Legal principle

Royalty and franchise fees paid for post-importation services such as management, consultation and training, measured by domestic sales volumes, are not includible in the assessable value under Rule 10(1)(c) of the Customs Valuation Rules, 2007 read with Section 14 of the Customs Act, since only royalties payable as a condition of sale for pre-importation activity are additive.

Court decision

The Tribunal set aside the impugned order in full and allowed all three appeals with consequential benefits: the royalty and franchise fees were held not includible in the assessable value, the penalty under Section 28(4) on provisionally assessed consignments was held impermissible, the demand was held time-barred, and the penalties on the individual appellants were set aside.

Facts

M/s Quest Retail Private Limited imports and retails 'The Body Shop' brand cosmetics and toiletries in India under a Franchise Agreement dated 8.2.2006 and two side letters (19.1.2006 and 16.3.2010) with The Body Shop International plc, England, under which it paid an initial franchise fee of GBP 1,00,000, store-opening fees of GBP 5,000, and royalty @ 2% (with a graded scale) of total annual retail sales from 2010 onwards. Acting on a DRI show cause notice dated 24.8.2016 for the period 6.9.2011 to 18.3.2015, the Commissioner of Customs, ICD Patparganj, confirmed a duty demand of Rs. 1,34,60,188 by including the royalty and franchisee fees in the assessable value, and imposed penalties including Rs. 91,75,546 under Section 114A on the company, Rs. 4,27,000 under Section 112(a)(ii), and Rs. 13,00,000 each on its Director and General Manager. An earlier, similar show cause notice dated 12.3.2012 had been settled by the Settlement Commission by order dated 30.5.2014 holding the royalty includible, and the appellants had discharged service tax on the royalty amounts.

Key provisions

• Section 14, Customs Act, 1962 — Valuation of goods
• Section 28, Customs Act, 1962 — Recovery of duties not levied or not paid or short-levied or short- paid or erroneously refunded
• Section 18, Customs Act, 1962 — Provisional assessment of duty
• Section 112(a)(ii), Customs Act, 1962 — Penalty for improper importation of goods
• Section 114A, Customs Act, 1962 — Penalty for short-levy or non-levy of duty in certain cases
• Section 2(25), Customs Act, 1962 — Definitions
• Section 10, Customs Act, 1962 — Appointment of boarding stations
• Rule 10(1)(c), Customs Valuation (Determination of value of Imported goods) Rules, 2007 — Cost and services