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M/s Mahindra Renault Pvt. Ltd. Versus Commissioner of Customs (Import) , Mumbai

2015 (11) TMI 1460 - CESTAT MUMBAI

Valuation of goods - Inclusion of royalty in assessable value of goods - Inclusion of lump sum fees paid/payable by the appellant to Renault under the Technical Assistance and Engineering Services Agreement - Held that:- when the Agreement terminated after production of 51000 vehicles, how the royalty would be payable in terms of the Agreement. It is also not the case of Revenue that royalty was paid in respect of 51000 vehicles. The Commissioner has clearly not understood the plain language of .....

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cision on this issue. We hold that the royalty on spare parts manufactured 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 title .....

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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 shall be accepted subject to certain restrictions specified in paras 2(a) to 2(d) of Rule 3. In the present case, the restrictions do not apply. We find that in the present case Revenue h .....

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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 paymen .....

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13/CSTB/C-I dt. 1.7.2013 has not assigned any reason while upsetting the order of the Commissioner (Appeals), the matter should be reconsidered by the Tribunal. The Civil Appeal was accordingly allowed and appeal was restored to the Tribunal for fresh consideration. This appeal arises from impugned order in appeal dated 8/6/2012 passed by Commissioner of Customs (Appeals), Mumbai. 2. The appellant is a Joint Venture between M/s. Mahindra & Mahindra (M&M) and Renault France in 51:49 share .....

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dication, 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 .....

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ense Agreement between Renault and the appellant. All the Agreements are of date 28 Sep, 2005. Although there are some other Agreements also but these do not have a bearing on the issue at hand. The findings of the Commissioner (Appeals) are based on Section 7 of the Services Agreement and Section 10 of the Technology License Agreement. In the former it is stated that the appellant will remunerate Renault lump sum fees of Fifteen million (15,000,000) Euros, for the services rendered under the Ag .....

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ankani took us through the salient features of the four Agreements. The first contention is that invoice price is to be accepted as transaction value as circumstances and facts do not indicate that the relationship between Renault (supplier) and the appellant (importer) has influenced the price of imported goods. Even the parts purchased by Renault from unrelated 3 rd part sellers on arm length basis were sold to the appellant at arms length post mark up. Secondly, he submitted that the finding .....

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luation Rules are unsustainable because the payment made under the Agreements are not made as a condition of sale of the imported parts. Neither are they alleged to have been made to off-set the prices of the imported goods. In particular the payments under the 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 payab .....

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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 of his case as below: (a) CC, Chennai vs. T .....

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T 200 (SC)]. According to him in that judgment the facts were that the imported components supplied by the Principal abroad as well as components imported from third party were subject to approval of the Principal to whom royalty was paid. Agreement also provided that all components are forwarded to the Principal for inspection. The royalty was payable at 3% of net ex-factory sale price of finished goods i.e. TVs which included the cost of imported components. In these circumstances Hon'ble .....

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when Explanation to Rule 10 of Valuation Rules was not in existence, he referred to the judgments delivered after introduction of the said Explanation. It was held therein under similar circumstances that royalty is not to be added to the price of the imported goods. He referred to Commissioner of Customs (Import), Mumbai vs. Bridgestone India Pvt. Ltd. - 2012-TIOL-166-CESTAT-MUM, Syngenta India Ltd. vs. Commissioner [2014(314) ELT 473] , BASF India Pvt. Ltd. vs. Commissioner Customs (I), [2014 .....

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-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 t .....

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sessable value. He also relied on the case of Mahindra & Mahindra (supra) which held that court should proceed on the basis that the apparent tenor of the agreement reflects real state of affairs. He submitted that in that case as the goods were supplied at the same price to the other buyers, therefore declared price was accepted. Therefore the appellant could not rely on this judgment. Ld. A.R. also relied on the judgment in the case of Matsushita Television (supra) but distinguished the ca .....

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e 10 (1)(c) was inserted. This explanation was not existing when the above judgments were delivered. As regards reliance by appellant on the case of Toyota Kirloskar. He submitted that the Matsushita case was distinguished by the Apex Court in the case of Toyota Kirloskar as the royalty payments were not related to the imported components in the latter judgment. He distinguished Toyota Kiloskar case stating that in that case the technical assistance and know-how was not given as condition preced .....

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the Apex Court. In the circumstances, we find the impugned order of no assistance to us in analyzing the issue in proper perspective. 7.1 It would be relevant to reproduce below various significant clauses of the Agreements between the appellant and Renault from whom the parts were imported. All Agreements were signed on 28/9/2005. We note that definitions of various terms used in the Agreements are common to all. "Imported Parts and Components Agreement PREAMBLE WHEREAS, under the joint Ve .....

