' ZAFAR IQBAL, MEMBER (TECHNICAL).---This appeal has been filed against the order, dated 19-7- 2003, passed by the Collector of Customs Appeals, Karachi.
2. Brief facts of the case are that the Deputy Controller of Customs Valuation, Karachi vide show- cause notice, dated 20-6-2002 alleged that the appellant had misdeclared the value of the imported goods and that his declarations in this regard were not correct in as much that the amount of royalty equivalent to 2% of the value of goods produced by him in Pakistan and paid by him to his principals had not been added to in the value declared to the customs. According to the facts available on record it is evident that as his principal was under an obligation to transfer technology and to authorize the appellant to sell these goods under his trademark, brand name and denomination. According to the respondent all these variables in a price are part of the transactional value as it amounts to the actual and correct value paid or payable within the framework of clauses (d) and (e) of subsection (2) of section 25 of the Customs Act, 1969.
3. The appellant vide their reply to the said show-cause notice denied the said allegations and inter alia stated that:--
(i) the transactional value of the appellant is not being accepted by the respondent without giving cogent reasons;
(ii) only a portion of all imports are effected from principal Messrs Clariant Switzerland;
(iii) royalty is paid on products for which raw material is imported from worldwide sources;
(iv) no royalty is paid on finished goods imported for sale but only on those manufactured in Pakistan by appellant;
(v) royalty was only payable on sales effected by appellant. If, for instance, no sale took place no royalty would be payable in spite of the import of the goods;
(vi) payment of royalty was above board and transparent and paid with the express permission of the State Bank of Pakistan and was disclosed' to valuation department at the time of issuance of value slip;
(vii) royalty was paid in accordance with section 12(4)(b) of the Income Tax Ordinance, 1979 and other applicable legal provisions;
(viii) payment of royalty was not related to the imports or the import price in any manner. Royalty is paid on the "ex-factory value of all new products technology" which has been transferred to Pakistan.
4. The Adjudicating Officer, however, did not agree with the appellant's point of view and passed the impugned order against which an appeal was preferred before the Collector of Customs Appeals, who by his impugned order upheld the order of the lower forum whereby it was held that the amount of royalty paid by the appellant be made part of the transactional value. He however, remanded the case on the point of reconciliation of calculations in respect of demanded customs duty and taxes.
5. The said impugned orders have now been challenged by way of this appeal. The first appellate authority had upheld the order passed by the Adjudicating Officer whereby he held that amount of royalty be added and be made part of the transactional value as being, an actual value paid or payable in terms of clauses (d) and (e) of subsection (2) of section 25 of the Customs Act, 1969.
6. The learned counsel for the appellant now contends that:--
(a) The transactional value of the imports made by the appellant is not accepted as per declaration and the customs duty is being assessed in accordance with the value slip issued by valuation department who load these consignments by 1.5% higher than the value declared in respect of dyes and 0.50% on the imports of chemical and dyes raw materials. Thus it is a case of passed and closed transaction which has been reopened by an officer not competent to do so in terms of the section 195 of the Customs Act, 1969.
(b) Import record of the appellant was audited and the show-cause notice as well, as the Order- in-Original was passed based on the recommendation of an audit team (as admitted by the Adjudicating Officer in his order). The audit team was not competent to initiate any action in terms of subsection (12) of section 25 of the Customs Act, 1969.
(c) Even otherwise the application and interpretation of section 25 as done by the auditor has not been objectively analyzed.
(d) The transaction value is inclusive of all the components Which are to be added to the actual price payable or paid in terms of subsection (2) of section 25 of the Customs Act, 1969 in respect of the import made by the appellant from its foreign associate/ principal and hence addition of royalty to the transaction value for levy of customs duty and taxes amounts to double taxation which is not permitted by law.
7. We have heard the rival parties at length and the case records has also been consulted. In order to dispose of this appeal, we frame the following issue.
(i) Whether or not in terms of the provisions of section 25 of the Customs Act. 1969 the royalty paid by the importer in the peculiar circumstances of this case is part of price?
8. In order to elucidate the said issue, it will be appropriate to reproduce the relevant legal provisions. The same read as under:-- "...125 Determination of Customs value of goods.--
(2) Subject to clause (b), in determining the customs value under subsection (1),-
(d) there shall also be added to such price, royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent and such royalties and fees are not included in the price actually paid or payable; and
(e) there shall also be added to such price, the value of any part of the proceed: of any subsequent resale, disposal or use+of the imported goods that accrues directly or indirectly to the seller..."
9. The said provisions of law are based on clauses (c) and (d) of Article 8 of the GATT Code of Valuation. In order to examine the impact of these provisions the actual facts of the matter are to be ascertained.
10. In this case the appellant entered into agreement with their suppliers for payment of royalty, that is, a sum calculated on agreed terms to the seller 6 2% on their annual ex-factory value and in accordance with the terms of the agreement, .Dated 13-6-1999. The licensee was allowed for manufacturing, marketing and selling of goods under the trademark, brand and denomination of Clariant Switzerland. It is evident that the royalty was due on the goods being produced by the appellant in Pakistan. Thus the question would be whether or not his imports are related to the "greement of royalty?
