Custom, Excise & Service Tax Tribunal
Commissioner Of Customs (Import) vs Excel Productions Audio Visuals Pvt. ... on 22 January, 2013
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL,WEST ZONAL BENCH AT MUMBAI COURT No. II APPEAL No.C/65/06 (Arising out of Order-in-Appeal No.609/2005/MCH/DC/GVC/05 dated 07/12/2005 passed by Commissioner of Customs (Appeals), Mumbai) For approval and signature: Honble Mr. P.R. Chandrasekharan, Member (Technical) Honble Mr. Anil Choudhary, Member (Judicial) 1. Whether Press Reporters may be allowed to see :No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it should be released under Rule 27 of the :Yes CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether Their Lordships wish to see the fair copy :Seen of the Order? 4. Whether Order is to be circulated to the Departmental :Yes authorities? ========================================
Commissioner of Customs (Import), Appellant Mumbai Vs. Excel Productions Audio Visuals Pvt. Ltd., Respondent Appearance:
Shri.M.S.Reddy, Asst. Comm. (AR) for appellant Shri.J.C.Patel, Advocate, for respondent CORAM:
Honble Mr. P.R.Chandrasekharan, Member (Technical) Honble Mr.Anil Choudhary, Member (Judicial) Date of Hearing : 22/01/2013 Date of Decision : /02/2013 ORDER NO Per: P.R.Chandrasekharan
1. The appeal in the present case has been filed by the Revenue against order-in-appeal No. 609/2005/MCH/DC/GVC/05 dated 07/12/2005 passed by Commissioner of Customs (Appeals), Mumbai.
2. The respondent, M/s.Excel Productions Audio Visuals Pvt. Ltd. is engaged in the business of importing and selling of DVDs. They entered into a licensing agreement dated 01/08/2002 with Buena Vista Home Entertainment Inc (the Licensor in short) under which the respondent acquired license/right to import and sell/distribute DVDs in respect of which the licensor held the copy right. Under the said agreement, the respondent was given the right to import from Replicators namely, U-Tech Medi Corporation of Taiwan and such other Replicators as the licensor may from time to time designate, DVDs for the purpose of distribution/re-sale in India. Accordingly, the respondent was importing DVDs from the U-Tech Media Corporation, Taiwan and Infodisc Technology Co. Ltd., Taiwan (vendors in short) by placing purchase orders from time to time on the vendors. The respondent was also locally purchasing DVDs from replicators/vendors in India. In consideration of the right granted to the respondent to distribute/re-sell the DVDs in India, the respondent was required to pay to the licensor, a license fee and further a royalty upon the sale of the DVDs in India. Such royalty was paid both in respect of imported DVDs as well as locally procured DVDs and the same was payable to the Licensor in view of the copy right held by the licensor and in view of the right granted by the licensor as holder of the copy right to the respondent to distribute/re-sell in India. Thus there were two sets of transactions, first with the licensor under the license agreement and second with the vendors by means of purchase orders.
3. The issue of valuation of the said DVDs imported by the respondent was examined by the Special Valuation Cell and vide order dated 24/01/2005, the Deputy Commissioner held that the respondent was not related to the Vendors within the meaning of Rule 2 (2) of the Customs Valuation Rules, 1988 and the payment of license fee/royalty to the licensor was not a condition of sale in the contract with the vendors and accordingly, the said payments are not includable in the taxable value of the imported goods. The revenue filed an appeal before the lower appellate authority against the order of the Deputy Commissioner and the lower appellate authority relying on the decision of the Tribunal in the case of Living Media India Ltd., Vs. CC, New Delhi, reported in 2002 (148) ELT 441 (Tri-Del) dismissed the appeal filed by the Revenue and held that the licence fee/royalty paid to the licensor is not includable in the transaction value of the goods imported from the vendors. The revenue is aggrieved of this order and hence before us.
