Legal principle

Royalty or licence fee paid for technical know-how for manufacture of finished products, and not as a condition of sale of the imported goods, is not includible in the transaction value of the imported raw materials, and the department cannot invoke the extended period alleging suppression when it was itself aware of the facts and had accepted the transaction values in unchallenged orders.

Court decision

The Tribunal held that the royalty payment is not includible in the transaction value of the imported raw materials, that invocation of the extended period was not legally sustainable, and that a differential duty demand spread over 13 years was blatantly illegal, particularly as the department had accepted the declared transaction values in four unchallenged Orders-in-Original. The impugned order was set aside as legally unsustainable and the appeal was allowed with consequential benefits, in favour of the appellant.

Facts

M/s. Valeo Friction Materials India Ltd imported raw materials (for manufacture of clutch facings) from related foreign suppliers of the Valeo, France group, and its Special Valuation Branch orders from 2000 onwards accepted the transaction value treating the 3.75% royalty on net sales value of finished goods as not includible. In 2012 the appellant's auditor pointed out an error in royalty computation (failure to include imported raw material value in net sales value), and Valeo France waived the shortfall royalty up to that period. By Order-in-Original No. 23474/2014 dated 17.01.2014, the adjudicating authority ordered addition of royalty paid/payable on imported goods under Rule 10(1)(c) of CVR 2007 and invoked Section 28(4)/proviso to Section 28(1) to demand differential duty of Rs.15,02,08,235/- for 2001–2013, with interest under Section 28AA and penalty under Section 114A for alleged suppression/wilful misstatement. The Commissioner (Appeals) upheld this order, and the appellant, having paid Rs.54,65,113/- under protest on held consignments, appealed to the Tribunal.

Key provisions

• Rule 10(1)(c), Customs Valuation (Determination of value of Imported goods) Rules, 2007 — Cost and services
• Section 28(4), Customs Act, 1962 — Recovery of duties not levied or not paid or short-levied or short- paid or erroneously refunded
• Rule 3, Customs Valuation (Determination of value of Imported goods) Rules, 2007 — Determination of the method of valuation