1. The appeal is filed against the order in appeal number 132/2017 dated 17/03/2017.
2. Brief facts of the case are as follows:-
The appellant is a public Ltd. company and is engaged in the manufacture of goods such as paints chemicals etc. using raw materials imported from related and unrelated parties. The Appellant is also engaged in trading of finished products such as car and wood paints imported from the Foreign Suppliers. Special Valuation Branch, New Custom House, New Delhi (hereinafter referred to as "SVB Delhi") took up the issue of valuation of goods imported by the Appellant from the Foreign Suppliers and vide Order-in-Original No. SVB/CUS/38/2011 dated 07.07.2011 held that the Appellant and the Foreign Suppliers are related persons in terms of Rule 2(2) of the Customs Valuation (Determination of Value of Imported Goods), Rules, 2007 (hereinafter referred to as "the Valuation Rules, 2007) and accepted the declared invoice values as transaction value under Rule 3(3)(a) of the Valuation Rules, 2007. Other SVB authorities also decided the matters of different group companies of Akzo Nobel operating in India. Various group companies viz. M/s. Akzo Nobel Coatings India Pvt. Ltd., Akzo Nobel Car Refinishes India Pvt. Ltd. and Akzo Nobel Chemicals (India) Ltd. got merged, pursuant to amalgamation held under Section 391 to 394 of the Indian Companies Act, 1956, duly approved by the Hon'ble High Court at Kolkata, Karnataka and Mumbai vide their orders dated 24.04.2012, 18.04.2012 and 11.05.2012 respectively. These companies were amalgamated with the business of the Appellant with effect from 01.04.2011 for joint operations in India. SVB-Delhi proceeded to renew the said order and also to incorporate activities undertaken by all above three mentioned entities post amalgamation. Appellant submitted various document to SVB. After analysis of information provided by the Appellant, SVB accepted the declared invoice values subject to addition of royalty paid/payable by the Appellant in terms of their agreements with different overseas companies. Being aggrieved by the said order, the Appellant has filed this appeal.
3. With the above background we heard Shri Kishor Kunal and Shri Vasu Nigam, Ld. Advocates for the appellant as well as Shri Govind Dixit, Ld. DR for the department.
4. The Ld. Counsel for the appellant explained the grounds of appeal and his arguments are summarized belo
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i. Overseas licensors and suppliers of goods are distinct persons.
ii. For royalties/license fee to be includible in the transaction value of imported goods, it is essential that the same is paid by the buyer of the goods to the seller of the goods. In their case, as the royalty fee is not being paid to the seller of the goods, same is not required to be added to the transaction value of imported goods.
iii. Royalty payment is not a condition of sale of goods imported.
iv. Payments under Royalty agreement are only with respect to post importation activities and are not co-related to the sale transaction between the Appellant and the supplier of the goods.
v. Impugned order itself states that technical assistance fee cannot be termed as condition of sale of goods.
vi. The Appellant is discharging service tax under reverse mechanism on payment of royalty to overseas related companies.
vii. Ld. Counsel also submitted that the appellant has entered into various license agreements with M/s. Akzo Nobel Coatings International BV, Netherlands. The agreements dated 01/06/12 and 01/09/2012 permit the appellant to use the intellectual property belonging to the principal, in the manufacture of various goods in India. Separately another agreement dated 16/9/2004 has been entered into by which the appellant has been allowed to use the technology, trade mark, technical knowhow etc for manufacture of industrial paints, ceilings etc. Other license agreements cover trading of goods. Even though royalty is payable to their principals in Netherlands, as per the above agreements, no goods have been imported from the said principal. In view of above, he submitted that the royalty paid is unrelatable to the import of goods and hence there is no justification for adding such royalty amounts to the assessable value to the imported goods rules 10(1)(c) of CVR, 2007. He relied on several case laws including:-
i. CC v. Toyota Kirloskar Motor P Ltd : 2007 (213) ELT 4 (SC);
ii. Commissioner of Customs v. Ferodo India Pvt. Ltd : 2008 (224) E.L.T. 23 (S.C.);
iii. Commissioner of Customs, Mumbai v. BASF Strenics Pvt. Ltd : 2006 (195) ELT 206;
iv. ABB Ltd. v. CC, 2013 (288) ELT 296;
viii. The Ld. Counsel further submitted that the lower authority has relied on the case of Matsushita Television and Audio (I) Ltd. Vs. CC : 2007 (211) ELT 200 (SC) but the same is not applicable to the present case where suppliers and licensers are different and there is no evidence of indirect payments.
5. The Ld. DR justified the impugned order. DR vide his written submission dated 19.09.2017 submitted as follows:
Akzo Nobel NV and its group companies hold 73% of the share capital of the appellant. The appellant was paying royalty to the Foreign Suppliers in terms of the IP royalty agreement on account of trademarks of imported goods.
