Commissioner of Customs Vs Michelin India Pvt Ltd (CESTAT Chennai)
CESTAT Chennai held that inclusion of royalty and technical know-how in the assessable value of the imported products unjustified as relationship has not influenced the pricing pattern.
Facts- The Respondent requested for registration in Special Valuation Branch (SVB) for their imports from M/s. Manufacture Francaise Des Pneumatiques Mechelin (MFPM), France and its group companies and subsidiaries.
Notably, it was held by the adjudicating authority that the royalty paid by Respondent during 2014-2015 to the overseas supplier and also further royalty payments, whenever made, has to be included in the transaction value as per Rule 10 (1) (c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
Being aggrieved, the Respondent filed appeal before the Commissioner (Appeals). Commissioner (Appeals) set aside the order of adjudicating authority to the extent of directing to add the royalty payment in the assessable value. Being aggrieved, the Department has preferred the present appeal.
Conclusion- Hon’ble Tribunal, in the case of Commissioner of Customs, Mumbai Vs. Bridgestone India Pvt Ltd, held that the royalty and license fee paid on net sale value of products sold in India which has nothing to do with imported goods nor was a condition of sale cannot be included in the assessable value.
Held that as far as the relationship has not influenced the pricing pattern there is no justification for inclusion of royalty and technical know-how in the assessable value of the imported products. Therefore, we set aside the impugned order.
FULL TEXT OF THE CESTAT CHENNAI ORDER
Brief facts are that the Respondent requested for registration in Special Valuation Branch (SVB) for their imports from M/s. Manufacture Francaise Des Pneumatiques Mechelin (MFPM), France and its group companies and subsidiaries (herein after referred as supplier / foreign company). Pursuant to this, order was passed on 31.12.2015 which was valid and operative for three years upto 28.12.2018. In the said order dated 31.12.2015 it was held by the adjudicating authority that the royalty paid by Respondent during 2014-2015 to the overseas supplier and also further royalty payments, whenever made, has to be included in the transaction value as per Rule 10 (1) (c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Against this order directing to add the royalty payment in the assessable value, the Respondent filed appeal before the Commissioner (Appeals) and vide order impugned herein, the Commissioner (Appeals) set aside the order of adjudicating authority to the extent of directing to add the royalty payment in the assessable value. Aggrieved by such order, the Department is now before the Tribunal.
2.1 The Ld. Authorised Representative Ms. Anandalakshmi Ganeshram appeared and argued for the Department. It is submitted by the Ld. Authorised Representative that the foreign suppliers are subsidiaries of the ultimate group parent company ‘Compagnie Generale – Des – Establishments Michelin (CGEM) and Compagnie Francaise – Michelin (CFM), Switzerland which hold 99.99% shares of importer company. Thus the amount of royalty paid to their ultimate group company, and their other group company, Michelin Recherchéer Technique S.A., Switzerland (MRT) would amount to indirect payment of royalty as provided in Rule 10 (c) CVR, 2007.
2.2 The importer – Respondent had entered into a Trade Mark and Technology License Agreement with Compagnie Generale – Des – Establishment – Michelin, France (CGEM), their ultimate group company and Michelin Recherchéer Technique S.A., Switzerland (MRT-Licensors) another group company on 04.2011. As per clause 3.3 of Article 3 of this agreement obligation of Licensee is stated. The importer has to pay royalty equal to 4% of the Annual Net Sales. Thus on plain reading of the said clause when royalty is paid on net sales value, it is to be construed that the royalty is paid on the value of raw materials and semi-finished goods which are also imported from CGEM or their group companies. The importer vide their letters dated 14.12.2015 and 23.12.2015 had submitted Chartered Accountant Certificates wherein it was stated that the annual net sales means the cumulative amount of the gross invoice sales price less discounts, if any. Thus, it is apparent that the royalty paid by the importer on the value of finished goods has a nexus with the goods imported. The sheer fact that royalty is paid on the value of finished goods would implicitly establish a condition of sale as well. It is submitted that the royalty paid as a percentage of annual net sale is therefore to be included in the transaction value. The Ld. Authorised Representative prayed that the appeal may be allowed.
