Commnr. Of Customs Excise, New Delhi vs M/S. Living Media(India) Ltd

NEW DELHI ....Appellant

VERSUS

M/S. LIVING MEDIA (INDIA) LTD. ....Respondent

WITH

CIVIL APPEAL NO. 2959 of 2008

WITH

CIVIL APPEAL NO. 4751 of 2006

WITH

CIVIL APPEAL NO. 2832 of 2006

AND

CIVIL APPEAL NO. 1 of 2009

JUDGMENT

Dr. MUKUNDAKAM SHARMA, J.

1. The Civil Appeal Nos. 8627-8628 of 2002 are filed against the

judgment and order passed by the Customs, Excise & Gold

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(Control) Appellate Tribunal (hereinafter for short referred to as

"CEGAT") on 23.1.2002, however, Civil Appeal No. 2959 of 2008,

Civil Appeal No. 4751 of 2006, Civil Appeal No. 2832 of 2006 and

Civil Appeal No. 1 of 2009 are filed against the judgment and order

passed by the Customs Excise and Service Tax Appellate Tribunal

(hereinafter for short referred to as "CESTAT") on 21.9.2007,

2.2.2006, 2.9.2005 and 16.10.2008 respectively.

CIVIL APPEAL NOS. 8627-8628 of 2002

2. The facts leading to the filing of the present appeals are that the

Respondent-company undertakes various music projects in India

and under these projects it enters into agreements with reputed

artists for composing and recording musical works. The music

thus recorded is converted into DAT [Digital Audio Tape] Master

which is then sent to Singapore for replicating the musical work on

compact discs. Apart from this, the Respondent also renders

service for quality production/duplication of various music titles

on compact discs.

3. The Respondent has entered into an agreement for rendering

services with M/s. World Media India Ltd., New Delhi, which

provides masters to the Respondent and Respondent in turn sends

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these masters to Australia for replicating the musical work on

compact discs (CDs).

4. The Respondent imported a consignment of Audio Compact Discs

from Singapore vide Bill of Entry No. 659308 dated 27.05.1998 for

home consumption. Customs duty was paid on the invoice value of

the replicator in Singapore and the declared value of each CD was

USD 0.6. The Respondent had similar import of Audio Compact

Discs from Australia under Bill of Entry No. 659289 dated

27.05.1998 for home consumption and the declared value of each

CD was @ 1.62 Australian Dollar. The dispute regarding the

valuation of these consignments imported by the Respondent

herein is the subject matter of these appeals.

5. The Assistant Commissioner vide order dated 23.06.1998, while

assessing the value of CDs imported from Singapore allowed all

deductions except expenses incurred under advertisement and

publicity and fixed the assessable value at Rs.100 per CD. For the

CDs imported from Australia, the assessing authority granted

deductions except to the extent of those claimed towards expenses

on royalty and advertisement and publicity and the assessable

value was determined as Rs.199 per CD.

Page 3 of 19 6. Aggrieved by the aforesaid order of the Assistant Commissioner,

the Respondent - assessee filed appeals before the Commissioner

(Appeals). The Commissioner (Appeals), vide order dated

12.06.2001, confirmed the order of the assessing authority.

Aggrieved thereby, the Respondent - assessee appealed to the

CEGAT. The CEGAT, vide order dated 23.01.2002, allowed the

appeals and set aside the order of the Commissioner (Appeals)

dated 12.06.2001.

CIVIL APPEAL NO. 2959 of 2008

7. The present appeal is filed against the judgment and order of

CESTAT passed on 21.09.2007 whereby the appeal filed by the

Revenue was rejected and the order of the Commissioner of

Customs (Appeals) dated 18.09.2006, was upheld.

8. The facts leading to the filing of the present appeal are that the

case of import of goods by respondent M/s Sony BMG Music

Entertainment (I) Pvt. Ltd. from supplier M/s Sony Music

Entertainment (Hong Kong) Ltd. was examined by GATT Valuation

Cell, Mumbai. The Deputy Commissioner of Customs vide order

dated 10.02.2006 held that the Respondent and the supplier were

related under Rule 2(2) of Customs Valuation Rules, 1988 and

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rejected the transaction value of goods imported and ordered that

the royalty at the note indicated in clause 4 read with Schedule A

to the International Repertorise License Agreement entered into

between the importer and M/s Sony BMG Music Entertainment,

New York, was to be added to the declared value in addition to

50% for the purpose of Customs Duty assessment. Payment of

royalty was held to be condition for sale at some subsequent stage

in the commercial history of the CDs.