The related persons have been defined in Rule 2(2) of the Customs Valuation Rules, 2007 which provides that persons shall be deemed to be "related" if they are officers of Directors of one another's business; they are legally recognized partners in business; they are employer of employee; any person directly or indirectly owns, controls or holds 5% or more of the outstanding voting stock or shares of both of them; either of them directly or indirectly controls the other; both of them are directly or indirectly controlled by a third person or together directly or indirectly control in a third person.
In the present appellant's case, it is undeniable that the appellant importer and its Foreign Suppliers are all subsidiaries of the Akzo Novel group and they have common Directors among them. When such is a relationship, it means that a foreign supplier and the appellant are related imported the invoice value for the imported goods can be treated as a transaction value only when the transaction value is adjusted in accordance with Rule 10(1)(c) read with Rule 3(2)(d) of the Customs Valuation Rules, 2007. In this particular case, the goods imported by the importer appellant from its related Foreign Supplier are manufactured by the Foreign Suppliers and are their proprietary goods, on which they hold Trademarks. The Suppliers have affirmed that all products exported to the importer are being sold on principal to principal basis.
The Foreign Suppliers have supplied the imported goods to the importer (appellant) only in accordance with the global transaction/pricing policy of the Akzo Nobel group, which requires that group company supplies are to be made on the basis of cost plus 5% markup. The importer appellant informed the SVB that the supply of all the goods from group companies are in accordance with same pricing policy. When asked specifically, the importer vide its letter dated 23.02.2015 has submitted that their company has entered into various licence agreements with M/s. Akzo Nobel Coating International BV, Netherland under which it was granted a non-exclusive, non-transferable, royalty bearing license with the right to sublicense to use the licensed intellectual property to manufacture, distribute, sell or otherwise supply products within India, Nepal and Bhutan for a period of 5 years. For use of the license, the importer appellant was required to pay a certain percentage of a Net Sale Value (NSV) of the goods sold using the imported good in a particular year as a royalty. The certain percentage of royalty amount as mentioned in the respective I.P. License Agreements is therefore directly related and dependent on the invoice sale value of the product sold by the importer (appellant). The I.P. License Agreements also revealed that the foreign supplier which is related to the importer (appellant) is entitled to a certain percentage of ht royalty and such royalty includes the value of the imported goods. This royalty amount i.e. paid to the foreign supplier is over and above the invoice value for determining the amount of royalty to be paid to the foreign supplier. The cost of the imported goods is not deducted from the Net Sale Value (NSV) of the importer's goods when sold in India. Purchase price of the importer's goods have been included in the Net Sale Value (NSV) and are the basis for the calculation of royalty to be paid by the appellant to group companies abroad. It is therefore clear that the royalty that is being paid, is directly related to the imported goods has not been deducted from the royalty calculation method.
Royalty is being paid by the appellant importer on its Net Sale Value (NSV) of the goods sold in India and there is no provision to exclude the assessable value of the goods which are imported by the importer from their related foreign supplier. All the three conditions prescribed in Rule 10(1)(c) of the Customs Valuation, 2007 are being fulfilled in the present case and this issue is directly covered by the ratio of the Hon'ble Supreme Court of India in the case of 'Matsushita Television & Audio (I) Ltd. vs. Commissioner of Customs reported as : 2007 (211) ELT 200 (S.C.) wherein it has been clearly held that when royalty is paid on the sales price of the finished products sold in India which also includes cost of imported components used in making finished products, it becomes a condition of sale that is related to the price of the imported goods. Paragraph 7 of the said judgment reads as under:
"7. The question which arises for consideration in the Civil appeal is: whether royalty payment was connected with the imported components. Under Rule 9(1)(c) of the Valuation Rules, 1988, only such royalty which is relatable to the imported goods and which is a condition of sale of such goods alone could be added to the declared price. However, in the present case, payment of continuing royalty was payable at the rate of 3% of the net ex-factory sale price of the colour T.V. exclusive of taxes, freight and insurance but including the cost of imported components. In other words, he royalty payment was to be computed not only on the domestic element of the net sale price of the colour T.V. but also on the cost of imported components. A bare reading of the agreement shows that payment under the said agreement related not only to the production of the goods in India but also to imports. In some of the decisions cited on behalf of the assessee, we find that the net ex-factory sale price of the finished products expressly excluded the cost of imported components. On the other hand, in the present case, the cost of imported components was expressly included in the net ex-factory sale price of the colour T.V. Further, when payment of MEI was at the rate of 3% of the sales turnover of the final products, including cost of imported component, it became a condition of sale of the finished goods. Hence, in this case both the conditions of Rule 9(1)(c) of the Valuation Rules, 1988 are satisfied."
