Royalty on Net Sales for Manufacturing Know-How by Owens Corning Not Addable to Customs Value of Imports u/r 10(1)(c) of CVR: CESTAT [Read Order]

The appellant, Owens Corning Industries Pvt Ltd, previously known as OCV Reinforcements Manufacturing Ltd, is engaged in the business of manufacturing reinforcement glass fiber products and composite products.

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The appellant had entered into a Manufacturing License Agreement with its principal located in the United States, under which the appellant obtained the know-how to manufacture specified products in India and paid royalty at the rate of 4% on the net sales value of the products manufactured using such know-how.

The appellant in 2011 sought renewal of its Special Valuation Branch (SVB) order. The Deputy Commissioner (SVB) accepted the same, but directed inclusion of the 4% running royalty in the assessable value of the imported goods.

This order was upheld by the Commissioner of Customs (Appeals). Aggrieved by the said order, the appellant filed an appeal before the tribunal.

In the subsequent year, the appellant once again sought renewal of the SVB order, and authorities reiterated their direction to include running royalty in the assessable value, a decision upheld on appeal and later taken up before CESTAT.

Both appeals before CESTAT were heard together, as they raised the same legal issue.

The appellant contended that in terms of Rule 10(1)(c) of the CVR, there are two conditions to be satisfied if Royalty amount is to be added in order to determine the cost of the value of imported goods. The first condition being that the Royalty/license fee should be related to the imported goods; second, such payment should be a condition of sale of goods.

It was further submitted that the royalty paid under the Manufacturing License Agreement was not related to imported goods, but to the net sales value of goods manufactured in India, and was for obtaining the know-how to manufacture finished products in India.

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The royalty was payable irrespective of whether goods were imported or not, and raw materials were regularly sourced from unrelated suppliers or purchased locally. Including the value of imported goods in the net sales price was merely a method of computing royalty and did not establish a direct link with the imported goods

The bench comprising Vasa Seshagiri Rao (Member Technical) and P. Dinesha (Member Judicial) found merit in the appellant's arguments and observed that as long as the royalty is not paid or payable on the imported goods and as long as there is no condition as to ‘sale of goods’ being valued, the same is not includable in the price.

The tribunal further held that the explanation to Rule 10(1)(c) applies only when the imported goods undergo the process for which royalty is paid, which was not the case here.

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Since the imported goods were not procured from the group company, and there was no condition requiring their sale only upon payment of royalty, and the royalty was fixed at 4% of the net sales, there was no requirement to add the royalty to the price of the imported goods.

Accordingly, the tribunal allowed the appeals with consequential benefits, if any, as per law.

The appellant was represented by T. Viswanathan, D. Santhana Gopalan and S. Ganesh Aravind. The respondent was represented by Sanjay Kakkar, Deputy Commissioner.

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