CASE NO.:Appeal (civil) 526 of 2002
PETITIONER:M/s. Matsushita Television & Audio (I) Ltd
RESPONDENT:Commissioner of Customs
DATE OF JUDGMENT: 12/04/2007
BENCH:S.H. KAPADIA & B. SUDERSHAN REDDY
JUDGMENT:J U D G M E N T
KAPADIA, J.
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 20.8.1993. 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 Products.
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 Assistance"):
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 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.
(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 Agreement.
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.
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 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 and sold. 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.
In view of the above, what I have stated earlier that splitting of contract pays hold good.
Friday, May 11, 2007
रोयाल्त्य अस कन्डीशन ऑफ़ सेल ऑफ़ कोम्पोनेंट्स हेल्ड तो बे includible
Tuesday, March 6, 2007
Limitations
Utilization of duty credit earned under SFISC is not be permitted for payment of duty in case of import of vehicles
The imported goods imported are nontransferable. However, transfer of imported goods is allowed within the Group Company
The duty credit entitlement certificate shall be valid for import for a period of 24 months. Revalidation of duty credit certificate is not allowed.
The imported goods imported are nontransferable. However, transfer of imported goods is allowed within the Group Company
The duty credit entitlement certificate shall be valid for import for a period of 24 months. Revalidation of duty credit certificate is not allowed.
RCMC Certificate & IEC
Service exporters is registered with the Federation of Indian Exporters Organisation (‘FIEO’)
Service provider has an Importer Exporter Code (IEC)
Service provider has an Importer Exporter Code (IEC)
Eneligible services/remittances
The following Foreign Exchange remittances are not eligible for entitlement.
I. Remittances related to Financial Services Sector
1. Raising of all types of foreign currency Loans
2. Export proceeds realisation of clients
3. Issuance of Foreign Equity through ADRs /GDRs or other similar instruments
4. Issuance of foreign currency Bonds
5. Sale of securities and other financial instruments
6. Other receivables not connected with the services rendered by the financial institutions
II. Other Remittances
1 Earnings through contract/regular employment abroad (e.g. labour remittances).
2 Payments received from Export Earners Foreign Currency (EEFC)
3 The foreign exchange turnover for Healthcare Institutions like equity participation, donations etc. (However remittances received on account of medical treatment, surgery, testing, consultancy and health care provided by the institution will be eligible.)
4 The foreign exchange turnover for Educational Institutions like equity participation, donations etc. (However remittances received on account of the course fees and consultancy provided by the institution will be eligible)
5 Export turnover of units operating under SEZ/EOU/EHTP/STPI/ BTP schemes or supplies made to such units or products manufactured by them and exported through DTA units. Moreover, the clubbing of turnover of services rendered from these units with DTA units is also not allowed.
I. Remittances related to Financial Services Sector
1. Raising of all types of foreign currency Loans
2. Export proceeds realisation of clients
3. Issuance of Foreign Equity through ADRs /GDRs or other similar instruments
4. Issuance of foreign currency Bonds
5. Sale of securities and other financial instruments
6. Other receivables not connected with the services rendered by the financial institutions
II. Other Remittances
1 Earnings through contract/regular employment abroad (e.g. labour remittances).
2 Payments received from Export Earners Foreign Currency (EEFC)
3 The foreign exchange turnover for Healthcare Institutions like equity participation, donations etc. (However remittances received on account of medical treatment, surgery, testing, consultancy and health care provided by the institution will be eligible.)
4 The foreign exchange turnover for Educational Institutions like equity participation, donations etc. (However remittances received on account of the course fees and consultancy provided by the institution will be eligible)
5 Export turnover of units operating under SEZ/EOU/EHTP/STPI/ BTP schemes or supplies made to such units or products manufactured by them and exported through DTA units. Moreover, the clubbing of turnover of services rendered from these units with DTA units is also not allowed.
Earnings in foreign exchange
Payment for services is received in free foreign exchange or in Indian Rupees which are otherwise considered as having been paid for in free foreign exchange by RBI. The earning in the preceding financial year or current financial year should be al least Rs 10 Lakhs.
For individuals, earnings in foreign exchange is required to be at least Rs 5 Lakhs in the preceding financial year
For individuals, earnings in foreign exchange is required to be at least Rs 5 Lakhs in the preceding financial year
List of eligible services
Following services are listed in the Appendix 10 of the Handbook of Procedure as eligible services under SFISC
LIST OF SERVICES
SECTORS AND SUB-SECTORS
1. BUSINESS SERVICES
LIST OF SERVICES
SECTORS AND SUB-SECTORS
1. BUSINESS SERVICES
A. Professional services
a. Legal services
b. Accounting , auditing and bookkeeping services
c. Taxation services
d. Architectural services
e. Engineering services
f. Integrated engineering services
g. Urban planning and landscape architectural services
h. Medical and dental services
i. Veterinary services
j. Services provided by midwives, nurses, physiotherapists and paramedical personnel
k. Others
B. Computer and related services
a. Legal services
b. Accounting , auditing and bookkeeping services
c. Taxation services
d. Architectural services
e. Engineering services
f. Integrated engineering services
g. Urban planning and landscape architectural services
h. Medical and dental services
i. Veterinary services
j. Services provided by midwives, nurses, physiotherapists and paramedical personnel
k. Others
B. Computer and related services
a. Consultancy services related to the installation of computer hardware
b. Software Implementation services
c. Data processing services
d. Database services
e. Others
C. Research and development services
b. Software Implementation services
c. Data processing services
d. Database services
e. Others
C. Research and development services
a. R&D services on natural sciences
b. R&D services on social sciences and humanities
c. Interdisciplinary R&D services
D. Real estate services
a. Involving own or leased property
b. On a free or contract basis
E. Rental/Leasing services without operators
a. Relating to ships
b. Relating to aircraft
c. Relating to other transport equipment
d. Relating to other machinery and equipment
e. Others
F. Other business services
a. Advertising services
b. Market research and public opinion polling services
c. Management consulting service
d. Services related to management consulting
e. Technical testing and analysis services
f. Services incidental to agricultural, hunting and forestry
g. Services incidental to fishing
h. Services incidental to mining
i. Services incidental to manufacturing
j. Services incidental to energy distribution
k. Placement and supply services of personnel
l. Investigation and security
m. Related scientific and technical consulting services
n. Maintenance and repair of equipment (not including maritime vessels, aircraft or other Transport equipment)
o. Building- cleaning services
p. Photographic services
q. Packaging services
r. Printing, publishing
s. Convention services
t. Others
2. COMMUNICATION SERVICES
A. Postal services
B. Courier services
C. Telecommunication services
a. Voice telephone services
b. Packet-switched data transmission services
c. Circuit-switched data transmission services
d. Telex services
e. Telegraph services
f. Facsimile services
g. Private leased circuit services
h. Electronic mail
i. Voice mail
j. On-line information and data base retrieval
k. Electronic data interchange (EDI)
l. Enhanced/value-added facsimile services including store and forward, store and retrieve
m. Code and protocol conversion
n. On-line information and/or data processing (including transaction processing)
o. Others
D. Audiovisual services
a. Motion picture and video tape production and distribution service
b. Motion picture projection service
c. Radio and television services
d. Radio and television transmission services
e. Sound recording
f. Others
E. Others
3. CONSTRUCTION AND RELATED ENGINEERING SERVICES
A. General Construction work for building
B. General Construction work for Civil Engineering
C. Installation and assembly work
D. Building completion and finishing work
E. Others
4. DISTRIBUTION SERVICES
A. Commission agents’ services
B. Wholesale trade services
C. Retailing services
D. Franchising
E. Others
5. EDUCATIONAL SERVICES
b. R&D services on social sciences and humanities
c. Interdisciplinary R&D services
D. Real estate services
a. Involving own or leased property
b. On a free or contract basis
E. Rental/Leasing services without operators
a. Relating to ships
b. Relating to aircraft
c. Relating to other transport equipment
d. Relating to other machinery and equipment
e. Others
F. Other business services
a. Advertising services
b. Market research and public opinion polling services
c. Management consulting service
d. Services related to management consulting
e. Technical testing and analysis services
f. Services incidental to agricultural, hunting and forestry
g. Services incidental to fishing
h. Services incidental to mining
i. Services incidental to manufacturing
j. Services incidental to energy distribution
k. Placement and supply services of personnel
l. Investigation and security
m. Related scientific and technical consulting services
n. Maintenance and repair of equipment (not including maritime vessels, aircraft or other Transport equipment)
o. Building- cleaning services
p. Photographic services
q. Packaging services
r. Printing, publishing
s. Convention services
t. Others
2. COMMUNICATION SERVICES
A. Postal services
B. Courier services
C. Telecommunication services
a. Voice telephone services
b. Packet-switched data transmission services
c. Circuit-switched data transmission services
d. Telex services
e. Telegraph services
f. Facsimile services
g. Private leased circuit services
h. Electronic mail
i. Voice mail
j. On-line information and data base retrieval
k. Electronic data interchange (EDI)
l. Enhanced/value-added facsimile services including store and forward, store and retrieve
m. Code and protocol conversion
n. On-line information and/or data processing (including transaction processing)
o. Others
D. Audiovisual services
a. Motion picture and video tape production and distribution service
b. Motion picture projection service
c. Radio and television services
d. Radio and television transmission services
e. Sound recording
f. Others
E. Others
3. CONSTRUCTION AND RELATED ENGINEERING SERVICES
A. General Construction work for building
B. General Construction work for Civil Engineering
C. Installation and assembly work
D. Building completion and finishing work
E. Others
4. DISTRIBUTION SERVICES
A. Commission agents’ services
B. Wholesale trade services
C. Retailing services
D. Franchising
E. Others
5. EDUCATIONAL SERVICES
A. Primary education services
B. Secondary education services
C. Higher education services
D. Adult education
E. Other educational services
6. ENVIRONMENTAL SERVICES
B. Secondary education services
C. Higher education services
D. Adult education
E. Other educational services
6. ENVIRONMENTAL SERVICES
A. Sewage services
B. Refuse disposal services
C. Sanitation and similar services
D. Others
7. FINANCIAL SERVICES
A. All Insurance and Insurance-related services
B. Refuse disposal services
C. Sanitation and similar services
D. Others
7. FINANCIAL SERVICES
A. All Insurance and Insurance-related services
a. Life, accident and health insurance services
b. Non-life insurance services
c. Reinsurance and retrocession
d. Services auxiliary to insurance (including brokering and agency services)
B. Banking and other Financial Services (excluding insurance)
a. Acceptance of deposits and other repayable funds from the public
b. Lending of all types, including consumer credit, mortgage credit, factoring and financing of commercial transaction
c. Financial leasing
d. All payment and money transmission services
e. Guarantees and commitments
f. Trading for own account or for account of consumer, whether on an exchange, in an over-the-counter market or otherwise, the following:
- money market instruments(cheques, bills, certificates of deposits, etc.)
