Holding

Royalty and licence fees that are not a condition precedent to the sale of the imported goods and are unrelated to the imported items cannot be added to the customs value under Rule 9(1)(c).

Summary

The appellant, Commissioner of Customs, appealed against the Tribunal’s order that the royalty and licence fees payable under a technical assistance and trademark agreement (TAA) between M/s Ferodo India Pvt. Ltd. (the respondent) and its foreign licensor should be added to the customs value of imported raw materials. The issue was whether such fees constitute a condition precedent to the sale of the imported goods under Rule 9(1)(c) and (e) of the Customs Valuation Rules, 1988, and therefore must be included in the transaction value. The Supreme Court held that the royalty and licence fees related only to the manufacture of licensed brake liners and pads in India and had no nexus with the imported raw material; consequently they are not a condition of sale of the imported goods. The Court emphasized that the Department must examine both the TAA and the pricing arrangement between the buyer and the foreign collaborator to determine any price adjustment. As the fees were not linked to the imported items, the Tribunal’s order was upheld and the Department’s appeals were dismissed.

Issues considered

Whether royalty and licence fees under a technical assistance agreement are to be included in the customs value of imported goods under Rule 9(1)(c) of the Customs Valuation Rules, 1988.
Whether such fees constitute a condition precedent to the sale of the imported goods.
Whether the consideration clause in the TAA and the pricing arrangement between the buyer and foreign licensor must be examined to ascertain nexus with the imported goods.

Legislation cited

Customs Act, 1962s. 14
Customs Valuation (Determination of Price of Imported Goods) Rules, 1988s. Rule 4, s. Rule 4(3)(a), s. Rule 4(3)(b), s. Rule 9, s. Rule 9(1)(c), s. Rule 9(1)(e)

Subjects

customs valuationRule 9(1)(c)royaltylicence feetechnical assistance agreementtransaction valueimported goodscondition precedentconsideration clausearm's length price

Judgment

(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- Technicalc
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
goods imported for manufacture of licensed products - E
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
consideration for the purchase of the imported goods. In
0
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
. ""I INDIA PVT. LTD.

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 payments of royalty/licence fees
was entirely relatable to the manufacture of brake liners
and brake pads-licensed products. The said payments
......... were in no way related to the imported items. In the instant D
case, no effort was made by the Department to examine
the pricing arrangement; to ascertain whether there exists
a price adjustment between cost incurred by the buyer
on account of royalty/licence fees payments and the price
paid for imported items; and to ascertain enhancement E
of royalty/licence fees by reducing the price of the
imported items. In this case, the Department has gone by
TAA alone. On reading TAA in entirety, there was no nexus
#--J between royalty/licence fees payable for the know-how
'
and the goods imported for the manufacture of licensed F
products. The Department itself invoked rule 9(1 )(c). (Paras
19 and 20) [159-F, G; 160-A, B, C]
1.4 In the alternate, the Department invoked rule
9(1)(e). This rule 9(e) cannot stand alone. It is a corollary
· to rule 4. There is no finding in the instant case that what G
was termed as royalty/licence fee was in fact not such
.,.. royalty/licence fee but some other payment made or to
be made as a condition pre-requisite to the sale of the
imported goods. Rule 9 refers to cost and services. Under
rule 9(1 ), the price for the imported goods had to be H
150 SUPREME COURT REPORTS [2008] 3 S.C.R. '°'