11. A similar situation arose in a case which was referred to the Customs Valuation Committee of the Customs Co-operation Council (CCC). In that case the importer bought two separate shipments of a concentrate from the foreign manufacturer M. Who owned the trademark for the goods shipped by him. The final product was used to be made by diluting the concentrate with ordinary water and then the same was bottled out. At the time of contracting as to each separate purchase, the importer specified whether he is to distribute the product with or without the trademark. In the first purchase the product made in the country of importation is to be resold without the Trade mark. In the later case the importer is obligated-allegedly under the sales contract-to pay a royalty or licence fee to the seller.
12. Since the goods were acquired in the first purchase without Trade mark rights and no royalty or licence fee was payable to ad and no question in this regard arose.
13. In opinion of the Committee constituted by the Customs Cooperation Council, Brussels, the royalty or licence fee payable to M in the Second sale, however, is to be included in the customs value, since the payment of royalty or licence fee is a condition of the sale of imported goods.
14. In the present case fact to be determined is whether or not the royalty payment was a condition of sale with reference to the imported goods. As according to the provisions of clause (d) of subsection (2), the apportionment in respect of royalties is to be made in respect of goods being valued, which the buyer pays either directly or indirectly, as a condition of sale. According to the facts available on record, the situation in this case is a bit different. Here the payment of royalty is neither a condition of sale nor the same is in respect of goods being valued by the respondent.
Here, the agreement of payment of royalty is in respect of goods manufactured in Pakistan which have no corelationship with the goods being valued. Furthermore, there is no evidence on record to support the fact that any direct or indirect payment was made in respect of goods being assessed and that too to the seller. According to the provisions of existing law for valuation of imported goods in Pakistan, in order to make apportionment in respect of royalties, the existence of following fact is necessary:
(a) Royalties and licence fee should be related to the goods being valued;
(b) these royalties or licence fee be paid by the buyer either directly or indirectly;
(c) the said transactions are to be part of the conditions of sale of the goods being valued; and
(d) these royalties or fees are not included in the price actually paid or payable.
15. Imported goods often are involved with intangible rights of various kinds, including rights to use ideas or names. These rights may relates to the manufacture of the goods, to their sale, or to their use or resale. The types of rights and the various possible payment arrangements are so numerous that the number of situations which may be presented is infinite. In most cases, if the price of the goods includes a payment for a right as well as the goods themselves, and the right is closely related to the goods in the condition as imported, the customs value will include the full price. If the right is not so closely related to the imported goods, the conclusion may be that the price is a single price for two different things and as a result there is not Transaction Value for the imported goods alone.
16. What we are concerned with here is the question of when a payment for a right, which is not included in the price (i,e,, a royalty or a licence fee), will be added to the price in arriving at Transaction Value. It should be noted that the price actually paid or payable for the goods includes---regardless of how they are characterized or designated by the parties---all payments or performances of value passing from the purchaser to the seller or for the benefit of the seller in respect of the goods being valued. By virtue of this fundamental provision, so-called royalties and licence fees which the purchaser must pay to the seller in order to receive the imported goods are part of the Transaction Value.
17. Thus in a broad sense the provisions of Article 8 as adopted in section 25 of the Customs Act, 1969 as to additions to price to arrive at Transaction Value may be characterized as amplifications of the general rule-although it is important to remember that additions dealt with in said provisions can only be made if and when the requirements laid down in section 25 are met.
18. With regard to the present subject, section 25 provides that there shall be added to the price; `royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.'
19. This provision in turn requires us to examine the meaning of its four key terms:-- `royalties and licence fees', `related to the goods being valued', `the buyer must pay ... As a condition of sale of goods', `directly or indirectly'.
' We examine each of these in turn.
20. The authors of the GATT Code did not attempt to define the terms 'royalties and licence fees,'- and there is no authoritative or exhaustive definition, so far as the authors are aware. The terms are most conveniently thought of as referring to any payments for the use of G rights or privileges or for intangibles such as information or services.
21. The terms 'royalties' and 'licence fees' are not differentiated from each other and are always used together in the law.
22. An implementing regulation of the EEC Commission defines royalties and licence fees in this context to mean payments for 'the use of rights relating:- 'to the manufacture of imported goods (in particular, patents, designs, models and manufacturing know-how), or ' to the sale for exportation of imported goods (in particular, trademarks, registered designs), or ' to the use or resale of imported goods (in particular, copyright, manufacturing processes inseparably embodied in the imported goods).'
23. These rights may be broadly grouped as relating to manufacture, marketing, or use of the imported products being valued. The subject-matter of the licence or payment may also be grouped as rights, information and services. It should also be noted that the concept also embraces rights which may not be created by law (information, know-how, or secrets) as well as those expressly created, regulated and protected by law (e.g., patents). The term may be differently applied under different national legal systems and there is no single list which is definitive and cannot be added to.
