Customs valuation- 'condition of the sale of goods'

Last Updated: Mon, Dec 03, 2012 04:10 hrs

Customs valuation in India is covered by the Customs Valuation Rules, which are modelled on the World Trade Organisation (WTO) valuation rules.

The WTO valuation rules provide that all payments made by the buyer as a condition of sale of the imported goods should be added to the transaction value for purposes of Customs valuation. Therefore, charges such as royalties and licence fees if paid by the buyer as a condition of sale would be added to the import price. The Indian Customs valuation rules have similar provisions.

A reading of the above provision would indicate that there are two conditions for inclusion of such payments to the transaction value:

(a) Such payments should be in relation to goods being imported, and

(b) The payment should, directly or indirectly, be made as a condition of sale of imported goods.

In many cases that have come up before the tribunals and the courts, it is the second condition has been emphasised by the revenue authorities. Even within the second condition, the crucial words ‘as a condition of sale’ have been largely ignored. The position of the department appears to be, if there is a royalty or technical service fee payment made to the supplier, such payment constitutes evidence that it is a condition of sale of the goods that are supplied.

As a result, there has been a considerable amount of litigation on this issue as well. Beginning with the landmark judgment by the Apex court in Collector of Customs (Prev.), Ahmedabad v. Essar Gujarat Ltd. in 1996 to date the different courts including the Apex court itself have issued contradictory rulings on this issue, under similar sets of facts.

The apex court in the Essar Gujarat case followed by Associated Cement Companies Ltd. v. Commissioner of Customs(‘CC’) (2001 (128) ELT 21) and Matsushita Television & Audio (I) Ltd v. CC (2007 (211) ELT 20) ruled in favour of the revenue and added royalties and licence fees to the transaction value of imported goods.

However, the apex court ruled in favour of the importer in several other cases, including CC v. Birla Tyres (2002 (143) ELT A183), CC, New Delhi v. Prodelin India (P) Ltd (2006 (202) ELT 13) and CC v. Toyota Kirloskar Motor (p) Ltd (2007 (213) ELT 4). In these cases, the court held that the royalty and technical service fee payments are not to be included to arrive at customs assessable value. While adjudicating on a number of other disputes, the lower courts and tribunals have selectively based their opinion on whichever of the apex court’s rulings best suited their interpretation.

In some contradictory decisions, there were indeed some differences in the underlying facts that explain the way the relevant tribunal or court made its ruling. However, there are many other rulings that are contradictory with no apparent reason for the deviation from each other.

The most common fact pattern is where an importer imports parts of the goods that he manufactures, along with technology.

For example, an automobile manufacturer manufactures a car in India and imports the fuel injection system from the parent company, which has also supplied the technology for the manufacture of the car.

Currently, the importer contemplating such a transaction has a situation of virtual certainty that he will be subject to a demand for additional customs duty and will have to go into various levels of appeal, the outcome of which is uncertain.

Therefore, it seems both desirable and feasible from the viewpoint of both the government and the industry that this issue should be clarified and the possibility of litigation and disputes minimised or eliminated.The key principle seems to be whether the royalty relates to the imported goods.

Using my hypothetical example of fuel injection pumps and cars, if there is a royalty payable (in addition to the price for the goods) at a particular rate on each fuel injection pump, this would qualify as a payment in relation to the goods that are imported. However, as noted earlier, the most common fact pattern deals with import of a component (such as a fuel injection system or an engine block) and payment of a royalty on manufacture of the entire automobile. Additionally, this royalty is typically paid as a percentage of the sale value of the car.

This method of calculation further lends credence to the importer’s position that this transaction is independent of the import of parts.

Therefore, the issue of a circular or clarification that the technology fee should be added to the import value of goods only where it relates to the goods that are imported would relieve importers of a considerable amount of uncertainty.

The Author is Leader, Indirect Tax Practice PwC India 
Supported by Tajinder Singh

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