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Ferodo India (P) Ltd. Vs. Commissioner of Customs, Mumbai - Court Judgment

LegalCrystal Citation
CourtCustoms Excise and Service Tax Appellate Tribunal CESTAT Delhi
Decided On
Judge
Reported in(2002)(82)ECC584
AppellantFerodo India (P) Ltd.
RespondentCommissioner of Customs, Mumbai
Excerpt:
.....technical know how fees paid by the importers are to be included in the assessable value of the goods imported or not. the appellants have argued that the payments are not relatable to the imported goods and was not a condition of sale of the imported goods and hence it cannot be included in the assessable value under rule 9(1)(c) of the customs valuation rules, 1988. they have also mentioned that royalty and technical assistance fees paid relates to goods manufactured in india and not to the goods imported and as such it should not be added to the assessable value of the imported goods. they have thus, distinguished their case from the case of m/s. essar gujarat decided by the hon'ble supreme court, which has been relied upon by the lower authority on the ground that the payments are.....
Judgment:
1. The appellant M/s. Ferodo India (Pvt.) Limited is a subsidiary of M/s. T&N International Ltd., U.K. from August 1998. Prior to that appellant was a joint venture with 51% shares holding by the same M/s.

T&N International Ltd., U.K. Thus, the appellant has always been a related person of M/s. T&N International Ltd., U.K.2. The present appeal is directed against impugned orders which held that in respect of imports of capital goods, spares and accessories thereof, and raw materials by the appellant from their related persons namely T&N International and its associates and subsidiaries, addition @ 17% is required to be made to the sale price of the goods in consideration of royally and technical know how fees payable by the appellant to M/s. T&N International. The above addition has been ordered in view of the provisions contained in Rule 9(1)(c) of Customs Valuation Rules, 1988. During the hearing of the case, learned SDR pointed out that the addition would be justifiable in terms of Rule 9(1)(e) also as indirect considerations also have to be taken into account while assessing goods to duty.

3. The legal provision being pressed into service by the Customs authorities reads as under :- "9(1)(c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.

9(1)(e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable".

"Rule 9(1)(c) 1. The royalties and licence fees referred to in rule 9(1)(c) may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value.

2. Payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for export to the country of importation of the imported goods".

4. The findings in the impugned order with regard to the applicability of provisions of Rule 9(1)(c) are as under :- "The lower authority had held that the importers and the suppliers are refated in terms of Rule 2(2) of Customs Valuation Rules, 1988.

This fact is not disputed and the only dispute is whether royalty and technical know how fees paid by the importers are to be included in the assessable value of the goods imported or not.

The appellants have argued that the payments are not relatable to the imported goods and was not a condition of sale of the imported goods and hence it cannot be included in the assessable value under Rule 9(1)(c) of the Customs Valuation Rules, 1988. They have also mentioned that Royalty and Technical Assistance fees paid relates to goods manufactured in India and not to the goods imported and as such it should not be added to the assessable value of the imported goods. They have thus, distinguished their case from the case of M/s. Essar Gujarat decided by the Hon'ble Supreme Court, which has been relied upon by the lower authority on the ground that the payments are not condition of sale in their case.

It is observed that the tower authority has held that the payments towards technical know how fees as well as the royalty for use of the licence for the sake of production and to use the trademarks, patent etc. become related to the imported goods in question and also becomes conditions of sale for the import of the said goods.

This view is further strengthened by Article No. 4.1 of Technical Assistance and Trade Mark Agreement between the two collaborators, without the licence and know how the goods cannot be manufactured in India. Further, without patent rights from the collaborators, the goods manufactured by the Indian Company cannot be marketed in India with the collaborator, the goods manufactured by the Indian Company cannot be marketed in India with the trade mark of the foreign collaborator. For achieving their business objective, therefore, the Indian company have not only to pay the price of the goods imported but also the fees for obtaining production licence rights, the technical know how, and royalty for manufacturing and marketing 'Ferodo Brand' Brake lining and Brake pads in India. Thus, these payments get related to the import and become condition of sale for the said import. Provisions of rule 9 of Customs Valuation Rules, 1988 therefore, get attracted in such a situation. The lower authority has also relied upon the judgment of Essar Gujarat Ltd. 1996 (88) E.L.T. 609 (S.C.) and Himson Textile Engineering industries ltd-1997 (71) ECR 8 (T).

