The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that royalty paid under a technology assistance agreement cannot be added to the transaction value of imported raw materials unless such payment is established as a condition of sale of the imported goods.
The bench of Justice P. Dinesha (Member Judicial) and M. Ajit Kumar (Member Technical) has observed that the agreement merely provided that the foreign collaborator would supply raw materials at the request of the Indian company and that the royalty was linked to the manufacture and sale of finished products rather than the import of raw materials. There was no contractual requirement making payment of royalty a pre-condition for the sale or import of the goods. Consequently, Rule 10(1)(c) of the Customs Valuation Rules, 2007, which permits inclusion of royalties only when they are related to the imported goods and are payable as a condition of sale, was found to be inapplicable.
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The appellant/assessee manufactures clutch facings and imports raw materials such as textured yarn, technical yarn, and semi-finished clutch facings from its related foreign supplier, M/s. Valeo Matériaux De Friction, France, and its associate companies.
The relationship between the Indian entity and its foreign supplier had been examined by the Special Valuation Branch (SVB) as early as 2000. Although the parties were found to be related under the Customs Valuation Rules, the SVB accepted the declared invoice value as the transaction value and categorically held that royalty paid at 3.75% of the net sale value of finished goods was not includible in the assessable value of imported goods. This position was reaffirmed through subsequent SVB review orders issued in 2004, 2007, and 2010.
However, in 2014, the Deputy Commissioner of Customs (SVB) revisited the issue and concluded that the royalty should have been computed on the net sales value without excluding the value of imported raw materials.
Based on this interpretation of the technology agreement, customs authorities sought to include the royalty amount in the transaction value of imports and raised differential customs duty demands for the period 2001 to 2013 under Section 28(4) of the Customs Act, 1962. Thereafter, a fresh show cause notice dated November 30, 2015 culminated in the impugned order confirming another demand along with interest and penalty, which was challenged before the Tribunal.
The Tribunal noted that an earlier coordinate Bench had already examined the very same technology assistance agreement and the issue of royalty inclusion in exhaustive detail.
The earlier Bench had also rejected the invocation of the extended limitation period, observing that the customs department had consistently accepted the appellant’s valuation methodology for over a decade through several Orders-in-Original and had never challenged those findings. The Tribunal held that a mere change in the interpretation of the same agreement could not justify allegations of suppression or misstatement against the importer.
The Bench observed that the issue stood fully settled. It found that the Revenue had failed to establish any material change in facts, any fresh documentary evidence, or any change in the legal position that would warrant a departure from the earlier decision.
The Tribunal held that since the controversy had already been conclusively decided, the impugned order confirming differential customs duty by adding royalty payments to the value of imported raw materials could not be sustained.
The Tribunal set aside the Order-in-Original dated May 31, 2016 and granted consequential relief to the appellant in accordance with law.
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