Case: Commnr. Of Customs Excise, New Delhi Vs. M/S. Living Media(India) Ltd

the Respondent-company undertakes various music projects in India and under these projects it enters into agreements with reputed artists for composing and recording musical works. The music thus recorded is converted into DAT [Digital Audio Tape] Master which is then sent to Singapore for replicating the musical work on compact discs. Apart from this, the Respondent also renders service for quality production/duplication of various music titles on compact discs.3. The Respondent has entered into an agreement for rendering services with M/s. World Media India Ltd., New Delhi, which provides masters to the Respondent and Respondent in turn sends 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.6. Aggrieved by the aforesaid order of the Assistant Commissioner, the Respondent - assessee filed appeals before the Commissioner (Appeals). The Commissioner (Appeals), vide order dated 12.06.2001, confirmed the order of the assessing authority. Aggrieved thereby, the Respondent - assessee appealed to the CEGAT. The CEGAT, vide order dated 23.01.2002, allowed the appeals and set aside the order of the Commissioner (Appeals) datedcase of import of goods by respondent M/s Sony BMG Music Entertainment (I) Pvt. Ltd. from supplier M/s Sony Music Entertainment (Hong Kong) Ltd. was examined by GATT Valuation Cell, Mumbai. The Deputy Commissioner of Customs vide order dated 10.02.2006 held that the Respondent and the supplier were related under Rule 2(2) of Customs Valuation Rules, 1988 and 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) datedcase 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 restored the order of the assessing authority datedRespondent 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 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 theAppellant 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,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 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.

Court's reasoning:
Royalties and license fees related to the imported 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 imported 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 concepts which operate simultaneously, namely, price for the imported goods and the royalties/license fees which are also paid to the foreignper 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 transactionis 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.