4. The Ld. Assistant Commissioner (AR appearing for the revenue makes the following submissions.
4.1 As per the agreement entered into between the respondent and the licensor, certain conditions have been imposed as per clause 12 of the agreement, which reads as follows:
12.2 Licensee shall procure that the following terms and conditions shall apply to any such purchase by Licensee of DVDs from Replicator:
(i) Licensee shall consult fully with licensor with respect to the prices payable to Replicator and, upon Licensees request Licensor shall seek to negotiate such prices negotiated prices on Licensees behalf but subject always to Licensees acceptance of any such negotiated prices.
(ii) Licensee shall place each purchase order for DVDs in writing with replicators in such format as may be designated or approved by licensor from time and each such Licensing Operations Buena Vista Home Entertainment Asia Pacific (or such other persons as Licensor may from time to time designate);
(iii) Replicator shall not except with the prior written consent of Licensor, accept purchase orders from Licensee for DVDs of any Release Title unless Licensee together with any other authorised licensees of Licensor, have, in aggregate, placed purchase orders with Replicator for that title amounting to at least 500 units. For the purposes of the paragraph a unit shall be a disc;
(iv) Licensee shall submit initial purchase order for DVDs of each Release Title prior to the order cut-off date of each such Release Title as notified by Licensor form time to time; and
(v) Licensee shall pay replicators all amounts due to Replicator in respect of the purchase of DVDs within thirty (30) days of the date of receipt of the relevant invoice.
4.2 The above clause clearly indicates that the payment of royalties/license fee has direct bearing on the purchase prices. Thus, the transaction with the vendors is not an arms strength transaction and the licensor virtually controls the transaction and determines the prices. Therefore, in terms of provisions of Rule 9 (1) (c) the license fee/royalty is paid by the respondent to the licensor is includable in the value of the goods imported by the respondent from the vendors, since the payments are a condition of sale for export of the goods from abroad to India. The Ld. AR also relies on the decision of the Honble apex Court in the case of CCE, New Delhi Vs. Living Media India Ltd., reported in 2011(271) ELT 3 (SC). He further submits that the decision of the Tribunal relied upon by the lower appellate authority has been over ruled by the apex Court in the cited case. Accordingly, he submits that the license fee and royalty paid to the licensor are includable in the price actually paid or payable for the imported goods as per Rule 9 (1) (c) of the Customs Valuation Rules.
5. The Ld. Counsel for the respondent submits that there are two independent sets of transaction involved. One is the agreement with the licensor for purchasing the copy rights in the DVDs as per which the respondent is paying license fee and royalty. The second agreement is with the vendor by means of purchase orders placed by the respondent. These two are independent sets of transaction and there is no condition in the purchase order placed on the vendor regarding any payment of royalty by the respondent. In this regard he placed reliance on two decisions of the Canadian Federal Court of Appeal and Supreme Court of Canada, namely, Reebok Canada Vs. Canada (Deputy Minister of National Revenue) 2002 (FCA 133 (CanLII) and Canada (Deputy Minister of National Revenue) Vs. Mattel Canada Inc 2001 SCC 36. In the Reebok case there was an agreement between the importer and the vendor in the form of a purchase order and the importer had another agreement (Royalty agreement) with the same vendor for payment of royalties. The purchase order did not contain any condition of payment of royalty, which was provided separately in the royalty agreement. In those circumstances, it was held that though there were two agreements with the same person, payment of royalty was not a condition of sale. In the Mattel Canada Inc. case the importer Mattel Canada Inc. had a license agreement with a Trade Mark Licensor X under which the importer was required to pay royalties to the Trade Mark Licensor. There was a separate sale contract with Mattel USA from whom Mattel Canada imported the goods affixed with the trade mark of the Trade Mark Licensor. Thus, the sale contract and the royalties agreement were two separate contracts with two different parties. In the said case, the Supreme Court of Canada held that since the payment of royalties was under a separate licence/royalty agreement and that too a party different from the vendor, it was not a condition of sale of the imported goods. The condition of sale has a settled legal meaning under the law relating to the sale of goods, namely, that it is a term in the sale contract which is of vital importance that goes to the root of the transaction and the breach of which gives the right to repudiate the contract of sale. Since the payment of royalty was not stipulated as a term/condition in the sales contract but was stipulated in a separate agreement, it was not a condition of sale. The Ld. Counsel submits that the Indian Sale of Goods Act in Section 12 (2) similarly provides that a condition of sale is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. In the present case, there is no stipulation of the payment of royalties to the licensor in the purchase orders placed on the vendors and therefore, there is no question of treating the royalties as being a condition of sale of export of goods to the country of imports.
