Case Law Details
Commissioner of Customs (Port) Vs Humboldt Wedag India Private Limited (CESTAT Kolkata)
Introduction: In a significant ruling, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) Kolkata held that royalty and license fees are not addable to the transaction value of imported parts and components. The case involved the Commissioner of Customs (Port) and Humboldt Wedag India Private Limited, a subsidiary of Humboldt Wedag GmbH, Germany.
Background: Humboldt Wedag India Private Limited (the respondent) imports parts and components from its related entity, Humboldt Wedag GmbH, Germany. The respondent entered into two separate license agreements with the related entity for technical know-how and technology transfer. The Special Valuation Branch (SVB) reviewed these transactions and initially accepted the invoice value. However, an Order-in-Original in 2012 directed the inclusion of royalty and lump sum fees paid under these agreements in the transaction value of the imported goods. This order was later set aside by the Commissioner (Appeals).
Revenue’s Appeal:The Revenue appealed against the Commissioner (Appeals) order, arguing that the royalty and license fees were inseparable conditions for the sale of the imported components, necessitating their inclusion in the transaction value. They contended that the net selling price of the finished products, which determined the royalty, was influenced by both domestic and imported component costs. Citing precedents such as Matsushita Television and Audio (I) Ltd., where the Supreme Court ruled that the net selling price includes the cost of imported components and customs duty, the Revenue asserted that these fees should be integrated into the transaction value calculation.
Respondent’s Defense: The respondent countered that the license agreements explicitly excluded the cost of imported components from the net selling price calculation for royalty payments, and they did not stipulate that royalty payment was a condition for the sale of imported components. Furthermore, the respondent emphasized that the majority of components were procured locally, with imports constituting only a small fraction of total purchases, thereby undermining the Revenue’s argument.
CESTAT’s Findings:The tribunal analyzed whether the royalty and license fees were a condition of sale for the imported components and concluded that they were not. The agreements did not mandate that the supplier would withhold sales unless royalty was paid, allowing the respondent to source components from other parties and use technology from other suppliers. Additionally, the cost of imported components was explicitly excluded from the royalty calculation, indicating no direct relation to the import transaction. The tribunal also referenced consistent jurisprudence from previous rulings, such as Atlas Copco India Ltd. and Brembo Brake India Pvt. Ltd., which supported the view that royalty payments for technical know-how should not be included in the transaction value of imported goods.
Conclusion: The CESTAT Kolkata upheld the Commissioner (Appeals) order, ruling that royalty and license fees are not addable to the transaction value of imported parts and components. This decision aligns with the established principle that payments for technical know-how and technology transfer, which are unrelated to the sale of imported goods, should not influence their transaction value. This judgment provides clarity and reinforces fair valuation practices in customs transactions.
FULL TEXT OF THE CESTAT KOLKATA ORDER
The present appeal has been filed by the Revenue against the impugned Order-in-Appeal No. KOL/CUS(PORT)/SS/187/2016 dated 19.07.2016 passed by the Ld. Commissioner of Customs (Appeals).
2. The brief facts of the case are that the Respondent, M/s. Humboldt Wedag India Private Limited, is a subsidiary of the M/s Humboldt Wedag GmbH, Germany (“Related Entity”) and is engaged in the business of industrial plant engineering and supply of equipment for cement plants. The equipment is manufactured in India either by the Respondent or a third-party vendor based on technical know-how provided by the Respondent. Apart from the above, the Respondent also provide spares to the customers on need basis and project related services.
2.1. The Respondent imports parts/components from the Related Entity and entered into two separate License agreements with the said Related Entity. The transaction between the parties being a related party transaction, the import of goods from the said Related Entity is reviewed by the Special Valuation Branch (SVB) from time to time. Pursuant to the review carried out by the SVB, a Review Order dated 08.12.2000 was passed, accepting the invoice value. The said Review Order dated 08.12.2000 was valid till 2003. After expiry of the said Review Order, an Order-in-Original dated 14.12.2012 was passed directing inclusion of Royalty and Lump sum Fee paid by the Respondent under the License Agreements on imports made against bills of entry provisionally assessed. On appeal, the said Order-in-Original was set aside by the Ld. Commissioner (Appeals) vide Order- in-Appeal No. KOL/CUS (PORT)/SS/187/2016 dated 13.07.2016, wherein it was held that the payment of Royalty by the Respondent for importation of Technology and Technical Knowhow under the License Agreements are not in relation to imported goods and are not a pre-condition of sale of imported goods and hence, Royalty paid are not to be considered for addition to transaction value of the imported goods under Rule 9/10 of Customs Valuation Rules (CVR), 1988/2007. Aggrieved against the impugned order passed by the Ld. Commissioner (Appeals), Revenue has filed this appeal.
