CESTAT Chennai Sets Aside Customs Duty Demand After Royalty Was Added To Import Value

The Chennai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a customs duty demand that arose after royalty payments were added to the transaction value of imported raw materials.

The tribunal followed its earlier ruling in the same company's case after finding that the Revenue had not shown any change in facts, produced any new document, or established any change in law to justify taking a different view.

The bench of Judicial Member P. Dinesha and Technical Member M. Ajit Kumar allowed the appeal filed by Valeo Friction Materials India Ltd.

The tribunal observed, “The Revenue has not demonstrated that there was any factual changes nor any new document has been referred to in the impugned order nor has the Revenue established that there was a change in law. Hence, we are of the clear view that as of now the ratio laid down in Final Order No.40589/2024 dated 31.05.2024 has settled the issue involved in this Appeal.”

Valeo Friction Materials India Ltd. imports raw materials, including textured yarn, technical yarn and semi-finished clutch facings, from its related supplier, Valeo Materiaux De Friction, France and its associate companies.

The relationship between the Indian company and the foreign suppliers, and its impact on the transaction value of imports, was first examined by the Special Valuation Branch in 2000. The authority accepted the declared invoice value as the transaction value despite the parties being related.

It also held that royalty payable at 3.75% of the net sale value of finished goods was not required to be added to the transaction value of the imported goods. That view was reaffirmed in review orders passed in 2004, 2007 and 2010.

The dispute resurfaced when the Deputy Commissioner of Customs (Special Valuation Branch) reconsidered the issue and concluded that, under the agreement between the parties, royalty should have been calculated on the net sales value without excluding the value of imported raw materials.

Customs authorities calculated the royalty that they believed should have been paid over a 13-year period and sought to include that amount in the transaction value of the imported goods. Differential customs duty was consequently demanded along with interest.

The company challenged that demand before the tribunal. In May 2024, the Chennai bench ruled in its favour, holding that the royalty payment was not a condition for the sale or import of the raw materials and therefore could not be added to the transaction value. The tribunal also found that customs authorities had accepted the valuation methodology for several years and had not challenged the earlier Special Valuation Branch orders.

The tribunal had observed in that earlier ruling, “We find that there is no such condition that emerges from the agreement between the appellant and VALEO, France which provides that royalty payment is a pre-condition for sale / import of raw materials. There is no evidence to establish as to how the royalty payment is linked to the import of raw materials.”

While the earlier appeal was pending, customs authorities issued another show cause notice on similar grounds. The Commissioner of Customs, Chennai-II, confirmed the proposed demand along with interest and penalty, leading to the present appeal before the tribunal.

Before the tribunal, Valeo Friction Materials India Ltd. argued that the issue had already been conclusively decided in its favour by the Chennai bench in 2024 and that there had been no change in facts or law since then.

Accepting the company's submissions, the tribunal held that the Revenue had failed to identify any factual change, produce any new document or establish any change in law that warranted departing from the earlier decision.

The tribunal observed, “The Revenue has not demonstrated that there was any factual changes nor any new document has been referred to in the impugned order nor has the Revenue established that there was a change in law. Hence, we are of the clear view that as of now the ratio laid down in Final Order No.40589/2024 dated 31.05.2024 has settled the issue involved in this Appeal.”

Holding that its earlier ruling continued to govern the dispute, the tribunal set aside the impugned order and allowed the appeal with consequential benefits, if any, in accordance with law.

For  Appellant: Advocate S. Ganesh Aravindh, 

For Respondent: Sanjay Kakkar, Authorized Representative