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2016 (9) TMI 931 - CESTAT MUMBAI

2016 (9) TMI 931 - CESTAT MUMBAI - 2017 (345) E.L.T. 236 (Tri. - Mumbai) - Valuation under section 14 of Customs Act, 1962 - inclusion of royalty payable to overseas entity in the assessable value - master tapes - rule 9 of Customs Valuation Rules, 1988 (or rule 10 of Customs Valuation Rules, 2007) - rejection of declared value under rule 10A of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 - transaction value - cost and services - Held that: - the case Collector of Cu .....

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st conform to the prescriptions in rule 9 of Customs Valuation Rules, 1988 (or rule 10 of Customs Valuation Rules, 2007). It is abundantly clear from the above narration that royalty is hinged upon post-importation manufacture and not on the imported goods per se. The impugned order has erred in including the royalty amounts in the valuation of the ‘master tapes’ that were imported. - Appeal allowed - decided against Revenue. - C/01 to 03, 5, 10 & 11/2011 CROSS-OBJECTION NO: C/CO-07/2011 - A .....

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ance with contracts entered into with such studios. In general, royalty based on gross sales in India are the recompense to the overseas entities. As a matter of trade practice, a minimum guarantee amount is remitted at scheduled intervals and which is to be recouped by the appellant from the royalty payable on sales. The agreement envisages access to a finite number of titles during the term of contract which are supplied to the appellant in betacam or digital linear technology (DLT) form and t .....

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ing the findings of the adjudicating authority. The imports in question were effected through couriers at the Mumbai Airport and duty liability discharged on the value of the media as declared by the supplier. The show cause notice dated 4th July 2008 (to be read with corrigendum dated 15th April 2009) sought to nullify the assessments, reject the declared value by invoking rule 10A of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 and to include the royalties payable t .....

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s Home Entertainment India. The period of demand is for 2005-06, 2006-07 and for a part of 2007-08 straddling the governance of valuation for assessment by Customs Valuation Rules, 1988 and its successor Rules of 2007; there is not much difference between the two except in relation to numbering of the rules. The imports were of digi beta masters and stampers. Revenue is in appeal against the quantum of penalty imposed. 4. Owing to the identical nature of the dispute, we take up all the appeals f .....

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ances, it devolves on us to elucidate and educate. 5. The valuation provision of Customs Act, 1962 is: Section 14. Valuation of goods for purposes of assessment. - (1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, whereunder a duty of customs is chargeable on any goods by reference to their value, the value of such goods shall be deemed to be the price at which such or like goods are ordinarily sold or offered for sale, for delivery .....

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ort, as the case may be, is presented under section 50. (1A) Subject to the provisions of sub-section (1), the price referred to in that sub-section in respect of imported goods shall be determined in accordance with the rules made in this behalf… … 6. The Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 and successor Rules of 2007 were applicable during the period of the two disputes and in the context of the provision for valuation of goods supra, the rele .....

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ined under the provisions of clause (i), the value shall be determined by proceeding sequentially through rules 5 to 8 of these rules. 4. Transaction value. - (1) The transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9 of these rules. (2) The transaction value of imported goods under sub-rule (1) above shall be accepted: Provided that - xxxxxxxx 9. Cost and services. - (1 .....

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, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. xxxxxx (3) Additions to the price actually paid or payable shall be made under this rule on the basis of objective and quantifiable data. (4) No addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule. 7. It should be abu .....

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equentially. Therein lies the nub in the present dispute: the declared price is sought to be rejected under ruled 10A without taking it to its logical conclusion as prescribed in rule 3 and, instead, the very same rejected price is sought to be adjusted by adding the royalty component as provided in rule 9 which applies only to the transaction value in rule 4. On this ground alone, the entire proceedings would fail. 8. Be that as it may, we proceed to examine the impugned order further. The orig .....

