Holding

The royalty payment is includable in the assessable value of the imported components because it is a condition of sale of the finished goods and relates to the imported components.

Summary

Matsushita Television & Audio (I) Ltd. entered into a technical know‑how agreement with Matsushita Electric Industrial Co. Ltd. (MEI) under which it paid a royalty of 3% on the net ex‑factory sale price of colour TV sets. The net price included the cost of imported components used in the TVs. The Customs authorities, relying on Rule 4(2) and Rule 9(1)(c) of the Customs Valuation (Determination of Imported Goods) Rules, 1988, added the royalty amount to the assessable value of the imported components. The appellant challenged this inclusion, arguing that the royalty was not directly related to the imported goods. The Supreme Court held that the royalty was a condition of sale of the finished product and related to the imported components, thereby satisfying both conditions of Rule 9(1)(c) and justifying its inclusion in the assessable value. Consequently, the appeal was dismissed.

Issues considered

Whether the royalty payment under the technical assistance agreement is connected with the imported components of colour TV sets.
Whether such royalty payment can be included in the assessable value of the imported components under Rule 9(1)(c) of the Customs Valuation Rules, 1988.

Legislation cited

Central Excise Act, 1944s. Section 35L(B)

Subjects

customs valuationroyaltyimported componentsassessable valuetechnical know‑how agreementRule 9(1)(c)Customs Valuation RulesCentral Excise Act

Judgment

A MIS MATSUSHITA TELEVISION & AUDIO (I) LTD.
11.
COMMISSIONER OF CUSTOMS

APRIL 12, 2007

B (S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]

_/

Customs Valuation (Determination of Imported Goods) Rules, 1988-
rr. 4(2) and 9(/)(c)-Agreement of technical know-how assistance-The
assistance also extended to supply of components and to approval of
c components duly imported-Agreement to pay royalty to the company
imparting assistance by the company taking assistance-Import of components
by company taking assistance (Assessee Company)-The royalty payment
was included in the assessable value of the components-Propriety of-Held:
Royalty payment was rightly included in the assessable value of the
D components-Royalty payment under the agreement related not only to the
domestic production of the goods, but also to imports. ~

Appellant-assessee is a joint venture of a company 'M'. Predecessors
of the appellants had entered into an agreement with company' M' for obtaining
technical know-how assistance. Technical assistance was also extended to
E supply of the components and also to the approval of the components (brought
out items) duly imported. In terms of the agreement, appellants were required
to pay royalty to company 'M' at 3% on net ex-factory sale price of the colour
receiver manufactured by them towards technical assistance rendered by
-
company 'M'. The Adjudicating Authority loaded the assessable value of the
said components with the cost of royalty payment holding that royalty payment ,>--
F
was related to compone·nts. The order was subsequently confirmed by the
Commissioner (Appeals) and also by Tribunal.

The question for consideration in the present appeal was whether the
royalty payment was connected with the imported components of Colour TV
G and if so whether such royalty payment was includible in the assessable value
of such components?
\.-
Dismissing the appeal, the Court

HELD: Under Rule 9(1) (c) of the Customs Valuation (Determination of
H 46
MATSUSHITA TELEVISION & AUDIO (I) Lill.•·. COMMNR. OF CUSTOMS
47
Imported Goods) Rules, 1988, only such royalty which is relatahle to the A
imported goods and which is a condition of sale of such goods alone could be
added 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 co5t of imported
components. The royalty payment was to be computed not only on the domestic B
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 the present case, the cost of imported components was
expressly included in the net ex-factory sale price of the colour T. V. Further, c
when payment to company 'M' was at the rate of 3% of the sales turnover of
the final product, including cost of imported components, it became a condition
ofsale of the finished goods. Hence, in this case both the conditions of Rule
9(l)(c) of the Rules are satisfied. [Para 71 [54-B-El

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 526 of 2002. D

\ From the Judgment and Order No. 307/01-A dated 24.08.2001 of The
Cu~toms Excise & Gold (Control) Appellate Tribunal, Principal Bench, New

- Delhi in Appeal No. C/120/2001-A.