9. Being aggrieved by the said order, the Respondent preferred an

appeal before the Commissioner of Customs (Appeals). The

Commissioner (Appeals) vide order dated 18.09.2006 set aside the

order of the adjudicating authority dated 10.02.2006 and held that

the inclusion of royalty in the invoice value was not permissible.

Aggrieved thereby, the Revenue filed an appeal before the CESTAT.

The CESTAT vide order dated 21.09.2007 rejected the appeal of

the Revenue and upheld the order of Commissioner (Appeals)

dated 18.09.2006.

CIVIL APPEAL NO. 4751 of 2006

10. The present appeal is filed against the judgment and order of

CESTAT passed on 02.02.2006 whereby the appeal filed by the

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Respondent was allowed and the order of the Commissioner

(Appeals) dated 24.09.2004 was set aside.

11.The facts leading to the filing of the present appeal are that the

case of imports of CDs from M/s EMI Compact Disc, Holland by

M/s Virgin Records (I) Pvt. Ltd. was taken up for examination. The

Deputy Commissioner of Customs vide order dated 17.08.2000

held that the Respondent and the Supplier are related to each

other by virtue of 2(2) of Customs Valuation Rules, 1988. The

relationship has not in any way affected the prices and the value of

the imports can be taken to be on the transaction value and

therefore did not propose the loading of the invoice bill.

12.Aggrieved thereby, the Revenue preferred an appeal to the

Commissioner (Appeals). The Commissioner (Appeals) vide order

dated 24.09.2004 rejected the order of the assessing authority and

held that the assessable value of the CDs should be assessed on

the basis of the invoice price plus the copyright fees payable on the

resale of records. Aggrieved by the aforesaid order of the

Commissioner (Appeals), the Respondent filed an appeal before the

CESTAT. The CESTAT vide order dated 02.02.2006 set aside the

order of the Commissioner (Appeals) dated 24.09.2004 and

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restored the order of the assessing authority dated 17.08.2000.

CIVIL APPEAL NO. 2832 of 2006

13. The present appeal is filed against the judgment and order of

CESTAT passed on 02.09.2005 whereby the appeal filed by the

Respondent - assessee was allowed and the order of the

Commissioner of Customs (Appeals) dated 20.11.2002, was set

aside.

14.The facts leading to the filing of the present appeal are that the

Respondent herein - M/s. Sony Music Entertainment (India) Ltd.,

is a wholly owned subsidiary of Sony Music Entertainment (India)

Inc., USA. They have a Licensing Agreement with Sony Corporation

of America, New York, U.S.A. The Indian Company has entered

into various agreements (licensing etc.) with their foreign

collaborator and associates.

15.The issue for determination in the said appeal is of royalty at the

rate of 20% of MRP minus Sales Tax minus 6.5% packaging

deduction payable by the Respondent herein on the sale of

imported recorded compact disc in India. The Adjudicating

Authority, vide order dated 31.10.2000, accepted the transaction

value declared in the invoice, holding that the payment of royalty

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is not the condition of sale of goods and that there is no distraction

on the Respondents sourcing CDs from any

manufacturer/supplier. The Commissioner (Appeals), however,

vide order dated 20.11.2002, set aside the Adjudication order

dated 31.10.2000, on appeal by the Revenue, holding that the

royalty payment is a condition of sale of imported goods.

16.The CESTAT vide order dated 02.09.05, set aside the order of the

Commissioner (Appeals) dated 20.11.2002 on appeal by the

Respondent and held that the Respondents are correct in their

contention based upon the interpretative notes to Rules 9(1)(c) that

the payment of royalty by them to Sony Corporation of America

cannot be included in the price of the imported goods. Hence, this

civil appeal by the Department.

CIVIL APPEAL NO. 1 of 2009

17. The present appeal is filed against the judgment and order of

CESTAT passed on 16.10.2008 whereby the appeal filed by the

Appellant - assessee was rejected and the order of the

Commissioner of Customs (Appeals) dated 09.04.2002, was

upheld.

