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2016 (3) TMI 510 - CESTAT CHENNAI

2016 (3) TMI 510 - CESTAT CHENNAI - TMI - Valuation - Related party transaction value - inclusion of royalty - whether royalty paid is for condition of sale or not - Legality of Commissioner (Appeals) order - Held that:- the Lower Appellate Authority has not discussed the issue as to how the revenue's contentions are not acceptable nor it has considered the intricacies of the agreements and the subsequent amendment agreements, billing and pricing patterns, instead, merely relied on this Tribunal .....

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/licence fees paid in the price of the imported goods but This ruling of the Apex Court has been overlooked by the lower authorities. There was no discussions either on facts or on legal issues in his impugned order and also it had not examined in detail the agreements and amendment agreements but merely endorses the respondent's view without any discussion. Therefore, the Commissioner (Appeals) order is set aside. - Matter remanded back to decide on merits - Appeal No. C/S/42377/2013 & C/42422/ .....

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brief facts of the case are that respondents M/s.3M India Ltd., Bangalore imported capital goods, raw materials, finished products from their principal company M/s.3M USA and their related subsidiaries located in other countries. Since the respondent and the supplier are related, the issue was dealt with by Special Valuation Branch by issue of Circular No.138/91 dt.23.10.91. Subsequently, the said circular was renewed / reviewed periodically vide OIO No.326/2001-SVB dt. 30.3.2001, OIO No.3349/2 .....

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ls) on the grounds that adjudicating authority has erred in accepting the declared price and also holding that royalty paid is not a condition of sale of imported goods. Revenue also in their grounds of appeal contended that royalty is addable in the imported goods under Rule 10 (1) (c) of Customs Valuation Rules, 2007. The LAA in his impugned order dt. 30.8.2013 upheld the OIO and rejected the Revenue's appeal. Hence the Revenue filed the present appeal before Tribunal. 4. The respondent fi .....

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ment has accepted the transaction value and periodically renewed the said orders. While renewing the orders for the period from 2011 to Feb'2014, there was a change in agreement by the respondent for paying royalty as per their amendment to the agreement. She drew our attention to page 17 at para 2 and findings at para-6 of the OIA and submits that amendment of the royalty agreement was renewed prospectively and the respondent did not inform that they paid royalty. She drew our attention to .....

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sactions between the respondent and M/s.3M USA and other related subsidiaries based on the specific intelligence that the transactions were not at arms length and the investigation is yet to complete. She submitted copy of DRI letter dt. 6.2.2014 and submits that DRI could not finalize investigation as the respondents were not co-operative, not submitted relevant agreements. She submits that SVB order has lapsed in Feb'2014 and produced copy of letter dt. 15.7.2015 issued by CC-III Customs H .....

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evision & Audio India Ltd. Vs CC New Delhi-2001 (136) ELT 1093 (Tri.-Del.) (2) Matsushita Television & Audio (I) Ltd. Vs CC-2007 (211) ELT 200 (SC) (3) Excel Production Audio Visuals P. Ltd. Vs Commissioner-2015 (321) ELT A49 (SC) She pleaded to set aside the orders and to remand the matter to original authority in view of pending investigation. 9. Learned Advocate representing the respondent submitted two written synopsis and also copy of Profit & Loss Account, Annual Reports for th .....

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lectual Property Agreement including the Nature of Royalty Clause 5.3 of the agreement and accepted the transaction as there is no nexus between the royalty paid and the imported goods under Rule 10 (1) (c) of CVR. She further explained in detail the relevant clause of agreement dt. 1.7.2006 and referred to amendment to the IP Agreement dt. 1.7.2006. The Recital of the agreement is given in clauses A, B, C, D and the definitions has been recorded in Article I from para 1.1 onwards. She particula .....

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ent, though there was a consideration, royalty was provided under Article V i.e. 5.1 to 5.4. As per clause 5.8 of Article V, she submits that their principal company viz. M/s.3M Company, USA has waived its right to receive royalty payments and the termination of this waiver shall constitute an amendment of this agreement. Ld. counsel submits that as per this agreement there was no payment of royalty till 30.6.2009. She further submits that there was an amendment to the said agreement which was m .....

