COMMISSIONER OF CUSTOMS v. M-S FERODO INDIA PVT. LTD

Citation: [2008] 3 S.C.R. 147

Court: Supreme Court of India

Bench: S.H. KAPADIA, B. SUDERSHAN REDDY

Case summary

COMMISSIONER OF CUSTOMS v. M-S FERODO INDIA PVT. LTD.pdf

Judgment text

(2008] 3 S. C. R. 147 r COMMISSIONER OF CUSTOMS " v. M/S FERODO INDIA PVT. LTD. (Civil Appeal No. 8426 of 2002) -· FEBRUARY 21, 2008 (S. H. KAPADIA AND B. SUDERSHAN REDDY, JJ.

) ~ Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 - Rule 9(1)(c) - Price of imported goods - Inclusion of technical know how fees and royalty- Technical assistance and trade mark agreement between buyer-licensee and foreign collaborator-licensor - Under the agreement, licensee permitted to manufacture licensed products - It was to import raw material from licensor and to pay license fee and royalty- Department loading CIF value of imported goods with know-how fees and royalty - Tribunal holding that knowhow fees and royalty related to licensed products to be produced in India and not to the imported goods - Held: Correct - On reading the agreement in entirety, there was no nexus between royalty/licence fees payable for know-how and goods imported for manufacture of licensed products - Department was to examine both the price arrangement and also the Consideration Clause in the agreement.

The respondent-manufacturer of brake liners and brake pads in India entered into a technical assistance ~ and tra. de mark agreement (TAA) with NK-foreign collaborator/licensor. Under the agreement, the licensor claimed to be in possession of certain secret processes, formula and information which it agreed to disclose it to the licensee; the licensor permitted the respondentlicensee to manufacture brake liner~ and brake padslicensed products; the licensee was :to import/buy raw material and capital goods from the· licensor; and the licensee was to pay licence fee along with royalty, based - .. on the net sales value of licensed products sol(:! , consumed or otherwise disposed of. The Adjudicating Authority held that technical know-how fees and royalty were related to the imported goods and thus, loaded the CIF value of the imported goods with the proportionate amount of know-how fees and royalty. The Commissioner upheld the order.

However, the tribunal held that the knowhow fees and the royalty payments stood related to the brake liners and brake pads to be produced in India and not to the imported goods. Hence, the present appeal. Dismissing the appeals, the Court HELD: 1. 1 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 0 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. (Para 18) [158-F, G] 1.

2 Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 stipulates that payments made towards technical knowhow 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. If such payment has no nexus with the working of the imported goods then such payment I INDIA PVT. LTD. .. "" was not includible in the price of the imported goods. The word indirectly in rule 9(1)(c) is emphasized. The buyer/ importer makes payment of the price of the imported goods. He als'o 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. (Paras 16 and 18) [158-D, G; - 159-A, B, C] 1. 3 The adjudicating authority did not examine the pricing arrangement between the foreign collaborator and the buyer. It only examined the royalty/TAA. On reading TAA, it is found that the payments of royalty/licence fees was entirely relatable to the manufacture of brake liners and brake pads-licensed products. The said payments ......... were in no way related to the imported items. In the instant case, no effort was made by the Department to examine the pricing arrangement; to ascertain whether there exists a price adjustment between cost incurred by the buyer on account of royalty/licence fees payments and the price paid for imported items; and to ascertain enhancement of royalty/licence fees by reducing the price of the imported items.

In this case, the Department has gone by TAA alone. On reading TAA in entirety, there was no nexus #--J between royalty/licence fees payable for the know-how ' and the goods imported for the manufacture of licensed products. The Department itself invoked rule 9(1 )(c). (Paras 19 and 20) [159-F, G; 160-A, B, C] 1. 4 In the alternate, the Department invoked rule 9(1)(e). This rule 9(e) cannot stand alone. It is a corollary · to rule 4. There is no finding in the instant case that what was termed as royalty/licence fee was in fact not such royalty/licence fee but some other payment made or to . ,.. be made as a condition pre-requisite to the sale of the imported goods. Rule 9 refers to cost and services. Under rule 9(1 ), the price for the imported goods had to be enhanced/loaded by adding certain costs, royalties and licence fees ·and values mentioned in sub-rules 9(1)(a) to 9(1 )(d).

It refers to "all other payments actually made or to be made as a condition of sale of the imported goods. " In the instant case, the Department invoked rule 9(1)(c) on the ground that royalty was related to the imported goods, having failed it cannot fall back upon rule 9(1)(e) because essentially the concern is with regard to the addition of royalty etc. to the price of the imported goods. Further, in the instant case, the Department accepted the transaction value of the imported goods. (Para 21) [160-C, D, E, F, G] 1. 5 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. Therefore, a number of factors 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.

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. The Consideration Clause in such circumstances is of relevance. Pricing arrangement and TAA are both to be seen by the Department. 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. Thus, there is no infirmity in the impugned order of the tribunal. (Paras 25 and 26) [161-G; 162-A, B, C, D, E, F] ' . COMMISSIONER OF CUSTOMS Ii.