- derivative products including, but not limited to, futures and options
- exchange rate and interest rate instruments, including products such as swaps, forward rate agreements, etc. transferable securities
- other negotiable instruments and financial assets, including bullion
g. Participation in issue of all kinds of securities, including under writing and placement as agent (whether publicly or privately) and provision of service related to such issues
h. Money binding
i. Asset management, such as cash or portfolio management, all forms of collective investment management, pension fund management, custodial depository and trust services
j. Settlement and clearing services for financial assets, including securities, derivative products and other negotiable instruments
k. Advisory and other auxiliary financial services on all the activities listed in article 1B of MTN.TNC/W/50, including credit reference and analysis, investment and portfolio research and advise, on acquisitions and own corporate restructuring and strategy
l. Provision and transfer of financial information and financial data processing and related software by providers of other financial services
C. Other
8. HEALTH-RELATED AND SOCIAL SERVICES (OTHER THAN THOSE LISTED UNDER 1.A.h-j.)
A. Hospital services
B. Other human health services
C. Social services
D. Other
9. TOURISM AND TRAVEL-RELATED SERVICES
A. Hotels and Restaurants (including catering)
B. Travel agencies and tour operators services
C. Tourist guides services
D. Others
10. RECREATIONAL, CULTURAL AND SPORTING SERVICES (Other than audiovisual services)
A. Entertainment services (including theatre, live bands and circus services)
B. New agency services
C. Libraries, archives, museums and other cultural services
D. Sporting and other recreational services
E. Others
11. TRANSPORT SERVICES
A. Maritime Transport Services
b. Non-life insurance services
c. Reinsurance and retrocession
d. Services auxiliary to insurance (including brokering and agency services)
B. Banking and other Financial Services (excluding insurance)
a. Acceptance of deposits and other repayable funds from the public
b. Lending of all types, including consumer credit, mortgage credit, factoring and financing of commercial transaction
c. Financial leasing
d. All payment and money transmission services
e. Guarantees and commitments
f. Trading for own account or for account of consumer, whether on an exchange, in an over-the-counter market or otherwise, the following:
- money market instruments(cheques, bills, certificates of deposits, etc.)
- derivative products including, but not limited to, futures and options
- exchange rate and interest rate instruments, including products such as swaps, forward rate agreements, etc. transferable securities
- other negotiable instruments and financial assets, including bullion
g. Participation in issue of all kinds of securities, including under writing and placement as agent (whether publicly or privately) and provision of service related to such issues
h. Money binding
i. Asset management, such as cash or portfolio management, all forms of collective investment management, pension fund management, custodial depository and trust services
j. Settlement and clearing services for financial assets, including securities, derivative products and other negotiable instruments
k. Advisory and other auxiliary financial services on all the activities listed in article 1B of MTN.TNC/W/50, including credit reference and analysis, investment and portfolio research and advise, on acquisitions and own corporate restructuring and strategy
l. Provision and transfer of financial information and financial data processing and related software by providers of other financial services
C. Other
8. HEALTH-RELATED AND SOCIAL SERVICES (OTHER THAN THOSE LISTED UNDER 1.A.h-j.)
A. Hospital services
B. Other human health services
C. Social services
D. Other
9. TOURISM AND TRAVEL-RELATED SERVICES
A. Hotels and Restaurants (including catering)
B. Travel agencies and tour operators services
C. Tourist guides services
D. Others
10. RECREATIONAL, CULTURAL AND SPORTING SERVICES (Other than audiovisual services)
A. Entertainment services (including theatre, live bands and circus services)
B. New agency services
C. Libraries, archives, museums and other cultural services
D. Sporting and other recreational services
E. Others
11. TRANSPORT SERVICES
A. Maritime Transport Services
a. Passenger transportation
b. Freight transportation
c. Rental of vessels with crew
d. Maintenance and repair of vessels
e. Pushing and towing services
f. Supporting services for maritime transport
B. Internal waterways transport
b. Freight transportation
c. Rental of vessels with crew
d. Maintenance and repair of vessels
e. Pushing and towing services
f. Supporting services for maritime transport
B. Internal waterways transport
a. Passenger transportation
b. Freight transportation
c. Rental of vessels with crew
d. Maintenance and towing services
e. Supporting services for internal waterways transport
C. Air transport services
b. Freight transportation
c. Rental of vessels with crew
d. Maintenance and towing services
e. Supporting services for internal waterways transport
C. Air transport services
a. Passenger transportation
b. Freight transportation
c. Rental of aircraft with crew
d. Maintenance and repair of aircraft
e. Supporting services for air transport
D. Space Transport
E. Rail Transport Services
a. Passenger transportation
b. Freight transportation
c. Pushing and towing services
d. Maintenance and repair of rail transport equipment
e. Supporting services for rail transport services
F. Road Transport Services
a. Passenger transportation
b. Freight transportation
c. Rental of Commercial vehicles with operator
d. Maintenance and repair of road transport equipment
e. Supporting services for road transport services
G. Pipeline Transport
a. Transportation of fuels
b. Transportation of other goods
H. Services Auxiliary To All Modes Of Transport
a. Cargo-handling services
b. Storage and warehouse services
c. Freight transport agency services
d. Others
12. OTHER SERVICES NOT INCLUDED ELSEWHERE
b. Freight transportation
c. Rental of aircraft with crew
d. Maintenance and repair of aircraft
e. Supporting services for air transport
D. Space Transport
E. Rail Transport Services
a. Passenger transportation
b. Freight transportation
c. Pushing and towing services
d. Maintenance and repair of rail transport equipment
e. Supporting services for rail transport services
F. Road Transport Services
a. Passenger transportation
b. Freight transportation
c. Rental of Commercial vehicles with operator
d. Maintenance and repair of road transport equipment
e. Supporting services for road transport services
G. Pipeline Transport
a. Transportation of fuels
b. Transportation of other goods
H. Services Auxiliary To All Modes Of Transport
a. Cargo-handling services
b. Storage and warehouse services
c. Freight transport agency services
d. Others
12. OTHER SERVICES NOT INCLUDED ELSEWHERE
Eligibility
Services should be one of the 161 tradable services covered under the General Agreement on Trade in Services.
Entitlement
10% of the earnings in foreign exchange from eligible service except for hotels (one star or above), entitlement is restricted to 5% of earnings in foreign exchange
Benefits
Service provider can import capital goods, office equipment, professional equipment, office furniture and consumables required to provide service free of customs duty against Served from India Scheme Certificate (‘SFISC’). Goods can be procured from private/public bonded warehouse also. - Notification No. 92/2004 dated 10 Sep 2004
Sunday, February 25, 2007
Payments in currency held for numismatic value
Wherever, payment is received in the form of currency which is held for its numismatic value, in that case, the face value (tenor) of the currency alone will not be the monetary consideration and it can not be said that service has been provided for monetary consideration alone, as the market value of such coin/currency will be different from the apparent value. If service provider receives 100 silver coins of Re 1 for the service, then the value of service is not Rs 100/= because silver coin has numismatic value and taxable value cannot be arrived based on face value of the coins. In such circumstances, value has to be determined under section 67(ii) of the Finance Act, as if money is not the sole consideration for the taxable service.
Cheque collection charges
Payment for the service received in any one or more manner i.e. currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments form part of the taxable value of the service. Some time, encashment of cheque, letter of credit etc involve some banking charges which are deducted by the bankers while giving credit for the instrument. In that case, whether the full value of the instrument is the consideration or the discounted/net value of the instrument is the consideration for the service is required to be analysed.
