Royalty paid on sale value of manufactured goods is not required to be loaded on invoice price of imported raw material

Royalty paid by the Assessee at 12% on the sale value of the manufactured goods is not required to be loaded on the invoice price of the imported raw material

Ortiker India P. Ltd. (the Appellant or the Company) imported clamps from the related supplier outside India. The transactions were examined on arms length basis and the SVB branch vide order dated February 6, 2009 held that the transaction value has not been influenced by related person. Thereafter,vide Order dated February 2, 2012, the value of imported goods was loaded to the extent of declared invoice value by 8.5% for the year 2010-11 and 18.86% for the year 2011-12 upto November 30, 2011 in the case of imports made from the related supplier and thus all provisional assessments were made final during the year 2010 to November 30, 2011 in terms of Section 28(4) of the Customs Act, 1962. This Order was challenged before the Commissioner (Appeals), wherein it was held that for the entire periodthe loading of 12% on the invoice value is required to be done. Being aggrieved, the Appellant preferred an appeal before the Hon’ble CESTAT, Mumbai.

The Appellant contended that initially the Company was in the activity of trading of clamps and in May-June 2009, the Appellant started manufacturing activity. For that, the Appellant entered into an Agreement (the Agreement) with their foreign supplier according to which the Appellant was required to make the payment at 12% on the net invoice value of the product manufactured and sold with the trade-mark, as the Appellant was given license to use the trade-mark. Consequently, the Appellant imported capital goods and raw material for manufacturing activity and raw material and finished goods for trading purpose. It was further submitted that the Appellant was paying royalty for manufacturing of finished product and not on trading activity. Furthermore, there is no pre-condition of sale of the imported goods to pay royalty as per the Agreement which is required in terms of the Rule 10(1)(c) of Customs Valuation Rules, 2007 (the Customs Valuation Rules).

On the other hand, the Department contended that being a related person, the value has to be determined as per Rule 3 of the Customs Valuation Rules and since the condition of Rule 3(b) thereof is not satisfied, the value of royalty paid by the Appellant is to be added in the invoice value.

The CESTAT Mumbai observed as under:

• No royalty or value of any amount over and above the invoice price has been paid by the Appellant for finished goods and capital goods to the related supplier, and there is no finding of the Adjudicating Authority that the price of the said goods have been influenced being a related person.
• The Appellant are required to pay the licence fee at 12% on the net invoice amount of all products manufactured and sold with the trade-mark which clearly means that the licence fee is being paid by the Appellant for use of the trade-mark for manufactured goods.
• There was no condition of sale that the Appellant is required to pay this royalty on the imported goods.

Therefore, in the light of the Agreement,the Hon’ble Tribunal allowed the appeal in favour of the Appellant and held that royalty paid by the Appellant at 12% on the sale value of the manufactured goods is not required to be loaded on the invoice price of imported raw materials, capital goods and finished goods.