TMI Blog2015 (11) TMI 1460X X X X Extracts X X X X X X X X Extracts X X X X ..... d is not includible while arriving at the assessable value. Agreement provides for increasing localization of indigenous parts to reach a level of 50% by value of total imported parts and components. Therefore, it cannot be said that the lump sum payment is a condition of the sale of imported goods when the Services Agreement provides for local sourcing and procurement. - Exhibit-I to the Services Agreement titled as "Description of Services” which is reproduced at page 14. The purpose of this document is stated to include services for localization of parts. The Resources for localization plan are to be shared between Renault and the appellant (para 2.1.3 of Exhibit). Para 3.1.5 of the Services Agreement provides for training of company personnel. All these activities are nowhere related to import of parts. Payment for such activities cannot be included in transaction value under Section 14. Value shall be the transaction value. The second part is that the transaction value shall include engineering, design work, royalties and license fees, as specified in the Rules made. The Rules are the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Under these R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le service and sale as accessories of the Licensed Vehicle in the specified territory. Admittedly, the supplier and importer are related persons in terms of Rule 2(2) of the Customs Valuation (Determination of Value of Imported goods) Rules, 2007. The import case of the appellant was referred to Special Valuation Branch. In adjudication, the Joint Commissioner held that declared value of the goods imported is acceptable for the purpose of arriving at the transaction value under Section 14 of the Customs Act, read with Rule 3 of the Valuation Rules. However in appeal proceedings, the Commissioner (Appeals) set aside the order holding that lump sum fees paid/payable by the appellant to Renault under the Technical Assistance and Engineering Services Agreement is required to be added to the price of the imported goods, so also the royalties paid in terms of the Technology License Agreement and Trademarks License Agreement The appellant are in appeal before us against this order of Commissioner (Appeals). 3. The important facts are that the Joint venture is executed by way of various agreements particularly the Imported Parts and Components Supply Agreement, Technical Assistance Engi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technology License Agreement are payable only after commencement of production of 140,000 th licensed vehicle whereas their joint venture was terminated after 51,000 cars only. And the royalty payment under the Services Agreement is payable for acquiring the technical documents/intellectual property for manufacture marketing, distribution and sale of the licensed vehicles and for manufacture, marketing, distribution and sale of spare parts of Licensed vehicles. It is not connected to the imported parts because it was paid in respect of certain services which are independent and distinct from the event of import of parts. Further Royalty of 2% is payable only on spare parts manufactured and sold in India. Further the payment made under the Trade Mark License Agreement is only for using Logan Trade Mark' to sell, market and distribute cars manufactured by the joint venture and not as condition of sale of imported parts. In any case, in terms of Section 3.1 of the Trade Marks License Agreement, this royalty payment is included in the royalty payment under Section 10 of the Technology License Agreement. 4.2 Ld. Sr. Counsel took us through various judicial decisions in support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are to be added for the purpose for determining the value of imported goods. He submitted that in the present case cost of services are not actually paid or payable pre-import; rather services are provided after the import of the goods. 5. Ld. A.R appearing on behalf of Revenue also made us travel through important features of the Agreements. He emphasized that there is no sale of identical goods/similar goods by the supplier, in India. Renault, as per the Agreement shall not sell imported parts and components to any third party in India but shall sell exclusively to the appellant. Even appellant are not free to procure from other parties. Therefore declared transaction value was not acceptable in terms of Rule 3(3) of the Customs Valuation Rules 2007. He submitted that in the Services Agreement, the word Technical Documentation means documents relating to product and process technology to manufacture, assemble, repair and service the licensed product. Section 3 deals with scope of the service. According to him various Agreements show that payments made are related to imported goods and as a condition of sale, hence should be included in the assessable value. He also relied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Parts and Components Agreement PREAMBLE WHEREAS, under the joint Venture Agreement, diverse agreement are to be entered into to give effect to and implement the understanding of the Parties thereto and accordingly the Company has, on the date hereto, also entered into a Technology Licese Agreement with Renault (Technology Licese Agreements), Pursuant to which Renault will grant to the Company certain technology for the manufacture and assembly of a low-cost family sedan vehicle, designed and developed by Renault, known and designated as the (L 90 Vehicle); and WHEREAS, the company has agreed to purchase from Renault, knocked-down parts, components and accessories it needs to assemble the Licensed Vehicles on the terms and conditions contained in this Agreement. 