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“Indirect Tax I Indirect Tax Litigation I Customs & FTP I Central Licensing I Arbitration I Advisory”

Dated: 23.02.2025

CESTAT Chennai ruled that the royalty should not be included in the customs valuation of the imported raw materials

Background of the Case:

M/s Owens Corning Industries (India) Pvt. Ltd., formerly known as OCV Reinforcements Manufacturing Ltd., filed appeals against orders issued by the Commissioner of Customs (Appeals), Chennai, regarding the inclusion of royalty payments in the customs valuation of imported goods.

The dispute arose over 4% running royalty paid on the net sales value of manufactured products. The customs department had included this royalty in the assessable value of imported goods, arguing that it was a condition of sale under Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR, 2007).

Key Issues in the Appeal:

• Whether the royalty paid by Owens Corning should be included in the customs valuation of imported raw materials.
• Whether the royalty was directly related to the imported goods or was only applicable to the final manufactured products in India.

Arguments by Owens Corning (Appellant):

• The royalty was not linked to imported goods but was paid for manufacturing know-how under a Manufacturing License Agreement.
• The payment was based on net sales of finished products, not on the imported raw materials.
• There was no obligation to procure raw materials or capital goods only from the licensor (Group Company).
• The company regularly sourced raw materials from unrelated suppliers and purchased processing aids and chemicals locally.
• Under Rule 10(1)(c) of CVR, 2007, royalty can only be added to transaction value if it is a condition of sale of the imported goods, which was not the case here.

Arguments by the Customs Department (Respondent):

• The royalty should be included in the assessable value since it was linked to the overall cost of manufacturing.
• The net sales value included costs of the license fee and technical know-how, making it indirectly related to imported goods.
• The imported raw materials were used in manufacturing reinforcement glass fiber products and composite products, which were subject to royalty payments.

CESTAT’s Decision & Key Findings:

• The royalty was paid for the use of technology to manufacture final products and not for the imported goods themselves.
• There was no condition in the agreement requiring Owens Corning to purchase raw materials only from the licensor.
• Since the royalty continued to be paid even when no goods were imported, it could not be considered a condition of sale of the imported goods.
• The tribunal rejected the customs department’s argument and ruled that the royalty should not be included in the customs valuation of the imported raw materials.

Final Verdict: The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai, ruled in favor of Owens Corning Industries, stating that the royalty payments should not be added to the assessable value of imported goods. The appeals were allowed with consequential benefits, and the previous orders by the customs department were set aside.

In case you face any issues related to Indirect Tax-Customs, GST, Foreign Trade Policy (FTP), Arbitration matters and Central Licensing and related advisory matters in India then please feel free to get in touch with SJ EXIM Services.

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Source: CESTAT, Chennai

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