M/S FERODO 151 COC v. Essar Gujarat Ltd. 1996 (88) ELT 609 (SC) distinguished. .... Matsushita Television & Audio India Ltd. v. Coe 2007 (211) ELT 200 (SC) - referred to. t CIVIL APPELLATE JURISDICTION : Civil Appeal No. ---r 8426 of 2002 From the final Order No. 91 /2002 dated 12/2/2002 of the Customs, Excise & Gold (Control) Appellate Tribunal, New Delhi in Appeal No. C/573/2001-A. WITH Civil Appeal Nos. 8417/03, 981/06, 3076/06, 3203/06 and 284/07. --.. -. Brijender Chahar, Abhinav Jain, Jyoti Chahar, Jagbir Singh Malik, R. Basant, Deepak Thakur and B. Krishna Prasad for the Appellant. V. Lakshmi Kumaran, R. Parthasarthy, Alok Yadav, M. P. Devnath, Rajesh Kumar and M/s. Dua Associates for the Respondent. The Judgment of the Court was delivered by KAPADIA, J.

This batch of civil appeals is filed by the "-J Department and is directed against the orders passed by the Customs, Excise & Gold (Control) Appellate Tribunal ("CEGAT") whereby and whereunder the appeals filed by the respondentsimporters herein stood allowed. They arise from assessment proceedings and not from show cause. The adjudicating authority has held that M/s Ferodo India Pvt. Ltd. ("buyer'' in short) is a subsidiary of M/s T & N International Ltd. , UK and are thus related, which finding is not in dispute. 2. For the sake of convenience we state the facts occurring in Civil Appeal No. 8426/02 -Commnr. of Customs v. Mis. Ferodo India Pvt. Ltd. -.... , "' 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 Mis T & N International Ltd. , UK (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. 4. Vide order dated 22. 9.

1999 the adjudicating authority held that, technical know-how fees and royalty were related to the imported goods and were a condition of sale for the import thereof and consequently, the adjudicating authority loaded the CIF value of the imported goods with the proportionate amount of know-how fees and royalty. In this connection, reliance was placed on the judgment of this Court in CoC v. Essar Gujarat Ltd. reported in 1996 (88) ELT 609 (SC). This order was \ _. ,, confirmed by the Commissioner (A). However, by the impugned order dated 12. 2. 2002, the Tribunal held that the know-how fees and the royalty payments stood related to the brake liners and brake pads to be produced in India and not to the imported goods. Hence, this civil appeal by the Department: 5. In this case, we are required to lay down the scope of rule 9(1 )(c) and rule 9(1 )(e} of CVR, 1988, which are quoted hereinbelow: "9. Cost and services.

- (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported y COMMISSIONER OF CUSTOMS v. MIS FERODO 153 ' ~ goods,- (a) (b) ~ (c) Royalties and licence fees related to the imported ---1 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. (d) (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 actuaJly paid or payable. " 6. At the outset, it may be stated that, this is not the case of rejection of transaction value, though it is held to be a related party transaction.

In this matter we are concerned with adjustment/addition to the price of the imported goods under rule 9(1 )(c) or in the alternative under rule 9(1 )(e). _.. __,_ 7. Under Section 14 of the Customs Act, 1962, the assessable value of imported goods is deemed to be the price at which such or like goods are ordinarily sold or offered for sale for delivery at the time and place of importation or l exportation, as the case may be, in the course of international trade, where the seller and the buyer have no interest in the business of each other and the price is the sole consideration for the sale or offer of sale. ) to Midrex by way of licence fees had to be added to the price paid to TIL for purchase of the plant. There is no such stipulations in the TAA in the present case. Therefore, in our view, the adjudicating authority erred in placing reliance on the judgment of this Court in Essar Gujarat Ltd. (supra). 23. In the case of Matsushita Television &Audio India Ltd. v.

CoC reported in 2007 (211) ELT 200 (SC) the question which arose for determination was whether royalty amount was '-1"- attributable to the price of the imported goods. In that case, the appellant was a joint venture company of MEI, Japan and SIL for obtaining technical assistance and know-how. Under the agreement, the appellants were to pay MEI a royalty@ 3% on net ex-factory sale price of the colour TV receivers manufactured by the appellants for the technical assistance rendered by MEI. The appellants were to pay a lump-sum amount of U. S. $ 2 lakhs to MEI for transfer of technical know-how. It was the case of the appellant that payment of royalty was not related to imported • Ji goods as the said payment was made for supply of technical assistance and not as a condition pre-requisite for the sale of '• the components. 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 imported 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 TM 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. .. 1 .

26. For the aforestated reasons, we find no infirmity in the impugned orders of the Tribunals. Accordingly, the civil appeals filed by the Department are hereby dismissed with no order as to costs. N. J. Appeals dismissed.