Court’s decision
The Customs Excise and Service Tax Appellate Tribunal, New Delhi set aside the adjudication order that had added Advertisement and Promotional Expenses (APE) and Management Service Fees (MSF) to the transaction value of imported motorcycles and parts. The Tribunal held that neither APE nor MSF constituted a “condition of sale” under Rule 10(1)(e) of the 2007 Customs Valuation Rules, as both were expenses incurred on the importer’s own account, after the goods became its property. Consequently, the Tribunal quashed the differential duty demand of ₹21,85,89,854, interest under Section 28AA, and penalty under Section 114A. The appeal was allowed in full.
Facts
The appellant imported completely built and knocked-down motorcycles, accessories and branded apparel from affiliated overseas manufacturers. Two agreements governed the commercial relationship: a Distributor Agreement requiring the importer to promote the brand in India, and a Management Services Agreement under which the parent company provided business-support services billed on an allocated cost-plus basis.
The Directorate of Revenue Intelligence initiated proceedings alleging that the importer deliberately undervalued goods by excluding MSF and APE, which allegedly were compulsory expenditures imposed by the seller. The adjudicating authority accepted this view and re-determined value by adding MSF of ₹6.86 crore and APE of ₹14.99 crore, raising a cumulative demand of over ₹21.8 crore with interest and penalty. The importer’s appeal challenged the legality of inclusion of these amounts.
Issues
- Whether APE incurred in India for brand promotion could be added to customs value under Rule 10(1)(e).
- Whether MSF paid to the foreign affiliate for business-support services was addable to the transaction value.
- Whether the extended period of limitation under Section 28(4) could be invoked.
- Whether interest under Section 28AA and penalty under Section 114A were legally sustainable.
- Whether previous Special Valuation Branch orders accepting the declared value precluded subsequent additions.
Petitioner’s arguments
The appellant contended that the Distributor Agreement and Management Services Agreement were two independent commercial arrangements: one for supply of goods and the other for provision of support services unrelated to importation. It argued that APE and MSF were not payable to satisfy any obligation of the seller and were never imposed as conditions for supply of motorcycles. The importer emphasised that expenses for promotion were undertaken on its “own account” to develop the Indian market and were not legally enforceable obligations of the seller.
It further submitted that the SVB had already examined the agreements and confirmed that the relationship with the overseas supplier had not influenced price. Citing extensive precedent, the appellant argued that neither MSF nor APE bore nexus to import of goods, could not be mathematically correlated with imports, and were already taxed under service tax/GST, ruling out customs loading.
Understanding the Role of the Customs Excise and Service Tax Appellate Tribunal
Respondent’s arguments
The department contended that the contract obligated the importer to incur promotional expenditure and pay MSF as a mandatory undertaking in furtherance of sales. It argued that the brand owner imposed specific requirements related to marketing, participation in promotional events, and purchase of marketing materials, making APE a condition of sale. The department also asserted that the MSF was integrally connected to the sale and distribution arrangement, thereby influencing the price.
The department also argued that all agreements were not disclosed before the SVB, enabling invocation of the extended limitation period and imposition of penalty. Reliance was placed on the Supreme Court’s judgment in Tata Iron to argue that where certain payments are essential to operationalise the imported goods or distribution, such payments must be included in customs value.
Analysis of the law
The Tribunal examined Section 14 of the Customs Act and Rules 3, 10, and 12 of the 2007 Valuation Rules, reiterating that transaction value is the primary method of valuation and additions can be made only in narrowly defined circumstances. Rule 10(1)(e) permits additions only where payments are made as a “condition of sale” or to satisfy an obligation of the seller, and only if such payments are not already included in the price.
The Tribunal relied heavily on Interpretative Notes to Rule 3, which clarify that marketing and promotional activities undertaken by the buyer—even pursuant to an agreement—are not considered payments made “for the benefit of the seller” and therefore cannot form part of customs assessable value. Similarly, independent services procured post-importation cannot be included in value, even if provided by the seller.
Precedent analysis
1. Thyssenkrupp Elevator (2017)
Held that corporate services such as accounting, strategy, marketing and IT support are independent of imports and cannot be added to customs value. Relied upon for MSF.
2. Schwing Stetter (2016)
Held that post-importation services, though provided by related parties, have no nexus with customs valuation. Reinforced the inapplicability of Rule 10 for MSF.
3. Reliance Brands (2024)
Clarified that promotional activities carried out on a buyer’s own account are excluded from customs value unless there exists an enforceable right compelling such expenditure.
4. Giorgio Armani, Adidas India, Indo Rubber
Confirmed that expenses for brand-building and marketing undertaken by Indian distributors are not addable absent a legal obligation of the foreign supplier.
5. Tata Iron & Steel (2000)
Distinguished: concerned supply of technical documents indispensable for functioning of machinery. Not applicable because APE/MSF are not essential to importation or functioning of Motorcycles.
These precedents together formed the basis for rejecting the department’s valuation theory.
Court’s reasoning
The Tribunal found that under the Distributor Agreement, the goods were sold outright to the importer, who became their owner. All promotional expenses were undertaken by the importer on its own commercial account, without any legally enforceable obligation imposed by the supplier. Termination for failure to achieve targets was a commercial consequence, not an enforceable right enabling addition under Rule 10(1)(e).
Regarding MSF, the Tribunal held that services such as finance, HR, marketing support, warranty management and IT were independent business-support functions billed on a cost-plus basis and had no nexus with import of goods. The Tribunal emphasised that these services were not required for importation or functioning of the goods and therefore could not be a “condition of sale.”
As neither element satisfied Rule 10(1)(e), the entire basis of the demand failed. Consequently, interest and penalties automatically fell.
Conclusion
The Tribunal held that neither Advertisement and Promotional Expenses nor Management Service Fees were addable to the transaction value of imported motorcycles, as both were undertaken on the importer’s own account and did not satisfy any obligation of the seller. The Tribunal set aside the entire adjudication order, including the ₹21.85 crore duty demand, interest, and penalty. It also declined to examine limitation and SVB arguments as the primary valuation findings were unsustainable. The appeal was allowed in full.
Implications
This ruling is a significant affirmation of valuation principles under Indian customs law. It clarifies that:
- Marketing, brand promotion, and advertising costs of Indian distributors cannot be treated as addable value.
- Business-support services billed on cost-plus basis cannot be added without evidence of being a condition of sale.
- SVB examination and acceptance of transaction value provides strong protection against later attempts to load value.
- The department cannot rewrite contractual arrangements or infer obligations based on commercial expectations.
- Importers gain legal certainty that “own-account” expenses cannot be subjected to customs duty by stretching Rule 10(1)(e).
This decision will directly impact multinational distributors and related-party importers across automotive, luxury goods, electronics and retail sectors.