CESTAT Rules in Favor of Ericsson India: Royalty Payments Excluded from Import Valuation

Tribunal Overturns Additional Director's Order; Extended Limitation Period and Penalties Dismissed

In a significant ruling, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in New Delhi has ruled in favor of M/s Ericsson India Private Limited, setting aside the order of the Additional Director General (Adjudication) regarding the inclusion of royalty payments in the assessable value of imported goods. The tribunal emphasized that royalty payments related to post-importation activities cannot be considered a "condition of sale" under Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.

The judgment addressed three appeals filed by Ericsson India and individuals Tej Nirmal Singh and Bharat Bandhu, who were penalized under sections 114A and 112(a)(ii) of the Customs Act, 1962. The tribunal ruled that the penalties were unsustainable as the demand for additional customs duty was based on erroneous grounds.

The tribunal noted that the royalty payments made by Ericsson India to its parent company in Sweden were for technical know-how and intellectual property rights, which pertained to post-importation activities. Therefore, these payments were not includible in the transaction value of the components imported from Ericsson Sweden. This decision was reinforced by previous judgments, including those from the Supreme Court and other tribunals, which established that royalty payments for post-importation activities are not part of the assessable value.

Additionally, the tribunal rejected the invocation of the extended period of limitation under section 28 of the Customs Act. It found no evidence of suppression of facts or intent to evade duty by Ericsson India, as the company had disclosed royalty payments in its financial statements and other statutory proceedings. Consequently, penalties imposed on the individuals involved were also deemed unsustainable.

The ruling highlights the nuanced interpretation of customs valuation rules, particularly concerning the inclusion of royalty payments. It underscores the importance of distinguishing between payments related to the sale of goods and those for post-importation activities. Legal experts suggest this decision could have broader implications for similar cases involving multinational corporations and their cross-border transactions.

Bottom Line:

Royalty payments related to post-importation activities cannot be included in the assessable value of imported goods under Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, as they do not constitute a 'condition of sale' of the imported goods.

Statutory provision(s): Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, Section 28, Section 114A, Section 112(a)(ii) of the Customs Act, 1962.

M/s. Ericsson India Private Limited v. Additional Director General (Adjudication), (CESTAT)(New Delhi)(Principal Bench) : Law Finder Doc Id # 2801453