Fees Paid to Foreign Affiliates For Management Services and Trademark Licensing Not Includable in Imported Goods Valuation: CESTAT [Read Order]

Recently in a ruling, the Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) held that fees paid to foreign affiliates for management services and trademark licensing are not to be included in the transaction value of imported goods. The case arose when the assessee/appellant, M/s. Schenck Process India Private Limited, engaged in the design, manufacturing, and sale of industrial systems, challenged a decision by the Commissioner of Central Excise and Central Tax. The department had argued that the Management and License Fees paid by the company to its parent entity, Schenck Process GmbH in Germany, should be added to the assessable value of the goods imported from related entities.

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The assessee imports various capital goods and components from its foreign affiliates for its manufacturing operations in India. As these transactions were between related entities, the company had obtained a Special Valuation Branch ( SVB ) registration to ensure that the declared import prices were at arm’s length, as required by the transfer pricing regulations under the Income Tax Act. Initially, the SVB accepted the declared transaction values, finalizing the assessments.

However, following the takeover of Schenck Process India by Schenck Process GmbH, a new Cost Allocation Agreement ( CAA ) was implemented across the group companies. This agreement required Schenck Process India to pay Management Fees to its parent company for administrative services, as well as a License Fee for the use of the “Schenck” trademark on the goods it manufactured and sold in India. The Commissioner of Central Excise (Appeals) subsequently ruled that these fees were directly related to the imported goods and, under Rule 10(1) of the Customs Valuation Rules, must be included in their assessable value.

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Schenck Process India contested this ruling, arguing that the Management and License Fees were unrelated to the importation of goods and instead pertained to services and trademark use associated with its domestic operations. They stated that the License Fee was a payment for the right to use the trademark on the finished goods they produced, not on the imported goods themselves. Similarly, the Management Fees were paid for administrative services, which were not contingent on the importation of goods. The company also pointed out that the fees were calculated based on their total external sales and not tied to the purchase or import of specific items from the parent company.

Upon review, the CESTAT bench of Mr R Muralidhar and Mr Rajeev Tandon sided with the appellant, overturning the lower authority’s decision. The tribunal found that the fees paid by Schenck Process India were not linked to the importation of goods nor constituted a condition for the sale of imported items. CESTAT noted that the License Fee was paid for the right to use the Schenck trademark on manufactured products, a service unrelated to the goods imported from the parent company. Additionally, the Management Fees covered administrative services rendered by the parent company and were not conditional upon the importation of goods. The tribunal stressed that for such fees to be added to the transaction value, they must be directly related to the sale of imported goods, which was not the case here.

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In its ruling, CESTAT referred to several previous judgments that dealt with similar issues, including cases where royalties and management fees were found to be unrelated to imported goods. The tribunal observed  that fees related to downstream manufacturing or service arrangements, as in this case, are not includable in the transaction value of imported goods.

In result, CESTAT set aside the order of the Commissioner of Central Excise (Appeals) and ruled in favor of the assessee.

To Read the full text of the Order CLICK HERE

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