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008. In support of her contention, she submitted Profit & Loss Account and Annual Reports of the company for the year 2008 to 2011 and drew our attention to page 48 of the P&L Account and the Annual Report and submits that there is no mention of any royalty payment for the year 2008. She drew our attention that adjudicating authority mentioned in his order that there was flow back for the year 2008 onwards which is not correct. In support of her plea, they have submitted a copy of Charte .....

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ts for each year and particularly for the year 2009 which clearly indicates royalty payments for July-Sep 2009, Oct-Dec 2009 and also for the period January to March 2010 showing a total payment of ₹ 5,15,63,747 for all the three quarters which is as per the Profit & Loss Account indicated at page 52 of the Annual Report for 2009-10. The same worksheet was also provided for the subsequent periods. She further submits that for all these royalty payments they have paid service tax under .....

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per sub-clause (c), there is no obligation for licensee to purchase any goods from licensor. She submits that though there was no obligation, they are importing 80% from their principal as well as from other related subsidiaries and 20% are purchased from unrelated buyers like grinding wheels, abrasives, adhesive hypo resins directly which are used in the manufacture of products for domestic and export. She further submits that as per the agreement Software has been clearly spelt out in Article .....

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- 2008 (224) ELT 23 (SC) and referred to para-20 of the judgement wherein the Hon'ble Apex Court taking into account the various clauses of the agreement has clearly held that there was no nexus between the royalty payable for the knowhow and the goods imported for manufacture of licensed products. She also relied on the following case laws :- (1) Wep Peripherals Ltd. Vs CC Chennai-2008 (224) ELT 30 (SC) (2) ABB Ltd. Vs CC (Import) Mumbai-2013 (288) ELT 296 (Tri.-Mumbai) (3) Johnson & J .....

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s that the transaction is not at arms length. For this very reason, the DRI is investigating the entire issue. She also relied on the Supreme Court order relied by the respondent in the case of CC Vs Ferodo India Pvt. Ltd. (supra), particularly relied para-18 of the judgement and submits that Supreme Court also said that if the department finds that the importer/buyer has misled the department then the adjudicating authority would be right in including the cost of royalty/licence fees payment in .....

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aries including other related subsidiaries which is clearly brought out in the OIO and concluded that the appellant followed uniform price policy. 12. We have carefully considered the submissions of both sides and examined the records and the Hon ble High Court of Madras Order dated 9.12.2014. The issue for consideration in the Revenue Appeal is whether Commissioner (Appeals) Order is legal and proper in rejecting the Department appeal and upholding the Order-In-Original accepting the transactio .....

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rity rejected the Department appeal. 14. On perusal of the impugned order dated 30.8.2013, we find that the Lower Appellate Authority has not discussed the issue as to how the revenue's contentions are not acceptable. Para.6 of his Order begins with his findings and in the said para he merely reproduced the Tribunal s Order of ABB Ltd. cited by the respondents, and at Para 8, he concluded in view of the above discussions and facts and legal position there is no infirmity in the Assistant Com .....

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ts of the case. The fact that the respondent is related subsidiary of 3M USA and its other subsidiaries located across the world is not in dispute and the respondents started importing 3M products since 1991, various products, capital goods, raw materials, finished goods for manufacture of excisable goods or for trading. On perusal of the respondent companys Annual Report 2008 submitted by them, we find at page - 7 it is stated that 3M a company of 75000 people with a century old history prod .....

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Labels 2. Surgical and Dental Products 3. Paint Polishes 4. Abrasives 5. Others (individually less than 10% of the total stock) 16. As seen from para (9) of the Schedule 14 of the reports, the ratio of imported and indigenous raw materials is 83% and 17% respectively and majority of imports were sourced from their own related overseas suppliers and their associated subsidiaries. It is pertinent to see from the said Annual Report that their principal company 3M USA has more than 100 Related Fello .....

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t it" pads, Road safety signs, graphics etc. This shows that the 3M USA controls the rights of 50,000 products, through its related subsidiaries and the transactions are within 3M Group. 17. Considering the above background of facts and the range of products vis-a-vis their relationship with principal company ie. 3M USA and their associated subsidiaries across the world, we examine the issue of whether the original authority & LAA are correct in accepting the declared price and holding .....

