Customs Duty and Valuation Rules: Forever New Apparels Case Analysis

In re Forever New Apparels Private Limited (CAAR Delhi)

In the case of Forever New Apparels Private Limited, the Customs Authority for Advance Rulings (CAAR) Delhi addressed several key valuation questions under the Customs Act. Firstly, regarding the transaction value of imported finished goods from third-party manufacturers, CAAR Delhi ruled that the proposed transaction value aligns with Section 14 of the Customs Act and Rules 2 and 3 of the Valuation Rules. Secondly, concerning the Buying Agent Fee paid to related agents ADT HK/Aoxin for sourcing goods, CAAR Delhi determined that this fee should not be included in the transaction value of goods imported from unrelated manufacturers, citing compliance with Section 14 and Rules 3 and 10 of the Valuation Rules. Thirdly, the License Fee paid to FN AU for intellectual property related to operating retail stores under the Forever New brand was deemed non-includible in the transaction value of imported goods, in line with valuation principles. Lastly, the Management Fee paid to FN AU for routine services was similarly excluded from the transaction value of goods imported from unrelated third-party manufacturers. These rulings provide clarity on customs duty payment obligations and the application of valuation rules for imported goods in similar commercial scenarios.

(a) Question 1: Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers, is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules.

Answer: It is ruled that the transaction value proposed to be adopted in respect of the import of finished goods by the Applicant from third party manufacturers, is acceptable and is consistent with the principles of valuation as provided under Section 14 of the Customs Act, read with Rules 2 and 3 of the Valuation Rules.

(d) Question 2: Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant, is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

Answer: It is ruled that the Buying Agent Fee payable by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the applicant is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

(e) Question 3: Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

Answer: It is ruled that the License Fee payable by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be Imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

(d) Question 4: Whether the Management Fee paid by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from another party i.e. an unrelated third-party manufacturer. consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules?

Answer: It is ruled that the Management Fee payable by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from unrelated third-party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

FULL TEXT OF THE ORDER OF CUSTOMS AUTHORITY OF ADVANCE RULING, DELHI

M/s. Forever New Apparels Private Limited (`Applicant’), holding IEC 0507014294, are having the registered head office located at B- 304, New Friends Colony, New Delhi 110025, India – subsidiary of FN AU and is engaged in business of trading in women’s clothing and apparels. The Applicant is importing finished goods from third parties on payment of applicable customs duty since last many years. Forever New Group (‘FN Group’) includes FN AU, FN International (‘FN Intl, the Applicant, ADT Buying Office HK (‘Buying Agent ADT HK’), Aoxin Apparel Company Limited (‘Buying Agent Aoxin’) and Other FN Group entities. Pursuant to agreement dated 1 July 2023, the Applicant is paying 5% License Fee to FN AU for grant of non-exclusive license to use or exploit Licensed IP in India which includes Forever New brand, retail and online store design, technical information and any improvements thereof. This fee is calculated as percentage of Retail Net Sales made by the Applicant in India subject to the Applicant’s return on sales of 5% or more. Pursuant to agreement dated 1 July 2022, the Applicant is paying 5% Management Fee to FN AU for routine management services like accounting, marketing support, human resources, information technology support, legal support, store development and other non-product related back-office type services. This fee is calculated on cost (direct and indirect costs) plus 5% markup basis. The Applicant is implementing new operating model as a part of its global supply chain re-structuring to centralize sourcing and procurement process across FN Group.

QUESTIONS BEFORE THE HON’BLE CUSTOMS AUTHORITY OF ADVANCE RULINGS

Question 1: Whether transaction value proposed to be adopted is acceptable under Section 14 of the Customs Act, 1962 read with the Customs (Determination of Price of Imported Goods) Rules, 2007?

Question 2: Whether Buying Agent Fee is excludible from value of imported goods? Question 3: Whether License Fee is excludible from value of imported goods? Question 4: Whether Management Fee is excludible from value of imported goods?

SUBMISSIONS OF THE APPLICANT

FN India is engaged in the business of trading in women’s clothing and apparels which includes active wear, belts, handbags, sunglasses, pants, skirts, jackets, coats, etc. and is a subsidiary of FN AU.

1.2. The present application is being filed for the purpose of determination of application of principles of valuation of the imported goods under the Customs Act and Valuation Rules, in the context of the transaction value of the imported goods, the Buying Agent Fee, License Fee and Management Fee paid by the Applicant under the proposed operating model.

Proposed flow of transaction:

1.3. FN Group is implementing a new operating model as part of its global supply chain which involves a change in its global sourcing and procurement arrangements. The purpose of the new operating model is to centralise the sourcing and procurement processes across the FN Group. The sourcing and procurement model to be implemented by the FN Group would involve wholly owned subsidiaries of ADT acting as ‘buying agents’ for the FN Group entities, including the Applicant. Under the new operating model, the Applicant would be importing goods into India from unrelated parties through two buying agent entities:

• Buying Agent — ADT HK, incorporated in Hong Kong; and
• Buying Agent – Aoxin, incorporated in China.

1.4. The buying agents will solely act on behalf of FN India and other members of the FN Group to source potential third party manufactures of finished goods and raw materials, negotiate contracts and place orders on the third party manufacturers. The buying agents would only facilitate the supply of finished goods and raw materials between the third party manufacturers and the buyer i.e., FN India and other members of the FN Group. The buying agents will have no obligation towards any manufacturers for purchase of goods. The buying agents will not take title or ownership of the goods nor assume any financial risk in relation to the transaction between the third party manufacturers and the buyer i.e., FN India and other members of the FN Group. The executed agreements between the Applicant and the buying agents have been produced herewith and marked for reference as Exhibit A.

1.5. The transactions under the new operating model can be undertaken under 3 different scenarios (which may operate in conjunction with each other):

Scenario — I: Procurement of raw material directly by FN Int

Procurement and sourcing of fabrics and other raw materials such as trims, buttons, zips etc.

1.6. Under this model, FN Int, a part of FN Group, located in Australia would be responsible for placing bulk orders and procuring raw materials i.e., fabrics, trims, buttons, etc., from unrelated third party vendors. FN Int shall procure these raw materials directly from third party vendors and would take title and ownership of the goods. These vendors would be paid by FN Int and FN Int, in turn would recharge the cost of the raw materials to FN Group entities including the Applicant at the third party cost. The title and ownership of the goods would be transferred by FN Int to FN Group entities including the Applicant, basis the cross-charge invoices which would be raised by FN Int.

1.7. On instruction of FN Int, the third party vendors would issue the fabric and other raw material free of cost to Cut, Make, Trim (‘CMT’) manufacturers for use in manufacturing of finished goods, on behalf of the Applicant

Procurement of finished goods

1.8. As explained above, under the new model, the Applicant would place the order through buying agents. The buying agents would identify and source the suppliers, consolidate the orders from the Applicant and other FN Group entities in order to meet minimum order quantities and to leverage better buying power in negotiating the price of goods. Thereafter, the buying agents would place an order for finished goods with the unrelated third party CMT manufacturers on behalf of the Applicant and other FN Group entities.

1.9. The CMT manufacturers would raise an invoice for the conversion of the raw materials into finished goods i.e., for the provision of a service at a CMT price specifying the Applicant as the buying entity, however, the invoice will be sent to Buying Agent – ADT HK/ Buying Agent – Aoxin, for administrative convenience. The buying agents would, in turn, raise an invoice to the Applicant, for recovery of the amount charged by the manufacturer, at cost. The invoices raised by Buying Agent- ADT HK and/or Buying Agent – Aoxin for the conversion charges on the Applicant, would refer to invoices raised by the third party CMT manufacturers. The buying agents would receive funds from the Applicant and would make the corresponding payment to the CMT manufacturers on behalf of the Applicant.

1.10. Buying Agent – ADT HK / Buying Agent – Aoxin would neither take title to the finished goods, fabric or any other materials nor would assume any financial risk in relation to the finished goods, fabric, or other materials. The title to the finished goods would pass directly from the CMT manufacturers to the Applicant, with the Applicant acting as the importer on record responsible for import clearances and paying any applicable local taxes or import duties and levies within India. Buying Agent – ADT HK and Buying Agent – Aoxin would each be remunerated for the buying agency services performed by way of the Buying Agent Fee. The fee would be paid by the Applicant to the buying agents separately from the payment for the finished goods. The Buying Agent Fee would be calculated on a cost plus basis (being direct and indirect costs incurred in performing the services plus an agreed mark up of 5%).

For the purpose of payment of Customs Duty on the import of the finished goods, it is proposed that the duty will be paid on the CMT charges paid in respect of such finished goods plus the cost associated with the free issue of the fabric and raw materials (being an assist cost) as per Section 14 Of the Customs Act.

The diagrammatic flow of scenario I is provided below:

Scenario II: Procurement of raw material by FN Int through the buying agent

Procurement and sourcing of fabrics and other raw materials such as trims, buttons, zips etc.

1.12. Under this scenario, FN Int would instruct Aoxin, who will act as a buying agent to place orders for procurement of raw materials i.e., fabrics, trims, buttons, etc., from unrelated third party vendors. FN Int would make payment to Aoxin and Aoxin would make the payments to the third party vendors as a buying agent of FN Int. FN Int would recharge the cost of the raw materials and Buying Agent Fee to FN Group entities including FN India, at cost. Further the title and ownership of the goods would be transferred to FN Group entities including FN India based on the cross-charge invoices which would be raised by FN Int. On the instruction of FN Int, on behalf of the Applicant, the third party vendors would issue the fabric and other raw material free of cost to CMT garment manufacturers for use in manufacturing of finished goods on behalf of the Applicant.

Procurement of finished goods

1.13. The process for procurement of finished goods will be the same as under Scenario I.

1.14. The diagrammatic flow of scenario II is provided below:

Scenario III: Purchase of raw material directly by third party manufacturers

Procurement and sourcing of fabrics and other raw materials such as trims, buttons, zips etc.

1.15. Under this model, the third party manufacturers directly purchase the raw materials required for manufacturing the finished goods on their own account. The cost incurred by the manufacturers would be recovered through the price charged for the finished goods.
Procurement of finished goods

1.16. Similar to Scenario I and II, FN India would place the order through buying agents, who in turn would place the order for finished goods with the unrelated third party manufacturers on behalf of FN India and other FN Group entities. The third party manufacturers would invoice for the finished goods to ADT HK/ Aoxin. Given that the buying agents act as central procurement agents for the FN Group to facilitate bargaining power for the group, the third party manufacturers raise an invoice to the buying agents, however, specifying, the Applicant as the buying entity. The invoice will merely be sent to Buying Agent – ADT HK/ Buying Agent – Aoxin, for administrative convenience. The buying agents would, in turn, raise an invoice to the Applicant, for recovery of the amount charged by the third party manufacturers, at cost, with supporting evidence of the invoices raised by the manufacturers. The invoices raised by Buying Agent- ADT HK and/or Buying Agent – Aoxin for the finished goods, would refer to invoices raised by the third party manufacturers. In this scenario, the third party manufacturers directly purchase the raw materials required for manufacturing the finished goods on their own account, therefore, the price of the finished goods includes the cost of raw materials procured by third party manufacturers. ADT HK and/or Aoxin would receive funds from FN India and would make the corresponding payment to the third party manufacturers on behalf of FN India. In other words, the buying agents merely act as an agent to facilitate sourcing and procurement, but neither take title or ownership of the goods.

1.17. Buying Agent – ADT HK and Buying Agent – Aoxin would each be remunerated for the buying agency services performed by way of a Buying Agent Fee that would be paid by FN India separately from the payment for the finished goods. The fee would be calculated on a cost plus basis (being direct and indirect costs incurred in performing the services plus an agreed mark up of 5%). Buying Agent – ADT HK / Buying Agent – Aoxin would neither take title to the finished goods, fabric or any other materials nor would assume any financial risk in relation to the finished goods, fabric, or other materials. The legal title to the finished goods would pass directly from third party manufacturers to the Applicant, with the Applicant acting as the importer on record responsible for import clearances and paying any applicable local taxes or import duties and levies within India.

1.18. Under this scenario, Customs Duty will be paid on the value of the finished goods as charged by the third party manufacturers through the buying agents.

1.19. The diagrammatic flow of scenario III is provided below:

Payments to be made by FN India under the proposed model and corresponding terms of the agreement

1.20. The following payments would be made by FN India under the proposed model

Cost of raw material to FN Int

1.21. As stated in the above scenarios, FN Int facilitates the payments for the FN Group with respect to raw materials. Based on the requirements of the group entities, it places orders for raw material on third party vendors and makes the payment for such vendors on behalf of the group entities. In order to recover the cost of the raw material. FN Int raises an invoice on the respective group entities, including the Applicant. FN Int recharges the value of the raw material at cost to the Applicant. Based on the invoice raised by FN Int, the Applicant will reimburse the cost of the raw material.

1.22. Further, the title and ownership of the goods would be transferred by FN Int to FN India basis such cross charge invoices which would be raised by FN Int.

Payments made to Buying Agent – ADT HK/ Buying Agent – Aoxin

1.23. As stated above, under the new operating model, the buying agents are appointed to undertake sourcing and procurement activities for the group, to facilitate the bargaining power of the group.

1.24. The relevant clauses of the executed agreement are reproduced below, for ease of reference:

• Schedule 2 — Services

The services may include:

(a) sourcing of Vendors on behalf of the Principals;

(b) passing Purchase Orders with Vendors on behalf of the Principal or where circumstances warrant, on behalf of two or more Principals on a consolidated basis;

(c) if directed by a Principal, arranging for consolidation of shipments and arranging for all freight, hauling, insurance and / or storage of the Goods by service providers unrelated to the Procurement Entity;

(d) facilitating and instructing Vendors in relation to the preparation of Vendor Invoices in accordance with the Principal’s instructions for the Goods provided;

(e) providing accounting and administrative support as it relates to the Services from time to time and as requested by the Principals;

(f) as required, providing supplier liaison, ethical sourcing and quality control services, as directed by the Principals; and

(g) making payments to Vendors for Vendor Invoices on behalf of and as directed by the Principals.

• Clause 2.1 -Each Principal appoints the Procurement Entity and the Procurement Entity accepts the appointment to act as the agent of that Principal and to provide the Services to that Principal during the Term in accordance with this Agreement.
• Clause 2.2 — In consideration for the Procurement Entity acting as an agent of each Principal and providing the Services to that Principal, that Principal must pay to the Procurement Entity the Remuneration Fee in accordance with this Agreement.
• Clause 3.1 – Purchase Orders

(a) Upon receipt of a completed Buying Requisition from a Principal, the Procurement Entity must:

i. review the Buying Requisition and where appropriate, consolidate, Buying Requisitions from other Principals into Purchase Orders on a per Vendor basis; and

ii. within 5 Business Days of receiving a Buying Requisition, pass the Purchase Orders with Vendors on behalf of the relevant Principals.

(b) A Purchase Order made in accordance with clause 3.1(a) must clearly state that the Procurement Entity is passing the order on behalf of the relevant Principal.

• Clause 3.4 — Risk and title in Goods

(a) Title in the Goods that are the subject of a Purchase Order passes from the Vendor to the relevant Principal on delivery of the ordered Goods to the delivery address nominated in the . Purchase Order.

(b) The Procurement Entity does not obtain title to the ordered Goods or any part of them under this Agreement or any other Agreement.

(c) The risk of loss or damage to the ordered Goods is transferred from the Vendor to the relevant Principal at the time of delivery of the ordered Goods to the delivery address nominated in the Purchase Order.

(d) The Procurement Entity does not bear risk of loss or damage in relation to the ordered Goods or any part of them under this Agreement or any other agreement.

• Clause 3.5 — Vendor Invoices

(a) The Procurement Entity must:

i. instruct Vendors to prepare commercial invoices in a form specified by a Principal or otherwise agreed to in writing by the parties, including:

(A) the relevant Principal(s) as the buying entity;

(B) the quantity and value of Goods on a destination country basis; and

(C) the price paid for each shipment of Goods,

(Vendor Invoice);

ii. ensure that all charges required to be declared to the customs authority in any country to which Goods are destined are identified on the Vendor Invoice;

iii. ensure that the Vendor Invoice accurately reflects that the Goods are sold to the Principals;

iv. ensure that the relevant Principal receives the Vendor Invoice;

v. upon request from a Principal, supply copies of Vendor Invoices and any other documentation that relates to the Principal or the Services provided to the Principal.

• Clause 3.6 – Payment for Goods pursuant to a Vendor Invoice

For the duration of the Term:

(a) each Principal appoints the Procurement Entity as their payment agent in respect of the payment or settlement of Vendor Invoices on that Principal’s behalf;

(b) each Principal will make payments to the Procurement Entity’s nominated bank account for goods procured on its behalf; and

(c) any such monies collected by the Procurement Entity will be paid by the Procurement Entity towards the Vendor Invoices based on allocations determined by the Procurement Entity acting reasonably.

• Clause 3.7 — Obligation to purchase

Nothing in this Agreement, amounts to an obligation on a Principal to purchase;

(a) any Goods exclusively through the Procurement Entity’s services or from any Vendor; or

(b) any minimum quantities of any Goods through the Procurement Entity’s services or from any Vendor.

• Clause 4.1 — Remuneration Fee

(a) In consideration of the Procurement Entity providing the Services under this Agreement, each Principal must pay their Remuneration Fee to the Procurement Entity in accordance with clause 4.1(c).

(b) For the avoidance of doubt:

i. the Remuneration Fee does not form part of the cost of the Goods, but rather is the fee for the Services provided to each Principal,. and

ii. none of the Remuneration Fee or any other amounts payable by each Principal to the Procurement Entity as compensation or reimbursement for the provision of the Services will be paid, directly or indirectly, to any Vendor or for the benefit of any Vendor.

(c) The Remuneration Fee will be calculated in accordance with Schedule 3.

