On 2 February 2007, the apex court in the case of J K Corporation Ltd in Appeal (Civil)4663 of 2006 held that:
"The basic principle of levy of customs duty, in view of the afore- mentioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of licence or technical knowhow for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.
Rule 12 of the Rules provides that the interpretative notes specified in the Schedule appended thereto would apply for construction thereof. They are statutory in nature being integral part of the Rules themselves. The relevant portion of Interpretative Note to Rule 4 reads as under:
"The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods:
(a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment;
(b) The cost of transport after importation;
(c) Duties and taxes in India."
What would, therefore, be excluded for computing the assessable value for the purpose of levy of custom duty, inter alia, has clearly been stated therein, namely, any amount paid for post-importation activities. The said provision, in particular, also apply to any amount paid for post- importation technical assistance. What is necessary, therefore, is a separate identifiable amount charged for the same. On the Revenue's own showing, the sum of US $ 14, 00, 000.00 was required to be paid by way of remuneration towards services to be offered by the companies in respect of matters specified in Part-A of the said Memorandum of Agreement. The said sum represents amount of licence or amount to be paid by the respondent for the licence for the manufacturing process for production of goods which were covered by the patents held by M/s. Samsung as also for technical knowhow.
No part of the knowhow fee was to be incurred by the respondent herein either for the purpose of fabrication of the plant and machinery or for any design in respect whereof M/s. Samsung held the patent right.
It may be noticed that the said Memorandum of Agreement specifically contemplates that the plant and machinery to be supplied thereunder may be procured from other independent manufacturers and suppliers who might not have anything to do with the knowhow or licence provided thereunder by Samsung.
The part of the Interpretative Note to Rule 4 relied on by the Tribunal has been couched in a negative form and is accompanied by a proviso. It means that the charges or costs described in clauses (a), (b) and (c) are not to be included in the value of imported goods subject to satisfying the requirement of the proviso that the charges were distinguishable from the price actually paid or payable for the imported goods. This part of the Interpretative Note cannot be so read as to mean that those charges which are not covered in clauses (a) to (c) are available to be included in the value of the imported goods."
Therefore, once again the apex court has upheld the GOLDEN RULE that if payment is not a condition of sale and pertains to post importation, it can not be added to the assessable value.
Sunday, February 11, 2007
Wednesday, January 10, 2007
Royalty Payment
What is Royalty
Royalty is the sum of money paid to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user (the Licensee) through the exercise of such rights. Royalties may be paid for the use of copyright, patent, registered design, knowhow, trademark or a combination of them.
The express rights granted to the licensee, and the amounts to be paid to the Licensor for the exercise thereof, are set out in a documented License Agreement. The agreement specifies the method of calculating the royalties and the period over which the payments become applicable.
The royalty amount can be one time lump sum payment or may be based on a formula specified in the licence agreement which defines the royalty rate and the unit base on which it is to be applied. Unit base can be value or volume of production of the licensed products.
Generally, the Licensee will import capital goods in the form of plant and machinery to create manufacturing base of the licensed product. Sometimes proprietary products are also imported to be used in manufacture of licensed products.
CUSTOMS DUTY
On importation, customs duty is required to be paid on the capital goods as well as other products. Duty of customs may be specific or ad valorem. Specific rate of duty means that duty is fixed on the basis of quantity or volume of the imported goods and expressed in the form of Rs XXX per unit. On the other hand, most of the time, custom duty is levied ad valorem which means that duty is calculated on the basis of value of the imported goods and expressed in percentage.
Customs Act, 1962
Section 14 of the Customs Act, 1962 deals with valuation of the imported goods, as per which the value goods is the price at which such or like goods are ordinarily sold, or offered for sale, to unrelated parties for delivery at the time and place of importation in the course of international trade and the price is the sole consideration for the sale or offer for sale. Royalty is paid to the supplier or a third party consequent upon the import of goods or technology and therefore, it may be possible that price is not the sole consideration to the buyer and a part of the consideration may be paid by way of royalty.
Customs Valuation Rules
As per Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, (‘the Valuation Rules’) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable is required to be added in the price of the goods.
Further, as per as per Interpretative Notes to the Valuation Rules, the royalties and licence fees may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation are not required to be added to the price for the imported goods. Further, payments made by the buyer for the right to distribute or resell the imported goods are not required to be added to the price of the imported goods if such payments are not a condition of the sale for export.
Conditions
In view of the above, following conditions are required to be fulfilled, if the payments for the royalty or licence fees are added in the price of the imported goods:
· Royalty payments are pursuant to the conditions of sale
· Such payments are not included in the price
· Royalty payments should have a direct nexus to the imported goods
· Payment does not pertain to right to produce goods in India
· Payment does not pertain to right to resell or distribute
To bring royalty payments within the dutiable event, all the above conditions are to be fulfilled. It is immaterial as to whether the payment for royalty or licence fee or technical know-how has been in lump-sum or on regular basis.
Once it is established that royalty is includible in the price, only to that extent payment towards royalty will be added in the price to which it directly relates to the imported goods. Such addition has to be made on the basis of quantifiable data and not on presumptions.