1.1.2 Ancillary Agreement means this Agreement, the Technology License Agreement, the Distribution Co-ordination Agreement, Trademarks License Agreements, Technical Assistance, Engineering and Training Services Agreement and Manufacturing and Assembly Agreement. 1.1.7 Imported Parts and Components means all parts, components, and Spare Parts (unless localized in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (1) percent(%) from the 1 st of April every year, commencing from April 1 st , 2008. 6.3.2 Adjustment of Prices of the Imported Parts and Components due to Section 12. Renault shall inform the Company, as soon as possible. 7.1 Localization Plan. The Parties acknowledge that the successful implementation of their cooperation lies with Renault's, Mahindra's and the Company's ability to organize locally, within an appropriate timeline, the sourcing of the Imported Parts and Components and Spare Parts, in substitution for those Imported. (a) attainment, by one (1) year from SOP, of a localization level of (i) fifty five (55) percent (%) by value of the Complete Imported Parts and Components Set composing the petrol engine version of the Licensed vehicles and . TECHNICAL ASSISTANCE, ENGINEERING AND TRAINING SERVICES AGREEMENTS 1.26 Technical Documentation means the technical documentation relating to product and process technology as described in Exhibit A of the technology license Agreement, for the manufacture, assembly, repair and service of the Licensed Products, that Renault owns or is otherwise free to make available for use to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suitability of the Licensed Vehicle for the Territory as of the SOP. 7.1 Payment of Fees. In consideration for the Services rendered under this Agreement (including additional services, as per Section 4), the Company shall remunerate Renault as follows. 7.1.1 Remuneration . In consideration for the Services rendered as per Section 3 (and set out in Appendix 1), the company shall remunerate Renault in the form of a lump-sum fee that shall be equal to fifteen milling (15,000,000) Euros, payable in eight installments of the million eight hundred thousand and seventy five (1,875,000) each, due and payable to Renault at the following dates. DESCRIPTION OF SERVICES 1. Purpose of the documents To specify the content of technical assistance from Renault to Mahindra Renault Private Ltd. within the scope of vehicles engineering, localization and manufacturing process engineer during the project phase and for a determined period following the SOP(Start of Production). 2. Engineering services The required workload to achieve the project phase as set out below shall be estimated and agreed upon by the parties by November 30, 2005. -Renault will s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing the Technical Documentation and the Intellectual Property, (ii) the Parts and Components and (iii) the Spare Parts. 1.1.27 Master Schedule means the project plan for the launch of production of the Licensed Vehicles, including all the major milestones for the project and start of commercial production, as set out in Exhibit D to this Agreement. The parties shall make best efforts to adhere to the Master Schedule, which they agree shall be continuously updated during the life of this Agreement. 2.1 Scope of License. Subject to the provisions of this Agreement and exclusively during its Term. Licensor hereby grants to Lisensee: a) An exclusive, non-transferable and non-licensable license to use the Technical Documentation and Intellectual Property to manufacture and assemble, or cause Mahindra to manufacture and assemble, the Licensed Vehicle within the Territory; provided, however that the Licensee shall be entitle to make available to subcontractor such portions of the Technical Documentation and Intellectual Property as are required to facilitate subcontractor's provisions of manufacturing and assembly services as per Section 2.2; b) A non-exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne hundred thousand and fortieth (140,000) Licensed Vehicle and continuing for the entire Term thereafter (the Royalty Term). The royalty shall be due and payable by Licensee to licensor at the point that such Licensed vehicle crossers the factory gate of Licensee (or its subcontractor). 