Payment of management and license fee not relatable to imported goods not includible in transaction value

Schenck Process India Private Limited Vs Commissioner of Customs (Port) (CESTAT Kolkata)

CESTAT Kolkata held that the payment of Management Fee and the License Fee not being relatable to the imported goods and condition precedent to the sale of imported goods are therefore not includible in the transaction value.

Facts- The present appeal is filed by the assessee and the short question in the present appeal revolves around the aspect of inclusion of Licence Fee and Management Fee in the assessable value of the goods imported from related parties.

Conclusion- Larger Bench of the Tribunal in the case of Panalfa Dongwon India Ltd. v. Commissioner of Customs, Mumbai, wherein it was clarified that royalty payable is required to be necessarily in connection with the import of the goods and that related to downstream production/training etc. being nowhere related to imported goods were not required to be a part of the transaction value.

Held that the payment of Management Fee and the License Fee not being relatable to the imported goods and condition precedent to the sale of imported goods are therefore not includible in the transaction value. We therefore set aside the order of the lower authority and allow the appeal with consequential relief, if any, as per law.

FULL TEXT OF THE CESTAT KOLKATA ORDER

The instant appeal has been filed by the appellant assailing the Order-in-Appeal No. KOL/CUS/(PORT)/114/2019 dated 27.09.2019 passed by Commissioner of Central Excise & Central Tax, (Appeals), Imphal, Custom House, Kolkata.

2. The short question in the present appeal revolves around the aspect of inclusion of Licence Fee and Management Fee in the assessable value of the goods imported from related parties.

3. The facts of the case are that M/s. Schenck Process India Limited, (formerly known as M/s. Schenck Jenson & Nicholson Limited), having its registered office at Salt Lake, Kolkata and factories at Ranchi and Gurgaon, is engaged in the business of design, manufacturing and selling of various types of Plant Sequencing, Continuous Weighing, Feeding, Proportioning and Online Data Handling, Batching Systems used exclusively for industrial applications. They also manufacture discontinuous Weighing Systems for Industrial & Commercial applications, set up of Modular Coal Preparation Plant, supply of Train Load-out System etc. The appellant imports capital goods, parts and components such as Controllers, Multicores, Centrifuges, Pneumatic Conveyors, Hydraulics, PLC, Liners, Reference and Master Load Cells etc. from related foreign entities for design, manufacturing and selling of various types of Plant Sequencing, Continuous Weighing, Feeding, Proportioning and Online Data Handling, Batching System used exclusively for industrial applications and the transactions are said to be effected at arm’s length price in accordance with the transfer pricing provisions/regulations envisaged under the Income Tax Act¹.

4. As the goods were imported from related foreign entities, the appellant obtained a SVB registration to ascertain that the transactions were effected at arm’s length and the relationship had not influenced the price of the import goods. After due examination and investigations the SVB Order No.06/2010 dated 28.09.2010, was issued whereby the transaction value declared had been accepted by the department and provisional assessments were ordered to be finalized. Subsequently in the year 2005, the name of the company was changed to M/s. Schenck Process India Limited (the appellant) as it was taken over by M/s. Schenck Process GmbH, Germany. The appellant thereby became a 100% subsidiary of M/s. Schenck Process GmbH, Germany. Pursuant to the take over, it is pointed out that the appellant was not required to pay royalty as the erstwhile collaboration agreement entered between the appellant and M/s. Carl Schnck AG had expired and the new Cost Allocation Agreement (CAA) dated 01.01.2006 had been entered between the intra group companies of the Schenck Process Group, ensuring cost of services to be allocated appropriately among all the group companies and parties to the agreement.

5. It is the department’s case that in terms of the said agreement, the central costs, management services being provided by Schenck Process Group are allocated and charged from the respective Group companies in the form of “Management Fee” in accordance with the terms and conditions of the agreement. It is noted by the department that in respect of Management Fee being paid to foreign group companies/associated entities, the appellant discharges service tax under the Reverse Charge Mechanism (RCM) in terms of the provisions of Finance Act, 1994. Pursuant to their request dated 17.05.2010 for renewal of SVB order No.06/2000 dated 28.09.2000 passed in the name of Schenck Jenson & Nicholson Sensors Ltd. for a further period of 3(three) years, the requisite documents were called for by the department when the appellant submitted report of the Transfer Pricing Audit conducted in accordance with the provisions of section 92E of the I.T. Act, where the auditor had observed that the transaction with associate enterprise were conducted by the appellant at arm’s length. The DC, Customs, SVB Kolkata had reviewed the earlier SVB order vide Review Order No.29/2010 dated 24.10.2010 and the declared invoice value was accepted as transaction value in terms of rule 3(3)(a) of the Customs Valuation Rules, 2007 2 prospectively for a period of three years.