This judgment has been relied upon by the original authority as well as the appellate authority in support of the proposition that the royalty paid in the appellant's case being directly connected to the sales value of the imported goods as embedded in the value of goods sold in India, has to be included in the transaction value for determining the Customs duty payable thereon.
The undersigned has strongly relied upon CESTAT's co-ordinate Bench decision in the case of Commissioner of Customs, New Delhi vs. Avaya Global Connect Ltd. reported as: 2016 (337) E.L.T. 402 (Tri. - Del.) which is squarely applicable to the present case. Specific attention is requested to paragraphs 4, 5 and 6 of this decision that correctly expound the applicable law. Similarly, Revenue has also relied upon paragraph 11 of CESTAT's decision in the case of Avenue Supermarket Pvt. Ltd. reported as 2017-TIOL-3128-CESTAT-DEL. to support its case. CESTAT's decision in the case of Universal Music India Pvt. Ltd. vs. Commissioner reported as 2009 (235) E.L.T. 829 (Tribunal) (paragraph 7) also supports the above proposition in favour of Revenue.
Similarly, the decision of the Hon'ble Supreme Court of India in the case of Commissioner of Custom Excise, New Delhi vs. Living Media India Ltd. reported as : 2011 (271) E.L.T. 3 (S.C.) (paragraphs 32 and 33) is also applicable to the facts of the present case. The Avaya Global decision (supra) has been upheld by the Hon'ble Supreme Court in the case of AGC Networks Ltd. vs. Commissioner reported as 2017 (349) E.L.T. A 158 (S.C.)
Another important decision of the CESTAT in the case of Atul Kaushik vs. Commissioner of Customs (Exports), New Delhi reported as : 2015 (330) E.L.T. 417 (Tri. - Del.) on the issue of Customs duty payable on royalty/license fee that is a condition of sale of imported goods is directly applicable to the facts of the present case. This decision has been upheld by the Hon'ble Supreme Court by its Order in Civil Appeal No. 13443 of 2015 dated 11.03.2016. In this, software imported into India from Oracle Ireland on Media Pack, license fee of 56% of the amount collected from the customer in India was paid to Oracle Corporation, USA. After going through the terms of the agreement, the Hon'ble Tribunal found that payment of royalty/license fee of 56% which was charged from the customers in India deserved to be added to the transaction value of the imported media packs and Customs duty was payable thereon because payment of license fee was a condition for the sale of media pack in India. As in the present case, Oracle entities worldwide were governed by a global pricing policy of an Oracle group, like the Akzo Nobel Group.
In view of the facts of the case and the ratio of the binding decisions as summarized in the preceding paragraphs, the royalty amount paid by the appellant to its foreign supplier must be added to the transaction value of the imported goods and the Customs duty is payable thereon.
6. We have heard both sides and perused the appeal record. The appellant has entered into several licence agreements with AKZO Noble International BV Netherlands (their Principal). Some of these agreements are for granting the right to the appellant to use intellectual properties. Certain other agreements are for licensing the use of technology, copyright, trademark etc. Royalty is payable as a percentage of net sales value as per the different agreements. Only in respect of technology license agreement, royalty is payable on net sales price less the value of bought out components. In respect of all other agreements the net sales value includes the value of components.
7. The claim of the appellant is that the goods such as raw materials for the manufacture of finished products as well as final products for trading were imported from other related group companies and not from AKZO Noble International BV Netherlands to whoever royalties are paid. Hence, it is their claim that the royalty cannot be held to be paid as a condition of the sale of goods by the principal. But the facts remain that the appellant as well as the suppliers of raw materials and finished goods are both subsidiaries of the principal in Netherlands. The question of adding of royalty amount to the assessable value of the goods imported from related persons was considered by the Hon'ble Supreme Court in the case of Matsushita Television & Audio (I) Ltd. Vs. CC (supra). Apex court also has occasion to consider the same issue again in the case of Ferodo India Pvt. Ltd.
8. From the impugned order we find that the show cause notice as well as impugned order has relied upon the judgment of the Hon'ble Supreme Court in Matsushita Television & Audio (I) Limited vs. Commissioner of Customs (supra) in which the Apex Court held as follows:-
7. The question which arises for consideration in this civil appeal is: whether royalty payment was connected with the imported components. Under Rule 9(1)(c) of the Valuation Rules, 1988, only such royalty which is relatable to the imported goods and which is a condition of sale of such goods alone could be added to the declared price. However, in the present case, payment of continuing royalty was payable at the rate of 3% of the net ex-factory sale price of the colour T.V. exclusive of taxes, freight and insurance but including the cost of imported components. In other words, the royalty payment was to be computed not only on the domestic element of the net sale price of the colour T.V. but also on the cost of imported components. A bare reading of the agreement shows that payment under the said agreement related not only to the production of the goods in India but also to imports. In some of the decisions cited on behalf of the assessee, we find that the net ex-factory sale price of the finished products expressly excluded the cost of imported components. On the other hand, in the present case, the cost of imported components was expressly included in the net ex-factory sale price of the colour T.V. Further, when payment to MEI was at the rate of 3% of the sales turnover of the final product, including cost of imported component, it became a condition of sale of the finished goods. Hence, in this case both the conditions of Rule 9(1)(c) of the Valuation Rules, 1988, are satisfied.
