DaikIn Shriram Air Conditioning Vs. Cc - Court Judgment

Excerpt:
1. the issue involved in this appeal, filed by m/s. daikin shriram air conditioning pvt. ltd. is whether the technology transfer fee and royalty are includible in the value of the goods imported by them.2. shri r. parthasarthy, learned advocate, mentioned that m/s. daikin shriram air conditioning pvt. ltd. is a joint venture between daikin industries ltd. japan and siel ltd., new delhi; that the foreign collaboration agreement provided for payment of a lumpsum amount of us $ 3,00,000 towards know-how and royalty of 4% on sale of the licensed products; that as per the technical collaboration agreement, m/s.daikin agreed to grant the appellants an exclusive and non-transferable right and licence to use daikin technology to manufacture licensed products and existing products within the territory and to sell, install, maintain and service licensed products; that the "licensed products" means such model of equipment as designated and identified in appendix i to the agreement and the specifications of the licensed products is described in appendix 2; that "existing products' means the air conditioning equipment which the appellant has been desiring to be improved and modified by daiken and the model of equipment shall be designated and identified in appendix 3; that daikin also grants the appellants an exclusive and non-transferable right in the territory to use daikin technology which means the specific technical information on the licensed and existing products, technical information on the assembly, adjustment. listing, quality control, insulation operation and maintenance of licensed products and existing products. he contended that it is apparent that the technology relates to post importation period and the same is not related to the goods imported by the appellants. he, further, mentioned that they imported components/sub-assemblies for local manufacturing of the products; that the deputy commissioner, under order dated 8.11.2000, has held that the lumpsum payment and royalty are not to be added to the assessable value of the imported goods as the said payment relates only to the manufacture of goods in india and as such there was no nexus between the technical know-how/royalty payment and the import of goods; that commissioner (appeals), on appeal filed by the department, has, under the impugned order, held that technical know-how and royalty payment are part of the imported goods, disregarding the judgments relied upon by them and relying upon the decision in the case of collector of customs (prev), ahmedabad v. essar gujarat ltd. 1996 (88) elt 609 (sc) : 1997 (68) ecr 386 (sc).3.1 the learned advocate submitted that according to article 11.1 of the technical collaboration of agreement, the technology; transfer fee is in consideration of the daikin technology transfer and the license granted by daikin; that article 1.3 which defines the terms "daikin technology" makes it clear that, the technology is related to 'licensed products' and 'existing products' that the technology is related to the manufacture of the licensed products and the installation and maintenance and service the products; that they had imported one item of capital equipment i.e. bending die and other components/sub-assemblies for local manufacturing of the licensed products; that the payment of lumpsum fee for technology transfer is not related to the imported components/sub-assemblies or the binding die; that as such the basic requirement of rule 9(1)(c) of the customs valuation rules that the royalty or license fee should be relate to the imported goods is not satisfied. he also contended that the payment of the technology transfer fee is not a condition of the sale of the components/sub-assemblies/capital goods; that article 15 of the agreement provides that the detailed sale terms and conditions for supply of k.d. components from daikin to the appellants shall be separately agreed upon by and between the parties thereto; that this article makes it clear that the technology transfer fee is not a condition for the sale of the k.d. components; that article 19.2 provides for substitution of k.d. components by local components with prior approval of m/s. daikin; that this also shows that while prior approval is necessary to meet the quality requirements; that purchase of k.d. components only from daikin is not pre-condition. he emphasized that the requirement of rule 9(1)(c) of the customs valuation rule is that the payment of the royalty or license fee should be a condition of the sale of the goods but not the converse; that the larger bench of the appellate tribunal has held in the case of s.d. technical service v. cc new delhi, 2003 (155) elt 274 (t-lb), : 2003 (109) ecr 387 (t-lb) that know-how relates to manufacture of the licensed equipment in india and has no relation whatsoever to the goods imported. reliance has also been placed on the following decisions: (i) polar