Royalty payments are pursuant to the conditions of sale
To bring within the mischief of the Rule 9(1)(c) of the Valuation Rules, it has to be established that one of the condition of the sale is payment of royalty. Generally, following conditions are required to be satisfied to allege that royalty payment is the condition of the sale:
· Goods under import is proprietary product
· Proprietary product has to be exclusively procured from the Licensee or his agent
· Proprietary product is essential for the manufacture of licensed product
Royalty payments should have a direct nexus to the imported goods
What is assessed to the customs duty is goods under import. Therefore, it is essential to establish that there is a nexus between royalty and imported goods. If nexus is not established, value can be loaded under Rule 9(1)(c) of the Valuation Rules.
Why it is difficult to establish that royalty payment is a condition of sale
Generally, the IPR holder and the Licensor enter in to a multiple but separate agreements for various activities. Following are the typical agreements:
Royalty is the sum of money paid to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user (the Licensee) through the exercise of such rights. Royalties may be paid for the use of copyright, patent, registered design, knowhow, trademark or a combination of them.
The express rights granted to the licensee, and the amounts to be paid to the Licensor for the exercise thereof, are set out in a documented License Agreement. The agreement specifies the method of calculating the royalties and the period over which the payments become applicable.
The royalty amount can be one time lump sum payment or may be based on a formula specified in the licence agreement which defines the royalty rate and the unit base on which it is to be applied. Unit base can be value or volume of production of the licensed products.
Generally, the Licensee will import capital goods in the form of plant and machinery to create manufacturing base of the licensed product. Sometimes proprietary products are also imported to be used in manufacture of licensed products.
CUSTOMS DUTY
On importation, customs duty is required to be paid on the capital goods as well as other products. Duty of customs may be specific or ad valorem. Specific rate of duty means that duty is fixed on the basis of quantity or volume of the imported goods and expressed in the form of Rs XXX per unit. On the other hand, most of the time, custom duty is levied ad valorem which means that duty is calculated on the basis of value of the imported goods and expressed in percentage.
Customs Act, 1962
Section 14 of the Customs Act, 1962 deals with valuation of the imported goods, as per which the value goods is the price at which such or like goods are ordinarily sold, or offered for sale, to unrelated parties for delivery at the time and place of importation in the course of international trade and the price is the sole consideration for the sale or offer for sale. Royalty is paid to the supplier or a third party consequent upon the import of goods or technology and therefore, it may be possible that price is not the sole consideration to the buyer and a part of the consideration may be paid by way of royalty.
Customs Valuation Rules
As per Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, (‘the Valuation Rules’) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable is required to be added in the price of the goods.
Further, as per as per Interpretative Notes to the Valuation Rules, the royalties and licence fees may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation are not required to be added to the price for the imported goods. Further, payments made by the buyer for the right to distribute or resell the imported goods are not required to be added to the price of the imported goods if such payments are not a condition of the sale for export.
Conditions
In view of the above, following conditions are required to be fulfilled, if the payments for the royalty or licence fees are added in the price of the imported goods:
· Royalty payments are pursuant to the conditions of sale
· Such payments are not included in the price
· Royalty payments should have a direct nexus to the imported goods
· Payment does not pertain to right to produce goods in India
· Payment does not pertain to right to resell or distribute
To bring royalty payments within the dutiable event, all the above conditions are to be fulfilled. It is immaterial as to whether the payment for royalty or licence fee or technical know-how has been in lump-sum or on regular basis.
Once it is established that royalty is includible in the price, only to that extent payment towards royalty will be added in the price to which it directly relates to the imported goods. Such addition has to be made on the basis of quantifiable data and not on presumptions.
Royalty payments are pursuant to the conditions of sale
To bring within the mischief of the Rule 9(1)(c) of the Valuation Rules, it has to be established that one of the condition of the sale is payment of royalty. Generally, following conditions are required to be satisfied to allege that royalty payment is the condition of the sale:
· Goods under import is proprietary product
· Proprietary product has to be exclusively procured from the Licensee or his agent
· Proprietary product is essential for the manufacture of licensed product
Royalty payments should have a direct nexus to the imported goods
What is assessed to the customs duty is goods under import. Therefore, it is essential to establish that there is a nexus between royalty and imported goods. If nexus is not established, value can be loaded under Rule 9(1)(c) of the Valuation Rules.
Why it is difficult to establish that royalty payment is a condition of sale
Generally, the IPR holder and the Licensor enter in to a multiple but separate agreements for various activities. Following are the typical agreements:
- Agreements for supply of know-how
- Agreement for supply of capital goods from the IPR Holder
- Agreement for supply of capital goods from the associate entities of the IPR Holder
- Agreement for erection and commissioning of the plant
- Agreement for supply of proprietary product from the IPR Holder
- Agreement for supply of proprietary product from the associate entities of the IPR Holder
- Agreement for supply of non-proprietary product from the IPR Holder
- Agreement for supply of non-proprietary product from the associate entities of the IPR Holder
- Agreement for supply of non-proprietary product from the other entities
- Agreement for technical training of the staff
In plethora of these various contracts entered at different dates, the obligation for payment of royalty will be in only one agreement i.e. Agreements for supply of know-how. Therefore, it is always difficult to establish that royalty payment is one of the conditions of sale of capital goods/components/raw material.
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