REPORTABLE
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
VERSUS
COMMISSIONER OF CENTRAL
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
follows:-
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.
…………………….J.
(A.K. Sikri)
…………………….J.
(R.F. Nariman)
New Delhi;
April 23, 2015.
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
VERSUS
COMMISSIONER OF CENTRAL
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
follows:-
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.
…………………….J.
(A.K. Sikri)
…………………….J.
(R.F. Nariman)
New Delhi;
April 23, 2015.