Relevant date for receipts of payment towards service
Encashment of cheque, letter of credit etc involve some banking charges which are levied by the bankers while giving credit for the instrument. In that case, whether the full value of the instrument is the consideration is required to be analysed. A cheque or letter of credit or any other instrument is issued by the service receiver to the service provider for the consideration of the service provided to him. Amount of the cheque represent the value of the service received by him. Therefore, cheque collection charges levied by the bankers can not be deducted from the value as charge of the service tax is on gross amount. Cheque collection charge will be an expenditure incurred by the service provider in the course of providing service and also an input service, if taxable, eligible for Cenvat credit.
When the payment is received in currency, date of the receipt of such currency is the relevant date to determine the payment of service tax. Similarly, when book adjustments are made or account is deducted for the service, date of such adjustment or deduction will be relevant date. Receipt of a cheque by service provider whether amounts to the receipt of payment is required to be analysed. Cheque is only a revocable authority issued to a bank by service receiver to pay to the service provider a sum of money. Accordingly, no payment can be considered to have been received by the service provider until the cheque is presented to the bank, honored by the payer and the proceeds of the cheque are credited to the supplier’s bank account. Further, receipts issued for cheque are subject to realization. In other words, if cheque is not realized, receipts are void. Therefore, date of the cheque or receipt thereof is not relevant date to determine tax liability. However, it is difficult in practice for the service provider to ascertain when the sum, as stipulated on the cheque, is credited to his bank account since he does not know when the bank has cleared the cheque. Furthermore, most banks only reflect the cheque presentation date instead of the cheque clearance date in their bank statement. Therefore, the question remains as to what is the relevant date. The question becomes difficult to answer in the case cheque is dishonored subsequently.
The Finance Act provides for adjustment in case of advance payments. However, there is no provision for adjustment in tax liability for any other count. Therefore, if assessee makes adjustment in the tax liability for the subsequent period for the dishonored cheque of the preceding period, it will be without authority of law and may attract penal provisions of non payment of service tax. Further, the Finance Act does not provide for any refund in such scenario. Therefore, the service provider may be loser on both counts.
In view of the complex situation as narrated above, it is desirable that the service provider opt for payment of service tax on the collection basis. As service tax is payable 5th of the subsequent month by which time, usually, one will know about dishonored cheque. However, on 31 March every year, one has to discharge his service tax liability on 31st March itself instead of 5th day of the subsequent month, therefore, it will pose difficulty in the above approach and one has to pay service tax on the cheque deposited in the bank for collection without knowing whether cheque has been collected or dishonored.
When the payment is received in currency, date of the receipt of such currency is the relevant date to determine the payment of service tax. Similarly, when book adjustments are made or account is deducted for the service, date of such adjustment or deduction will be relevant date. Receipt of a cheque by service provider whether amounts to the receipt of payment is required to be analysed. Cheque is only a revocable authority issued to a bank by service receiver to pay to the service provider a sum of money. Accordingly, no payment can be considered to have been received by the service provider until the cheque is presented to the bank, honored by the payer and the proceeds of the cheque are credited to the supplier’s bank account. Further, receipts issued for cheque are subject to realization. In other words, if cheque is not realized, receipts are void. Therefore, date of the cheque or receipt thereof is not relevant date to determine tax liability. However, it is difficult in practice for the service provider to ascertain when the sum, as stipulated on the cheque, is credited to his bank account since he does not know when the bank has cleared the cheque. Furthermore, most banks only reflect the cheque presentation date instead of the cheque clearance date in their bank statement. Therefore, the question remains as to what is the relevant date. The question becomes difficult to answer in the case cheque is dishonored subsequently.
The Finance Act provides for adjustment in case of advance payments. However, there is no provision for adjustment in tax liability for any other count. Therefore, if assessee makes adjustment in the tax liability for the subsequent period for the dishonored cheque of the preceding period, it will be without authority of law and may attract penal provisions of non payment of service tax. Further, the Finance Act does not provide for any refund in such scenario. Therefore, the service provider may be loser on both counts.
In view of the complex situation as narrated above, it is desirable that the service provider opt for payment of service tax on the collection basis. As service tax is payable 5th of the subsequent month by which time, usually, one will know about dishonored cheque. However, on 31 March every year, one has to discharge his service tax liability on 31st March itself instead of 5th day of the subsequent month, therefore, it will pose difficulty in the above approach and one has to pay service tax on the cheque deposited in the bank for collection without knowing whether cheque has been collected or dishonored.
Payment received during Transit period
There may be situations where a particular service becomes taxable during its performance. There are many service assignments which are performed over a period of time. In every budget, Central Government brings new services within the service tax net. It is a regular occurrence that during the initial period, the service is not taxable but before completion of the service it has become taxable. There may be two possible scenario regarding payment for the service, i.e. (i) Payment for the service is received after the subject service has become taxable, and (ii) payment has been received in advance for a service and during the performance of the service, it has become taxable wherein part of the service was provided to the client when it was not taxable. As per second proviso to Rule 6(1) of the Service Tax Rules, notwithstanding the time of receipt of payment towards the value of services, no service tax is payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable. In other words, if the payment is for the service which became taxable during the performance of such service, tax is payable on pro-rata basis.
Therefore, in the first scenario, there is no ambiguity in law and a provision has been incorporated in the service Tax Rules that even if payment is received after service has become taxable, such service or part of such service cannot be taxed.
In the second scenario, position of law is not clear. As per Section 66 of the Finance Act, service tax is levied on the value of the taxable service at prescribed rate, whereas as per Section 68 thereof, service provider is required to pay service tax at the prescribed rate in prescribed manner. As per Rule 6 of the Service Tax Rules, payment of service tax is required to be made on the subsequent month on the basis of payment received during the month for the taxable service.
From the above, it appears service provider is required to pay service tax on the payments received for taxable services at the prescribed rate within stipulated time. Since the payment for service has been received in advance, no service tax has been paid thereon during the said period, as it was not a taxable service. As per Rule 4A of the Service Tax Rules, provider of a taxable service is required to issue Bill/Invoice/Challan within fourteen days from the date of completion of taxable service or receipt of any payment towards the value of taxable service, whichever is earlier.
In the present case, as payment has already been received, an event occurring earlier than completion of service, service provider is not required to issue any fresh Bill/Invoice/Challan for rendering service. Therefore, it appears that such advance receipts escape levy of service tax. However, that is not the case may be. The advance receipt for the services will be shown in the books of account as advance and will be adjusted in the books as and when the service is provided to the client. Such adjustments in the books of accounts have been considered as consideration for the service and therefore, it will be exigible to the service tax. Central Board of Excise and Customs (‘CBEC’) vide Circular No. 65/14/2003-S.T., dated 5 November 2003 has also clarified, although for a different logic, that where the value of taxable service has been received in advance for a service which became taxable subsequently, service tax has to be paid on the value of service attributable to the relevant month/quarter which may be worked out on pro rata basis. Relevant Para of the circular is reproduced below:
“As per the said circular, Rule 6 only prescribes the procedure of payment of tax. The liability to tax is created by Section 66 of the Finance Act, 1994. The liability to pay tax is fastened on the service provider by Section 68 of the said Act. These two sections read together imply that service tax is payable by the service provider on the value of taxable services. Thus if a service provided is taxable, tax has to be paid on its value. Section 67 also clarifies value of service as the amount charged for the taxable service by the service provider. In other words, an amount becomes value of taxable service only when it has a nexus with the service provided. That is the reason why the expression used in Rule 6 is “value of taxable services” and not amount. The implication is that the tax has to be paid on the value of taxable services attributable to the service provided in a month/quarter as and when it is received. Thus, Rule 6(1) cannot be read in isolation.”
In this context, it is interesting to note that maintenance and repair of goods and equipment service was brought within service tax in the year 2003 from 1 July 2003. Government vide Notification No. 11/2003 dated 20 June 2003 exempted service tax on maintenance and repair on the payment received prior to 1 July 2003 provided the bill or invoice for the said portion of taxable services was also raised prior to the 1 July 2003. CBEC vide circular No. 59/8/2003 dated 20 June 2003 clarified that similar will be the situation for payments made for continuing service. In other words, if the payment has been received in before 1 July 2003 but service is continuing even after 1 July 2003, after it has become taxable, no service tax is leviable.
If the similar logic is taken in respect of other service, it will appear that in case of continuing service where bill is raised and payment is received in advance, no tax is leviable on the services which subsequently become taxable. However, CBEC vide Circular No. 65/14/2003-S.T., dated 5 November 2003 has clarified that:
“Circular No. 59/8/2003, dated 20-6-2003 [2003 (155) E.L.T. T7] wherein it was clarified that in view of the Notification 11/2003-S.T., dated 20-6-2003, no service tax would be payable where maintenance contracts are entered into before 1-7-2003, provided the invoices are raised and paid prior to 1-7-2003. It was further mentioned in the circular that similar would be the situation in case of continuing services. By continuing services what was meant was continuing maintenance services where there is an ongoing contract under which regular periodical payments are made. That Para 2.3.1 was only in the context of maintenance and repair service is also quite clear from the heading, “MAINTENANCE AND REPAIR SERVICES” of Para 2.3 in that circular. No similar exemption has been granted to any other service in case of advance payments.”
It is an open question as to whether the Board can issue contrary clarifications with respect to assessment practice wherein different assessees are placed in similar situation but the liability is different.
Therefore, in the first scenario, there is no ambiguity in law and a provision has been incorporated in the service Tax Rules that even if payment is received after service has become taxable, such service or part of such service cannot be taxed.
