Valuation (Customs) — Calculation of Royalties and deduction of buying commission

F. No. 467(36)/89-Cus. V/ICD, dated 29-8-1989

Government of India

Ministry of Finance (Department of Revenue)

New Delhi

Subject : Calculations of Royalties and deduction of buying commission, in the Valuation of goods under the Customs Valuation Rules, 1988 – Regarding.

Attention is invited to your letter No. F. No. S. Misc 54/88-SVB, dated 25.4.89 and to clarify as under :-

Under the GATT Valuation Agreement and the Valuation 2. rules (Rules 9(1)(c)) royalties and licence fee are to be added to the invoice value only if they relate to the imported goods and are paid as a condition of sale of the goods. It is possible to identify such royalties on verification of the contracts. In majority of the cases it could be quantified and allocated to individual consignments or per unit of the imported goods for addition to invoice value. If it is not quantifiable, then the provisions of Rule 9(3) will operate, which says that addition to the price of imported goods under this rule, which is part of Rule 4, shall be made on the basis of objective and quantifiable data. When the royalty or licence fee meant for addition under Rule 9(1)(c) cannot be quantified, the value of imported goods cannot be determined under the transaction value method under Rule 4 read with Rule 9 and as such the declared value can be rejected and the assessing officer can proceed to do the valuation under the succeeding Rules 5, 6, 7 etc. In other words, difficulty in quantifying Royalty and licence fee should not cause any serious problem in valuation of goods.

As regards the possibility of compensatory payments by 3. way of royalty without including in the invoice value or without making it a condition of sale of imported goods and the suggestion that such royalties should also be added for valuation irrespective of the condition of sale as it is difficult to obtain ‘test values’ under Rule 4, it is clarified that ‘Test Values’ referred to in the rules are for related party transactions and the same are to be provided by the importer in support of his declared value when sellers and buyer are related. Where test values are not acceptable it is possible to reject the declared value and adopt the successive methods for valuation. Arbitrary addition or loading of royalties as suggested would not be in line with the Agreement or the valuation rules.

As far as the buying commission is concerned, the Rule 4. 9(1) provides only for addition of commissions to the invoice value if not already included. However, buying commissions are not to be added. There is no provision to deduct buying commission from the invoice value. Moreover, if the invoice is raised by the agent then the agent becomes the seller of the goods and the agent’s invoice value should be regarded as the transaction value. Buying commissions are usually billed separately by the agents independent of the invoice and the same is not to be added for valuation.

The Board desires that the above clarification may be 5. brought to the notice of all officers for guidance.

OFFICE OF THE COLLECTOR OF CUSTOMS : CUSTOMS HOUSE : MADRAS-600001.

S.MISC. 54/88-SVB

From

The Addl. Collector of Customs,

Custom House,

Madras-1.

To,

Shri N. Sasidharan,

Deputy Secretary,

Central Board of Excise & Customs,

New Delhi.

Sir,

Subject : Difficulties in the implementation of GATT Valuation Rules -Reg.

Difficulties had been expressed about quantifying royalties and licence fees for addition under Rule 9c. In this regard Board had clarified vide F. No. 528/93/88-Cus(TU)/ICD dated 03-11-1988 that “addition is permissible of these royalties and licence fees agreed as a condition of sale of imported goods”.

No modalities of quantifying the loading factor was not specified nor clear-cut guidelines provided to decide the type of cases where loading towards royalties and licence fee is necessary.

No definition of royalty or licence fee is available. However, it is generally recognised to be a payment made towards “know-how” and/or for patented rights and copyrights. In India in most cases royalty is paid for using the know-how.

Two factors concerning royalty are relevant under the new valuation rules. One is that the payment should be related to the goods imported and the other that such payments must be in the nature of a condition to the sale of goods.

The Government of India formula regarding payment of royalty is based on a percentage of the exfactory sales price of the product exclusive of excise duties minus the cost of standard bought out components and the landed cost of imported components. In view of the formula it would appear that royalty payments do not relate to imported goods. However going by the special circumstances surrounding the collaboration agreement between the related parties especially those involving financial participation it is felt that sometimes invoice value is less than what it should have been and that compensatory payments are made by way of royalty payments. In all such cases because of the exclusiveness of the agreement it is difficult to obtain “test values” for establishing transacion value under Rule 4 and make suitable additions under Rule 8 read with Rule 9 of the new Valuation Rules, 1988.

The position is made more complex in view of the interpretative note to Rule 9(1)(c). As per the said interpretative note, payment made towards the right to reproduce the imported goods should not be added to the price actually paid. It is difficult to pinpoint whether the royalty payment is made towards the right to reproduce or as a condition of sale of the imported goods. In all such cases it is proposed to load the invoice value where ever it is felt that the seller would not be prepared to sell the goods without royalty/licence fee payments.

In some cases agreements specify separate payments towards technical know-how and towards royalty. In all such cases it is proposed to ignore the payment made towards technical know-how and take only the royalty payments for computation of the loading factor. Where such separate payment are not made for technical know-how a suitable allocation may be made towards transfer of technical know-how.

As regards quantifying the loading factor the old guidelines issued in this regard by Board (letter F. No. 3/27/64-Cus. IV) of allocating the royalty fees in the same ratio as a value of the imported components to the total value of the finished products sold in India, may be followed. Application of this practical course is also difficult in view of the Government of India formula regarding royalty payment. Under this formula it would be difficult to precisely quantify in advance the extent of import to be made and the amount of royalty which may be paid. One way of getting over this problem would be to assess all Bills of Entry in such cases to provisional duty and finalise after the expiry of the year when the relevant data would be available. This procedure would have to continue till the expiry of the period for royalty payments which is normally 5 years.

As regards buying commission, it has been decided in the conference that no deduction will be allowed from the invoice value towards buying commission and that the person who has raised invoice cannot be accepted as “buying agent”. It may be pointed out here that in most of the transactions involving a buying agent abroad, it is the buying agent who raises the invoice. As per Rule 9(1)(a)(i) of the New Valuation Rules buying commissions are specifically excluded from computing the transaction value. In view of this Board may kindly clarify whether deductions shown in the invoice towards buying Commission (subject to a maximum limit as approved by RBI) be allowed in arriving at assessable value.

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