COMMNR. OF CUSTOMS EXCISE, NEW DELHI vs. M/S. LIVING MEDIA(INDIA) LTD

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 Page 1 of 19

(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

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

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 Page 5 of 19

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 Page 6 of 19

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 Page 7 of 19

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 Page 8 of 19

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 Page 9 of 19

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: Page 11 of 19

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 Page 19 of 19