Royalty on Post-Import Manufacturing Cannot Be Added to Customs Assessable Value Without Satisfying Dual Statutory Conditions: CESTAT Chennai

Overview of the Dispute

A significant ruling has emerged from the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, in the matter of CET Power Solutions India Pvt. Ltd. Vs Commissioner of Customs (CESTAT Chennai), concerning the includibility of royalty payments in the assessable value of imported goods under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.

The central question before the Tribunal was whether royalty paid by an importer to its foreign collaborator — covering technology transfer, patents, trademarks, technical know-how, and post-import manufacturing rights — could be loaded onto the customs value of imported components, merely on the basis that those components were subsequently used in manufacturing branded finished products in India.

The Tribunal answered this question in favour of the assessee, holding that the statutory conditions prescribed under Rule 10(1)(c) were not met and that the departmental orders sustaining such addition were legally untenable.

Background and Factual Matrix

CET Power Solutions India Pvt. Ltd. is a 100% Export Oriented Unit engaged in the manufacture of power conversion and inverter systems. The company imports goods from two related foreign entities — M/s. CE+T SA, Belgium, and M/s. Suzhou CE+T Power Solutions Co. Ltd., China.

During a Special Valuation Branch (SVB) investigation, the Revenue took the view that royalty payments made by the assessee to its foreign collaborator under a series of agreements were liable to be added to the assessable value of imported goods under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.

The contractual framework comprised three instruments:

  • Term Sheet dated 06.03.2008 — granting non-exclusive rights to establish manufacturing operations in India along with technical support, engineering assistance, and product development rights
  • Royalty Agreement dated 01.04.2010 — conferring rights relating to patents, trademarks, confidential technical know-how, and manufacturing technology
  • Licence Agreement dated 01.04.2012 — under which royalty at 2% was payable on the net selling price of finished products manufactured and sold in India using CE+T technology

Procedural History

In the first round of proceedings, Order-in-Original No. 24406/2014 dated 14.03.2014 accepted the assessee's declared transaction value and held that royalty was not includible in assessable value. Revenue challenged this outcome, securing a remand for fresh examination.

Following the remand, a de novo Order-in-Original No. 38622/2015 dated 10.06.2015 reversed the earlier conclusion and held that royalty was includible because imported components constituted integral raw materials for the manufacture of CE+T branded products. This finding was affirmed by Order-in-Appeal No. 824/2015 dated 03.09.2015, prompting the assessee to approach CESTAT Chennai.

The Two Cumulative Conditions Under Rule 10(1)(c)

The Tribunal commenced its analysis by examining the statutory scheme. Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 provides that royalties and licence fees shall be added to the price actually paid or payable only where:

  1. Such royalties are related to the imported goods, and
  2. The buyer is required to pay the same, directly or indirectly, as a condition of sale of the imported goods being valued

The Tribunal emphasized that these two requirements are cumulative in nature — both must be independently established by the Revenue. Satisfaction of one, without establishing the other, is insufficient to sustain any addition to assessable value.