• Clause 6.2 — Performance

In performing its obligations under this Agreement, the Procurement Entity will not under any circumstances:

(a) act as a Vendor in any transactions with the Principals;

(b) produce (in whole or in part) or control the production (in whole or in part) of the Goods or any other goods of the same class of goods as the Goods, purchase, exchange, sell or trade in the Goods other than as agent of the Principals;

(c) sell, for its own account, any raw materials to any Vendors;

(d) be involved in the design of the Goods or facilitate product development;

(e) supply, or control the supply of, any services in relation to Goods;

(f) have a financial interest or any ownership in the Vendors or any other suppliers that provide any services in relation to the Goods;

(g) transport the Goods;

(h) act as agent for, or in any other way represent, any Vendor, supplier or m or otherwise be associated with any Vendor, supplier or manufacturer except as agents of the Principals;

(i) act as agent for, or in any other way represent, Vendors or any other suppliers of any services in relation to the Goods;

j) receive any compensation from any party other than a Principal in connection with its performance under this Agreement or claim or receive, directly or indirectly, the benefit of any commission, fee or other payment, in the form of money, letter of credit, negotiable instrument, or any goods or services, from any person, other than the Remuneration Fee or any other payment from a Principal for services provided by the Procurement Entity pursuant to this Agreement;

(k) hold title to the Goods;

(l) bear any risk for loss or damage of the Goods, including paying Vendors for the Goods in advance of receiving payment for the Goods from the Principals;

(m) provide Vendor financing for the Goods; or

(n) effect or maintain insurance on a Vendor’s behalf.

The executed service agreements with ADT HK and Aoxin are attached as Exhibit A.

Reimbursement of cost of CMT price or FOB price charged by third party manufacturers

1.25. As is evident from the terms of the Agreement as reproduced above, namely, Schedule 2 and clauses 3.1, 3.4, 3.5, 3.6 and 6.2 of the Agreement, the buying agents merely act as agents to facilitate the orders, procurement and payment for the Goods, on behalf of the Applicant, on account of administrative and commercial convenience. The buying agents do not take any title or risk on their own account, instead, the title and risk of the goods transfers directly from the manufacturer to the Applicant.

1.26. The unrelated third party manufacturers would raise an invoice for the conversion charges at CMT price (where the raw materials are supplied on a free of cost basis to CMT manufacturers) or Free on Board price (where the raw materials are procured directly by the unrelated third party manufacturers on its own account), specifying the Applicant as the buying entity. However, for administrative convenience the invoice will be sent to ADT HK/ Aoxin, who would in turn would raise an invoice on the Applicant for the recovery of the charges from the Applicant. The invoices raised by the buying agents would have the supporting evidence i.e., the invoices raised by third party manufacturers. ADT HK and/or Aoxin would receive funds from FN India on the basis of the invoice raised and would make the corresponding payment to the unrelated third party manufacturers on behalf of FN India. In other words, the buying agents merely operate as an agent of the Applicant, and any payment received by the buying agents from the Applicant in respect of the finished goods, is in its capacity as an agent.

Buying Agent Fee

1.27. In consideration of the procurement agent services provided by the buying agent as captured in Schedule 2 of the agreement, the Applicant will be obligated to pay the Buying Agent Fee. Such Buying Agent Fee will be paid on a cost plus basis, in accordance with the clause 4.1 read with Schedule 3 of the agreement. The payment of the price of the finished goods / conversion charges is separate from the payment of the Buying Agent Fee to the buying agents, by the Applicant.

License Fee for brand intellectual property

1.28. FN AU is the owner of FN Group intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e., portfolio of retail brands) and the Forever New image (i.e. goodwill and reputation). The FN Group IP owned by FN AU consists of intellectual property, including brand, store related intellectual property such as store designs, know-how, manuals and guidelines, systems and technical information for retail operations.

1.29. For the grant of such license, FN India pays a License Fee to FN AU. The License Fee is calculated as 5% of Retail Net Sales of the Goods by FN India within India, however, may be reduced (including to nil if necessary) where the Return on Sales achieved by FN India is less than 5%. The License Fee at 5% of Retail Net Sales was determined based on a benchmarking study conducted to identify a sample of independent comparable external license arrangements that are comparable to the arrangements between FN AU and the FN Group entities, including the Applicant. Further, it is pertinent to note that FN India’s rights to purchase the goods is not conditional on FN India paying the license fee to FN AU and payment of the license fee is not conditional on the payment of any charges due, payable, or arising in relation to the purchase of the goods.

1.30. A Brand License Agreement (IP Agreement) is entered into by FN AU (as Licensor) and FN India (as Licensee), effective from 1 July 2023, which outlines the arrangements in place for the grant of license to utilise the Group intellectual property by FN India in India. The agreement is produced herewith and marked for reference as Exhibit B. The relevant clauses of the agreement are reproduced below, for ease of reference:

• Clause 1.1 — Definitions

Brand Guidelines means the Forever New Group guidelines for use of the Forever New Branding as revised and replaced from time to time.

Designs means the registered designs set out in Schedule 4.

Exploit means advertising, marketing and sale of the Products within the Licensed Territory and the operation of Forever New Retail Sites.

Forever New Brand means the Forever New Group’s collective portfolio of retail brands, developed and operated by the Forever New Group from time to time. As at the Commencement Date, the Forever New Brand includes branding associated with “Forever New”, “Ever New” and the Trade Marks.

Forever New Retail Site means a store (physical or online) bearing the Forever New Brand and Image, with the concepts and presentation in compliance with the Store Manual and Brand Guidelines and selling exclusively the Products.

Image means the Forever New Group’s distinctive image, goodwill, reputation and recognizable common appearance created by the use of the Licensed IP and compliance with the Store Manual and the Brand Guidelines.

Intellectual Property Rights means:

(a) All rights conferred by statute, common law or in equity and subsisting anywhere in the world in relation to:

i. registered and unregistered copyright;

ii. inventions (including patents, innovation patents, plant variety rights and utility models);

iii. confidential Information, trade secrets, technical data and know-how;

iv. registered and unregistered designs;

v. registered or unregistered trade marks, trade names, brand names, business names, devices, get-ups, indications of sources or appellations of origin, domain names, commercial names, designations or other forms of branding; and

vi. circuit layout designs, topography rights and rights in databases, whether or not any of these are registered, registrable or patentable;

(b) any other rights resulting from intellectual activity in the industrial, commercial, scientific, literary or artistic fields which subsist or may hereafter subsist;

(c) any license or other right to use a domain name;

(d) moral rights and goodwill;

(e) any license or other similar right from a third party to use any of the above which is capable of unilateral transfer or sub-license to any other third party without reference to or the consent of the licensor of such right;

(f) any right to grant the use of any of the above;

(g) any applications and the right to apply for registration of any of the above; and

(h) any rights of action against any third party in connection with the rights included in clauses (a) to (g) above, whether presently existing or as may arise in the future and existing in Australia or elsewhere in the world.

Licence means the licence granted to each Licensee by the Licensor under clause 3.1.

Licence Fee means, in respect of a period and a Licensee, the amount determined in accordance with Schedule 2.

Licensed IP means the Intellectual Property Rights in connection with and subsisting in:

(a) the Forever New Brand;

(b) the retail and online store design, colour schemes, copyright, identify signs, equipment and know-how, Store Manual, Image, Brand Guidelines and POS System in respect of the set­up and operation of Forever New Retail Sites;

(c) all other technical information which the Licensor has developed or which is used in the Forever New Group’s in-store and online retail operations; and

(d) any Improvements in respect of the items identified in clauses (a) — (c) above.

Products means such range of products as approved by the Licensor from time to time.

Store Manual means any manual (as amended from time to time) supplied by the Licensor to the Licensees for the conduct and operation of Forever New Retail Sites.

• Clause 3.1 — Grant

Subject to the terms of this Agreement, the Licensor grants to each Licensee a separate, non­exclusive license to Exploit the Licensed IP within the Licensed Territory and for the Term (License),

• Clause 5.1 — Licence Fee

(a) In consideration of the Licensor granting the Licence to each Licensee under this Agreement, that Licensee must pay the Licensor its Licence Fee in accordance with this Agreement.

(b) The parties acknowledge and agree that each Licenese’s rights to purchase the Products is not conditional on that Licensee paying the Licence Fee (or any other amounts due and payable under this Agreement) to the Licensor in accordance with this clause 5.

Management fees for routine inter-company services

1.31. To support the business operations, FN India receives routine management services from FN AU relating to the back-office services for the operation of retail stores (being physical and online stores) in India. A Master Services Agreement is entered between FN AU (as service provider) and FN India (as recipient), effective from 1 July 2022, which outlines the arrangements for the routine management services that FN AU provides to FN India. The agreement is produced herewith and marked for reference as Exhibit C.

1.32. Under the terms of Master agreement, FN AU agrees to provide routine intercompany services to FN India including general administration, business development services, marketing support, tax and accounting support, financial management, information technology services, human resource support, store development and operational support, legal support, etc. A complete list of services being provided by FN AU is detailed in Schedule II under the agreement. FN India pays a Management Fee to FN AU on a cost plus mark-up basis which is calculated as the total of direct and indirect costs (as defined in the Master Services Agreement) incurred by FN AU for the provision of the services, plus a markup of 5%. Further, FN India also pays FN AU for any disbursements, expenses or charges incurred in performing the management services that are not considered in direct or indirect costs.

1.33. The management fee paid by FN India to FN AU is completely independent of the importation of finished goods by FN India. Further, the management fee paid to overseas entity does not form a condition to import of goods by FN India. The relevant clauses of the Master Agreement are reproduced below, for ease of reference:

• Clause 1.1 — Definitions

Services means, in respect of a Recipient:

(a) the services set out in Schedule 2; and

(b) any incidental services under clause 3.4 to the Services,

provided by the Service Provider to that Recipient from time to time in accordance with the terms of this Agreement.

Services Fee means, in respect of Services received by a Recipient, the amount payable to the Service Provider by that Recipient in consideration for the provision of those Services by the Service Provider, as calculated in accordance with Schedule 3.

• Schedule 2 — Services

The Services contemplated by this agreement are routine intercompany services undertaken by the Service Provider that provide a benefit to the Service Recipient and are not otherwise covered by other intercompany arrangements between the parties. The services include:

(a) routine strategic management and oversight;

(b) general administrative and management services (that is not a shareholder activity), including administration services as required for the operations of the Recipient’s retail stores from time to time;

(c) business development services;

(d) marketing support;

(e) tax and accounting support to ensure the Recipient’s compliance;

(f) financial management, accounting and treasury assistance and support, including:

i. cash management; and

ii. providing financial reporting calendar compliance and support, including

(A) month end closing reports to be provided within 5 Business Days after each month end, including profit and loss statement, balance sheet, variance analysis and balance sheet support;

(B) quarter end reporting, quarterly forecasts and quarterly management recap reporting, including quarterly management presentation;

(C) the foregoing to include breakdown by channel (e.g., wholesale, retail, e-commerce) and by segment (e.g., apparel, footwear and accessories) and brand name; and

(D) annual budgets;

(g) information technology services including installation, maintenance and support of hardware and software;

(h) human resource function support;

(i) store development, operational and visual merchandising support;

(j) commercial and legal support;

(k) assistance in relation to store construction, design and development;

(l) buying services, range build and product mix;

(m) planning activities;

(r) administering and effecting accounts payable and disbursements of the business of the Recipient;

(s) administering and collecting accounts receivable and collections of the business of the Recipient;

(t) assistance with merchandise and stock/product/inventory;;

(u) customer services and support;

(v) real-estate leasing;

(w) such other manage services required for day-to-day operations of the Recipient’s business; and

(x) such other corporate support services as agreed between a Service Provider and Recipient from time to time.

1.34. Given the facts submitted above, may the below mentioned questions and corresponding submissions be considered for the purpose of this Advance Ruling.

Statement containing applicant’s interpretation of law and/or facts, as the case may be, in respect of the questions(s) on which advance ruling is required.

QUESTIONS FOR DETERMINATION

1.4 The questions before this Hon’ble Customs Authority for Advance Ruling are:

A. Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers, is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules.

B. Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant, is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

C. Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

C. Whether the Management Fee paid by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from another party i.e., an unrelated third party manufacturer, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

1.41 The issue placed for determination has to be appreciated in light of the following legal submissions and its applicability to the transaction undertaken by the Applicant.

Legislative background:

1.5 In order to fully appreciate the questions for determination, the Applicant provides below the legislative background relevant for the transactions.

Section 14 of the Customs Act – Valuation of goods

“(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 deliver)/ 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.

Provided further that the rules made in this behalf may provide for,-

(i) the circumstances in which the buyer and the seller shall be deemed to be related;

(ii) the manner of determination of value in respect of goods when there is no sale, or the buyer and the seller are related, or price is not the sole consideration for the sale or in any other case

Rule 2(2) of the Valuation Rules: Related party

For the purpose of these rules, persons shall be deemed to be “related” only if —

i. they are officers or directors of one another’s businesses;

ii. they are legally recognized partners in business;

iii. they are employer and employee;

ix. any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;

x. one of them directly or indirectly controls the other;

xi. both of them are directly or indirectly controlled by a third person;

xii. together they directly or indirectly control a third person: or

xiii. they are members of the same family.

Explanation I — The term “person” also includes legal persons.

Explanation II — Persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other shall be deemed to be related for the purpose of these rules, if they fall within the criteria of this sub-rule.

Rule 3 of the Valuation Rules: Determination of the method of valuation

(1) Subject to rule 12, the value of imported goods shall be the transaction value adjusted in accordance with provisions of rule 10;

(2) Value of imported goods under sub-rule (1) shall be accepted:

Provided that —

(a) …

(b) the sale or price is not subject to some condition or consideration for which a value cannot be determined in respect of the goods being valued;

(c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of rule 10 of these rules; and

(d) the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purposes under the provisions of sub-rule(3) below.

(3) (a) Where the buyer and seller are related, the transaction value shall be accepted provided that the examination of the circumstances of the sale of the imported goods indicate that the relationship did not influence the price.

(b) In a sale between related persons, the transaction value shall be accepted, whenever the importer demonstrates that the declared value of the goods being valued, closely approximates . to one of the following values ascertained at or about the same time —

i. the transaction value of identical goods, or of similar goods, in sales to unrelated buyers in India;

ii. the deductive value for identical goods or similar goods;

iii. the computed value for identical goods or similar goods:

Provided that in applying the values used for comparison, due account shall be taken on demonstrated difference in commercial levels, quantity levels, adjustments in accordance with the provisions of rule 10 and cost incurred by the seller in sales in which he and the buyer are not related;

(c)…

(4)

Rule 10 of the Valuation Rules – 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) the following to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:-

(i) commissions and brokerage, except buying commissions’

(ii) the cost of containers which are treated as being one for customs purposes with the goods in question;

(iii) the cost of packing whether for labour or materials;

(c) royalties and license 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;

(d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller;

(e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable.

Explanation- Where the royalty, license 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 goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.”

Further, interpretative notes to Rule 10 (1)(a)(i) defines the terms ‘ buying commission paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued.”

Submissions in relation to the Applicant’s interpretation of law and facts, in respect of the questions in respect of which the advance ruling is sought

1.6 Given the above mentioned facts and legislative background, the Applicant prefers this application before this Hon’ble Authority on the following grounds, each of which is taken in the alternative and without prejudice to the others:

Question 1:

1.6.1 Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers, is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules.

1.6.2 As submitted above, the FN Group proposes to implement a new operating model to facilitate centralized procurement of raw material and finished goods. A summary of the new operating model and the method of determining the transaction value of the imported finished goods, are provided below:

• FN Int will procure fabric directly from third party vendors and pay such vendors directly. Based on the nature of the fabric and raw materials, FN Int may also purchase materials through the buying agents. The cost of the fabric and raw materials paid to the third party vendors directly or through the buying agent, will be recharged to the Applicant, at cost. This is on account of the fact that FN Int facilitates payment for raw materials, on behalf of the various FN group entities, including the Applicant. The material will be issued free of cost to the CMT garment manufacturers on account of the Applicant.
• In all other cases, the third party manufacturers, are responsible for sourcing and purchasing fabrics and raw materials for use in the manufacture of the finished goods, which is ultimately recovered through the price of the finished goods.
• For purchasing the finished goods, the Applicant places orders for such goods to ADT HK / Aoxin, being buying agents for the group. These buying agents, who are related parties, sources the vendors and places the orders on behalf of the Applicant. The objective of introducing buying agents is to enable consolidation of orders for the group, in order to meet minimum order quantities and to leverage better buying power in negotiating the pricing of goods.
• The third party manufacturers will raise invoices specifying the Applicant as the buying entity, however, the invoices will be issued to the buying agents for administrative convenience. It is pertinent to note that the title and risk of the goods passes directly from the vendors to the Applicant and not to the buying agent. The buying agent will raise an invoice for the recovery of the price charged by the vendors at cost, along with supporting documentation, such as the invoices raised by the vendors. Upon collection of the amount from the Applicant, the buying agent will remit the amount to the vendors, against the invoices raised. In other words, the buying agents act as an agent and do not operate on a principal-to-principal basis.
• Where the raw material is issued free of cost to the third party manufacturers, the vendors will raise an invoice for the conversion services undertaken i.e., the CMT price. Whereas, if the raw material is procured by the manufacturer on their own account, the vendors will raise an invoice for the finished goods, which would include the cost of the raw materials procured as well as any margin for the manufacture of the finished goods.
• For the purpose of determination of the transaction value for the payment of Customs Duty on the import of finished goods, it is proposed that:
  • Where the raw material is free issued to the CMT manufacturers and an invoice is raised for the conversion charges, the transaction value will be determined as the sum of the price paid to the CMT manufacturer and the cost associated with the free issue of the fabric (being an assist cost).
  • Where the raw material is procured directly by the manufacturers, the transaction value will be determined as the value of the finished goods charged by the manufacturers.

1.6.3 As per Section 14 of the Customs Act, the value of the imported goods shall be the transaction value of such goods i.e. the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, where the buyer and seller are not related and price is the sole consideration for the sale.

1.6.4 Further, Section 14 read with Rule 2 and 3 of the Valuation Rules provided that the transaction value of the imported goods may also be accepted where the buyer and seller are related provided that the examination of the circumstances of sale of the imported goods indicate that the relationship did not influence the price of the imported goods.

1.6.5 Therefore, given the above, it can be said that in order for the transaction value to be accepted as per the principles of valuation laid down in Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules, the following conditions are to be fulfilled:

i. Price should be the sole consideration for the sale and

ii. Buyer and seller should not be related and if related, the relationship should not influence the price of the imported goods.

Price is the sole consideration for the goods

1.6.6 In the instant case, the Applicant procures the finished goods from a third party unrelated third party manufacturer. The price payable to the manufacturer will either be the CMT price i.e., the price for the conversion of the raw material to finished goods or free on board (FOB) price where the finished goods are procured from the manufacturer. As submitted above, where the manufacturer is only undertaking a conversion activity, the transaction value proposed to be considered is the price paid to the CMT manufacturer and the cost associated with the free issue of the fabric (being an assist cost).

