Technical know-how and royalty not includible in price of imported goods

NEW DELHI. Vide a ruling AIT-2008-63-SC dated 21st February 2008; the Supreme Court has ruled that under rule 9(1)(c) of Customs Valuation Rules , the cost of technical know-how and payment of royalty is includible in the price of the imported goods if the said payment constitutes a condition pre-requisite for the supply of the imported goods by the foreign supplier. If such a condition exists then the payment made towards technical know-how and royalties has to be included in the price of the imported goods. On the other hand, if such payment has no nexus with the working of the imported goods then such payment was not includible in the price of the imported goods.

  • One of the questions which ariose for determination was 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.
  • SC ruled that 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. It is keeping in mind the Consideration Clause along with other surrounding circumstances that the Tribunal in the case of AIT-2007-142-SC had taken the view that royalty payment had to be added to the price of the imported goods.
  • SC found no infirmity in the impugned orders of the Tribunals. Accordingly, the civil appeals filed by the Department were dismissed.
  • The buyer was 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., 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.
  • 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. However, 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.

(Source: Allindiantaxes)

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