A enhanced/loaded by adding certain costs, royalties and
licence fees ·and values mentioned in sub-rules 9(1)(a) to
9(1 )(d). It refers to "all other payments actually made or to
be made as a condition of sale of the imported goods." In
the instant case, the Department invoked rule 9(1)(c) on
B the ground that royalty was related to the imported goods,
having failed it cannot fall back upon rule 9(1)(e) because
essentially the concern is with regard to the addition of
royalty etc. to the price of the imported goods. Further, in
the instant case, the Department accepted the transaction
c value of the imported goods. (Para 21) [160-C, D, E, F, G]
1.5 Rule 4(3)(b) of the CVR, 1988 provides for an
opportunity for the importer to demonstrate that the
transaction value closely approximates to a "test" value.
Therefore, a number of factors have to be taken into
D consideration in determining whether one value "closely
approximates" to another value. These factors include the
nature of the imported goods, the nature of the industry
itself, the difference in values etc. Rule 4(3)(a) and rule
4(3)(b) of the CVR, 1988 provides for different means of
E establishing the acceptability of a transaction value. The
Consideration Clause in such circumstances is of
relevance. Pricing arrangement and TAA are both to be
seen by the Department. In a given case, if the
Consideration Clause indicates that the importer/buyer
F had adjusted the price of the imported goods in guise of
enhanced royalty or if the Department finds that the buyer
had misled the Department by such pricing adjustments
then the adjudicating authority would be justified in adding
the royalty/licence fees payment to the price of the
G imported goods. Therefore, it cannot be said that the
consideration clause in TAA is not relevant. Ultimately, the
test of close approximation of values require all
circumstances to be taken into account. Thus, there is
no infirmity in the impugned order of the tribunal.
H (Paras 25 and 26) [161-G; 162-A, B, C, D, E, F]
'.
COMMISSIONER OF CUSTOMS Ii. M/S FERODO 151
INDIA PVT. LTD. [KAPADIA, J.]

COC v. Essar Gujarat Ltd. 1996 (88) ELT 609 (SC) - A
distinguished.
....
Matsushita Television & Audio India Ltd. v. Coe 2007
(211) ELT 200 (SC) - referred to.
t CIVIL APPELLATE JURISDICTION : Civil Appeal No. B
---r 8426 of 2002
From the final Order No. 91 /2002 dated 12/2/2002 of the
Customs, Excise & Gold (Control) Appellate Tribunal, New Delhi
in Appeal No. C/573/2001-A.
c
WITH
Civil Appeal Nos. 8417/03, 981/06, 3076/06, 3203/06 and
284/07.
--..-. Brijender Chahar, Abhinav Jain, Jyoti Chahar, Jagbir Singh D
Malik, R. Basant, Deepak Thakur and B. Krishna Prasad for
the Appellant.
V. Lakshmi Kumaran, R. Parthasarthy, Alok Yadav, M.P.
Devnath, Rajesh Kumar and M/s. Dua Associates for the
Respondent. E
The Judgment of the Court was delivered by

"-J KAPADIA, J. This batch of civil appeals is filed by the
Department and is directed against the orders passed by the
Customs, Excise & Gold (Control) Appellate Tribunal ("CEGAT") F
whereby and whereunder the appeals filed by the respondents-
importers herein stood allowed. They arise from assessment
proceedings and not from show cause. The adjudicating
authority has held that M/s Ferodo India Pvt. Ltd. ("buyer'' in short)
is a subsidiary of M/s T & N International Ltd., UK and are thus G
related, which finding is not in dispute.
2. For the sake of convenience we state the facts occurring
in Civil Appeal No. 8426/02 -Commnr. of Customs v. Mis.
Ferodo India Pvt. Ltd.
H
152 SUPREME COURT REPORTS (2008] 3 S.C.R.
-....,
"'
A 3. The buyer is the manufacturer of brake liners and brake
pads in India. On 8.9.1995, a technical assistance and trade
mark agreement ("TAA" for short) was entered into between
....
the respondent (buyer/licensee) and Mis T & N International Ltd.,
UK (foreign collaborator/licensor). Under the said agreement,
B the licensor claimed to be in possession of certain secret
processes, formula and information. Under the agreement, the ,_
licensor agreed to permit manufacture of brake liners and brake
pads (licensed products) by the licensee. Under the agreement,
the licensor agreed to disclose the relevant secret processes,
c formula and information to the licensee. Under the agreement,
the licensee was required to import/buy raw material and capital
goods from the licensor. Under the agreement, the licensee was
obliged to pay a licence fee along with royalty, based on the net
sales value of licensed products sold, consumed or otherwise
disposed of.
D
4. Vide order dated 22.9.1999 the adjudicating authority
held that, technical know-how fees and royalty were related to
the imported goods and were a condition of sale for the import
thereof and consequently, the adjudicating authority loaded the
E CIF value of the imported goods with the proportionate amount
of know-how fees and royalty. In this connection, reliance was
placed on the judgment of this Court in CoC v. Essar Gujarat
Ltd. reported in 1996 (88) ELT 609 (SC). This order was
\ _.,,
confirmed by the Commissioner (A). However, by the impugned
F order dated 12.2.2002, 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, this civil appeal by the Department:
5. In this case, we are required to lay down the scope of
G rule 9(1 )(c) and rule 9(1 )(e} of CVR, 1988, which are quoted
herein below:
"9. Cost and services.-
(1) In determining the transaction value, there shall be
H added to the price actually paid or payable for the imported
y COMMISSIONER OF CUSTOMS v. MIS FERODO 153
' ~
INDIA PVT LTD. [KAPADIA, J.]