In the second scenario, position of law is not clear. As per Section 66 of the Finance Act, service tax is levied on the value of the taxable service at prescribed rate, whereas as per Section 68 thereof, service provider is required to pay service tax at the prescribed rate in prescribed manner. As per Rule 6 of the Service Tax Rules, payment of service tax is required to be made on the subsequent month on the basis of payment received during the month for the taxable service.
From the above, it appears service provider is required to pay service tax on the payments received for taxable services at the prescribed rate within stipulated time. Since the payment for service has been received in advance, no service tax has been paid thereon during the said period, as it was not a taxable service. As per Rule 4A of the Service Tax Rules, provider of a taxable service is required to issue Bill/Invoice/Challan within fourteen days from the date of completion of taxable service or receipt of any payment towards the value of taxable service, whichever is earlier.
In the present case, as payment has already been received, an event occurring earlier than completion of service, service provider is not required to issue any fresh Bill/Invoice/Challan for rendering service. Therefore, it appears that such advance receipts escape levy of service tax. However, that is not the case may be. The advance receipt for the services will be shown in the books of account as advance and will be adjusted in the books as and when the service is provided to the client. Such adjustments in the books of accounts have been considered as consideration for the service and therefore, it will be exigible to the service tax. Central Board of Excise and Customs (‘CBEC’) vide Circular No. 65/14/2003-S.T., dated 5 November 2003 has also clarified, although for a different logic, that where the value of taxable service has been received in advance for a service which became taxable subsequently, service tax has to be paid on the value of service attributable to the relevant month/quarter which may be worked out on pro rata basis. Relevant Para of the circular is reproduced below:
“As per the said circular, Rule 6 only prescribes the procedure of payment of tax. The liability to tax is created by Section 66 of the Finance Act, 1994. The liability to pay tax is fastened on the service provider by Section 68 of the said Act. These two sections read together imply that service tax is payable by the service provider on the value of taxable services. Thus if a service provided is taxable, tax has to be paid on its value. Section 67 also clarifies value of service as the amount charged for the taxable service by the service provider. In other words, an amount becomes value of taxable service only when it has a nexus with the service provided. That is the reason why the expression used in Rule 6 is “value of taxable services” and not amount. The implication is that the tax has to be paid on the value of taxable services attributable to the service provided in a month/quarter as and when it is received. Thus, Rule 6(1) cannot be read in isolation.”
In this context, it is interesting to note that maintenance and repair of goods and equipment service was brought within service tax in the year 2003 from 1 July 2003. Government vide Notification No. 11/2003 dated 20 June 2003 exempted service tax on maintenance and repair on the payment received prior to 1 July 2003 provided the bill or invoice for the said portion of taxable services was also raised prior to the 1 July 2003. CBEC vide circular No. 59/8/2003 dated 20 June 2003 clarified that similar will be the situation for payments made for continuing service. In other words, if the payment has been received in before 1 July 2003 but service is continuing even after 1 July 2003, after it has become taxable, no service tax is leviable.
If the similar logic is taken in respect of other service, it will appear that in case of continuing service where bill is raised and payment is received in advance, no tax is leviable on the services which subsequently become taxable. However, CBEC vide Circular No. 65/14/2003-S.T., dated 5 November 2003 has clarified that:
“Circular No. 59/8/2003, dated 20-6-2003 [2003 (155) E.L.T. T7] wherein it was clarified that in view of the Notification 11/2003-S.T., dated 20-6-2003, no service tax would be payable where maintenance contracts are entered into before 1-7-2003, provided the invoices are raised and paid prior to 1-7-2003. It was further mentioned in the circular that similar would be the situation in case of continuing services. By continuing services what was meant was continuing maintenance services where there is an ongoing contract under which regular periodical payments are made. That Para 2.3.1 was only in the context of maintenance and repair service is also quite clear from the heading, “MAINTENANCE AND REPAIR SERVICES” of Para 2.3 in that circular. No similar exemption has been granted to any other service in case of advance payments.”
It is an open question as to whether the Board can issue contrary clarifications with respect to assessment practice wherein different assessees are placed in similar situation but the liability is different.
Advance payments for the taxable service
As per Rule 6 of the service Tax Rules, 1994 (‘the Service Tax Rules’), service tax is required to be paid to the Government by the 5th of the month immediately following the calendar month in which the payments are received towards the value of taxable services. The liability to pay service tax arises on receipt of the payment for the service already provided or to be provided to a client. Therefore, service provider is also required to pay service tax on the advance payment received for the services which are yet to be provided by him. However, in case, service is not provided either wholly or partly for any reason and service provider refunds the amount to the client, the service provider may adjust the excess service tax so paid by him (calculated on a pro rata basis) against his service tax liability for the subsequent period . Further, if the service provider has received payment attributable to a service provided by him during the period when such service was not taxable, he is not required to pay service tax to that extent.
Mode of Receipts for the service rendered
Payment for the service can be in any one or more manner i.e. currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance, credit cards and other similar instruments and book adjustments. It may be seen that issue of debit/credit notes and deductions from accounts or book adjustments has also been considered as monetary consideration for the purpose of valuation of service.
Statutory Provisions
As per section 66 of the Finance Act, 1994 (‘the Finance Act’), Service tax is levied ad valorem @ 12% on the value of the taxable service.
Value of the taxable service is determined in accordance with the provisions of Section 67 of the Finance Act read with Service Tax (Determination of Value) Rules, 2006 (‘the Valuation Rules’).
As per Section 67(i) of the Finance Act, the value of taxable service is the gross amount charged by the service provider for such service provided or to be provided, where the provision of service is for a monetary consideration alone.
As per the explanation (a) to the section 67 of the Finance Act, consideration includes any amount which is paid or payable for the service provided or to be provided. Further as per explanation (b) thereto “money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value and as per explanation (c) thereto “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment.
Value of the taxable service is determined in accordance with the provisions of Section 67 of the Finance Act read with Service Tax (Determination of Value) Rules, 2006 (‘the Valuation Rules’).
As per Section 67(i) of the Finance Act, the value of taxable service is the gross amount charged by the service provider for such service provided or to be provided, where the provision of service is for a monetary consideration alone.
As per the explanation (a) to the section 67 of the Finance Act, consideration includes any amount which is paid or payable for the service provided or to be provided. Further as per explanation (b) thereto “money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value and as per explanation (c) thereto “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment.
Sunday, February 11, 2007
Latest Judgment of the Apex Court
On 2 February 2007, the apex court in the case of J K Corporation Ltd in Appeal (Civil)4663 of 2006 held that:
"The basic principle of levy of customs duty, in view of the afore- mentioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of licence or technical knowhow for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.
Rule 12 of the Rules provides that the interpretative notes specified in the Schedule appended thereto would apply for construction thereof. They are statutory in nature being integral part of the Rules themselves. The relevant portion of Interpretative Note to Rule 4 reads as under:
"The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods:
(a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment;
(b) The cost of transport after importation;
(c) Duties and taxes in India."
What would, therefore, be excluded for computing the assessable value for the purpose of levy of custom duty, inter alia, has clearly been stated therein, namely, any amount paid for post-importation activities. The said provision, in particular, also apply to any amount paid for post- importation technical assistance. What is necessary, therefore, is a separate identifiable amount charged for the same. On the Revenue's own showing, the sum of US $ 14, 00, 000.00 was required to be paid by way of remuneration towards services to be offered by the companies in respect of matters specified in Part-A of the said Memorandum of Agreement. The said sum represents amount of licence or amount to be paid by the respondent for the licence for the manufacturing process for production of goods which were covered by the patents held by M/s. Samsung as also for technical knowhow.
No part of the knowhow fee was to be incurred by the respondent herein either for the purpose of fabrication of the plant and machinery or for any design in respect whereof M/s. Samsung held the patent right.
It may be noticed that the said Memorandum of Agreement specifically contemplates that the plant and machinery to be supplied thereunder may be procured from other independent manufacturers and suppliers who might not have anything to do with the knowhow or licence provided thereunder by Samsung.
The part of the Interpretative Note to Rule 4 relied on by the Tribunal has been couched in a negative form and is accompanied by a proviso. It means that the charges or costs described in clauses (a), (b) and (c) are not to be included in the value of imported goods subject to satisfying the requirement of the proviso that the charges were distinguishable from the price actually paid or payable for the imported goods. This part of the Interpretative Note cannot be so read as to mean that those charges which are not covered in clauses (a) to (c) are available to be included in the value of the imported goods."
Therefore, once again the apex court has upheld the GOLDEN RULE that if payment is not a condition of sale and pertains to post importation, it can not be added to the assessable value.
"The basic principle of levy of customs duty, in view of the afore- mentioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of licence or technical knowhow for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.
Rule 12 of the Rules provides that the interpretative notes specified in the Schedule appended thereto would apply for construction thereof. They are statutory in nature being integral part of the Rules themselves. The relevant portion of Interpretative Note to Rule 4 reads as under:
"The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods:
(a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment;
(b) The cost of transport after importation;
(c) Duties and taxes in India."
