The Toyota decision will be particularly useful for most joint venture companies
A recent Supreme Court decision makes it clear that royalty and fees for technical knowhow can be added to the assessable value of imported capital goods and components only if such payment is condition for their sale.
Toyota Kirloskar case
Toyota Kirloskar Motor Private Ltd was a joint venture for manufacture of automobiles. Toyota Motor Corporation of Japan was a major shareholder and provided technical knowhow under a technical assistance agreement. The Japanese company also supplied capital goods, components and parts for the manufacture of motor vehicles.
The Customs authorities took the view that lumpsum amount of approximately one billion yen paid towards technical knowhow should be added to the value of components, tools and capital goods imported from Toyota Corporation of Japan.
The assessing authority also took the view that the amount paid by way of royalty should be added to the value of spares and accessories imported. The addition was made under Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 on the ground that lumpsum fees and annual royalties were relatable to the imported goods and were a condition for import of goods. It was also observed that the Japanese company would be treated as being related to the joint venture company in view of its shareholding.
The appeal to the Commissioner of Customs (Appeals) was partly allowed and both parties filed appeals to the Tribunal which allowed the appeal of the joint venture company. The Tribunal held that technical know-how fees and royalty were payable for setting up the plant and for manufacture of goods in India; they were not a condition for the sale of imported goods. Rule 9(1)(c) reads as follows: "Royalties and licence fees related to 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."
An analysis of this clause shows that royalty and licence fee can be added only if they are to be paid as a condition for the import of goods. In this case, royalty and technical knowhow fees were paid for setting up of the unit and for manufacture of final products and, therefore, Rule 9(1)(c) would not apply.
The court then referred to an earlier decision Collector of Customs v Essar Gujarat Ltd (1997 9 SCC 38). Analysing the agreement in detail, it was found that Essar had to pay technical fees to Midrex International as a condition for importing a second-hand gas-based Midrex Direct Reduction Plant. The agreement stipulated that process licence fees had to be paid as a condition before the second-hand plant could be purchased by Essar.
It was in this factual background that the Supreme Court had upheld the addition of technical fees to the imported cost of the second-hand sponge iron plant in the Essar case. On the other hand, in the case of Toyota, the payments were not a condition precedent for the supply of capital goods and components. The technical knowhow fee was attributable to the setting up of the plant, preparation of pilot and product models and did not have a direct nexus with the import of capital goods or components.
J. K. Corporation case
In another case, Commissioner of Customs vs J. K. Corporation Ltd (2007 (2) SCALE 459), it was held that the value of imported goods cannot be increased by any amount which is to be paid after the import is complete. This amount may be for transfer of licence or technical knowhow for setting up of the plant. These amounts are paid for post-importation service or activities and, therefore, are not to be added while determining the assessable value of imported goods.
Applying this decision and, on a combined reading of Section 14 of the Customs Act and Rules 3, 4 and 9 of the Valuation Rules, technical knowhow and royalty fees could not be added to the value of capital goods, components, tools, spares/accessories.
The Toyota decision will be particularly useful for most joint venture companies. If it can be established that payment of technical knowhow and royalty fees are not a condition for their sale but payable for setting up of the plant and for manufacture or production, the assessable value of imported goods cannot be increased by these payments.
A common shareholding between a foreign company and the Indian manufacturing unit or joint-venture company is also a ground to add these amounts. The payment of royalty/technical fees should be a pre-condition for the import of these goods.
The three Supreme Court decisions in the Toyota, Essar Gujarat and J. K. Corporation cases will have to be carefully studied before finalising any joint-venture agreement or an agreement for supply of technical know-how.
The clauses will determine whether the payment of royalty and fees for technical know-how will be added to the assessable value of imported capital goods, components, spares and accessories.
Arvind P. Datar (The author is a Senior Advocate of the Madras High Court.)