24. The concept of payments for rights, information and services will suffice; the true limiting factors are the requirements of Article 8.1 (c) that the payments must be related to the goods and must be a condition of sale of the goods.
25. Beyond this, the best aid to understanding the concept of royalties and licence fees is by way of illustration of what the payments are for: ' The manufacturing rights may include, in addition to patents and know-how, rights of reproduction, rights of construction and rights to breed distinctive animals, seeds etc. ' The marketing rights or services the buyer pays for may include the use of trademarks, trade names, customer lists, market surveys training or provision of sales or service personnel, or payment for exclusive rights in particular markets, or for a complex of rights to goods and services under a franchise, or accounting, EDP or administrative services.
' The rights of use the purchaser may pay for would include use of the imported product as an ingredient in a patented product or process or use of an imported machine to make a patented product or practice a patented process.
26. We hasten to add most emphatically those payments by an importer for many of the rights, information or services listed above should not be included in customs value of the imported goods. Even though the payments for these rights, information or services may properly be called royalties or licence fees, their relation to the imported goods or the export sale may not be such as to justify inclusion of the payment. This is especially true with regard to intangibles such as trademarks, which have value in the marketing phase after the goods pass through Customs into the country of importation.
27. In fact a lot is left to interpretation and implementation, and so little can be derived from a literal reading of the words used. We may criticize the law framers that they did not explore this subject sufficiently, and it is true that the subject was only reached rather late in the Geneva negotiations and revealed considerable differences between governments (often as to what problems required attention, rather than how they should be resolved).
28. The key requirements of the law and more particularly para. 1(c) of the GATT Code are that the royalty or licence fee shall be included in the Transaction Value only if it is. `related to the goods being valued', and ' the buyer (importer) 'must pay, either directly or indirectly, as a condition of sale of the goods being valued'.
29. Both requirements must be satisfied separately. However, there is also a close economic connection between these requirements; a royalty or licence fee that is a condition of sale is usually (but not always) paid for rights, information or services that also relate to the imported goods. It then becomes appropriate from an economic perspective to treat the royalty as part of the purchase price of the goods.
30. A royalty or licence fee is not necessarily "related to the imported goods" merely because its calculation is based on the value of the imported goods or on the proceeds from the further sale of the imported goods. The question depends, rather, on a careful examination of exactly what the royalty or licence fee is being paid for.
31. It may be difficult to determine unambiguously what a royalty or licence fee is being paid for, depending on the special circumstances of each individual case. Normally, what will have to be determined in the first place is the type, scope and value of the rights, information or L services covered by the royalty or licence fee. If there is nothing of value other than the imported goods passing from the exporter to the importer, the (refutable) conclusion is appropriate that there is no `royalty or licence fee' at all but simply a separated part of the purchase price.
32. A right to reproduce imported goods is not related to those goods (being valued) but to other (not yet existing) goods to be produced in the country of importation. Therefore, a royalty payment for this right is not a payment for the imported goods themselves. This is confirmed by the Explanatory Notes to the GATT Valuation:- `charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value.'
33. The most essential point in assessing the relationship of goods (the tangible) to the payment for the right, information or service (the intangible) is whether the importer could have purchased the tangible without the purchase of the intangible. If so, it should be possible to establish a separate value for each, and to say that the royalty payment does not relate to the tangible.
34. For the royalty to be added to the price in determining customs value, still a second condition must be satisfied under the terms of section 25 i,e,, payment of the royalty or licence fee must be a condition of sale of the goods being valued. While the law does not specify which sale is meant, the corresponding Note 87 of GATT Valuation makes it clear that the reference is to 'the sale for export to the country of importation' of the goods being valued. Thus no royalty or licence fee can become part of the Transaction Value because it is imposed by the importer as a condition of sale when he resells in the country of importation.
35. The requirement that 'the buyer must pay (the royalty) as a condition of sale' does not have a single, clear meaning which one can hope to master and then be able to apply automatically and with confidence. Broadly speaking, the term can most appropriately be interpreted to refer to the separability or inseparability of the purchase of the goods being imported from the payment of the royalty for the rights. If they are sufficiently separable, the royalty is not to be added to the price in determining the customs value, at the goods. This factor of separability may depend upon technological facts, on methods of doing business, or on the terms of the contract between the parties. The mere fact that the payment of the royalty is a term of the contract between the parties does not mean that payment of the royalty is a condition of the sale within the meaning of section 25 if the buyer had a genuine choice whether to take the goods with or without the rights.
