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Friday, April 24, 2015

What was imported by the appellant was not merely paper but drawings and designs on paper whose value had to be added for the reason that the appellants/importers were themselves going to exploit the intellectual content of the goods that were imported themselves. In the facts before us the appellants, as has been pointed out above, do not exploit the intellectual content in the CDs produced by them by way of sale as the sale by them can only be to the copyright owner himself. It is clear therefore that this case would have no bearing on the present case. 14. Given the fact that no part of the royalty can be loaded on to the duplicate CDs produced by the appellant, the circular dated 19.2.2002 which deals with apportionment of royalty would have no application to the facts of the present case. In the circumstances, the impugned judgment dated 11.6.2004 is set aside. Refund, if any, to be made of additional duty collected pursuant to the impugned judgment may be claimed by the appellant in accordance with law. The appeal is allowed in the aforesaid terms.


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO.6709 OF 2004

      M/S. K.R.C.D. (I) PVT. LTD.                 …APPELLANT


      EXCISE, MUMBAI                       ...RESPONDENT

                               J U D G M E N T

      R.F. Nariman, J.

      1.    The facts of the present case reveal that the appellant  started
      manufacturing duplicate CDs from a master tape/CD issued to them by  a
      distributor who  had  copyright  in  the  contents  of  the  CD.   The
      following chain will show exactly how the present transaction  of  job
      work is done.  The artist/lyricist who is the owner of copyright parts
      with the copyright for a certain consideration to a producer of  music
      which music/picture is then captured on video CD and CD.  The producer
      in turn parts with such copyright in  favour  of  a  distributor  who,
      ultimately, gets the said CDs duplicated as has been stated  aforesaid
      by the appellant on job work basis, and who then sells the CDs in  the
      market to the ultimate customer.  The facts also demonstrate that  the
      appellant/assessee  is  only  given  the  master  CD  from  which   it
      duplicates such master tape/CD on blank CDs that are owned by  it  and
      then sold to the distributor copyright holder, having paid a lump  sum
      royalty to the producer of the music which is on the CD.  The  process
      adopted by the appellant for  duplicating  the  CDs  from  the  master
      tape/CD or DAT  has  been  detailed  in  the  impugned  order  of  the
      Commissioner (Appeals).  From the DAT supplied by the  customers,  the
      appellants arrange to manufacture a stamper i.e. Nickel plate on which
      the data is coded.  The stamper is used as a mould  to  manufacture  a
      CD, which while manufacturing the CD, transfers data from the  stamper
      to a CD.  The programme which is duplicated on the CD is owned by  the
      customer who is either himself  the  distributor  or  is  a  copyright
      owner.  The distributor/copyright holder then,  upon  receipt  of  the
      duplicate copies from the appellant loads part of the royalty paid  to
      the music producer on each such CD which as has been stated  above  is
      then sold to the ultimate customer in the market.  The entire stock of
      duplicate CDs can only be sold to the distributor/copyright holder and
      to nobody else.

      2.    On 31.8.1998, provisional assessments for  the  period  1995  to
      1998 were finalised by the Assistant Commissioner  of  Central  Excise
      demanding  duty  inter  alia  on  royalty  charges  incurred  by   the
      distributor/copyright holder.  The Commissioner (Appeals) by an  order
      dated 20.7.1999 set aside the order dated 31.8.1998 and held that  the
      appellants were already including a royalty of one rupee per CD in the
      assessable value of the  CD  and  remanded  the  matter  back  to  the
      Assistant  Commissioner.   On  remand,  the   Assistant   Commissioner
      directed the appellant to file a price  declaration  along  with  cost
      break up certified by  a chartered account.  Such declaration reads as

           Declaration under Rule 173C dated 14.3.2000 for break up of  the
           cost of CDs.

|Raw material and other       |6.31               |
|expenses                     |                   |
|Inlay Card                   |2.00               |
|Jewel Box                    |4.30               |
|Royalty (cost of copyright)  |1.00               |
|Royalty (Patent charge)      | 0.43              |
|Total                        |14.43              |

             Based  on  the  aforesaid  declaration,  the   appellant   paid
      differential duty of Rs.14,31,678/- at the rate of one  rupee  per  CD
      for CDs cleared during the period 1995 to 2000, and also paid a sum of
      Rs.10,210/- for CDs cleared for the period 1st March  to  14th  March,
      2000.  On 4.12.2001, the Assistant Commissioner issued  a  show  cause
      notice proposing to demand differential duty  of  Rs.5,91,45,700/-  on
      CDs cleared during the period November, 2000 to  October,  2001.  This
      differential   duty   consisted   of   royalty    payable    to    the
      distributor/copyright holder which royalty  was  calculated  at  54.81
      rupees per CD.  The basis of the royalty calculation was given in  the
      said show cause notice.