6. It was submitted before the lower authorities by the appellant that there was no change in the mode of transaction for the period 2010-2013. Vide their letter dated 25.06.2014, the requisite details for “Management Fee” incurred for the period 2010-2013 along with copies of relevant invoices etc. were supplied to the authorities by the appellant. The proceedings culminated in the aforesaid Order-in-Original dated 17.07.2014, whereby it was directed that the Trademark License Fee of Rs.1,26,85,000/-, Rs.1,38,58,000/-, Rs.1,28,05,000 & Rs.1,52,29,000/- for the year 2010, 2011, 2012 & 2013 respectively and the Management Fee of Rs.2,09,40,000/-, Rs.1,31,13,000/- & Rs.1,83,11,000/- for the year 2010, 2011 & 2012 respectively paid to the Group Companies and/or associated enterprise shall be added to the transaction value of imported goods in terms of Rule 10(1)(c) and 10(1)(e) of the Valuation Rules.

7. In appeal against the said order of the adjudicating authority the Commissioner(Appeals) observed that the appellant had submitted two agreements “between M/s. Schenck Process India Limited and M/s. Schenck Process GmbH, Germany and its associates. The Management Fee Agreement was dated 01.01.2006. As per definition given under clause (3) of Para 3, the management cost will be split according to external sales where the external sale was defined as total sales of the respective companies less the sales to other companies within the Schenck Process Group. He further observed as under :

“8. ………….. . that as elaborated in schedule 15 of the Auditor’s report under the terms of the agreement, the company will re-imburse direct or indirect cost incurred by the other related party in connection with management, sales technical support, personnel financial accounting, information technology and other services provided to the company. It is seen from the Auditor’s report that the related supplier has extended these services only to M/s. Schenck Process India Limited, since they are the buyer of their goods and not to any unrelated buyer. That the management fees is to be paid on the net external sale of goods excluding the sale of goods to group companies is also indicative of the fact that the same is related to imported goods. Hence, it can be said that the services and therefore, the fees paid for the same are related to the impugned goods. Based on the above such management fees are includible to the transaction value of the imported goods.”

8. The Ld. Commissioner(Appeals) interalia further observed that the appellant had paid license fee to M/s. Schenck Process, GmbH, Germany, a holder of the “Schenck Trade Mark”, holding exclusive rights to use and allow the use of the said trade mark to other companies. Agreement for this came into effect from the year 2010 whereby as per para 3 thereof lump sum License Fee is required to be paid per calendar year equal to the amount of 1% of the external sales of the licensee, achieved in the respective calendar year. The Ld. Commissioner(Appeals) therefore in terms of explanation 10(1) of the Valuation Rules, stating “where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clause (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.” and the fact that the appellant manufactured the goods by using the imported goods from related suppliers and its associates/group companies plus the fact that related supplier did not supply any goods to any other unrelated buyer, (which fact was not denied by the appellant) held trade mark “License Fee” and “Management Fee” as required to be included in the transaction value and thereby upheld the Order-in-Original passed by the SVB authority. The Ld. Commissioner(Appeals) further noted in the order that the License Fee paid by Schenck Process India Limited to Schenck Process GmbH, Germany and its associates was only on account of the imported goods and directly related to the imported goods and the fact that it was not sold to group companies was indicative of the fact that the same is related to imported goods only. In respect of his findings the Ld. Commissioner(Appeals) also emphasized that as the goods were manufactured out of imported material, by using the brand name in terms of Technical License Agreement and thus the said License Fee was payable every year in respect of such goods produced. He therefore refused to interfere with the order of the lower authority.