36. The payment of a royalty or licence fee is always a 'condition of sale' if without the payment of this royalty or licence fee the goods would not have been sold at all or not at the agreed price and payment and delivery terms. In this connection it is not the wording of the written agreement which governs but rather an examination of the alternatives that were available to the importer in the circumstances of the particular case. Thus, the agreement of the parties will usually establish both the price of the tangible and the amount of any royalty connected with the goods; and payment of the royalty on one shipment may even be a condition of the seller's obligation to deliver the second shipment. The question which is critical under section 25, however, is whether the seller would have sold the tangible at the price in question if the buyer had preferred to omit the intangible and the royalty. If so, in the commercial sense, agreeing to take the intangible and pay the royalty were not pre-conditions to the buyer's ability to buy the goods at this price. Otherwise expressed, there is a bona fide separate price for the tangible and the intangible, and duty is properly payable only on the former. In such a case, the royalty should not be added to the price.
37. The question thus is whether the purchase could have been made without the royalty, i,e,, without taking the right too. If the royalty (or licence fee) pays for a right, or information, or service necessary for the manufacture of the goods in the country of exportation, or their sale for export. It represents costs of the exporter-seller which he obviously must cover and thus ordinarily any such 'royalty' will be a condition of sale of the goods and a proper part of their customs value.
38. Section 25 provides for the addition of the royalty or licence fee whether it is paid directly or indirectly. Therefore, royalties and licence fees that are paid to third parties can also be added to the Transaction Value under these provisions; however, the payment of a royalty or licence fee to a third party will only be a condition of the sale if the seller was obligated to the third party to pay the royalty or licence fee and if the importing purchaser effects such payment for the benefit of the seller (and by agreement with the seller).
39. A royalty or licence fee is paid directly if it is paid in money to the seller of the imported goods. If it is paid in kind or to a third person this may be regarded as an indirect payment to the seller.
However, it has to be based on a condition of sale, i,e,, the seller must have required S the buyer to make that payment on behalf of the seller. The EEC has included this condition in its implementing legislation. Such a situation may particularly occur when in a multinational company an affiliate is required by the selling parent, as a condition of a sale, to pay a royalty on the technology involved directly to another affiliate (e.g., to a central research and development center). An indirect payment to a third party may also be made if the seller of the goods has acquired a trademark right from this third party and requires the buyer to take the trade mark rights with the goods.
40. If the purchaser pays royalties or licence fees for manufacturing rights and manufacturing know-how to a third party upon his own initiative, and if he makes such rights or know-how available to the seller (manufacturer) free of charge, an inclusion of such royalties or licence fees is not possible under section 25. In such a case these services could rather be part of customs value only if they qualify as dutiable assists.
41. It is stated in EEC legislation that in all cases in which the method of calculation of the amount of a royalty or licence fee is derived from the price of the imported goods it may he assumed in the absence of evidence to the contrary that the payment of that royalty or licence fee is related to the goods to be valued. This statutory presumption, however, does not necessarily mean that the payment of the royalty or licence fee is a condition of sale of the goods to be valued. Nor does it extend to those cases in which the royalty or licence fee is calculated on the basis of the quantity of the imported goods but not on the basis of their price. Also the second EEC statement. That, where the amount of a royalty or licence fee is calculated without regard to the price of the imported goods, it may nevertheless be related to the goods to be valued,' makes it clear that the basis'of calculation alone does not allow any conclusion as to what is the subject-matter of the royalty or licence fee. However, this means also that the addition to the Transaction Value cannot be avoided merely by connecting the calculation of the royalty or licence fee to the later proceeds from the resale of the imported goods or of the goods produced from them or to any other basis.
42. The meaning of the foregoing general observations can best be illuminated by discussing hypothetical fact situations which illustrate the problems. We proceed to do so by examining in sequence various types of rights to which royalties and licence fees typically pertain; trade marks patents, known how, and copyrights. At the end of this subject-chapter, we will deal at length with further examples, covering a variety of special problems and situations.'
43. The subject of Trade marks has generated much controversy and difference of opinion. The new definition of value has in many situations altered drastically the treatment of Trade mark royalties in countries which previously had been applying the BDV.
44. The Trade mark which is relevant is the one existing in (and under the laws of) the country of importation. The same Trade mark may exist and be used in the country of manufacture and third countries as well, but the importer presumably pays for the right to use it in marketing the product in his own country, and the question is whether that payment is to be added to the price paid for the goods as such in arriving at the customs value.
45. A Trade mark is a marketing device indicating a specific manufacturer or distributor and Conveying a promise of the quality associated with that source. For customs purposes what matters is not when or where the Trade mark is affixed to (or removed from) the goods, but whether they are to be marketed with the mark, and if so whether the importer was.Free to take the goods without the mark (and the royalty) or whether he was obliged to take the mark and pay the royalty in order to get the goods. In the latter situation, payment of the Trade mark royalty is a condition of the sale of the goods for export, and accordingly the royalty is part of the customs value of the goods. The point is brought into sharp focus if we assume a situation in which the exporter sends the goods unmarked, with the importer free to mark any or all of them, so long as he pays a royalty of 5 per cent of sales price on those sold under the Trade mark. The fact that the goods are not physically marked at the time they pass through customs is not controlling, but the fact that all of them can be paid for and resold without the Trade mark means that the royalty is not a condition of sale and thus not dutiable. Of course, in such situation it is essential to be able to show that the non-Trade marked (or 'private brand'.) and the Trade marked goods are equal in quality and kind.
