Technology transfer fees issue: SC view

EXIM MATTERS

Traditionally, the Customs have sought to load the technology transfer fees whenever they suspected that the fees were payable as a condition of sale of the imported goods.

Repeatedly, the Courts have held that unless the fees relate to the imported goods in question, the loading would be unjustified and about fifty judgments starting from Maruti Udyog Ltd. [1987 (28) ELT 390-T] have held that royalty and technology transfer fees relating to manufacture can not be added to the value of imported goods.

In the case of JK Corporation Ltd [2007 (208) ELT 485 (S.C.)], it was held that even if the royalty is payable as a condition of sale, the same cannot be loaded if the payment relates to a postimportation activity.

The Revenue hit back by inserting an explanation to Rule 10 (1) in the new Customs Valuation Rules, 2007, clarifying that royalty, licence fee or any other payment for using a process, when they are otherwise includible in terms of Clause (c) or (e) of Rule 10(1), shall be added to the price actually paid or payable, notwithstanding the fact that such goods may be subjected to the said process after their importation. The CBEC explained that royalty, license fee or any other payment will be includible in the value of the goods irrespective of whether such payments relate to a process which is made operational during the running of the machines, i.e., after importation of the goods.

Now, the Ferodo India Ltd judgment says that two concepts operate simultaneously, namely, the price for the imported goods and the royalty/licence fees paid to the foreign supplier. So, the department is required to look at not only technical assistance and trade mark agreement but also the pricing arrangement/agreement between the buyer and the foreign collaborator.

The Revenue appeal was dismissed as no effort was made by the department to ascertain whether there exists a price adjustment between cost incurred by the buyer on account of royalty/licence fees payments and the price paid for the imported items. No effort was made by the department to ascertain enhancement of royalty/licence fees by reducing the price of the imported goods, said the apex court.

If the consideration clause indicates that the importer/buyer had adjusted the price of the imported goods in the guise of enhanced royalty or if the department finds that the buyer had misled the department by such pricing adjustment. then the addition of such fees to the value of imported goods would be justified, explained the Supreme Court. In such cases, the principle of attribution of royalty/licence fees to the price of goods would apply, held the Apex Court.

This means that the Customs will have to establish that part of the price of imported goods was adjusted downwards and that part was shifted to the payments for royalty etc. The quantum of alleged adjustment will also have to be determined for loading on the basis of objective data. That will not be very easy and importers now have better chance of successfully contesting any arbitrary loading.

tncr@sify.com