18. The facts leading to the filing of the present appeal are that the

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Appellant in this case are engaged in the marketing of audio

cassettes and CDs imported inter alia from M/s Universal

Manufacturing and Logistics, Germany and associated companies.

Their company is a 100% subsidiary of Universal Music Holding,

Netherlands.

19.The issue for determination in the said appeal is whether the

royalty paid by the Appellant to Universal Music Holding,

Netherlands on net sales in India can be added to the transaction

value of Audio Compact Disc imported from Universal

Manufacturing and Logistics, Germany.

20.As per the agreement entered into with the foreign collaborator the

Indian company was required to pay royalty at the rate of 15% at

the retail sale price of the goods to the foreign supplier. Since the

importer was a 100% subsidiary company, it was considered as a

related person and the royalty payable by it to the supplier was

considered to be as a condition of sale and therefore required to be

included in the declared invoice value to the extent of royalty

amount for which a show cause notice was issued to the Appellant

and adjudicated by the Deputy Commissioner, who vide order

dated 16.10.2001, held that the value of the goods imported by the

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Appellant is to be loaded by 15% as per Rule 9(1)(c) of Customs

Valuation Rules, 1988.

21.Aggrieved thereby, the Appellant preferred an appeal to the

Commissioner (Appeals), who vide order dated 09.04.2002 rejected

the same and upheld the order of the assessing authority.

Aggrieved by the aforesaid order of the Commissioner (Appeals),

the Appellant filed an appeal before the CESTAT which was

rejected vide order dated 16.10.2008 and the order of the

Commissioner (Appeals) dated 09.04.2002 was upheld.

22.Since all these appeals involve almost similar facts and the issues

raised therein also being similar, we propose to dispose of all these

appeals by this common judgment and order.

23.The learned counsel appearing for the parties made extensive

arguments and drawn our attention to the relevant materials on

record also. On the basis of the same, we proceed to answer the

issue that arises for our consideration.

24.In order to appreciate the contentions of the parties, we propose to

extract the provisions of Section 14 of the Customs Act, 1962

which deals with valuation of goods for the purpose of assessment.

The said section reads as follows:-

Page 10 of 19 "14. Valuation of goods. - (1) For the purposes of

the Customs Tariff Act, 1975 (51 of 1975), or any

other law for the time being in force, the value of the

imported goods and export goods shall be the

transaction value of such goods, that is to say, the

price actually paid or payable for the goods when

sold for export to India for delivery at the time and

place of importation, or as the case may be, for

export from India for delivery at the time and place

of exportation where the buyer and seller of the

goods are not related and price is the sole

consideration for the sale subject to such other

conditions as may be specified in the rules made in

this behalf;

Provided that such transaction value in the case of

imported goods shall include, in addition to the

price as aforesaid, any amount paid or payable for

costs and services, including commissions and

brokerage, engineering, design work, royalties and

licence fees, costs of transportation to the place of

importation, insurance, loading, unloading and

handling charges to the extent and in the manner

specified in the rules made in this behalf:

Provided further that the rules made in this behalf

may provide for, -

(i) the circumstances in which the buyer and the

seller shall be deemed to be related;

(ii) the manner of determination of value in

respect of goods when there is no sale, or the

buyer and the seller are related, or price is not

the sole consideration for the sale or in any

other case;

(iii) the manner of acceptance or rejection of value

declared by the importer or exporter, as the

case may be, where the proper officer has

reason to doubt the truth or accuracy of such

value, and determination of value for the

purposes of this section:

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Provided also that such price shall be calculated

with reference to the rate of exchange as in force on

the date on which a bill of entry is presented under

section 46, or a shipping bill of export, as the case

may be, is presented under section 50.

(2) Notwithstanding anything contained in sub-

section (1), if the Board is satisfied that it is

necessary or expedient so to do, it may, by

notification in the Official Gazette, fix tariff values

for any class of imported goods or export goods,

having regard to the trend of value of such or like

goods, and where any such tariff values are fixed,

the duty shall be chargeable with reference to such

tariff value."

25.In exercise of the power vested under the Customs Act, the

Central Government has made Customs Valuation (Determination

of Value of Imported Goods) Rules, 2007 (hereinafter for short

called "the Rules").