1.6.7 Where the manufacturer only undertakes the activity of conversion at the behest of the Applicant, FN India will effectively be making two payments towards the purchase of the finished goods i.e., payment for the raw material to FN Int and the conversion charges to the third party manufacturer through the buying agents. Therefore, in this regard, it is submitted that such payment is the only consideration paid towards the import of the finished goods and no other direct or indirect payment accrues to the seller, hence, such value should be accepted as the transaction value of the goods for the purpose of payment of Customs Duty.

1.6.8 As regards the scenario where the manufacturer procures the raw material on his own account and undertakes to sell the finished goods (and not merely undertake the service of conversion), the transaction value will be the FOB value of the goods being manufactured. There is no other direct or indirect payment due to the third party manufacturer, hence, it is submitted that the price is the sole consideration for the goods being imported. Accordingly, such value should be accepted as the transaction value of the goods for the purpose of payment of Customs Duty.

Buyer and seller are not related parties

1.6.9 The seller of the goods in the instant case, is a third party manufacturer. As per Rule 2 of the Valuation Rules, a person will be deemed to be related only if:

i. they are officers or directors of one another’s businesses;

ii. they are legally recognized partners in business;

iii. they are employer and employee;

iv. any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;

v. one of them directly or indirectly controls the other;

vi. both of them are directly or indirectly controlled by a third person;

vii. together they directly or indirectly control a third person: or

viii. they are members of the same family.

1.6.10 In the instant case, the third party manufacturers do not qualify under any of the scenarios mentioned above:

Related party scenarios	Remarks in the context of the. FN Group model
Officers or directors of one another’s businesses	The third party manufacturers and FN India are not officers or directors of one another’s businesses.
Legally recognized partners in business	The third party manufacturers and FN India are not partners in business.
Employer and employee	The third party manufacturers and FN India are employer and employee.
Any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them	No party directly or indirectly owns, controls or holds 5% or more of the outstanding voting stock or shares of the third party manufacturers and FN India.
One of them directly or indirectly controls the other	The third party manufacturers and FN India do not directly or indirectly control the other.
Both of them are directly or indirectly controlled by a third person	The third party manufacturers and FN India are not directly or indirectly controlled by any person from the Forever New Group.
Together they directly or indirectly control a third person	The third party manufacturers and FN India do not directly or indirectly control a third party.
They are members of the same family	The third party manufacturers and FN India are not members of the same family / Forever New Group.

1.6.11 Additionally, it is submitted that while the payment for the finished goods will be made to the third party manufacturers through the buying agents (related party), the sale will be effected, invoice will be raised and risk and title will be transferred directly by the third party manufacturers to the Applicant. In other words, merely because the payment is routed through a related party, the buying agent does not act in the capacity of a seller (as is also provided under clause 6.2 of the agreement). The buying agents do not have any financial interest of ownership in the vendors of the goods or services in relation to the goods. Based on the commercial arrangement, supported by the agreement, the seller will be the third party manufacturer and the buyer, the Applicant. Therefore, there can be no question that the buyer and seller are unrelated.

1.6.12 Further, it is also relevant to note that the Applicant is under no obligation to necessarily purchase goods exclusively through the buying agents or from any vendor or to purchase a specified quantity of goods through the buying agent or vendor, as provided under clause 3.7 of the agreement. In other words, the Applicant has the prerogative to purchase through another vendor, other than through the buying agent or the vendors sourced by the buying agent. Accordingly, the price charged by the third party manufacturer cannot be said to be influenced by the relationship of the Applicant with the related party buying agents or any other group entity.

1.6.13 Given the price is the sole consideration and the parties are not related, the transaction value as submitted above should be accepted as the value on which Customs Duty should be paid, in accordance with the principles as laid down in Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules.

Question 2:

1.7 Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HIV Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant, is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

1.7.1 The relevant terms of the service agreement executed between the buying agents and the Applicant has been summarized below to highlight the relationship of the buying agent and the Applicant:

• The buying agents act as an agent to source vendors on behalf of the Applicant.
• The purchase orders are created by the Applicant, which the buying agents pass on to the vendors on behalf of the Applicant. The purchase orders are required to clearly state that the buying agents are passing the orders on behalf of the Applicant.
• Act as a liaison for shipment / transportation of goods with third party vendors on behalf of the Applicant.
• The buying agents do not act as a vendor or supplier in any transactions with the Applicant.
• The buying agents do not produce or control the production of goods, purchase, exchange, sell or trade in the goods other than as an agent of the Applicant. They are also not involved in the design of the goods.
• The buying agents do not have any financial interest of ownership in the vendors of the goods or services in relation to the goods.
• The buying agents do not act as an agent or represent any vendors, suppliers or manufacturers in relation to the goods.
• As and when required, the buying agents acts as a supplier liaison, undertakes ethical sourcing and quality control.
• The risk and title to the goods passes from the vendor directly to the Applicant on the delivery of the goods.
• The buying agents receive invoices raised by the third party manufacturer on the Applicant and makes payments to the vendors on behalf of and as directed by the Applicant.
• The buying agents also act as a payment agent on behalf of the Applicant for settlement of the invoices raised by the vendor. The Applicant will remit the amount to be paid to the vendors through the buying agents.
• The Buying Agent Fee does not form part of the cost of goods, and is not paid, either directly or indirectly, to any vendor or for the benefit of any vendor.
• In consideration for acting as an agent for the Applicant and providing the services as encapsulated in Schedule 2 of the agreement, the Applicant pays the buying agents a Buying Agent Fee.

1.7.2 In the context of the facts mentioned above, the terms of the agreement and the legislative framework, the question to be determined is whether the Buying Agent Fee for sourcing and procuring goods on behalf of the Applicant, is required to be included in the transaction value of goods as per the principles set forth under Section 14 of the Customs Act read with Rules 3 and 10 of the Valuation Rules. As per these provisions, where the buyer and seller of the goods are not related and price is the sole consideration, the price actually paid or payable for the goods shall be the transaction value of such goods. Further, the Valuation Rules indicate that the commissions and brokerage, which are not included in such price paid or payable, should be included in the transaction value. However, the exception to this rule is the payment of buying commission. The interpretative notes to Rule 10(1)(a)(1) defines the term ‘buying commissions’ as ‘fees paid by an importer to an agent for the service of representing him abroad in the purchase of the goods being valued’.

1.7.3 In the instant case, as submitted above, Buying Agent – ADT HK and Buying Agent – Aoxin act as agents appointed for the purpose of sourcing vendors and purchasing finished goods on behalf of the Applicant. The details of the services provided by the buying agents are provided in Schedule 2 read with clause 6.2 of the agreement attached as Exhibit A to this application. Further, risk and title in goods would pass on directly from the manufacturers to the Applicant on delivery of the goods ordered. Further, the buying agents neither represent any other party as agent nor receive any compensation from any other party other than the Applicant and other members of the FN Group in connection with its performance under this arrangement.

1.7.4 It is also relevant to note that the Applicant would not be under any obligation to purchase the goods exclusively through ADT HK/ Aoxin or from any manufacturers selected ADT HK/ Aoxin. FN India, being the principal, can procure finished goods from any independent third party manufacturers without involvement of the buying agents.

1.7.5 Thus, in light of the above, it is evident that ADT HK/ Aoxin act in the capacity of a buying agent on behalf of the Applicant and the Buying Agent Fee is towards the services provided by the buying agents outside India for facilitating procurement of finished goods on behalf of the Applicant. Accordingly, it is submitted that the Buying Agent Fee paid by the Applicant will qualify as a buying commission as defined under the interpretative notes to Rule 10. Therefore, Buying Agent Fee should not be included in the transaction value for the purpose of payment of Customs Duty, as per Section 14 of the Customs Act read with Rule 3 and Rule 10 of the Valuation Rules.

1.7.6 To substantiate the above, reliance is placed on the following rulings:

i. Ruling of the Hon’ble Supreme Court in case of Apollo Tyres Ltd. versus Collector of Customs [1996 (12) TMI 48] which is similar to the facts in the present case. As per the ruling, General Tyre International Company (‘General’) is procuring items or equipment, machinery, spares, accessories, and raw materials required by Apollo Tyres Ltd (ATL) and is arranging for obtaining quotations and for rendering of all the related services. Further, it is provided that in the case of items of equipment which ATL calls upon Gen- rocure, General shall obtain quotations from the appropriate suppliers and submit such quotations, with its recommendations, to ATL for final approval, and no orders may be placed by General unless final approval is accorded by ATL. The agreement provides that such items of equipment shall be purchased directly in the name of ATL, and it would pay for the same, including shipping, transportation charges and insurance premium. The Supreme Court after detailing out the facts held that General was appointed as a purchasing agent and the provisions provided that the appellants would review the quotations submitted to General by various suppliers and would approve the same. Hence, the value of the equipment should not be enhanced by the remuneration paid to the agents.

ii. Similar ruling was pronounced by CESTAT, New Delhi in case of Anand Textiles versus Commr. Of Cus. Amritsar [2008 (3) TM! 523], wherein the appellant has entered into an agreement with M/s. Mahey Brothers Pte. Ltd., Singapore engaging them as their buying agent to procure nylon filament yarn and polyester filament yarn from different overseas parties. Further it was mentioned by the Appellant that the invoices by the suppliers were in the name of the Singapore based buying agent with the appellant as the notified party. The appellant was making payments for consignments to the Singapore based buying agent who in turn was making payments to the suppliers. The other documents like bill of lading were in the name of the buying agent but also mentioned the appellant as notified party.

The court examined the documents like agreement with the buying agent, contract with the foreign supplier, invoices, bill of lading etc. and found that M/s. Mahey Brothers Pte Ltd., Singapore was providing services to the appellant as a buying agent and that the commission or remuneration paid by the appellant to the Singapore based party is in the nature of buying commission. Therefore, the said amount is eligible to be excluded in arriving at the assessable value of the imported goods in terms of Rule 9(1)(a)(i) of the Customs Valuations Rules 1988 (which is pari materia to Rule 10 of the Valuation Rules).

1.7.7 Drawing inference from the above, given that the buying agents represent the Applicant in the context of the procurement of the finished goods from the third party manufacturers outside India, and makes payment to the manufacturers on behalf of the Applicant, it is submitted that the payment of Buying Agent Fee squarely qualifies as a buying commission defined in the interpretative notes to Rule 10. Accordingly, the Buying Agent Fee paid to buying agents falls within the exception of Rule 10(1)(a)(i) of the Valuation Rules and should be excluded from the transaction value of the imported goods, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

Question 3:

1.8 Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from another party I.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

1.8.1 As provided above, valuation of goods imported into India is governed by Section 14 of the Customs Act read with the Valuation Rules. Rule 3 of the Valuation Rules states that the transaction value should be adjusted with the costs and payments covered under Rule 10. Therefore, to examine whether the License Fee paid by the applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e., portfolio of retail brands) and the Forever New brand image is to be included in the transaction value for Customs Valuation, the Applicant refers to Rule 10 (1)( c) and Rule 10 (1)( d) of the Valuation Rules.

License Fee paid by the Applicant does not fall within the purview of Rule 10(1)(c) of the Valuation Rules

1.8.2 Rule 10(1)(c) of the Valuation Rules provides that royalties and license 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 is required to be included in the transaction value of the imported goods.

1.8.3 Drawing inference from the above, it can be said that the royalties and license fee not included in the price paid or payable, shall be added to the transaction value of imported goods only when the following conditions of the Rule 10(1)(c) are satisfied:

• Royalties and license fee that the importer is required to pay should be related to the imported goods.
• Such royalties and license fee should be a condition of the sale of the goods being valued.

License fee is not related to the imported goods

1.8.4 In the present case, the Applicant has entered into a Brand License Agreement with FN AU, wherein FN AU has granted a license to the Applicant to use or exploit the Licensed IP. A specimen of the agreement is produced herewith and marked for reference as Exhibit B. As per the agreement, the licensed IP means the Intellectual Property Rights in connection with and subsisting in:

a) the Forever New Brand (i.e., means the Forever New Group’s collective portfolio of retail brands, developed and operated by the Forever New Group from time to time);

b) the retail and online store design, colour schemes, copyright, identity, signs, equipment and know-how, store manual, image, brand guidelines and POS System in respect of the set-up and operation of Forever New Retail Sites;

c) all other technical information which the Licensor has developed, or which is used in the Forever New Group’s in-store and online retail operations; and

d) any improvements in respect of the items identified in clauses (a) — (c) above.

1.8.5 Based on the above definition of Licensed IP, it is submitted that the Licensed IP is in connection with the Forever New retail brand image and operation of retail stores (both physical and online store) bearing Forever New branding and the Forever New image (i.e., goodwill and reputation). In addition to the Forever New retail brand, the license fee is paid for the processes and operating procedures, designs etc. required for the operation of the retail stores in India.

1.8.6 In view of this, it is submitted that the license fee has no nexus with the finished goods being imported, instead is in relation to the retail brand image, and operating procedures, processes and designs for the retail outlets in India i.e., for activities post importation of the goods. Therefore, the License Fee does not fall within the purview of Rule 10(1)(c) of the Valuation Rules and accordingly, should not be included in the transaction value of goods.

License fee is not a condition of sale of the imported goods

1.8.7 The second condition states that the royalties and license fee should be a condition of the sale of the goods being valued. As per oxford Dictionary ‘condition’ means “stipulation or something on fulfilment of which something else depends”. Therefore, it can be inferred that the license fee will only be includible in the transaction value of the goods only where such payment of such license fee is a pre-condition for the import of goods. In other words, the law stipulates that if the Applicant does not make a payment of such license fee, the finished goods will not be supplied by the seller.

1.8.8 However, in the instant case, the license fee is paid in connection with the retail brand, and operating procedures, processes and designs for the retail outlets in India post Import into India. Such license fee would be payable irrespective of the import of finished goods. In order to substantiate this, the Applicant refers to clause 5.1(b) of the Brand License Agreement, which states the Applicant’s rights to purchase the products is not conditional on the Applicant paying the license fee (or any other amounts due and payable under this Agreement) to the FN AU. Therefore, the payment of the license fee is not a condition of the sale of imported finished goods from the third party manufacturer.

1.8.9 Further, the license fee is payable on the basis of net sales made by the Applicant in India, and may be reduced (including to nil if necessary) where the return on sales achieved by the Applicant is less than 5% (i.e. may not be payable by the Applicant, even where the Applicant has purchased imported goods from the foreign supplier). Accordingly, such payments have no nexus with the transaction relating to purchase of imported goods from the foreign supplier. Accordingly, the license fee cannot be said to be payment made as a condition of sale of the imported goods.

1.8.10 Moreover, the goods are imported from a third party manufacturer which is not related to the Applicant, whereas the license fee is paid to FN AU. Accordingly, it is submitted that the payment of the license fee does not qualify as a payment of royalty or license fee under Rule 10(1)(c) of the Valuation Rules and is not required to be included in the transaction value of the imported goods.

i. In the case of M/S. H & M Hennes & Mauritz Retail Private Limited Versus Commissioner of Customs (2016 (9) TMI 318], which is similar to the present case, the applicant has entered into foreign collaboration and sub-license agreement to exploit the ‘H&M’ brand for sale of goods into India and also into trademark license agreement for the use of the trademark rights with respect to the ‘H&M concept’ for distribution and retailing of the said goods in India. The Authority for Advance Ruling held that the license fee paid by the applicant are in relation to post importation activities and are not related to the sale of goods by the third party manufacturers to the applicant. The relevant extract from the AAR is produced below for your reference:

“7. The applicant will pay the Trademark License fee in lieu of grant of right to exploit “H&M concept” in India and use of associated trademark for sale of said goods; that such Trademark License fee will be payable on the basis of the sales made by the applicant in India; that said activities for which the applicant will pay the license fee are post importation activities and are not related to the sale of goods by the third party manufacturers to the applicant. Further, the said payment of Trademark License Fee is not a condition for sale between the third party manufacturers and the applicant; that royalties and license fee to be includible in the Transaction Value, it is essential that the buyer of the goods pay the same to the seller of the goods; that this aspect has been clarified in the interpretative notes to Rule 3 of the Valuation Rules; that the said interpretative notes provide that the “Price actually paid or payable is total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods”

………..

10(b) The Trade Mark/ License Fee and the payment made in terms of the foreign collaboration agreement by the Applicant to H&M GBC does not qualify as payment under Rule 10 (1) (c) of the Rules or any other Rule and is not required to be added to the Transaction Value of the said goods for levy of Customs Duty under the Act read with the Rules.”

ii. Reliance is also placed on the ruling pronounced by CESTAT New Delhi in the case of M/s Quest Retail Private Limited, Ms. Shriti Malhotra, Director, Mr. Suvendu Sahu, General Manager (legal & finance) versus Commissioner of Customs & Excise, Patparganj (2019 (7) TMI 778], the appellant being in the business of import and retail sale of the ‘Body Shop’ brand of cosmetics and toiletries has entered into an agreement of royalty fee for the management, consultation advice, service of training provided to the appellant in connection with the use of the system and the proprietary marks of M/s Body Shop. The Tribunal held that the amount of royalty is measured in terms of value of sale by the appellant and is dependent upon the volume of sale in the domestic market. The treatment of such type of royalty as condition of sale for the import of goods by the appellant is not explicit from the agreement and thus, shall not be included in the transaction cost of the imported goods. The relevant extract of the case law is produced below for your reference.

“9. …The condition of payment of the royalty, which is contingent upon the volume of sale in the domestic market after importation of the goods has no connection with the import of goods. Once the goods have been cleared from the Customs area the same is not required to be treated as imported goods and all the activities of the management, consultation etc. is relatable to the goods which is ceased to be imported goods in terms of the Customs Act, 1962. We find that the learned Advocate, on behalf of the appellant has countered all the decisions relied upon by learned Authorised Representative in the facts and circumstances of the case which we also find that is appropriate and relevant to the case at hand. We find that in the case of Ferro Alloy, Bridgestone India Pvt. Ltd. and Max Atotech Ltd. (supra), the Hon’ble Supreme Court and Hon’ble Tribunal have held that if there is no nexus of royalty payment with that of the imported merchandise and which relate to the subsequent marketing thereof the same is not required to be included for the purpose of payment calculation of Customs duty on the imported goods, in terms of Customs Act and Valuation Rules.

iii. Further, the Applicant refers to the Supreme Court judgement in the case of Commissioner of Customs vs M/s Ferodo India Private Limited [2008(2) TMI 12 — Supreme Court] wherein the respondents had entered into technical assistance and trademark agreement between the respondent and M/s. T&N International Limited. The licensor agreed to disclose the relevant secret process, formula and information from the licensee and the licensee was obliged to pay a license fee along with royalty based on the net sales value. The Supreme Court held that the payment of royalty/license fee was entirely relatable to the manufacture of licensed products and were in no way related to the imported items. There is no nexus between royalty/license fees payable for the know-how and the goods imported for the manufacture of licensed products.

