Royalty Payments Held Dutiable: CESTAT Confirms Inclusion in Transaction Value Under Rule 10(1)(c) of Customs Valuation Rules

The CESTAT Delhi held that royalty payments made by Ericsson India Pvt. Ltd. to its foreign parent company for technical know-how are includible in the transaction value of imported components under Rule 10(1)(c) of the Customs Valuation Rules, 2007. The Tribunal found that the royalty was related to the imported goods and was a condition of their sale. Accordingly, it upheld the inclusion of royalty in assessable value, sustained the demand of duty, interest, penalties, and dismissed the appeals.

1. Ericsson India Pvt. Ltd., a wholly owned subsidiary of a Swedish company, imported telecom components used in the manufacture of final telecom equipment.
2. It made royalty payments to its parent company under Technical Cooperation Agreements (TCAs), which granted rights to use know-how, patents, and technical data.
3. The customs authority alleged undervaluation by excluding royalty from the assessable value of imports and issued a demand for additional duty, interest, and penalties.
4. The Adjudicating Authority held that royalty payments were related to imported goods and a condition of sale, and added them to the assessable value.
5. The appellant challenged the order, arguing that the royalty was not linked to the import transaction and covered post-importation services.

Whether royalty payments made by the appellant to its parent company should be added to the assessable value of imported goods under Rule 10(1)(c) of the Customs Valuation Rules, 2007.

1. Royalty was paid for post-importation services, such as technical know-how and assistance.
2. There was no direct linkage between royalty and the import of goods.
3. The royalty was not a precondition for the sale of the goods.
4. Relied on precedent where royalty not related to imports was excluded from valuation.
5. No suppression or fraud to justify extended limitation or penalty.

1. The royalty was directly related to imported components, as the imported goods could not be manufactured or sold without the licensed know-how.
2. Payment of royalty was a condition for the supply of goods under the licensing agreement.
3. After 2012, royalty was calculated on gross sales, which included the value of imported parts, strengthening the link between the royalty and imported goods.
4. Royalty was not merely for post-importation services but integral to the import transaction.
5. Justified invocation of extended limitation, penalty, and confiscation due to deliberate undervaluation.

1. Rule 10(1)(c) requires that royalty must be both related to imported goods and be paid as a condition of sale.
2. Post-2012 royalty being calculated on gross sales (including imported parts) showed a direct link with the imported goods.
3. The technical cooperation agreements made the royalty a condition for the sale and use of the imported components.
4. The royalty was intrinsically connected to the imported components and not just post-import services.
5. Precedents relied upon by the appellant were distinguishable based on facts.
6. The adjudicating authority’s reasoning on inclusion, limitation, and penalties was found to be proper and legally sustainable.

1. Rule 10(1)(c), Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 – Includibility of royalty/license fees in transaction value.
2. Section 14, Customs Act, 1962 – Valuation of goods.
3. Section 114A, Customs Act – Penalty for suppression of facts.
4. Section 111(m), Customs Act – Confiscation for misdeclaration of value.

1. The royalty was rightly included in the assessable value under Rule 10(1)(c).
2. The demand for duty, interest, penalty, and confiscation was upheld.
3. The appeals by Ericsson India and its officers were dismissed.

Case Title: Ericsson India Pvt. Ltd. & Ors. v. Additional Director General (Adjudication)

Case Number: Customs Appeal No. 50439 of 2021 (and connected appeals)

Bench: CESTAT, Delhi

Coram: Hon’ble Mr. Justice Dilip Gupta (President) and Mr. P. V. Subba Rao (Technical Member)