mumo agglomerates ltd. v. cc, new delhi 2003 (155) elt 283 (t-lb) : 2003 (109) ecr 384 (t-lb).panalfa dongwon india ltd. v. cc, mumbai 2003 (155) elt 287 (t-lb) : 2003 (109) ecr 354 (t-lb).pale pharmalab filteration p. ltd. v. cc, mumbai final order no. 1092/04 nb(a) dated 29.9.2004 wherein the tribunal has held that the cost of royalty and technical know-how is not includible in the value of the goods imported as there is no material adduced by the revenue to show that the same is a condition pre-requisite for supply of goods by the foreign supplier.3.2 the learned counsel also mentioned that in terms of article 11.1(2), they are required to pay royalty of 4% on the ex-factory sale price for all sales of the licensed products, both local and export; that this royalty is related to the goods manufactured in india and sold/exported; that the payment does not arise if either there is no manufacture or there is no sale; that the larger bench of the tribunal, in the case of hoerbiger india pvt. ltd. v. cc, mumbai, 2003 (156) elt 62 (t-lb) : 2003 (109) ecr 352 (t-lb) has held that running royalty is not includible in the price of the goods imported as the royalty is not relatable to the goods imported. reliance has also been placed on the decision inmando brake systems india ltd. v. cc, chennai 2004 (163) elt 333 (t) andneg micon (india) pvt. ltd. v. cc, chennai 2004 (170) elt 29 (t).4. finally, he submitted that the decision of the supreme court in essar gujarat is not applicable as the facts are different; that essar gujarat imported a 'complete plant in as is where is condition from m/s. teviot investment ltd. subject to condition that essar gujarat should obtain operation license from midrex of charloltes usa., that essar also entered into an agreement with m/s. voest alpine a.g. for technical services, and with m/s. midrex international b.v. for obtaining operation license. the supreme court has held that the license fees paid to midrex is to be included in the value of the plant as the agreement with m/s. teviol investment ltd. showed that essar should obtain the operation license from midrex was a condition and pre-requisite of sale of the plant. the learned advocate mentioned that no argument that the various payments related to the imported plant was ever raised by essar before the supreme court nor was this aspect considered by the supreme court; that in fact essar conceded before the supreme court that the payments related to the imported plant; that in fact the supreme court held that the service rendered by voest alpine were for the improvement of the plant; that this is because a running plant was imported by essar in as is where is condition; that thus the said judgment is not applicable to the present case; that more over, the present appellants has only imported a binding die and no capital goods incorporating the technology has been imported.5. countering the arguments shri s.m. tata, learned senior departmental representative, submitted that article 1.5 of the technological collaboration agreement defines "k.d. components" as "any components and materials supplied from daikin under separate agreements to be concluded between daikin and the appellants; that this clearly binds the appellants to purchase the components from m/s. daikin and as such is a condition pre-requisite for supply of technical know-how; that further article 19.2 does not visualize indigenous production of the components; that in fact this article binds to import the components from m/s. daikin; that article 19.2 provides that the appellants have not only to notify daikin if they intend to substitute particular k.d.components by local components but have to set out reasoning at least three months prior to the commencement of production using substitute local component and seek daikin's prior approval. the learned senior departmental representative also referred to annexure 5 of the memorandum of appeal which is a "list of components/sub-assemblies imported" which shows that the components supplied were also non-standard one and even bought out components have been purchased through m/s. daikin only. the learned senior departmental representative contended that the licence fee and royalty are thus related to the imported goods and provisions of rule 9(1)(c) of the customs valuation rules are attracted in the present matter. he mentioned that the decisions relied upon by the learned advocate are thus not applicable to the present matter as the facts are different; that in sd technical service case, there was no such restricted clause as article 19.2; that in the case of panaifa dong won ltd. goods were from unconnected parties; that it is clearly mentioned in para 5 of the said decision that "during the year 1996 the entire import of raw material was from unconnected party. chart showing price of imports from foreign collaborator and other parties would show that the price was comparable." 