TMI Blog2019 (1) TMI 1049X X X X Extracts X X X X X X X X Extracts X X X X ..... administrative and other general expenses, tax liability, depreciation of the factory investments, loading, unloading charges, handling charges, internal freight charges, insurance profit etc in determining the prices for the purpose of export. This all addition constitutes from 15% to 25% in addition to the procured prices. However, only 10% has been added by the supplier for exportation of the goods to the Indian importer. Accordingly, the invoice value may be loaded to the tune of 10% in terms of Rule 8 of Customs Valuation Rules, 2007 read with section 14 of the Customs Act, 1962 (as amended time to time). - Though these findings and addition were challenged by the appellant in their appeal before the Commissioner (Appeal), Commissioner (Appeal) has not recorded any finding in his order in this respect. Hence matter for consideration of additions as ordered by the adjudicating authority under Rule 7A of Valuation Rules 1988/ Rule 8 of Valuation Rules 2007 needs to be remanded back to the Commissioner (Appeal) for consideration of the issue. Addition of royalty charges to value of imported goods in terms of Rule 9(1) (c) of Valuation Rules, 1988 and 10(1) (c) of the Valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Rules, 2007 with an addition mentioned in Table A of para 6.5, year wise for goods imported from the related suppliers for the imports under Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 1988 from 10.10.2007 by assessing officer after usual check, scrutiny and verification of the declared value. However, if contemporary imports at higher prices are noticed or there exists reasons other than the influence of relationships to doubt the value assessing group may evaluate the value of the imported goods under appropriate provision of the said rules. d. All the assessments, which have been made final during the period mentioned in Table A para 6.5 shall be taken up in terms of para 7 and suitable demands may be issued in terms of Section 28(1) of the Customs Act, 1962 upto April 2011 and thereafter under Section 28(4) of the Customs Act, 1962 or any other action under Customs Act, 1962 or any other Law for the time being in force. e. All pending provisional assessment may be finalized in terms of para 6 and 6.5 of the Order in Review. f. The above decisions has been taken on the basis of importer s statement, information, af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its. Commissioner (Appeal) has in remand proceedings pass this order which is subject matter of the present appeal. 3.1 Appellants have in their appeal challenged the order of Commissioner (Appeal) on various grounds detailed below: a) They are not manufacturer of the goods but are engaged in providing consulting engineer/ technology based erection of water treatment plants. The shipments are based on procurement invoices with addition of handling charges. The royalty is not related to import of goods and hence cannot be added to invoice value. b) Order for addition to extent of 15% to 25% to the invoice value has been made without disclosing any quantifiable basis for the same. c) Appellants have not suppressed any facts from the department at any time. d) Despite the fact that related party was charging 10% handling charge over the procurement price from the un-related third party yet loading on the invoice value has been ordered. e) The related party i.e their principals in U S A themselves are not the manufacturer of imported goods but they source them from third party. Hence the royalty cannot be related to the impugned goods supplied. f) In case of all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and this is not profit on the prices procured by them from other vendors/ suppliers. r) The order is contrary to the interpretative notes to Rule 7A and 9(1) (c) of Valuation Rules, 1988 and Rule 8 and 10(1) (c) of the Valuation Rules, 2007, hence cannot be sustained. 4.1 Have heard Shri C M Sharma Consultant on behalf of Appellants and Shri R Kumar, Assistant Commissioner (Authorized Representative) on behalf of revenue. 4.2 Arguing on the behalf of Appellants learned Consultant submitted: i. That it is now settled law that royalty charges can be added to the value of imported goods if it can be show that royalty has been paid as a condition of sale of the said imported goods. ii. In the present case royalty is not paid as condition of sale of the said goods, procured by them through the related person. In fact their principals in USA also are not the manufacturers of the imported goods but procure the same from third party. These goods are then supplied to them after addition of 10% towards margin of handling charges on the procurement prices. iii. No Quantifiable data has been produced to reject the addition of 10% towards the margin of handling charges, and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 (SC)] and Matsushita Television Audio (I) Ltd [2007 (211) ELT 200 (SC)] iv. After analyzing the Royalty agreement in para 7 of his order Commissioner (Appeal) has concluded in para 8 that post import expenditures shall not be included for the purpose of royalty. Therefore the royalty was paid or would be payable in future by the appellants on the imported goods only and that, not on the other expenses incurred after import. Further it has been rightly observed by the original authority under para 6.4 of the order dated 14.01.2013 that the imported goods were used in the projects using HERO technology, even those goods which are required for the projects, were/ are procured by the supplier for the appellant and supplied to the appellant after adding their 10% margin, which constitutes as a condition of sale . v. Thus the order of Commissioner in respect of addition of royalty charges to the import value is in accordance with the rule 9(1) (c) of Valuation Rules, 1988 and 10(1) (c) of the Valuation Rules, 2007, and the decisions rendered by various authority on the subject. vi. Accordingly he prayed for dismissing the appeal. 5.1 We have considered the submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational Corporation, USA either from their local vendors in the different cities of USA or imported from other countries on CIF basis and after that the said products were supplied to M/s. Aquatech Systems (Asia) Pvt. Ltd. on CIF basis in India. On comparison of the prices of the in terms of rule 3(3)(b)(iii) ibid in column 4 6 of the Table I find that the supplier has taken nearly 10% margin of profit on the prices procured by them from other vendors. In a normal trade practice, if the goods are being exported to India by the suppliers, there are some addition like marketing, selling expenses, administrative and other general expenses, tax liability, depreciation of the factory investments, loading, unloading charges, handling charges, internal freight charges, insurance profit etc in determining the prices for the purpose of export. This all addition constitutes from 15% to 25% in addition to the procured prices. However, only 10% has been added by the supplier for exportation of the goods to the Indian importer. Accordingly, the invoice value may be loaded to the tune of 10% in terms of Rule 8 of Customs Valuation Rules, 2007 read with section 14 of the Customs Act, 1962 (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loaded to the price thereof. 18. Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and know-how in the manufacture of the licensed product in India. Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/licence fees which are also paid to the foreign supplier. Rule 9(1)(c) stipulates that payments made towards technical know-how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under Rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. At this stage, we would like to emphasis the word indirec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a licence to use the technical assistance and the technical knowhow for the manufacture of the colour T.V. at the appellants factory in India and also for sale of such products throughout India. Under Clause 6.01, in consideration of the technical assistance to be rendered by MEI and in consideration of the licence to be granted by MEI to the appellants it was agreed that the appellants shall pay to MEI the royalty at the rate of 3% on the net ex-factory sale price of the colour T.V. manufactured and sold. Further, 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 to use such components in the manufacture of colour T.V. 7. The question which arises for consideration in this civil appeal is : whether royalty payment was connected with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mported component, it became a condition of sale of the finished goods. 6.4 Examining the terms of Royalty Agreement in the present case wherein it has been stipulated in consideration for use of HERO Technology, ASA shall pay to AIC, Royalty @ 5% of the project value, subject to reduction towards freight outwards, commission, spare parts cost and field services, and also subject to applicable taxes in India. The project value shall be net amount, excluding any statutory levies, recoverable from the client. In case of the projects under Build, Own, Operate, and Transfer contracts, (hereinafter referred to as BOOT arrangement) the project value shall be the net amount of the total capital cost incurred on the BOOT Plant excluding any statutory levies and amounts applicable for BOOT arrangement . Appellants have given the explanation of the said clause in the Royalty agreement, in following manner: Royalty Calculation Basis Royalty is payable @5% of the project value for use of HEROTM process license, subject to reduction towards freight outwards, commission, spare part costs and field services and also subject to applicable taxes in India. The project value shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Gujarat Ltd. (supra). 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 knowhow. Under the agreement, the appellants were to pay MEI a royalty @ 3% on net ex-factory sale price of the colour TV receivers manufactured by the appellants for the technical assistance rendered by MEI. The appellants were to pay a lump-sum amount of U.S. $ 2 lakhs to MEI for transfer of technical know-how. It was the case of the appellant that payment of royalty was not related to imported goods as the said payment was made for supply of technical assistance and not as a condition pre-requisite for the sale of the components. 24. One of the questions which arises for determination in this civil appeal is whether 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 imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and suppliers are procuring the goods/spare parts, components, equipments for their projects. Hence, if any spare parts, components or any equipments are required for the completion of the projects, they are supposed to procure the materials from different vendors. However, the importers have chosen the suppliers to supply these spare parts/components/equipments to supply the importers. They were in a binding situation to import these goods from the related suppliers. Although they were free to import from the unrelated vendors. Now the question is whether the Royalty, which is being paid or payable as per the Royalty Agreement dated 01.11.2004, is includable to the assessable value of the imported goods or not? I find that there are various judgments viz. M/s. Ferodo India Pvt. Ltd. [2008(224)ELT 23(SC)], M/s. Toyota Kirloskar Motor Pvt. Ltd. [2007(231)ELT 4(SC)] and M/s. Steel Authority of India [2007(210)ELT150(Tri- Bang)] wherein, Hon ble Supreme Court and CESTAT have held that Technical Know How fees and Royalty is includible in prices of imported goods, if said payments constitutes a condition pre-requisite for supply of imported goods by foreign suppliers. If such payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted goods covered under the Royalty Agreements effective from 01.11.2004. Although they are paying royalty from Nov. 2004, however, the Customs Act, 1962 provides recovery of duty for last 5 years under Section 28(1) upto April 2011 and under Section 28(4) thereafter. Hence, the % of loading on assessable value with respect to total amount of Royalty paid on the imported goods may be determined as per formula as under for the last 5 years:- Loading % on Assessable Value = Royalty paidx100 (Reference column (4) below) Value of imported goods Year Amount of Royalty paid to the suppliers (in Rs.) Value of imported goods (in Rs.) % Loading (1) (2) (3) (4) 2006-07 NIL 12,33,261/- 0 2007-08 1,07,64,657/- 30,09,297/- 357.71% 2008-09 NIL 23,74,263/- 0 2009-10 50,92,162/- 33,91,84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e execution of Royalty Agreement dated 01.11.2004, which ultimately going to effect the transaction value of the imported goods. Therefore, I find that this case is rightly covered under the provisions of Section 28(1) of the Customs Act, 1962 upto April 2011 and under Section 28(4) of the Customs Act, 1962, thereafter (as amended time to time) or any other action under Customs Act, 1962 or any other law for the time being in force. 6.9 On the other issues adjudicating authority has himself held and asked appellants to submit proportional quantum of royalty for each consignment. Para 6.6 of the order reads as follows: 6.6 From the above, it is seen that the % loading is dependent upon the quantum of import and quantum of royalty paid to the suppliers as the project value of the contract , on which the patented trade mark HERO technology is used, may vary year to year basis. Similarly, the quantum of import may vary year to year basis. Hence, to ascertain the quantum of % loading to the assessable value for the live consignments, the Royalty may be loaded proportionately to the assessable value under Rule 10(1)(c) of the Customs Valuation Rules, 2007. The importers sho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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