9. The appellant however contends that the trade mark “License Fee” as per the agreement entered with Schenck Process GmbH, Germany is for use of trade mark on the manufactured goods and not in relation to import of goods. They state that in terms of the said agreement Schenck Process GmbH, Germany had granted them non­exclusive, non-transferable permission to use the trademark on the appellant’s product for sale and production of goods and the sale and rendering of services (Para 2 of Trademark Licensing Agreement), at a net lump-sum license fee of 1% on the appellant’s external sales.

10. In view of the contentious position, it would be in the fitness of things to place on record the relevant clauses of the said two agreements. The same are reproduced below as :

A – Trade Mark Licensing Agreement

B – Cost Allocation Agreement

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11. At this juncture, it would also be imperative to draw attention to the provisions of rule 10 of the Valuation Rules. The same reads as hereunder:-

RULE 10. Cost and services. – (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, –

(a) …………………………

(b) …………………………….

(c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable;

(d) …………………………….

(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, licence fee or any other payment for a process, whether patented or otherwise, is included referred to in clases (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.

12. From the aforesaid provisions of Rule 10(1)(c) of the Valuation Rules royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods, to the extent that such royalties and fees are not included in the price actually paid or payable, does constitute a component of the transaction value. It can thus be said that royalties and licence fees, necessarily required to be added to transaction value has to be relatable to the imported goods alone and should be necessarily a condition precedent for sale of the goods.

13. From the agreement provisions reproduced above, it can be noted that the said licence fee payments are not anywhere related to imported goods and are neither stated to be as a condition of the sale of the said goods. The trade mark licence fee is required to be paid for affixing the trade mark on the goods manufactured by the appellant. It is thus clear that such licence fee would be payable as and when there is sale of the finished goods produced (such as Plant Sequencing, Continuous Weighing, feeding, Proportioning, On-Line Data Handling and Batching Systems exclusively for industrial applications) and has no bearing with the import of goods. The appellant has pointed out that in terms of the trade mark affixation, the licence fee is required to be paid and has been paid for the affixation of the words and marks/label of Carl Schenck AG on their finished goods. This payment is neither related to the import of goods nor is prescribed to be paid as a condition of sale of the imported goods. Thus, the licence fees paid by the appellant not being related to imported goods cannot be added to the transaction value fo the imported goods.

14. The appellant also seeks to place reliance on certain judgements in support of their arguments. The Ld.C.A. invites our attention to the following case laws :

14.1 Commissioner of Customs v. Ferodo India Pvt.Ltd.³

“18. ……………… Rule 9(1)(c) stipulates that payments made towards technical know-how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under Rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. At this stage, we would like to emphasis the word indirectly in Rule 9(1)(c). As stated above, the buyer/importer makes payment of the price of the imported goods. He also incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at TAA, it is also required to look at the pricing arrangement/agreement between the buyer and his foreign collaborator. For example if on examination of the pricing arrangement in juxtaposition with the TAA, the Department finds that the importer/buyer has misled the Department by adjusting the price of the imported item in guise of increased royalty/licence fees then the adjudicating authority would be right in including the cost of royalty/licence fees payment in the price of the imported goods. In such cases the principle of attribution of royalty/licence fees to the price of imported goods would apply.

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20. …………. on reading TAA we find that the payments of royalty/licence fees was entirely relatable to the manufacture of brake liners and brake pads (licensed products). The said payments were in no way related to the imported items. In the present case, no effort was made by the Department to examine the pricing arrangement. No effort was made by the Department to ascertain whether there exists a price adjustment between cost incurred by the buyer on account of royalty/licence fees payments and the price paid for imported items. No effort was made by the Department to ascertain enhancement of royalty/licence fees by reducing the price of the imported items. In the circumstances, we find no infirmity in the impugned judgment of the Tribunal. In this case, the Department has gone by TAA alone. On reading TAA in entirety, we are of the view that there was no nexus between royalty/licence fees payable for the know-how and the goods imported for the manufacture of licensed products.

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• The aforesaid decision of the Hon’ble Apex Court has been followed by the Mumbai Bench of the Tribunal in the case of Tata Yutaka Autocomp Ltd. v. Commr. of Cus. (Import), Mumbai⁴ and the Chennai Bench of the Tribunal in the case of Sundaram Dynacast Pvt. Ltd. v. Commissioner of Customs, Chennai⁵.