6. we have considered the submissions of both the sides. as per rule 3 of the customs valuation (determination of price of imported goods) rules, 1988 the value of imported goods shall be the transaction value.as per rule 4, the transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to india, adjusted in accordance with the provisions of rule 9 of these rules; rule 9(1) (c) of the valuation rules provides that in determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, "royalties and license 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. "thus, as per the provisions of rule 9(1)(c), royalty and license fee will be included in the assessable value if the same relates to the imported goods and the buyer is required to pay the same as a condition of the sale of the goods being valued. the various decision of the larger bench of the tribunal has laid down the law that the royalty/licence fee can be included in the assessable value only when the same is related to the goods imported. the tribunal has held in all the decision, relied upon by the learned advocate, that the fee/royalty has no relation to the goods imported by the importers in those cases as the same relates to manufacture of the licensed goods or the payment of licence fee or royalty is not a condition precedent for sale of the goods imported.for arriving at this conclusion, the provisions of the agreement have to be considered and examined and if there is any clause which shows connection between the payment of licence fee/royalty and the goods imported by the appellants, provisions of rule 9(1)(c) would be attracted. in the present matter, the following articles in the technology collaboration agreement clearly shows the connection between the payment of royalty/licence fee and the goods imported by the appellants. 1.5 k.d. components" means any components and materials supplied from daikin under separate agreements to be concluded between daikin and licensee. 1.6 "local components" means any components and materials other that k.d. components which may be produced or procured by licensee within the territory subject to the provisions of this agreement. 15. supply of k.d. components - detailed sales terms and conditions for the supply of k.d. components from daikin to licensee, including but not limited to price, payment, ordering and claims shall be separately agreed upon by and between the parties hereto. 19.1 adoption of local componetns by licensee shall be subject to daikin's prior written approval, licensee shall not use any such local components as would, when sued, render licensed products manufactured hereunder inferior to the quality standards required by daikin and/or cause deviation from the framework of designs and/or specifications established for licensed products. 19.2 if licensee intends to substitute particular k.d. components by local components and to, accordingly, cease to purchase k.d. components from daikin, the licensee shall notify daikin, for its prior approval, of such intention, and licensee shall set out its reasoning in such notification, at least three (3) months prior to the commencement of production using such substitute local components. no such substitutions shall be made by licensee without daikin's prior written consent.7. a perusal of these clause makes it apparent that the appellants have to procure "k.d. components" from m/s. daikin only who have agreed to grant a licensee and technical assistance for manufacture etc. of licensed products and existing products. no doubt the terms and conditions for the supply of k.d. components from daikin shall be separately agreed upon by and between the parties. the fact, however, remains that the components have to be procured only from m/s. daikin.this is strengthened from the list of components imported by them which shows that even the non-standard components were supplied by m/s.daikin and moreover the same were even bought by m/s. daikin only from the market for being supplied to the appellants. article 19 of the agreement binds the appellants to procure components from daikin as adoption of local components by them shall be subject to daikin's prior written approval. in case the appellants intends to substitute and k.d.components by local components and to cease to purchase k.d. components from daikin, they have to (2) set out their reasoning in such notification, at least 3 months prior to the commencement of production using substitute local components, and (3) no substitution shall be made by the appellant without daikin's prior consent.8. it is thus apparent that supply of technical know-how is subject to procuring k.d. components, from m/s. daikin and accordingly royalty and licence fee is related to the imported goods which the appellants are required to pay, directly or indirectly as a condition of the sale of the goods in question. thus we hold that the license fee/royalty are includible in the assessable value of the goods in question. the appeal is accordingly rejected.