10.2 Royalty on Spare Parts. Licensee shall pay to Licensor a royalty of two (2) percent calculated on the aggregate quarterly sales at ex-factory supplier price before excise duty of the Spare Part manufactured and sold in the Territory during the time the licensed vehicles is being manufactured and assembled by the Licensee. As from the date commercial production of the Licensed shall pay to Licensor a royalty of five (5) percent % calculated on the aggregate quarterly sales of the spares Part manufactured and sold in the Territory, in accordance with Section 17.1(a) (hereinafter, the Spare Parts Royalty ) (b) If the Royalty is not paid when due, for any reason solely attributable to Lisensee , then the Licensor shall also have the right, upon giving a fourteen (14) days prior written notice, to withhold delivery of the CKD Parts and Components until full payment is made by License ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he territory during the time the licensed vehicle is being manufactured and assembled by Licensee. Quite apparently the royalty is related to the spare parts manufactured by the appellant and has no relation to the parts imported by the appellant. The Commissioner has not even discussed this issue. However, since the Commissioner has set aside the Order-in-Original which had held that such royalty is not includible, we find it necessary to give our decision on this issue. We hold that the royalty on spare parts manufactured is not includible while arriving at the assessable value. 8.3. Next issue is the royalty under Section 3 of the Trademarks License Agreement to be paid by the licensee in consideration of the rights granted in the Territory by Licensor to Licensee. But this royalty in terms of Section 3.1 is included in the royalty payment to be made to the Licensor under Section 10 of the Technology License Agreement. As we have held above that royalty under Section 10 is not includible, there is no question of including the royalty in terms of Section 3. We are constrained to point out that Commissioner's findings are perverse because his finding on royalty under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 (c) of the agreement cannot be read as a clause for procurement after approval from M/s. GMDAT spares from abroad. The Commissioner (Appeals) has observed about the appellants being free to import but precluded by the agreement is not an interpretation which we can uphold . In the present case, we note Exhibit-I to the Services Agreement titled as Description of Services which is reproduced at page 14. The purpose of this document is stated to include services for localization of parts. The Resources for localization plan are to be shared between Renault and the appellant (para 2.1.3 of Exhibit). Para 3.1.5 of the Services Agreement provides for training of company personnel. All these activities are nowhere related to import of parts. Payment for such activities cannot be included in transaction value under Section 14. We also find that in the case of Matsushita Television Audio India Ltd., the Apex Court held that royalty paid at 3% of sales turnover of the final product which included the cost of the imported components and, therefore, became a condition of sale of the finished goods. Therefore, this judgment quite clearly would not apply to the facts of the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf: Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf . There are two parts to the above law. The first is that the value shall be the transaction value. The second part is that the transaction value shall include engineering, design work, royalties and license fees, as specified in the Rules made. The Rules are the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Under these Rules, transaction value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind . The Ld. AR emphasized that it was because of this judgment that Explanation under Rule 10(1) of the Valuation Rules was introduced so as to clarify that such royalty will be includible in the value of the goods irrespective of the fact that such royalty, license fee etc. relates to a process which is made operational during running of the machines. He mentioned that this has been clarified in Board Circular No. 38/2007-Cus. dt. 9.10.2007. We find that the Explanation would still not help the case of Revenue. This is because the main condition of Rule 10(c) or for that matter even Rule 10 (e)] that the license fee must be paid as a condition of the sale of the imported goods is still not shown to be satisfied. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p sum for services provided under the Services Agreement and the price of the imported goods. Further, the services are not paid or payable for the imported goods pre-import. 11. An argument was made by the Ld. AR that in terms of Rule 3(3)(b), in a sale between related persons, the transaction value shall be accepted, whenever the importer demonstrates that the declared value closely approximates the transaction value of identical goods etc. And since this was not demonstrated, the transaction value cannot be accepted. We find this contention unacceptable. If the importer cannot demonstrate the value of identical goods or deductive value of identical goods, or computed value of identical goods it is because there are no such identical goods. In these circumstances the onus does not shift to the importer to prove that the declared value is not the transaction value under Section 14. In such cases it is for Revenue to come up with good evidence to reject the transaction value. Revenue has no evidence to reject the transaction value, but has only resorted to Rule 10. We have already held above that, even in terms of Rule 10, the lump sum payment is not liable to be included in the ..... 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