LexCOMMISSIONER OF CUSTOMS versus M/S FERODO INDIA PVT. LTD.
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(2008] 3 S.C.R. 147 " r COMMISSIONER OF CUSTOMS A v. M/S FERODO INDIA PVT. LTD. (Civil Appeal No. 8426 of 2002) -· FEBRUARY 21, 2008 B (S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.) ~ Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 - Rule 9(1)(c) - Price of imported goods - Inclusion of technical know how fees and royalty- Technical c assistance and trade mark agreement between buyer-licensee and foreign collaborator-licensor - Under the agreement, licensee permitted to manufacture licensed products - It was to import raw material from licensor and to pay license fee and royalty- Department loading CIF value of imported goods D with know-how fees and royalty - Tribunal holding that know- - how fees and royalty related to licensed products to be produced in India and not to the imported goods - Held: Correct - On reading the agreement in entirety, there was no nexus between royalty/licence fees payable for know-how and E goods imported for manufacture of licensed products - Department was to examine both the price arrangement and also the Consideration Clause in the agreement. The respondent-manufacturer of brake liners and ~ brake pads in India entered into a technical assistance F and tra.de mark agreement (TAA) with NK-foreign collaborator/licensor. Under the agreement, the licensor claimed to be in possession of certain secret processes, formula and information which it agreed to disclose it to the licensee; the licensor permitted the respondent- G licensee to manufacture brake liner~ and brake pads- licensed products; the licensee was :to import/buy raw material and capital goods from the· licensor; and the - licensee was to pay licence fee along with royalty, based 147 H 148 SUPREME COURT REPORTS [2008] 3 S.C.R. A on the net sales value of licensed products sol(:!, consumed or otherwise disposed of. The Adjudicating Authority held that technical know-how fees and royalty were related to the imported goods and thus, loaded the CIF value of the imported goods with the proportionate B amount of know-how fees and royalty. The Commissioner upheld the order. However, the tribunal held that the know- how fees and the royalty payments stood related to the brake liners and brake pads to be produced in India and not to the imported goods. Hence, the present appeal. C Dismissing the appeals, the Court HELD: 1.1 Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as 0 consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and know-how in the manufacture of the licensed product in India. E Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/licence fees which are also paid to the foreign supplier. (Para 18) [158-F, G] F 1.2 Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 stipulates that payments made towards technical know- how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and .fees have to be G included in the price of the imported goods. Under rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirectly, as a condition of the sale of imported goods. If such payment has no nexus H with the working of the imported goods then such payment .. COMMISSIONER OF CUSTOMS v. M/S FERODO 149 "" INDIA PVT. LTD. .. I was not includible in the price of the imported goods. The A word indirectly in rule 9(1)(c) is emphasized. The buyer/ importer makes payment of the price of the imported goods. He als'o incurs the cost of technical know-how. Therefore, the Department in every case is not only required to look at TAA, it is also required to look at the B -_, pricing arrangement/agreement between the buyer and his foreign collaborator. (Paras 16 and 18) [158-D, G; - 159-A, B, C] 1.3 The adjudicating authority did not examine the pricing arrangement between the foreign collaborator and c the buyer. It only examined the royalty/TAA. On reading TAA, it is found that the paymen
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