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CASE NO.: Appeal (civil)  526 of 2002

PETITIONER: M/s. Matsushita Television & Audio (I) Ltd

RESPONDENT: Commissioner of Customs

DATE OF JUDGMENT: 12/04/2007

BENCH: S.H. KAPADIA & B. SUDERSHAN REDDY

JUDGMENT: J U D G M E N T

KAPADIA, J.

This civil appeal under Section 35L(B) of the Central  Excise Act, 1944, is directed against the Order passed by   the Central Excise & Customs & Gold Control Tribunal  (for short, ’CEGAT’) dated 24.8.01. By the said Order the  CEGAT (Tribunal) has dismissed the assessee’s appeal.

A short question which arises for determination in  this civil appeal is: whether the royalty payment was  connected with the imported components of Colour TV  and if so whether such royalty payment was includible in  the assessable value of such components.   

Appellants-assessee is a joint venture of M/s.  Matsushita Electric Industrial Co. Ltd., Japan, (for short,  ’MEI’).  The predecessor of the appellants was M/s.  Salora International Ltd. (for short, ’SIL’).  In 1993, M/s.  SIL had entered into an agreement with M/s. MEI for  obtaining technical assistance and know-how.  The  technical assistance and know-how was assigned by  M/s. SIL  to the appellants.  This was in 1996.  In terms  of clause 6.01, appellants were required to pay royalty at  3% on net ex-factory sale price of the colour receiver  manufactured by them towards technical assistance  rendered by MEI.  In addition to royalty the appellants  were also required to pay U.S.$ 2 lakhs, as lump-sum  payment to MEI for transfer of technical know-how.   Under the agreement, MEI agreed to assist the appellants  by selling the equipment at commercial prices.  Under  the agreement appellants’ predecessor imported  components of colour receiver from M/s. B.M. Nagaro &  Co. who in turn had procured components (bought-out  items) from different manufacturers including those in  Singapore.   

By Adjudication Order NO.6/99 dated 20.5.99, the  Adjudicating Authority loaded the value of the said  components by 2% and 1.58% for the years 1996-97 and  1997-98 respectively.  This was in terms of Rule 4(2) and  Rule 9(1)(c) of the Customs Valuation (Determination of  Price of Imported Goods) Rules, 1988 [for short,  ’Valuation Rules, 1988’].  The said Order confirmed by  the Commissioner (Appeals) vide his Order No.683/2000

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dated 15.11.2000.  The said concurrent findings were  also confirmed by the impugned judgment of the  Tribunal.  According to the impugned judgment, the  assessable value of the components were required to be  loaded with the cost of royalty payment as under the  Agreement the appellants had agreed to pay to MEI a  royalty at 3% on the net ex-factory sale price of the  colour receiver manufactured by the appellants for the  technical assistance rendered by MEI.  According to the  Tribunal, on bare reading of the Agreement it was clear  that the royalty payment was related to components in  view of clause 7.02.  According to the Tribunal, the  technical assistance under the Agreement was related to  the components since under clause 7.02 it was stipulated  that not only MEI would assist SIL in selling the  components but MEI would also assist the appellants in  approving the components which were bought-out items.   Under the Agreement, samples of bought-out items were  to be sent by the appellants to MEI for inspection and  quality certification.  Under the agreement, the bought- out items (components) could be used in the T.V. only if  it was approved by MEI.  Under the Agreement, MEI had  to approve in writing the quality and the specifications of  such bought-out items (components).  In the  circumstances, the Tribunal took the view that technical  assistance extended not only to the supply of  components but also to the approval of the components  (bought-out items).  Further, according to the Tribunal,  the amount of royalty had to be included in the price  paid for bought-out items (components).  For the above  reasons, the Tribunal held that royalty payment  constituted consideration for technical assistance  rendered by MEI and, therefore, the Department was  right in including the cost of royalty payment in the  assessable value of the components (bought-out items),  duly imported.  For the above reasons, the Tribunal  dismissed the appellants’ appeal.  Hence this civil appeal.

This matter has been decided by all the authorities  below and CEGAT only on interpretation of the various  clauses containing in the Agreement dated 20.8.1993.   Therefore, we quote hereinbelow the relevant provisions  of the Agreement which are as follows: "TECHNICAL ASSISTANCE AND KNOW- HOW AGREEMENT"

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1.      DEFINITIONS

1.02    The term "Products" shall mean one or  more of such models of the Item designed  by MEI, as MEI regularly manufactures  at its own and/or its  subsidiaries/affiliates’ factories and as  shall be selected from time to time during  the term hereof by mutual agreement of  the parties hereto in writing, provided  that MEI reserves the right to finally  decide in selecting such specific models  as the products.

1.03 (a) The term "Net-factory Sales Prices"  shall mean the sales prices billed by SIL  of the Products to its customers in

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normal arm’s length transaction exclusive  of excise duties, custom duties, ocean  freight and insurance, but including the  cost of the standard brought out  components (hereinafter defined) and the  cost of the imported Components.

