Legal principle

Royalty and licence fee paid by an importer under agreements with IPR holders, not disclosed to the customs authorities, is includible in the assessable value under Rule 10(1)(c) of the Customs Valuation Rules, 2007, and where penalty is levied under Section 114A no separate penalty can be imposed under Section 112 by virtue of the fifth proviso to Section 114A.

Court decision

The Tribunal partly allowed and partly rejected the appeals by way of modification and remand: it confirmed the redetermined values and the differential duty with applicable interest as per specific paragraphs of the impugned order; held the CMs are not 'buyers' and Xiaomi India is the beneficial owner of the imported parts; held royalty and licence fee is addable under Rule 10(1)(c) and differential duty payable by Xiaomi India for the extended period; held the goods liable to confiscation under Section 111(m) but no redemption fine since the goods are not physically available or covered by a bond; held Xiaomi India is liable to penalty under Section 114A alone (the fifth proviso barring a Section 112 penalty where Section 114A penalty is levied) and not under Section 114AA since no false declaration was alleged against it in the SCN; held penalties under Sections 112(a) and 114AA on the CMs justified; held no penalty on Mr. Sameer Bhatrahalli Sundar Rao under Sections 112(a)(i) and 114AA; and held no interest or penalty on Xiaomi India purely for differential IGST. Penalties were remanded to the original authority for redetermination in light of these findings.

Facts

DRI intelligence indicated that Xiaomi Technology India Pvt. Ltd. was evading customs duty by not including royalty and licence fee paid to Qualcomm Inc. and other IPR holders, under exclusive agreements, in the assessable value of mobile phones imported from Xiaomi China and affiliates or manufactured in India by four contract manufacturers (Rising Star, Flextronics, Hi-Pad and DBG). Xiaomi India had not disclosed these agreements to the Special Valuation Branch, Bangalore, and informed it only in October 2019 after DRI investigation began. The department issued three Show Cause Notices dated 07-09.12.2021 under Section 28(4) of the Customs Act for 01.04.2017 to 30.06.2020, alleging suppression and wilful misstatement. The Principal Commissioner of Customs (Air Cargo), Chennai-VII, appointed as common adjudicating authority, redetermined the assessable value, demanded differential duty, held the goods liable to confiscation and imposed penalties, prompting cross-appeals by Xiaomi India, the contract manufacturers and Revenue before the CESTAT, Chennai.

Key provisions

• Section 114AA, Customs Act, 1962 — Penalty for use of false and incorrect material
• Section 114A, Customs Act, 1962 — Penalty for short-levy or non-levy of duty in certain cases
• Section 111(m), Customs Act, 1962 — Confiscation of improperly imported goods etc
• Section 112(a), Customs Act, 1962 — Penalty for improper importation of goods
• Section 28, Customs Act, 1962 — Recovery of duties not levied or not paid or short-levied or short- paid or erroneously refunded
• Rule 10(1)(c), Customs Valuation (Determination of value of Imported goods) Rules, 2007 — Cost and services
• Section 14, Customs Act, 1962 — Valuation of goods
• Section 2(26), Customs Act, 1962 — Definitions
• Section 3(12), Customs Tariff Act, 1975 — Levy of additional duty equal to excise duty, sales tax, local taxes and other charges
• Section 12, Customs Act, 1962 — Dutiable goods
• Section 28AA, Customs Act, 1962 — Interest on delayed payment of duty
• Section 125, Customs Act, 1962 — Option to pay fine in lieu of confiscation