CESTAT Chennai Quashes Royalty Addition To CET Power Solutions' Import Value, Says Sale Nexus Needed

On 22 September, the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) set aside the order adding royalty paid by CET Power Solutions India Pvt. Ltd. to its foreign collaborator to the assessable value of imported goods.

A Bench comprising Technical Member Vasa Seshagiri Rao and Judicial Member Ajayan T.V. held that royalty paid to a foreign collaborator cannot be added to the assessable value of imported goods merely because the imported components are used to manufacture finished products. It held:

“The Department has failed to establish that the royalty paid by the appellant under the contractual agreements was an obligation intrinsically linked to sale of the imported goods. The agreements demonstrate that the payments were made towards technology transfer, intellectual property rights and post-import manufacturing rights and not as consideration flowing from the import transaction itself. Consequently, invocation of Rule 10(1)(e) and its Explanation is equally misconceived.”

CET Power Solutions India Pvt. Ltd., a 100% Export Oriented Unit, manufactures power conversion and inverter systems. It imported components from related foreign entities in Belgium and China and paid royalty under agreements covering technology transfer, patents, trademarks, technical know-how and manufacturing rights.

Under the Term Sheet, Royalty Agreement and Licence Agreement, the company was required to pay royalty at 2% of the net selling price of finished products manufactured and sold in India using CE+T technology. None of the agreements made payment of royalty a condition for purchasing or importing raw materials or components.

The royalty obligation arose only after manufacture and subsequent sale of the finished products. It therefore represented consideration for post-import manufacturing rights and commercial exploitation of intellectual property, rather than consideration connected with the import transaction.

The Customs authorities sought to include the royalty in the assessable value of the imported goods on the ground that the imported components were used to manufacture CE+T branded products. The Commissioner (Appeals) upheld the demand, following which the company approached the CESTAT.

The Tribunal rejected the Revenue's argument that the imported components had a sufficient nexus with the royalty merely because they were used in the finished products. It held that every payment remotely connected with imported goods cannot automatically be included in their assessable value.

It held that the Revenue was required to establish two conditions under Rule 10(1)(c) of the Customs Valuation Rules, 2007: that the royalty related to the imported goods and that payment of royalty was a condition of sale of those goods.

The Bench relied on the Supreme Court's decisions in Ferodo India Pvt. Ltd. v. Commissioner of Customs, Mumbai and Toyota Kirloskar Motor Pvt. Ltd. v. Commissioner of Customs, Bangalore, observing that royalty cannot be added unless a clear nexus with the imported goods and the condition-of-sale requirement are established.

Further, relying on its earlier decision in Commissioner of Customs, Chennai v. BBL Daido Pvt. Ltd., it reiterated that even where some nexus exists between imported raw materials and royalty payments, the Department must independently establish that payment of royalty was a condition of sale of the imported goods.

The Tribunal also noted that the appellant's imports from related foreign suppliers constituted only a relatively small portion of its overall raw material procurement. It held that this further weakened the Revenue's claim that the royalty was intrinsically linked to the imports. It observed:

“The royalty payments made by the appellant under the contractual agreements do not satisfy the statutory requirements contemplated under Rule 10(1)(c) or Rule 10(1)(e) of the Customs Valuation Rules, 2007 and therefore cannot be added to the assessable value of imported goods”

Accordingly, the CESTAT set aside the Order-in-Appeal and allowed the appeal.

For Appellant: M. Karthikeyan, Advocate 

For Respondent: Sanjay Kakkar, Advocate