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Commissioner of Central Excise, Mumbai Versus Herbalife International India Pvt. Ltd.

2016 (9) TMI 830 - CESTAT MUMBAI

Valuation - inclusion of royalty in the value of imports - collaboration agreement - related party - M/s.Herbalife USA holds 75% of the equity in Herbalife International India Pvt. Ltd - import of material from Herbalife USA - valuation by SVB - Rule 2(2) of the Customs Valuation Rules, 1988 - royalty paid by the importer under the agreement relates to the manufacturing process of product to be manufactured in India or to the manufacture of imported goods - Rule 9(1)(C) of the Customs Valuation .....

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e, USA provide for transmission of technical information and grant of license and involves consideration in the shape of royalty. Running royalties are condition of sale for the transaction value and thus needs to be added in the value for the purpose of payment of Customs duty. - Appeal allowed - decided partly in favor of appellant. - C/1071/04 - A/89193/16/CB - Dated:- 10-8-2016 - Mr. Raju, Member (Technical) Shri.D.K.Sinha, Asst. Comm. (AR) for appellant Shri.Tarun Jain, Advocate for res .....

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hallenged the said order before the Commissioner (Appeals). Revenue s appeal was rejected by the Commissioner (Appeals). Aggrieved by the said order, the Revenue is in appeal before the Tribunal. 2. The learned AR argued that the Commissioner (Appeals) erred in holding that the royalty paid by the importer under the agreement relates to the manufacturing process of product to be manufactured in India and not to the manufacture of imported goods. He argued that neither Herbalife, USA would suppor .....

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Technical Assistance Agreement dated 10/11/1999. He argued that without the technical information, i.e. raw material data and expertise pertaining to the manufacturing of the raw materials, it would not be possible to manufacture the raw materials to the exacting standards as required for manufacture of final products in India. He argued that without technical know-how of the raw materials, the final production cannot be manufactured. He argued that Rule 9 (1) (C) of the Customs Valuation Rules .....

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tting the said goods manufactured from others and without any margin supplying the said goods to the appellants at the same price, after including freight. He showed us the price list of Herbalife USA submitted to the Deputy Commissioner of Customs. In the said price list he pointed out as an example Sl.No.9 pertaining to Chinese Cruciferous which shown as the rate of US $ 17.60 per unit. He also showed us the invoice of Triarco for the same products in the name of herbalife USA showing a unit p .....

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ow-how and the royalty payable to Herbalife USA. No remittance in foreign currency have been made. However, related tax and R&D cess has been remitted with appropriate authorities. He also pointed out that this certificate was issued from Deloitte Haskins & Sells, on February 01, 2001. Also records that provisions of ₹ 4,67,07,146/- (equivalent to US $ 1.0 million) payable to Herbalife USA towards administrative service fees have been made in the books of accounts. However, the rem .....

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r: 9 (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods. (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. 3.1 He argued that there is no co-relation of the royalties with the imported goods as the royalt .....

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added to the price actually paid or payable for the imported goods in determining the customs value. Payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for export to the country of importation of the imported goods. 4. The learned Counsel relied on the decision of the Apex Court in the case of Ferodo India Pvt. Ltd. - 2008 (224) ELT 23 .....

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tion and grant of license and involves consideration in the shape of royalty. Term "technical information" has been defined as follows: "Technical information" shall mean that information, owned or authorized for use by licensor as of the effective date of this agreement, in whatever form, tangible or intangible, in connection with the manufacture of the products and shall include all patents, copyrights, trade names, trademarks, trade secrets and other proprietary rights or .....

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ement royalty has been defined as follows: "Royalties: In consideration for the transfer of know-how and the technical assistance services and the license granted under this agreement, during the tern of this agreement, licensee shall pay licensor the following royalties: a) An initial lump sum payment of US @ 2 million; and b) A running royalty of five percent (5%) of the aggregate Net Retail Sales during each calendar month. The term "Retail Sales" has been defined in para 1.4 i .....

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country and are not related to the import of goods. In the case of Matsushita Television & Audio (I) Ltd. Vs. CC - 2007 (211) ELT 200 (SC) the Hon'ble Supreme Court had the occasion of examining a similar contract. In para 6 & 7 of the same decision, the Hon'ble Apex Court observed as follows: 6. On reading the above agreement, the following features emerge. Under Clause 1.03 the term Net-factory sale price has been defined to mean the sale price billed by the appellants for .....

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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 us .....

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rther, it was agreed that in addition to the technical assistance, MEI would assist the appellants in the manufacturing of the colour T.V. by selling the components to the appellants. Under the Agreement, the parties further agreed that if the appellant desired to make use of bought-out components it can do so provided the said components are forwarded to MEI for inspection and if MEI approves the quality and the specifications of such bought-out components then alone the appellant would be free .....

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net ex-factory sale price of the colour T.V. exclusive of taxes, freight and insurance but including the cost of imported components. In other words, the royalty payment was to be computed not only on the domestic element of the net sale price of the colour T.V. but also on the cost of imported components. A bare reading of the agreement shows that payment under the said agreement related not only to the production of the goods in India but also to imports. In some of the decisions cited on beha .....

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he conditions of Rule 9(1)(c) of the Valuation Rules, 1988, are satisfied. 5.2 It is seen that the facts of the instant case are quite similar in respect of the running royalty amount being paid after inclusion of the value of the goods imported by the appellant from Herbalife USA. In these circumstances, the decision of the Hon'ble Apex Court in the case of Matsushita Television & Audio (I) Ltd (supra) squarely applies to this case. 5.3 The appellants have relied on the decision of the .....

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s follows: 23. In the case of Matsushita Television & Audio India Ltd. v. CoC reported in 2007 (211) E.L.T. 200 (S.C.) the question which arose for determination was whether royalty amount was attributable to the price of the imported goods. In that case, the appellant was a joint venture company of MEI, Japan and SIL for obtaining technical assistance and know-how. Under the agreement, the appellants were to pay MEI a royalty @ 3% on net ex-factory sale price of the colour TV receivers .....

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reliance could be placed by the Department only on the Consideration Clause in the TAA for arriving at the conclusion that payment for royalty was includible in the price of the important components. 25. Rule 4(3)(b) of the CVR, 1988 provides for an opportunity for the importer to demonstrate that the transaction value closely approximates to a test value. A number of factors, therefore, have to be taken into consideration in determining whether one value closely approximates to another va .....

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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 Claus .....

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tion value of imported goods to be adjusted in accordance with the provisions of Rule 9 of Customs Valuation Rules. Rule 4 (3) examines the influence of relationship on the transaction value. Both the rules are independent and can be separately and jointly applied to different cases depending on the facts and circumstances of the case. There may be transaction between related parties which involved influence on the transaction value due to relationship and also adjustment of the transaction valu .....

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