goods,- A
(a)
(b)
~ (c) Royalties and licence fees related to the imported
---1 goods that the buyer is required to pay, directly or B
-~ 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.
c
(d)
(e) All other payments actually made or to be made as

'
- a condition of sale of the imported goods, by the
buyer to the seller, or by the buyer to a third party to
satisfy an obligation of the seller to the extent that D
such payments are not included in the price actuaJly
paid or payable."
6. At the outset, it may be stated that, this is not the case of
rejection of transaction value, though it is held to be a related
party transaction. In this matter we are concerned with E
adjustment/addition to the price of the imported goods under
_..__,_
rule 9(1 )(c) or in the alternative under rule 9(1 )(e).
7. Under Section 14 of the Customs Act, 1962, the
assessable value of imported goods is deemed to be the price F
at which such or like goods are ordinarily sold or offered for
sale for delivery at the time and place of importation or
l exportation, as the case may be, in the course of international
trade, where the seller and the buyer have no interest in the
business of each other and the price is the sole consideration G
for the sale or offer of sale.
)<
--.--;-..,..· 8. The Customs Valuation (Determination of Price of
Imported Goods) Rules, 1988 ("CVR, 1988" for short)
recognises the fundamental principle of arm's length price while
dealing with transaction value. The Rules provide for the H
154 SUPREME COURT REPORTS [2008] 3 S.C.R. "(
".
A determination of the correct price of goods that are imported in
the country or exported out of the country uninfluenced by
relationship between the transacting parties.
9. Transaction Value, Deductive Value, Computed Value
and Residual Value Methods are the methods prescribed in
B the Rules, to be followed sequentially in that order in the matter ,._
of determination of arm's length pricing.
10. To determine the assessable value for the levy of
customs duty on imported goods, Section 14 of the 1962 Act
c has to be read with the provisions of CVR, 1988 because under
Section 14(1) there is reference to a deemed price of goods
imported and under Section 14(1A) such deemed price is to
be determined in accordance with the CVR, 1988.
11. Rule 3 of the CVR, 1988 inter a/ia provides for six
D methods of determination of the price of imported goods. The
six methods are:
Method 1 - Transaction Value (Rule 4)
The primary basis for customs duty is "transaction value",
E as defined in rule 4(1) of CVR, 1988, which is the price
actually paid or payable for the goods when sold for export
to India, adjusted in accordance with the provisions of rule
9. Adjustments to the price actually paid or payable are ~--
required in cases where certain specific elements which
F form part of the value for customs purposes are incurred
by the buyer but are not included in the price actually paid
or payable for the imported goods. Rule 9 embodies the!
principle of attribution of certain costs to the price of the
imported goods. Rule 9 also provides for inclusion of
certain considerations which passes from the buyer to the
G
supplier in the form of specified goods or services, other
than in the form of money. ~

Method 2 - TV of Identical Goods (Rule 5)
Rule 5 through rule 7A provides for four alternate methods
H
y COMMISSIONER OF CUSTOMS v. MIS FERODO 155
"' INDIA PVT. LTD. [KAPADIA, J.]

