Case: M/S. K.R.C.D. (I) Pvt. Ltd Vs. Commnr. Of Central Excise, Mumbai

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 expenses6.31Inlay Card2.00Jewel Box4.30Royalty (cost of copyright)1.00Royalty (Patent charge)0.43Total14.43Based 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).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 expenses6.31Inlay Card2.00Jewel Box4.30Royalty (cost of copyright)1.00Royalty (Patenton 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

Court's reasoning:
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.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.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.