(b)     In relation to the products sold other than  in normal arm’s length transaction, used,  leased or otherwise disposed of by SIL, the  prices equal to the arithmetic average of  the Net Ex-factory Sales prices of the  same products reported to MEI in the  immediately preceding Calculation Period  (hereinafter defined) shall be deemed to be  the Net Ex-factory Sales Prices for such  Products, but if there be no same  Products so reported, then the Net Ex- factory Sales Prices for such Products  shall be determined by mutual agreement  of the Parties hereto.

1.04    The term "Technical Know-how" shall  mean such technical information in  written form as shall be specified in  Section 3.01 hereof, embodying technical  know-how and data required for the  manufacture of the Products.

1.05    The term "components" shall mean  component, parts, material and/or sub- assemblies comprising the Products.

2.   RENDERING OF TECHNICAL ASSISTANCE

2.01    MEI agrees to render to SIL the technical  assistance regarding the manufacturing  of the Products in the manner provided  in Clause 2 hereof.  To the extent that  both parties deem necessary, the  technical assistance to be rendered by  MEI as aforesaid shall comprise the  training to effectuate the following items  (hereinafter called "Technical  Assistance"):

1.      Advice and instruction for he  manufacture of the Products; 2.      advice and instruction on  installation, operation and  maintenance of Production  Equipment used for the  manufacture of the Products; 3.      Advice and instruction on factory  layout used for the manufacture of  the Products; and  4.      Other necessary advice and  instruction.

2.02    The Technical Assistance for the  manufacture of the Products shall be  actually rendered in the manner  hereinbelow specified.

(A)     During the term of this

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Agreement upon request of  SIL and by consent of MEI  thereto, MEI will permit  employees of SIL to visit the  manufacturing department  concerned of MEI and/or  MEI’s subsidiaries/affiliates  which manufacture the  Products, for a period MEI  deems  necessary, for training  in the process of  manufacturing the Products. (B)     During the term of this  Agreement, upon request of  SIL and by consent of MEI  thereto, MEI will send the  engineers of MEI and/or  MEI’s subsidiaries/affiliates  to SIL’s factory  manufacturing the Products  hereunder for a period MEI  deems necessary to give  instructions to the employees  of SIL engaged in the  manufacture of the Products. (C)     All costs and expenses  incurred for the Technical  Assistance as referred to in  (A) and (B) of this Section  2.02 hereof (including those  for accommodation,  transportation, and both way  air coaches and salaries and  allowances payable for MEI  (including MEI’s  subsidiaries/affiliates)’s  engineers and SIL’s  Employees) shall be paid by  SIL in United States Dollars.   In case any costs and  expenses payable by SIL to  MEI for the Technical  Assistance herein contained  be prepaid by MEI, SIL shall  reimburse to MEI in United  States Dollars promptly after  receipt by SIL of MEI’s invoice  therefore.  Details of the  terms and conditions for the  Technical Assistance of MEI  (including MEI’s  subsidiaries/affiliates)’s  engineers visiting SIL’s  factory and SIL employees  visiting MEI (including MEI’s  subsidiaries/affiliates)’s  factory, as the case may be,  shall be confirmed in writing  between the parties hereto  prior to such visit.

4. USE OF TECHNICAL ASSISTANCE AND  TECHNICAL KNOW HOW  

4.01    During the term of this Agreement MEI

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agrees to grant to SIL a non-exclusive  and non-transferable licence to use the  Technical Assistance and the Technical  Know-how manufacture of the Products  at SIL’s factory in India and for sale of  such Products throughout India.  In the  event this Agreement expired, however,  MEI agrees to grant to SIL a non-  exclusive and non-transferable licence to  use the Technical Assistance and the  Technical Know-how for manufacture of  the Products at SIL’s factory in India only  for the orders booked from SIL’s customer  in India during the terms of this  Agreement. 4.02    The Technical Assistance and the  Technical Know-how made available to  SIL hereunder shall be used only for SIL’s  own manufacture of the Products at its  own factory in India, and SIL undertakes  that such Technical Assistance and  Technical Know-how made available to  SIL hereunder shall be neither directly or  indirectly transferred nor be made  available to any third party.  The term  "third party" used herein shall mean any  party who shall not sign this Agreement.

6.      REMUNERATION

6.01    Payment of the Technical Assistance:

A.      In consideration of the Technical  Assistance rendered by MEI under Clause  2 hereof and the license granted under  Clause 4 hereof, SIL shall pay to MEI the  royalty at the rate of three percent (3%)  on the Net Ex-factory Sales Prices of the  Products manufactured and sold, used,  leased or otherwise disposed of by SIL  herein.

