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2015 (4) TMI 856 - SUPREME COURT

2015 (4) TMI 856 - SUPREME COURT - 2015 (319) E.L.T. 364 (SC) - Valuation of goods - Inclusion of royalty amount - Manufacture of duplicate CD - Held that:- Section 4(1)(a) of the Central Excise Act will not apply for the simple reason that price is not the sole consideration for the sale as a master tape had to be handed over by the distributor/copyright holder to the appellant. Since Section 4(1)(b) applies, the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, .....

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e copyright holder to the appellant, whether free of charge or at a reduced cost such master tape must be used in connection with the production and sale of goods by the assessee. What is clear from the present transaction is that the master tape contains within it music/picture in digital form. There is no doubt whatsoever that the music/picture supplied on the master tape ought to be valued and has been valued as additional consideration that flowed from the buyer to the assessee, and its valu .....

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copyright is not “used” by the appellant while selling the duplicate CDs to the distributor. The distributor having paid a lump sum royalty to the producer of the music, then sells, after the job work done by the appellant, the duplicate CDs in the market with the cost of the royalty loaded thereon.

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 ha .....

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v., Mr. B. Krishna Prasad,Adv. Judgment R.F. Nariman, J. 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 .....

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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 progra .....

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al 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 Commissione .....

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Ds cleared during the period 1995 to 2000, and also paid a sum of ₹ 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 ₹ 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 .....

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sistant 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). 4. Shri Lakshmikumaran, learned counsel on behalf of the appellant has argued that the job work done by the appellant did not include any element of royalty. In fact, the amount of rupee one that was declared in the price list f .....

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he music content of the CD and the jewel box. It is the distributor and others who are the copyright holders who then sell these duplicate CDs in the market loading on to them the royalty cost paid by the distributor and others in lump sum to the music producer. Since no part of the royalty had in fact passed, no amount of royalty could be included in the assessable value. 5. Shri Rupesh Kumar, learned counsel on behalf of the Revenue argued that when the master tape was handed over by the distr .....

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s payable would also have to be loaded on to the duplicate CDs produced by the appellant and apportioned in a manner stated in the circular dated 19.2.2002. This being so, there is nothing wrong with the order of the Tribunal that is impugned in the present case. 6. In the present case, Section 4(1)(a) of the Central Excise Act will not apply for the simple reason that price is not the sole consideration for the sale as a master tape had to be handed over by the distributor/copyright holder to t .....

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uch goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee. Explanation.-For removal of doubts, it is hereby clarified that the value, apportioned as appropriate, of the following goods and services, whether supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to the ext .....

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oduction of such goods; (iii) value of material consumed, including packaging materials, in the production of such goods; (iv) value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods." A reading of Rule 6 shows that the value of the goods referred to in the Rule shall be deemed to be the aggregate of the transaction value and the amount of money value of any addition .....

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the present transaction is that the master tape contains within it music/picture in digital form. There is no doubt whatsoever that the music/picture supplied on the master tape ought to be valued and has been valued as additional consideration that flowed from the buyer to the assessee, and its value has been accepted at rupee one per CD. So far as the royalty payable for such music is concerned, even if we agree with the learned counsel for the Department that such royalty is inextricably conn .....

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the sale of such goods inasmuch as no part of the copyright which may have been passed on by the distributor to the assessee is used by the assessee in selling the duplicate CDs to the distributor who is himself the owner of the copyright. Clearly therefore on the assumption that the music/picture embedded in the master tape is inextricably bound with the copyright thereof, the copyright is not used by the appellant while selling the duplicate CDs to the distributor. The distributor having paid .....

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k 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. 9. Shri Lakshmikumaran relied upon two judgments of this Court. The first is Joint Secretary to Governme .....

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on of the respondent was purchased by Nestle and Nestle alone. Since the respondent enjoyed no interest in the trademarks and labels, this Court held that such trademarks and labels cannot form a component of the value of the goods for the purpose of assessment of excisable duty. 10. Similarly, in Sidhosons & Anr. v. Union of India & Others, 1986 (26) E.L.T. 881 (S.C.), the appellants were manufacturing electrical goods which were labeled with the brand name Bajaj and sold by the appella .....

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into its coffers. It accrues to the buyers to whom the brand name belongs and to whom the fruits of the goodwill belong. Excise duty is payable in the market value fetched by the goods, in the wholesale market at the factory gate manufactured by the manufacturers. It cannot be assessed on the basis of the market value obtained by the buyers who also add to the value of the manufactured goods the value of their own property in the goodwill of the brand name . The petitioners are therefore right .....

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be added as part of the value of the goods sold in such cases. 12. The Tribunal relied upon a customs case reported in Associated Cement Companies Ltd. v. Commissioner of Customs, 2001 (128) E.L.T. 21 (S.C.). In that case, certain drawings and designs were received from abroad as part of technical collaboration and/or knowhow. The value of these drawings and designs was declared at a nominal value of one dollar because according to the appellant the drawings by themselves have no value and it i .....

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ompared to the value or price of an encyclopaedia. 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 duty is on the final product, whether it be the encyclopaedia or the engineering or architectural drawings or any manual. 40. 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 .....

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The Bank filed an application for refund of customs duty on the ground that the basic cost of software was US $ 401.047. While the rest of the amount of US $ 3,683,428 was payable only as a licence fee for its right to use the software for the Bank countrywide. The claim for the refund of the customs duty paid on the aforesaid amount of US $ 3,683,428 was not accepted by this Court as in its opinion, on a correct interpretation of Section 14 read with the Rules, duty was payable on the transacti .....

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ls the same are goods liable to customs duty on the transaction value in respect thereof. 41. 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. The .....

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