3.1 The Ld. counsel Shri Harish Bindumadhavan appeared and argued for the Respondent. It is submitted that the Commissioner of Customs (Appeals) in the impugned Order-in-Appeal has rightly held that the Royalty paid by the Respondent to CGEM and MRT is not includible in the transaction value.
3.2 Royalty is a payment made on post-import activity as per Article 3 of the Trademark and Technology License Agreement entered into by the Respondent with CGEM and Further, the Royalty is to be paid on the sale value of the product that is manufactured utilizing the raw materials and capital goods imported from the supplier. This is a payment made on post-import activities and hence cannot be included in the transaction value of the import. The relevant portion of the said Clause in the agreement is extracted below:
“In consideration for the license granted pursuant to Article 2, the Licensee shall pay to the Licensors, on the products manufactured and sold by the Licensee to third parties or to other Michelin Group Companies, a royalty equal to four per cent (4%) of the Annual Net Sales. Annual Net Sales means the cumulative amount of the gross invoice sale price of the Products manufactured by the licensee and related activities within the scope of this Agreement, when sold during the respective calendar year in a bona fide arm’s length commercial transaction, after deduction of: – all discounts, allowances, commissions and credits of any kind, and – all invoices for tubes, flaps, internal supports, components, semi-finished, and accessories to other Licensed companies. The licensee shall pay 13/16 of the total royalties to CGEM and 3/16 to MRT”
3.3 The royalty is paid for the following post-import purposes as stated in Article 2.4 of the said agreement:
i. Developing products for sale in the markets of the Territory
ii. Manufacturing the products in the Territory
iii. Using and Commercializing the products in and for the markets of the territory
3.4 In view of the above, it is submitted that the royalty paid as a percentage of net sale value is a post importation activity and is not to be included in the transaction value. There is no nexus between the royalty and the imported goods as the incidence of payment of royalty is on sale of finished goods and the scope of valuation is restricted to payments preceding import. This submission finds it roots in Section 14 of the Customs Act, 1962 which reads as follows:
“(1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf:”
Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and license fees, costs of transportation to the place of importation, insurance, loading, unloading and handling charges to the extent and in the manner specified in the rules made in this behalf:”
3.5 In this regard, reliance is placed on the case of Commissioner of Customs, Chennai Vs. Toyota Kirlosakar Motor Pvt Ltd. [2007 (213) E.L.T. 4 S.C.] wherein it was held that technical assistance fee having direct nexus with post-import activities and not with importation of goods is not includible in the assessable Reliance is also placed on the case of Total Finaelf India Ltd. Vs. Commissioner of Customs, Mumbai [2008 (227) EL.T. 581 (Tri.-Mumbai)], wherein it was held that transfer of technical know-how and license to manufacture stipulating payment of royalty to foreign supplier is a post importation activity and such payment shall not be includible in the assessment value.
3.6 From a perusal of Rule 10(1)(c) it can be said that for including the amount of royalty to the value of imported goods, the following twin conditions have to be satisfied:-
i. The payment made should be in relation to imported goods.
ii. The payment thus made should also be as a condition of sale of the imported goods.
Neither of these conditions have been satisfied in the present case, as the Royalty is paid on the value of post- import activities.
3.7 Reliance is placed on case of Commissioner of Customs, Mumbai Vs. Bridgestone India Pvt Ltd. [2012- TIOL-166-CESTAT-MUM], wherein royalty paid on the net sale value of the manufactured product was said to be not includible in the transaction value of the import of raw materials and components for such The principle applied in this case is squarely applicable to the Respondent’s case.
3.8.1 The term ‘condition of sale’ has not been defined in the provisions of the Act or Rules. However, the same has been dealt with in various judicial precedents as follows:
3.8.2 In the case of Ortiker India Pvt Vs. Commissioner of Customs (I), Mumbai [2014 (307) EL.T. 956 (Tri.-Mumbai)], it was held that, where as per the agreement entered into, the Appellant was required to pay license fee on the net invoice amount of all products manufactured and sold with the trademark, there was no condition of sale that Appellant was required to pay royalty on imported goods. In such situation, royalty paid on sale value of manufactured goods is not required to be loaded on the invoice price of raw material.
3.8.3 In the case of Shasun Chemicals Vs. Commissioner of Customs [2010 (249) ELT 80 (Tri.-Chennai)] it was held that, if royalty is payable for final products to be manufactured by them in India, it is not includible in the value of imported goods.