3. In the grounds of appeal, Revenue made the following submissions:
(i) As per the Terms and Conditions of the Agreements made in 2006 and 2010, the Licensor, who is the related foreign supplier in this case, shall transfer Technical Knowhow to the Respondent, which include transfer of designs, patents, copyrights, handbooks etc. The Respondent manufacture specified products and provide specified services to its customers in India and abroad. In lieu of offering this ‘Technology’, the Respondent agreed to pay a specified percentage of the ‘Net Selling Price’ of the products and services sold within India and abroad. The ‘Net Selling Price’ has been defined as the net ex-factory sale price of the products less, inter alia, the landed cost of the imported components, irrespective of the source of procurement. Thus, the price of the imported components and parts affect the Net selling Price of the finished products manufactured with the Technology transferred by the Licensor. Royalty, being an agreed percentage of the net selling price, is ipso fact dependent not only on the price of the domestic components but also on the imported components used in the manufacture of the finished products.
(ii) Royalty and License Fees mentioned in the two Agreements are inseparable condition for sale of the parts and components imported by the respondent and hence shall be added to the Transaction value of the imported goods as per the CVR, 1988 and CVR, 2007.
(iii) In the case of Matsushita Television and Audio (I) Ltd. [2007 (211) E.L.T. 200 (S.C.)], the Hon’ble Apex Court has ruled that the ex-factory price or the net selling price of the finished item in the market shall include the cost of imported components and the customs duty paid on them. Since Royalty is payable as a percentage of the net selling price, Royalty must be added to the Transaction value of the imported goods.
(iv) The order passed by CESTAT in the case of Agro Tech Foods Pvt. Ltd. vs Commissioner of Customs (I), Nava Sheva [2015 (330) E. L. T. 448 (Tri-Mum.)] also supports the view that Royalty and License Fees payable by the Respondent are includable in the Transaction Value of the imported components.
(v) Accordingly, Revenue prayed for setting aside the impugned order.
4. In their Reply to Appeal, the Respondent has made the following submissions:
(i) A perusal of the Agreements entered by the Respondent with the Related Entity reveals that for the transfer of the Technology, the Respondent shall pay to the Licensor:
a. A lump sum fee of Rupees equivalent of USD 1,400,000/- in specified instalments under License Agreement of 2006; and
b. A Royalty of 5% net of taxes of Net Selling Price of products and services sold in India and 8% of net of taxes of Net Selling Price on export of products and services under License Agreement of 2006
c. Further, a Royalty of 3% net of applicable taxes on Net Selling Price of products and services sold domestically and exported under License Agreement of 2010.
(ii) The term “Net Selling Price” has been defined in the License Agreement 2006 as to mean the net ex-factory sale price of the Products sold less the following:
a. landed cost (including freight, insurance, custom duties etc.) of imported components, irrespective of the source of procurement,
b. cost of standard bought out items (i.e. finished components which are not tailor made and in respect of which the licensor has not provided any Technology),
c. the cost of any parts or components which are manufactured in accordance with drawings of the Licensee which are in no way related to the Technology or New IP, and
d. Excise Duty and other Government taxes and levies, freight, insurance, packing and forwarding expenses.
(iii) In the transaction of import of technology and payment of license fees, the cost of imported components or parts are specifically excluded for the purpose of payment of Royalty. The Royalty payable has not be held as a condition of sale of imported components and hence the same are not addable to the value of imported components. In this regard, reliance is also placed on the following decisions: –
a. Atlas Copco India Ltd vs. Commissioner of Cus. (Import), Mumbai [2015 (319) E.L.T. 517 (Tri.- Mum.)] ;
b. Brembo Brake India Pvt. Ltd. v. Commr. of (Imports), Mumbai [2014 (302) E.L. T. 551 (Tri. – Bom.)] ;
c. Commissioner of Customs Vs Ferodo India Private Limited [2008 (224) E. L. T. 23 (S.C.)] ;
d. Commissioner of Customs New Delhi v. M/s. Sicpa India Ltd. [2017 (2) TMI 608 (Tri. – New Delhi)];
e. Sandvik Asia Pvt Ltd vs Commissioner of Customs (Import), Mumbai [2015 (329) E.L. T. 493 (Tri. -Mum.)]