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signing of the agreement by the parties which is normally shown in any agreement. [with a phrase: on this ____ day of the ______ month of the ____year]. Even the signature of the signatories do not show the date. Only the "Stamp paper" issued by Govt. of Karnataka reveals the date of issue as "16.1.2006" and we can only presume that the said agreement was signed after the date or later. 19. The scope of the Intellectual Property Agreement are set out in various clauses at Rec .....

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e reproduced as under :- A. 3M is an innovative multinational company with its headquarters in the United States and affiliates in more than 60 countries around the world. Collectively referred to as the worldwide 3M corporate family, 3M and its affiliates sell 3M products in more than 180 countries. 3M manages the worldwide 3M corporate family on a global basis to maximize the overall benefit to that corporate family, and thus to shareholders of 3M. 3M has a long and established history of deve .....

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l property rights that provide the worldwide 3 M corporate family with a substantial competitive advantage in manufacturing and selling products, and providing services, around the world. 3M IPC continuously obtains new intellectual property rights from 3M, other members of the worldwide 3M Corporate family, and third parties, and licenses those intellectual property rights to 3M, other members of the worldwide 3M corporate family, and third parties in exchange for royalties or other considerati .....

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to conduct and expand its business. Accordingly, the intellectual property rights licensed hereunder will enable Affiliate to conduct manufacturing operations and other general business operations normally conducted by members of the worldwide 3M corporate family. D. 3M and Affiliate may have decided, or may decide, that it is in their best interest and in the best interest of the worldwide 3M corporate family or Affiliate to manufacture certain 3M products. To protect Affiliates investment in .....

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filiate wishes to obtain, a license to conduct such operations. 3M and 3M IPC support Affiliates manufacturing and other general business operations by constantly expanding and refreshing the portfolio of intellectual property rights that are provided to Affiliate. In this manner, Affiliate will continue to receive 3Ms most current developments, information, research, systems and techniques as they relate to 3Ms administrative, engineering, information technology, laboratory, management, manu .....

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s. To facilitate the transfer of technologies, products, services and intellectual property rights among the members of the worldwide 3M corporate family. 3M, 3M IPC, and Affiliate therefore wish to enter into this Agreement. This Agreement provides for the transfer of technologies, products and services, and for the licensing of intellectual property rights from 3M and 3M IPC to Affiliate. Other agreements among 3M, 3M IPC and Affiliate provide for the transfer to 3M and 3M IPC of intellectual .....

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liates companies will benefit from the corresponding efforts of Affiliate. F. Instead of negotiating separate license agreements for different technologies, products, services and intellectual property rights, the Parties wish to negotiate a single agreement that will grant a license to Affiliate under the entire portfolio of 3M IPCs intellectual property rights. The compensation to be paid under this Agreement takes into account the licenses received by Affiliate under the intellectual propert .....

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suant to these other agreements. In total, fair compensation will be paid by the Parties in exchange for the benefits that each receives under this Agreement and the other agreements. G. 3M, 3M IPC and Affiliate operate as separate companies. The Parties understand, however, that 3M IPC and Affiliate are controlled by 3M, and thus are members of the worldwide 3M corporate family. As such, the Parties intend that this Agreement further the interests of the worldwide 3M corporate family, and in al .....

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nd collectively. 1.5 "Affiliate" shall mean 3M India Limited, a corporation organized under the laws of India and having a registered office at Raheja Paramount, 138, Residency Road, Bangalore 560 025, India. ... ... ... 1.9. "Effective Date" shall mean July 1, 2006, unless the approval of the government of the Primary Territory is required before this Agreement may become effective, in which event the Effective Date shall mean the date on which such approval is obtained. ... .....

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ee to any entity other than Licensor or a 3M Related Company for 3M Products intended for consumption in the Primary Territory, but excluding: (A) sales, value-added and other transaction taxes, where applied; and (B) transportation costs to customers, if invoiced separately. Article II 2.1(e) Responsibility of the Licensor Intellectual Property (i) As noted previously, 3M IPC coordinates the transfer and management of Licensor Intellectual Property for the benefit of the worldwide 3M corporate .....

