Finding that royalty payments by Xiaomi Technology for the use of technologies include the parts and components as a single composite payment, includable in the transaction value of the imported goods, and also includes payment for the right to distribute or resell the imported goods, the Chennai Customs, Excise and Service Tax Appellate Tribunal (CESTAT) ruled that Royalties and License Fees paid by Xiaomi India are addable to the assessable value of the impugned goods as per Rule 10(1)(c) of the Customs Valuation Rules, 2007 and the differential duty is payable by Xiaomi India for the extended period.
Further, if the royalties are for IPRs/ patents and processes embedded in the imported goods, without which the parts and components are of no use and which cannot be vivisected from the large number of other patents and processes required for post import activity, then the royalty payment will have to be added as a whole to the transaction value, as the availability of such IPR’s/ patents are understood to be a part of the sale, whether it is written or unwritten, added the Tribunal.
The Tribunal noted that the payment of royalty to Qualcomm Inc. and Beijing Xiaomi was for the Xiaomi brand Mobile Phones manufactured by their contract manufacturers in India, as well as for the complete Xiaomi brand mobile phones imported by Xiaomi India from Xiaomi China, and such royalty is paid on account of bundled licensed software technologies and licensed hardware technologies, embedded in the imported parts and components used for making, using in the manufacture and selling of finished mobile phones.
The ruling came after finding that the substantial control over the goods is with Xiaomi India, which is the dominant party in the agreement, and there is no such right of effective possession and control that comes to vest with the Contract Manufacturers (CMs). In fact, it is this mutual understanding of control between the CMs and Xiaomi India and the reimbursement of any unseen costs, like duty, interest, etc, to the CMs, which resulted in the agreement and occasioned the imports. The Tribunal therefore upheld the investigation made by DRI in piercing the corporate veil and demonstrating that Xiaomi India exercises effective control over the goods and is the ‘beneficial owner’ of the goods.
Finding that all costs incurred by the Contract Manufacturers (CMs) are reimbursed to them as per the ring-fencing clause of the Agreement between Xiaomi India and the CMs, the Division Bench comprising P. Dinesha (Judicial Member) and M. Ajit Kumar (Technical Member) observed that the ‘buyer’ of the imported goods is Xiaomi India and not the CMs. In this context, including the ring fencing of the CMs from government-related demands and making it reimbursable to the CMs, the Bench observed that the customs duty can be demanded from the beneficial owners, i.e., Xiaomi India.
The Bench found that Xiaomi India has granted a non-exclusive royalty-free license to the contract manufacturers (CMs) to use IPR, which is either owned or licensed to them solely for the CM’s production of goods and not for any other purpose. As per Xiaomi’s own submissions, the licenses are a part of a whole-portfolio/ whole-device license, giving access to a licensor’s entire relevant portfolio of patents for activities including making, importing and using ‘Subscriber Units’, selling such Subscriber Units and making components, which incorporate all or any part of the licensor’s IPR.
Essentially, the Bench found that Xiaomi India purchases the finished mobile phone from the CMs as per a pricing model that is based on cost construction, and the CMs are not free to fix their own price for the sale of the finished mobile phones. Hence, the exclusion of the royalty/ license fee from the price structure, although it pertains to a whole-portfolio/ whole-device license, can be reasonably presumed to be at the behest of the dominant party, which is Xiaomi India. The CMs have no effective control over the inputs, and they only get paid a manufacturing cost for assembling/ manufacturing the finished mobile phones.
In brief, the intelligence gathered by the DRI officers of the Delhi Zonal Unit indicated that Xiaomi Technology India (appellant), based at Bengaluru, was allegedly evading customs duty by way of non-inclusion of royalty and license fee (paid by Xiaomi India under exclusive agreements with IPR holders) to the assessable value of the goods imported. The department alleged that Xiaomi India had admitted that it did not disclose the existence of agreements between its company, Xiaomi China, and Qualcomm Inc. for the payment of royalties before the authorities at the Special Valuation Branch (SVB), Bangalore, while submitting an application under Board Circular No. 05/2016 dated February 9, 2016.
Accordingly, alleging suppression of facts and wilful misstatement, SCN were issued to Xiaomi India along with four of its ‘Contract Manufacturers’ (CM) under Section 28(4) of the Customs Act. Later, the Principal Commissioner of Customs redetermined the assessable value of mobile phones and demanded differential customs duties, in addition to a proposal for confiscation of goods and levy of penalties.
Cases Distinguished:
COMMISSIONER OF C. EX., NEW DELHI Vs MODI ALKALIES & CHEMICALS LTD. [2004 (171) E.L.T. 155 (S.C.)]
PARLE BISLERI PVT. LTD. Vs COMMR. OF CUS. & C. EX., AHMEDABAD [2011 (263) E.L.T. 15 (S.C.)]
Vishnu Agencies (Pvt) Ltd. Etc vs Commercial Tax Officer & Ors. [AIR 1978 SUPREME COURT 449]
Bhavnagar University Vs Palitana Sugar Mills Pvt Ltd [2003(2) SCC 111]
Commissioner Of Customs, New Customs House, New Delhi Vs Pawan Kant Munjal [2024 (390) E.L.T. 721 (Del.)]
Appearances:
Advocates Lakshmi Kumaran V, Anurag Kapur, Rohan Muralidharan, Shobhana Krishnan, Sameer Bhatrahalli Rao, Vikram Naik, and Harsh Makhija, for the Appellant/ Taxpayer
Advocates P.R.V. Ramanan and Anoop Singh, for the Respondent/ Revenue