26.Rule 2(f) of the Rules defines "transaction value" where it says

that it means the value determined in accordance with rule 4 of

the Rules. Rule 3 of the Rules deals with the determination of the

method of valuation where it states as follows:-

"Determination of the method of valuation.-

For the purpose of these rules -

(i) subject to rules 9 and 10-A the value of import-

ed goods shall be the transaction value;

(ii) if the value cannot be determined under the

provisions of Cl. (i) above, the value shall be deter-

Page 12 of 19 mined by proceeding sequentially through rule 5 to

8 of these rules."

27.What is transaction value is stated in Rule 4 in the following

manner:-

"4. Transaction value - (1) The transac-

tion value of imported goods shall be the price ac-

tually paid or payable for the goods when sold for

export to India, adjusted in accordance with the

provisions of Rule 9 of these rules."

28.Rule 9(1)(c) of the Rules states as follows:-

"9. Costs and services (1) In determining the

transaction value, there shall be added to the

price actually paid or payable for the imported

goods -

***** ***** ***** *****

***** ***** ***** *****

(c) - royalties and license fees related to the im-

ported goods that the buyer is required to pay, di-

rectly or indirectly, as a condition of the sale of the

goods being valued, to the extent that such royal-

ties and fees are not included in the price actually

paid or payable."

29. In the case of Commissioner of Customs Vs. Ferodo India Pvt.

Ltd. reported in 2008 (4) SCC 563 this Court had occasion to

analyze the aforesaid relevant provision of Rule 9(1)(c) with which

we are also concerned in the present appeals. The relevant portion

of which is extracted herebelow: -

Page 13 of 19 "16. Under Rule 9(1)(c), the cost of technical know-

how and payment of royalty is includible in the

price of the imported goods if the said payment con-

stitutes a condition prerequisite for the supply of the

imported goods by the foreign supplier. If such a

condition exists then the payment made towards

technical know-how and royalties has to be includ-

ed in the price of the imported goods. On the other

hand, if such payment has no nexus with the work-

ing of the imported goods then such payment was

not includible in the price of the imported goods.

17. In Essar Gujarat Ltd. the condition prerequi-

site, referred to above, had direct nexus with the

functioning of the imported plant and, therefore, it

had to be loaded to the price thereof.

18. Royalties and license fees related to the im-

ported goods is the cost which is incurred by the

buyer in addition to the price which the buyer has

to pay as consideration for the purchase of the im-

ported goods. In other words, in addition to the

price for the imported goods the buyer incurs

costs on account of royalty and license fee

which the buyer pays to the foreign supplier

for using information, patent, trade mark and

know-how in the manufacture of the licensed

product in India. Therefore, there are two con-

cepts which operate simultaneously, namely, price

for the imported goods and the royalties/license

fees which are also paid to the foreign suppli-

er.

19. Rule 9(1)(c) stipulates that payments made

towards technical know-how must be a condition

prerequisite for the supply of imported goods by the

foreign supplier and if such condition exists then

such royalties and fees have to be included in the

price of the imported goods. Under Rule 9(1)(c) the

cost of technical know-how is included if the same

Page 14 of 19

is to be paid, directly or indirectly, as a condition of

the sale of imported goods. At this stage, we would

like to emphasize the word indirectly in Rule 9(1)(c).

As stated above, the buyer/importer makes pay-

ment of the price of the imported goods. He also in-

curs the cost of technical know-how. Therefore, the

Department in every case is not only required to

look at TAA, it is also required to look at the pricing

arrangement/agreement between the buyer and his

foreign collaborator. For example, if on examination

of the pricing arrangement in juxtaposition with

TAA, the Department finds that the importer/buyer

has misled the Department by adjusting the price of

the imported item in guise of increased royalty/li-

cense fees then the adjudicating authority would be

right in including the cost of royalty/license fees

payment in the price of the imported goods. In such

cases the principle of attribution of royalty/license

fees to the price of imported goods would apply.

This is because every importer/buyer is obliged to

pay not only the price for the imported goods but he

also incurs the cost of technical know-how which is

paid to the foreign supplier. Therefore, such adjust-

ments would certainly attract Rule 9(1))(c)."

30. While laying down the aforesaid proposition this Court has

considered the case of Collector of Customs (Prev.), Ahmedabad

Vs. Essar Gujarat Ltd. reported in 1996 88 ELT 609 (S.C.) to

which also reference was made at the time of hearing of the

appeals.

