a condition of sale of the imported goods. The Supreme Court and Tribunal decisions have consistently held that royalty payments not linked as a condition of sale to imported goods are not includible.

Court's interpretation and reasoning: The Licensing Agreement stipulated royalty payments based on a percentage of net sales of licensed products, not on import of raw materials. The importer had discretion not to source raw materials from the foreign supplier but was still liable to pay royalty on manufactured goods. This demonstrated that royalty payments were independent of import transactions and related to post-import manufacturing and sale.

Key evidence and findings: The Agreement clauses showed royalty payable on sales of finished products, not as a precondition for import of raw materials. The Department failed to establish a nexus between royalty payments and imported goods or that royalty was a condition of sale of imported goods.

Application of law to facts: Since the royalty payments were not a condition of sale of imported goods and related to manufacture and sale of finished products, they are not includible under Rule 10(1)(c). The Tribunal relied on consistent judicial precedents holding that royalty payments for technical know-how or brand use, unconnected to import conditions, cannot be added to customs value.

Treatment of competing arguments: The Department sought to include royalty payments on the ground of related party transactions and alleged linkage to imports. The Tribunal rejected this, noting the absence of contractual conditions linking royalty to imports and the discretion given to the importer to source materials elsewhere.

Conclusion: Royalty payments under the Licensing Agreement are not includible in the customs transaction value of imported raw materials.

3. Jurisdiction and Procedural Issues

Legal framework: The appellant challenged the jurisdiction of the Customs authorities to make additions without proper invocation of review or revision jurisdiction under Section 129E of the Customs Act. The appellant also alleged bias and procedural impropriety.

Court's interpretation and reasoning: The Tribunal noted the appellant's contention but did not find merit in the jurisdictional challenge sufficient to overturn the substantive findings. The focus remained on the correct application of valuation rules.

Key evidence: The appellant's reliance on a High Court judgment was noted, but the Tribunal proceeded to decide on merits of valuation.

Conclusion: No substantive jurisdictional infirmity was found to invalidate the proceedings, but the substantive additions were held unsustainable on valuation principles.

Significant holdings:

"Neither in Section 14 of the said Act nor in the Valuation Rules is there any provision which provides that the cost of designs and drawings/Royalty required for procurement or manufacture of goods in India by the importer or which relates to post-importation activities for assembly, construction, erection, operation and maintenance of the plant are to be included in the price of equipments for determining their transaction value and consequently their assessable value for the purpose of levy of customs duty under the said Act."

"The design and drawing charges were not paid for production of standardized products but rather for customer specific products it could not have been paid as a condition of sale in any manner."

"The royalty payment is not related to and is not the condition of sale for the imported goods and therefore, Rule 10(1)(c) conditions are not satisfied. Hence, royalty is not includible in the value of the imported goods."

"Rule 10(1)(c) of Customs Valuation Rules, 2007 states that royalties and licence fees related to the import 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 which provides that royalty payment is a pre-condition for sale / import of raw materials."

"The department could not show that the royalty and other charges were for the imported goods and they were as a condition 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 Tribunal conclusively held that payments for design and drawing charges and royalty fees made under the Licensing Agreement to the foreign parent company are not includible in the customs transaction value of imported stainless steel sheets and standard parts used in manufacture of wet processing textile machines. The additions made by the original and lower appellate authorities under Rule 10(1)(b)(iv), 10(1)(e), and 10(1)(c) of the CVR were set aside. The appeal was allowed with consequential benefits.

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