The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has clarified a critical principle in customs valuation: payments for technical assistance, engineering services, and license fees cannot be included in the assessable value of imported goods unless they are a condition of sale. This decision reinforces the statutory requirement under the Customs Valuation Rules that only directly linked, inseparable costs may be added to transaction value.
Background & Facts
The Dispute
M/s. Aglow Chemical Pvt. Ltd., an importer based in Udaipur, Rajasthan, imported plant and machinery components from M/s. Cimprogetti Srl, Italy under Bill of Entry No. 8367218 dated 21.04.2022. The importer declared an assessable value of EUR 1,26,000 (Rs. 1,06,34,400) under CTH 84179000, based on Invoice No. 2022000067EQ dated 08.03.2022. However, the Department discovered that the total contractual value between the parties was EUR 4,20,000, comprising EUR 1,26,000 for key equipment and EUR 2,94,000 for engineering package, technical assistance, and license fees. The Department alleged that the importer had artificially split the invoice to evade customs duty.
Key Facts
- The contract dated 30.11.2020 between Aglow Chemical and Cimprogetti Srl had a total value of EUR 4,20,000
- The contract was bifurcated into two separate invoices on 08.03.2022:
- Invoice No. 2022000067EQ: EUR 1,26,000 for key equipment
- Invoice No. 2022000067EN: EUR 2,94,000 for engineering package, technical assistance, and license fee
- The consolidated invoice (No. 2022000067) reflected the full EUR 4,20,000
- Clause 3.1.1 of the contract covered technical services; Clause 3.1.2 covered supply of key components
- Clause 2.2 of the contract explicitly stated that the buyer would procure all additional machinery, infrastructure, and local construction independently
- The imported equipment constituted only 5%-10% of the total plant value
- The lime kiln could not be operated without the technical know-how, but the contract did not make purchase of services a prerequisite for equipment delivery
Procedural History
- 21.03.2022: Bill of Lading issued by supplier
- 21.04.2022: Bill of Entry filed by appellant declaring EUR 1,26,000 as assessable value
- 11.05.2022: Pre-Notice Consultation letter issued by Department
- 23.05.2022: Goods seized under Section 110(1) of the Customs Act, 1962
- 30.06.2022: Show Cause Notice issued proposing assessable value of EUR 4,20,000, confiscation under Section 111(m), and penalty under Section 112(a)
- 06.10.2022: Adjudicating Authority ordered inclusion of EUR 2,94,000 in assessable value, confiscation, and penalty
- 24.11.2023: Commissioner (Appeals) upheld the order
- 02.04.2026: Hearing before CESTAT
- 15.05.2026: Final Order issued
Relief Sought
The appellant sought: (1) setting aside of the impugned order dated 24.11.2023, (2) acceptance of declared transaction value of EUR 1,26,000, (3) cancellation of confiscation and penalty orders, and (4) release of seized goods.
The Legal Issue
The central question was whether royalty, license fees, and technical assistance charges, paid separately under a distinct invoice and contract clause, constitute a condition of sale of the imported goods under Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, and are therefore includible in the transaction value.
Arguments Presented
For the Appellant
The appellant’s counsel argued that the contract clearly separated the supply of equipment from technical services, with distinct pricing and obligations. He relied on Steel Authority of India Ltd. v. Commissioner of Customs and Tata Iron and Steel Co. Ltd. v. Commissioner to establish that when services are for post-importation activities and not a condition of sale, their value cannot be added to customs value. He emphasized that Clause 2.2 of the contract placed responsibility for ancillary infrastructure on the buyer, proving the technical services were not integral to the equipment’s sale. He further contended that the split invoices reflected commercial reality, not tax evasion.
For the Respondent
The Department argued that the entire EUR 4,20,000 constituted a single composite transaction, and the split invoices were a deliberate attempt to reduce duty liability. It relied on Collector of Customs v. Essar Gujarat Ltd. and Mukund Ltd. v. Commissioner of Customs to assert that where imported machinery is commercially unusable without technical know-how, the associated fees form part of the transaction value. It cited CBIC Circular No. 38/2007 and contended that the equipment was incomplete without the engineering package, making the fees a condition of sale under Rule 9(1)(e).
The Court's Analysis
The Tribunal examined the contractual terms, invoice structure, and judicial precedents to determine whether the technical fees were a condition of sale. It noted that Rule 10(1)(c) permits inclusion of royalties and license fees only if they are paid as a condition of sale of the goods being valued. The Court emphasized that the burden lies on the Revenue to prove such a condition.
"The value of documents and drawings etc. cannot be 'charges for construction, erection, assembly etc.' of imported goods. Alternatively, even on the view as taken by the Tribunal on this Note, the drawings and documents having been supplied to the buyer-importer for use during construction, erection, assembly, maintenance etc. of imported goods, they were relatable to post-import activity to be undertaken by the appellant."
The Tribunal found no language in the contract requiring the purchase of technical services as a precondition for delivery of equipment. Clause 2.2 explicitly assigned responsibility for non-imported components to the buyer, indicating the imported equipment was a standalone item. The Court distinguished this case from Essar Steel, where technical services were integral to the machinery’s functionality at the time of import. Here, the services were for commissioning and operation - post-importation activities.
The Tribunal rejected the Department’s assertion of intentional invoice splitting, noting that the bifurcation was consistent with the contract’s structure and reflected distinct obligations. It held that Rule 3 of the Interpretative Notes to the Valuation Rules does not permit inclusion of separately contracted technical fees unless they are directly tied to the sale condition. The Court concluded that the Department failed to establish the necessary nexus between the fees and the sale of the imported goods.
The Verdict
The appellant succeeded. The Tribunal set aside the impugned order dated 24.11.2023, accepted the declared transaction value of EUR 1,26,000, cancelled the confiscation order under Section 111(m), and quashed the penalty imposed under Section 112(a). The seized goods were ordered to be released without further conditions.
What This Means For Similar Cases
Technical Services Must Be Contractually Tied to Sale
- Practitioners must now demonstrate that royalty or technical fees are contractually mandated as a condition precedent to the sale of imported goods
- Merely showing that equipment is unusable without technical support is insufficient; the contract must explicitly link payment of fees to the transfer of title
- Split invoices are not prima facie evidence of evasion if they reflect genuine contractual separation
Post-Importation Services Are Excluded
- Fees for installation, commissioning, training, or operational support are excluded from transaction value if paid under a separate agreement
- Importers may now confidently structure contracts to separate equipment supply from post-import services without fear of value addition
- Customs authorities must now provide specific contractual clauses proving the condition-of-sale nexus
Documentation Strategy Is Critical
- Maintain clear contractual language distinguishing sale of goods from provision of services
- Ensure invoices, delivery notes, and payment records align with contractual bifurcation
- Retain evidence of buyer’s independent responsibility for ancillary infrastructure (e.g., Clause 2.2 in this case)
Burden of Proof Rests on Revenue
- The Department bears the onus to prove that fees are a condition of sale
- General assertions of commercial indispensability will not suffice
- Judicial precedents (SAIL, Tata Iron) now form a robust shield against arbitrary value additions