(iv) The payment of lump-sum fee and Royalty paid under the Agreements cannot be added to the value of imported goods, inasmuch as: –
(a) The Royalty and lump fees are for the purpose of transfer of technical know- how which will include designs, layouts, processes, procedures, techniques, procedures, methods etc. No part of the said Agreements envisages imports of components and parts under the said Agreements;
(b) For the purpose of payment of Royalty, the cost of imported components and standard bought out items are specifically excluded. In other words, the Royalty is payable only on the value addition done by the Respondent utilizing the technical know-how of the Licensor and has nothing to do with the value of imported components. Even when the components are locally procured and not imported from the related overseas entity, the Respondent is obliged for the payment of Royalty on the value addition done by the Respondent. In other words, when the Royalty is only payable on the value addition done by the Respondent and is not related to the value of imported components, it cannot be held that the Royalty payment is made in relation to imported goods;
(v) In order to include payment of Royalty/License Fee in the assessable value, it is a settled principle that the same ought to be shown as a condition of sale. Reliance in this regard is placed on the following decisions of the Hon’ble Supreme Court: –
a. CC (Port), Chennai vs. Toyota Kirloskar Motor P. Ltd., [2007 (213) E.L.T. 4 (S.C.)]
b. Commissioner of Customs vs. Ferodo India (P) , [2008 (224) E.L.T. 23 (S.C.)]
c. Commissioner vs. Essar Steel Ltd. [2015 (319) E.L.T. 202 (S.C.)]
(vi) In the present case, the said payments are not a ‘condition of sale’, inasmuch as:-
(a) Agreement does not stipulate that supplier would not sell the goods unless amount of Royalty is paid;
(b) Importer is not precluded from sourcing the components from non-related parties;
(c) Agreement does not stipulate that importer would use only the technology of the supplier and of no one else.
(vii) The Respondent is not obligated to purchase any raw material or capital goods only from the Licensor, with whom the License Agreements have been entered into (for payment of Royalty).
(viii) In fact, the imported components constitute only a small fraction of the total purchases made by the Respondent and constituted only 2.8% of the total value of purchases made by the Respondent during all the years under consideration. It is also submitted that the Respondent imports from overseas (both related and unrelated parties) on need basis only and only in cases when the raw material is not available within India. In fact, most of the purchases are made in India only and the locally procured components in all the years constituted more than 80% of the total share of components used in the manufacture of finished goods. Thus, the grounds of appeal that the Respondent cannot import parts and components from parties other than the related party is baseless and has no merit. The above figures negate conditions of Rule 10(1)(c) which states that the Royalty is includible only when the payment is made as a pre- condition of sale of imported components.
(ix) In identical cases, where there was no exclusivity of procuring tools and components from the related overseas entity and where procurements were made for various other suppliers, it has been held that the Rule 10 (1)
(c) is not attracted. In this regard, reliance is placed on the following: –
a. ABB Ltd. vs. Commissioner [2013 (288) E.L.T. 296 (Tri.)]
b. Totalfinaelf India Ltd. vs. Commissioner [2008 (227) E.L.T. 581 (Tri.)]
c. Engelhard Environmental Systems India Ltd. vs. Commissioner [2005 (185) E.L. T. 155 (Tri.) upheld by Supreme Court in 2006 (193) E.L.T. A198 (S.C.)]
(x) Rule 10(3) of the Customs valuation Rules, 2007 specifically excludes Royalty from inclusion in the Transaction value of the imported components.
(xi) Accordingly, the Respondent prayed for upholding the impugned order and rejecting the Revenue’s appeal.
5. The Ld. Authorized Representative appearing for the Revenue reiterated the points stated in the Grounds of Appeal filed by the Revenue.
6. Heard both sides and perused the appeal documents.
7. We observe that the issue to be decided in the present appeal filed by the Revenue is whether Royalty and License Fees mentioned in the two Agreements are includable in the Transaction value of the parts and components imported by the Respondent. The Revenue argued that Royalty, being an agreed percentage of the net selling price, depends not only on the price of the domestic components but also on the imported components used in the manufacture of the finished products. Accordingly, Revenue contended that Royalty and License Fees mentioned in the two Agreements are inseparable conditions for sale of the parts and components imported by the respondent and hence shall be added to the Transaction value of the imported goods as per the CVR, 1988 and CVR, 2007.
7.1. Thus, we observe that it is to be seen from the Agreements whether payment of Royalty and License Fees is a condition of sale of the imported components or not. In the present case, we observe that the said payments are not a ‘condition of sale’ due to the following reasons: –
(i) Agreement does not stipulate that supplier would not sell the goods unless amount of royalty is paid;
(ii) Importer is not precluded from sourcing the components from non-related parties;
(iii) Agreement does not stipulate that importer would use only the technology of the supplier and of no one else.
