Supreme Court Refines the Doctrine of Royalty Inclusion in Import Valuation

Aadrikaa Legal Services (ALS) – IDT Tax I Arbitration I Litigation

Date: 16.04.2026

Supreme Court Refines the Doctrine of Royalty Inclusion in Import Valuation

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In the realm of international trade, customs valuation plays a pivotal role in determining the assessable value of imported goods. A landmark case in Indian customs law, Commissioner of Customs vs. M/s Ferodo India Pvt. Ltd., sheds light on the inclusion of royalties and license fees in the assessable value of imported goods. This article delves into the legal principles and implications of this case, providing insights into the complexities of customs valuation under Indian law.

Background of the Case

The case revolves around M/s Ferodo India Pvt. Ltd., a subsidiary of M/s T & N International Ltd., UK. Ferodo India is a manufacturer of brake liners and brake pads in India. On September 8, 1995, the company entered into a Technical Assistance and Trademark Agreement (TAA) with its foreign collaborator, T & N International Ltd. Under this agreement:

• The licensor (T & N International Ltd.) provided technical know-how, secret processes, formulas, and information to Ferodo India.
• Ferodo India was required to import raw materials and capital goods from the licensor.
• The agreement mandated the payment of license fees and royalties based on the net sales value of the licensed products sold, consumed, or otherwise disposed of.

The central issue in this case was whether the technical know-how fees and royalty payments should be included in the assessable value of the imported goods for customs duty purposes.

Legal Framework: Customs Valuation Rules, 1988

The Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (CVR, 1988) provide the framework for determining the assessable value of imported goods. The rules emphasize the principle of arm’s length pricing, ensuring that the transaction value is uninfluenced by the relationship between the buyer and seller.

Key Provisions of CVR, 1988

1. Rule 9(1)(c):
   • Royalties and license fees related to imported goods must be added to the transaction value if they are paid as a condition of sale.
   • Payments must be directly or indirectly related to the imported goods.
2. Rule 9(1)(e):
   • Any other payments made as a condition of sale of the imported goods must be added to the transaction value.
3. Section 14 of the Customs Act, 1962:
   • Defines the assessable value of imported goods as the price at which such goods are ordinarily sold in international trade, uninfluenced by the relationship between the buyer and seller.
4. Methods of Customs Valuation:
   • Transaction Value Method: The primary method, based on the price actually paid or payable for the goods.
   • Alternate Methods: Include transaction value of identical goods, transaction value of similar goods, deductive value, computed value, and fall-back method.

Key Issues in the Case

The Department argued that the technical know-how fees and royalty payments were related to the imported goods and constituted a condition of sale. Consequently, they sought to include these payments in the assessable value of the imported goods under Rule 9(1)(c) or Rule 9(1)(e).

However, the Customs, Excise & Gold (Control) Appellate Tribunal (CEGAT) ruled that the payments were related to the manufacture of brake liners and brake pads in India, not the imported goods. The Department challenged this decision, leading to the civil appeal.

Supreme Court’s Analysis and Judgment

The Supreme Court examined the scope of Rule 9(1)(c) and Rule 9(1)(e) of CVR, 1988. Key observations include:

1. No Nexus Between Royalties and Imported Goods:
   • The Court found that the royalties and license fees were entirely related to the manufacture of brake liners and brake pads in India, not the imported goods.
   • The Department failed to establish a direct or indirect link between the payments and the imported goods.
2. Importance of Pricing Arrangements:
   • The Court emphasized the need to examine both the Technical Assistance Agreement (TAA) and the pricing arrangement between the buyer and the foreign collaborator.
   • If the Department could prove that the importer adjusted the price of imported goods to disguise increased royalty payments, the royalties could be included in the assessable value.
3. Interpretative Notes:
   • The Court highlighted the significance of the Interpretative Notes to CVR, 1988, which place the burden of proof on the importer to demonstrate the correctness of the transaction value.
4. Comparison with Previous Cases:
   • The Court distinguished this case from earlier judgments, such as Essar Gujarat Ltd. and Matsushita Television & Audio India Ltd., where royalties were found to be directly related to the imported goods.
5. Final Decision:
   • The Court upheld the Tribunal’s decision, dismissing the Department’s appeal. It ruled that the royalties and license fees were not related to the imported goods and could not be included in their assessable value.

Implications of the Judgment

This case has significant implications for businesses and customs authorities:

1. Clarification on Rule 9(1)(c):
   • Payments for technical know-how and royalties can only be included in the assessable value of imported goods if they are directly or indirectly related to the goods and are a condition of sale.
2. Burden of Proof:
   • Importers must provide evidence to demonstrate the correctness of the transaction value.
3. Importance of Agreements:
   • Both the technical assistance agreements and pricing arrangements must be scrutinized to determine the relationship between royalties and imported goods.
4. Precedent for Future Cases:
   • The judgment sets a precedent for similar disputes, emphasizing the need for a detailed examination of agreements and pricing arrangements.

Conclusion

The case of Commissioner of Customs vs. M/s Ferodo India Pvt. Ltd. underscores the complexities of customs valuation and the inclusion of royalties and license fees in the assessable value of imported goods. By clarifying the scope of Rule 9(1)(c) and Rule 9(1)(e) of CVR, 1988, the Supreme Court has provided valuable guidance for businesses and customs authorities, ensuring a fair and transparent valuation process in international trade.

Connected Matter

CESTAT Bangalore- Technical assistance fees not to be included in the value of imported goods

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Source: Supreme Court

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