Therefore royalty/license fee should not be added to the transaction value of imported goods.

iv. A similar ruling was pronounced by the Mumbai Tribunal in the case of Commissioner of Cus. (Import), Mumbai Versus Bridgestone India Pvt. Ltd. (2013 (12) TMI 1089] wherein the appellant was paying royalty and license fee to their foreign collaborator M/s. Bridgestone Corporation, Japan in terms of the License and Technical Assistance Agreement. The appellant contented that the Technical Assistance and License Agreement did not have a clause whereby or wherein the importer-appellant is legally obliged to pay license fee as a condition of sale of the imported goods and thus, the license fee should not be included in the transaction value. Additionally, the royalty was payable on net sales in India. The relevant extract of the case law is produced below for your reference.

“7.2 In the present case, from a reading of the agreement, it is evident that the payments made by way of royalty or license fee has nothing to do with the imported goods nor is it a condition of sale for the imported goods. As already discussed earlier, these payments are required to be made in respect of the rubber products manufactured and sold by the licensee in India.

7.3 In view of the above position, the provisions of Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 are not attracted.”

1.8.12 The view taken by the courts in above rulings was reiterated in the following cases:

• M/s. Schunk Metal and Carbon (India) Private Limited Versus Commissioner of Customs, Bangalore [2023 (11) TMI 225]
• The Commissioner of Customs (Imports) , Chennai Versus M/s. Vestas Wind Technology India Pvt. Ltd. [2023 (7) TMI 589]
• Commissioner Of Customs (I), Mumbai Versus Max Atotech Ltd (2013 (8) TMI 580]
• M/s. Thyssenkrupp Elevator (India) Pvt. Ltd. Versus The Asstt. Commissioner of Customs (Import & General) New Delhi [2017 (4) TMI 204]
• Foseco India Ltd. vs. Commissioner of Customs (Import) (TS-56-Tribunal-2014(Mum)-CUST)
• Commr. Of Cus., Chennai vs. Bayer Indian Syntans Ltd. [2008 (232) ELT 474]
• Johnson & Johnson Ltd. vs. Commissioner of Customs, Mumbai [2013 (292) ELT 111 (Tri.-Mumbai)

1.8.13 Drawing inference from the above, it is submitted that the payment of license fee towards exploitation of Licensed IP is not related to the imported goods nor is it a condition of sale of the imported goods being valued. Therefore, the payment of license fee should not be included in the transaction value of goods imported from unrelated third party manufacturers in India.

1.8.14 The Applicant also wishes to submit that as per interpretative notes to Rule 3 of the Customs Valuation rules 2017, the price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. Therefore, it can be said that for royalties and license fee to be included in the transaction value, its essential that the buyer of the goods pays such royalties and license fee to the seller of the goods. In the present case, while the goods are being imported by the Applicant from an unrelated third party manufacturers, the license fee is being paid to FN AU, a related party. Therefore, based on the above discussion since the consideration for finished products and the license fee are paid to different entities, the license fee paid to FN AU should not be included in the transaction value of goods imported from unrelated third party manufacturers.

License Fee paid by the Applicant does not fall within the purview of Rule 10(1)(e) of the Valuation Rules

1.8.15 Further, Rule 10(1)(e) provides that all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable will be required to be included in the transaction value of goods.

1.8.16 Therefore, in order for a payment not included in the price actually paid or payable, to qualify under Rule 10(1)(e) of the Valuation Rules, the following conditions are to be satisfied:

• The payment should be a condition of sale of the imported goods
• Payment should be made by the buyer to the seller or by the buyer third party to satisfy an obligation of the seller.

1.8.17 As submitted above, the payment of license fee is not a condition of sale of the imported goods. Additionally, the payment is made to FN AU, and not to the seller of goods. Further, by virtue of such payment being made to FN AU, there is no obligation of the seller being fulfilled by such payment. Accordingly, it is submitted that the payment of the license fee does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules, therefore, would not be required to be included in the transaction value of the goods. Therefore, to summarise, the payment of License Fee neither qualifies as a payment under Rule 10(1)(c) nor qualifies as a payment under Rule 10(1)(e) of the Valuation Rules and as a result, would not be required to be included in the transaction value of the imported goods.

Question 4:

1.9 Whether the Management Fee paid by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from another party i.e. an unrelated third party manufacturer, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules?

1.9.1 The Applicant has executed an agreement with FN AU for the provision of routine management services such as routine management, business development, tax and accounting support, information technology and other services as provided in Schedule 2 of the agreement. In order to determine whether the management fee payable for such services is to be included in the transaction value of the imported goods, it would be relevant to examine the provisions of the Valuation Rules.

1.9.2 Rule 3 of the Valuation Rules states that the transaction value should be adjusted with the costs and payments covered under Rule 10. Rule 10(1)(e) of the Valuation Rules states that ‘all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable’ should be added to the price actually paid or payable for the imported goods.

1.9.3 Drawing inference from the above, it is submitted that any other payments not included in the price actually paid or payable, shall be included in the transaction value only in cases where:

• payments actually made or to be made as a condition of sale of the imported goods
• payments are made by the buyer to the seller or to a third party to satisfy an obligation of the seller.

Payment of management fee is not a condition of sale

1.9.4 In the present case, the Applicant has entered into a Master Service Agreement with FN AU, wherein FN AU agrees to provide routine management services in relation to the business operations in India. These management services relate to the back-office services for the operation of retail stores (being physical and online stores) by FN India and include accounting, marketing support, human resources, information technology support, legal support, store development and other non-product related back-office type services. Schedule 2 of the agreement provides the list of services that will be provided by FN AU to FN India under the said agreement. The agreement is produced herewith and marked for reference as Exhibit C. The management fee for such services will be charged on a cost plus mark up basis, i.e., total of direct and indirect cost plus a markup of 5% to reflect an arm’s length markup and any disbursements, expenses or charges (including payments to third party fees) incurred by FN AU in relation to providing these services to FN India (Schedule 3 of the agreement).

1.9.5 The routine management services provided by FN AU is an independent service and does not have any relation to the goods imported by FN India from unrelated third party manufacturers. Further, FN India’s rights to purchase goods from unrelated third party manufacturers is not conditional on FN India paying the management fee to FN AU. FN India would continue to pay such fee to FN AU with respect to services received from FN AU irrespective of whether FN India imports goods from the unrelated third party manufacturers or not. Since, there is no nexus of the management services provided by FN AU with the goods imported from unrelated parties in India, the Management Fee payable provided by FN AU cannot be construed as a condition of sale of the imported goods.

Payment of Management Fee is neither made to the seller or to a third party to fulfill the obligation of the seller

1.9.6 The management fee is independent of the supply of the finished goods by the manufacturers. At the outset, the payment of the Management Fee is not made to the seller but to FN AU. Additionally, such payment is not made to FN AU to fulfill any obligation of the seller. The manufacturer does not have any nexus with FN AU and the payment of the Management Fee payable to FN AU.

1.9.7 Given the above, it is submitted that the payment of management fee does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules and accordingly, would not be required to be included in the transaction value of the imported goods.

1.9.8 In order to substantiate this, the Applicant places reliance on the following rulings:

i. The case of M/S. H & M Hennes & Mauritz Retail Private Limited Versus Commissioner of Customs [2016 (9) TMI 318], wherein the applicant had entered into sales and business support agreement with H&M GBC to provide overall market strategy, store location, store design and concept and other services for which sales and business support fee was payable to H&M GBC. The Authority for Advance Ruling held that the payment of sales support and business development fee is not payable by the applicant as a condition to sale of imported goods by overseas third party manufacturers to the applicant. Therefore, such payments are not required to be included in transaction value of the imported goods.

ii. The case of Alcan India Private Limited vs Commissioner of Customs (Import), Mumbai [2014(12)TMI 899], wherein the Revenue authorities alleged inclusion of BU fees, legal and professional fees and secondment payments paid by the appellant to the related party in the transaction value of goods imported from such related party. The Tribunal held that a crucial factor for application of Rule 10(1)(e) is that the payment should have been made as a condition of sale of the goods imported. There is nothing in the two agreements stipulating such a condition and the services provided by the related party have nothing to do with the import of raw materials. In the absence of any nexus, even remotely, between these two agreements and the import of raw materials, there is no justification whatsoever to relate the payments made for the services received to the value of the goods imported. Hence, such payments should not be included in the valuation of imported goods.

iii. Similarly, in the case of M/S. Thyssenkrupp Elevator (India) Pvt. Ltd. versus The Asstt. Commissioner of Customs (Import & General) New Delhi [2017 (4) TMI 204 CESTAT NEW DELHI], wherein the Revenue authorities alleged that the declared value of the imported goods shall be assessed after loading management fees paid to the related party for various corporate services, such as coordination, support accounting, consultancy, marketing and sale support etc. The Tribunal held that the services are completely independent of the import of goods by the appellant. Consequently, there is no justification for such loading of the invoice value. A similar view has been expressed by the Tribunal in several other cases including the case law cited by the appellant in the case of Expert Industries. In this case, Tribunal held that product consultancy charge which has got nothing to do with the imported goods and is covered by a separate contract, hence, cannot be included in the assessable value. Therefore, it was held that the value of management fee should not be included in the transaction value of imported goods.

1.9.9 Drawing inference from the above, it is submitted that the management fee paid to FN AU by the Applicant is not a condition of sale of the goods imported from unrelated manufacturers and accordingly, does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules. Hence, such management fee will not be includible in the transaction value of the imported goods.

1.9.10 The judicial precedents referred in the application is attached as Exhibit D

PRAYER

In the light of the above, a Ruling is sought from the Hon’ble Authority as follows:

A. It may please be ruled that the transaction value proposed to be adopted in respect of the import of finished goods by the Applicant from third party manufacturers, is acceptable and is consistent with the principles of valuation as provided under Section 14 of the Customs Act, read with Rules 2 and 3 of the Valuation Rules.

B. It may please be ruled that the Buying Agent Fee payable by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the applicant is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

C. Further, may please be ruled that the License Fee payable by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules?

D. Further, it may please be ruled that the Management Fee payable by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules?

A. Transactions undertaken are acceptable in terms of Section 14

A.1 Applicant fulfills all conditions under Section 14 read with Rule 3 of the Customs (Determination of Price of Imported Goods) Rules, 2007 for value to be accepted:

Condition	Scenario-I	Scenario-II	Scenario-III
Relationship did not influence price	Procurement of both raw materials and finished goods are from unrelated parties. Buying Agents.do not have control over goods, price etc. Amount payable by the Applicant to FN Int. (for raw materials) and Buying Agent (for finished goods) is equal to amounts charged by vendors and CMT manufacturers respectively. No compulsion on Applicant to route procurements through Buying Agent or FN Int.		Import of goods in India (finished goods) are made from CMT manufacturers (unrelated parties). Buying Agents do not have control over goods, price etc. Amount payable by Applicant to Buying Agent is equal to amount charged by CMT manufacturers. No compulsion on Applicant to route procurements through Buying Agent.
No adjustment to price required under Rule 10	The Appellant makes payments of Buying Commission, License Fee and Management Fee. These are not includible under Rule 10 for detailed submissions given below.

A.2 Therefore, basis above, valuation proposed to be adopted must be accepted.

B. Buying Agent Fee is to be excluded from value of imported goods

B.1 Buying Agent Fee is paid to Buying Agents for sourcing / procurement of orders on behalf of the Applicant. Relevant clauses from agreements dated 1 July 2023 and 1 January 2024 with Buying Agents are reproduced as under:

B.2 Rule 10(1)(a)(i) specifically excludes ‘buying commissions’ incurred by the buyer. Incurred shall be interpreted to mean ‘liable to’.

B.3 Interpretative Note defines ‘buying commission’ to mean fees paid by the importer to his agent for the service of representing him abroad for purchase of goods

B.4 In all the Scenarios, Buying Agents act as agents of the Applicant in identifying CMT manufacturers abroad for sourcing of imported goods and perform all required activities that are necessary to effect purchase of imported goods.

B.5 Following judgments also stipulate that buying commission is not liable to be included:

• Apollo Tyres Limited v. Collector of Customs [1996 (12) TMI 48 — Supreme Court]
• Anand Textiles v. Commissioner of Customs [2008 (3) TMI 523 — CESTAT, New Delhi]

C. License Fee is to be excluded from value of imported goods

C.1 License Fee paid by the Applicant to FN AU relates to grant of non-exclusive license to use or exploit Licensed IP in India which includes Forever New brand, retail and online store design, technical information and any improvements thereof which has no relation with imported goods.

C.2 In this regard, relevant clauses of agreement dated 1 July 2023 entered with FN AU are as follows:

Definitions (Designs; Forever New Brand; Forever New Retail Site; Intellectual Property Rights; License Fee; Products)	Clause 1.1
Applicant granted a separate, non-exclusive license to exploit Licensed IP	Clause 3.1
Applicant must not: – use Licensed IP for any other purpose – use Licensed IP or sell any Products in location other than Licensed Territory – use any trademarks registered outside of Licensed Territory – transfer Licensed IP to any other person	Clause 3.2
Applicant not granted any rights in or Licensed IP	Clause 4.1
Applicant rights to purchase products is not conditional on it paying License fee to FN	Clause 5.1(b)

C.3 Applicant can import goods despite non-payment of License Fee. License Fee is linked to performance of Applicant’s retail business and not the imported goods.

C.4 Interpretative Note 2 to Rule 10(1)(c) also provides that payments made for acquiring rights to distribute or resell imported goods shall not be added.

C.5 License Fee paid to FN AU, an entity separate from CMT manufacturers, indicates that payment does not satisfy an obligation of the seller. Further, Applicant has been paying License Fee to FN AU much prior to proposed transaction which clearly evidences lack of nexus with proposed transaction.

C.6 Following judgments also support the Applicant’s case:

• CC v. Feredo India Private Limited [2008 (2) TMI 12 — Supreme Court]
• H&M Hennes & Mauritz Retail Private Limited v. CC [2016 (9) TMI 318 — AAR-Cus]
• Quest Retail Private Limited v. CC [2019 (7) TMI 778 — CESTAT New Delhi]
• CC v. Luxoticca India Eyewear Private Limited [2018 (1) TMI 1025 — CESTAT New Delhi]

D. Management Fee is to be excluded from value of imported goods

D.1 Management Fee is payable by the Applicant in consideration of administrative and routine management services (including accounting, HR, IT, marketing, legal support) provided by FN AU.

D.2 Relevant clauses of agreement with FN AU are as under:

D.3 Routine management services are independent services provided in relation to the Applicant’s business as a whole irrespective of any imports made.

D.4 Applicant’s right to purchase goods from unrelated third-party manufacturers is not conditional on it paying Management Fee.

D.5 Management Fee is paid to FN AU, party different from the imported goods, indicates that payment does not satisfy an obligation of the seller. Further, Applicant has been paying Management Fee to FN AU much prior to proposed transaction which clearly evidences lack of nexus with proposed transaction.

D.6 CMT being unrelated third party would not have any direct or indirect interest from the Applicant making payment of Management Fee to FN AU.

D.7 Following judgments also support the Applicant’s case:

• Alcan India Private Limited v. CC [2014 (12) TMI 899 — CESTAT Mumbai]
• Thyssenkrupp Elevator (India) Private Limited v. CC [2017 (4) TMI 204 — CESTAT New Delhi]
• H&M Hennes & Mauritz Retail Private Limited v. CC [2016 (9) TMI 318 — AAR-Cus]

Along with this synopsis, the Applicant has filed a paper book containing the compilation of reported judicial decisions and other documents.

2. The Comments of the Air Cargo Imports (Customs) Commissionerate, New Delhi with regard to points raised in the application are furnished as under:

3(i) Eligibility of the applicant, in terms of Section 28E(c) of the Customs Act, 1962 to seek such advance ruling,:

Yes, M/s Forever New Apparels Pvt Ltd is a valid applicant within the meaning of Section 28E(c) (i) of the Customs Act, 1962, having IEC Code 0507014294.

3(ii) Applicability of proviso (lof section 28-1 (2) of the Customs Act, 1962 regarding the question raised in the application:

As per records available in the Section, no application for the advance ruling of the applicant is pending with any officer of the Customs, other Appellate Tribunal or any Court as per proviso of Section 28(D) (2) of Customs Act, 1962.

3(iii) Please specify whether the claim of the applicant regarding the nature of activity, i.e. it is ongoing/proposed is correct:

As per available records, these items were not imported previously by this importer at this port. 3(iv) Comments on merit:

The questions raised by the applicant in their application have been examined in view of the material evidences submitted by them. Subsequently, comments on merit are discussed in the below paras.

2.1 “Principles of valuation to be adopted in respect of transaction value of the import of finished goods from unrelated party in accordance with Section 14 of the Customs Act read with Rule-2 and 3 of the valuation Rules and that the Buying Agent Fee, License Fee and Management Fee paid to related parties should not be treated as costs and payments required to be included in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, in accordance with the principles of valuation under section 14 of the Customs Act, 162 read with Rules 3 as well as rule 10 of the valuation Rules.”:

2.2 The Applicant proposes to import apparels and accessories from third party unrelated manufacturers, through related party buying agents situated outside India, for sale to the customers in the Indian market. For this, the applicant is paying Buying Agent Fee, License Fee and Management Fee to related parties. These payments are related to the products that the applicant proposes to import from third party unrelated manufacturers.

2.3 As per the models represented in the application at Scenario I and Scenario II, the raw materials are being transferred to CMT on FOC (Free of cost) basis and invoice for the same is issued to FN Int which is related party to FN India. Further, CMT manufacturers are selling final goods to buying agents on order which is placed by buying agents on the behalf of FN India and ownership is also transferred to FN India. Therefore, it is difficult to arrive to the conclusion that the price quoted by the CMT manufacturers (unrelated party) should be accepted as fair transaction value and is not influenced by the relation among FN Int, FN India and buying agents.

