The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi, saved Ericsson India from the rigours of penalty and held that the coordination and advice provided post-importation activities cannot lead to a conclusion that technical services are a precondition for the sale of imported goods. The Tribunal explained that royalty paid for technical know-how is not a ‘condition of sale’ merely because it is included in the value of imported goods.
Accordingly, the Tribunal quashed the order passed by the Additional Director General where it was held that the royalty paid by the Ericsson India (appellant) to its foreign related party LM Ericsson Sweden would be includible in the transaction value of the components imported by Ericsson India from Ericsson Sweden in terms rule 10(1)(c) of the 2007 Valuation Rules, 2007. Resultantly, the Tribunal also quashed the penalty imposed upon Ericsson India under section 114A of the Customs Act.
The Division Bench comprising Justice Dilip Gupta (President) and Hemembika R. Priya (Technical Member) observed from a perusal of the Technical Cooperation Agreement that Ericsson India (appellant) shall purchase “components of GSM Mobile Telephone System” which are basically finished goods. However, the Agreement does not extend to the imported goods, i.e., components used in the manufacture of finished goods.
The Tribunal therefore emphasized that when the technical know-how provided by Ericsson India does not extend to “manufacturing” raw materials and other components of Licensed Parts & Products, the Department cannot erroneously assume that if Ericsson Sweden makes payment for use of such specification, it will recover the same from Ericsson India.
Briefly, the appellant (Ericsson India) entered into a Technical Cooperation Agreement with its Associated Enterprise (AE), i.e., LM Ericsson Sweden, for the grant of non-exclusive rights and licenses to manufacture, sell, repair, and service finished goods using Ericsson know-how and Ericsson IPR. The Special Valuation Branch accepted the declared import prices as “transaction value” under section 14 of the Customs Act, read with Rule 3(1) of the Valuation Rules, 2007. Later, the appellant entered into a fresh Technical Cooperation Agreement with its AE. Both agreements are identical in form and substance except for the royalty clause.
The dispute arose when the appellant paid the applicable duty on the royalty payments made to its AE, resulting in the issuance of a show cause notice, which was later converted into an order alleging that said royalty payment was includible in the value of imported goods in terms of Rule 10(1)(c) of the 2007 Valuation Rules. This was opposed by the appellant, contending that royalty payments were not stipulated as sine qua non in the Technical Agreement for the import of components.
Appearances:
Advocates V. Lakshmikumaran, Anurag Kapur, Rubel Bareja, and Anisha Arya, for the Appellant/ Taxpayer
Advocate Mihir Ranjan, for the Respondent/ Revenue