Judgment:
1. The issue involved in this Appeal, filed by M/s. Daikin Shriram Air Conditioning Pvt. Ltd. is whether the technology transfer fee and royalty are includible in the value of the goods imported by them.

2. Shri R. Parthasarthy, learned Advocate, mentioned that M/s. Daikin Shriram Air conditioning Pvt. Ltd. is a joint venture between Daikin Industries Ltd. Japan and SIEL Ltd., New Delhi; that the foreign collaboration agreement provided for payment of a lumpsum amount of US $ 3,00,000 towards know-how and royalty of 4% on sale of the licensed products; that as per the Technical Collaboration Agreement, M/s.

Daikin agreed to grant the Appellants an exclusive and non-transferable right and licence to use Daikin Technology to manufacture licensed Products and existing products within the Territory and to sell, install, maintain and service licensed products; that the "Licensed Products" means such model of equipment as designated and identified in Appendix I to the Agreement and the specifications of the Licensed Products is described in Appendix 2; that "Existing Products' means the air conditioning equipment which the Appellant has been desiring to be improved and modified by Daiken and the model of equipment shall be designated and identified in Appendix 3; that Daikin also grants the Appellants an exclusive and non-transferable right in the territory to use Daikin Technology which means the specific technical information on the Licensed and Existing Products, technical information on the assembly, adjustment. Listing, quality control, insulation operation and maintenance of Licensed Products and Existing Products. He contended that it is apparent that the technology relates to post importation period and the same is not related to the goods imported by the Appellants. He, further, mentioned that they imported components/sub-assemblies for local manufacturing of the products; that the Deputy Commissioner, under Order dated 8.11.2000, has held that the lumpsum payment and royalty are not to be added to the assessable value of the imported goods as the said payment relates only to the manufacture of goods in India and as such there was no nexus between the technical know-how/royalty payment and the import of goods; that Commissioner (Appeals), on Appeal filed by the Department, has, under the impugned Order, held that technical know-how and royalty payment are part of the imported goods, disregarding the judgments relied upon by them and relying upon the decision in the case of Collector of Customs (Prev), Ahmedabad v. Essar Gujarat Ltd. 1996 (88) ELT 609 (SC) : 1997 (68) ECR 386 (SC).

3.1 The learned Advocate submitted that according to Article 11.1 of the Technical Collaboration of Agreement, the technology; transfer fee is in consideration of the Daikin Technology transfer and the license granted by Daikin; that Article 1.3 which defines the terms "Daikin Technology" makes it clear that, the technology is related to 'licensed products' and 'existing products' that the technology is related to the manufacture of the licensed products and the installation and maintenance and service the products; that they had imported one item of capital equipment i.e. Bending Die and other components/sub-assemblies for local manufacturing of the licensed products; that the payment of lumpsum fee for technology transfer is not related to the imported components/sub-assemblies or the binding die; that as such the basic requirement of Rule 9(1)(c) of the Customs Valuation Rules that the royalty or license fee should be relate to the imported goods is not satisfied. He also contended that the payment of the technology transfer fee is not a condition of the sale of the components/sub-assemblies/capital goods; that Article 15 of the Agreement provides that the detailed sale terms and conditions for supply of K.D. components from Daikin to the Appellants shall be separately agreed upon by and between the parties thereto; that this Article makes it clear that the technology transfer fee is not a condition for the sale of the K.D. Components; that Article 19.2 provides for substitution of K.D. Components by local components with prior approval of M/s. Daikin; that this also shows that while prior approval is necessary to meet the quality requirements; that purchase of K.D. Components only from Daikin is not pre-condition. He emphasized that the requirement of Rule 9(1)(c) of the Customs Valuation Rule is that the payment of the royalty or license fee should be a condition of the sale of the goods but not the converse; that the Larger Bench of the Appellate Tribunal has held in the case of S.D. Technical Service v. CC New Delhi, 2003 (155) ELT 274 (T-LB), : 2003 (109) ECR 387 (T-LB) that know-how relates to manufacture of the licensed equipment in India and has no relation whatsoever to the goods imported. Reliance has also been placed on the following decisions: (i) Polar Mumo Agglomerates Ltd. v. CC, New Delhi 2003 (155) ELT 283 (T-LB) : 2003 (109) ECR 384 (T-LB).Panalfa Dongwon India Ltd. v. CC, Mumbai 2003 (155) ELT 287 (T-LB) : 2003 (109) ECR 354 (T-LB).Pale Pharmalab Filteration P. Ltd. v. CC, Mumbai Final Order No. 1092/04 NB(A) dated 29.9.2004 wherein the Tribunal has held that the Cost of royalty and technical know-how is not includible in the value of the goods imported as there is no material adduced by the Revenue to show that the same is a condition pre-requisite for supply of goods by the foreign supplier.

