Royalty, License Fee or any other Payment for a Process must be included in the Assessable Value of Imported Goods: CESTAT [Read Order]

The Delhi bench of the CESTAT, while granting relief to M/s Fujitsu Ten India Pvt. Ltd, held that royalty, license Fee or any other Payment for a Process etc, are includable while determine the assessable value of imported goods in terms of Rule 10 of Customs Valuation Rules, 2007.

Appellant-Assessee is regularly importing goods from Thailand, China and Philippines. Assessee, as per a license agreement with M/s Fujitsu Ten Limited, Japan, imported goods to India. As per the agreement, the appellant has the right to use IPR and know how, for the manufacture of car infotainment system.

The department said that royalty paid by the appellant to Fujitsu Ten Limited and Patent and Software usage fee paid are required to be added in the assessable value in terms of Rule 10 of Customs Valuation Rules, 2007.

Before the appellate authorities, the appellants contended that for addition of royalty in the admissible value, the said royalty should have been paid in relation to the imported goods and payment of royalty should be a condition for sale of the imported goods. The two conditions are not fulfilled in the instant case, they said.

It was further argued that they are reimbursing the patent/software fee on behalf of the various patent /software owners for which agreement dated 30.05.2013 was entered into with Fujitsu Ten India Ltd., Japan. This is to get volume discount.

After perusing the license agreement, the bench noted that the “Licensed products”, means products in which the foreign company approve the appellant’s use of industrial property rights and know-how for the manufacture and sale by the appellant and the appellants are liable to pay royalty on gross sale value of the manufactured goods.

“Admittedly, such value includes cost of goods imported by the appellant. The lower authorities held that there is no provision for exclusion of cost of imported goods in such situation.”

The bench relied on the Apex Court decision in Matsushita Television & Audio Co. wherein it was held that when the cost of imported items were included in the net ex factory sale price of the manufactured goods and the importer pays royalty as a percentage of turnover of final product, which included the cost of imported components, it becomes a condition of sale of finished goods. “Hence, both the conditions of Rule 9(1)(c ) of the Valuation Rules are satisfied,” the bench said.

The bench further placed reliance on the Tribunal’s decision in Herbalife International India Pvt. Ltd and Husco Hydraulics Pvt. Ltd., in which it was held that when the cost of imported goods is included in the amount, which is considered for payment of royalty, then such royalty should be added in the assessable value of imported goods.

With regard to the payment of patent/software fee, it was noted that the softwares are essentially required to make the imported components integrated and functional as well as for final operation of the manufactured goods. “Admittedly, these patent/softwares are required for the functional utility of the imported items as well as the finished final product. The appellants are under obligation to pay fee for the said third party patent/software. Rule 10(1)(e) of the Valuation Rules stipulates that all other payments actually made are to be made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to the third party to satisfy and obligation of the seller to the extent that such payments are not included in the price actually paid or payable, shall be added to the price actually paid or payable for the imported goods. Explanation to the said rule provides that whether the royalty, license fee or any other payment for a process, whether partial or otherwise, is includible,” the bench added.

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