Pranav B Prem

The New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) comprising Justice Dilip Gupta (President) and Hemembika R. Priya (Technical Member) held that royalty paid for technical know-how is not a “condition of sale” merely because it is included in the value of imported goods. The Tribunal clarified that payments towards technical know-how pertain to post-importation activities and cannot be added to the assessable value of imported goods under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.

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Background Facts

The assessee, Ericsson India Pvt. Ltd., had entered into a Technical Cooperation Agreement (TCA) dated December 23, 2008, with LM Ericsson, Sweden, granting non-exclusive rights and licenses to manufacture, sell, repair, and service finished goods using Ericsson’s know-how and intellectual property rights (IPR). Under this agreement, royalty was payable for the technical know-how received from LM Ericsson, Sweden. The Special Valuation Branch (SVB) accepted the declared import prices as “transaction value” under Section 14 of the Customs Act, 1962 read with Rule 3(1) of the 2007 Valuation Rules.

Subsequently, a fresh Technical Cooperation Agreement was executed on June 27, 2013, which was identical to the earlier one except for the royalty clause. As a matter of cooperation, Ericsson India paid customs duties such as CVD, SAD, and customs cess on royalty payments made to LM Ericsson, Sweden, while reserving its right to seek remedies. However, a show cause notice was later issued, alleging that royalty paid by Ericsson India to LM Ericsson, Sweden, should be included in the assessable value of imported goods under Rule 10(1)(c) of the 2007 Valuation Rules. The Additional Director General (ADG) held that royalty was includible in the value of imported goods, treating it as a “condition of sale.”

Contentions of the Assessee

Ericsson India contended that the payment of royalty under the Technical Cooperation Agreements was not a condition precedent for importing components from Ericsson Sweden. It was argued that both the 2008 and 2013 agreements dealt with post-importation technical assistance, including manufacturing methods, design sheets, and raw material specifications for finished goods, and not with the sale of imported components.

The appellant submitted that royalty for technical know-how could not automatically be regarded as a “condition of sale” merely because it was included in the value of imported goods. Therefore, it should not form part of the assessable value under Rule 10(1)(c).

Tribunal’s Observations

The CESTAT observed that both Technical Agreements were intended for the transfer of know-how related to the manufacture, assembly, and servicing of products and components. It noted that the royalty payments were connected to post-importation activities and not to the condition of import itself. The Bench observed: “The payment of royalty to LM Ericsson Sweden is not a sine qua non for import of components from Ericsson Sweden. The royalty for technical know-how does not automatically become a condition of sale merely because it is inclusive of the value of imported components.”  The Tribunal also found merit in the assessee’s submission that it had a bona fide belief that duty was not payable on royalty. The Bench stated that a mere incorrect belief cannot be construed as mala fide intent to evade customs duty.

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Holding that royalty for technical know-how could not be treated as a “condition of sale” of imported goods, the CESTAT concluded that such royalty payments pertained to post-importation activities and hence were not includible in the assessable value under Rule 10(1)(c) of the 2007 Valuation Rules. Accordingly, the appeal was allowed, and the order passed by the Additional Director General was set aside.

Appearance

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

Counsel for Respondent/ Department: Mr. Mihir Ranjan

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

Case No: Customs Appeal No. 50439 Of 2021

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