What would, therefore, be excluded for computing the assessable value for the purpose of levy of custom duty, inter alia, has clearly been stated therein, namely, any amount paid for post-importation activities. The said provision, in particular, also apply to any amount paid for post- importation technical assistance. What is necessary, therefore, is a separate identifiable amount charged for the same. On the Revenue's own showing, the sum of US $ 14, 00, 000.00 was required to be paid by way of remuneration towards services to be offered by the companies in respect of matters specified in Part-A of the said Memorandum of Agreement. The said sum represents amount of licence or amount to be paid by the respondent for the licence for the manufacturing process for production of goods which were covered by the patents held by M/s. Samsung as also for technical knowhow.
No part of the knowhow fee was to be incurred by the respondent herein either for the purpose of fabrication of the plant and machinery or for any design in respect whereof M/s. Samsung held the patent right.
It may be noticed that the said Memorandum of Agreement specifically contemplates that the plant and machinery to be supplied thereunder may be procured from other independent manufacturers and suppliers who might not have anything to do with the knowhow or licence provided thereunder by Samsung.
The part of the Interpretative Note to Rule 4 relied on by the Tribunal has been couched in a negative form and is accompanied by a proviso. It means that the charges or costs described in clauses (a), (b) and (c) are not to be included in the value of imported goods subject to satisfying the requirement of the proviso that the charges were distinguishable from the price actually paid or payable for the imported goods. This part of the Interpretative Note cannot be so read as to mean that those charges which are not covered in clauses (a) to (c) are available to be included in the value of the imported goods."
Therefore, once again the apex court has upheld the GOLDEN RULE that if payment is not a condition of sale and pertains to post importation, it can not be added to the assessable value.
Latest Judgment of the Apex Court
On 2 February 2007, the apex court in the case of J K Corporation Ltd in Appeal (Civil)4663 of 2006 held that:
"The basic principle of levy of customs duty, in view of the afore- mentioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of licence or technical knowhow for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.
Rule 12 of the Rules provides that the interpretative notes specified in the Schedule appended thereto would apply for construction thereof. They are statutory in nature being integral part of the Rules themselves. The relevant portion of Interpretative Note to Rule 4 reads as under:
"The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods:
(a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment;
(b) The cost of transport after importation;
(c) Duties and taxes in India."
What would, therefore, be excluded for computing the assessable value for the purpose of levy of custom duty, inter alia, has clearly been stated therein, namely, any amount paid for post-importation activities. The said provision, in particular, also apply to any amount paid for post- importation technical assistance. What is necessary, therefore, is a separate identifiable amount charged for the same. On the Revenue's own showing, the sum of US $ 14, 00, 000.00 was required to be paid by way of remuneration towards services to be offered by the companies in respect of matters specified in Part-A of the said Memorandum of Agreement. The said sum represents amount of licence or amount to be paid by the respondent for the licence for the manufacturing process for production of goods which were covered by the patents held by M/s. Samsung as also for technical knowhow.
No part of the knowhow fee was to be incurred by the respondent herein either for the purpose of fabrication of the plant and machinery or for any design in respect whereof M/s. Samsung held the patent right.
It may be noticed that the said Memorandum of Agreement specifically contemplates that the plant and machinery to be supplied thereunder may be procured from other independent manufacturers and suppliers who might not have anything to do with the knowhow or licence provided thereunder by Samsung.
The part of the Interpretative Note to Rule 4 relied on by the Tribunal has been couched in a negative form and is accompanied by a proviso. It means that the charges or costs described in clauses (a), (b) and (c) are not to be included in the value of imported goods subject to satisfying the requirement of the proviso that the charges were distinguishable from the price actually paid or payable for the imported goods. This part of the Interpretative Note cannot be so read as to mean that those charges which are not covered in clauses (a) to (c) are available to be included in the value of the imported goods."
Therefore, once again the apex court has upheld the GOLDEN RULE that if payment is not a condition of sale and pertains to post importation, it can not be added to the assessable value.
"The basic principle of levy of customs duty, in view of the afore- mentioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of licence or technical knowhow for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.
Rule 12 of the Rules provides that the interpretative notes specified in the Schedule appended thereto would apply for construction thereof. They are statutory in nature being integral part of the Rules themselves. The relevant portion of Interpretative Note to Rule 4 reads as under:
"The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods:
(a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment;
(b) The cost of transport after importation;
(c) Duties and taxes in India."
What would, therefore, be excluded for computing the assessable value for the purpose of levy of custom duty, inter alia, has clearly been stated therein, namely, any amount paid for post-importation activities. The said provision, in particular, also apply to any amount paid for post- importation technical assistance. What is necessary, therefore, is a separate identifiable amount charged for the same. On the Revenue's own showing, the sum of US $ 14, 00, 000.00 was required to be paid by way of remuneration towards services to be offered by the companies in respect of matters specified in Part-A of the said Memorandum of Agreement. The said sum represents amount of licence or amount to be paid by the respondent for the licence for the manufacturing process for production of goods which were covered by the patents held by M/s. Samsung as also for technical knowhow.
No part of the knowhow fee was to be incurred by the respondent herein either for the purpose of fabrication of the plant and machinery or for any design in respect whereof M/s. Samsung held the patent right.
It may be noticed that the said Memorandum of Agreement specifically contemplates that the plant and machinery to be supplied thereunder may be procured from other independent manufacturers and suppliers who might not have anything to do with the knowhow or licence provided thereunder by Samsung.
The part of the Interpretative Note to Rule 4 relied on by the Tribunal has been couched in a negative form and is accompanied by a proviso. It means that the charges or costs described in clauses (a), (b) and (c) are not to be included in the value of imported goods subject to satisfying the requirement of the proviso that the charges were distinguishable from the price actually paid or payable for the imported goods. This part of the Interpretative Note cannot be so read as to mean that those charges which are not covered in clauses (a) to (c) are available to be included in the value of the imported goods."
Therefore, once again the apex court has upheld the GOLDEN RULE that if payment is not a condition of sale and pertains to post importation, it can not be added to the assessable value.
Wednesday, January 17, 2007
View my other blogs on Service Tax
Airport Services
http://servicetax-airport.blogspot.com/
Intellectual Property Rights
http://servicetax-ipr.blogspot.com/
Consulting Engineers
http://servicetaxind.blogspot.com/
Blogs on Customs Duty and procedure
Import of Computer Software
http://customs-software.blogspot.com/
Import of capital goods/components where supplier is paid royalty
http://customs-royalty.blogspot.com/
How Bill of Entry is assessed in a Custom House
http://import-procedure.blogspot.com/
Blogs on Central Excise duty and procedure
Exemption to new industrial units in Himachal Pradesh and Uttaranchal
View my other blogs on Service Tax
Airport Services
http://servicetax-airport.blogspot.com/
Intellectual Property Rights
http://servicetax-ipr.blogspot.com/
Consulting Engineers
http://servicetaxind.blogspot.com/
Blogs on Customs Duty and procedure
Import of Computer Software
http://customs-software.blogspot.com/
Import of capital goods/components where supplier is paid royalty
http://customs-royalty.blogspot.com/
How Bill of Entry is assessed in a Custom House
http://import-procedure.blogspot.com/
Blogs on Central Excise duty and procedure
Exemption to new industrial units in Himachal Pradesh and Uttaranchal
My Blogs
Blogs on Service Tax
Airport Services
http://servicetax-airport.blogspot.com
Intellectual Property Rights
http://servicetax-ipr.blogspot.com
Consulting Engineers
http://servicetaxind.blogspot.com
Blogs on Customs Duty and procedure
Import of capital goods/components where supplier is paid royalty
http://customs-royalty.blogspot.com
Blogs on Central Excise duty and procedure
Exemption to new industrial units in Himachal Pradesh and Uttaranchal
http://excise-uttaranchal.blogspot.com/
Airport Services
http://servicetax-airport.blogspot.com
Intellectual Property Rights
http://servicetax-ipr.blogspot.com
Consulting Engineers
http://servicetaxind.blogspot.com
Blogs on Customs Duty and procedure
Import of capital goods/components where supplier is paid royalty
http://customs-royalty.blogspot.com
Blogs on Central Excise duty and procedure
Exemption to new industrial units in Himachal Pradesh and Uttaranchal
http://excise-uttaranchal.blogspot.com/
Wednesday, January 10, 2007
Royalty Payment
What is Royalty
Royalty is the sum of money paid to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user (the Licensee) through the exercise of such rights. Royalties may be paid for the use of copyright, patent, registered design, knowhow, trademark or a combination of them.
The express rights granted to the licensee, and the amounts to be paid to the Licensor for the exercise thereof, are set out in a documented License Agreement. The agreement specifies the method of calculating the royalties and the period over which the payments become applicable.
The royalty amount can be one time lump sum payment or may be based on a formula specified in the licence agreement which defines the royalty rate and the unit base on which it is to be applied. Unit base can be value or volume of production of the licensed products.
Generally, the Licensee will import capital goods in the form of plant and machinery to create manufacturing base of the licensed product. Sometimes proprietary products are also imported to be used in manufacture of licensed products.
CUSTOMS DUTY
On importation, customs duty is required to be paid on the capital goods as well as other products. Duty of customs may be specific or ad valorem. Specific rate of duty means that duty is fixed on the basis of quantity or volume of the imported goods and expressed in the form of Rs XXX per unit. On the other hand, most of the time, custom duty is levied ad valorem which means that duty is calculated on the basis of value of the imported goods and expressed in percentage.