31. There is yet another decision on the aforesaid issue rendered by

three Judges' Bench of this Court in the case of Associated

Cement Companies Ltd. Vs. Commissioner of Customs reported

Page 15 of 19

in (2001) 4 SCC 593. Having referred to the case of Essar

Gujarat (supra) and after having noted Rules 3, 4 and 9 of the

Rules, this Court has stated thus in paragraph 42, 43 and 44 as

follows:-

"42. .............................. Therefore, the intellectual

input in such items greatly enhances the value of

the paper and ink in the aforesaid examples. This

means that the charge of a duty is on the final prod-

uct, whether it be the encyclopaedia or the engi-

neering or architectural drawings or any manual.

43. Similar would be the position in the case

of a programme of any kind loaded on a disc

or a floppy. For example in the case of music

the value of a popular music cassette is sever-

al times more than the value of a blank cas-

sette. However, if a pre-recorded music cas-

sette or a popular film or a musical score is

imported into India duty will necessarily have

to be charged on the value of the final prod-

uct.

......................................................

.....................................................

44. It is a misconception to contend that what is

being taxed is intellectual input. What is being

taxed under the Customs Act read with the Cus-

toms Tariff Act and the Customs Valuation Rules is

not the input alone but goods whose value has been

enhanced by the said inputs. The final product at

the time of import is either the magazine or the en-

cyclopaedia or the engineering drawings as the

case may be. There is no scope for splitting the en-

gineering drawing or the encyclopaedia into intellec-

tual input on the one hand and the paper on which

it is scribed on the other. For example, paintings are

Page 16 of 19

also to be taxed. Valuable paintings are worth mil-

lions. A painting or a portrait may be specially com-

missioned or an article may be tailor-made. This as-

pect is irrelevant since what is taxed is the final

product as defined and it will be an absurdity to

contend that the value for the purposes of duty

ought to be the cost of the canvas and the oil paint

even though the composite product, i.e., the paint-

ing, is worth millions."

32. The issue that arises for our consideration is therefore appears to

be answered by the aforesaid decision in Associated Cements

Companies Ltd. (Supra). In the said decision this Court had

stated clearly that if a pre-recorded music cassette or a popular

film or musical score is imported into India, duty will necessarily

have to be charged on the value of the final product. As per Rule

9, in determining the transaction value there has to be added to

the price actually paid or payable for the imported goods, royalties

and the license fees related to the imported goods that the buyer is

required to pay, directly or indirectly, as a condition of sale of

goods. Therefore, when pre-recorded music cassette is imported

as against the blank cassette, definitely its value goes up in the

market which is in addition to its value and therefore duty shall

have to be charged on the value of the final product. Therefore,

there can be no dispute with regard to the fact that value of the

royalty paid is to be included in the transaction value.

Page 17 of 19 33.In all these cases, there is no dispute that the cassettes under

question are brought to India as pre-recorded cassettes which

carry the music or song of an artist. There is an agreement

existing in all the matters that royalty payment is towards money

to be paid to artists and producers who had produced such

cassettes. Such royalty becomes due and payable as soon as

cassettes are distributed and sold and therefore, such royalty

becomes payable on the entire records shipped less records

returned. It could therefore, be concluded that the payment of

royalty was a condition of sale. Counsel appearing for the

Respondent relied upon the commentary on the GATT Customs

Valuation Code. We failed to see as to how the aforesaid

commentary on the GATT Customs Valuation Code could be said

to be applicable to the facts of the present case. The specific

sections and the rules quoted hereinbefore are themselves very

clear and unambiguous. We are required only to give interpretation

of the same and apply the same to the facts of the present case.

34. Considering/Looking at the decision of this Court in the case of

Associated Cement Companies Ltd. [supra] and also to the clear

and unambiguous provisions of law discussed above we set aside

the orders passed by the Tribunal in matters, i.e., Civil Appeal No.

Page 18 of 19

8627-8628 of 2002, Civil Appeal No. 2959 of 2008, Civil Appeal No.

4751 of 2006, Civil Appeal No. 2832 of 2006 and restore the order

passed by the Department, whereas Civil Appeal No. 1 of 2009 is

dismissed. We leave the parties to bear their own costs.

............................................J

[Dr. Mukundakam Sharma]

............................................J

[Anil R. Dave]

New Delhi

August 17, 2011

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