3.2 The learned Counsel also mentioned that in terms of Article 11.1(2), they are required to pay royalty of 4% on the ex-factory sale price for all sales of the licensed products, both local and export; that this royalty is related to the goods manufactured in India and sold/exported; that the payment does not arise if either there is no manufacture or there is no sale; that the Larger Bench of the Tribunal, in the case of Hoerbiger India Pvt. Ltd. v. CC, Mumbai, 2003 (156) ELT 62 (T-LB) : 2003 (109) ECR 352 (T-LB) has held that running royalty is not includible in the price of the goods imported as the Royalty is not relatable to the goods imported. Reliance has also been placed on the decision inMando Brake Systems India Ltd. v. CC, Chennai 2004 (163) ELT 333 (T) andNeg Micon (India) Pvt. Ltd. v. CC, Chennai 2004 (170) ELT 29 (T).

4. Finally, he submitted that the decision of the Supreme Court in Essar Gujarat is not applicable as the facts are different; that Essar Gujarat imported a 'complete plant in as is where is condition from M/s. Teviot Investment Ltd. subject to condition that Essar Gujarat should obtain operation license from Midrex of Charloltes USA., that Essar also entered into an agreement with M/s. Voest Alpine A.G. for technical Services, and with M/s. Midrex International B.V. for obtaining operation license. The Supreme Court has held that the license fees paid to Midrex is to be included in the value of the Plant as the agreement with M/s. Teviol Investment Ltd. showed that Essar should obtain the operation License from Midrex was a condition and pre-requisite of sale of the Plant. The learned Advocate mentioned that no argument that the various payments related to the imported plant was ever raised by Essar before the Supreme Court nor was this aspect considered by the Supreme Court; that in fact Essar conceded before the Supreme Court that the payments related to the imported plant; that in fact the Supreme Court held that the service rendered by Voest Alpine were for the improvement of the plant; that this is because a running plant was imported by Essar in as is where is condition; that thus the said judgment is not applicable to the present case; that more over, the present Appellants has only imported a binding die and no capital goods incorporating the technology has been imported.

5. Countering the arguments Shri S.M. Tata, learned Senior Departmental Representative, submitted that Article 1.5 of the Technological Collaboration Agreement defines "K.D. Components" as "any components and materials supplied from Daikin under separate agreements to be concluded between DAIKIN and the Appellants; that this clearly binds the Appellants to purchase the components from M/s. DAIKIN and as such is a condition pre-requisite for supply of technical know-how; that further Article 19.2 does not visualize indigenous production of the components; that in fact this Article binds to import the components from M/s. DAIKIN; that Article 19.2 provides that the Appellants have not only to notify DAIKIN if they intend to substitute particular K.D.Components by local components but have to set out reasoning at least three months prior to the commencement of production using substitute local component and seek DAIKIN's prior approval. The learned Senior Departmental Representative also referred to Annexure 5 of the Memorandum of Appeal which is a "List of components/sub-assemblies Imported" which shows that the components supplied were also non-standard one and even bought out components have been purchased through M/s. DAIKIN only. The learned Senior Departmental Representative contended that the licence fee and royalty are thus related to the imported goods and provisions of Rule 9(1)(c) of the Customs Valuation Rules are attracted in the present matter. He mentioned that the decisions relied upon by the learned Advocate are thus not applicable to the present matter as the facts are different; that in SD Technical Service case, there was no such restricted clause as Article 19.2; that in the case of Panaifa Dong won Ltd. goods were from unconnected parties; that it is clearly mentioned in Para 5 of the said decision that "during the year 1996 the entire import of raw material was from unconnected party. Chart showing price of imports from foreign collaborator and other parties would show that the price was comparable." 6. We have considered the submissions of both the sides. As per Rule 3 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 the value of imported goods shall be the transaction value.