      3.    On 25.2.2002, the Deputy Commissioner confirmed the  show  cause
      notice and also issued a  penalty  of  an  equivalent  amount  plus  a
      penalty of  Rs.1  crore  on  Shri  Rajiv  Aggarwal,  Director  of  the
      Appellant Company.  By  an  order  dated  2.8.2002,  the  Commissioner
      (Appeals)  held   that   the   royalty   charges   incurred   by   the
      distributor/copyright  holder  is  liable  to  be  included   in   the
      assessable value of the CDs. He remanded the matter to  the  Assistant
      Commissioner to quantify the demand after  taking  into  consideration
      the amount of royalty to be apportioned,  which  had  been  prescribed
      under a circular dated 19.2.2002.  Vide  an  order  dated  11th  June,
      2004, CESTAT confirmed the order of the Commissioner (Appeals).

      4.    Shri Lakshmikumaran, learned counsel on behalf of the  appellant
      has argued that the job work done by the appellant did not include any
      element of royalty.  In  fact,  the  amount  of  rupee  one  that  was
      declared in the price list filed by the appellant  was  only  for  the
      music that is embedded in the CD but not for any royalty thereon. This
      is clear from the fact that the appellant had to perform  certain  job
      work on blank CDs owned by it, which is merely to copy the master tape
      given by the distributor/copyright holder, and, as  is  apparent  from
      the price list filed, the distributor/copyright holder is charged  for
      the raw material and other expenses, being the blank duplicate CD, the
      inlay card, the royalty attributable to the music content  of  the  CD
      and the jewel box.  It is the  distributor  and  others  who  are  the
      copyright holders who then sell these  duplicate  CDs  in  the  market
      loading on to them the royalty cost paid by the distributor and others
      in lump sum to the music producer.  Since no part of the  royalty  had
      in fact passed,  no  amount  of  royalty  could  be  included  in  the
      assessable value.

      5.    Shri Rupesh Kumar, learned counsel  on  behalf  of  the  Revenue
      argued that when the master tape was handed over  by  the  distributor
      who was also the copyright holder, obviously what was handed over  was
      a CD with music on it, which music was inextricably bound with royalty
      that was paid for it.  It is clear that the master tape could  not  be
      given to the appellant for duplication unless royalty  had  been  paid
      which royalty would form part of the cost of the goods to be  produced
      by the appellant and then sold to  the  distributor/copyright  holder.
      In this view of the matter, it  would  be  correct  to  say  that  the
      royalty that is payable would  also  have  to  be  loaded  on  to  the
      duplicate CDs produced by the appellant and apportioned  in  a  manner
      stated in the circular dated  19.2.2002.   This  being  so,  there  is
      nothing wrong with the order of the Tribunal that is impugned  in  the
      present case.

      6.    In the present case, Section 4(1)(a) of the Central  Excise  Act
      will not apply for the simple  reason  that  price  is  not  the  sole
      consideration for the sale as a master tape had to be handed  over  by
      the distributor/copyright holder  to  the  appellant.   Since  Section
      4(1)(b) applies, the Central Excise Valuation (Determination of  Price
      of Excisable Goods) Rules, 2000, would apply.  Both parties agree that
      Rule 6 would be applicable to the facts of the present case.

      7.    Rule 6 of the said Rules reads as follows:

           “Rule 6. Where the excisable goods are sold in the circumstances
           specified in clause (a) of sub section (1) of section 4  of  the
           Act except the circumstance where the  price  is  not  the  sole
           consideration for sale, the value of such goods shall be  deemed
           to be the aggregate of such transaction value and the amount  of
           money value of any additional consideration flowing directly  or
           indirectly from the buyer to the assessee.

           Explanation.-For removal of doubts, it is hereby clarified  that
           the value, apportioned as appropriate, of  the  following  goods
           and services, whether supplied directly  or  indirectly  by  the
           buyer free of charge or at reduced cost for  use  in  connection
           with the production and sale of such goods, to the  extent  that
           such value has not been included in the price actually  paid  or
           payable, shall be treated to be the amount  of  money  value  of
           additional consideration flowing directly or indirectly from the
           buyer to the assessee in relation to sale  of  the  goods  being
           valued and aggregated accordingly, namely:-

           (i) value of materials,  components,  parts  and  similar  items
           relatable to such goods;

           (ii) value  of  tools,  dies,  moulds,  drawings,  blue  prints,
           technical maps and charts and similar items used  in  production
           of such goods;

           (iii) value of material consumed, including packaging materials,
           in the production of such goods;

           (iv) value of engineering, development, art  work,  design  work
           and plans and sketches undertaken elsewhere than in the  factory
           of production and necessary for the production of such goods."

