CAAR declines to rule on royalty valuation, sends related-party import issue to SVB
Background and context
The Customs Authority for Advance Rulings (CAAR), Mumbai, in the matter of In re R. Stahl Private Limited (CAAR Mumbai), was approached to clarify a key customs valuation issue: whether licence fees/royalties payable for technical know-how are to be included in the assessable value of imported goods in terms of Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
The applicant, an Indian entity, is engaged in the production and supply of explosion-protected electrical and electronic equipment. It operates as a wholly owned subsidiary of a German group company and manufactures goods in India using technical know-how sourced from a related foreign group company.
The advance ruling application arose in the backdrop of a historical dispute before the Special Valuation Branch (SVB) and subsequent clarity given by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on earlier arrangements involving technical know-how fees.
Business model and group structure
Profile of the applicant
- The applicant is an Indian company engaged in manufacturing explosion-proof electrical and electronic products.
- It is a wholly owned subsidiary of a foreign (German) parent company.
- Production activities in India are carried out using technical know-how supplied by another group company, which is a related party for customs valuation purposes.
Use of technical know-how
To enable domestic manufacture and sale of specific equipment, the applicant relies on specialised technical information and know-how owned by a foreign group entity. This know-how is not transferred outright; rather, it is licensed under defined contractual terms which regulate:
- Scope of use,
- Territorial limits,
- Obligations of the licensor and licensee,
- Commercial terms for licence fee payments.
Licence arrangements and royalty structure
Key agreements and their features
In June 2023, the applicant entered into:
- A licence fee arrangement, and
- A licence agreement
with a related overseas group entity. These documents together govern the use of technical know-how required for manufacturing and distributing certain specified products in India.
Notable features of the agreements include:
- The licence is non-transferable, non-assignable and non-exclusive.
- The applicant is authorised to use the technical know-how solely for:
- Manufacturing the licensed products, and
- Distributing those licensed products, both in India and in agreed territories.
- The licensor retains full ownership and intellectual property rights over the know-how.
- The agreements are stated to be standalone and do not purport to incorporate or extend any previous contracts between the parties.
The applicant clarified that although there were prior arrangements for technical information between the parties, the new agreements effective from June 2023 operate independently for the relevant period.
Commercial terms: licence fee computation
Under the current licence agreement:
- A licence fee is payable at 3.5% of net sales of finished products.
- Net sales are to be determined after reducing the following from the gross sales value:
- Sales returns,
- Price adjustments and allowances,
- Trade discounts,
- Proceeds from sale of scrap,
- Recoveries towards packing materials,
- Recoveries towards transportation,
- The value of imported built-in components sourced from the licensor.
Thus, while the royalty base is linked to the turnover of finished products, the valuation formula explicitly excludes the value of imported components supplied by the licensor itself.
Operational aspects include:
- Quarterly invoicing and payment of the licence fee.
- Payments are to be settled in euros.
- Provisions addressing applicable taxes, duration and renewal, termination triggers, confidentiality obligations and other standard commercial terms.
- A record that licence fees had also been charged for prior financial years under a separate arrangement letter, preceding the June 2023 agreement.
History of SVB proceedings and CESTAT ruling
Earlier SVB investigation
The applicant had previously been subjected to SVB scrutiny owing to import transactions with its related foreign group entities. During an earlier SVB investigation, customs authorities had taken the view that the technical know-how fee should be loaded into the transaction value of imported goods, on the premise that the royalty/licence fee was related to imported items and was a condition of sale.
Based on this line of reasoning, SVB initially required inclusion of such technical know-how fees in the assessable value.
CESTAT decision in applicant’s favour
The dispute escalated to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).