B.      SIL agrees to forward to MEI written  royalty reports in a form attached hereto  as EXHIBITS A and B, which shall be  audited and certified by a certified public  accountant retained by SIL, within ninety  (90) days after the end of each  Calculation Period, setting forth the  number of all Products manufactured  and sold, used, leased or otherwise  disposed of by SIL during the  immediately preceding Calculation  Period, and also showing computation of  the royalty payable pursuant to the  provisions of this Clause 6 and deduction  of the withholding tax as referred to in  Section 6.01-E below.

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7 PRODUCTION EQUIPMENT AND COMPONENTS.

7.02    Components:

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A.      In addition to the technical assistance  herein contained, MEI will assist SIL  as much as practicably possible in  manufacturing the Products by selling,  at the reasonable request of SIL, the  Components to SIL. B.      SIL may, if it so desires, use in  manufacturing the Products certain  Components available from sources  other than MEI, if SIL first sends  reasonable quantities of samples of  such components to MEI for  inspection and if then MEI approves in  writing the quality and the  specifications of such Components.

7.03    Sale and purchase of the Production  Equipment and the Components  supplied by MEI pursuant hereto  shall be made at commercial prices  under payment and other terms to  be agreed upon between MEI and  SIL and subject to the necessary  approval and the concerned  authorities of the Japanese  Government or Indian Government,  as the case may be.  Specifically  payment of the purchase price of the  Production Equipment and the  components so supplied by MEI to  SIL shall be made through the  Japanese shippers designated by  MEI under the terms and conditions  to be agreed upon among the parties  concerned. 7.04    Supply of the Production Equipment  and Components from MEI to SIL  hereinabove set forth is for the sole  purpose of SIL’s own manufacturing  of the Products hereunder for itself,  and unless otherwise agreed in  writing by MEI, any item of the  Production Equipment and the  Components supplied by MEI  hereunder, unless otherwise agreed  by MEI."     

On reading the above agreement, the following  features emerge.  Under Clause 1.03 the term "Net- factory sale price" has been defined to mean the sale  price billed by the appellants for its products to its  customers in normal arm’s length transaction exclusive  of taxes, freight and insurance, but including the cost of  the bought-out components and the cost of the imported  components.  Under Clause 1.04 the term "Technical  Know-how" was defined to mean technical information  required for the manufacture of colour T.V. as specified  in Clause 3.01.  The technical know-how which was  agreed to be furnished to the appellants was to consist of  quality control standard and specification of the  components to be used in the manufacture of T.V. sets.   Further, under Clause 2.01 it was agreed that MEI shall  render to the appellants the technical assistance  regarding the manufacture of the T.V. sets in the manner

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provided in the said clause.  Under the said Clause  2.02(C), all costs, charges and expenses, incurred by the  appellants for technical assistance, was to be paid by the  appellants in U.S. Dollars.  Further, under Clause 4.01,  MEI agreed to grant to the appellants a licence to use the  technical assistance and the technical know-how for the  manufacture of the colour T.V. at the appellants’ factory  in India and also for sale of such products throughout  India.  Under Clause 6.01, in consideration of the  technical assistance to be rendered by MEI and in  consideration of the licence to be granted by MEI to the  appellants it was agreed that the appellants shall pay to  MEI the royalty at the rate of 3% on the net ex-factory  sale price of the colour T.V. manufactured and sold.   Further, it was agreed that in addition to the technical  assistance, MEI would assist the appellants in the  manufacturing of the colour T.V. by selling the  components to the appellants.  Under the Agreement, the  parties further agreed that if the appellant desired to  make use of bought-out components it can do so  provided the said components are forwarded to MEI for  inspection and if MEI approves the quality and the  specifications of such bought-out components then alone  the appellant would be free to use such components in  the manufacture of colour T.V.

The question which arises for consideration in this  civil appeal is: whether royalty payment was connected  with the imported components.  Under Rule 9(1)(c) of the  Valuation Rules, 1988, only such royalty which is  relatable to the imported goods and which is a condition  of sale of such goods alone could be added to the  declared price.  However, in the present case, payment of  continuing royalty was payable at the rate of 3% of the  net ex-factory sale price of the colour T.V. exclusive of  taxes, freight and insurance but including the cost of  imported components.  In other words, the royalty  payment was to be computed not only on the domestic  element of the net sale price of the colour T.V. but also  on the cost of imported components.  A bare reading of  the agreement shows that payment under the said  agreement related not only to the production of the goods  in India but also to imports.  In some of the decisions  cited on behalf of the assessee, we find that the net ex- factory sale price of the finished products expressly  excluded the cost of imported components.  On the other  hand, in the present case, the cost of imported  components was expressly included in the net ex-factory  sale price of the colour T.V.  Further, when payment to  MEI was at the rate of 3% of the sales turn over of the  final product, including cost of imported component, it  became a condition of sale of the finished goods.  Hence,  in this case both the conditions of Rule 9(1)(c) of the  Valuation Rules, 1988, are satisfied.  

For the above reasons, we find no merit in this civil  appeal and the same accordingly stands dismissed with  no order as to costs.