Customs Act, 1962
Section 14 of the Customs Act, 1962 deals with valuation of the imported goods, as per which the value goods is the price at which such or like goods are ordinarily sold, or offered for sale, to unrelated parties for delivery at the time and place of importation in the course of international trade and the price is the sole consideration for the sale or offer for sale. Royalty is paid to the supplier or a third party consequent upon the import of goods or technology and therefore, it may be possible that price is not the sole consideration to the buyer and a part of the consideration may be paid by way of royalty.
Customs Valuation Rules
As per Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, (‘the Valuation Rules’) royalties and licence 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 is required to be added in the price of the goods.
Further, as per as per Interpretative Notes to the Valuation Rules, the royalties and licence fees may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation are not required to be added to the price for the imported goods. Further, payments made by the buyer for the right to distribute or resell the imported goods are not required to be added to the price of the imported goods if such payments are not a condition of the sale for export.
Conditions
In view of the above, following conditions are required to be fulfilled, if the payments for the royalty or licence fees are added in the price of the imported goods:
· Royalty payments are pursuant to the conditions of sale
· Such payments are not included in the price
· Royalty payments should have a direct nexus to the imported goods
· Payment does not pertain to right to produce goods in India
· Payment does not pertain to right to resell or distribute
To bring royalty payments within the dutiable event, all the above conditions are to be fulfilled. It is immaterial as to whether the payment for royalty or licence fee or technical know-how has been in lump-sum or on regular basis.
Once it is established that royalty is includible in the price, only to that extent payment towards royalty will be added in the price to which it directly relates to the imported goods. Such addition has to be made on the basis of quantifiable data and not on presumptions.
Royalty payments are pursuant to the conditions of sale
To bring within the mischief of the Rule 9(1)(c) of the Valuation Rules, it has to be established that one of the condition of the sale is payment of royalty. Generally, following conditions are required to be satisfied to allege that royalty payment is the condition of the sale:
· Goods under import is proprietary product
· Proprietary product has to be exclusively procured from the Licensee or his agent
· Proprietary product is essential for the manufacture of licensed product
Royalty payments should have a direct nexus to the imported goods
What is assessed to the customs duty is goods under import. Therefore, it is essential to establish that there is a nexus between royalty and imported goods. If nexus is not established, value can be loaded under Rule 9(1)(c) of the Valuation Rules.
Why it is difficult to establish that royalty payment is a condition of sale
Generally, the IPR holder and the Licensor enter in to a multiple but separate agreements for various activities. Following are the typical agreements:
Royalty is the sum of money paid to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user (the Licensee) through the exercise of such rights. Royalties may be paid for the use of copyright, patent, registered design, knowhow, trademark or a combination of them.
The express rights granted to the licensee, and the amounts to be paid to the Licensor for the exercise thereof, are set out in a documented License Agreement. The agreement specifies the method of calculating the royalties and the period over which the payments become applicable.
The royalty amount can be one time lump sum payment or may be based on a formula specified in the licence agreement which defines the royalty rate and the unit base on which it is to be applied. Unit base can be value or volume of production of the licensed products.
Generally, the Licensee will import capital goods in the form of plant and machinery to create manufacturing base of the licensed product. Sometimes proprietary products are also imported to be used in manufacture of licensed products.
CUSTOMS DUTY
On importation, customs duty is required to be paid on the capital goods as well as other products. Duty of customs may be specific or ad valorem. Specific rate of duty means that duty is fixed on the basis of quantity or volume of the imported goods and expressed in the form of Rs XXX per unit. On the other hand, most of the time, custom duty is levied ad valorem which means that duty is calculated on the basis of value of the imported goods and expressed in percentage.
Customs Act, 1962
Section 14 of the Customs Act, 1962 deals with valuation of the imported goods, as per which the value goods is the price at which such or like goods are ordinarily sold, or offered for sale, to unrelated parties for delivery at the time and place of importation in the course of international trade and the price is the sole consideration for the sale or offer for sale. Royalty is paid to the supplier or a third party consequent upon the import of goods or technology and therefore, it may be possible that price is not the sole consideration to the buyer and a part of the consideration may be paid by way of royalty.
Customs Valuation Rules
As per Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, (‘the Valuation Rules’) royalties and licence 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 is required to be added in the price of the goods.
Further, as per as per Interpretative Notes to the Valuation Rules, the royalties and licence fees may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation are not required to be added to the price for the imported goods. Further, payments made by the buyer for the right to distribute or resell the imported goods are not required to be added to the price of the imported goods if such payments are not a condition of the sale for export.
Conditions
In view of the above, following conditions are required to be fulfilled, if the payments for the royalty or licence fees are added in the price of the imported goods:
· Royalty payments are pursuant to the conditions of sale
· Such payments are not included in the price
· Royalty payments should have a direct nexus to the imported goods
· Payment does not pertain to right to produce goods in India
· Payment does not pertain to right to resell or distribute
To bring royalty payments within the dutiable event, all the above conditions are to be fulfilled. It is immaterial as to whether the payment for royalty or licence fee or technical know-how has been in lump-sum or on regular basis.
Once it is established that royalty is includible in the price, only to that extent payment towards royalty will be added in the price to which it directly relates to the imported goods. Such addition has to be made on the basis of quantifiable data and not on presumptions.
Royalty payments are pursuant to the conditions of sale
To bring within the mischief of the Rule 9(1)(c) of the Valuation Rules, it has to be established that one of the condition of the sale is payment of royalty. Generally, following conditions are required to be satisfied to allege that royalty payment is the condition of the sale:
· Goods under import is proprietary product
· Proprietary product has to be exclusively procured from the Licensee or his agent
· Proprietary product is essential for the manufacture of licensed product
Royalty payments should have a direct nexus to the imported goods
What is assessed to the customs duty is goods under import. Therefore, it is essential to establish that there is a nexus between royalty and imported goods. If nexus is not established, value can be loaded under Rule 9(1)(c) of the Valuation Rules.
Why it is difficult to establish that royalty payment is a condition of sale
Generally, the IPR holder and the Licensor enter in to a multiple but separate agreements for various activities. Following are the typical agreements:
- Agreements for supply of know-how
- Agreement for supply of capital goods from the IPR Holder
- Agreement for supply of capital goods from the associate entities of the IPR Holder
- Agreement for erection and commissioning of the plant
- Agreement for supply of proprietary product from the IPR Holder
- Agreement for supply of proprietary product from the associate entities of the IPR Holder
- Agreement for supply of non-proprietary product from the IPR Holder
- Agreement for supply of non-proprietary product from the associate entities of the IPR Holder
- Agreement for supply of non-proprietary product from the other entities
- Agreement for technical training of the staff
In plethora of these various contracts entered at different dates, the obligation for payment of royalty will be in only one agreement i.e. Agreements for supply of know-how. Therefore, it is always difficult to establish that royalty payment is one of the conditions of sale of capital goods/components/raw material.
Royalty Payment
What is Royalty
Royalty is the sum of money paid to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user (the Licensee) through the exercise of such rights. Royalties may be paid for the use of copyright, patent, registered design, knowhow, trademark or a combination of them.
The express rights granted to the licensee, and the amounts to be paid to the Licensor for the exercise thereof, are set out in a documented License Agreement. The agreement specifies the method of calculating the royalties and the period over which the payments become applicable.
The royalty amount can be one time lump sum payment or may be based on a formula specified in the licence agreement which defines the royalty rate and the unit base on which it is to be applied. Unit base can be value or volume of production of the licensed products.
Generally, the Licensee will import capital goods in the form of plant and machinery to create manufacturing base of the licensed product. Sometimes proprietary products are also imported to be used in manufacture of licensed products.
CUSTOMS DUTY
On importation, customs duty is required to be paid on the capital goods as well as other products. Duty of customs may be specific or ad valorem. Specific rate of duty means that duty is fixed on the basis of quantity or volume of the imported goods and expressed in the form of Rs XXX per unit. On the other hand, most of the time, custom duty is levied ad valorem which means that duty is calculated on the basis of value of the imported goods and expressed in percentage.
Customs Act, 1962
Section 14 of the Customs Act, 1962 deals with valuation of the imported goods, as per which the value goods is the price at which such or like goods are ordinarily sold, or offered for sale, to unrelated parties for delivery at the time and place of importation in the course of international trade and the price is the sole consideration for the sale or offer for sale. Royalty is paid to the supplier or a third party consequent upon the import of goods or technology and therefore, it may be possible that price is not the sole consideration to the buyer and a part of the consideration may be paid by way of royalty.
Customs Valuation Rules
As per Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, (‘the Valuation Rules’) royalties and licence 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 is required to be added in the price of the goods.
Further, as per as per Interpretative Notes to the Valuation Rules, the royalties and licence fees may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation are not required to be added to the price for the imported goods. Further, payments made by the buyer for the right to distribute or resell the imported goods are not required to be added to the price of the imported goods if such payments are not a condition of the sale for export.
Conditions
In view of the above, following conditions are required to be fulfilled, if the payments for the royalty or licence fees are added in the price of the imported goods:
· Royalty payments are pursuant to the conditions of sale
· Such payments are not included in the price
· Royalty payments should have a direct nexus to the imported goods
· Payment does not pertain to right to produce goods in India
· Payment does not pertain to right to resell or distribute
To bring royalty payments within the dutiable event, all the above conditions are to be fulfilled. It is immaterial as to whether the payment for royalty or licence fee or technical know-how has been in lump-sum or on regular basis.
