Customs, Excise and Service Tax Appellate Tribunal, Chennai: In an appeal was filed by the Appellant-Valeo Friction Materials India Ltd. assailing the order dated 21-07-2014, passed by the Commissioner of Customs (Appeals), Chennai (‘the Appellate Authority’), the bench of Sulekha Beevi C.S., Member (Judicial) and Vasa Seshagiri Rao, Member (Technical), opined that the distinction between an amount payable as the condition of import and amount payable in respect of sale of manufactured goods using the brand name had to be understood properly. Rule 10(1)(c) of the Customs Valuation Rules, 2007 (‘2007 Rules’) stated that royalties and licence fees related to the import goods had to be added to the transaction value of the imported goods. However, there was no such condition in the agreement between the Valeo Materriaux De Friction, France (‘Valeo France’) and the appellant, which provided that royalty payment was a pre-condition for sale/import of raw materials.
Accordingly, the Tribunal opined that in the present case, Royalty was not includible the transaction value of the imported raw materials to demand any differential customs duty, and accordingly set aside the impugned order as being legally unsustainable.
Background
In the present case, the appellant was engaged in the manufacture of clutch facings from raw materials, imported from various foreign suppliers which were group and associate companies of Valeo France. Appellant was ordered to accept the transactional value under Rule 4 of the Customs (Determination of Price of Imported Goods) Rules, 1988, because the Royalty payable to the related supplier at the rate of 3.75% on net sale value of finished goods was not to be includible in the transaction value of the imported goods.
During 2012, the appellant’s auditor pointed out the error in computation of Royalty and from July 2012, the appellant started including the value of imported raw materials in the net sales value to compute Royalty. However, with respect to Royalty payment made until 2012, Valeo France vide letter 31-12-2012, waived the short fall towards Royalty arising out of non-inclusion of imported raw material. Meanwhile, the appellant sought for renewal of this letter and submitted relevant documents to the Adjudicating Authority.
After due process of law, the Adjudicating Authority vide order dated 17-01-2014, ordered for addition of Royalty on imported goods at the end of each financial year, as per Rule 10(1)(c) of 2007 Rules with option to pay duty on Royalty for a particular financial year or at the rates applicable under each Bill of Entry for a particular year. Further, the assessing group was ordered to invoke Section 28(4) of the Customs Act, 1962 (‘the Act’) to demand differential duty of Rs. 15,02,08,325 from 2001 to 2013, along with applicable interest under Section 28AA of the Act and to invoke the penal provisions under Section 114A of the Act for suppression of fact/wilful misstatement to the department, to impose appropriate penalty.
Subsequently, the appellant filed the appeal before the Appellate authority contending that the adjudicating authority could not have passed an order covering thirteen years. However, during pendency of the matter, the Department started keeping consignments imported by the appellant on hold. Since, the appellant was in urgent need of the goods for continuing the production of the goods, the appellant paid Rs. 54,65,113 under protest and also requested for a speaking order in this respect. However, the appellate authority rejected appellant’s appeal and upheld the original order.
Thus, the present appeal was filed.
Analysis, Law, and Decision
The Tribunal stated that it was evident that the appellant had entered into a Technology License Agreement dated 11-02-1998 (‘the Agreement’) with Valeo, France for transfer of technology to the appellant for manufacturing and assembling of products in India for payment of royalty at 3.75% of the Net Sales Value of the product manufactured and sold. The Tribunal stated that from 01-08-1997 to 31-03-1999, royalty was not payable by the appellant and from 1999-2000, the appellant started paying royalty, which was calculated on Net Sales Value excluding the value of imported raw materials. Though the agreement stipulated that the Net Sales Value was inclusive of value of raw materials, the same was not included while calculating the amount of royalty to be paid up to July 2012.
The Tribunal observed that certain essentials must be fulfilled to arrive at the transaction value as per Rule 10(1)(c) of 2007 Rules. These essentials were that the royalty/licence fee must be related to the imported goods, it must be required to be paid by the buyer and such payment should be a condition of sale of the imported goods. Thus, it was essential to examine whether the payment of royalty was linked to import of raw materials and whether sale of raw materials was a pre-condition.
The Tribunal observed that in Article 8 of the Agreement, it was clearly indicated that at the appellant’s request, Valeo France should supply the parts and raw materials necessary for the manufacture of the products. This indicated that payment of royalty was not entirely related to import of raw materials. Thus, the Tribunal opined that it could be inferred that payment of royalty was not completely relatable to import of raw materials as there was no condition of sale attached for their import.
The Tribunal opined that the distinction between an amount payable as the condition of import and amount payable in respect of sale of manufactured goods using the brand name had to be understood properly. Rule 10(1)(c) of the 2007 Rules stated that royalties and licence fees related to the import goods that the buyer was required to pay directly or indirectly had to be added to the transaction value of the imported goods. However, there was no such condition in the agreement between the Valeo, France which provided that royalty payment was a pre-condition for sale/import of raw materials. There was no evidence to establish as to how the royalty payment was linked to the import of raw materials.
Further regarding differential duty, the Tribunal observed that the order dated 17-01-2014 had quantified the differential duty to be Rs. 15,02,08,325 on the basis of percentage of imported raw materials used for manufacture of finished goods and the amount of royalty paid. The Tribunal opined that this method of computation was against the prescribed procedures and rules, as it assumed that the entire royalty payment was related to import of raw materials.
The Tribunal opined that the appellate authority even though had found fault with such a quantification, it upheld that the royalty paid had a nexus with the importation of raw materials and thus royalty paid had to be included in the value of the imported raw materials. Further, the Tribunal stated that the appellant had not only imported the raw materials like fibre yarn and impregnated yarn but also various other raw materials like textured yarn, technical yarn, copper wire, resins even semi-finished clutch facings. So, linking the raw materials imported entirely to royalty payment was not legal and could not be accepted.
The Tribunal relied on Commr. of Customs (Port) v. Toyota Kirloskart Motor (P) Ltd., (2007) 5 SCC 371, and held that Royalty payment was not includible in the transaction value of imported raw materials. Thus, the issue of inclusion of Royalty payment in the transaction value of the imported raw materials was decided in favour of the appellant. Accordingly, the Tribunal opined that the Royalty was not includible the transaction value of the imported raw materials to demand any differential customs duty, and accordingly set aside the impugned order as being legally unsustainable.
Further, the Tribunal observed that the Adjudicating authority had demanded differential customs duty by including the royalty payment in transaction value of imported raw materials from 2000-2001 to 2012-2013. The Tribunal opined that even by invoking extended periods, demanding differential customs duty for thirteen years was blatantly illegal and against the provisions of customs law. Thus, the differential duty demand had to be set aside.
[Valeo Friction Materials India Ltd. v. Commr. of Customs, 2024 SCC OnLine CESTAT 550, order dated 31-05-2024]
Advocates who appeared in this case :
For the Appellant: S. Ganesh Aravindh, Advocate;
For the Respondent: R. Rajaraman, Authorised Representative.