5.1 As regards the reliance placed by the department on the Living Media India Ltd. case, he submits that a decision cannot be an authority or precedent for an issue which did not arise before the Court and which was hence not considered and decided by the Court. In the Living Media India Ltd. case, it is nowhere indicated that there were two separate agreements, one license/royalty agreement with the licensor and the other the sale contract with the vendor and that the latter did not contain any stipulation as to the payment of royalties. In these sets of facts, Revenues reliance on the Living Media India Ltd. case is misplaced. He further submits that the payment of royalty is for the right to distribute and re-sell the imported goods in India. He also relies on the Note to Rule 9 (1) (c), which reads as follows:
A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.
5.2 In the light of these submissions, he prays for upholding the lower authoritys order.
6. We have carefully considered the submissions made by both the sides
6.1 From clause 12 of the agreement entered into by the respondent with the licensor it is clear that the replicators from whom the DVDs have been bought are decided by the licensor. This is evidenced from the clause 1 (q) of the said agreement which reads as follows:
Replicator shall mean U-Tech Media Corporation, a company registered in Taiwan R.O.C., or such other replication facility as shall be designated in writing by Licensor from time to time.
6.2 Thus, the respondent is not free to choose any replicator but the goods have to be bought from a specific replicator as determined by the licensor. Secondly, as per sub-clause (i) of clause 12.2, the licensee shall consult fully with the licensor with respect to the prices payable to replicator and, upon the licensees request licensor shall seek to negotiate such prices on Licensees behalf. In other words, the licensee is not free to negotiate with the replicator for the prices for the sale of the goods. Further, under sub-clause (ii) of clause 12.2, the purchase order placed with the vendors requires the prior written approval of the licensor. There is also an additional condition under clause (iii) with regard to the minimum number of DVDs for which purchase orders have to be placed and these are also time limits for placing the order. The agreement also stipulates that the amounts due to the replicator (vendor) shall be paid within thirty days of the receipt of the relevant invoices. From the above terms and condition, it is clear hat the entire transaction of sale of the DVDs by the replicator to the respondent is controlled, regulated and closely monitored by the licensor and the licensor has the ultimate say in the matter. In addition to the above, the clause 6 of the agreement prescribes payment of a non-refundable license fee of US $ 25,000, which has to be paid in advance even before the import of the goods.
6.3 As regards the payment of royalty there is a minimum amount stipulated per DVD/VCD of the order on Rs.27/- and Rs.130/- respectively. Otherwise, the royalty is 25% of the gross invoice amount for the VCD distributed and 35% of the gross invoice amount for the DVDs distributed. Thus, the payment of royalties is not related not only to the sale price of DVDs/VCDs in India, but there is a stipulation as to the minimum royalty to be paid to the licensor. It is in these circumstances, one has to examine provisions of Rule 9 (1) (c) of the Customs Valuation Rules.
6.4 In the case laws relied upon by the respondent of the Federal Court of Appeal and Supreme Court of Canada, these conditions of sale were not in existence as could be seen from those decisions and therefore, the facts of the present case are different and distinguishable from the facts involved in those decisions and in view of that no reliance can be placed on those decisions.
6.5 Coming to the provisions of Rule 9 (1) (c), the said Rule reads as follows:
9. Costs and Services (1) In determining the transaction value, thee shall be added to the price actually paid or payable for the imported goods
a)
b) .
c) Royalties and licensee fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.