·of determining the customs value whenever such value A
cannot be decided under the provisions of rule 4.
Under Rule 5, the value of imported goods shall be the
transactional value of identical goods sold for export to
India if the goods are:
' .,, B
(i) the same in all respects (including physical
· characteristics, quality and reputation);
(ii) produced in the same country as the goods being
valued; and
c
(iii) produced by the producer of the goods being valued.
Method 3- TV of Similar Goods (Rule 6):
Under this method, the value of imported goods is the
transaction value of similar goods if:
D
(i) goods closely resemble the goods being valued in
terms of components, materials and characteristics;
(ii) goods which are capable of performing the same
functions and are commercially interchangeable with
E
the goods being valued;
(iii) goods which are produced in the same country and
~ .J by the producer of the goods being valued.
Rule 6A provides for determination of value when
transaction value cannot be determined under rules 4, 5 F
and 6. In such cases, the following two methods are
envisaged on the request of the importer and subject to
the approval of the proper officer, i.e., under rules 7 and
7A.
G
Method 4 - Deductive Value (Rule 7)
Rule 7 provides that when customs value cannot be
determined on the basis of transaction value of the
imported goods or identical or similar goods, the value of
H
156 SUPREME COURT REPORTS [2008] 3 S.C.R. --.,
"
A the imported goods shall be based on the unit price at
which the imported goods or identical goods or similar
goods are sold to an unrelated buyer in the country of
importation in the greatest aggregate quantity.
The starting point in calculating the deductive value is the
B same price in the country of importation. Various ;..
deductions are necessary to reduce that price to the
relevant customs value. These deductions are:
(i) commissions usually paid or agreed to be paid,
c profits and general expenses added in connection
with sales;
(ii) usual transport cost and corresponding insurance
are to be deducted from the price of the goods when
these costs are usually incurred within the country of
D importation;
(iii) the customs duty and other national taxes payable in
the country of importation by reason of importation;
(iv) value added by further processing, wherever
E applicable.
·Method 5 - Computed Value (Rule 7A)
Computed value determines the customs value on the \ ~
basis of the cost of production of the goods being valued
F plus an amount for profit and general expenses usually
reflected in sales from the country of exportation to the
country of importation of goods of the same class or kind.
It is, therefore, the total sum of production cost and profit
and general expenses.
G Method 6 - Fall-Back Method (Rule 8)
When the customs value cannot be determined under any
of the previous methods, it has to be determined using
reasonable means consistent with the principles and
general provisions of the CVR, 1988 and Section 14(1) of
H
COMMISSIONER OF CUSTOMS v. M/S FERODO 157
INDIA PVT. LTD. [KAPADIA, J.]
..,
"' ' the 1962 Act and on the basis of data available in India. A
To the great extent possible, this method is based on
previously determined values and methods with a
reasonable degree of flexibility in their application.
Basis of CVR, 1988
B
.. 12. Article 7 of GATT, 1994 is the foundation of the CVR,
.J,.
1988. The said Article brought in the concept of arm's length
price in customs valuation to test values arrived from sale of
identical or similar goods and in cases where such values were
not available, it provided for deductive and computed value c
methods, which methods are akin to resale price method and
cost plus method under the transfer pricing in the Income-tax
Act, 1961.
Role of Interpretative Notes to CVR, 1988
D
13. At the outset, it may be stated that rule 9(1)(c) has to
~
be read with the Interpretative Notes and when so read it
authorises the Customs to add the royalties/licence fees to the
assessable value only in certain conditions, namely, when the
royalties/licence fees are related to imported goods; that, when
the buyer is required to pay to the seller, directly or indirectly, as E
the condition of the sale of the goods being valued, such royalties
and licence fees are not included in the transaction value.
14. One more significance of the Interpretative Notes is
T .J that it has placed the burden on the importer/buyer to prove the F
correctness of the price of the imported goods in terms of the
means prescribed in rule 4(3)(a) and rule 4(3)(b). In other words,
the CVR mandates the hierarchy of valuation methods to be
applied in the event of the transfer price being rejected.
Analysis of Rule 9(1)(c) G
15. Rule 9(1 )( c) extends the quantum of levy under rule 4.
Rule 9(4) mandates that there can be addition to the transaction
value except as provided in rule 9(1) and (2). Hence, addition
for cost can only be made in situations coming under rule 9(1)
H
158 SUPREME COURT REPORTS [2008] 3 S.C.R.