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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 << .....

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e implemented within the milestones delineated in the time schedule described in the present Agreement. 1.1.46 <<Territory>> means the geographical limits of India, Bhutan, Nepal and Maldives. PURPOSE OF THIS AGREEMENT 2.1 The purpose of this Agreement is to set out the terms and conditions under which Renault shall exclusively sell to be Company and the Company shall exclusively purchase from Renault the Imported Parts and Components for manufacture and assembly and/or after sales s .....

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rpose of domestic sales in the Territory, then such contracts shall be structured in such a manner to compensate the Company to an extent of four (4) percent (%) of the selling price of such Engines. 6.2 Prices of the Imported Parts and Components 6.2.1. The detailed price list for imported parts and components, express on Ex. Works Automobile Dacia S.A.'s plant in Mioveni (Romania) basis (According to the Incoterms of the International Chamber of Commerce, 2000 Edition, publication 560), sh .....

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ne (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 Component .....

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bit 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 Company free of any payment to third parties and which is made available to the Company. The Technical Documentation shall comprise of, interalia, specifications, quality systems, drawings, methods inspection and test standards, after sales process and after sales methods. SECTION -3 THE SERVICES 3.1 Scope. .....

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ts within which period the Company shall attain a localization level of at least fifty-five percent (55%) by value of the total Parts and Components composing the petrol engine version of the Licensed Vehicles. 3.1.2 process engineering services rendered until the attainment of the <<Quality Confirmation>> milestone(as set out at Exhibit C of the Technology License Agreement) in order to assist the company in preparing for mass-production (including ramping up period) of the licensed .....

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ological Literature setting forth the result of such studies and analyses. 3.1.4 Ensuring that the Licensed Vehicles and version meet all the Indian regulatory requirement as of SOP and are homologated successful as per the applicable regulations in the Territory. 3.1.5 Provide training to the Company personnel or others nominated by the Company at no additional charges. 3.3 The detailed scope of the Services to be provided hereunder is set out in Appendix I. The Parties agree that the Services .....

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at 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 f .....

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al suppliers -Technical requirements release to the suppliers -Assistance to purchasing dept and suppliers on technical issues during the RFQ process -Monitoring of suppliers development activity according to ANPQP standard -Check of final compliance of parts at PSW milestone -Suppliers' ramp-up monitoring 2.1.3 Resources Of the total requirement resources, seventy (70%) will be provided by Renault and thirty (30)% will be provided by Mahindra as per the job sharing protocol entered into bet .....

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ut sourced: 55 parts approximately. Manufacturing parts at suppliers in India. Body shop -Process to be installed for assembly and handling. Pneumatic clamping and automated transfer are included in scope. Paint shop In accordance to Renault requirement: -existing installations (PT, ovens, ED, Coat etc.) to be adapted. -Underbody sealing line to be created. Robots planned -Wax shop (about 94 injection points) with full manual operation to be created. -P2 application cabin to be created. -Two spe .....

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arts 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 th .....

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facilitate subcontractor's provisions of manufacturing and assembly services as per Section 2.2; b) A non-exclusive, non-transferable and non sub-licenseable license to use the Technical Documentation and Intellectual Property to manufacture/have manufactured, or cause the Local suppliers to manufacture parts and components and Spare Parts within the Territory; provided, however that the Licensee shall be entitled to make available to subcontractor and/or Local Suppliers such portions of th .....

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ch other information as may be requested by Licensor regarding the Local supplier, (y) identification of the Parts and Component or Spare Part to be manufactured by the Local supplier and (z) the Technical Documentation required therefore. 2.7 Localised Parts and Components: During the Term, Licensor may have a separate local presence in India by itself or through it Affiliates or licensees for the manufacture and sale of vehicles, other than the Licensed Vehicles in accordance with the Joint Ve .....

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ght to use the same pursuant to this agreement SECTION 10: FINANCIAL ARRANGEMENTS 10.1 Royalty on Licensed Vehicle. In consideration for the rights granted under this Agreement and the Renault Trademarks License Agreement, Licensee shall pay to licensor in the form of a running royalty, an amount of one hundred (100) Euros for each and every Licensed Vehicle manufactured in the Territory. Such royalty shall remain due and payable to Licensor commencing on the production of the one hundred thousa .....

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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 th .....