2.4 As per Rule 3(2)(c) of CVR 2007, value of the imported goods under sub rule (1) of Rule 3 shall be accepted provided no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of rule 10 of these rules. The applicant in para 1.38 of the application has mentioned that FN India pays a license Fee to FN AU (5% of the Retail Net Sales of the goods within India by FN India). Therefore, going by the rule 3(2)(c), the transaction value of the goods cannot be accepted and liable to be rejected under Rule 12 of the CVR 2007. Further, Board, vide para 4.1 of Circular No 05/2016 dated 09.02.2016 has clarified that:

“4.1 Apart from investigation of transactions involving related parties, cases involving possible additions to declared transaction value also need to be examined to determine whether SVB investigations are necessary. Accordingly, transactions where any payments are sought to be made which are in the nature of instances given below, shall be examined with respect to the need for SVB investigations:

a. ‘royalty’ and ‘license fee’ under Rule 10 (1)(c) of CVR, 2007 or

b. where the value of any part of proceeds of any subsequent resale, disposal or use of imported goods accrues to the seller /i.e. Rule (10)(1)(d) of CVR, 2007 or

c. Where any other payments are made or are contemplated to be made in future by buyer to seller as a condition of sale of imported goods etc., [i.e. Rule 10(1) (e) of CVR, 2007″

Therefore, the admissibility/quantum of the payment made to the seller/related party is subject to the SVB investigation at the time of import in terms of the Circular 05/2016-Customs Dated 09.02.2016.

2.5 Further, the SVB section is the specialized section which examines the influence of relation between related parties on the transaction value. Further the decision taken by the advance ruling committee may have far reaching revenue implication. Therefore, comments may be sought from SVB section for more clarity.

3. A personal hearing in the matter was conducted on 12.08.2024. During the personal hearing, the authorized representative of the applicant reiterated the submissions already made in their application for advance ruling and emphasized that the applicant wants clarity on the principles of valuation to be adopted in the current case.

4.1 3(i) Eligibility of the applicant, in terms of Section 28E(c) of the Customs Act, 1962 to seek such advance ruling: Yes, M/s Forever New Apparels Pvt Ltd is a valid applicant within the meaning of Section 28E(c) (i) of the Customs Act, 1962, having IEC Code 0507014294.

4.2 3(ii) Applicability of proviso (lof section 28-1 (2) of the Customs Act, 1962 regarding the question raised in the application: As per records available in the Section, no application for the advance ruling of the applicant is pending with any officer of the Customs, other Appellate Tribunal or any Court as per proviso of Section 28(D) (2) of Customs Act, 1962.

4.3 3(iii) Please specify whether the claim of the applicant regarding the nature of activity, i.e. it is ongoing/proposed is correct: As per available records, these items were not imported previously by this importer at this port.

4.4 3(iv) Comments on merit: The questions raised by the applicant in their application have been examined in view of the material evidences submitted by them. Subsequently, comments on merit are discussed in the below paras:

i. “Principles of valuation to be adopted in respect of transaction value of the import of finished goods from unrelated party in accordance with Section 14 of the Customs Act read with Rule-2 and 3 of the valuation Rules and that the Buying Agent Fee, License Fee and Management Fee paid to related parties should not be treated as costs and payments required to be included in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, in accordance with the principles of valuation under section 14 of the Customs Act, 162 read with Rules 3 as well as rule 10 of the valuation Rules.

ii. The Applicant proposes to import apparels and accessories from third party unrelated manufacturers, through related party buying agents situated outside India, for sale to the customers in the Indian market. For this, the applicant is paying Buying Agent Fee, License Fee and Management Fee to related parties. These payments are related to the products that the applicant proposes to import from third party unrelated manufacturers.

iii. As per the models represented in the application at Scenario I and Scenario II, the raw materials are being transferred to CMT on FOC (Free of cost) basis and invoice for the same is issued to FN Int which is related party to FN India. Further, CMT manufacturers are selling final goods to buying agents on order which is placed by buying agents on the behalf of FN India and ownership is also transferred to FN India. Therefore, it is difficult to arrive to the conclusion that the price quoted by the CMT manufacturers (unrelated party) should be accepted as fair transaction value and is not influenced by the relation among FN Int, FN India and buying agents.

iv. As per Rule 3(2)(c) of CVR 2007, value of the imported goods under sub rule (1) of Rule 3 shall be accepted provided no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of rule 10 of these rules. The applicant in pare 1.38 of the application has mentioned that FN India pays a license Fee to FN AU (5% of the Retail Net Sales of the goods within India by FN India).

v. Therefore, going by the rule 3(2)(c), the transaction value of the goods cannot be accepted and liable to be rejected under Rule 12 of the CVR 2007. Further, Board, vide para 4.1 of Circular No 05/2016 dated 09.02.2016 has clarified that:

“4.1 Apart from investigation of transactions involving related parties, cases involving possible additions to declared transaction value also need to be examined to determine whether SVB investigations are necessary. Accordingly, transactions where any payments are sought to be made which are in the nature of instances given below, shall be examined with respect to the need for SVB investigations:

a. ‘royalty and ‘license fee’ under Rule 10 (1)(c) of CVR, 2007 or

b. where the value of any part of proceeds of any subsequent resale, disposal or use of imported goods accrues to the seller /i.e. Rule (10)(1)(d) of CVR, 2007 or

c. Where any other payments are made or are contemplated to be made in future by buyer to seller as a condition of sale of imported goods etc., [i.e. Rule 10(1) (e) of CVR, 2007″

Therefore, the admissibility/quantum of the payment made to the seller/related party is subject to the SVB investigation at the time of import in terms of the Circular 05/2016-Customs Dated 09.02.2016.

vi. Further, the SVB section is the specialized section which examines the influence of relation between related parties on the transaction value. Further the decision taken by the advance ruling committee may have far reaching revenue implication. Therefore, comments may be sought from SVB section for more clarity.

5. The Applicant acknowledged the receipt of letters from Office of the Commissioner of Customs, Chennai -11 (Import) and Office of the Principal Commissioner of Customs Air Cargo Complex (Import), New Delhi in relation to the captioned AAR application. In both the letters, the Revenue has indicated that as per the application the Applicant proposes to undertake transaction from a related party as the payments like remuneration fee, license fee, management fee and reimbursement of cost of raw materials to their related parties. Since there is already a well laid mechanism for verification of valuation of such cases in Customs, Circular No. 5/2016-Customs dated 09.02.2016 issued in F. No. 465/12/2010-Cus V may be referred to in this case. Accordingly, this case requires investigation by Special Valuation Branch (SVB) which will look into all the aspects before finalization as whether declared value is at arm’s length cannot be decided at this stage. In relation to the above observation by the Revenue, the Applicant wishes to submit as follows:

I. The proposed import transactions are between two unrelated parties

1.1. The Applicant wishes to submit that in all the scenarios covered in the application, the seller of the goods is an unrelated third-party manufacturer. The unrelated third-party manufacturer will export the goods directly to the Applicant in India. While the payment for the finished goods will be made to the third-party manufacturers through the buying agents (related party), the sale will be effected, invoice will be raised and risk and title will be transferred directly by the unrelated third-party manufacturers to the Applicant. In other words, merely because the payment is routed through a related party, the buying agent does not act in the capacity of a seller (as is also provided under clause 6.2 of the agreement). The buying agents do not have any financial interest or ownership in the vendors of the goods or services in relation to the goods. Based on the commercial arrangement, supported by the agreement, the seller will be the third-party manufacturer and the buyer, the Applicant. Therefore, there can be no question that the buyer and seller are unrelated.

1.2. Further, it is also relevant to note that the Applicant is under no obligation to necessarily purchase goods exclusively through the buying agents or from any vendor or to purchase a specified quantity of goods through the buying agent or vendor, as provided under clause 3.7 of the agreement. In other words, the Applicant has the prerogative to purchase through another vendor, other than through the buying agent or the vendors sourced by the buying agent.

1.3. Further, as provided in the application, the remuneration fee, license fee, management fee being paid by the Applicant to FN AU (related party), has no connection with the goods being imported by the unrelated third-party manufacturers. The payments made to FN AU are not linked to the imports and are not a condition to sale to such imports. These are independent payments made to FN AU for the services being provided by FN AU to the Applicant. Accordingly, the price charged by the third party manufacturer cannot be said to be influenced by the relationship of the Applicant with the related party buying agents or FN AU or any other group entity.

1.4. The Applicant wishes to submit that as per Rule 2 of the Valuation Rules, a person will be deemed to be related only if:

i. they are officers or directors of one another’s businesses;

ii. they are legally recognized partners in business;

iii. they are employer and employee;

iv. any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;

v. one of them directly or indirectly controls the other;

vi. both of them are directly or indirectly controlled by a third person;

vii. together they directly or indirectly control a third person: or

viii. they are members of the same family.

1.5. In the instant case, the third-party manufacturers do not qualify under any of the scenarios mentioned above:

Related party scenarios	Remarks in the context of the FN Group model
Officers or directors of one another’s businesses	The third party manufacturers and FN India are not officers or directors of one another’s businesses.
Legally recognized partners in business	The third party manufacturers and FN India are not partners in business.
Employer and employee	The third party manufacturers and FN India are employer and employee.
Any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them	No party directly or indirectly owns, controls or holds 5% or more of the outstanding voting stock or shares of the third party manufacturers and FN India.
One of them directly or indirectly controls the other	The third party manufacturers and FN India do not directly or indirectly control the other.
Both of them are directly or indirectly controlled by a third person	The third party manufacturers and FN India are not directly or indirectly controlled by any person from the Forever New Group.
Together they directly or indirectly control a third person	The third party manufacturers and FN India do not directly or indirectly control a third party.
They are members of the same family	The third party manufacturers and FN India are not members of the same family / Forever New Group.

1.6. Based on the above submissions, since the Applicant and third-party manufacturer are not related, the file should not be referred to SVB to determine the principles of valuation to be adopted in this case.

II. SVB investigations can only be initiated at the time of first import from a related party and not for proposed transactions

11.1. Notwithstanding the fact that the Applicant and third party manufacturer are unrelated, without admitting even if its argued that the transaction is being undertaken between two related parties and price is not the sole consideration, the Applicant wishes to submit that the SVB investigation can be initiated only while filing the first bill of entry by the Applicant whereas in the present case, the question before AAR is sought for a proposed transaction . The Applicant wishes to refer to para 4.0 of the Circular 5/2016- Customs dated 9 February 2016 which necessitates the initiation of SVB proceedings at the time of import.

‘Cases, which may be considered for SVB Investigations

4.0 While filing a bill of entry, every importer makes a declaration about whether the seller of imported goods is a related party or not, as defined under Rule 2(2) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 (CVR. 2007). In other words, where any importer makes a declaration that the transaction is between ‘related persons, as defined under Rule 2 (2) of CVR 2007, it would be necessary to examine whether or not the circumstances surrounding the sale of the imported goods indicate that the relationship has influenced the price. Accordingly, such transactions will require to be examined as to whether SVB inquiries are necessary.’

11.2. In the present case, the Applicant seeks to obtain clarity on a proposed transaction in relation to the principles of valuation. Based on the outcome of the AAR ruling, the Applicant would be deciding viability and feasibility of implementation the proposed model. It is not possible for the Applicant to seek clarity from SVB or to request the SVB for initiating investigations on the imports that has not been/being undertaken.

11.3. Without admitting that the import transaction is between related parties, the Applicant wishes to submit that in case it is concluded that the transaction proposed to be undertaken by the Applicant qualifies as a related party transaction, the Applicant would disclose the transaction as a related party import at the time of filing the Bill of Entry for the first import and such transaction may be referred by the concerned port to SVB if they so deem fit. The Applicant would follow the procedure provided in Circular 5/2016- Customs dated 9 February 2016 if the case is referred for SVB investigation.

11.4. Having said this, in the meantime, while the import is a proposed transaction, the Applicant submits that the file should not be referred to SVB in the present case and the ruling be pronounced by the Hon’ble Customs Authority for Advance Ruling.

III. The questions on which the advance ruling is sought is in respect of the principles to be adopted for the purposes of determination of value of the goods as per Section 28H of the Customs Act, 1962

III.1. The Applicant wishes to submit that as per Section 28 H of the Customs Act, 1962, an Applicant can make an application to the advance ruling authority in respect of the principles to be adopted for the purposes of determination of value of the goods under the provisions of this Act. Therefore, the Hon’ble Customs Authority for Advance Ruling has jurisdiction under the Act to accept applications on the question involving principles to be adopted for the purposes of determination of the value of goods, irrespective of whether the transaction is between related parties. The law does not create an exclusion for applications in relation to transactions between related parties.

III.2. In the instant case, given that the matter entails a question of application of the principles for determination of the import value of goods, it is submitted that this Hon’ble Customs Authority for Advance Ruling has the jurisdiction to entertain this application and accordingly, pass a ruling.

III.3. Further, the Applicant relies on the following AAR rulings wherein transactions between related parties were examined by the Customs Authority for Advance Ruling in the context of principles to be adopted for the purposes of determination of value of the goods and rulings was pronounced in this regard:

• • M/S. H & M HENNES & MAURITZ RETAIL PRIVATE LIMITED VERSUS COMMISSIONER OF CUSTOMS [Ruling No. AAR/Cus/21 /2016, Application No. AAR/44/CUS/08/2014]
  • M/S. SICK INDIA PVT. LTD. VERSUS THE COMMISSIONER OF CUSTOMS (I11), MUMBA1[Ruling No. CMR/Mum/ARC/47/2022 In Aplication No. CAAR/CUS/APPL/69/2022]
  • M/S FOXCONN TECHNOLOGY (INDIA) PVT. LTD. VERSUS COMMISSIONER OF CUSTOMS, MUMBAI [Ruling Nos. CAAR/Mum/ARC/18/2023 IN Application No. CAAR/CUS/APPL/79/2022]

Based on the above submissions, the Applicant requests this Hon’ble Authority that our application should be admitted, and a ruling be passed on the questions raised by the Applicant. The Applicant is willing to provide any further documents or submission required in this regard.

6. I have taken into consideration of all the materials placed on record in respect of the subject goods including the submissions made by the applicant during the course of personal hearing. I have gone through the response from the Customs Port Commissionerate of (Imports), Delhi. Having gone through the objections raised by the applicant, let’s look at the original submissions made by the applicant and the responses filed additionally with reference to the observations of the Port Commissionerate.

6.1 Forever New India is engaged in the business of trading in women’s clothing and apparels which includes active wear, belts, handbags, sunglasses, pants, skirts, jackets, coats, etc. and is a subsidiary of FN AU. The present application is being filed for the purpose of determination of application of principles of valuation of the imported goods under the Customs Act and Valuation Rules, in the context of the transaction value of the imported goods, the Buying Agent Fee, License Fee and Management Fee paid by the Applicant under the proposed operating model.

6.2 As declared, FN Group is implementing a new operating model as part of its global supply chain which involves a change in its global sourcing and procurement arrangements. The purpose of the new operating model is to centralise the sourcing and procurement processes across the FN Group. The sourcing and procurement model to be implemented by the FN Group would involve wholly owned subsidiaries of ADT acting as ‘buying agents’ for the FN Group entities, including the Applicant. Under the new operating model, the Applicant would be importing goods into India from unrelated parties through two buying agent entities:

• Buying Agent — ADT HK, incorporated in Hong Kong; and
• Buying Agent – Aoxin, incorporated in China.

6.3 The buying agents will solely act on behalf of FN India and other members of the FN Group to source potential third party manufactures of finished goods and raw materials, negotiate contracts and place orders on the third party manufacturers. The buying agents would only facilitate the supply of finished goods and raw materials between the third party manufacturers and the buyer i.e., FN India and other members of the FN Group. The buying agents will have no obligation towards any manufacturers for purchase of goods. The buying agents will not take title or ownership of the goods nor assume any financial risk in relation to the transaction between the third party manufacturers and the buyer i.e., FN India and other members of the FN Group.

6.4 The transactions under the new operating model can be undertaken under 3 different scenarios (which may operate in conjunction with each other):

A. Scenario — I: Procurement of raw material directly by FN Int: Under this model, FN Int, a part of FN Group, located in Australia would be responsible for placing bulk orders and procuring raw materials i.e., fabrics, trims, buttons, etc., from unrelated third party vendors. FN Int shall procure these raw materials directly from third party vendors and would take title and ownership of the goods. These vendors would be paid by FN Int and FN Int, in turn would recharge the cost of the raw materials to FN Group entities including the Applicant at the third party cost. The title and ownership of the goods would be transferred by FN Int to FN Group entities including the Applicant, basis the cross-charge invoices which would be raised by FN Int. On instruction of FN Int, the third party vendors would issue the fabric and other raw material free of cost to Cut, Make, Trim (`CMI’) manufacturers for use in manufacturing of finished goods, on behalf of the Applicant.

I. As explained above, under the new model, the. Applicant would place the order through buying agents. The buying agents would identify and source the suppliers, consolidate the orders from the Applicant and other FN Group entities in order to meet minimum order quantities and to leverage better buying power in negotiating the price of goods. Thereafter, the buying agents would place an order for finished goods with the unrelated third party CMT manufacturers on behalf of the Applicant and other FN Group entities.

II. The CMT manufacturers would raise an invoice for the conversion of the raw materials into finished goods i.e., for the provision of a service at a CMT price specifying the Applicant as the buying entity, however, the invoice will be sent to Buying Agent – ADT HK/ Buying Agent – Aoxin, for administrative convenience. The buying agents would, in turn, raise an invoice to the Applicant, for recovery of the amount charged by the manufacturer, at cost. The invoices raised by Buying Agent- ADT HK and/or Buying Agent – Aoxin for the conversion charges on the Applicant, would refer to invoices raised by the third party CMT manufacturers. The buying agents would receive funds from the Applicant and would make the corresponding payment to the CMT manufacturers on behalf of the Applicant

III. Buying Agent – ADT HK / Buying Agent – Aoxin would neither take title to the finished goods, fabric or any other materials nor would assume any financial risk in relation to the finished goods, fabric, or other materials. The title to the finished goods would pass directly from the CMT manufacturers to the Applicant, with the Applicant acting as the importer on record responsible for import clearances and paying any applicable local taxes or import duties and levies within India. Buying Agent – ADT HK and Buying Agent -Aoxin would each be remunerated for the buying agency services performed by way of the Buying Agent Fee. The fee would be paid by the Applicant to the buying agents separately from the payment for the finished goods. The Buying Agent Fee would be calculated on a cost plus basis (being direct and indirect costs incurred in performing the services plus an agreed mark up of 5%).

IV. For the purpose of payment of Customs Duty on the import of the finished goods, the applicant has proposed that the duty will be paid on the CMT charges paid in respect of such finished goods plus the cost associated with the free issue of the fabric and raw materials (being an assist cost) as per Section 14 of the Customs Act.

