You are on page 1of 16

TAXABILITY OF ROYALTY AND LICENSE

FEE

A Customs law Perspective

ROYALTY AND LICENSE FEE


Royalty is the sum of money paid to the proprietor ('the Licensor') of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user ('the Licensee') through the exercise of such rights. Royalties may be paid for the use of copyright, patent, registered design, knowhow, trademark or a combination of them.

CALCULATION OF ROYALTY
The
1. 2.

royalty amount can be:

One time fixed lump sum payment; Formula based, specified in the license agreement which defines the royalty rate and the unit base on which it is to be applied.

Unit base can be value or volume of production of the licensed products.

SECTION 14 OF THE CUSTOMS ACT, 1962


Transaction Value:
y

the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation.

where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf`

CUSTOMS VALUATION (DETERMINATION OF VALUE OF IMPORTED GOODS) RULES, 2007


As per Rule 10(1)(c) of the Valuation Rules 07 Royalty is includible in the transaction value if it fulfills the following conditions:
1. 2.

Royalties and license fee is related to the imported goods; The payment of royalty forms condition of the sale of the goods being valued;
To the extent that such royalties and fees are not included in the price actually paid or payable is required to be added in the price of the goods.

It is immaterial as to whether the payment for royalty or license fee or technical know-how has been in lump-sum or on regular basis: Matsushita case

Generally, the IPR holder and the Licensor enter in to a multiple but separate agreements for various activities. it is always difficult to establish that royalty payment is one of the conditions of sale of capital

goods/components/raw material. it is all the more difficult for the Customs to load value in absence of an explicit condition in the agreement.

IPRS: INTANGIBLES: TAXABLE?


Customs Duty mostly is applicable over only tangible goods. But, when other attributable intangible properties add-up to the value of the tangible goods, then, the issue to those intangible property arises.

WHAT IS TAXABLE?

SECTION 12 of the Customs Act, 1962


Dutiable goods. (1) Except as otherwise provided in this Act, or any other law for the time being in force, duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act, 1975 (51 of 1975)], or any other law for the time being in force, on goods imported into, or exported from, India. Thus, the issue which arises is that whether IPRs or for that matter other intangible properties qualify to be goods?

Tata Consultancy Services v. State of Andhra Pradesh


The Honble Supreme Court opined:


y

the term goods includes all types of movable properties,

whether those properties be tangible or intangible.


y

In India the test to determine whether a property is goods for the purpose of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the item concerned is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc.

Commissioner of Income Tax v. Sun T.V. Ltd

It was held:
y

goods may be tangible property or intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and

possessed. If the above attributes are satisfied, the same would be goods.

Collector of Customs (Prev.), Ahmedabad v. Essar Gujarat Ltd.

(1996) 88 E.L.T. 609

The Honble Supreme Court has held:


y

technical service charges and payments made for training cannot be included in the value on which customs is levied. A new Duty Free Import Authorisation Scheme has been introduced by the Government according to which, the inputs required for export production are exempt from basic customs duty, additional customs duty, education cess, etc.

Reading all these agreements together, it is not possible to uphold the contention of Mr. Salve that the pre-condition of obtaining a licence from Midrex was not a condition of sale, but a clause inserted to protect EGL. Without a licence from Midrex, the plant would be of no use to EGL. That is why this overriding clause was inserted. This overriding clause was clearly a condition of sale. It was essential for EGL to have this licence from Midrex to operate this plant and use Midrex technology for producing sponge iron in India. Therefore, in our view, obtaining a licence from Midrex was a pre-condition of sale.

The entire purpose of Section 14 is to find out the value of the goods which are being imported. The EGL in this case was purchasing a Midrex Reduction Plant in order to produce sponge iron. In order to produce sponge iron, it was essential to have technical know-how from Midrex. It was also essential to have an operating licence from them. Without these, the plant would be of no value. That is why the pre-condition of a process licence of Midrex was placed in the agreement with TIL.

CUSTOMS VALUATION RULES: A SHIFT FROM 1988 RULES TO RULES 07


The Customs Valuation Rules 07 brings in the 1998 Rules, as it was, only with a explanation as an addition. The explanation to Rule 10(1)(c) of the CVR 07 (Rule 9(1)(c) of the CVR 88 reads as:

Explanation.- Where the royalty, licence fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.

CC vs. M/s. J.K. Corporation Limited (2007-TIOL-15-SCCUS)

the Apex Court held that assessment of customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of license or technical know-how for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose CC vs. Toyota Kirloskar Motor Private Limited (2007-TIOL-94-SC-CUS) In absence of any direct nexus of the royalty with the imported capital goods, the same cannot be included in the transaction value.

The

above two landmark judgements had almost settled the legal position in so far as it relate to payment of royalty/license fee on imported goods. In the above rulings, the Apex Court laid down the basic principal that if the royalty is in relation to any activity done after importation, the same would not be included in the assessable value of imported goods.

You might also like