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nsfer of such Licensor Intellectual Property. Licensee shall, when requested by Licensor and without cost to Licensor, do all things necessary to assist Licensor in these activities. ... ... ... 2.2 (a) Licensee's Use of Licensor Trademarks. Licensee shall take all necessary measures to ensure that its use of Licensor Trademarks always conforms to the laws of the territory in which Licensee is using Licensor Trademarks. ... ... ... (c) Restrictions on Licensee's Use of Licensor Trademark .....

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under Article II and Article III hereof and other benefits received by Licensor and Licensee hereunder, the Parties have agreed to the payment of reasonable compensation, as provided for in this Article V. 5.2 Royalties. In partial consideration for the rights received hereunder and to the extent permitted under applicable regulations of the Primary Territory, Licensee shall pay 3M IPC a royalty equal to : (a) five percent (5%) of the Net Selling Value (Domestic Manufactured Products) as partial .....

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the Net Selling Value (Domestic 3M Products) as partial consideration for Licensee s use of Marketing Intangibles in conducting Licensees general business operations other than producing Manufactured Products, providing 3M Services, or relating to Software or Special Value Products; plus (e) two percent (2%) of the Net Selling Value Exported 3M Products) as partial consideration for Licensee s use of Marketing Intangibles in conducting Licensee s general business operations other than producin .....

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r Licensee s use of Production Intangibles and Marketing Intangibles in conjunction with Licensee s business operations relating to Software; plus (g) compensation for Special Value Product(s), as set forth in Appendix B hereto, in a separate agreement among the Parties, or in a notice from Licensor to Licensee, the terms of which notice shall be deemed to have been accepted by License upon the sale, license, lease or other disposal of the Special Value Product(s) by Licensee, and as partial con .....

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Licensee (including, but not limited to, Licensor Trademarks applied to that product by Licensor or a 3M Related Company), the compensation for which shall be reflected in the purchase price of that product. (c) There is no obligation hereunder for Licensee to purchase any goods from Licensor. 5.4 Royalty Payments. All royalty payments due hereunder shall be made by Licensee monthly not later than the last day of the succeeding month, or such other schedule as may be agreed to by the Parties. Pa .....

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or waives its right to receive royalty payments and royalty reports pursuant to Paragraphs 5.2 to 5.5 and termination of this waiver shall constitute an amendment of this Agreement under Paragraph 9.2. As seen from the scope of the agreement, the agreement is effective from 1.7.2006. 3M Company, U.S.A, which is a principal company through their affiliates sell their products in more than 180 countries and it manages and controls worldwide 3M corporate family on global basis. Whereas 3M IPC (USA) .....

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s, and for the licensing of Intellectual Property Rights for 3M, 3M IPC (USA) to the respondent. Clause (F) of the agreement explains that instead of negotiating separate licence agreements for different technologies, products, services and I.P.R rights they decided to negotiate a single agreement that will grant licence to the respondent under entire portfolio of 3M IPCs Intellectual Property Rights. Clause (G) of the agreement while stating that though 3M and 3M IPC (USA) and the respondent o .....

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d as Compensation which is set out above in clause 5.2 of the agreement and the percentage of consideration for each category has been specified of 5%, 8%, 1% etc. It is pertinent to refer Para 5.8 of the Article V of the agreement wherein the licensor waived his right to receive the royalty payments. Subsequently, amendment to the above agreement was signed on 16.12.2009 between the overseas companies and the respondent where they have terminated the waiver of payment of royalty by amending t .....

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rganized under the laws of India having a registered office at Plot Nos. 48-51, Electronics City, Hosur Road, Bangalore 560 100, India ("Affiliate") Recitals A. 3M Innovative Properties Company, 3M Company and 3M India Limited entered into an intellectual Property Agreement effective July 1, 2006 (the "Agreement"). B. Under Paragraph 5.8 of the Agreement, Licensor (3M Company and 3M Innovative Properties Company) waived its right to receive royalty payments and royalty report .....