Dushyant Dave and Vibha Datta Makhija for the Appellant. E

- Mathai M. Paikeday, Shishir Pinaki, K.K. Sentilvelan and B. Krishna
Prasad for the Respondent.

The Judgment of the Court was delivered by
F
KAPADIA, J. I. This civil appeal under Section 35L(B) of the Central
Excise A.ct, 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.

2. A short question which arises for detennination in this civil appeal G
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.

3. Appellants-assessee is a joint venture of M/s. Matsushita Electric
H
48 SUPREME COURT REPORTS (2007] 5 S.C.R.

A Industrial Co. Ltd., Japan, (for short, 'MEI'). The predecessor of the appellants f
was Mis. Salora International Ltd. (for short, 'SIL'). In 1993, Mis. SIL had
entered into an agreement with Mis. MEI for obtaining technical assistance
and know-how. The technical assistance and know-how was assigned by Ml
s. SIL to the appellants. This was1n 1996. In terms of clause 6.01, appellants
were required to pay royalty at 3% on net ex-factory sale price of the colour
B receiver manufactured by them towards technical assistan«e 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
J .-
the agreement, MEI agreed to assist the appellants by selling the equipment
at commercial prices. Under the agreement appellants' predecessor imported
c components of colour receiver from Mis. B.M. Nagaro & Co. who in turn had
procured components (bought-out items) from different manufacturers
including those in Singapore.

4. 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
D 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

E
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
-
F 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
G 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
H assistance extended not only to the supply of components but also to the
MATSUSHITA TELEVISION & AUDIO (I) LTD. v. COMMNR. OF CUSTOMS [KAPADIA, I.] 49

approval of the components (bought-out items). Further, according to the A
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 B
appellants' appeal. Hence this civil appeal.

5. 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 C
the Agreement which are as follows:

"TECHNICAL ASSISTANCE AND KNOW-HOW AGREEMENT"

I. DEFINITIONS D
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 E
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 p
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 G
prices equal to the arithmetic average of the Net Ex-factory Sales
prices of the same products reported to MEI in the immediately
-l
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 H
50 SUPREME COURT REPORTS [2007] 5 S.C.R.

A agreement of the Parties hereto.
f
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.
B 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
c 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"):

D I. Advice and instruction for the 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
E 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.
F (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.
G
(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
H
MATSUSHITA TELEVISION&: AUDIO (I) LTD. v. COMMNR. OF CUSTOMS [KAPADIA. J.] 51
engaged in the manufacture of the Products. A
(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 B
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. C
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. D
4. USE OF TECHNICAL ASSISTANCE AND TECHNICAL KNOW
HOW
4.0 I During the term of this Agreement MEI agrees to grant to SIL a
non-exclusive and non-transferable licence to use the Technical E
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 F
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 G
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.
H
52 SUPREME COURT REPORTS (2007] 5 S.C.R.

A 6. REMUNERATION r
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
B
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
c 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
D 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

E 7 PRODUCTION EQUIPMENT AND COMPONENTS.

7.02 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
F 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
G 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
H and the concerned authorities of the Japanese Government or
MATSUSHITA TELEVISION & AUDIO (I) LTD. v. COMMNR. OF CUSTOMS [KAPADIA, J.) 53

Indian Government, as the case may be. Specifically payment of A
t 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 B
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."
c
6.0n 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 D
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 2.0 I it was agreed that MEI shall render to the appellants E
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 4.0 l,
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 F
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. G
manufactured and sold. Further, it was agreed that in addition to the technical
assistance, MEI would assist the appellants in the manufacturing of the
'
-'I
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
H
54 SUPREME COURT REPORTS (2007) 5 S.C.R.

A 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 rrranufacture of colour T. V.
r
7. The question which arises for consideration in this civil appeal is:
whether royalty payment was connected with the imported components. Under
B Rule 9(l)(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
C 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
D 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
tum over of the final product, including cost of imported component, it
E becanie a condition of sale of the finished goods. Hence, in this case both
the conditions of Rule 9(i)(c) of the Valuation Rules, 1988, are satisfied.

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

F K.K.T. Appeal dismissed.