3.8.4 In HSI Automotive Vs. Commissioner of Customs, Chennai [2008 (224) ELT 439 (Tri. Chennai)], it was held that royalty paid as a percentage of net sale proceeds has no nexus with import of raw materials/components, and it could not be loaded in their assessable value, especially if it was not paid as a condition of their purchase.
3.9 In this regard, it is also relevant to note the decision of the Chennai Bench in the case of Engelhard Environmental Sys. India Ltd. [2005 (185) E.L.T. 155 (Tri. Chennai)], wherein it was held:-
“We have heard rival contentions. In this case the appellants have imported one of the raw materials required for the manufacture of catalyst. In order to manufacture the catalyst they require many other raw materials. The technical fee in terms of the agreement with the foreign supplier is only for the manufacture of the final product. Hence it is not relatable to the imported goods. There is no clause in the agreement which says that the condition of sale of the imported product payment technical know-how fees. In fact there is no obligation to import the item imported only from the foreign supplier. As regards reference to Appendix A, the precious metal solutions are supplied by the foreign supplier as a part of Engelhard’s assistance in the start-up of the facility. From this we cannot infer that payment of technical transfer know- how fee is a condition of sale of the imported goods. The case law cited by ld. Counsel are very much relevant. Moreover, the price of the imported goods are based on London Metal Exchange price. Hence Revenue does not have a good case. The technical knowhow fee paid in relation to the manufacture of catalyst cannot be added to the value of the imported goods which are one of the raw materials required for the finished goods. Under these circumstances we allow the appeal of the appellants with consequential relief, if any.”
3.10 Reliance is also placed on the case of NCL industries limited Commissioner of Customs [2005 (189) ELT 193 (Tri.-Mumbai)] it was held that where contract of purchase of goods is not conditional upon supply of technical know-how, the charges paid on technical know fee is not includible. This view was upheld by Supreme Court [2006 (194) E.LT. A86 (S.C)] and maintained in [2015 (322) E.L.T. A91 (S.C.)].
3.11 It is submitted that MFPM/ group Companies who are the suppliers are not party to the royalty agreement between CGEM, MRT and the Respondent. Where the raw material suppliers, MFPM and group entities and licensors of copyright and patent, CGEM and MRT are different and distinct entities having no contractual relationship in this regard, royalty paid to licensors has no nexus with goods imported from the said supplier.
3.12 Even if one Company is a holding company of another, they are still two separate legal entities and payment to one cannot be considered as payment to It has also been confirmed in the affidavit by MRT that consideration received from the Respondent is not shared with any of the group entities whatsoever. Further MFPM by way of an Affidavit has also clearly stated that the payment of royalty to CGEM or MRT is not mandated by MFPM for sale of capital goods and raw materials.
3.13 The payment for the import and the payment of royalty arise from two distinct agreements/ transactions and do not have any direct bearing on each other. Further, the Royalty is not a pre-condition in the agreement to import and it is a payment made for post-import activities. In this regard reliance is placed on the case of Commissioner of Customs, Chennai Vs. Toyota Kirloskar Motor Pvt. Ltd. [2007 (5) TMI 20-SC], wherein a single agreement provided for both import of goods and payment of royalty and fees for technical-know-how to the same entity.
3.14 In the present case, the raw materials are procured from MFPM or suppliers approved by MFPM whereas the royalty is paid to CGEM and MRT. MFPM establishes a list of approved suppliers who comply with the quality standards imposed by CGEM and MRT, and the Respondent is free to choose any from the said list to source the Capital goods and raw materials No additional consideration is paid to MFPM and there is no nexus between the payment of royalty to CGEM or MRT and goods by MFPM to the Respondent.
3.15 Further, CGEM and MRT do not mandate any condition with regard to the choice of supplier of the imported goods as long as the safety and security standards of CGEM or MRT are met. It is also submitted that the royalty payment received by both CGEM and MRT is for the sole purpose of utilization of trademark and technological patents with regard to the manufactured products and for no other service. As already pointed out this consideration is not shared with any group entity either. The Ld. counsel prayed that the appeal may be dismissed.
4. Heard both sides.
5.1 The issue to be considered is whether the royalty paid by the appellant to the foreign entity is to be included in the transaction value for the purpose of payment of duty.