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rties agree as follows :- 1. This letter agreement hereby amends Paragraph 5.8 of the Agreement by terminating the waiver effective July 1, 2009. With effect from July 1,2009, Affiliate shall henceforth be obligated to make royalty payments as per the terms of the Agreement. 2. Any obligation to provide royalty reports that arose after July 1, 2009 and before the date first appearing above shall be satisfied by delivery of a single royalty report within sixty (60) days of the date of this agreem .....

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ement made on 16th December 2009, royalty is payable with effect from 1.7.2009. On perusal of the original order passed by AC, SVB and the impugned order, the original authority in his order mentioned this royalty payment. It is pertinent to see that the department has renewed the SVB order accepting the transaction value imported from parent company and from their subsidiaries and associates vide order dt. 8.2.2008. It is seen that though the respondents were importing and carrying out the busi .....

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Master Agreement on licensing the products, know how, software etc. The purpose of the said agreement is to license the knowhow and the products to the respondent and the consideration is the Royalty payment as set out at Clause 5.2. It is pertinent to see the Clause 5.2 of Article V of the said Intellectual Property Agreement the word used in para 5 (a) to 5 (f) is In partial consideration for the rights received or In partial consideration for the licensee's use of production intangibles .....

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2, the same agreement at Clause 5.8 says that the Licensor waives its rights to receive the Royalty payment from the respondent company. If the overseas company wants to waive Royalty payment from respondent, it raises serious questions why the IPR agreement was signed with effect from 1.7.2006 under the terms and conditions of rights and liabilities and considerations made between the related parties. This indicates that there is a special consideration and the transactions are not at arms leng .....

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greement dt.1.7.2006, whereas we find that the payments of royalty was made retrospectively only from 1.7.2009. All these facts establishes that the entire related party transactions are not at arms length or on principal to principal basis. This clearly shows that the principal company is compensated indirectly or directly in some other means either by way of pricing of the goods or other method of payments or the principal company absorbs the royalty payments by adjustment which can be brough .....

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t relevant. If that be the case, the very purpose of entering into agreement, with effect from 1.7.2006 has no meaning. Even the termination of waiver agreement made on 16.12.2009 also covers payments towards electronic office software, health care software etc. and the payment of royalty starts w.e.f. 1.7.2009. All these aspects have not been examined either by the original authority or by L.A.A. 26. On perusal of a copy of the letter 6.2.2014 (F.No.S/IV/34/2012/BZU) signed by ADG, DRI Bangalor .....

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hat the detailed investigations of transactions between the related parties will throw light which is not done by the Lower Appellate Authority. 27. Considering the above facts, we hold that neither the original authority nor the lower appellate authority has considered the intricacies of the agreements and the subsequent amendment agreements, billing and pricing patterns. Instead, merely relied on this Tribunals decision of ABB Ltd. (supra). It is pertinent to see that the Tribunal in the abov .....

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This ruling of the Apex Court has been overlooked by the lower authorities. We find that the investigation proceedings already initiated by the D.R.I is on this very aspect. 28. In view of the above facts, we hold that both the original authority and the L.A.A. have not examined in detail, viz. agreements, amendment agreements but merely endorses the respondents view without any discussion. Therefore, there is enough justification on the Revenues contention and the Order-in-Original and the i .....

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IO dt.4.2.2011 as confirmed in OIA dt. 30.8.2013. The Hon'ble High Court, Madras in their interim order dt.7.4.2014 granted interim injunction against deposit of 1% EDD with condition that the importer to furnish a bank guarantee for ₹ 10 crores till the disposal of writ petition. The said writ petition is still pending. (ii) Importer filed second W.P.No.3565/2014 before Hon'ble High Court of Madras seeking to transfer the entire case to DC (SVB) Bangalore Customs, Air Cargo and to .....

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dependently without in any manner being influenced by the pendency of writ petition before High Court. (iv) It is interesting to note that since 1991 the importer's transactions were accepted as per invoice price and all the orders in the past from 1991 till the last order dt. 4.2.2011 are in favour of importer-respondent and the Revenue appeal before Commissioner (Appeals) was also rejected and OIO was upheld by LAA and the entire proceedings were in favour of the assessee. Under normal cir .....

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