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decision of Tribunal in Indo Overseas Films v. Commissioner of Customs Chennai [2002 (139) ELT 729 (Tri)] affirmed by the Hon ble High Court of Madras in Indo Overseas Films v. Union of India [2007 (210) ELT 348 (Madras)] as well as that of the Hon ble Supreme Court in State Bank of India v. Collector of Customs, Mumbai [2000 (115) ELT 597 (SC)]. The adjudicating authority has also recorded a finding that, instead of using the air cargo route and seeking provisional assessment, the appellant del .....

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imports effected by the appellant. The goods under import are master tapes / stampers loaded with feature films despatched by the overseas licensor through courier. Courier is an authorized method of carriage of import articles with the procedure for clearance, including custodianship, declaration, examination and duty payment prescribed in Courier Imports & Exports (Clearance) Regulations, 1998. We see no earthly reason for debarring the disputed import from being routed through this in the .....

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rts were of drawings relating to technical know-how (described as ideas by the importers in their appeals). It must be borne in mind that the dispute resolved by the Hon ble Supreme Court pre-dates tax on services and the streamlined regulations governing courier mode. One of the contentions raised therein pertained to taxability of transactions in trade deals that are not restricted to supply of goods. The Hon ble Supreme Court held, in the context of the Forty-Sixth amendment to the Constituti .....

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rted and the Courier Imports and Exports (Clearance) Regulations, 1998 do not admit a significant role to the importer in the clearance of packages. We are, therefore, of the opinion that the reliance on the decision in re Associated Cement Companies in the impugned order appears to be misplaced. 11. Considering the above factual matrix and on a perusal of the licence agreements, we note an omission in the issues framed for determinants by the adjudicating authority. The agreement are for sale o .....

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he product itself or its value to the intended consumer. Undoubtedly, destruction or damage to the storage media destroys or damages the motion picture contained in it, the picture itself, however, is not erased out of existence. Indeed, as recorded in the impugned order, the motion picture can be re-sent should the need arise. And it is the motion picture that the viewing public has in mind with reference to the product - and source of revenue to render the production venture viable. Therefore, .....

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ated Cement Companies that ideas embedded on paper or disks are dutiable is a clear pointer to the direction that the adjudication should have taken but did not. 12. The motion picture industry is collectively described as dream merchants and is extremely complex in its structuring and operations; in recent times, the investment that goes into a single production is mind-boggling. It all begins with an idea culled from imagination or a literacy that is dramatized for performance by emotion speci .....

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f time to be spent in a fantasy land. It is unlikely that a tariff heading or tape/stamper/ disc could encage such an experience. Given this complexity, the tax collector may be excused his reluctance to strain beyond the valuation aspect. Nevertheless, for recourse to valuation after rejection of declared value, the adjudicating authority should have necessarily undertaken this onerous burden. 13. Appellant had contended before the original authority that the import is that of a recorded storag .....

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d 12th December 2002 in which the Central Board of Excise & Customs has referred to applicability rule 9(1)(c) of Customs Valuation Rules with the rescinding of exemption notification that had limited duty only to cost of print and cost of freight on imported cinematographic film; its context hardly advances the cause of deeming a motion picture to be inseparable from the media which carries the motion picture . That cinematographic films are goods is not in doubt and, with motion pictures n .....

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at restrict, viewing, distribution and transmission to those who remit copyright fees. Normally, these are a component of the box office receipts or included in the price sold in home viewing format. Unlike patented product whose royalty is determined by negotiation, the breadth of consumer market of motion pictures would required a prior fixation includible in the collection fee or market price. The adjudicating authority was prepared to accept that reproduction rights is one of the components .....

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that could assist us in reading the nature of motion picture we take note of the levy of service tax on temporary transfer of copyright in motion pictures which has been tested for ultra vires in the Hon ble High Court of Madras in AGS Entertainment Pvt Ltd v. Union of India [2013 (32) STR 129]. Being a service, it is subject to tax when rendered by an overseas provider to recipient in India under the Taxation of Services (Provided from Outside India and Received in India) Rules, 2005. Transfer .....