5.2 Rule 10(1)(c) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, reads as under:-
“Rule- 10. Cost and services. – (1)In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, –
(a)….
(b)…..
(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;”
5.3 The twin conditions required to be satisfied are (i) the payment of royalty should be in relation to imported goods (ii) the payment should be as a condition of sale of the imported goods.
5.4 It would be beneficial to examine the relevant terms and conditions in the agreement. The Michelin Trade Mark of Technology License Agreement is as under:-
This Trademark and Technology Licence Agreement (the “Agreement”) enters into force on the 1 April 2011, between:
(1) Compagnie Générale des Etablissements Michelin (“CGEM”) a French company with its registered office at 12, cours Sablon, 63000 Clermont-Ferrand, France, and
(2) Michelin Recherche et Technique S. A. (“MRT”), a Swiss company, with its registered office at 10, route Louis-Braille, 1763 Granges-Paccot, Switzerland, of the one part, hereinafter referred to individually and collectively as “the Licensors”,
and:
(3) Michelin India Tamil Nadu Tyres Private Limited (MITTPL), a company incorporated under the laws of India, whose registered office is situated at 9th floor, Shyamala Towers, No. 136, Arcot Road, Saligramam, Chennai – 600 093,
.
.
PRELIMINARY STATEMENT:
WHEREAS the Licensors own all exclusive rights as regards Intellectual Property (defined below) for which the Licensee desires to obtain a license.
WHEREAS the Licensee wishes to acquire the right to use the Intellectual Property Rights in order to manufacture radial tyres suitable for road conditions in India and other countries and distribute them in India.
WHEREAS the Licensors agree to grant to Licensee the rights to use the Intellectual Property pursuant to the terms and conditions set forth hereinafter.
.
.
“Annual Net Sales” shall mean the cumulative amount of the gross invoice sale price of the Products manufactured by the licensee and related activities within the scope of this Agreement, when sold during the respective calendar year in a bona fide arm’s length commercial transaction, after deduction of:
-all discounts, allowances, commissions and credits of any kind, and
-all invoices for tubes, flaps, internal supports, components, semi-finished, and accessories sold to other Licensed Companies.
.
.
1.8 “Intellectual Property>>shall mean all exclusive rights of the Licensors as regards Marks, Technology, Patents, Copyrights and Designs.”
5.5 On perusal of the impugned order, it can be seen that Commissioner (Appeals) has thoroughly examined these documents. The Article 3 of the Agreement provides for payment of royalty by the Respondent. The Agreement is executed by Respondent with two group entities; viz., M/s. CGEM and M/s. MRT. The Respondent has to pay 4% of net sale value of the licensed manufactured products. This royalty is to be divided in the ratio of 13/16 to M/s. CGEM and 3/16 to M/s. MRT. The Ld. counsel has asserted that these entities are not supplying any capital goods or raw materials to the appellant. The capital goods and raw materials are supplied by M/s. MFPM, France and its group companies. The capital goods procured from M/s. MFPM are not manufactured by M/s. MFPM itself. They procure it from other and after adding mark-up has supplied to the appellant. Again, the royalty payments does not make it obligatory for the appellant to purchase the capital goods / raw materials from one supplier only. The appellants are free to source these from any qualified / approved suppliers.
5.6 The contention of the Department is that since CGEM & MRT are group companies of M/s. MFPM there is a nexus of the royalty paid to the annual net sales. It is to be seen that M/s. MFPM, France procures goods from third party suppliers and then supply to Respondent. Further royalty is paid only on the annual net sales to M/s. CGEM & MRT who have no role in supply of capital goods and are companies in Switzerland. Other than the contention that these are group companies there is no evidence adduced to establish that royalty is paid as a condition of sale of capital goods / raw materials. The Rule 10(1)(c) does not say that royalty is to be added in transaction value if the supplier is a group company. It says that if the royalty is a condition for sale, the same has to be included in the transaction value.