Once it is established that royalty is includible in the price, only to that extent payment towards royalty will be added in the price to which it directly relates to the imported goods. Such addition has to be made on the basis of quantifiable data and not on presumptions.
Royalty payments are pursuant to the conditions of sale
To bring within the mischief of the Rule 9(1)(c) of the Valuation Rules, it has to be established that one of the condition of the sale is payment of royalty. Generally, following conditions are required to be satisfied to allege that royalty payment is the condition of the sale:
· Goods under import is proprietary product
· Proprietary product has to be exclusively procured from the Licensee or his agent
· Proprietary product is essential for the manufacture of licensed product
Royalty payments should have a direct nexus to the imported goods
What is assessed to the customs duty is goods under import. Therefore, it is essential to establish that there is a nexus between royalty and imported goods. If nexus is not established, value can be loaded under Rule 9(1)(c) of the Valuation Rules.
Why it is difficult to establish that royalty payment is a condition of sale
Generally, the IPR holder and the Licensor enter in to a multiple but separate agreements for various activities. Following are the typical agreements:
Royalty is the sum of money paid to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user (the Licensee) through the exercise of such rights. Royalties may be paid for the use of copyright, patent, registered design, knowhow, trademark or a combination of them.
The express rights granted to the licensee, and the amounts to be paid to the Licensor for the exercise thereof, are set out in a documented License Agreement. The agreement specifies the method of calculating the royalties and the period over which the payments become applicable.
The royalty amount can be one time lump sum payment or may be based on a formula specified in the licence agreement which defines the royalty rate and the unit base on which it is to be applied. Unit base can be value or volume of production of the licensed products.
Generally, the Licensee will import capital goods in the form of plant and machinery to create manufacturing base of the licensed product. Sometimes proprietary products are also imported to be used in manufacture of licensed products.
CUSTOMS DUTY
On importation, customs duty is required to be paid on the capital goods as well as other products. Duty of customs may be specific or ad valorem. Specific rate of duty means that duty is fixed on the basis of quantity or volume of the imported goods and expressed in the form of Rs XXX per unit. On the other hand, most of the time, custom duty is levied ad valorem which means that duty is calculated on the basis of value of the imported goods and expressed in percentage.
Customs Act, 1962
Section 14 of the Customs Act, 1962 deals with valuation of the imported goods, as per which the value goods is the price at which such or like goods are ordinarily sold, or offered for sale, to unrelated parties for delivery at the time and place of importation in the course of international trade and the price is the sole consideration for the sale or offer for sale. Royalty is paid to the supplier or a third party consequent upon the import of goods or technology and therefore, it may be possible that price is not the sole consideration to the buyer and a part of the consideration may be paid by way of royalty.
Customs Valuation Rules
As per Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, (‘the Valuation Rules’) royalties and licence 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 is required to be added in the price of the goods.
Further, as per as per Interpretative Notes to the Valuation Rules, the royalties and licence fees may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation are not required to be added to the price for the imported goods. Further, payments made by the buyer for the right to distribute or resell the imported goods are not required to be added to the price of the imported goods if such payments are not a condition of the sale for export.
Conditions
In view of the above, following conditions are required to be fulfilled, if the payments for the royalty or licence fees are added in the price of the imported goods:
· Royalty payments are pursuant to the conditions of sale
· Such payments are not included in the price
· Royalty payments should have a direct nexus to the imported goods
· Payment does not pertain to right to produce goods in India
· Payment does not pertain to right to resell or distribute
To bring royalty payments within the dutiable event, all the above conditions are to be fulfilled. It is immaterial as to whether the payment for royalty or licence fee or technical know-how has been in lump-sum or on regular basis.
Once it is established that royalty is includible in the price, only to that extent payment towards royalty will be added in the price to which it directly relates to the imported goods. Such addition has to be made on the basis of quantifiable data and not on presumptions.
Royalty payments are pursuant to the conditions of sale
To bring within the mischief of the Rule 9(1)(c) of the Valuation Rules, it has to be established that one of the condition of the sale is payment of royalty. Generally, following conditions are required to be satisfied to allege that royalty payment is the condition of the sale:
· Goods under import is proprietary product
· Proprietary product has to be exclusively procured from the Licensee or his agent
· Proprietary product is essential for the manufacture of licensed product
Royalty payments should have a direct nexus to the imported goods
What is assessed to the customs duty is goods under import. Therefore, it is essential to establish that there is a nexus between royalty and imported goods. If nexus is not established, value can be loaded under Rule 9(1)(c) of the Valuation Rules.
Why it is difficult to establish that royalty payment is a condition of sale
Generally, the IPR holder and the Licensor enter in to a multiple but separate agreements for various activities. Following are the typical agreements:
- Agreements for supply of know-how
- Agreement for supply of capital goods from the IPR Holder
- Agreement for supply of capital goods from the associate entities of the IPR Holder
- Agreement for erection and commissioning of the plant
- Agreement for supply of proprietary product from the IPR Holder
- Agreement for supply of proprietary product from the associate entities of the IPR Holder
- Agreement for supply of non-proprietary product from the IPR Holder
- Agreement for supply of non-proprietary product from the associate entities of the IPR Holder
- Agreement for supply of non-proprietary product from the other entities
- Agreement for technical training of the staff
In plethora of these various contracts entered at different dates, the obligation for payment of royalty will be in only one agreement i.e. Agreements for supply of know-how. Therefore, it is always difficult to establish that royalty payment is one of the conditions of sale of capital goods/components/raw material.
Tuesday, January 9, 2007
Bill of Entry
FILING OF THE BILL OF ENTRY
The importer /CHA have to file a B/E for clearance of import goods either through RES, ICEGATE or service center.
Bill of entry is of 3 types depending upon delivery of the goods:
1 B/E for home consumption
The importer intends to clear the goods for sale or use in the production,
Duty to be paid in full before delivery.
Duty to be paid in full before delivery.
2 B/E for warehousing
Importer does not need the goods immediately,
Payment of duty is delayed
Duty can be paid in parts depending upon the requirement of goods
Payment of warehousing charges and interest
May be change in the rate of duty
Payment of duty is delayed
Duty can be paid in parts depending upon the requirement of goods
Payment of warehousing charges and interest
May be change in the rate of duty
3 B/E for ex-bonding
To remove the goods from warehouse
Applicable rate of duty as on the filing of the Ex-bond B/E
Applicable rate of duty as on the filing of the Ex-bond B/E
Import General Manifest
IGM FILING
The shipping line/steamer agent submits the manifest on line through E-mail or ICEGATE or at Service Center and obtains the IGM Number generated by the System. On arrival of the vessel, the Preventive Officer updates the database in the system by entering the arrival date and grant entry inwards. IGM can be amendment with the approval of AC (Import). For each consignment, there is Line number in the IGM. The system would accept B/E only if it finds that the IGM No. and bill of lading (B/L) No. match the corresponding line number of the IGM. Only one declaration against a line number is accepted.
Types of Bill of Entry
Bill of entry can be classified under 3 types depending upon the filing:
1 Advance Noting of B/E
Within 30 days before, from the expected date arrival of the vessel
fresh B/E would have to be filed if the vessel does not arrive within 30 days,
Assessment of the B/E is complete before arrival of goods
Final printout of the B/E only after arrival of the vessel, and after comparison with IGM
The rate of exchange as prevailing on the date of filing the Advance B/E
rate of duty as on the date of entry inward of the vessel
B/E to be re-assessed for any change in the Rate of duty.
fresh B/E would have to be filed if the vessel does not arrive within 30 days,
Assessment of the B/E is complete before arrival of goods
Final printout of the B/E only after arrival of the vessel, and after comparison with IGM
The rate of exchange as prevailing on the date of filing the Advance B/E
rate of duty as on the date of entry inward of the vessel
B/E to be re-assessed for any change in the Rate of duty.
2 Prior Entry B/E
Filing of B/E after submission of IGM but before arrival of the vessel
Assessment of the B/E is complete before arrival of goods
Final printout of the B/E only after arrival of the vessel
The rate of exchange as prevailing on the date of filing the Prior Entry B/E
rate of duty as on the date of entry inward of the vessel
B/E to be re-assessed for any change in the Rate of duty.
Assessment of the B/E is complete before arrival of goods
Final printout of the B/E only after arrival of the vessel
The rate of exchange as prevailing on the date of filing the Prior Entry B/E
rate of duty as on the date of entry inward of the vessel
B/E to be re-assessed for any change in the Rate of duty.
3 Regular B/E
Filing of B/E after arrival of the vessel
Rate of exchange and rate of duty as on the date of the filing of B/E
Bill of Entry under Section 46
Then there is a special kind of B/E filed under section 46 of the Act:
Import documents like Invoice etc not available
Value of the goods not known
Contents of the package not known
Value is appraised by the shed officers
Once the value is appraised, it is dealt further in the normal procedure.
Import documents like Invoice etc not available
Value of the goods not known
Contents of the package not known
Value is appraised by the shed officers
Once the value is appraised, it is dealt further in the normal procedure.