(iv) No part of the said Agreements envisages imports of components and parts under the said Agreements;
(v) The Respondent is not obligated to purchase any raw material or capital goods only from the Licensor, with whom the License Agreements have been entered into (for payment of Royalty).
7.2. We observe that in transactions of import of technology and payment of license fee, the cost of imported components or parts are specifically excluded for the purpose of payment of royalty. Thus, we observe that the royalty payable cannot be held as a condition of sale of imported components. When the royalty payment is not a condition of sale of the parts and components, the same are not addable to the value of imported components. In the present case, we observe that the royalty is payable only on the value addition done by the Respondent utilizing the Technical Know-how of the Licensor and has nothing to do with the value of imported components. Accordingly, we hold that payment of Royalty is not a condition of sale of the parts and components in the Agreements and hence, we hold that the same are not includable in the Transaction value of the imported components.
7.3. We observe that the above said view has been held in the following decisions: –
a. Atlas Copco India Ltd vs. Commissioner of Cus. (Import), Mumbai [2015 (319) E.L.T. 517 (Tri.- Mum.)] ;
b. Brembo Brake India Pvt. Ltd. v. Commr. of (Imports), Mumbai [2014 (302) E.L.T. 551 (Tri. – Bom.)] ;
c. Commissioner of Customs Vs Ferodo India Private Limited [2008 (224) E. L. T. 23 (S.C.)] ;
d. Commissioner of Customs New Delhi v. M/s. Sicpa India Ltd. [2017 (2) TMI 608 (Tri. – New Delhi)];
e. Sandvik Asia Pvt Ltd vs Commissioner of Customs (Import), Mumbai [2015 (329) E.L. T. 493 (Tri. -Mum.)]
7.4. We also observe that a Royalty of 3% net of applicable taxes on Net Selling Price of products and services sold domestically and exported, is payable under License Agreement of 2010. The imported components constitute only a small fraction of the total purchases made by the Respondent and constituted only 2.8% of the total value of purchases made by the Respondent during all the years under consideration. We observe that most of the components purchased by the Respondent are from India only and the locally procured components in all the years constitute more than 80% of the total share of components used in the manufacture of finished goods. Thus, we observe that the observation of the Revenue in the grounds of appeal that the Respondent cannot import parts and components from parties other than the related party is baseless and has no merit.
7.5. The Revenue relied upon the decision in the case of Matsushita Television and Audio (I) Ltd. [2007 (211) E.L.T. 200 (S.C.)], and contended that the Hon’ble Apex court has ruled that the ex-factory price or the net selling price of the finished item in the market shall include the cost of imported components and the customs duty paid on them. We do not agree with the submission of Revenue. In the said decision, the Hon’ble Apex Court has categorically held that Royalty would not be added to the Transaction value, if the net ex-factory sale price of the finished goods expressly excluded the cost of imported components. As the ex-factory price has excluded the cost of imported components in this case, we observe that the above decision cited by Revenue supports the view of the Respondent that in the facts and circumstances of this case, Royalty is not includable in the Transaction value.
7.6. The Interpretative Notes to Rule 10(3) of the Customs valuation Rules, 2007, specifically excludes Royalty from inclusion in the Transaction value of the imported components. For the purpose of ready reference, the said Interpretative Note to Rule 10 (3) is reproduced below: –
“Where objective and quantifiable data do not exist with regard to the additions required to be made under the provisions of rule 10, the transaction value cannot be determined under the provisions of rule 3. As an illustration of this, a royalty is paid on the basis of the price in a sale in the importing country of a litre of a particular product that was imported by the kilogram and made up into a solution after importation. If the royalty is based partially on the imported goods and partially on other factors, which have nothing to do with the imported goods (such as when the imported goods are mixed with domestic ingredients and are no longer separately identifiable, or when the royalty cannot be distinguished from special financial arrangements between the buyer and the seller), it would be inappropriate to attempt to make an addition for the royalty. However, if the amount of this royalty is based only on the imported goods and can be readily quantified, an addition to the price actually paid or payable can be made.”
(Emphasis supplied)
7.7. From the Interpretative Notes to Rule 10(3) cited above, we observe that when the imported goods are mixed with domestic ingredients and are no longer separately identifiable, or when the Royalty cannot be distinguished from special financial arrangements between the buyer and the seller, in those circumstances, Royalty is not addable to the Transaction value of the imported parts and components.
7.8. In view of the decisions cited above and the Interpretative Notes to Rule 10(3) of the Valuation Rules, we hold that Royalty and License Fees are not includable in the transaction value of the imported parts and components.
8. In view of the above discussions, we uphold the impugned order and reject the appeal filed by the Revenue.
(Operative part of the order was pronounced in open court)
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