Customs | Royalty For Technical Know-How Not 'Condition Of Sale' Even If Included In Value Of Imported Goods: CESTAT

Justice Dilip Gupta (President) and Hemembika R. Priya (Technical Member) opined that both the Technical Agreements relate to transfer of technical know-how, amongst others, in the form of design sheets detailing manufacturing methods and specifications of raw materials for all the components used in the manufacture/assemble or the products and the payment on royalty is not a condition of sale of imported goods and in fact relates to post import activities.

The assessee/appellant (Ericsson India) entered into a Technical Cooperation Agreement dated 23.12.2008 with LM Ericsson Sweden for the grant of non-exclusive rights and licenses to manufacture, sell, repair, and service finished goods using Ericsson know-how and Ericsson IPR.

Special Valuation Branch accepted the declared import prices as “transaction value” under section 14 of the Customs Act, read with rule 3(1) of the 2007 Valuation Rules.

Ericsson India entered into a fresh Technical Cooperation Agreement dated 27.06.2013 with LM Ericsson Sweden. Both agreements are identical in form and substance except for the royalty clause.

As a matter of co-operation, Ericsson India paid the applicable duty (CVD, SAD and Customs Cess) on the royalty payments made to LM Ericsson Sweden during the relevant period, while reserving its rights of remedies.

A show cause notice alleging that payment of royalty by Ericsson India to LM Ericsson Sweden is includible in the value of imported goods.

The Additional Director General held that the amount of royalty paid by Ericsson India to LM Ericsson Sweden is includible in the value of goods imported by Ericsson India from Ericsson Sweden in terms of rule 10(1)(c) of the 2007 Valuation Rules.

The assessee submitted that both the Technical Agreement do not stipulates that payment of royalty is a sine qua non for import of components. Therefore, royalty for technical know-how does not automatically become a “condition of sale” merely because it is inclusive of the value of imported goods.

The issue before the Tribunal was whether royalty paid by Ericsson India to LM Ericsson Sweden towards know-how can be included in the transaction value of the components imported by Ericsson India from Ericsson Sweden under rule 10(1)(c) of the 2007 Valuation Rules.

The bench agreed with the assessee that since both the Technical Agreements do not stipulate that payment of royalty to LM Ericsson Sweden is a sine qua non for import of components from Ericsson Sweden, royalty for Technical Know-how will not automatically become a “condition of sale” merely because it is inclusive of the value of imported components. This apart, the payment of royalty pertains to post importation activities and as such cannot be included to the value of the assessable goods.

The Tribunal stated that the contention of the assessee that it bona fide believed that it was not liable to pay duty on the payment of royalty also deserves to be accepted.

It cannot be urged by the department that merely because the belief is subsequently found to be wrong, there would be a mala fide intention in not paying customs duty, added the bench.

In view of the above, the Tribunal allowed the appeal and set aside the order passed by the Additional Director General.

Case Title: M/s. Ericsson India Private Limited v. Additional Director General

Case Number: CUSTOMS APPEAL NO. 50439 OF 2021

Counsel for Appellant/ Assessee: Mr. V. Lakshmikumaran, Mr. Anurag Kapur, Ms. Rubel Bareja and Ms. Anisha Arya

Counsel for Respondent/ Department: Mr. Mihir Ranjan

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