A and (2). Rule 9(1) and (2) is based on the principle of attribution.
Under Customs law, valuation is done on pricing whereas in the
case of transfer pricing under Income-tax Act, 1961, valuation
is profit based. The principle of attribution of certain costs
(including royalty and licence fee payments) to the price of the
B imported goods is provided for in rule 9 under situations
mentioned in rule 9(1) and (2). In transfer pricing, the arm's
length price is inferred from various methods to avoid profit-
shift from one jurisdiction to another and it is here that principle
of allocation of profits comes in (i.e. in the case of transfer
c pricing).
16. Under rule 9(1 )(c), the cost of technical know-how·and
payment of royalty is includible in the price of the imported goods
if the said payment constitutes a condition pre-requisite for
the supply of the imported goods by the foreign supplier.
D . If such a condition exists then the payment made towards
technical know-how and royalties has to be included in the price
of the imported goods. On the other hand, if such payment has
no nexus with the working of the imported goods then such
payment was not includible in the price of the imported goods.
E 17. In the case of Essar Gujarat Ltd. (supra) the condition
pre-requisite, referred to above, had direct nexus with the
functioning of the imported plant and, therefore, it had to be
loaded to the price thereof.
F 18. 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 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
G 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.
Therefore, there are two concepts which operate simultaneously,
namely, price for the imported goods and the royalties/licence
H fees which are also paid to the foreign supplier. Rule 9(1 )(c}
COMMISSIONER OF CUSTOMS v. MIS FERGDO 159
INDIA PVT. LTD. [KAPADIA, J.]
)'

"' stipulates that payments made towards technical know-how A
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 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, B
as a condition of the sale of imported goods. At this stage, we
" would like to emphasis the word indirectly in rule 9(1 )(c). As
" stated above, the buyer/importer makes payment of the price
of the imported good&. He also incurs the cost of technical know-
how. Therefore, the Department in every case is not only required c
to look at TAA, it is also required to look at the pricing
arrangement/agreement between the buyer and his foreign
collaborator. For example if on examination of the pricing
arrangement in juxtaposition with the TAA, the Department finds
that the importer/buyer has misled the Department by adjusting
D
the price of the imported item in guise of increased royalty/
~ licence fees then the adjudicating authority would be right in
including the cost of royalty/licence fees payment in the price of
the imported goods. In such cases the principle of attribution of
royalty/licence fees to the price of imported goods would apply.
This is because every importer/buyer is obliged to pay not only E
the price for the imported goods but he also incurs the cost of
technical know-how which is paid to the foreign supplier.
Therefore, such adjustments would certainly attract rule 9(1 ))(c).
• i Application of Rule 9(1)(c) to the facts of the present F
case
19. Applying th~ above tests to the facts of the present
case, we find that the adjudicating authority had not examined
the pricing arrangement between the foreign collaborator and
the buyer. It has only examined the royalty/TM. G
20. Be that as it may, in the present case, on reading TAA
we find that the payments of royalty/licence fees was entirely
relatable to the manufacture of brake liners and brake pads
(licensed products). The said payments were in no way related
H
160 SUPREME COURT REPORTS [2008] 3 S.C.R.

'(

A to the imported items. In the present case, no effort was made "'
by the Department to examine the pricing arrangement. No effort
was made by the Department to ascertain whether there exists
a price adjustment between cost incurred by the buyer on
account of royalty/licence fees payments and the price paid for
.
I

B imported items. No effort was made by the Department to
ascertain enhancement of royalty/licence fees by reducing the ¥

