Background
In Case No. A56-68092/2023 the issue of including royalties in the customs value of food ingredients imported by Orion International Euro LLC (“Declarant”) was considered.The Declarant manufactured finished products (including Choco Pie, Chocoboy) using imported and Russian raw materials (vanillin, gelatine, cocoa, etc.), paying royalties to foreign right holders:
- 2% of the revenue for granting rights to use technologies; and
- 0.5% for granting rights to trademarks.
Based on the results of the inspection, the Vyborg Customs Office (“Customs Office”) charged additional customs payments, including in the cost of the raw materials the amounts of royalties for both the use of the technologies and the trademarks on the finished products.
Position of the courts
During the first round of the consideration of the case, the Arbitrazh Court of the City of St Petersburg and the Leningrad Region (“St Petersburg Arbitrazh Court”) granted the Declarant’s application and recognised the Customs Office decisions as invalid. The court noted that the licence payments do not relate to the imported goods (i. e. the raw materials), but to the production technology of finished products.The 13th Arbitrazh Court of Appeal (“13th ACA”) set aside this decision. In accordance with the 13th ACA, the licence payments are related to the imported goods, since the imported goods are part of the technological process and without them, the production of finished products is impossible.
The Arbitrazh Court of the North-Western District expressed a fundamental agreement with the position of the 13th ACA, but noted that the main part (80-90% in different years) of the raw materials for the production of finished products is purchased from Russian suppliers. In this connection the case was sent for new consideration.
During the second round of the consideration of the case, the St Petersburg Arbitrazh Court concluded that the Customs Office had unreasonably included all licence payments in the customs value without distinguishing between payments related to products made from imported and Russian raw materials. The Customs Office ignored the documents and information provided and included royalties for technology and trademarks in the customs value, including those paid in relation to finished products made from raw materials purchased on the Russian domestic market from Russian suppliers. The court concluded that inclusion is possible only proportionally to the share of imported raw materials in the value of finished products. In this connection, the St Petersburg Arbitrazh Court set aside the Customs Office’s decisions regarding the collection of RUB 103 million.
Conclusion
The case under consideration is notable due to the court’s more careful approach to the issue of including royalties in the customs value. The court took into account the detailed calculation of payments based on the share of imported raw materials in the price of finished products.Despite the fact that the very issue of classifying royalties paid for technologies used in Russia (i. e. not directly related to imported raw materials) as imported raw materials remains debatable, it is nevertheless a positive step that the courts are beginning to include royalties not in full, but only in respect of the relevant part.
It is worth noting separately that the court took into account the position of the Supreme Court of the Russian Federation in the “Fanagoria case” (No. A32-5147/2022) on the need for a proportional correlation of royalty amounts with imported goods. Therefore, this is already the second case known to us in which a similar approach has been applied.