46. The trademark in the country of importation may be owned by the manufacturer (or other exporter-seller), or by the importer, or by a third person (whose location is irrelevant):
(1) If the Trade mark is owned by the importer, he presumably makes no payment to anyone for its use in connection with these particular goods, and thus the question of adding a royalty payment to the price of the goods does not arise.
(2) If the Trade mark is owned by a third person (i,e,, someone unrelated to and not acting for either the importer or the exporter), then the payment for the imported goods and for the Trade mark used in the country of importation are quite clearly separate, since they go to different person. The 'condition of sale' test is thus not satisfied, and the royalty should not be added to the price of the goods.
47. Some careful analysis of this situation is helpful in laying a foundation for the more different cases which follow. First of all, the key to the result in this situation is that there can be no doubt as to what is paid for the goods and what is paid for the rights (which we assume are to be used only in the resale of the imported products in the country of importation). By hypothesis, the price goes to the manufacturer and the royalty goes to the Trade mark owner and they are unrelated to each other and not connected by any agreement regarding payment of royalties on the Trade mark in the country of importation. This separation, as previously noted, is the key to the conclusion implicit in the law that Customs should not put together that which the marketplace or the world of commerce has separated that is. Customs should not add the royalty to the price in arriving at customs value. (As previously noted, the conclusion might well be different, however, if the separate payment were made for a right essential to the manufacture of the goods, such as a patent licence, rather than for a right relating to marketing in the country of importation after the goods clear Customs).
48. It is worth noting that the manufacturer in this situation is likely to have an interest in the Trade mark question, even though he does not own the mark or licence it or receive the royalty. At the least, he does not want to be a party to any improper use of a trademark by the importer, and so before placing the Trade mark on the product or the package (assuming he is asked to do so) he may want to be sure that the importer is licensed to use it. The same third party (or his licensee or licensor) is likely to own the same Trade mark in the country of manufacture, or the manufacturer himself may be..The owner or licensee of the Trade mark in the country of manufacture. All of these factors might give the manufacturer (or a middleman-exporter) a strong interest in making sure that the importer obtains and pays for the necessary Trade mark rights. Nevertheless, as long as the royalty goes to a different person and is only for the Trade mark and not for the goods as such, that should suffice to prevent Customs from making an addition under sections 25. The result should be the same even if the seller collects the royalty for the third person by invoicing it alongwith the price (though of course stated separately), so long as the royalty is in fact remitted to the third person.
49. This brings us to the more difficult and more common situation in which the Trade mark is owned by the manufacturer-seller. (In this discussion, reference to 'the manufacturer' includes a middleman-exporter.) Again the GATT Code and the Notes are silent. But in the SAA the United States took the position that:- "an addition will be made for any royalty or licence fees paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise, and was not a condition of the sale of the imported merchandise for exportation to the United States."
50. Once again, the key is whether the royalty is distinct from the price.The present problem is more difficult than the one just discussed because the price and the royalty are now both paid to the same person, and so they are not separate or distinct by reason of being paid to and agreed upon with two different person. To state the problem in more practical terms. Customs cannot be in a position where the importer and exporter can reduce the customs value by simply agreeing that instead of saying as in the past that the price is DM 100,000 per unit and the royalty is DM 10,000 per unit, in the future the price will, be DM 10,000 per unit and the royalty will be DM 100,000 per unit.
Obviously this would make it too easy for importers to' reduce their duty by 90 per cent.
51. It is important to recognize that the foregoing is only the beginning of the subject, not the end.
The question now becomes: What circumstances might show that the price and the royalty are truly separate and, not just arbitrarily set by the importer and exporter to achieve a lower duty?
Here are three situations in which the importer should be able to satisfy Customs that the royalty is distinct from the price even though both are paid to the manufacturer: Example: For many years, the importer, I, has been buying art supplies for his store from M and paying to T, a (third) person who owns the trade name and is unrelated to M, a royalty-licence fee of 10,000 francs a month for the exclusive right to use the name in his country. The royalty for the trade name was not dutiable, among other reasons because it was paid to a third person and thus was plainly separate from the price(s) of the goods. It was neither a condition of sale nor the subject of any negotiations between M and I.T is growing old and wishes to purchase safe investment and retire. M agrees to purchase the trade name from T. He assures I that the royalty- licence fee will remain as before. I should not be concerned that his customs value will increase just because the royalty is now payable to the seller of the goods, M. The objective validity and separate existence of the price and the royalty is established by the history. The same result should be reached in the future, despite price charges, if I and M agree, for example, that ' the royalty-licence fee will increase in the future in the same proportion as an official price index, or the prices of the art supplies; or that ' the price of the goods to I will, as in the past, always be 90 per cent of the price M charges to customers in M's home country (where the price includes the right to use the trade name).