After considering rival submissions, I am of the view that the payment for royalty and technical know how fees were condition of sale of the raw materials as clearly mentioned in the Art. No. 4.1 of the contract, wherein it is clearly mentioned that except with the prior written consent of the licensor, the licensee shall not be permitted to use the technical information to manufacture the licensed products using raw materials supplied from sources other than those nominated by the licensor in writing.

Accordingly, I am of the view that this case is squarely covered by the Judgment of the Apex Court in the matter of M/s. Essar Gujarat Ltd. 1996 (88) E.L.T. 609 (S.C.)".

5. On the same issue, the finding recorded by the Dy. Commissioner is as under :- "I have carefully gone through the records of the case including the written and oral submissions made by the importer. It is observed that M/s. Ferodo Ltd. U.K. and M/s. Ferodo India belong to the T&N (I), U.K. group. The Ferodo Ltd. U.K. and Ferodo India are collaborators and as there is a 76% equity participation of the Foreign collaborator with the Indian counterpart, they are related in terms of Rule 2(2) of Customs Valuation Rules, 1988. By virtue of the Technical Assistance and Trade Mark Agreement the Indian collaborator is required to pay the technical know how fees and royalty to M/s. Ferodo Ltd., U.K. in order to use the technical know how to produce the licensed product exclusively developed by the Foreign Collaborator and also use the patent and the trade mark etc.

Then only they would be in a position to start the production under the said collaboration agreement. In order to start the said products, the Indian collaborator needs to import the capital goods, the components, raw material etc. On the contrary had there been no agreement, no transfer of know how, no payment for this transfer of know how fees and no payment of royalty and therefore, no use of patent, trademark etc. then there would have been no occasion to start the said know how related production and therefore, no question of import of capital goods, raw material etc. would have arisen. Thus the payments towards technical know how fees as well as the royalty for use of the licence for the sake of production and to use the trademark, patent, become related to the imported goods in question and also become conditions of sale for the import of the said goods. This view is further strengthened by Article No. 4.1 of Technical Assistance and Trade Mark Agreement between the two collaborators. Without the licence and know how the goods can not be manufactured in India. Without patent rights from the collaborator, the goods manufactured by the Indian Company cannot be marketed in India with the trade mark of the foreign collaborator. For achieving their business objective, therefore, the Indian company have not only to pay the price of the goods imported but also the fees for obtaining production licence rights, the technical know how, and royalty for manufacturing and marketing 'Ferodo Brand' Brake lining and Brake pads in India. Thus these payments get related to the import and become condition of sale for the said import. Provisions of Rule 9 of Customs Valuation Rules, 1988 get, therefore, attracted in such a situation in the light of the ratio of Hon'ble Supreme Court judgment in the case of Essar Gujarat Ltd. [1996 (88) E.LT. 619 (S.C.)] and the ratio of decision of the Hon'ble CEGAT in Commissioner v. Himsan Textile Engg. Industries Ltd. [1997 (71) ECR 8 (T)]. In terms of Rule 4 read with Rule 9, these elements of payment become includible in the value for assessment of duty purpose".

6. The appellant's contention is that the above findings of the lower authorities are contrary to the specific provisions of the Rule 9(1)(c) which have been relied upon while passing the orders. They contend that the royalties and licence fees are includible in the assessment of goods only if those payments "related to the imported goods". They submit that it is the admitted position in the present case that the royalties and licence fees payable by the appellant to M/s. T&N International related to the products, namely, brake liners and disc brake parts, which are to be manufactured in India by the appellant with the technical assistance and under the trade market of M/s. T&N International and not in relation to the capital goods and spares and accessories and raw materials which are under import. They have also submitted that it is settled law that unless the royalties and fees payments are related to the imported goods, the provisions of Rule 9(1)(c) have no application to their valuation. They have relied on the decisions of this Tribunal in Vestas RRB India Ltd. v. CC, Chennai [2000 (41) RLT 645 (CEGAT)], Tata Timken Ltd. v. Commissioner of Customs, CalcuttaDaewoo Motors India Ltd. v. Commissioner of Customs, New Delhi [2000 (115) E.L.T. 489 (Tribunal)] in support of this contention.