B. Scenario II: Procurement of raw material by FN Int through the buying agent: Under this scenario, FN Int would instruct Aoxin, who will act as a buying agent to place orders for procurement of raw materials i.e., fabrics, trims, buttons, etc., from unrelated third party vendors. FN Int would make payment to Aoxin and Aoxin would make the payments to the third party vendors as a buying agent of FN Int. FN Int would recharge the cost of the raw materials and Buying Agent Fee to FN Group entities including FN India, at cost. Further the title and ownership of the goods would be transferred to FN Group entities including FN India based on the cross-charge invoices which would be raised by FN Int. On the instruction of FN Int, on behalf of the Applicant, the third party vendors would issue the fabric and other raw material free of cost to CMT garment manufacturers for use in manufacturing of finished goods on behalf of the Applicant.

C. Scenario III: Purchase of raw material directly by third party manufacturers: Under this model, the third party manufacturers directly purchase the raw materials required for manufacturing the finished goods on their own account. The cost incurred by the manufacturers would be recovered through the price charged for the finished goods. Similar to Scenario I and II, FN India would place the order through buying agents, who in turn would place the order for finished goods with the unrelated third party manufacturers on behalf of FN India and other FN Group entities. The third party manufacturers would invoice for the finished goods to ADT HK/ Aoxin. Given that the buying agents act as central procurement agents for the FN Group to facilitate bargaining power for the group, the third party manufacturers raise an invoice to the buying agents, however, specifying, the Applicant as the buying entity.

I. The invoice will merely be sent to Buying Agent – ADT HK/ Buying Agent – Aoxin, for administrative convenience. The buying agents would, in turn, raise an invoice to the Applicant, for recovery of the amount charged by the third party manufacturers, at cost, with supporting evidence of the invoices raised by the manufacturers. The invoices raised by Buying Agent- ADT HK and/or Buying Agent – Aoxin for the finished goods, would refer to invoices raised by the third party manufacturers. In this scenario, the third party manufacturers directly purchase the raw materials required for manufacturing the finished goods on their own account, therefore, the price of the finished goods includes the cost of raw materials procured by third party manufacturers. ADT HK and/or Aoxin would receive funds from FN India and would make the corresponding payment to the third party manufacturers on behalf of FN India. In other words, the buying agents merely act as an agent to facilitate sourcing and procurement, but neither take title or ownership of the goods.

II. Buying Agent – ADT HK and Buying Agent – Aoxin would each be remunerated for the buying agency services performed by way of a Buying Agent Fee that would be paid by FN India separately from the payment for the finished goods. The fee would be calculated on a cost plus basis (being direct and indirect costs incurred in performing the services plus an agreed mark up of 5%). Buying Agent – ADT HK / Buying Agent – Aoxin would neither take title to the finished goods, fabric or any other materials nor would assume any financial risk in relation to the finished goods, fabric, or other materials. The legal title to the finished goods would pass directly from third party manufacturers to the Applicant, with the Applicant acting as the importer on record responsible for import clearances and paying any applicable local taxes or import duties and levies within India.

III. Under this scenario, Customs Duty will be paid on the value of the finished goods as charged by the third party manufacturers through the buying agents.

D. Let’s summarise the aforesaid three conditions in the following table:

D1. Transactions undertaken are acceptable in terms of Section 14: The Applicant appears to have fulfilled all conditions under Section 14 read with Rule 3 of the Customs (Determination of Price of Imported Goods) Rules, 2007 for value to be accepted:

Condition	Scenario – I	Scenario-II	Scenario-III
Relationship did not influence price	Procurement of both raw materials and finished goods are from unrelated parties. Buying Agents do not have control over goods, price etc. Amount payable by the Applicant to FN Int. (for raw materials) and Buying Agent (for finished goods) is equal to amounts charged by vendors and CMT manufacturers respectively. No compulsion on Applicant to route procurements through Buying Agent or FN Int.		Import of goods in India (finished goods) are made from CMT manufacturers (unrelated parties). Buying Agents do not have control over goods, price etc. Amount payable by Applicant to Buying Agent is equal to amount charged by CMT manufacturers. No compulsion on Applicant to route procurements through Buying Agent.
No adjustment to price required under Rule 10	The Appellant makes payments of Buying Commission, License Fee and Management Fee. These are not includible under Rule 10 for detailed submissions given below.

Therefore, basis above, the valuation proposed may be accepted.

6.4.1 Payments to be made by FN India under the proposed model and corresponding terms of the agreement: As stated in the above scenarios, FN Int facilitates the payments for the FN Group with respect to raw materials. Based on the requirements of the group entities, it places orders for raw material on third party vendors and makes the payment for such vendors on behalf of the group entities. In order to recover the cost of the raw material. FN Int raises an invoice on the respective group entities, including the Applicant. FN Int recharges the value of the raw material at cost to the Applicant. Based on the invoice raised by FN Int, the Applicant will reimburse the cost of the raw material. Further, the title and ownership of the goods would be transferred by FN Int to FN India basis such cross charge invoices which would be raised by FN Int.

6.4.2 Payments made to Buying Agent – ADT HK/ Buying Agent – Aoxin: As stated above, under the new operating model, the buying agents are appointed to undertake sourcing and co cement activities for the group, to facilitate the bargaining power of the group.

6.5 The relevant clauses of the executed agreement are reproduced below, for ease of reference:

• Schedule 2 — Services

The services may include:

(a) sourcing of Vendors on behalf of the Principals;

(b) passing Purchase Orders with Vendors on behalf of the Principal or where circumstances warrant, on behalf of two or more Principals on a consolidated basis;

(c) if directed by a Principal, arranging for consolidation of shipments and arranging for all freight, hauling, insurance and / or storage of the Goods by service providers unrelated to the Procurement Entity;

(d) facilitating and instructing Vendors in relation to the preparation of Vendor Invoices in accordance with the Principal’s instructions for the Goods provided;

(e) providing accounting and administrative support as it relates to the Services from time to time and as requested by the Principals;

(f) as required, providing supplier liaison, ethical sourcing and quality control services, as directed by the Principals; and

(g) making payments to Vendors for Vendor Invoices on behalf of and as directed by the Principals.

• Clause 4.1 — Remuneration Fee

(a) In consideration of the Procurement Entity providing the Services under this Agreement, each Principal must pay their Remuneration Fee to the Procurement Entity in accordance with clause 4.1(c).

(b) For the avoidance of doubt:

i. the Remuneration Fee does not form part of the cost of the Goods, but rather is the fee for the Services provided to each Principal; and

ii. none of the Remuneration Fee or any other amounts payable by each Principal to the Procurement Entity as compensation or reimbursement for the provision of the Services will be paid, directly or indirectly, to any Vendor or for the benefit of any Vendor.

(c) The Remuneration Fee will be calculated in accordance with Schedule 3.

• Clause 6.2 — Performance

In performing its obligations under this Agreement, the Procurement Entity will not under any circumstances:

(a) act as a Vendor in any transactions with the Principals;

(b) produce (in whole or in part) or control the production (in whole or in part) of the Goods or any other goods of the same class of goods as the Goods, purchase, exchange, sell or trade in the Goods other than as agent of the Principals;

(c) sell, for its own account, any raw materials to any Vendors;

(d) be involved in the design of the Goods or facilitate product development;

(e) supply, or control the supply of, any services in relation to Goods;

(f) have a financial interest or any ownership in the Vendors or any other suppliers that provide any services in relation to the Goods;

(g) transport the Goods;

(h) act as agent for, or in any other way represent, any Vendor, supplier or manufacturer or otherwise be associated with any Vendor, supplier or manufacturer except as agents of the Principals;

(bb) act as agent for, or in any other way represent, Vendors or any other suppliers of any services in relation to the Goods;

(cc) receive any compensation from any party other than a Principal in connection with its performance under this Agreement or claim or receive, directly or indirectly. the benefit of any commission. fee or other payment, in the form of money, letter of credit. negotiable instrument, or any goods or services, from any person, other than the Remuneration Fee or any other payment from a Principal for services provided by the Procurement Entity pursuant to this Agreement;

(dd) hold title to the Goods;

6.5.1 As is evident from the terms of the Agreement as reproduced above, namely, Schedule 2 and clauses 3.1, 3.4, 3.5, 3.6 and 6.2 of the Agreement, the buying agents merely act as agents to facilitate the orders, procurement and payment for the Goods. on behalf of the Applicant. on account of administrative and commercial convenience. The buying agents do not take any title or risk on their own account, instead, the title and risk of the goods transfers directly from the manufacturer to the Applicant.

6.5.2 The unrelated third party manufacturers would raise an invoice for the conversion charges at CMT price (where the raw materials are supplied on a free of cost basis to CMT manufacturers) or Free on Board price (where the raw materials are procured directly by the unrelated third party manufacturers on its own account), specifying the Applicant as the buying entity. However, for administrative convenience the invoice will be sent to ADT HK/ Aoxin, who would in turn would raise an invoice on the Applicant for the recovery of the charges from the Applicant. The invoices raised by the buying agents would have the supporting evidence i.e., the invoices raised by third party manufacturers. ADT HK and/or Aoxin would receive funds from FN India on the basis of the invoice raised and would make the corresponding payment to the unrelated third party manufacturers on behalf of FN India. In other words, the buying agents merely operate as an agent of the Applicant, and any payment received by the buying agents from the Applicant in respect of the finished goods, is in its capacity as an agent.

6.5.3 In consideration of the procurement agent services provided by the buying agent as captured in Schedule 2 of the agreement, the Applicant will be obligated to pay the Buying Agent Fee. Such Buying Agent Fee will be paid on a cost plus basis, in accordance with the clause 4.1 read with Schedule 3 of the agreement. The payment of the price of the finished goods / conversion charges is separate from the payment of the Buying Agent Fee to the buying agents, by the Applicant.

6.6 License Fee for brand intellectual property: FN AU is the owner of FN Group intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e., portfolio of retail brands) and the Forever New image (i.e. goodwill and reputation). The FN Group IP owned by FN AU consists of intellectual property, including brand, store related intellectual property such as store designs, know-how, manuals and guidelines, systems and technical information for retail operations.

6.6.1 For the grant of such license, FN India pays a License Fee to FN AU. The License Fee is calculated as 5% of Retail Net Sales of the Goods by FN India within India, however, may be reduced (including to nil if necessary) where the Return on Sales achieved by FN India is less than 5%. The License Fee at 5% of Retail Net Sales was determined based on a benchmarking study conducted to identify a sample of independent comparable external license arrangements that are comparable to the arrangements between FN AU and the FN Group entities, including the Applicant. Further, it is pertinent to note that FN India’s rights to purchase the goods is not conditional on FN India paying the license fee to FN AU and payment of the license fee is not conditional on the payment of any charges due, payable, or arising in relation to the purchase of the goods.

6.6.2 A Brand License Agreement (IP Agreement) is entered into by FN AU (as Licensor) and FN India (as Licensee), effective from 1 July 2023, which outlines the arrangements in place for the grant of license to utilise the Group intellectual property by FN India in India. The relevant clauses of the agreement are reproduced below, for ease of reference:

• Clause 5.1 — Licence Fee

(a) In consideration of the Licensor granting the Licence to each Licensee under this Agreement, that Licensee must pay the Licensor its Licence Fee in accordance with this Agreement.

(b) The parties acknowledge and agree that each Licenese’s rights to purchase the Products is not conditional on that Licensee paying the Licence Fee (or any other amounts due and payable under this Agreement) to the Licensor in accordance with this clause 5.

6.7 Management fees for routine inter-company services: To support the business operations, FN India receives routine management services from FN AU relating to the back-office services for the operation of retail stores (being physical and online stores) in India. A Master Services Agreement is entered between FN AU (as service provider) and FN India (as recipient), effective from 1 July 2022, which outlines the arrangements for the routine management services that FN AU provides to FN India.

6.7.1 Under the terms of Master agreement, FN AU agrees to provide routine intercompany services to FN India including general administration, business development services, marketing support, tax and accounting support, financial management, information technology services, human resource support, store development and operational support, legal support, etc. A complete list of services being provided by FN AU is detailed in Schedule II under the agreement. FN India pays a Management Fee to FN AU on a cost plus mark-up basis which is calculated as the total of direct and indirect costs (as defined in the Master Services Agreement) incurred by FN AU for the provision of the services, plus a markup of 5%. Further, FN India also pays FN AU for any disbursements, expenses or charges incurred in performing, the management services that are not considered in direct or indirect costs.

6.7.2 The management fee paid by FN India to FN AU is completely independent of the importation of finished goods by FN India. Further, the management fee paid to overseas entity does not form a condition to import of goods by FN India. The relevant clauses of the Master Agreement are reproduced below, for ease of reference:

• Clause 1.1 — Definitions

Services means, in respect of a Recipient:

(a) the services set out in Schedule 2; and

(b) any incidental services under clause 3.4 to the Services,

provided by the Service Provider to that Recipient from time to time in accordance with the terms of this Agreement.

Services Fee means, in respect of Services received by a Recipient, the amount payable to the Service Provider by that Recipient in consideration for the provision of those Services by the Service Provider, as calculated in accordance with Schedule 3.

• Schedule 2 — Services

The Services contemplated by this agreement are routine intercompany services undertaken by the Service Provider that provide a benefit to the Service Recipient and are not otherwise covered by other intercompany arrangements between the parties. The services include:

(a) routine strategic management and oversight;

(b) general administrative and management services (that is not a shareholder activity), including administration services as required for the operations of the Recipient’s retail stores from time to time;

(c) business development services;

(d) marketing support;

(e) tax and accounting support to ensure the Recipient’s compliance;

(f) financial management, accounting and treasury assistance and support, including:

i. cash management; and

ii. providing financial reporting calendar compliance and support, including

(A) month end closing reports to be provided within 5 Business Days after each month end, including profit and loss statement, balance sheet, variance analysis and balance sheet support;

(B) quarter end reporting, quarterly forecasts and quarterly management recap reporting, including quarterly management presentation;

(C) the foregoing to include breakdown by channel (e.g., wholesale, retail, e-commerce) and by segment (e.g., apparel, footwear and accessories) and brand name; and

(D) annual budgets;

(g) information technology services including installation, maintenance and support of hardware and software;

(h) human resource function support;

(i) store development, operational and visual merchandising support;

(j) commercial and legal support;

(k) assistance in relation to store construction, design and development;

(l) buying services, range build and product mix;

(m) planning activities;

(n) administering and effecting accounts payable and disbursements of the business of the Recipient;

(o) administering and collecting accounts receivable and collections of the business of the Recipient;

(p) assistance with merchandise and stock/product/ inventory;

(q) customer services and support;

(r) real-estate leasing;

(s) such other manage services required for day-to-day operations of the Recipient’s business; and

(t) such other corporate support services as agreed between a Service Provider and Recipient from time to time.

6.8 QUESTIONS FOR DETERMINATION

The questions before this Hon’ble Customs Authority for Advance Ruling are:

A. Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers, is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules.

B. Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant, is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

C. Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

D. Whether the Management Fee paid by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from another party i.e., an unrelated third party manufacturer, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

6.8.1 Legislative background:

A. Section 14 of the Customs Act – Valuation of goods

“(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.

Provided further that the rules made in this behalf may provide for,-

(i) the circumstances in which the buyer and the seller shall be deemed to be related;

(ii) the manner of determination of value in respect of goods when there is no sale, or the buyer and the seller are related, or price is not the sole consideration for the sale or in any other case

………………..;

B. Rule 3 of the Valuation Rules: Determination of the method of valuation

(1) Subject to rule 12, the value of imported goods shall be the transaction value adjusted in accordance with provisions of rule 10;

(2) Value of imported goods under sub-rule (1) shall be accepted:

Provided that —

(a)

(a) the sale or price is not subject to some condition or consideration for which a value cannot be determined in respect of the goods being valued;

(b) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of rule 10 of these rules; and

(d) the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purposes under the provisions of sub-rule(3) below.

(3) (a) Where the buyer and seller are related, the transaction value shall be accepted provided that the examination of the circumstances of the sale of the imported goods indicate that the relationship did not influence the price.

(b) In a sale between related persons, the transaction value shall be accepted, whenever the importer demonstrates that the declared value of the goods being valued, closely approximates to one of the following values ascertained at or about the same time —

i. the transaction value of identical goods, or of similar goods, in sales to unrelated buyers in India;

ii. the deductive value for identical goods or similar goods;

iii. the computed value for identical goods or similar goods:

Provided that in applying the values used for comparison, due account shall be taken on demonstrated difference in commercial levels, quantity levels, adjustments in accordance with the provisions of rule 10 and cost incurred by the seller in sales in which he and the buyer are not related;

(c)…

C. Rule 10 of the Valuation Rules – Cost and services

(1) “In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, –

b) the following to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:-

(i) commissions and brokerage, except buying commissions’

(ii) the cost of containers which are treated as being one for customs purposes with the goods in question;

(iii) the cost of packing whether for labour or materials;

(c) royalties and license 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;

(d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller;

(e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable.

Explanation- Where the royalty, license 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 goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.”

Further, interpretative notes to Rule 10 (1)(a)(i) defines the terms ‘ buying commissions’ as “fees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued.”

6.9 Let us take up each of the four questions sought to be answered.

6.9.1 Question 1: Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers. is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules.

6.9.2 As submitted above, the FN Group proposes to implement a new operating model to facilitate centralized procurement of raw material and finished goods. A summary of the new operating model and the method of determining the transaction value of the imported finished goods, are provided below:

• FN Int will procure fabric directly from third party vendors and pay such vendors directly. Based on the nature of the fabric and raw materials, FN Int may also purchase materials through the buying agents. The cost of the fabric and raw materials paid to the third party vendors directly or through the buying agent, will be recharged to the Applicant, at cost. This is on account of the fact that FN Int facilitates payment for raw materials, on behalf of the various FN group entities, including the Applicant. The material will be issued free of cost to the CMT garment manufacturers on account of the Applicant.
• In all other cases, the third party manufacturers, are responsible for sourcing and purchasing fabrics and raw materials for use in the manufacture of the finished goods, which is ultimately recovered through the price of the finished goods.
• For purchasing the finished goods, the Applicant places orders for such goods to ADT HK / Aoxin, being buying agents for the group. These buying agents, who are related parties, sources the vendors and places the orders on behalf of the Applicant. The objective of introducing buying agents is to enable consolidation of orders for the group, in order to meet minimum order quantities and to leverage better buying power in negotiating the pricing of goods.
• The third party manufacturers will raise invoices specifying the Applicant as the buying entity, however, the invoices will be issued to the buying agents for administrative convenience. It is pertinent to note that the title and risk of the goods passes directly from the vendors to the Applicant and not to the buying agent. The buying agent will raise an invoice for the recovery of the price charged by the vendors at cost, along with supporting documentation, such as the invoices raised by the vendors. Upon collection of the amount from the Applicant, the buying agent will remit the amount to the vendors, against the invoices raised. In other words, the buying agents act as an agent and do not operate on a principal-to-principal basis.
• Where the raw material is issued free of cost to the third party manufacturers, the vendors will raise an invoice for the conversion services undertaken i.e., the CMT price. Whereas, if the raw material is procured by the manufacturer on their own account, the vendors will raise an invoice for the finished goods, which would include the cost of the raw materials procured as well as any margin for the manufacture of the finished goods.
• For the purpose of determination of the transaction value for the payment of Customs Duty on the import of finished goods, it is proposed that:
  • Where the raw material is free issued to the CMT manufacturers and an invoice is raised for the conversion charges, the transaction value will be determined as the sum of the price paid to the CMT manufacturer and the cost associated with the free issue of the fabric (being an assist cost).
  • Where the raw material is procured directly by the manufacturers, the transaction value will be determined as the value of the finished goods charged by the manufacturers.