14.2 Sandvik Asia Pvt. Ltd. v. Commissioner of Customs (Import), Mumbai⁶, wherein the Tribunal held –

“8. Coming to the merits of the present case, we may straight away to the relevant provisions of the Customs Valuation Rules, 2007, i.e., Rule 10(1)(c) under which it is to be decided to whether the royalty paid is includible in the value of the imported goods for assessment to duty. As pointed out by the ld. Counsel, we find that the two conditions required to be satisfied for invoking Rule 10(1)(c) are :-

(i) Royalty is related to the imported goods; and

(ii) Royalty is paid as a condition of sale of imported goods.

From the facts it is clear to us that the royalty is not related to the imported raw material the royalty is related to the finished goods. Only because imported goods are contained in the finished goods, it cannot be said that royalty is related to the imported goods. The royalty is only paid for using the Trademark, i.e., Sandvik on the products manufactured and sold in India. Therefore, we are of the view that the first condition of Rule 10(1)(c) is not satisfied because the royalty is not related to the imported goods.”

14.3 Commissioner of Cus., New Delhi v. Luxottica India Eyewear Pvt.Ltd.⁷, wherein the Tribunal held –

“8. On careful consideration of the impugned order, we note that the Original Authority has given specific attention to all the facts relevant to the case and applied the provisions of Rule 10(l)(c) appropriately. With reference to dispute at hand, the Original Authority proceeded to examine the legal provisions in the following manner :-

26.2 From a plain reading of Rule 10(l)(c ), it is evident that the following conditions must be satisfied for the rule to apply :

(i) the royalty and licence fees should be related to the imported goods and the buyer should be required to pay the same;

(ii) the payment could be direct or indirect;

(iii) the requirement to pay must be a condition for sale; and

(iv) such royalty or licence fees should not have been included in the price actually paid or payable.

It is only when all these conditions are fulfilled that an amount paid or payable by the buyer as royalty or licence fees can be included in the assessable value of the imported goods.”

9. The Original Authority proceeded to examine each one of the above conditions with reference to the facts of the present case. He held that the first and fourth conditions mentioned above are fulfilled in the present case. On the second condition regarding the payment could be direct or indirect, he relied on the decision of the Hon’ble Supreme Court in Ferodo India Pvt Ltd. (supra) to interpret the term “directly”. We are in agreement with the analyses made by the Original Authority with reference to non-fulfilment of conditions No. 3 viz. payment being not direct or indirect. The payment would be considered “indirect” where the pricing arrangement is such that the price of imported goods is “adjusted” downwards and the royalty or licence fee is inflated suitably to make up for that. It is clear that payment of licence trade mark fee by the respondent to RBSOIL would not merit as “indirect” payments within the ambit of Rule 10(l)(c).”

14.4 Commissioner of Cus. (Import), Mumbai v. Bridgestone India Pvt.Ltd.⁸ –

“7.2 A reading of the above clauses makes it absolutely clear that the royalty has to be paid @ 3% on net sale value of the rubber products manufactured and sold by the Licensee in India. Similarly, licence fee has to be paid @ 1% of the net sale value of the rubber products manufactured and sold by the Licensee bearing the trade mark. In other words, these payments are liable to be made in respect of the goods manufactured and sold in India and not in respect of the goods under importation. The goods under importation may be raw materials or components for the manufacture of the goods in India but the royalty and the licence fee are not payable on the imported goods but on the goods manufactured and sold in India. Rule 10(1)(c) of the Customs Valuation (Determination of Value of the Imported Goods) Rules, 2007 says that in determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, royalties and licence fees related to the imported goods which the buyer is required to pay directly or indirectly as a condition of sale of the goods being valued to the extent that such royalties and fees are not included in the price actually paid or payable. In other words, the payments made should be related to the imported goods and such payments are condition of the sale of the goods. In the present case, from a reading of the agreement, it is evident that the payments made by way of royalty or licence 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 and, therefore, we do not find any infirmity in the order passed by the lower appellate authority.”

