2025 (7) TMI 8 - AT - Customs

Recovery of Customs Duty with interest and penalty - imported beta tapes - enhancement of value - right to use - applicability of rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 - HELD THAT - Adjustment in value is a legacy of the frailty of value necessarily to be hyphenated with assessment when rates of duty are not specific and benchmarked as price contracted for sale which may not resonate with the importer as for accountal being inclusive of and extending even by amortization of recompense for services. Though the constitutional assignment of authority for duties of customs in the Seventh Schedule is restricted to goods the measure of tax impliedly should include costs of services connected with the sale that is merely deferred from mutual convenience for payment. It was during the currency of the intermediate regime that tax on services was legislated and only well into its dying days did the range of the tax spread to cover especially post-importation service in relation to goods. Enactment of Finance Act 1994 and Goods and Service Tax Act 2017 provisioning for mandated levy on rendering or supply of services in India did not exclude imported goods from its coverage or services procured from abroad and overlap of import in both could not for having been triggered by identical event subject the same consideration to tax twice without grievous injury to the integrity of the boundaries of tax vested in the Union. The presumption against implied repeal has the effect of two statutes operating simultaneously on the same consideration and both chargeable on import. The law pertaining to duties on import is restricted to commodities and valuation is only a measure for the purpose of determination of the tax. Determination of tax under Finance Act 1994 arises on the value of the service upon import in terms of section 66A of Finance Act 1994 and in terms of taxable territory as set out in Place of Provision of Services Rules 201. There is thus a clear delineation which in the face of deeming fiction for the purpose of proviso to section 14 of Customs Act 1962 cannot be so stretched as to bring in other deeming fictions related to sale for the purpose of rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007. Disposal of the show cause notice insofar as the proposals therein for enhancement of value have not taken the legal delineation supra for consideration is questionable. In the absence of a clear finding on fact in the light of law it is unable to endorse the findings or decide on its incorrectness. It would therefore be appropriate to set aside the impugned order and remand the matter back to the original authority for a decision on the legality of such inclusion bearing in mind the decision of the Hon ble Supreme Court in Commissioner of Customs Excise New Delhi v. Living Media India Ltd 2011 (8) TMI 41 - SUPREME COURT that 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 impugned order is set aside and the matter remanded to the original authority for fresh decision.

Summary

The core legal questions considered in this judgment revolve around the applicability of rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, specifically whether certain payments-namely licence fees or royalties associated with imported 'beta tapes'-must be included in the assessable value of imported goods for customs duty purposes under the Customs Act, 1962. The issues include:

• Whether payments for licence fees or royalties related to the 'beta tapes' imported are to be treated as part of the transaction value under section 14 of the Customs Act, 1962 and rule 10 of the Customs Valuation Rules.
• The interpretation of "condition of sale" and its bearing on inclusion of such payments in customs valuation.
• The interplay and potential overlap between customs valuation provisions and domestic taxation laws such as the Finance Act, 1994, and Goods and Services Tax Act, 2017, particularly regarding services connected with imported goods.
• The legal validity of enhancement of assessable value and imposition of penalty under section 114A of the Customs Act, 1962 based on the inclusion of licence fees and royalties.

Issue-wise Detailed Analysis:

1. Applicability of Rule 10 of Customs Valuation Rules to Licence Fees and Royalties

The legal framework centers on section 14 of the Customs Act, 1962, which defines "transaction value" for imported goods and mandates inclusion of certain payments such as royalties and licence fees in the assessable value. Rule 10 of the Customs Valuation Rules, 2007, elaborates on such inclusions, particularly payments made as a "condition of sale" which are not already included in the price actually paid or payable. The relevant provisions are:

"(1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods... (e) all other payments actually made or to be made as a condition of sale of the imported goods..."

and the Explanation clarifying inclusion of royalties or licence fees even if the goods are subjected to the process after importation.

The Court interpreted these provisions strictly, emphasizing that inclusion of such payments depends on whether they are "condition of sale" and part of the contractual arrangement between buyer and seller. The Court highlighted that the adjustment to value is not a surrogate or substitute value but an addition to the agreed price when certain payments are made or payable as a condition of sale.

Key findings include that the legislative intent is to include payments that benefit the seller and are connected to the sale of goods, but such inclusion must be based on clear contractual or factual evidence. The Court noted that the adjustment mechanism is a legacy of the need to capture all components of value related to imported goods for duty assessment, especially when duty rates are ad valorem.

The Court rejected any broad or flexible interpretation that could result in double taxation or overlap with other tax regimes. It stressed the necessity of establishing the existence of "condition of sale" both contractually and factually, not by mere inference.

2. Treatment of Licence Fees and Royalties vis-`a-vis Domestic Tax Regimes

The Court examined the relationship between customs valuation and domestic taxation laws such as the Finance Act, 1994 (service tax), and the Goods and Services Tax Act, 2017. It recognized that these statutes impose taxes on services, including those related to imported goods, and that the same transaction could attract both customs duty and service tax under different legal provisions.

The Court underscored the presumption against implied repeal, holding that both statutes operate simultaneously but must be applied without causing double taxation or overlap. It clarified that the deeming fiction under section 14 of the Customs Act for valuation purposes cannot be extended to incorporate other deeming provisions related to sale or services under separate tax statutes.

This delineation requires careful factual and legal determination to avoid taxing the same consideration twice. The Court found that the original adjudicating authority failed to consider this legal demarcation properly, thereby rendering its order questionable.

3. Interpretation of "Condition of Sale" and Contractual Arrangements

The Court emphasized that the inclusion of licence fees or royalties in the customs value depends on whether such payments are a "condition of sale" of the imported goods. This requires examination of the contractual terms and the factual matrix surrounding the import transaction.

It referred to authoritative precedent wherein the Supreme Court held that royalty payments related to pre-recorded cassettes imported into India were to be included in the transaction value since they were payable as a condition of sale. The Court quoted:

"...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... 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."

However, the Court distinguished the present case on the ground that the appellant's licence fees were payable on further sales in India and not necessarily part of the import transaction price. The Court found that the original authority did not adequately analyze these contractual distinctions.

4. Legality of Enhancement of Assessable Value and Penalty Imposition

The enhancement of assessable value by Rs. 1,17,22,019 and imposition of penalty under section 114A of the Customs Act, 1962 were challenged. The Court held that such enhancement is contingent upon the proper application of rule 10 and the establishment of licence fees or royalties as a condition of sale included in the transaction value.

Given the lack of clear factual findings and the failure to consider the legal nuances discussed above, the Court found the impugned order unsustainable. It remanded the matter for fresh consideration in light of the correct legal framework and factual matrix.

Significant Holdings:

"A harmonious construct of these provisions enables perception of legislative intent to include such payments that are, directly or indirectly, to the benefit of the seller if not already included, or demonstrated to be so on challenge by customs officers, in the price for sale of the goods and as condition of sale."

"Rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 needs to be strictly construed with no scope for flexibility at time of import that may have the effect of overlap in tax collection and, consequently, that 'condition of sale' must not be inferred but determined to exist both in the contractual arrangement and by the factual matrix peculiar to each import."

"The presumption against implied repeal has the effect of two statutes operating simultaneously on the same consideration and both chargeable on import."

"...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... 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."

Final determinations include setting aside the impugned order and remanding the matter to the original authority for a fresh decision on the legality of inclusion of licence fees and royalties in the customs value, considering the contractual terms, factual circumstances, and the legal principles outlined above.