JUDGMENT

S.B. SINHA, J :

1. Leave granted.

2. This appeal is directed against a final order dated 07.12.2005 passed by the Customs, Excise and Service Tax Appellate Tribunal (for short, the CESTAT) passed in Appeal Nos. C/231/04 and C/949/04 whereby and whereunder the appeal preferred by Respondent herein was allowed and that of Appellant herein was dismissed.

3. Kirloskar Systems Limited entered into an agreement with Toyota Motor Corporation, Japan. It is also a major shareholder in the Respondent-Company. For the purpose of establishing an automobile manufacturing

plant, Respondent imported some capital goods and parts thereof.

4. Dispute between the parties revolves round the valuation of the said capital goods and parts imported by the respondent from Toyota Motor Corporation for manufacture of automobile in India. Under the agreements entered into by and between the respondent and the said Toyota Motor Corporation, royalty and know-how fees were to be paid.

5. According to the Revenue such payments were to be added to the invoice value of the goods so as to arrive at a proper transaction value, in terms of Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (for short, the Rules). Payments of royalty, according to the Revenue, have a direct nexus to the imported goods as the same go into the manufacture of the licensed vehicles and spare parts.

6. Before embarking upon the rival contentions of the parties, we may notice the basic and undisputed facts of the matter.

7. A Technical Assistance Agreement was entered into by and between Toyota Motor Corporation and the respondent herein. Some of the payments were required to be made towards engineering services and for imparting training to its personnel at Japan.

In the said agreement, the terms licensed vehicles, local parts, and licensed products have been defined. By reason of the said agreement, the respondent was given manufacturing licence for the licensed products of Toyota. The licence was to be given on non-exclusive, non-divisible, non-transferable and non-assignable basis and was not to include any right to grant sub-licences without the licensors prior consent.

Articles 3 and 4 of the said agreement, which are material for our purpose, read as under :

"Article 3 Ordinary Assistance

(a) The Licensor shall, in accordance with the formalities and conditions separately prescribed by it, furnish the licensee, upon its request, with such technical know how, information, data etc. relating to the licensed products in written, verbal or any other form, as then are or where used by the Licensor and are then in the hand of and freely disposable by the Licensor and as are then considered necessary and applicable by the Licensor for the manufacture of the licensed products from among those stipulated in appendix-C attached hereto.

(b) Any technical know-how, information, data, etc. furnished to the Licensee by the Licensor in accordance with the preceding paragraph (a) and all copies thereof shall, at the licenses expense, be sent back to the Licensor even during the terms of this agreement, as soon as the Licensor requests their return, considering the same unnecessary for the licensee, the Licensee shall also impose said obligation upon its employees, officers and directors who may have the custody of or access to such know-how information data etc. and those reproduced, whether those persons are in or out of office."

Appendix C of the agreement provides for technical know-how, information data, etc. which were to be furnished by the licensor to the licensee under Article 3 being those which had separately been designated by the licensor from amongst those specified therein, namely, for :

(i) studying the feasibility of local parts manufacturing,

(ii) manufacturing of local parts, and

(iii) production, preparation of licensed products.

Article 4 of the agreement reads as under :

"Article 4 Additional Assistance

(a