price of the imported items. In the circumstances, we find no ~
infirmity in the impugned judgment of the Tribunal. In this case,
the Department has gone by TAA alone. On reading TAA in
c entirety, we are of the view that there was no nexus between
royalty/licence fees payable for the know-how and the goods
imported for the manufacture of licensed products. The
Department itself has invoked rule 9(1)(c).
21. In the alternate, it has invoked rule 9(1 )(e). This rule
D 9(e) cannot stand alone. It is a corollary to rule 4. There is no
finding in the present case that what was termed as royalty/
licence fee was in fact not such royalty/licence fee but some
other payment made or to be made as a condition pre-requisite
to the sale of the imported goods. It is important to bear in mind
E that rule 9 refers to cost and services. Under rule 9(1 ), the price
for the imported goods had to be enhanced/loaded by adding
certain costs, royalties and licence fees and values mentioned
in sub-rules 9(1 )(a) to 9(1 )(d). It refers to "all other payments
actually made or to be made as a condition of sale of the
F imported goods." In the present case, the Department invoked ~·
rule 9(1 )(c) on the ground that royalty was related to the imported
goods, having failed it cannot fall back upon rule 9(1 )(e) because
essentially we are concerned with the addition of royalty .etc. to
the price of the imported goods. Further, in the present case,
the Department has accepted the transaction value of the
G
imported goods.
22. In the case of Essar Gujarat Ltd. (supra), the buyer
had entered into a contract with TIL for purchase of Direct
Reduction Iron Plant ("the plant"). The entire agreement was for
H import of the plant. The agreement was subject to two conditions-
COMMISSIONER OF CUSTOMS v. M/S FERODO 161
INDIA PVT. LTD. [KAPADIA, J.)
.., r
(a) approval of G.0.1. and (b) obtaining transfer of licence from A
M/s Midrex, USA. Without the licence from Midrex, the imported
plant was of no use to the buyer. Therefore, it .was essential to
have the licence from Midrex to operate the plant. Therefore, it
was held by this Court that procurement of licence from Midrex
was a pre-condition of sale which was specifically recorded in B
the agreement itself In view of specific terms and conditions to
• that effect in the agreement, this Court held that payments made
·>
to Midrex by way of licence fees had to be added to the price
paid to TIL for purchase of the plant. There is no such stipulations
in the TAA in the present case. Therefore, in our view, the c
adjudicating authority erred in placing reliance on the judgment
of this Court in Essar Gujarat Ltd. (supra).
23. In the case of Matsushita Television &Audio India
Ltd. v. CoC reported in 2007 (211) ELT 200 (SC) the question
which arose for determination was whether royalty amount was D
'-1"- attributable to the price of the imported goods. In that case, the
appellant was a joint venture company of MEI, Japan and SIL
for obtaining technical assistance and know-how. Under the
agreement, the appellants were to pay MEI a royalty@ 3% on
net ex-factory sale price of the colour TV receivers manufactured E
by the appellants for the technical assistance rendered by MEI.
The appellants were to pay a lump-sum amount of U.S.$ 2 lakhs
to MEI for transfer of technical know-how. It was the case of the
appellant that payment of royalty was not related to imported
• Ji goods as the said payment was made for supply of technical F
'• assistance and not as a condition pre-requisite for the sale of
the components.
24. One of the questions which arises for determination in
this civil appeal is whether reliance could be placed by the
Department only on the Consideration Clause in the TAA for G
arriving at the conclusion that payment for royalty was includible
in the price of the imported components.
... 25. Rule 4(3)(b) of the CVR, 1988 provides for an
opportunity for the importer to demonstrate that the transaction
H
162 SUPREME COURT REPORTS (2008) 3 S.C.R.

A value closely approximates to a "test" value. A number of factors,
therefore, have to be taken into consideration in determining
whether one value "closely approximates" to another value.
These factors include the nature of the imported goods, the
nature of the industry itself, the difference in values etc .. As
B stated above, rule 4(3)(a) and rule 4(3)(b) of the CVR, 1988
provides for different means of establishing the acceptability of
a transaction value. In the case of Matsushita Television
(supra) the pricing arrangement was not produced before the
Department. In our view, the Consideration Clause in such
c circumstances is of relevance. As stated above, pricing
arrangement and TM are both to be seen by the Department.
As stated above, in a given case, if the Consideration Clause
indicates that the importer/buyer had adjusted the price of the
imported goods in guise of enhanced royalty or if the Department
D finds that the buyer had misled the Department by such pricing
adjustments then the adjudicating authority would be justified in
adding the royalty/licence fees payment to the price of the
imported goods. Therefore, it cannot be said that the
consideration clause in TAA is not relevant. Ultimately, the test
of close approximation of values require all circumstances to
E be taken into account. It is keeping in mind the Consideration
Clause along with other surrounding circumstances that the
Tribunal in the case of Matsushita Television (supra) had taken
the view that royalty payment had to be added to the price of the
imported goods.
F .. 1

. 26. For the aforestated reasons, we find no infirmity in the
impugned orders of the Tribunals. Accordingly, the civil appeals
filed by the Department are hereby dismissed with no order as
to costs.
G N.J. Appeals dismissed.