5.7 In the case of Commissioner of Customs, Chennai Toyota Kirlosakar Motor Pvt Ltd. [2007 (213) E.L.T. 4 S.C.], it was held that when technical assistance fees have direct nexus with post import activities and not with import of goods, the same is not to be included in the assessable value. The relevant paragraphs read as under:-
“8. Indisputably, in terms of the said agreement, the Respondent imported capital goods from Toyota Motor Corporation for manufacture of Passenger Utility Vehicles. Proceeding on the basis that the supplier is related to the respondent, the matter relating to valuation of the said capital goods was referred to the Special Valuation Branch for verification in regard to acceptance or otherwise of the declared invoice value. The Special Valuation Branch by reason of a Circular dated 6-4-1999 was directed to continue to assess the value of imports from the related supplier provisionally.
9. Another agreement known as „TMSS Overseas Parts Export Agreement‟ was entered into by and between the respondent and the Toyota Motor Management Services Singapore Pvt. Ltd. The said agreement covered the seal of the TMSS. The Assessing Authority passed an Order-in-Original dated 31-1-2003 holding : (1) In view of Articles 3 and 4 of the agreement, a lump sum amount of J.Y. 1,015,000,325 paid up to 31-10-2002 towards technical know-how should be loaded to the value of goods imported as components, tools and new capital goods imported from related supplier. (2) The value of components be arrived at by the adjustments, namely, proportionate addition of lump sum amount and by loading of 5% royalty. (3) The invoice values of spares/accessories be loaded by 2% on account of royalty payment and 3% on spares/accessories imported after 1-1-2004.
.
.
.
30. The observations made by this Court Essar Gujarat Limited (supra) in Paragraph 18 must be understood in the factual matrix involved therein. The ratio of a decision, as is well-known, must be culled out from the facts involved in a given case. A decision, as is well-known, is an authority for what it decides and not what can logically be deduced Even in Essar Gujarat Limited (supra), a clear distinction has been made between the charges required to be made for pre-importation and post- importation. All charges levied before the capital goods were imported were held to be considered for the purpose of computation of transaction value and not the post-importation one. The said decision, therefore, in our opinion, is not an authority for the proposition that irrespective of nature of the contract, licence fee and charges paid for technical know-how, although the same would have nothing to do with the charges at the pre-importation stage, would have to be taken into consideration towards computation of transaction value in terms of Rule 9(1)(c) of the Rules.
31. The transactional value must be relatable to import of goods which a fortiori would mean that the amounts must be payable as a condition of import. A distinction, therefore, clearly exists between an amount payable as a condition of import and an amount payable in respect of the matters governing the manufacturing activities, which may not have anything to do with the import of the capital goods.
32. Article 4 provided for additional assistance in respect of the matters specifically laid down therein. Technical assistance fees have a direct nexus with the post-import activities and not with importation of goods.
33. It is also a matter of some significance that technical assistance and know-how were required to be given not as a condition precedent, but as and when the respondent makes a request therefor and not otherwise. Appendix C of the agreement relates to manufacture of local parts which evidently has nothing to do with the import of the capital goods. Appendix D again is attributable to construction of plant; production preparation; and pilot production and production model, wherewith the import of capital goods did not have any nexus.”
5.8 The Tribunal in the case of Commissioner of Customs, Mumbai Bridgestone India Pvt Ltd. [2013 (292) ELT 403 (Tri.-Mum.)] held that the royalty and license fee paid on net sale value of products sold in India which has nothing to do with imported goods nor was a condition of sale cannot be included in the assessable value. The relevant paragraphs reads as under:-
“2.1 M/s. Bridgestone India Pvt. Ltd. are manufacturers of tyres and tubes and they undertook imports from their foreign collaborator M/s. Bridgestone Corporation, Japan. Inasmuch as the foreign supplier and the buyer are related persons the valuation of the goods imported is undertaken by the SVB cell attached to the Custom House. As per the joint venture agreement entered into between the two parties it was noticed that the importer was paying royalty and licence fee to the foreign supplier in terms of the Licence and Technical Assistance Agreement entered into on 1-4-2005. The department was of the view that the royalty and licence fee paid by the importer is relatable to the goods imported and, therefore, their value should be included in the assessable value of the goods supplied by the foreign collaborator and accordingly ordered that the declared invoice value for the goods imported by M/s. Bridgestone India Pvt. Ltd. from M/s. Bridgestone Corporation, Japan and other affiliates and associates shall be loaded by 4% with effect from 1-4-2005 onwards under Section 14 of the Customs Act, 1962 read with the Customs Valuation Rules, 1988 and Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