            A reading of Rule 6 shows that the value of the  goods  referred
      to in the Rule shall be deemed to be the aggregate of the  transaction
      value and the amount of money value of  any  additional  consideration
      that may flow directly or indirectly from the buyer to  the  assessee.
      Both parties relied upon the explanation to further their case.  Since
      the explanation is determinative of the present case, it is  important
      to note that where the master tape is supplied by the distributor  who
      is the copyright holder to the appellant, whether free of charge or at
      a reduced cost such master tape must be used in  connection  with  the
      production and sale of goods by the assessee.  What is clear from  the
      present transaction  is  that  the  master  tape  contains  within  it
      music/picture in digital form.  There is no doubt whatsoever that  the
      music/picture supplied on the master tape ought to be valued  and  has
      been valued as additional consideration that flowed from the buyer  to
      the assessee, and its value has been accepted at rupee one per CD.  So
      far as the royalty payable for such music is  concerned,  even  if  we
      agree with the learned counsel for the Department that such royalty is
      inextricably connected with the music and therefore would be  used  in
      connection  with  the  production  of  the  duplicate  CDs,  yet   the
      explanation requires that such use must not merely  be  in  connection
      with production but must also be in connection with the sale  of  such
      duplicate CDs.  As has been pointed out earlier in this judgment,  the
      entirety of the duplicate CDs is sold only to the distributor  who  is
      the copyright holder.  Obviously therefore the copyright value in  the
      duplicate CD is not used in connection with the  sale  of  such  goods
      inasmuch as no part of the copyright which may have been passed on  by
      the distributor to the assessee is used by the assessee in selling the
      duplicate CDs to the distributor who  is  himself  the  owner  of  the
      copyright.  Clearly therefore on the assumption that the music/picture
      embedded in the master tape is inextricably bound with  the  copyright
      thereof, the copyright is not “used” by the  appellant  while  selling
      the duplicate CDs to the distributor.  The distributor  having paid  a
      lump sum royalty to the producer of the music, then sells,  after  the
      job work done by the appellant, the duplicate CDs in the  market  with
      the cost of the royalty loaded thereon.

      8.    Clause (iv) of the explanation also  makes  it  clear  that  the
      value of art  work  or  design  work  on  goods  which  is  undertaken
      elsewhere than in the factory of the production and necessary for  the
      production on such goods alone must be  taken  into  account.  On  the
      assumption that the music/picture component is the  art  work  in  the
      master CD, that alone is to be taken into account as it  is  necessary
      for the production of the duplicate CDs.   Royalty  payable  for  such
      music/picture cannot extend to art work  that  is  necessary  for  the
      production of duplicate CDs, as no part of it is in  fact  taken  into
      account by either the distributor who is the copyright holder  or  the
      appellant in the job work done by the appellant.

      9.    Shri Lakshmikumaran relied upon two  judgments  of  this  Court.
      The  first  is  Joint  Secretary  to  Government  of  India  v.   Food
      Specialties Ltd., 1985 (22) E.L.T. 324 (S.C.).  The facts in this case
      were that the respondent entered into a number of agreements with M/s.
      Nestle Products (India) Limited and M/s. Nestle Holdings  Limited,  to
      manufacture for and on behalf of M/s Nestle Products  (India)  Limited
      sweetened condensed milk and other food products for sale in India  by
      Nestle under  certain  trademarks  in  respect  of  which  Nestle  was
      registered  as  the  sole  registered  user  in  India.   The   entire
      production of the respondent was purchased by Nestle and Nestle alone.
       Since the respondent  enjoyed  no  interest  in  the  trademarks  and
      labels, this Court held that such trademarks and labels cannot form  a
      component of the value of the goods for the purpose of  assessment  of
      excisable duty.

      10.   Similarly, in Sidhosons & Anr. v. Union of India & Others,  1986
      (26) E.L.T. 881 (S.C.), the appellants were  manufacturing  electrical
      goods which were labeled with the brand name “Bajaj” and sold  by  the
      appellant only to Bajaj Electricals Limited and  to  none  else.   The
      price fetched by the goods manufactured by the appellant was the price
      of the electrical goods without the brand name.  It was held:-

           “….The enhancement in the value of the goods by  reason  of  the
           application of the brand name is  because  of  the  augmentation
           attributable to the value of the  goodwill  of  the  brand  name
           which does not belong  to  the  manufacturers  and  which  added
           market value does not accrue to the  petitioner  company  or  go
           into its coffers. It accrues to the buyers  to  whom  the  brand
           name belongs and to whom the  fruits  of  the  goodwill  belong.
           Excise duty is payable in the market value fetched by the goods,
           in the wholesale market at the factory gate manufactured by  the
           manufacturers. It cannot be assessed on the basis of the  market
           value obtained by the buyers who also add to the  value  of  the
           manufactured goods the  value  of  their  own  property  in  the
           goodwill of the “brand  name”.  The  petitioners  are  therefore
           right and the respondents wrong.”