It is to be noted that facts of case before the Apex Court was similar to the present case. Accordingly, revenue has taken the view that royalty is to be added.
9. The appellants have relied on the subsequent Apex Court decision in the case of Ferodo India (supra). It has been argued that the facts before the Apex Court in Ferodo was also similar to the present case and the decision is in their favour. The facts of the Ferodo India case are as follows:
"3. The buyer is the manufacturer of brake liners and brake pads in India. On 8-9-1995, a technical assistance and trade mark agreement ("TAA" for short) was entered into between the respondent (buyer/licensee) and M/s. T & N International Ltd., U.K. (foreign collaborator/licensor). Under the said agreement, the licensor claimed to be in possession of certain secret processes, formula and information. Under the agreement, the licensor agreed to permit manufacture of brake liners and brake pads (licensed products) by the licensee. Under the agreement, the licensor agreed to disclose the relevant secret processes, formula and information to the licensee. Under the agreement, the licensee was required to import/buy raw material and capital goods from the licensor. Under the agreement, the licensee was obliged to pay a licence fee along with royalty, based on the net sales value of licensed products sold, consumed or otherwise disposed of."
The Apex Court further observed as follows:
"18. Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and know-how in the manufacture of the licensed product in India. Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/licence fees which are also paid to the foreign supplier. Rule 9(1)(c) stipulates that payments made towards technical know-how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under Rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. At this stage, we would like to emphasis the word indirectly in Rule 9(1)(c). As stated above, the buyer/importer makes payment of the price of the imported goods. He also incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at TAA, it is also required to look at the pricing arrangement/agreement between the buyer and his foreign collaborator. For example if on examination of the pricing arrangement in juxtaposition with the TAA, the Department finds that the importer/buyer has misled the Department by adjusting the price of the imported item in guise of increased royalty/licence fees then the adjudicating authority would be right in including the cost of royalty/licence fees payment in the price of the imported goods. In such cases the principle of attribution of royalty/licence fees to the price of imported goods would apply. This is because every importer/buyer is obliged to pay not only the price for the imported goods but he also incurs the cost of technical know-how which is paid to the foreign supplier. Therefore, such adjustments would certainly attract Rule 9(1))(c)."
The Apex Court further observes as follows:
"24. One of the questions which arises for determination in this civil appeal is whether reliance could be placed by the Department only on the Consideration Clause in the TAA for arriving at the conclusion that payment for royalty was includible in the price of the important components.
25. Rule 4(3)(b) of the CVR, 1988 provides for an opportunity for the importer to demonstrate that the transaction value closely approximates to a "test" value. A number of factors, therefore, have to be taken into consideration in determining whether one value "closely approximates" to another value. These factors include the nature of the imported goods, the nature of the industry itself, the difference in values etc. As stated above, Rule 4(3)(a) and Rule 4(3)(b) of the CVR, 1988 provides for different means of establishing the acceptability of a transaction value. In the case of Matsushita Television (supra) the pricing arrangement was not produced before the Department. In our view, the Consideration Clause in such circumstances is of relevance. As stated above, pricing arrangement and TAA are both to be seen by the Department. As stated above, in a given case, if the Consideration Clause indicates that the importer/buyer had adjusted the price of the imported goods in guise of enhanced royalty or if the Department finds that the buyer had misled the Department by such pricing adjustments then the adjudicating authority would be justified in adding the royalty/licence fees payment to the price of the imported goods. Therefore, it cannot be said that the Consideration Clause in TAA is not relevant. Ultimately, the test of close approximation of values require all circumstances to be taken into account. It is keeping in mind the Consideration Clause along with other surrounding circumstances that the Tribunal in the case of Matsushita Television (supra) had taken the view that royalty payment had to be added to the price of the imported goods."
10. What emerges upon careful consideration of the decisions of the Apex Court in Ferodo as well as Matsushita TV cases (supra) is that before adding the royalty amounts to the value of imported components, it is necessary for the department to examine both the technical assistance agreement as well as the pricing agreement. Before taking the final view in the matter, it is necessary to reexamine the matter of both license agreement as well as supply contract simultaneously, as has been observed by the Apex Court in the Ferodo India case, to see if the enhanced royalty was in the guise of adjustment of the price of components. To facilitate such reconsideration, we set aside the impugned order and remand the matter to the Adjudicating Authority.
11. Needless to mention that adequate opportunities of effective hearing should be provided to all the appellants before passing de novo decision in the matter