Technical Know-how Fee cannot be added to Invoice Value: SC

AIT News Network

NEW DELHI. Dismissing the Appeal filed by the Customs against the final order passed by the CESTAT ; SC vide a significant ruling dated 31^st August 2006 has ruled that  the Customs authorities can not add the technical know-how fee in respect of the post-importation activities to the assessable value of the imported goods.

T H E   F A C T S

The respondent-Company was set up under an agreement between M/s PC USA and one Mr. Ashok Mago for marketing facility for promotion and selling VSAT Antennas, accessories and other communication equipments, assembly of equipments, testing, servicing etc.As per the joint venture agreement M/s PC USA owns 75% of equity shares in M/s PIPL which shall assemble and test feed components provided by M/s PC USA and will service, test and install these products.  Technical service fee was also to be paid by M/s PIPL to M/s PC USA for the period 1.10.1997 to 30.9.1998 @ US $ 25,000 per month in terms of technical service agreement between the two companies.  The Dy. Commissioner of Customs, ICD, passed an order on 11.1.2001 for loading of 10% in the invoice value of the goods imported from M/s PC, USA.  As per the Department, M/s PIPL, India and M/s PC, USA were related persons in terms of Rules 2(2)(i) and 2(2)(iv) of the Customs Valuation (Determination of Price of Imported Goods)  Rules, 1988 and this relationship had influenced the price of the imported goods.

The Commissioner of Customs (Appeal) dismissed the appeal preferred by the respondents upholding the order dated 11.1.2001 passed by the Dy. Commissioner. The Commissioner held that as regards the relationship between the respondents and its foreign collaborator, it is manifestly clear that they had a complex and interwoven relation in which the latter did not only have 75% of the equity shares but also had their own three of the four Directors in the Board of Directors of the  respondent, therefore, it is correctly held by the Adjudicating Authority that their foreign collaborator are related persons covered by  Rules 2(2)(i) and 2(2)(iv) of the Rules.  It  also held that the foreign company had a controlling interest in the activities of the company.  It was further held that it is not a case which is covered by Rules 4(3)(b) and 4(3)(a) of the Rules and it is clear that the relations between the two companies would have a bearing on the value of the goods imported.

The CESTAT vide its impugned judgment had allowed the appeal and set aside the impugned order on the ground that though the authorities were right in holding that the transaction was between related person inasmuch as the importer was a joint venture in which the foreign supplier was the partner, however, that by itself, was no ground to make addition to sale price.  The CESTAT has held that the reference to raw material is for assistance in sourcing of supply.  A sourcing assistance can be required only when the sourcing is from a third party and not when it is from one of the partners.

T H E   R U L I N G 

• There is nothing  in the joint venture agreement which may reveal that M/s PC USA has charged any technical fee for any pre-operative function of the antenna system.  There is no denial of the fact that some of the parts/components of the antenna system were being supplied by M/s PC USA the price at which the said parts were supplied at full commercial value without having been influenced by the joint venture agreement. 

• A perusal of the joint venture agreement would clearly reveal that all the activities for which the technical fee was being paid by the respondent was for various functions which were to be carried out in India.  It is wrong on the part  of the appellant to link the design, drawing, fabrication drawing, manufacture of dyes, assembly testing and alignment of feed etc.  with the imported parts being supplied by M/s PC USA. 

• There is nothing on record to show that any technical fee was paid in respect of the goods being manufactured and supplied by PC USA to the respondent. 

• In our view, the Department has wrongly interpreted these clauses and wrongly attributed design, drawing, fabrication etc. to the imported goods whereas a perusal of this break up clearly reveals that the technical fee is in respect of the various jobs/consideration which M/s PC USA was to perform in respect of the manufacture of the antennas system in India. 

• The Department has not brought any evidence on record to show that the relationship between the respondent and M/s PC USA has influenced the price or value of the imported goods.  There is no evidence brought by the appellant that their relationship did influence the price of the imported components.

• It is settled law that the onus to prove that the declared price did not reflect the true transaction value is always on the Department.  It is also a settled law that the Department is bound to accept the transaction value entered between the two parties.  It is not the case of the Department that M/s PC USA were exporting the identical goods to other importers at higher price and that the Department has not made any effort to bring on record any evidence that identical or similar goods were imported by other importers at higher price.  Therefore, in view of the clear position of law about the acceptance of the transaction value, the Customs authorities could not add the technical know-how fee in respect of the post-importation activities to the assessable value of the imported goods.

• Even assuming for argument's sake that the respondent and M/s PC USA are related persons even in that case their transaction value is to be accepted provided that the examination of the circumstances of the sale of the imported goods indicate that the relationship did not influence the price and the importer demonstrates that the declared value of the goods being valued, closely approximates to the value for identical goods or similar goods.

• In the present case, a perusal of the order-in-original would reveal that the loading was ordered in terms of Rule 9(1)(c) of  the Rules.  There was no challenge to the value declared by the respondent before the Customs Authorities.  There was also no finding in the Order-in-original that the value was not increased with Custom Valuation Rules, 1988  read with Rules 2(2)(i), 2(2)(iv), 4(3)(a) and 4(3)(b).However, in the grounds of appeal, it is not the case of the Department that the value requires to be loaded because of the provisions of Rule 9(1)(c).  But the Department is treating the respondent and M/s PC USA as a related person and straightaway invoked Rule 4(3)(a) or 4(3)(b).  The Department, in our view, cannot adopt such a course unless it is alleged that some evidence is brought on record that the prices at which M/s PC USA had supplied the imported goods to the respondent was not reflecting the correct transaction value.

• Therefore, viewed from any angle, the appeal filed by the Department is wholly misconceived.  In the instant case, the appellant had reproduced the contents of their letter dated 18.10.2000 wherein they had brought on record the considerations for which they had paid fee to M/s PC USA and had nothing  to do with the imported goods and M/s PC USA was only supplying the parts of antenna systems and not a complete antenna.  This letter has been reproduced in the order of the Deputy Commissioner.  However, he did not controvert the contentions raised by the respondent before him but went on to load the assessable value by 10% in terms of rule 9(1)(c).  When the respondent had taken a categorical stand about the nature of technical fee to be paid to M/s PC USA and it was clearly contended that it was for post-importation activity, it was obligatory on the part of the original authority to have controverted the contents of the said letter.   He simply ignored the same and went on to pass an adverse order.  In the appeal also, the Department have accepted the same.  Therefore, in the absence of anything brought on record contrary to the submissions of the respondent, the nature of technical fee, it is not open for the appellant to justify the loading of 10% in the invoice value ordered by the original authority.

(Click here for Full Text of ruling AIT-2006-120-SC )