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TMI Blog2025 (5) TMI 586X X X X Extracts X X X X X X X X Extracts X X X X ..... possession of adequate expertise and technology to produce the wet processing machines, they have entered into a Licensing Agreement during 2008 with their overseas parent company, as per which their parent company agreed to provide the technology in the form of designs and drawings to fabricate such wet processing machines in India on onetime payment of EURO 78704. By using the technology, they had fabricated / manufactured their first wet processing textile machinery for their customer at Bangladesh and exported the said machine to the said customer. Subsequently, they had set up their own design and drawing department for developing their own designs for the fabrication of the various sheet metal components which are the major components for the wet processing textile machines, fabricated by them and which are custom designed to suit the needs of the individual Indian customers keeping in view of Indian conditions and requirement of standard parts. The Appellant was importing the SS sheets and certain standard parts required for the fabrication of the wet processing textile machines from M/s. ERBATECH GmbH, Germany and the Department prima facie found that that the Appellant an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the wet processing continuous machines has no nexus whatsoever to the imported stainless sheets and standard parts to be used for further manufacture in the wet processing continuous machines, more particularly when the license agreement do not provide any such condition of sale and therefore the findings of the lower appellate authority holding that the said payment is a condition of sale for the only reason that the goods were sourced from their parent company and not from others could not be sustained in law. iv. That it was on record that the payment toward the drawing and design charges made in pursuance to the Licensing Agreement entered into between the Appellant and their parent company towards permanent acquiring of the intangible asset [technology] and consequently the cost of the same amortized as shown in their financial statements for the three financial years namely 2009-10 to 2011-12 as per the accounting standards rendering the impugned order devoid of any merits. v. That once the declared value of imported goods has been accepted as true and correct transaction value in terms of Rule 3 [3][a] of the CVR, then taking recourse to Rule 10 to make further additions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Coimbatore, the Appellant as per the SVB requirement filed the questionnaire with answers with the SVB Branch of the Chennai Sea Customs Commissionerate for approval of the transaction value for the goods imported by them in as much as their transactions fell within the ambit of related party transactions under the Customs Valuation Rules 2007. As required by the rules and procedures, the Appellant had furnished copies of various documents and replies to the questionnaire as detailed in para 4 of the order in original dated 25.03.2013 and also deposited EDD @ 5% of the value of imports as per required. After due scrutiny of the documents and replies furnished by them and considering their relationship with their parent company as evidenced from the Licensing Agreement, the adjudicating authority had fairly concluded that the price declared by them for their imports was much on the higher side than the contemporaneous price available for similar/identical goods and accordingly held that "the activity of the Indian Company is development oriented which is done as per the requirement of the customer, and the only further manufacturing operations are carried out on the imported goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o enhancement merely on the ground of payment of design and drawing charges/Royalty to the overseas supplier. It would appear that the original authority has presumed that addition is mandated by Rule 10(1)(b)(iv) of CVR, 2007 while the lower authority felt that the charges are includible in assessable value of the imported goods in terms of Rule 10(1) (e) of CVR,2007. Neither in Section 14 of the said Act nor in the Valuation Rules is there any provision which provides that the cost of designs and drawings/Royalty required for procurement or manufacture of goods in India by the importer or which relates to post-importation activities for assembly, construction, erection, operation and maintenance of the plant are to be included in the price of equipments for determining their transaction value and consequently their assessable value for the purpose of levy of customs duty under the said Act. Rule 10(1) of CVR,2007 reads as follows: - "Rule 10 (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, - (a) the following to the extent they are incurred by the buyer but are not included in the price actually paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, either free or at reduced costs and such goods and services are used for the production of import goods and in which case, as provided in clause (iv), if such goods and services are in the form of Designs and Development that are necessary for the production of imported goods. However, in the present case, no goods and services were supplied by the appellants that are used in the form of Design and Development in the production of import goods. On the other hand, the Design and Drawings supplied by the foreign supplier are meant for the production of customized wet processing textile machines