Matsushita Television & Audio (I) Ltd Vs. Commissioner of Customs  Insc 396
(12 April 2007)
S.H. KAPADIA & B. SUDERSHAN REDDY
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 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
Therefore, we quote hereinbelow the relevant provisions of the Agreement
which are as follows:
"TECHNICAL ASSISTANCE AND KNOW- HOW AGREEMENT"
xxx xxx xxx
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 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
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
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
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 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 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
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.
C to G xxx xxx xxx 7 PRODUCTION EQUIPMENT AND COMPONENTS.
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 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
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.
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