7. During the hearing of the appeal, learned Counsel for the appellant took us through various provisions of the agreement between the parties and showed that the licence fees and royalty had no relation to the import of capital goods or raw materials. The order of the Commissioner specifically refers to Clause 4(1) of the agreement. Clause 4 of the agreement relates to "supply of materials" and is reproduced below in order to see whether that clause or Sub-clause 4.1 referred to by the Commissioner could anyway be linking the royalty and licence fees to supply of capital goods and materials.

4.1 Except with the prior written consent of the licensor, the licensee shall not be permitted to use the technical information to manufacture the licensed products using raw materials supplied from sources other than those nominated by the licensor in writing. The licensor will use its reasonable endeavours to assist the licensee to obtain locally the necessary raw materials. Any costs incurred in adapting locally obtained raw materials shall be borne by the licensor".

4.2 If so requested by the licensee, the licensor will use its best endeavours to obtain on the licensee's behalf items of machinery, equipment and tooling required for the production of the licensed products. Any such ilems will be delivered by the licensor free on board to an Indian port and stall be supplied in accordance with the licensor's standard conditions of sale, save that in the event of any conflict or discrepancy between the said conditions and the terms of this agreement, the terms of this agreement shall prevail.

The licensee shall pay to the licensor the whole of the licensor's costs in supplying items of machinery, equipment and tooling in accordance with this clause. For such purpose the licensor's invoice and copy of bill of lading shall be conclusive evidence of the costs and expenses incurred by the licensor and delivery of the items free on board to an Indian port.

4.3. At the request of the licensee, the licensor shall use its best endeavours to supply raw materials to the licensee for use in the manufacture of the licensed products. Where raw materials are supplied to the licensee, the licensee shall pay to the licensor all costs and expenses incurred in relation to such supply no later than sixty (60) days, or as otherwise agreed, after the presentation of the licensor's invoice in that behalf and such invoice shall be conclusive evidence of the costs and expenses incurred by the licensor. Prices of the raw materials will be those ruling at the date of dispatch and shall be in accordance with those applying to other licensees of the licensor. Unless otherwise agreed, the method of payment will be by documentary term bills of exchange drawn under irrevocable letter of credit confirmed by a bank specified by the licensor".

'9. A perusal of the various clauses, and in particular, Clause 4.1 makes it clear that the royalty and licence fees are not related to supply of materials or capital goods. They only deal with selection of material suppliers, assistance that would be available in that area from the foreign shareholder etc. The earlier clauses of the agreement under Clause (1), Clause (2) and Clause (3) etc. clearly show that the licence fees and royalty are in relation to supply of know how and use of the foreign shareholder's brand name on the products to be manufactured by the appellant in India. Perusal of other clauses of the agreement, in particular, Clauses 11.1 and 11.2 also makes this position very clear. It is also noticed that with regard to the imports in question the foreign shareholder was only assisting the appellant with regard to identification and procurement of goods abroad and they made available the invoices of the original suppliers to appellant.

Those prices conformed to the sale price of the appellant's foreign shareholder. Thus, the invoices covering the import of capital goods, spares and raw materials represented the full value of the goods under import. Viewed from that angle also, there was no justification to load the declared value of the goods.

8. The licence fee and royalty payment being entirely related to the goods to be produced in India and training the appellant's personnel by the foreign shareholder, these payments are in no way related to the imported capital goods or materials. Therefore, the addition ordered in the impugned order is contrary to the specific provisions contained in Rule 9(1)(e). It is also contrary to the legal position stated in this Tribunal's decision in the case of Vesta RRB India Ltd., Tata Timken Ltd., etc. The judgment of the Apex Court in Essar Gujarat Ltd. [1996 (88) E.L.T. 609 (S.C.)] has no application to the present case. Rule 9(1)(e) also is not attracted as there was no indirect payment also towards the cost of the goods under import.

9. In the result, we hold that there was no requirement to make any addition to the declared values for the purpose of customs assessment of the goods. The impugned order, which has taken a contrary view, is set aside and the appeal is allowed with consequential relief, if any, to the appellants.


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