ITAT Quashes Assessment Order Against Bret Lee As Reassessment Notice Not Served Within Limitation Period

The Chennai Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that the royalty is not included in the transaction value of the imported raw materials to demand any differential customs duty.

The bench of Sulekha Beevi C.S. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) has observed that the royalty payment is only for providing technical assistance for the manufacture and sale of licensed products, and the import of raw materials is incidental to such manufacture and sale. There is no condition of sale attached to the importation of raw materials, and having not met the required conditions of Rule 10(1)(c), payment of royalty amounts cannot be added to the transaction value of the import of raw materials.

The appellant/assessee is in the business of manufacturing and clearing clutch facings from raw materials imported from various foreign suppliers, which are group and associate companies that were held to be related to the appellant.

After due process of law, the adjudicating authority ordered the addition of royalty paid or payable on imported goods at the end of each financial year, in terms of Rule 10(1)(c) of the Customs Valuation Rules, 2007 (CVR, 2007), with options to pay duty on royalty as a lump sum payment for a particular financial year or at the rates applicable to individual goods imported under each Bill of Entry for a particular year.

The assessing group was ordered to invoke Section 28(4) of the Customs Act, 1962, to demand differential duty of Rs. 15,02,08,325 for the period from 2001 to 2013, along with applicable interest.

The appellant filed an appeal before the Commissioner of Customs (Appeals), contending that the Deputy Commissioner could not have passed an order covering 13 years. However, during the pendency of the matter before the Commissioner (Appeals), the Department started keeping the consignments imported by the appellant on hold. However, since the appellant was in urgent need of the goods for continuing the production of the goods, the appellant paid Rs. 54,65,113 under protest and also requested a speaking order in this respect.

The appellant contended that the royalty or licence fee is not included in the transaction value of the imported goods, as per Section 14 read with Rule 3 of CVR, 2007, adjusted in accordance with Rule 10 of CVR, 2007, as all the conditions specified under Rule 10(1)(c) of CVR, 2007 have not been fulfilled. The Transfer of Technology agreement pertains only to the final goods manufactured by the appellant and not to the goods imported by them. It becomes evident that the royalty is payable on the sale of the product manufactured by the appellant with respect to the value addition of the imported goods, and there was no condition of sale on the imported goods.

The department contended that the value of imported raw materials constitutes a major portion of the clutch facings manufactured by the appellant, and royalty is payable on the net sales value (NSV), which includes the cost of raw materials imported. The provision of Rule 10(1)(c) of the Customs Valuation Rules, 2007 has been rightly invoked for the addition of royalty payments to the cost of imported goods. The appellant has failed to bring it to the notice of the Department regarding the change in the computation of royalty payment by including the cost of imported raw materials, and initially, from the year 2000 onwards, the appellant has declared that the cost of imported goods is excluded from the computation of royalty payable. On reading various clauses of the agreement, there is a direct nexus between the payment of royalty and the importation of raw materials.

The issue raised was whether royalty payments made by the appellant to Valeo, France, in terms of the Technology Licence Agreement are to be added or not to the value of imported raw materials in terms of the Customs Valuation Rules, 2007.

Yet another issue raised was whether the demand for differential customs duties by the addition of royalty payments from 2000–2013 to the value of imported raw materials is legal or not in the facts of the appeal.

The court noted that, as per the agreement, the appellant has the discretion not to buy raw materials from Valeo, France, and will have to pay royalty on manufactured goods whether or not there are imports from the supplier in a given period. This shows that the royalty payment is not related to and is not the condition of sale for the imported goods. Hence, royalty is not included in the value of the imported goods.

The tribunal held that the royalty payment is not included in the transaction value of imported raw materials. Thus, the issue of including royalty payments in the transaction value of the imported raw materials is decided in favour of the appellant.

Counsel For Appellant: S. Ganesh Aravindh

Counsel For Respondent: R. Rajaraman

Case Title: M/s. Valeo Friction Materials India Ltd. Versus Commissioner of Customs

Case No.: Customs Appeal No. 42211 of 2014

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