6.6 It is not the case of the respondent herein that the cost of royalties/license fee has already been included in the price actually paid or payable for the imported goods. It cannot be so, for the reason that if they are already included, there is no need to pay the license fee/royalties to the licensor. Secondly, the license fee of US $ 25,000 has been paid much before the import of goods. Thirdly, irrespective of the sale prices in India, the respondent is required to pay a minimum amount of royalties to the licensor on the number of units sold. The price of the imported goods are negotiated by the licensor and the respondent has no freedom to negotiate the price on his own. The number of goods which to be purchased at a time is also stipulated by the licensor. The replicator/vendor from whom the goods can be purchased is also decided by the licensor. These conditions in the license/royalty agreement make it amply clear that neither the replicator/vendor (foreign supplier) nor the respondent the importer has any freedom to decide the price and both are under the control of the licensor and the transaction value is virtually determined/decided by the licensor. If that be so, the licence fee/royalties paid to the licensor becomes a condition of sale and therefore, in terms of Rule 9 (1) (c), the said amount of licence fee/royalty is includable in the price actually paid or payable for the imported goods. It is also worth noting here that the taxable value includes not only the amounts to be paid to the supplier of the goods directly but also payments made to the third parties for the purchase of goods. All such payments shall be includable in the price actually paid or payable.
6.7 The Honble apex Court in the case of Living Media India Ltd. case (cited supra) decided a similar case. In that case the respondent company namely, Living Media India Ltd., entered into agreements with reputed artists for composing and recording musical works. The music recorded is converted into DAT (Digital Audio Tape) Master which is then sent to Singapore for replicating the musical work on compact discs. Living Media India Ltd. entered into an agreement with M/s.World Media India Ltd. New Delhi for providing of masters which was sent to Australia for replicating into CDs. Thereafter, the respondent company imported a consignment of Audio Compact Discs (ACDs)from Singapore and Customs duty was paid on the invoice value of the replicator in Singapore. Similarly, ACDs were purchased from Australia also, wherein duty was paid on the invoice value of the replicator. The dispute arose with regard to the valuation of these consignments imported by the respondent and the Honble apex Court held as follows:-
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.
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. 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.
6.8 The facts of the present case closely resembles that in the Living Media India Ltd. case and therefore, the ratio of the said decision is squarely applicable to the facts of the present case. In the said case it was held that Customs duty is liable to be paid not only on the cost of the media but also on the value including the contents of the media. It is for the contents of the VCD/DVDs that the respondent is paying licensee fee/royalty to the licensor.
6.9 Similarly, in the case of Associated Cement Co. Ltd., Vs. CC, 2001 (128) ELT 21 (SC), relying on the decision in the case of Essar Gujarat Ltd., 1996 (88) ELT 609 (SC), the Honble apex Court held as follows:
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. v. Commissioner of Customs reported in (2001) 4 SCC 593 = 2001 (128) E.L.T. 21 (S.C.). 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 :-
Therefore,?42.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 product, whether it be the encyclopaedia or the engineering 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 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.
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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 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. 6.10 Thus, it may be seen that the value for the purpose of levy of Customs duty is not only the cost of the media but also the cost of matter contained in the media, that is, the content of the media. Since a replicated CD contains the artistic intellectual inputs, the cost of the same has to be considered while charging Customs duty. It is not the case of respondent herein that the cost of the contents has already been included in the value charged by the replicator. If that was so, there was no need for payment of licence fee/royalty to the Licensor separately.
7. In the light of these decisions, we are of the considered view that the licence fee and royalty paid by the respondent to the licensor is includable in the value of the goods purchased from the replicator(s). Therefore, the impugned order is set aside and the appeal of the Revenue is allowed.
(Pronounced in Court on ..) (Anil Choudhary) Member (Judicial) (P.R. Chandrasekharan) Member (Technical) pj 1 14