Risk Management System
Risk Management System
Customs has recently introduced RMS for cargo clearance. The objective of the RMS is to strike an optimal balance between facilitation and enforcement and to enable low risk consignments, which are perceived to be law compliant, to be cleared with minimal intervention. This enables enhancement of the level of facilitation and speed up the process of cargo clearance. Once B/E is filed, it will go in the Risk Management System.
System will process the B/E against various risk parameters like:
- Whether importer is an individual, firm, company etc.
- Paid-up capital of the Company
- Reputation of the importer and persons
- Reputation of the CHA
- Past records of importer
- Sensitivity of the goods and exemption notification
- Recorded value data for the goods under import
- Country of Origin/ Country of Consignment etc
These parameters have been assigned individual risk weight and the result will depend upon the overall risk perceived by the RMS. Further, RMS has a Central Risk Manager and Local Risk Manager for human intervention and depending upon the external inputs, he can modify/give suitable directions for specific importer/ commodity.
Flow of Bill of Entry
Depending upon the perceived risk, B/E will be dealt by the RMS in various ways:
Delivery of goods after Assessment and Examination
Delivery of goods after Examination
Direct delivery of goods
Post Clearance Audit
Accredited Client Programme
Under this programme, highly law compliant importers are given assured facilitation by the RMS and most of the consignments, based on the importers’ self-declaration, will be cleared without any assessment/examination. Assessment/examination will be on random basis and not as a rule.
There are prescribed eligibility criteria like import of goods over Rs 10 Crores, payment of customs duty or excise duty over Rs 1 Crore, more than 25 B/E, unblemished records, no demand due, good internal accounting system and control etc.
Assessment procedure
As the Assessment and Examination order will cover all point, let us see how the B/E is processed in the typical environment:
B/E is assessed by the Appraising Officers (AO) who are either Appraisers of Customs or Superintendents. They are divided in to various appraising groups 1 to 7. All of us know that the Customs Tariff Act is divided in to 99 chapters. The chapter wise allocation is as follows:
Appraising Group 1 Chapter 1 to 26
Appraising Group 2 Chapter 27 to 49
Appraising Group 3 Chapter 50 to 71
Appraising Group 4 Chapter 72 to 83
Appraising Group 5 Chapter 84
Appraising Group 5A Chapter 85 to 89
Appraising Group 6 Chapter 90 to 99
Appraising Group 7/7A….. Export promotion related schemes
Each group comprises of appraisers and headed by an Asst/Deputy Commissioner. If selected for assessment, System allocates B/E to various appraising groups depending upon the value of the goods and the Scheme opted. B/E will be put into Assessment queue and will be available to AO on first come first serve basis. At present, B/E pertaining to Group 7 are not assessed under RMS, therefore all B/E are marked for assessment and examination.
Assessment of B/E
Assessment means verification of classification, valuation, licensing and compliance with other enactments. The Assessment of B/E will be done on screen by the A.O. with no physical verification of documents. AO may raise a query in the system with the approval of the AC for any clarification required for the Assessment. The query may be replied online.
There are two types of appraisement
First Check - If the AO feels that it is not possible to assess the B/E based on the available information, he may order for examination of the goods before assessment and based on examination report, assessment is completed. Generally, the first check appraisement is ordered in exceptional cases.
Second Check - Assessment is made based on the declarations in the B/E and examination order is given as per requirement. Goods may be allowed delivery directly, or on inspection of package or inspection of goods or on examination of goods.
Verification of Valuation - Generally the transaction value is accepted as assessable value. However, to verify the correctness of declared value, the AO take help of NIDB data maintained by Directorate of Valuation, valuation guidelines and alerts of DoV, trade journals and bulletins like London Metal Bulletin, Commodity Ledgers, PLATT plastic bulletin etc. If the declared value is found on lower side, he may issue a notice under Rule 10A for the rejection of declared value. The AO also verify whether the seller and buyer are related and if so whether the declared value is affected or not. If prima facie, he is of the view that relationship has affected the transaction value then he refers the matter to Special Valuation Branch (SVB).
License and Compliance with other enactments
for the protection of country and public, a large number of enactments are implemented by the Customs. An illustrative list is given below:
* Foreign Trade (Development and Regulation) Act 1992 & Foreign Trade Policy
* Live Stock Importation Act, 1898
* Wild Life Protection Act, 1972
* C I T E S - (Convention of International Trade in Endangered Species of Wild Fauna and Flora) * Plant Quarantine Order 2003 issued under Sec.3 (1) of Destructive and Insects and Pest Act, 1914
* Plants, Fruits and seeds (Regulation of Import into India) Order, 1989
* Prevention of Food Adulteration Act, 1954 and Rules, 1955
* Breast Milk Substitutes (Advertisements and Labeling) Act.1982
* Drugs and Cosmetics Act, 1940 and Rules, 1945
* Standards of Weights and Measures Act, 1976
* Essential Commodities Act, 1958
* Insecticide Act, 1968
* Trade marks Act, 1999
* Copyright Act, 1957 and Rules, 1958
* Patents Act, 1970 and Rules, 1972
* The Bureau of Indian Standards Act, 1986 and Rules, 1987
* Environment (Protection) Act, 1986 and Rules, 1986
* Explosives Act, 1884 and Rules 1983
* Gas Cylinder Rules, 1981 and S&MPV (unfired) Rules, 1981
* Information Technology Act, 2000
* Motor Vehicles Act, 1988
* Atomic Energy Act, 1962
* Arms Act, 1959
* BIS applicable as per DGFT NOT.44 (RE) 2000 DT. 24.11.2000
* Indian Telegraph Act, 1882
* Wireless Communication Act, 1933
Undertakings, declarations: import of some goods requires end use undertaking, end use declarations, bonds etc to be executed. Importer has to execute the same beforehand and incorporate the same in the B/E for online processing.
Provisional assessment
B/E are assessed based on the available information. If the AO feels that the available information, in spite of first check/query is not sufficient to make a correct assessment, he may order for Provisional Assessment under Section 18 of the Act. If the case has been taken for investigation by SIIB or DRI, the Importer can seek release of goods under provisional assessment. In these cases, assessment is made against Bond with or without cash deposit/ bank guarantee/ surety pending production of some documents/information/clarification/investigation. Assessed duty is required to be paid.
Other feature
Provisional assessment even for one purpose is deemed as provisional for all purpose;
Goods will be allowed delivery as usual;
B/E will be finally assessed on production of required documents;
If there is short levy during provisional assessment, interest has to be paid;
Relevant date for Demand under Section 28 or refund under Section 27 is the date of finalization of the provisional assessment;
On refund arising out of finalization, principle of unjust enrichment will apply.
Once the AO process the B/E, he gives the appropriate open order in the case of second check and the B/E goes to AC/DC screen. After AC/DC approval, one copy of the B/E along with three copies of the Challan for payment of assessed duty is generated and the duty is required to be paid, if any. In the RMS, concurrent audit has been done away and B/E gets audited by the system.
Concurrent Audit
In the case of B/E not under RMS, same is audited by a concurrent auditor before the B/E moves to DC/AC screen. In case of any objection, he returns the B/E to the group for clarification and B/E again go in the queue of the AO.
Speaking Order
While filing the B/E, importer declares classification and value of the goods and the exemption notification he intents to avail. In case the Department does not agree with any of the above, a query is raised in the system. If the Importer agrees with the contention of the department, he may accept the same in writing and assessment will be made accordingly. However, if does not agree with the contention of the department, then department will issue a speaking order which can be appealed. In such case, it is advisable to pay duty under protest so that time limit under section 27 of the Act will not apply and the refund application will not be time barred.
Goods registration and Examination
The B/E in the first check and after payment of duty in the case of second check moves to Goods registration section in Examination Area where the Examiner will register the goods and examine the same as per examination order. The documents like invoice, packing list etc are submitted to the shed appraisers who verify the same and retains for records. The shed officer will comply with the requirement of open order.
There are different types of examination
Green channel- there will not be any examination and pass out charge will be given after verification of the marks and numbers of the consignment or verification of the seal and container number in case of full consignment load (FCL).
Open and inspect- selected 10% of the packages subject to minimum 2 and maximum 10 will be opened for inspection. The description will be matched by the officers. If required, samples may be drawn.
Open and examine- apart from inspection, goods will be subject to weighment/counting/measurement. Examination of the goods is more thorough than the inspection of goods.
Examination Report
The examination report is entered by the Examiner in the system and B/E is forwarded to the shed AO. If AO is satisfied, in the case of first check forward the B/E to the Appraising Group for assessment and in the case of second check gives the Out of Charge Order. If any discrepancy is noticed during the second check, B/E is returned to group for further action.
Remission of Duty
Before delivery of goods, if importer find that imported goods, after landing, has been pilfered/lost/destroyed in full or in part, he may seek remission of the duty by arranging a survey and informing the custodian and shed officer. Shed officer will enter the facts in the examination report and the importer may either get the B/E reassessed or apply for the refund of duty under section 27 of the Act. On the other hand, in the case of short delivery of the goods by the supplier, importer has to get the B/E reassessed by producing evidence of the short delivery.
DELIVERY OF THE IMPORTED GOODS
Pass Out of Charge Order is given by the shed appraiser. He generates copies of the B/E and gate pass and custodian of the goods delivers the goods against gate pass. In case of bonded goods, goods are deposited in bonded warehouse.
Ex-Bond B/E
B/E is assessed online in the usual manner. The Bond officer gives the pass out of charge as the goods have already been executed.
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