(Note that I's position in resisting addition of the royalty may also be strengthened by the fact that the royalty is a fixed amount and does not vary according to the volume of I's import purchases, nor the volume of his sales. This factor would not in itself be conclusive The relationship to past pricing (when T was still in the picture) does appear to be decisive.)
52. It may be suggested on the basis of this example that intangible rights should in principle not figure in customs value, at least if the rights relate to the sale or use of the goods after importation.
The problem is whether the value of the goods and rights can be adequately separated. Often the problem is essentially one of evidence or proof, rather than one of principle.
' Example: The manufacturer, M, is willing to sell his face cream either on a "private label" basis (i,e,, without M's Trade mark) or with the Trade mark rights. In either event, the price of the product is DM 100 per unit. The royalty for the Trade mark is DM 10 per unit if the importer chooses to take it. I, an importer, ejects to take the product with the Trade mark. The royalty should not be added to the price in establishing the customs value. Their independent existence and commercial validity is established, and the customs value is not being arbitrarily set to suit the convenience of the parties. (The case is especially clear if the trademark is not physically attached until after the goods are imported---e.g., if they are imported in bulk and then packed for resale. But the ECC interpretation is different see 336 below).
' Example: In its Advisory Opinion 4.5 the Technical Committee on Customs Valuation (CCC) described the following situation: Foreign manufacturer M owns a Trade mark protected in the country of importation. Imported to makes a sells under M's Trade mark six types of cosmetics. I is required to pay M a royalty calculated as 5 per cent of his annual gross sales of all cosmetics sold under M's Trade mark. All of the cosmetics are manufactured to M's formula from ingredients obtained in the country of importation, with the exception of one for which the essential ingredients are normally purchased from M.
53. The Technical Committee on Customs Valuation expressed the view that, since the royalty is payable to M irrespective of whether I uses M's ingredients or those from local suppliers, it is not a condition of sale of the goods, and for valuation purposes cannot be added by virtue of section 25 to the price actually paid or payable. Thus, objective validation of either the price of the goods or the royalty, standing alone, is sufficient to validate the division of payments between the two, so that the duty should be based solely on the price of the goods.
' Example: In Advisory Opinion 4.660 the Technical Committee on Customs Valuation described the following situation: An importer makes two separate purchases of a concentrate from foreign manufacturer M.M owns a trademark which may or may not be applied to the goods when they are resold after dilution and packing, depending on the terms of particular sale for importation. The fee for use of the Trade mark is paid on a per unit basis. The imported concentrate is simply diluted with ordinary water and consumer packed before sale. In the first purchase the concentrate is diluted and resold without Trade mark with no requirement that the fee be paid. In the second case, the concentrate is diluted and resold under a Trade mark, and 'as a condition of the sale' for import there is a requirement for payment of the fee,
54. The Committee took the position that in the first purchase, since the goods are resold without the trademark and no fee is paid, an addition is not appropriate; in the second case, however, the fee required by M had to be added to the price actually paid or payable for the imported goods.
This second conclusion could be correct if the facts were as described, namely that the payment of the royalty really is a condition of the sale. But this factual assumption is inconsistent. Since the goods can also be obtained without Trade mark rights, the payment of the royalty even in the second purchase cannot be a condition of sale of the goods but only a condition of acquiring the isolated Trade mark right, which is not what the Code has in mind.
55. It should be remembered in connection with the above examples that the Trade mark rights under discussion are rights under the law of the country of importation, rights to use the mark in that country. Thus the Trade mark rights are not imported-they are there all along, so to speak, waiting for the goods to arrive and join them. These rights do not attach to the goods until after the goods have passed through Customs - and entered the commerce of the country of importation.
This is true even if a Trade mark or trade name is physically, attached to the goods or the package before they are imported, since the value lies in the right to use the name in the marketplace on resale in the country of importation.
56. Once again, the test comes back to the question whether we are able to separate the price and the royalty on an objective basis which assures that they are not arbitrarily dealt with by the parties merely to minimize duties. Here are two more examples where the separation can be made even though the royalty is paid to the seller who also receives the price: ' Example: I, an Argentine importer, agrees to pay a royalty of 5 per cent of his net sales for the use of M's Trade mark in the country of importation. I can only obtain the goods at present from M, who manufactures the product in Brazil and also owns the Argentine Trade mark rights. However, the Trade mark licence agreement runs for five years, and there is a realistic possibility that I may produce the product himself after a year or two, or may buy from a third party supplier. Once again, the royalty should not be added to the price of the goods in arriving at customs value. On these facts, it is clear that I has agreed to pgy and M has agreed to accept the 5 per cent royalty as a payment for the right to use the Trade mark, entirely independently from the purchase or non- purchase of the goods from M. (The result, incidentally, should be the same even if it is clear that M would not sell the goods on a private table basis-that is, to a purchaser who does not use the Trade mark.) Since the licence agreement is applicable without regard to who manufactures the product or where it is made, the agreement establishes a truly independent price for the Trade mark rights.