15. Further, to a query from the Bench, the appellant informed that they were not obligated to obtain the equipment from the licensor. However, due to the predominantly proprietary nature of the equipment, it was not available from suppliers outside the Group Companies Network. Consequently, the appellant exclusively imported such equipment from the group companies. They added that the appellant retains the right to procure any other component essential for the manufacturing process from entities not falling under the classification of “Group Company” and that the majority of raw materials and components were procured from suppliers outside the group companies.

16. The appellant also placed reliance on the Interpretative Notes to Rule 10 of the Customs Valuation Rule 2007, to point out that even if the royalty is based partially on the imported goods and partially on other non-related factors, it would be inappropriate to make out a case for addition of royalty. As observed by us in foregoing paras, if the royalty paid is solely based on the imported goods and as a condition precedent to the sale of imported goods, then alone can it be added to the price actually paid or payable.

17. As regards the Management Fee charged as per Cost Allocation Agreement between intra-group companies of the Schenck Process Group so as to ensure that the cost of services is allocated among all companies, it is noted that the Management Fees paid by the appellant served as a mechanism for reimbursement of costs of various administrative services received from the group companies which in itself are defined in the said agreement and reiterated in Para 10 above. These services are in the nature of Management Services and cannot be held to be related to importation of goods. They rather represent fees for the Management Services rendered to the group companies as a continuous process and are not contingent upon the importation of the goods from the group company. The appellant has also submitted that even in the absence of such imports, the group companies are still mandated for the payment of aforementioned fees for the Management Services received by the appellant. This Tribunal in the case of Thyssenkrupp Elevator (I) P.Ltd. v. A.C.C. (Import & General), New Delhi⁹, has also held to the said effect. In the said case the Tribunal observed :

“13. On a perusal of the relevant service agreement dated 21-12­2011, we observe that the appellant is required to pay the principal in Hong Kong for various corporate services, such as coordination, support accounting, consultancy, marketing and sale support, etc. It emerges on perusal of the agreement 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. Similar views has been expressed by the Tribunal in several other cases including the case law cited by the appellant in the case of Expert Industries (Supra). In this case, Tribunal held that product consultancy charge which has got nothing to do with the imported goods and is covered by the separate contract cannot be included in the assessable value.”

18. It may also be appropriate to refer to the decision of the Larger Bench of the Tribunal in the case of Panalfa Dongwon India Ltd. v. Commissioner of Customs, Mumbai¹⁰, wherein it was clarified that royalty payable is required to be necessarily in connection with the import of the goods and that related to downstream production/training etc. being nowhere related to imported goods were not required to be a part of the transaction value. Para 8 of the said decision is reproduced hereunder :

“8. On going through the entire agreement we come to the conclusion that royalty is payable in connection with the manufacturing process and not in connection with the import of the goods. The ratio of the decision of Essar Gujarat has no application in the facts of the case. In Essar Gujarat the condition of obtaining a licence from Midrex who was having the patent of the plant was treated as a pre-condition for sale of the plant since the plant will not be workable without obtaining the patent from Midrex. According to us in the facts in the present case the ratio of the decision of the Tribunal in Ferodo India (P) Ltd. v. CC, Mumbai would be directly applicable. In the above decision it was held that the licence fee and royalty payment being entirely related to the production in India and training the personnel by the foreign shareholder, these payments are in no way related to the imported goods or materials.”

19. In view of our findings above and the payment of Management Fee and the License Fee not being relatable to the imported goods and condition precedent to the sale of imported goods are therefore not includible in the transaction value. We therefore set aside the order of the lower authority and allow the appeal with consequential relief, if any, as per law.

(Order pronounced in the open court on 03.09.2024.)

Notes:

¹ The I.T. Act

² The Valuation Rules

³ 2008 (224) ELT 23 (SC)

⁴ 2013 (294) ELT 467 (Tri.-Mumbai)

⁵ 2009 (247) ELT 685 (Tri.-Chennai)

⁶ 2015 (329) ELT 493 (Tri.-Mumbai)

⁷ 2018 (364) ELT 515 (Tri.-Del)

⁸ 2013 (292) ELT 403 (Tri.-Mumbai)

⁹ 2017 (356) ELT 249 (Tri.-Del.)

¹⁰ 2003 (155) ELT 287 (Tri.-LB)