As per Rule 4, the transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9 of these Rules; Rule 9(1) (c) of the Valuation Rules provides that in determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, "royalties and license 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. "Thus, as per the provisions of Rule 9(1)(c), royalty and license fee will be included in the assessable value if the same relates to the imported goods and the buyer is required to pay the same as a condition of the sale of the goods being valued. The various decision of the Larger Bench of the Tribunal has laid down the law that the royalty/Licence Fee can be included in the assessable value only when the same is related to the goods imported. The Tribunal has held in all the decision, relied upon by the learned Advocate, that the fee/royalty has no relation to the goods imported by the importers in those cases as the same relates to manufacture of the Licensed goods or the payment of licence fee or royalty is not a condition precedent for sale of the goods imported.

For arriving at this conclusion, the provisions of the Agreement have to be considered and examined and if there is any clause which shows connection between the payment of licence fee/royalty and the goods imported by the Appellants, provisions of Rule 9(1)(c) would be attracted. In the present matter, the following Articles in the Technology Collaboration Agreement clearly shows the connection between the payment of royalty/licence fee and the goods imported by the Appellants.

1.5 K.D. Components" means any components and materials supplied from DAIKIN under separate agreements to be concluded between DAIKIN and LICENSEE. 1.6 "Local Components" means any components and materials other that K.D. Components which may be produced or procured by LICENSEE within the TERRITORY subject to the provisions of this Agreement.

15. Supply of K.D. Components - Detailed sales terms and conditions for the supply of K.D. Components from DAIKIN to LICENSEE, including but not limited to price, payment, ordering and claims shall be separately agreed upon by and between the parties hereto.

19.1 Adoption of LOCAL COMPONETNS by LICENSEE shall be subject to DAIKIN's prior written approval, LICENSEE shall not use any such LOCAL COMPONENTS as would, when sued, render LICENSED PRODUCTS manufactured hereunder inferior to the quality standards required by DAIKIN and/or cause deviation from the framework of designs and/or specifications established for LICENSED PRODUCTS. 19.2 If LICENSEE intends to substitute particular K.D. COMPONENTS by LOCAL COMPONENTS and to, accordingly, cease to purchase K.D. COMPONENTS from DAIKIN, the LICENSEE shall notify DAIKIN, for its prior approval, of such intention, and LICENSEE shall set out its reasoning in such notification, at least three (3) months prior to the commencement of production using such substitute LOCAL COMPONENTS. No such substitutions shall be made by LICENSEE without DAIKIN's prior written consent.

7. A perusal of these clause makes it apparent that the appellants have to procure "K.D. COMPONENTS" from M/s. DAIKIN only who have agreed to grant a licensee and technical assistance for manufacture etc. of Licensed Products and Existing Products. No doubt the terms and conditions for the supply of K.D. Components from DAIKIN shall be separately agreed upon by and between the Parties. The fact, however, remains that the Components have to be procured only from M/s. DAIKIN.This is strengthened from the list of components imported by them which shows that even the non-standard components were supplied by M/s.

DAIKIN and moreover the same were even bought by M/s. DAIKIN only from the market for being supplied to the Appellants. Article 19 of the Agreement binds the Appellants to procure components from DAIKIN as adoption of Local Components by them shall be subject to DAIKIN's prior written approval. In case the Appellants intends to substitute and K.D.Components by local components and to cease to purchase K.D. Components from DAIKIN, they have to (2) Set out their reasoning in such notification, at least 3 months prior to the Commencement of production using substitute local components, and (3) No substitution shall be made by the Appellant without DAIKIN's prior consent.

8. It is thus apparent that supply of technical know-how is subject to procuring K.D. Components, from M/s. DAIKIN and accordingly royalty and licence fee is related to the imported goods which the Appellants are required to pay, directly or indirectly as a condition of the sale of the goods in question. Thus we hold that the license fee/royalty are includible in the assessable value of the goods in question. The Appeal is accordingly rejected.