' Example: An importer of chemicals, I, imports intermediate products which he then manufactures into finished products and resells. The value-added in the country of importation is substantial. I has an agreement with his supplier of intermediates, M, giving I the right to use M's Trade marks on I's finished products. In return, I pays M 5 per cent of the net proceeds of resale of all of his finished products, I is free to manufacture the intermediates himself or to buy them from others, and he sometimes does. Sometimes the imported intermediates are combined with other ingredients, domestic or imported, in making the finished products. The royalty payments should not be added to the purchase price of the intermediates supplied by M in arriving at Transaction Value. The Trade mark does not relate to the imported product but to the finished products, and the two are sold to entirely different buyers. In addition, the purchase of the imported goods from M is separable from the Trade mark licence and royalty, since the latter exists whether or not I purchases the intermediates from M. (Such agreements frequently licence M's know-how and technical assistance to I, alongwith M's Trade marks.)
57. In cases where the royalty is based partially on the imported goods and partially on domestic ingredients, with the ingredients no longer separately identifiable, there may not be sufficient objective and quantifiable data, so that it- may be inappropriate to consider an addition for the royalty and there may be no Transaction Value.
58. The foregoing example have all dealt with situations where in our view the Trade mark royalty should be duty-free. We do not wish to make exporters and importers overconfident, nor do we wish to give Customs the impression that we think all royalties are excluded from customs value under the GATT Code. Quite the contrary. There are special features in all of the foregoing cases, and in many similar situations the royalty will be dutiable. Example: The most common situation is where M manufactures in his home country and owns a valuable Trade mark which he has protected and continues to own in all relevant countries. He only sells the goods (not obtainable elsewhere) with the Trade mark and only to franchised dealers. He does not permit use of the mark on goods manufactured by anyone else. At all times and in all markets he charges a fixed price for the goods plus a royalty of 5 per cent of the importer's net sales (resales), designated as a Trade mark royalty and payable each calendar quarter under the terms of the franchise agreement. The royalty is not invoiced in respect of any particular imported shipment, nor is it mentioned when prices are quoted or changed. The royalty is nevertheless a proper addition in calculating Transaction Value (assuming it can be calculated in an appropriate manner as related to the particular goods being imported and appraised). For, in the absence of any special feature nor mentioned in this example, the goods and the Trade mark have no separate commercial existence or value apart from each other even though they could if M operated his business differently.
59. On these facts, the payment of the royalty is a condition of the sale of the goods.
60. The key to the problem in the last example is that there is no way in which M or his customers abroad can show that the so called royalty should not really be only 4 per cent. If so, the added I per cent is really a deferred price payment-part of the proceeds of resale which should be added as part of the price under section 25. Nor is there any way to establish that 2 pet cent or 3 per cent out of the royalty should not be added to the value of the goods. Indeed, there is no way to pay any particular value on the royalty on the basis of actual market prices on these facts.
61. The subject is one that calls for creative imagination on the part of the importer. Perhaps the royalty and the price payment have different financial consequences which can be shown to give one or both of the two payments a meaningful economic existence independent of the other.
62. But the mere existence of a Trade mark and a decision to label part of the total agreed price paid to the supplier as a royalty for the mark will not exclude the payment from the customs value.
Nor will the mere willingness to tie part of the payment to the time and price of resale by the importer. Something more is needed, along the lines discussed in this section.
63. In the absence of any elucidation from the GATT Code and its Notes itself, the EEC interpretation, partly deviating from what has been said above be neglected. In an imp'iementing regulation the EEC stated that a royalty or licence fee for the right to use a Trade mark might be added to the price actually paid or payable for the imported goods only when: `the royalty or licence fee refers to good which are resold in the same state or which are subject only to minor processing after importation, ' the goods are marketed under the Trade mark, affixed before or after importation, for which the royalty or licence fee is paid, and ' the buyer is not free to obtain such goods from other suppliers unrelated to the seller.'
64. All three conditions must be met simultaneously as the result of the use of the word 'and' before the last condition. The third condition, namely that the buyer must not be free to obtain the respective goods from other suppliers unrelated to the seller, results from the licence agreement and is an interpretation of the GATT Code provision requiring that, to be added to the Transaction Value, the payment of the royalty or licence fee must be a condition of the sale of the goods. In the view of the authors the payment of the royalty or licence fee is clearly not a condition of sale of the imported goods to be valued, if ' it can be shown that the buyer is free to distribute the imported goods under a Trade mark (subject to payment of a royalty or licence fee to the supplier or a third party) or without this Trade mark (without payment of a royalty or licence fee), or if ' the right to use the Trade mark is acquired from an unrelated third party even though it is used exclusively for the imported goods.
