Chem Rend Chemicals Co. Pvt. Ltd. Vs Commissioner of Customs (CESTAT Bangalore)
Introduction: In a significant ruling, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) Bangalore addressed the intricate issue of valuation under the GST regime, particularly focusing on the inclusion of royalty payments. The case of Chem Rend Chemicals Co. Pvt. Ltd. Vs Commissioner of Customs has set a precedent, clarifying the circumstances under which royalty is considered in the valuation of imported goods under the Customs Valuation Rules, 2007.
Detailed Analysis: The appellant, Chem Rend Chemicals Co. Pvt. Ltd., engaged in trading various industrial products, faced a valuation dispute under Rules 9 and 10(1)(c) of the Customs Valuation Rules, 2007. The contention revolved around the addition of royalty payments to the value of imported goods. The appellant had an agreement with Chem Trend, USA, involving the payment of royalty for the use of trade secrets and Intellectual Property Rights related to manufacturing and selling specified products in India.
The crux of the dispute was whether the royalty paid for intellectual property rights should be added to the assessable value of imported goods used for trading and repacking in India. The Customs authorities initially ordered a 100% loading on the declared invoice price and included the royalty payments in the assessable value, which was challenged by the appellant.
The Tribunal meticulously examined the Customs Valuation Rules, 2007, and relevant legal precedents. It emphasized that royalty payments are pertinent to the valuation only when they relate directly to the imported goods and are a condition of their sale. The Tribunal observed that in the appellant’s case, the royalty was paid for manufacturing technology used exclusively for products made in India, not for the traded or repacked imported goods.
Conclusion: The CESTAT Bangalore’s ruling marks a pivotal point in the understanding of GST valuation, particularly in the context of royalty payments. It unequivocally stated that royalty payments related to manufacturing technology for goods produced in India do not form part of the valuation of traded or repacked imported goods. This decision provides much-needed clarity for businesses engaged in similar operations, ensuring that royalty payments are appropriately considered in customs valuation only when directly related to the condition of sale of the imported goods.
This judgment not only aids in the accurate valuation of goods under the GST regime but also ensures that businesses are not unjustly burdened with additional costs unrelated to the actual import transactions. The Tribunal’s nuanced approach underscores the importance of understanding the specific details and purposes behind royalty payments when determining their impact on the valuation of imported goods.
In essence, the Chem Rend Chemicals Co. ruling by CESTAT Bangalore serves as a guiding light for importers, customs practitioners, and policymakers, reinforcing the principle that the inclusion of royalty in the valuation of imported goods must be closely tied to the nature of the transaction and the specifics of the payment agreements.
FULL TEXT OF THE CESTAT BANGALORE ORDER
The issue in the present appeal is regarding valuation of imported goods under Rule 9 and 10(1)(c) of the Customs Valuation Rules, 2007. The Appellant herein is engaged in trading of various types of industrial standard mould release agent and dye lubricant. Appellant used to import raw material from M/s. Chem Trend, USA for manufacture of finished goods. Thereafter, Appellant had entered into an agreement dated 01.01.2010 for 5 years for use of trade secrets and other Intellectual Property Rights in connection with the manufacture and sale of specified products in India by paying royalty @ 3.7% and 4% of net sale volume of the finished goods manufactured and sold to customers. In 2007, Assistant Commissioner of Customs, Special Valuation Branch (SVB) Mumbai passed an ex parte order rejecting the declared invoice value and for loading of declared invoice price by 100% under the provisions of Rule 8 read with Rule 9 of the Customs Valuation Rules, 2007. Thereafter, when the office of the Appellant was shifted to Bangalore on 02.06.2007, the Appellant stopped import from Chem Trend, Singapore and started to import from Chem Trend, USA. The Appellant filed documents before the SVB Chennai which was transferred to SVB Bangalore. Appellant had submitted various documents pertaining to operation and valuation of goods. Appellant had also produced import prices, comparing the import price with transfer price list by way of comparison and submitted that the goods are supplied across the global to the other related parties at the same price as mentioned in the Appellant’s price list. However, the Assistant Commissioner, SVB Bangalore passed an order dated 02.02.2016 ordering loading of 100% value on the declared price along with addition of payment made towards royalty under Rule 10(1)(c) of the Customs Valuation Rules, 2007. Aggrieved by this order, an Appeal was filed before the Commissioner (Appeals) and the Commissioner (Appeals) partially allowed the appeal by setting aside the loading of import value by 100% and additional royalty of the assessable value. However, Commissioner (Appeals) upheld the rejection of declared value and remanded the matter for re-determination of the assessable value and to decide the issue of addition of payment made towards royalty as per Customs Valuation Rules, 2007. Aggrieved by the same, present appeal is filed.
2. When the appeal came up for hearing, Learned Counsel for the Appellant submits that the though it is not disputed that overseas supplier and the Appellant are related to each other as the Appellant is 100% subsidy of foreign supplier, price declared by the Appellant is not influenced by the relationship between the Appellant and the Supplier; therefore, transaction value has to be accepted in the present case. Learned Counsel for the Appellant also drew our attention to the relevant provisions of Section 14 of the Customs Valuation Rules, 2007 and submitted that in Appellant’s case, none of the circumstances specified in the Rule 3(3)(a) of the Customs Valuation Rules, 2007 are present except for the fact that the Appellant and the foreign supplier are related. There is no evidence available on record to prove that the relationship between the Appellant and supplier has influenced the price and value declared by the Appellant is closely approximate to the transaction value of identical goods in the case of sales made with unrelated buyers in India and the declared price is purely on the basis of commercial consideration. Learned Counsel for the Appellant also drew our attention to the transfer pricing guidelines, letter from the overseas supplier, transfer pricing report, order passed on the transfer pricing authority wherein no objection has been raised on the pricing between group companies and price has been confirmed as being at arm’s length. He further submits that the costing of imported goods clearly show that the price of the goods is as per the transfer price list of Chem Trend, USA and the declared value corresponds to the computed value. To substantiate the above, Learned Counsel drew our attention to the cost certification obtained from M/s. Chem Trend, USA and stated that even if the deductive method is adopted in terms of Rule 7 of the Customs Valuation Rules, 2007, the import price of the imported goods is closely approximate to the deductive value. To substantiate the same, he produced the following details of profit and weighted profit for various years.
