REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 8627-8628 of 2002
COMMNR. OF CUSTOMS EXCISE,
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.
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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:-
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"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-
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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: -
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"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
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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.
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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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