Pranav B Prem

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi Bench, has held that Advertisement and Promotional Expenses (APE) and Management Service Fees (MSF) paid by an importer are independent commercial transactions and cannot be included in the transaction value of imported goods under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. A Division Bench comprising Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) observed that where expenditure is incurred by an importer on its own account in the interest of its own business, Rule 10(1)(e) of the 2007 Valuation Rules is not applicable.

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Background

The appellant, Triumph Motorcycles (India) Pvt. Ltd., is engaged in the import and trading of motorcycles from Triumph UK and Triumph Thailand. The company entered into two separate agreements:

1. A Distributor Agreement dated 01 July 2013, governing the import and sale of motorcycles in India, and

2. A Management Services Agreement (MSA) dated 28 June 2013, under which Triumph UK provided various management and consultancy services to the appellant.

Both agreements were subsequently renewed in 2017.

A show cause notice was issued to the appellant by the Directorate General of Valuation, alleging that the Advertisement & Promotional Expenses (APE) and Management Service Fees (MSF) incurred by the appellant were to be added to the value of imported goods under Rule 10(1)(e) of the 2007 Valuation Rules, treating them as part of the “condition of sale” between the buyer and the foreign supplier. It was further alleged that the appellant undervalued the imported goods and thereby evaded customs duty, as the expenses incurred were not included in the assessable value.

Findings of the Adjudicating Authority

The Additional Director General of Valuation, in the impugned order, concluded that payments made under the Management Services and Distributor Agreements constituted a “condition of sale” and hence, should be added to the transaction value of imported motorcycles. The authority held that such payments were made to satisfy the seller’s obligation towards third parties, thereby necessitating inclusion under Rule 10(1)(e). Consequently, the value of imports was enhanced, and the demand for customs duty was confirmed, along with interest under Section 28AA and a penalty under Section 114A of the Customs Act, 1962. Aggrieved, the importer filed an appeal before the CESTAT.

Appellant’s Submissions

The appellant contended that the Distributor Agreement and the Management Services Agreement were independent commercial arrangements having distinct purposes — one for supply of goods and the other for provision of services. It argued that the advertisement and promotional expenditure incurred in India was undertaken on its own account for developing its market and increasing sales, and not as a condition of sale imposed by the foreign supplier. The appellant relied on the judgment of the Supreme Court in Commissioner v. Matsushita Television & Audio (I) Ltd. to assert that where expenditure is incurred by the importer voluntarily and independently, such costs cannot be added to the transaction value.

Revenue’s Arguments

The Department maintained that both agreements were interlinked, and the payments made under them were part of a composite commercial understanding between Triumph UK and its Indian subsidiary. It was argued that since the marketing activities directly enhanced the brand value of Triumph UK, the expenses were incurred on behalf of the seller, and therefore should form part of the assessable value.

Tribunal’s Analysis

The Bench carefully analyzed the Distributor Agreement and the Management Services Agreement, and found no clause requiring the importer to discharge any obligation on behalf of the seller. It held that both agreements were independent, with no mutual dependency. The Tribunal observed: “If the expenditure is undertaken by an importer on his own account in the interest of his own business, Rule 10(1)(e) of the 2007 Valuation Rules would not be applicable.”

The Bench noted that the advertising and promotional expenses were aimed at developing the appellant’s own dealership network and market presence in India, and not at satisfying any contractual requirement of Triumph UK. Similarly, the Management Services Fees (MSF) represented payment for professional services rendered by Triumph UK to the appellant under a distinct contract and could not be equated with the price of imported goods. The Tribunal further stated: “An analysis of the Distributor Agreement leaves no manner of doubt that the appellant was not required to discharge any obligation of Triumph UK. The expenses were borne entirely on its own account to develop its own business.” Consequently, the Bench held that neither APE nor MSF could be added to the transaction value of imported goods under Rule 10(1)(e). It also found that the imposition of interest and penalty was unjustified, as there was no willful misdeclaration or suppression of facts.

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Allowing the appeal, the CESTAT set aside the findings of undervaluation and related penalties. The Bench held that the payments made under the Management Services and Distributor Agreements were independent transactions outside the ambit of customs valuation provisions. The order stated: “The Distributor Agreement and the Management Services Agreement are two independent commercial transactions. Therefore, Rule 10(1)(e) of the 2007 Valuation Rules cannot be invoked to include the consideration paid towards service fees as part of the assessable value of imported goods.” Accordingly, the Tribunal allowed the appeal and set aside the demand for customs duty, interest, and penalty.

Appearance

Counsel for Appellant/ Assessee: Shri Rohan Shah and Shri Mohammed Anajwalla

Counsel for Respondent/ Department: Shri Mihir Ranjan, Special Counsel and Shri M.K. Shukla, AR

Cause Title: M/s. Triumph Motorcycles (India) Pvt. Ltd. v. Addl. Director General (Adjudication), D.R.I., New Delhi

Case No: Customs Appeal No. 50212 Of 2021

Coram: Justice Dilip Gupta (President), Hemambika R. Priya (Technical Member)