      11.   Both the aforesaid judgments, though decided before the  Central
      Excise Valuation (Determination of Price of Excisable Goods) Rules  of
      2000, go to show that the value of goodwill contained in a brand  name
      would not form part of the assessable value of goods that are produced
      and sold only to the owner of the goodwill.  In the present case,  the
      appellant also sells the duplicate CDs only to the distributor who  is
      the owner of the copyright, and this enhancement cannot  be  added  as
      part of the value of the goods sold in such cases.

      12.   The Tribunal relied upon a customs case reported  in  Associated
      Cement Companies Ltd. v. Commissioner of Customs, 2001 (128) E.L.T. 21
      (S.C.).  In that case, certain drawings and designs were received from
      abroad as part of technical collaboration and/or knowhow.   The  value
      of these drawings and designs was declared at a nominal value  of  one
      dollar because according to the appellant the drawings  by  themselves
      have no value and it is only the cost of the paper on which  they  are
      made that would have any value. On a reading of Rule 9(1)(b)(iv) which
      is similar to Rule 6 of the Central Excise Rules, this Court held:-

           “39. To put it differently, the legislative intent can easily be
           gathered by reference to the Customs  Valuation  Rules  and  the
           specific entries in the Customs Tariff  Act.  The  value  of  an
           encyclopaedia or a dictionary or a  magazine  is  not  only  the
           value of the paper. The value of the paper is in fact negligible
           as  compared  to  the  value  or  price  of  an   encyclopaedia.
           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 duty is on the final  product,  whether
           it be the encyclopaedia  or  the  engineering  or  architectural
           drawings or any manual.

           40. 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 several  times
           more than the value of a blank  cassette.  However,  if  a  pre-
           recorded music cassette 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 product. In this behalf we may note  that
           in State Bank of India v. Collector of Customs [(2000) 1 SCC 727
           : (2000) 1 Scale 72] the Bank had, under an agreement  with  the
           foreign company, imported a computer software and  manuals,  the
           total value of which was US  $  4,084,475.  The  Bank  filed  an
           application for refund of customs duty on the  ground  that  the
           basic cost of software was US $ 401.047. While the rest  of  the
           amount of US $ 3,683,428 was payable only as a licence  fee  for
           its right to use the software  for  the  Bank  countrywide.  The
           claim for the refund of the customs duty paid on  the  aforesaid
           amount of US $ 3,683,428 was not accepted by this  Court  as  in
           its opinion, on a correct interpretation of Section 14 read with
           the Rules, duty was payable on the transaction value  determined
           therein, and 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 licence fee for which  the
           buyer is required to pay, directly or indirectly, as a condition
           of sale of goods to the extent that such royalties and fees  are
           not included in the price actually paid or payable. This clearly
           goes to show that when technical material is supplied whether in
           the form of drawings or manuals the same  are  goods  liable  to
           customs duty on the transaction value in respect thereof.

           41. 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 Customs 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  encyclopaedia  or  the  engineering
           drawings as the case may be. There is no scope for splitting the
           engineering drawing or the encyclopaedia into intellectual input
           on the one hand and the paper on which  it  is  scribed  on  the
           other. For example, paintings are also  to  be  taxed.  Valuable
           paintings are worth millions. A painting or a  portrait  may  be
           specially commissioned or an article may  be  tailor-made.  This
           aspect 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
           painting, is worth millions.”

      13.   This case is clearly distinguishable.  What was imported by  the
      appellant was not merely paper but drawings and designs on paper whose
      value had to be added for the  reason  that  the  appellants/importers
      were themselves going to exploit the intellectual content of the goods
      that were imported themselves.  In the facts before us the appellants,
      as has been pointed out above, do not exploit the intellectual content
      in the CDs produced by them by way of sale as the  sale  by  them  can
      only be to the copyright owner himself.  It is  clear  therefore  that
      this case would have no bearing on the present case.

      14.   Given the fact that no part of the royalty can be loaded  on  to
      the duplicate CDs  produced  by  the  appellant,  the  circular  dated
      19.2.2002 which deals with apportionment  of  royalty  would  have  no
      application to the facts of the present case.  In  the  circumstances,
      the impugned judgment dated 11.6.2004 is set aside.  Refund,  if  any,
      to be made of additional  duty  collected  pursuant  to  the  impugned
      judgment may be claimed by the appellant in accordance with law.   The
      appeal is allowed in the aforesaid terms.

                                              (A.K. Sikri)

                                              (R.F. Nariman)
      New Delhi;
      April 23, 2015.

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