6.9.3 As per Section 14 of the Customs Act, the value of the imported goods shall be the transaction value of such goods i.e. the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, where the buyer and seller are not related and price is the sole consideration for the sale. Further, Section 14 read with Rule 2 and 3 of the Valuation Rules provided that the transaction value of the imported goods may also be accepted where the buyer and seller are related provided that the examination of the circumstances of sale of the imported goods indicate that the relationship did not influence the price of the imported goods.

6.9.4 Therefore, given the above, it can be said that in order for the transaction value to be accepted as per the principles of valuation laid down in Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules, the following conditions are to be fulfilled:

i. Price should be the sole consideration for the sale and

ii. Buyer and seller should not be related and if related, the relationship should not influence the price of the imported goods.

6.9.5 In the instant case, the Applicant procures the finished goods from a unrelated third party manufacturer. Where the manufacturer is only undertaking a conversion activity, the transaction value proposed to be considered is the price paid to the CMT manufacturer and the cost associated with the free issue of the fabric (being an assist cost).

6.9.6 Where the manufacturer only undertakes the activity of conversion at the behest of the Applicant, FN India will effectively be making two payments towards the purchase of the finished goods i.e., payment for the raw material to FN Int and the conversion charges to the third party manufacturer through the buying agents. Therefore, in this regard, such payment appears to be the only consideration paid towards the import of the finished goods and no other direct or indirect payment accrues to the seller, hence, such value may be accepted as the transaction value of the goods for the purpose of payment of Customs Duty.

6.9.7 As regards the scenario where the manufacturer procures the raw material on his own account and undertakes to sell the finished goods (and not merely undertake the service of conversion), the transaction value will be the FOB value of the goods being manufactured. There is no other direct or indirect payment due to the third party manufacturer, hence, the price appears to be the sole consideration for the goods being imported. Accordingly, such value may be accepted as the transaction value of the goods for the purpose of payment of Customs Duty.

6.9.8 The seller of the goods in the instant case, is a third party manufacturer. As per Rule 2 of the Valuation Rules, a person will be deemed to be related only if:

i. they are officers or directors of one another’s businesses;

ii. they are legally recognized partners in business;

iii. they are employer and employee;

iv. any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;

v. one of them directly or indirectly controls the other;

vi. both of them are directly or indirectly controlled by a third person;

vii. together they directly or indirectly control a third person: or

viii. they are members of the same family.

6.9.9 In the instant case, the third party manufacturers do not qualify under any of the scenarios mentioned above:

Related party scenarios	Remarks in the context of the FN Group model
Officers or directors of one another’s businesses	The third party manufacturers and FN India are not officers or directors of one another’s businesses.
Legally recognized partners in business	The third party manufacturers and FN India are not partners in business.
Employer and employee	The third party manufacturers and FN India are employer and employee.
Any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them	No party directly or indirectly owns, controls or holds 5% or more of the outstanding voting stock or shares of the third party manufacturers and FN India.
One of them directly or indirectly controls the other	The third party manufacturers and FN India do not directly or indirectly control the other.
Both of them are directly or indirectly controlled by a third person	The third party manufacturers and FN India are not directly or indirectly controlled by any person from the Forever New Group.
Together they directly or indirectly control a third person	The third party manufacturers and FN India do not directly or indirectly control a third party.
They are members of the same family	The third party manufacturers and FN India are not members of the same family / Forever New Group.

6.9.10 Additionally, it is submitted that while the payment for the finished goods will be made to the third party manufacturers through the buying agents (related party), the sale will be effected, invoice will be raised and risk and title will be transferred directly by the third party manufacturers to the Applicant. In other words, merely because the payment is routed through a related party, the buying agent does not act in the capacity of a seller (as is also provided under clause 6.2 of the agreement). The buying agents do not have any financial interest of ownership in the vendors of the goods or services in relation to the goods. Based on the commercial arrangement, supported by the agreement, the seller will be the third party manufacturer and the buyer, the Applicant.

6.9.11 Further, it is also relevant to note that the Applicant is under no obligation to necessarily purchase goods exclusively through the buying agents or from any vendor or to purchase a specified quantity of goods through the buying agent or vendor, as provided under clause 3.7 of the agreement. In other words, the Applicant has the prerogative to purchase through another vendor, other than through the buying agent or the vendors sourced by the buying agent. Accordingly, the price charged by the third party manufacturer cannot be said to be influenced by the relationship of the Applicant with the related party buying agents or any other group entity.

6.9.12 Given the price is the sole consideration and the parties are not related, the transaction value as submitted above may be accepted as the value on which Customs Duty should be paid, in accordance with the principles as laid down in Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules.

6.10 Question 2: Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant, is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers. consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

6.10.1 The relevant terms of the service agreement executed between the buying agents and the Applicant has been summarized earlier highlights the relationship of the buying agent and the Applicant. Emphasis is laid to the following provisions:

• The Buying Agent Fee does not form part of the cost of goods, and is not paid, either directly or indirectly, to any vendor or for the benefit of any vendor.
• In consideration for acting as an agent for the Applicant and providing the services as encapsulated in Schedule 2 of the agreement, the Applicant pays the buying agents a Buying Agent Fee.

6.10.2 In the context of the facts mentioned above, the terms of the agreement and the legislative framework, the question to be determined is whether the Buying Agent Fee for sourcing and procuring goods on behalf of the Applicant, is required to be included in the transaction value of goods as per the principles set forth under Section 14 of the Customs Act read with Rules 3 and 10 of the Valuation Rules. As per these provisions, where the buyer and seller of the goods are not related and price is the sole consideration, the price actually paid or payable for the goods shall be the transaction value of such goods. Further, the Valuation Rules indicate that the commissions and brokerage, which are not included in such price paid or payable, should be included in the transaction value. However, the exception to this rule is the payment of buying commission. The interpretative notes to Rule 10(1)(a)(i) defines the term ‘buying commissions’ as ‘fees paid by an importer to an agent for the service of representing him abroad in the purchase of the goods being valued’.

6.10.3 In the instant case, as submitted above, Buying Agent – ADT HK and Buying Agent – Aoxin act as agents appointed for the purpose of sourcing vendors and purchasing finished goods on behalf of the Applicant. The details of the services provided by the buying agents are already provided in Schedule 2 read with clause 6.2 of the agreement. Further, risk and title in goods would pass on directly from the manufacturers to the Applicant on delivery of the goods ordered. Further, the buying agents neither represent any other party as agent nor receive any compensation from any other party other than the Applicant and other members of the FN Group in connection with its performance under this arrangement.

6.10.4 It is also relevant to note that the Applicant would not be under any obligation to purchase the goods exclusively through ADT HK/ Aoxin or from any manufacturers selected ADT HK/ Aoxin. FN India, being the principal, can procure finished goods from any independent third party manufacturers without involvement of the buying agents.

6.10.5 Thus, in light of the above, it is evident that ADT HK/ Aoxin act in the capacity of a buying agent on behalf of the Applicant and the Buying Agent Fee is towards the services provided by the buying agents outside India for facilitating procurement of finished goods on behalf of the Applicant. Accordingly, it is submitted that the Buying Agent Fee paid by the Applicant will qualify as a buying commission as defined under the interpretative notes to Rule 10. Therefore, Buying Agent Fee should not be included in the transaction value for the purpose of payment of Customs Duty, as per Section 14 of the Customs Act read with Rule 3 and Rule 10 of the Valuation Rules.

6.10 6 To substantiate the above, reliance is placed on the following rulings:

i. Ruling of the Hon’ble Supreme Court in case of Apollo Tyres Ltd. versus Collector of Customs [1996 (12) TMI 48] which is similar to the facts in the present case. As per the ruling, General Tyre International Company (‘General’) is procuring items equipment, machinery, spares, accessories, and raw materials required by Apollo Tyres Ltd (ATL) and is arranging for obtaining quotations and for rendering of all the related services. Further, it is provided that in the case of items of equipment which ATL calls upon General to procure, General shall obtain quotations from the appropriate suppliers and submit such quotations, with its recommendations, to ATL for final approval, and no orders may be placed by General unless final approval is accorded by ATL. The agreement provides that such items of equipment shall be purchased directly in the name of ATL, and it would pay for the same, including shipping, transportation charges and insurance premium. The Supreme Court after detailing out the facts held that General was appointed as a purchasing agent and the provisions provided that the appellants would review the quotations submitted to General by various suppliers and would approve the same. Hence, the value of the equipment should not be enhanced by the remuneration paid to the agents.

ii. Similar ruling was pronounced by CESTAT, New Delhi in case of Anand Textiles versus Commr. Of Cus. Amritsar [2008 (3) TMI 523], wherein the appellant has entered into an agreement with M/s. Mahey Brothers Pte. Ltd., Singapore engaging them as their buying agent to procure nylon filament yarn and polyester filament yarn from different overseas parties. Further it was mentioned by the Appellant that the invoices by the suppliers were in the name of the Singapore based buying agent with the appellant as the notified party. The appellant was making payments for consignments to the Singapore based buying agent who in turn was making payments to the suppliers. The other documents like bill of lading were in the name of the buying agent but also mentioned the appellant as notified party.

The Court examined the documents like agreement with the buying agent, contract with the foreign supplier, invoices, bill of lading etc. and found that M/s. Mahey Brothers Pte Ltd., Singapore was providing services to the appellant as a buying agent and that the commission or remuneration paid by the appellant to the Singapore based party is in the nature of buying commission. Therefore, the said amount is eligible to be excluded in arriving at the assessable value of the imported goods in terms of Rule 9(1)(a)(i) of the Customs Valuations Rules 1988 (which is pan materia to Rule 10 of the Valuation Rules).

6.10.7 Drawing inference from the above, given that the buying agents represent the Applicant in the context of the procurement of the finished goods from the third party manufacturers outside India, and makes payment to the manufacturers on behalf of the Applicant, it is submitted that the payment of Buying Agent Fee squarely qualifies as a buying commission defined in the interpretative notes to Rule 10. Accordingly, the Buying Agent Fee paid to buying agents falls within the exception of Rule 10(1)(a)(i) of the Valuation Rules and should be excluded from the transaction value of the imported goods, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

6.11 Question 3: Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

6.11.1 As provided above, valuation of goods imported into India is governed by Section 14 of the Customs Act read with the Valuation Rules. Rule 3 of the Valuation Rules states that the transaction value should be adjusted with the costs and payments covered under Rule 10. Therefore, to examine whether the License Fee paid by the applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e., portfolio of retail brands) and the Forever New brand image is to be included in the transaction value for Customs Valuation, the Applicant refers to Rule 10 (1)( c) and Rule 10 (1)( d) of the Valuation Rules.

6.11.2 License Fee paid by the Applicant does not fall within the purview of Rule 10(1)(c) of the Valuation Rules: Rule 10(1)(c) of the Valuation Rules provides that royalties and license 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 is required to be included in the transaction value of the imported goods.

6.11.3 Drawing inference from the above, it can be said that the royalties and license fee not included in the price paid or payable, shall be added to the transaction value of imported goods only when the following conditions of the Rule 10(1)(c) are satisfied:

• Royalties and license fee that the importer is required to pay should be related to the imported goods.
• Such royalties and license fee should be a condition of the sale of the goods being valued.

6.11.4 In the present case, the Applicant has entered into a Brand License Agreement with FN AU, wherein FN AU has granted a license to the Applicant to use or exploit the Licensed IP. A specimen of the agreement is produced herewith. As per the agreement, the licensed IP means the Intellectual Property Rights in connection with and subsisting in:

a) the Forever New Brand (i.e., means the Forever New Group’s collective portfolio of retail brands, developed and operated by the Forever New Group from time to time);

b) the retail and online store design, colour schemes, copyright, identity, signs, equipment and know-how, store manual, image, brand guidelines and POS System in respect of the set-up and operation of Forever New Retail Sites;

c) all other technical information which the Licensor has developed, or which is used in the Forever New Group’s in-store and online retail operations; and

d) any improvements in respect of the items identified in clauses (a) — (c) above.

6.11.5 Based on the above definition of Licensed IP, it is submitted that the Licensed IP is in connection with the Forever New retail brand image and operation of retail stores (both physical and online store) bearing Forever New branding and the Forever New image (i.e., goodwill and reputation). In addition to the Forever New retail brand, the license fee is paid for the processes and operating procedures, designs etc. required for the operation of the retail stores in India.

6.11.6 In view of this, it is submitted that the license fee has no nexus with the finished goods being imported, instead is in relation to the retail brand image, and operating procedures, processes and designs for the retail outlets in India i.e., for activities post importation of the goods. Therefore, the License Fee does not fall within the purview of Rule 10(1)(c) of the Valuation Rules and accordingly, should not be included in the transaction value of goods.

6.11.7 The second condition states that the royalties and license fee should be a condition of the sale of the goods being valued. As per oxford Dictionary ‘condition’ means “stipulation or something on fulfilment of which something else depends”. Therefore, it can be inferred that the license fee will only be includible in the transaction value of the goods only where such payment of such license fee is a pre-condition for the import of goods. In other words, the law stipulates that if the Applicant does not make a payment of such license fee, the finished goods will not be supplied by the seller.

6.11.8 However, in the instant case, the license fee is paid in connection with the retail brand, and operating procedures, processes and designs for the retail outlets in India post import into India. Such license fee would be payable irrespective of the import of finished goods. In order to substantiate this, the Applicant refers to clause 5.1(b) of the Brand License Agreement, which states the Applicant’s rights to purchase the products is not conditional on the Applicant paying the license fee (or any other amounts due and payable under this Agreement) to the FN AU. Therefore, the payment of the license fee is not a condition of the sale of imported finished goods from the third party manufacturer.

6.11.9 Further, the license fee is payable on the basis of net sales made by the Applicant in India, and may be reduced (including to nil if necessary) where the return on sales achieved by the Applicant is less than 5% (i.e. may not be payable by the Applicant, even where the Applicant has purchased imported goods from the foreign supplier). Accordingly, such payments have no nexus with the transaction relating to purchase of imported goods from the foreign supplier. Accordingly, the license fee cannot be said to be payment made as a condition of sale of the imported goods.

6.11.10 Moreover, the goods are imported from a third party manufacturer which is not related to the Applicant, whereas the license fee is paid to FN AU. Accordingly, it is submitted that the payment of the license fee does not qualify as a payment of royalty or license fee under Rule 10(1)(c) of the Valuation Rules and is not required to be included in the transaction value of the imported goods.

6.11.11 In order to substantiate this, the Applicant places reliance on the following rulings:

i. In the case of M/S. H & M Hennes & Mauritz Retail Private Limited Versus Commissioner of Customs (2016 (9) TMI 3181, which is similar to the present case, the applicant has entered into foreign collaboration and sub-license agreement to exploit the ‘H&M’ brand for sale of goods into India and also into trademark license agreement for the use -mark rights with respect to the ‘H&M concept’ for distribution and retailing of the said goods in India. The Authority for Advance Ruling held that the license fee paid by the applicant are in relation to post importation activities and are not related to the sale of goods by the third party manufacturers to the applicant. The relevant extract from the AAR is produced below for your reference:

“7. The applicant will pay the Trademark License fee in lieu of grant of right to exploit “H&M concept” in India and use of associated trademark for sale of said goods; that such Trademark License fee will be payable on the basis of the sales made by the applicant in India; that said activities for which the applicant will pay the license fee are post importation activities and are not related to the sale of goods by the third party manufacturers to the applicant. Further, the said payment of Trademark License Fee is not a condition for sale between the third party manufacturers and the applicant; that royalties and license fee to be includible in the Transaction Value, it is essential that the buyer of the goods pay the same to the seller of the goods; that this aspect has been clarified in the interpretative notes to Rule 3 of the Valuation Rules; that the said interpretative notes provide that the “Price actually paid or payable is total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods”

…….

10(b) The Trade Mark/ License Fee and the payment made in terms of the foreign collaboration agreement by the Applicant to H&M GBC does not qualify as payment under Rule 10 (1) (c) of the Rules or any other Rule and is not required to be added to the Transaction Value of the said goods for levy of Customs Duty under the Act read with the Rules.”

ii. Reliance is also placed on the ruling pronounced by CESTAT New Delhi in the case of M/s Quest Retail Private Limited, Ms. Shriti Malhotra, Director, Mr. Suvendu Sahu, General Manager (legal & finance) versus Commissioner of Customs & Excise, Patparganj [2019 (7) TMI 778], the appellant being in the business of import and retail sale of the ‘Body Shop’ brand of cosmetics and toiletries has entered into an agreement of royalty fee for the management, consultation advice, service of training provided to the appellant in connection with the use of the system and the proprietary marks of M/s Body Shop. The Tribunal held that the amount of royalty is measured in terms of value of sale by the appellant and is dependent upon the volume of sale in the domestic market. The treatment of such type of royalty as condition of sale for the import of goods by the appellant is not explicit from the agreement and thus, shall not be included in the transaction cost of the imported goods. The relevant extract of the case law is produced below for your reference.