and not related to imported goods. The condition of sale too is absent. As the design and Development charges were not paid for production of standardized products but rather for customer specific products it could not have been paid as a condition of sale in any manner. Hence the addition of one time payment towards design and drawing charges in the assessable value in terms of Rule 10(1)(b)(iv) or 10(1)(e) is not legally sustainable and thus the impugned order is liable to be set aside. The facts do not warrant inclusion of one time drawing and design charges paid in the assessable value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [2008 (2) TMI 12], both affirmed by the Hon'ble Supreme Court. On a similar issue in the case of M/s. Valeo Friction Materials India Ltd. Vs CCE, this Tribunal vide Final Order No. 40589 / 2024 dated 31.05.2024 has held as follows: - "12. We find that as per Rule 10(1)(c) of Customs Valuation Rules, 2007 ('CVR, 2007'), there are certain essential conditions, only on fulfilment of which the said rule can be invoked to arrive at the transaction value by including royalty / license fees payment. a. The royalty/ license fee must be related to the imported goods; b. It must be required to be paid by the buyer; and, c. Such payment should be a condition of sale of the imported goods. 13. As such, it is essential to examine whether the payment of royalty is anyway linked to import of raw materials and whether sale of raw materials is a pre-condition in the present appeal. A reading of various clauses of Agreement indicate that the royalty is payable at 3.75% of the annual net sales of the product sold by the Company. There is a clear formula regarding the method to arrive at the above net sales value of the product sold. The royalty payment covers transfer and use of techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no such condition that emerges from the agreement between the appellant and the VALEO, France which provides that royalty payment is a pre-condition for sale / import of raw materials. There is no evidence to establish as to how the royalty payment is linked to the import of raw materials. ... ... 17. The Order-in-Original dated 17.01.2014, had quantified the differential duty payable to be Rs.15,02,08,325/- for the period from 2000-2013 on the basis of percentage of imported raw materials used for manufacture of finished goods and the amount of royalty paid. The above method of computation of royalty is clearly against the prescribed procedures and rules. The above computation assumes that the entire royalty payment is related to import of raw materials. Even the Lower Appellate Authority has found fault with such a quantification though upheld that the royalty paid is having a nexus with the importation of raw materials and as such royalty paid has to be included in the value of the imported raw materials. The appellant has not only imported the raw materials like fibre yarn and impregnated yarn but also various other raw materials like textured yarn, technical yarn, cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Rule 10(l)(c). Undisputedly the appellants have imported components for the manufacture of Disc Brake Systems for two wheelers. The department has sought to load the assessable value as per Rule 10(l)(c) which is reproduced for convenience of the reference :- Rule 10(1)(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; The following explanation has been added to Rule 10(l)(c). "Where the royalty, licence fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e) such charges shall be added to the price actually paid or payable for the imported good, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods". From the above it is clear that the royalty and the other charges can be included: (i) In case of imported goods (ii) As condition sale of goods And the explanation only added that such royalty would be includable' in the case e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 value. These factors include the nature of the imported goods, the nature of the industry itself, the difference in values etc. As stated above, Rule 4(3)(a) and Rule 4(3)(b) of the CVR, 1988 provides for different means of establishing the acceptability of a transaction value. In the case of Matsushita Television (supra) the pricing arrangement was not produced before the Department. In our view, the Consideration Clause in such circumstances is of relevance. As stated above, pricing arrangement 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions are not satisfied. Hence, royalty is not includible in the value of the imported goods. We find that in the case of Brembo Brake India Pvt. Ltd. vs. CC, [2014 (302) E.L.T. 551 (Tri. - Mumbai)], it was held that royalty and other charges not includible in assessable value if Payment of royalty and other charges not for imported goods and not a condition of sale of goods. The relevant extracts of the above decision have been reproduced below: - "We have carefully considered the submissions and perused the records. The department has sought to load royalty relating to the technical know-how as per Rule 10(l)(c). Undisputedly the appellants have imported components for the manufacture of Dis Brake Systems for two wheelers. The department has sought to load the assessable value as per Rule 10(l)(c) which is reproduced for convenience of the reference :- Rule 10(1)(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; The following explanation has been adde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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