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in principle is to rely on the existing Quality Assurance system of "Renault Automobiles to adapt it to the specificities of the L90 India Project specificities, to define roles and after risks analysis in project, to focus and manage necessary organization implementation and actions in order to achieve objectives. (Quality, Cost and Delivery) TRADEMARKS LICENSE AGREEMENT SECTION 3 FINANCIAL ARRANGEMENT 3.1 The royalty to be paid by Licensee in consideration of the rights granted in the Ter .....

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or, that is the supplier of the imported components. 8.1. Under one arrangement appearing at Section 10 of the Technology License Agreement, there are further two types of royalty payments. The first royalty payment "shall remain due and payable to licensor commencing on the production of the 140000 th license vehicle . We fail to understand that when the Agreement terminated after production of 51000 vehicles, how the royalty would be payable in terms of the Agreement. It is also not the c .....

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e spare parts manufactured and sold in the 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 decisio .....

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at 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 Section 10 is perverse. 9. The other part of the financial arrangement finds mention in Section 7 of the Services Agreement. According to this, the appellant shall remunerate Renault in the form of a lump sum fee equal to EURO 15 Million in consideration of the service .....

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td. (supra), the Hon'ble Tribunal held that "the license fee is not paid for manufacture of the components or the capital goods themselves and therefore the fee cannot be related to imported goods. The licensee fee is also not a condition of sale of the imported goods for the reason that the appellants are at liberty to procure the components from other sources also and in fact indigenously procured a high percentage of the components required for the manufacture of the car . In the pre .....

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;The reliance of the Additional Commissioner on the decision of Matsushita Television & Audio India Ltd. v. CCE - 2001 (46) RLT 506 to add the royalty is misplaced since in that case the Tribunal had come to a conclusion that Royalty payment was related to the imported components as the supplier of know-how was to "approve the imports from other sources than the Technical know-how provider. That is not the case herein. There is no 100% prior mandatory approval from M/s. GMDAT to procure .....

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eement 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 .....

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case of Mahindra & Mahindra (supra) in which the Hon'ble Apex Court held that as the Agreement between Mahindra & Mahindra and their supplier provided for supply of CKD packs of engines to Indian manufacturers at the same price as charged from the foreign supplier's other international buyers, no nexus was established between the payment for know-how transfer and that for import of engines. Ld AR also relied on para 5 of this judgment wherein the Hon'ble Apex Court held that .....

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real and that the price for the sale of the CKD packs is not the true price, and the price was determined by reckoning or taking into consideration the lump sum payment made under the collaboration agreement in the sum of 15 million. French Francs. The short question is whether the revenue has succeeded in showing that the apparent is not the real and that the price shown in the invoices does not reflect the true sale price and so section 14(1)(b) of the Act was properly invoked. According to Ld .....

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- (1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of each goods, that is to say, the price actually paid or payable for the goods 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 .....

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ing 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 shall be accepted subject to certain r .....

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s laid down in the Rules, are mandatory. The relevant Rule is Rule 10. Particularly, Rule 10 (1)(c) and Rule 10 (1)(e) read with the Explanation as under: (c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition 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; (e) all other payments actually made or to be made as a condition of sal .....

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goods may be subjected to the said process after importation of such goods. The Ld AR drew our attention to the Explanation whereby the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible. He drew our attention to the case of Commissioner of Customs Vs. J.K. Corporation Ltd. 2007 (208) ELT 485 (S.C.). In that case a lump sum payment was made for supply of license know-how technology, there was also payment for supply of equipment plant and machi .....

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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 .....

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ted goods is still not shown to be satisfied. In the present case the lump sum payment is not related to the imported goods nor is it a condition of sale for the imported goods. The lump sum fee is required to be paid as mentioned in paras above for the services provided under the Services agreement. Looking at the matter from a different aspect, we also find that the Services agreement mostly relates to activities which are not connected with the process of manufacture such as : parts localizat .....

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ht to be enhanced were the plant and equipment itself and not the raw materials/inputs and the payment was for technical know-how for setting up of the plant from the machinery imported. In the present case the payment is not for know-how of the goods imported or their being subjected to any process as such. The payment is for entire gamut of activities detailed in the Services Agreement and particularly the Exhibit-I to the Services Agreement. Thus even on considering the Explanation and after .....

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erefore their value was held includible. 10.1. We may draw upon the principle laid down in the Hon'ble Apex Court decision in the case of Ms/. Essar Steel (supra), wherein the Apex Court held that only payment for services that are paid for imported goods pre-import are liable to be added. And that too when the services are a pre-condition for the sale of the goods. In the current case we find no relationship between the payment of lump sum for services provided under the Services Agreement .....

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