“9. …The condition of payment of the royalty, which is contingent upon the volume of sale in the domestic market after importation of the goods has no connection with the import of goods. Once the goods have been cleared from the Customs area the same is not required to be treated as imported goods and all the activities of the management, consultation etc. is relatable to the goods which is ceased to be imported goods in terms of the Customs Act, 1962. We find that the learned Advocate, on behalf of the appellant has countered all the decisions relied upon by learned Authorised Representative in the facts and circumstances of the case which we also find that is appropriate and relevant to the case at hand. We find that in the case of Ferro Alloy, Bridgestone India Pvt. Ltd. and Max Atotech Ltd. (supra), the Hon’ble Supreme Court and Hon’ble Tribunal have held that if there is no nexus of royalty payment with that of the imported merchandise and which relate to the subsequent marketing thereof the same is not required to be included for the purpose of payment calculation of Customs duty on the imported goods, in terms of Customs Act and Valuation Rules.

iii. Further, the Applicant refers to the Supreme Court judgement in the case of Commissioner of Customs vs M/s Ferodo India Private Limited [2008(2) TMI 12 — Supreme Court] wherein the respondents had entered into technical assistance and trademark agreement between the respondent and M/s. T&N International Limited. The licensor agreed to disclose the relevant secret process, formula and information from the licensee and the licensee was obliged to pay a license fee along with royalty based on the net sales value. The Supreme Court held that the payment of royalty/license fee was entirely relatable to the manufacture of licensed products and were in no way related to the imported items. There is no nexus between royalty/license fees payable for the know-how and the goods imported for the manufacture of licensed products. Therefore royalty/license fee should not be added to the transaction value of imported goods.

iv. A similar ruling was pronounced by the Mumbai Tribunal in the case of Commissioner of Cus. (Import), Mumbai Versus Bridgestone India Pvt. Ltd. [2013 (12) TMI 1089] wherein the appellant was paying royalty and license fee to their foreign collaborator M/s. Bridgestone Corporation, Japan in terms of the License and Technical Assistance Agreement. The appellant contented that the Technical Assistance and License Agreement did not have a clause whereby or wherein the importer-appellant is legally obliged to pay license fee as a condition of sale of the imported goods and thus, the license fee should not be included in the transaction value. Additionally, the royalty was payable on net sales in India. The relevant extract of the case law is produced below for your reference.

“7.2 In the present case, from a reading of the agreement, it is evident that the payments made by way of royalty or license fee has nothing to do with the imported goods nor is it a condition of sale for the imported goods. As already discussed earlier, these payments are required to be made in respect of the rubber products manufactured and sold by the licensee in India.

7.3 In view of the above position, the provisions of Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 are not attracted.”

6.11.12 Drawing inference from the above, it is submitted that the payment of license fee towards exploitation of Licensed IP is not related to the imported goods nor is it a condition of sale of the imported goods being valued. Therefore, the payment of license fee may not be included in the transaction value of goods imported from unrelated third party manufacturers in India.

6.11.13 The Applicant also submitted that as per interpretative notes to Rule 3 of the Customs Valuation rules 2017, the price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. Therefore, it can be said that for royalties and license fee to be included in the transaction value, its essential that the buyer of the goods pays such royalties and license fee to the seller of the goods. In the present case, while the goods are being imported by the Applicant from an unrelated third party manufacturers, the license fee is being paid to FN AU, a related party. Therefore, based on the above discussion since the consideration for finished products and the license fee are paid to different entities, the license fee paid to FN AU may not be included in the transaction value of goods imported from unrelated third party manufacturers.

6.11.14 License Fee paid by the Applicant does not fall within the purview of Rule 10(1)(e) of the Valuation Rules: Further, Rule 10(1)(e) provides that all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a. third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable will be required to be included in the transaction value of goods.

6.11.15 Therefore, in order for a payment not included in the price actually paid or payable, to qualify under Rule 10(1)(e) of the Valuation Rules, the following conditions are to be satisfied:

• The payment should be a condition of sale of the imported goods
• Payment should be made by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller.

6.11.16 As submitted above, the payment of license fee is not a condition of sale of the imported goods. Additionally, the payment is made to FN AU, and not to the seller of goods. Further, by virtue of such payment being made to FN AU, there is no obligation of the seller being fulfilled by such payment. Accordingly, it is submitted that the payment of the license fee does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules, therefore, would not be required to be included in the transaction value of the goods. Therefore, to summarise, the payment of License Fee neither qualifies as a payment under Rule 10(1)(c) nor qualifies as a payment under Rule 10(1)(e) of the Valuation Rules and as a result, would not be required to be included in the transaction value of the imported goods.

6.12 Question 4: Whether the Management Fee paid by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from another party i.e. an unrelated third party manufacturer, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules?

6.12.1 The Applicant has executed an agreement with FN AU for the provision of routine management services such as routine management, business development, tax and accounting support, information technology and other services as provided in Schedule 2 of the agreement. In order to determine whether the management fee payable for such services is to b the transaction value of the imported goods, it would be relevant to examine the provisions of the Valuation Rules.

6.12.2 Rule 3 of the Valuation Rules states that the transaction value should be adjusted with the costs and payments covered under Rule 10. Rule 10(1)(e) of the Valuation Rules states that ‘all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable’ should be added to the price actually paid or payable for the imported goods.

6.12.3 Drawing inference from the above, it is submitted that any other payments not included in the price actually paid or payable, shall be included in the transaction value only in cases where:

• payments actually made or to be made as a condition of sale of the imported goods
• payments are made by the buyer to the seller or to a third party to satisfy an obligation of the seller.

6.12.4 In the present case, the Applicant has entered into a Master Service Agreement with FN AU, wherein FN AU agrees to provide routine management services in relation to the business operations in India. These management services relate to the back-office services for the operation of retail stores (being physical and online stores) by FN India and include accounting, marketing support, human resources, information technology support, legal support, store development and other non-product related back-office type services. Schedule 2 of the agreement provides the list of services that will be provided by FN AU to FN India under the said agreement. The management fee for such services will be charged on a cost plus mark-up basis, i.e., total of direct and indirect cost plus a markup of 5% to reflect an arm’s length markup and any disbursements, expenses or charges (including payments to third party fees) incurred by FN AU in relation to providing these services to FN India (Schedule 3 of the agreement).

6.12.5 The routine management services provided by FN AU is an independent service and does not have any relation to the goods imported by FN India from unrelated third party manufacturers. Further, FN India’s rights to purchase goods from unrelated third party manufacturers is not conditional on FN India paying the management fee to FN AU. FN India would continue to pay such fee to FN AU with respect to services received from FN AU irrespective of whether FN India imports goods from the unrelated third party manufacturers or not. Since, there is no nexus of the management services provided by FN AU with the goods imported from unrelated parties in India, the Management Fee payable provided by FN AU cannot be construed as a condition of sale of the imported goods.

6.12.6 The management fee is independent of the supply of the finished goods by the manufacturers. At the outset, the payment of the Management Fee is not made to the seller but to FN AU. Additionally, such payment is not made to FN AU to fulfil any obligation of the seller. The manufacturer thus appear not have any nexus with FN AU and the payment of the Management Fee payable to FN AU.

6.12.7 Given the above, it is submitted that the payment of management fee does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules and accordingly, would not be required to be included in the transaction value of the imported goods.

6.12.8 In order to substantiate this, the Applicant places reliance on the following rulings:

i. The case of M/S. H & M Hennes & Mauritz Retail Private Limited Versus Commissioner of Customs 12016 (9) TMI 318], wherein the applicant had entered into sales and business support agreement with H&M GBC to provide overall market strategy, store location, store design and concept and other services for which sales and business support fee was payable to H&M GBC. The Authority for Advance Ruling held that the payment of sales support and business development fee is not payable by the applicant as a condition to sale of imported goods by overseas third party manufacturers to the applicant. Therefore, such payments are not required to be included in transaction value of the imported goods.

ii. The case of Alcan India Private Limited vs Commissioner of Customs (Import), Mumbai 12014(12)TMI 899], wherein the Revenue authorities alleged inclusion of BU fees, legal and professional fees and secondment payments paid by the appellant to the related party in the transaction value of goods imported from such related party. The Tribunal held that a crucial factor for application of Rule 10(1)(e) is that the payment should have been made as a condition of sale of the goods imported. There is nothing in the two agreements stipulating such a condition and the services provided by the related party have nothing to do with the import of raw materials. In the absence of any nexus, even remotely, between these two agreements and the import of raw materials, there is no justification whatsoever to relate the payments made for the services received to the value of the goods imported. Hence, such payments should not be included in the valuation of imported goods.

iii. Similarly, in the case of M/S. Thyssenkrupp Elevator (India) Pvt. Ltd. versus The Asstt. Commissioner of Customs (Import 8. General) New Delhi [2017 (4) TMI 204 – CESTAT NEW DELHI], wherein the Revenue authorities alleged that the declared value of the imported goods shall be assessed after loading management fees paid to the related party for various corporate services, such as coordination, support accounting, consultancy, marketing and sale support etc. The Tribunal held that the services are completely independent of the import of goods by the appellant. Consequently, there is no justification for such loading of the invoice value. A similar view has been expressed by the Tribunal in several other cases including the case law cited by the appellant in the case of Expert Industries. In this case, Tribunal held that product consultancy charge which has got nothing to do with the imported goods and is covered by a separate contract, hence, cannot be included in the assessable value. Therefore, it was held that the value of management fee should not be included in the transaction value of imported goods.

6.12.9 Drawing inference from the above, it is submitted that the management fee paid to FN AU by the Applicant is not a condition of sale of the goods imported from unrelated manufacturers and accordingly, does not qualify as a payment under Rule 10(1)(e) of the Valuation Rules. Hence, such management fee will not be includible in the transaction value of the imported goods.

A. It is ruled that the transaction value proposed to be adopted in respect of the import of finished goods by the Applicant from third party manufacturers, is acceptable and is consistent with the principles of valuation as provided under Section 14 of the Customs Act, read with Rules 2 and 3 of the Valuation Rules.

B. It is be ruled that the Buying Agent Fee payable by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the applicant is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs-Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

C. Further, it is ruled that the License Fee payable by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

D. Further, it is ruled that the Management Fee payable by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from unrelated third-party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

7. Last but not the least, it’s pertinent to respond to the observations made by the Port Commissionerate. It may be seen that the Port Commissionerate has recommended to obtain the response of the Special Valuation Branch (SVB) in the instant case. However, it needs to be emphasized that the Customs Act has empowered the Advance Ruling Authority to issue Rulings in respect of Principles of Valuation. In the instant case, the applicant has sought a very clear-cut instruction from the Authority so as to provide which principles of valuation to be adopted. The Port authorities are free to look for the statutory documents at the time of import to arrive at exact valuation.

7.1 The legal framework related to issue raised by the applicant is governed by section 14 of the Customs Act 1962, CVR 2007 and circulars issued by the CBIC from time to time pertaining to examination of related parties’ transactions by special valuation branch. Section 14 of the Customs Act, 1962 governs the valuation of goods for the purposes of the Customs Tariff Act, 1975 or any other law for the time being in force. It stipulates that the value of imported 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 where the buyers and sellers 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. Section 14 further provides proviso to sub section (1) as follows: ‘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 licence 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 rides made in this behalf ”

Next proviso to sub section (1) further states as follows:-

“Provided further that the rules made in this behalf may provide for, –

(i) the circumstances in which the buyer and the seller shall be deemed to be related;

(ii) the manner of determination of value in respected of goods when the buyer and the sellers are not related or the price is not the sole consideration for the sale or any other case;… “

7.2 In both the responses of the Port Commissionerates of (Import) New Delhi and Chennai had indicated that as per the application, the Applicant proposed to undertake transaction from a related party as the payments like remuneration fee, license fee, management fee and reimbursement of cost of raw materials to their related parties. Since there is already a well laid mechanism for verification of valuation of such cases in Customs, Circular No. 5/2016-Customs dated 09.02.2016 issued in F. No. 465/12/2010-Cus V may be referred to in this case. Accordingly, this case requires investigation by Special Valuation Branch (SVB) which will look into all the aspects before finalization as whether declared value is at arm’s length cannot be decided at this stage.

A. It may be important to see whether the proposed import transactions are between two unrelated parties or not. The Applicant has submitted that in all the scenarios covered in the application, the seller of the goods is an unrelated third-party manufacturer. The unrelated third-party manufacturer will export the goods directly to the Applicant in India. While the payment for the finished goods will be made to the third-party manufacturers through the buying agents (related party), the sale will be effected, invoice will be raised and risk and title will be transferred directly by the unrelated third-party manufacturers to the Applicant. In other words, merely because the payment is routed through a related party, the buying agent does not act in the capacity of a seller (as is also provided under clause 6.2 of the agreement). The buying agents do not have any financial interest or ownership in the vendors of the goods or services in relation to the goods. Based on the commercial arrangement, supported by the agreement, the seller will be the third-party manufacturer and the buyer, the Applicant. Therefore, there can be no question that the buyer and seller are unrelated.

A.1. Further, it is also relevant to note that the Applicant is under no obligation to necessarily purchase goods exclusively through the buying agents or from any vendor or to purchase a specified quantity of goods through the buying agent or vendor, as provided under clause 3.7 of the agreement. In other words, the Applicant has the prerogative to purchase through another vendor, other than through the buying agent or the vendors sourced by the buying agent.

A.2 Further, as provided in the application, the remuneration fee, license fee, management fee being paid by the Applicant to FN AU (related party), has no connection with the goods being imported by the unrelated third-party manufacturers. The payments made to FN AU are not linked to the imports and are not a condition to sale to such imports. These are independent payments made to FN AU for the services being provided by FN AU to the Applicant. Accordingly, the price charged by the third-party manufacturer may not be said to be influenced by the relationship of the Applicant with the related party buying agents or FN AU or any other group entity.

A.3 As per Rule 2 of the Valuation Rules, the eight conditions are laid out clearly as to when a person will be deemed to be ‘related’. In the instant case, the third-party manufacturers do not qualify under any of the scenarios mentioned earlier. Based on the above submissions, since the Applicant and third-party manufacturer are not related, it cannot be recommended to refer the file to SVB to determine the principles of valuation to be adopted in this case.

B. As far as SVB investigations are concerned, they can only be initiated at the time of first import from a related party and not for proposed transactions- Notwithstanding the fact that the Applicant and third party manufacturer are unrelated, without admitting even if its argued that the transaction is being undertaken between two related parties and price is not the sole consideration, the Applicant wishes to submit that the SVB investigation can be initiated only while filing the first bill of entry by the Applicant whereas in the present case, the question before AAR is sought for a proposed transaction. Attention is drawn to para 4.0 of the Circular 5/2016- Customs dated 9 February 2016 which necessitates the initiation of SVB proceedings at the time of import.

B.1 ‘Cases, which may be considered for SVB Investigations- 4.0 While filing a bill of entry, every importer makes a declaration about whether the seller of imported goods is a related party or not, as defined under Rule 2(2) of the Customs Valuation (Determination of Price of Imported Goods) Rules. 2007 (CVR, 2007). In other words, where any importer makes a declaration that the transaction is between ‘related persons, as defined under Rule 2 (2) of CVR 2007 it would be necessary to examine whether or not the circumstances surrounding the sale of the imported goods indicate that the relationship has influenced the price. Accordingly, such transactions will require to be examined as to whether SVB inquiries are necessary.’

B.2 In the present case, the Applicant seeks to obtain clarity on a proposed transaction in relation to the principles of valuation. Without admitting that the import transaction is between related parties, the Applicant has submitted that in case it is concluded that the transaction proposed to be undertaken by the Applicant qualifies as a related party transaction, the Applicant would disclose the transaction as a related party import at the time of filing the Bill of Entry for the first import and such transaction may be referred by the concerned port to SVB if they so deem fit. The Applicant would have to follow the procedure provided in Circular 5/2016-Customs dated 9 February 2016 if the case is referred for SVB investigation in that case.

C. Finally, the questions on which the advance ruling is sought is in respect of the principles to be adopted for the purposes of determination of value of the goods as per Section 28H of the Customs Act, 1962- As per Section 28 H of the Customs Act, 1962, an Applicant can make an application to the advance ruling authority in respect of the principles to be adopted for the purposes of determination of value of the goods under the provisions of this Act. Therefore, the Customs Authority for Advance Ruling has jurisdiction under the Act to accept applications on the question involving principles to be adopted for the purposes of determination of the value of goods, irrespective of whether the transaction is between related parties. The law does not create an exclusion for applications in relation to transactions between related parties. Further, the following AAR rulings wherein transactions between related parties were examined by the Customs Authority for Advance Ruling in the context of principles to be adopted for the purposes of determination of value of the goods and rulings was pronounced in this regard are: (i) M/S. H & M HENNES & MAURITZ RETAIL PRIVATE LIMITED VERSUS COMMISSIONER OF CUSTOMS [Ruling No. AAR/Cus/21 /2016, Application No. AAR/44/CUS/08/2014]; (ii) M/S. SICK INDIA PVT. LTD. VERSUS THE COMMISSIONER OF CUSTOMS (III), MUMBAI [Ruling No. CAAR/Mum/ARC/47/2022 In Application No. CAARICUS/APPU69/2022]; (iii) M/S FOXCONN TECHNOLOGY (INDIA) PVT. LTD. VERSUS COMMISSIONER OF CUSTOMS, MUMBAI (Ruling Nos. CAAR/Mum/ARC/18/2023 IN Application No. CAARICUS/APPL/79/20221

8. The answers to the questions raised by the applicant are as follows:

(a) Question 1: Whether the transaction value proposed to be adopted for the purposes of payment of Customs Duty on the import of finished goods by the Applicant from third party manufacturers, is acceptable in accordance with the principles of valuation as provided under Section 14 of the Customs Act read with Rules 2 and 3 of the Valuation Rules.

Answer: It is ruled that the transaction value proposed to be adopted in respect of the import of finished goods by the Applicant from third party manufacturers, is acceptable and is consistent with the principles of valuation as provided under Section 14 of the Customs Act, read with Rules 2 and 3 of the Valuation Rules.

(d) Question 2: Whether the Buying Agent Fee paid by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the Applicant, is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

Answer: It is ruled that the Buying Agent Fee payable by the Applicant to related buying agents ADT HK/ Aoxin situated outside India for the services of sourcing and procuring finished goods on behalf of the applicant is not includible in the transaction value of the goods proposed to be imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

(e) Question 3: Whether the License Fee paid by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be imported from another party i.e. unrelated third party manufacturers, consistent with the principles of valuation section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

Answer: It is ruled that the License Fee payable by the Applicant to FN AU for intellectual property (IP) related to operating retail stores bearing Forever New branding (i.e. portfolio of retail brands) and the Forever New brand image is not includible in the transaction value of the goods proposed to be Imported from unrelated third party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

(d) Question 4: Whether the Management Fee paid by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from another party i.e. an unrelated third-party manufacturer. consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules?

Answer: It is ruled that the Management Fee payable by the Applicant to FN AU for routine management services is not includible in the transaction value of the goods proposed to be imported from unrelated third-party manufacturers, consistent with the principles of valuation under Section 14 of the Customs Act read with Rule 3 as well as Rule 10 of the Valuation Rules.

9. I rule accordingly.