65. If the EEC view is followed, difficulties arise as to when goods are regarded as being subject to only 'minor' processing after importation. The following activities should be deemed minor for this purpose. ' the mere affixing of a trademark. ' the painting or other coating of the goods with a new colour which is typical for the products of the importer or identified with the Trade mark, ' the dyeing of liquids (e.g. Fuels) which is only intended to identify the mark but has no influence on the use and the marketability of the goods, ' all types of warehouse handling (e.g., inspection, examination, airing, lubrication, etc.) solely to check or protect the quality of the goods, ' the removal of an old trade mark which is not to be used in the country of importation. ' the simple assembly, not requiring any particular know-how, of goods which were shipped unassembled (`knocked down').
66. In these cases, apart from the Trade mark, the product eventually sold and distributed in the country of importation is from a commercial perspective still identical with the goods as imported.
67. Whether diluting is a 'minor' process for these purposes should depend on the circumstances of the individual case. In another context it is stated that merely diluting does not prevent a royalty or licence fee from being considered related to the imported goods. However, the mixing of wine and liquor according to special recipes, the formulation and measuring out of pharmaceutical substances, as well as the manufacture of drinks from sustainable subject to patent protection, are normally not mere diluting or minor processing. In these cases it is thus important to observe whether all further conditions with respect to the addition of the royalty are met.
68. The EEC clarifies that it is irrelevant whether the Trade mark emblem under which the imported goods are distributed is 'affixed' before or after importation of the goods. Indeed, it is important only when and where the Trade mark may be used in resale. In many cases the goods themselves do not bear any Trade marks; but the Trade mark is used in offers, contracts, invoices and on transport vehicles (e.g., in the case of bulk goods of liquids). 'Affixed' is therefore to be understood as 'used in distribution'.
69. The impugned order passed by the learned respondent is based on confused thinking inasmuch as the learned respondent has confused the goods as defined in section 2(1) of the Customs Act, 1969 with the Trade mark under the Merchandise Marks Act, 1889 according to which Trade mark means any mark used for denoting that goods as the manufacture of merchandise of a particular person and includes any Trade mark which is registered in the register of Trade marks kept under the Trade Mark Act, 1940. That the issue involved in the matter relates to the addition of royalty to the transaction value in terms of section 25(2)(d) of the Customs Act, 1969 which, the appellant pays in terms of Article 4.1 of the agreement executed between the Clariant International of Switzerland and the appellant on the ex-factory value of all new products technology of which is transferred to Pakistan and sold under the trademarks, brands and denomination owned by Messrs Cariant International of Switzerland.
70. Even otherwise the liability to pay customs duty by virtue of the section 18 of the Customs Act, 1969 is on the goods imported in Pakistan as prescribed in the First Schedule and Second Schedule and according to the definition of the goods in terms of section 2(1) of the Customs Act, 1969 and incorporated by the learned respondent in para.10 of the impugned order and by stretch of any imagination the Trade mark, brands and denomination belonging to Clariant International of Switzerland and used by the appellant for which royalty is paid by the appellant can be termed as goods.
71. It is submitted that on a plain reading of the Article 4.1 of the agreement, dated 13-6-1999 executed between the Clariant International of Switzerland and the appellant is clear that the agreement or payment of royalty relates to the productions and/or marketing of the goods manufactured locally and/or of the imported finished goods the value of such activities representing the payment of royalty by the appellant cannot be part of the value of imported goods by virtue of the proviso being explanation to rule 115 of the Customs Rules, 2001 which is reproduced hereunder:-- "Conditions or considerations relating to the production or marketing of the imported goods shall not result in rejection of the transaction value. For example, the fact that the buyer furnishes the seller with engineering and plans undertaken in Pakistan shall not result in rejection of the transaction value. Likewise, if the buyer undertakes on his own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value of these activities shall not be part of the value of imported goods nor shall such activities result in rejection of the transaction value."
72. The local use of Trade marks and brands owned and belonging to Clariant International of Switzerland by the appellant is merely a licence granted to the appellant to use such Trade marks and brands in a particular manner on fulfilment of certain conditions without any power to hold such Trade marks and brands to the exclusion of the Clariant International of Switzerland. Thus the ownership of such Trade marks and brands is not transferred to the appellant and hence the import of goods by the appellant either in the finished form or raw materials wherein the ownership of the finished products or raw material is transferred to the appellant as a result of the consideration paid ,by way of sale price or transaction value has no nexus whatsoever with the payment of royalty which is only for the local use of such Trade marks and brands ownership of which remain with Clariant International of Switzerland.
73. These aspects were not looked into neither by the adjudication officer nor by the appellant authority. The impugned order is sketchy and devoid of reasons. The said order is not at all a speaking order and cannot be called a quasi-judicial order within the parameters set up by law.
74. In the light of above, we have examined the impugned order and find that the same is not sustainable in law, thus we have no alternative except to set aside the same and remand the case to the learned Adjudication Officer for de novo consideration of the matter in dispute.