The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai Bench has upheld that royalty or technical know how fees paid by an importer to a foreign collaborator should not be considered a condition of sale of imported goods. As a result, these fees are excluded from the assessable value for calculating customs duty, as the conditions under Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1998, were not met.
The issue arose from an appeal filed by the Commissioner of Customs, Chennai, against an order passed by the Commissioner (Appeals) who upheld the original authority’s decision regarding the inclusion of technical know how fees or royalty in the assessable value of imported goods for customs duty calculation.
The appellant revenue, represented by Ms. Anandalakshmi Ganeshram, argued that the payment of royalty and technical know how fees to a foreign collaborator should be included in the assessable value as these payments were considered a condition of sale.
However, the respondent, represented by Shri M. Kanan, argued that the payment of royalty and lump sum fees should not be included in the assessable value as they were not a condition of sale.
The respondent maintained that the transaction value was at arm’s length when buying from their principal and that the technical know how fees were for post-import activities, unrelated to the imported goods.
The CESTAT, after examining the agreement between the respondent-importer and their foreign collaborator, concluded that the royalty and technical know how fees were based on the net sales price of domestic sales of the licensed articles.
The bench noted that there was no restriction in the agreement that required the respondent to procure raw materials or capital goods solely from the foreign supplier. Thus, the CESTAT found that the fees were not a condition of sale for the imported goods.
The bench relied on previous tribunal decisions, including M/s. HIS Automotive Ltd. and M/s. Daewoo Motors India Ltd., which had similar findings regarding the exclusion of royalty payments from assessable value.
Additionally, the bench also referred to the Supreme Court decision in the case of CC(Port), Chennai vs. Toyota Kirloskar Motor P. Ltd. [2007 (213) E.L.T. 4(S.C.)], which upheld that royalty payments to a foreign collaborator did not satisfy the conditions outlined in Rule 9(1)(c) and, therefore, should not be included in the assessable value of imported goods.
The bench highlighted that the department had not filed any appeal against the orders passed in the earlier rounds of valuation, which had been accepted which further supported the dismissal of the revenue’s appeal.
In conclusion, the two-member bench comprising Mrs. Sulekha Beevi C.S (Judicial Member) and Mr. Vasa Seshagiri Rao (Technical Member) held that royalty or technical know how fees paid to a foreign collaborator should not be considered a condition of the sale of imported goods and, as such, should be excluded from the assessable value for customs duty calculation.
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