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ropriety of adjustment of transaction value in accordance with rule 9 and rule 10 respectively. Learned Counsel for appellant cites Living Media India Ltd v. Commissioner of Customs [2002 9148) ELT 441 (Tri-Del)], Commissioner of Customs v. Living Media India Ltd [2011 (271) ELT 3 (SC)], Associated Cement Companies Ltd v. Commissioner of Customs [2002 (128) ELT 21 (SC)], Commissioner of Customs (Import) v. Sony BMG Entertainment (I) Pvt Ltd [2007 (218) ELT 699], Sony Music Entertainment Pvt Ltd .....

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[2002 (128) ELT 21 (SC)], Star Entertainment Pvt Ltd v. Commissioner of Customs [2014-TIOL-583-CESTAT-Mum], Commissioner of Customs (Import) v. Excel Productions Audio Visuals Pvt Ltd [2014 (314) ELT 366 (Tri-Mumbai)] and Universal Music India P Ltd v. Commissioner of Customs (Import), Mumbai [2009 (128) ELT 829 (Tri-Mumbai)]. 16. Of the various decisions cited, and some of them by both sides, we have already observed supra that the decision in Associated Cement Companies Ltd is not applicable i .....

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ELT 609 (SC)]. The decision in re Indo Overseas Films, which was upheld by the Hon ble High Court of Madras, has been relied upon by the adjudicating authority in support of his rejection of the claim for exclusion of the costs attributable to reproduction rights owing to inability of appellant to furnish the break-up of royalty; it has been cited by the appellant as relevant to the present dispute which is solely about cost of reproduction rights. This, too, places reliance on Essar Gujarat Lt .....

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these and the decisions in re Sony BMG Entertainment (I) Pvt Ltd, re Sony Music Entertainment Pvt Ltd, re Excel Productions Audio Visuals Pvt Ltd and re Universal Music India P Ltd pertaining to motion picture and music rights flow from the decision in re Essar Gujarat Ltd. There is a particular significance to the preceding observation that we shall come to at a later stage. The decisions in re Excel Productions Audio Visuals Pvt Ltd and in re Universal Music India P Ltd are in relation to pre- .....

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s not the subject of royalty but the pre-recorded media made from these imported goods are. For this reason, the decisions sought to be relied upon by Revenue do not apply to this dispute as also the decisions in re Star Entertainment Ltd and re Indo Overseas Films for reasons stated supra. 18. In a recent decision of the Tribunal, in Commissioner v. Kinetic Technology India Ltd. (Final order no. A/89229/2016/CB dated 17th August 2016 in appeal no. C/875/2004), the scope of rule 9 of Customs Val .....

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presumed that addition is mandated by Rule 9 of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. 11. In Commissioner of Customs (Import), Mumbai v. Hindalco Industries Ltd [2015 (320) ELT 42 (SC)] it was held that: 7. It is also to be borne in mind that the respondent had purchased various capital components from other parties and the goods for which the agreement was signed with OEC constituted only 16% of thee total value. On these facts, we are of the opinion that th .....

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chased from some other exporters as well as indigenous, we also find that these agreements pertained to rendering of services which are post-import. Therefore, this case is also squarely covered by the judgment of this Court in Commissioner of Customs, Ahmedabad v. M/s Essar Steel Ltd [Civil Appeal No. 3042 of 2004] decided on 13th April, 2015 [20115 (319) ELT 202 (SC)]. 12. Accordingly, we have perused the decision of the Hon ble Supreme Court in Commissioner of Customs, Ahmedabad v. M/s Essar .....

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in mind that the rule made under sub-clause 1(A) have been framed and have to be interpreted. and distinguishing the facts in Collector of Customs (Preventive) v. Essar Gujarat Ltd [1996 (88) ELT 609 (SC)] wherein the agreement covered a licence for operation of the plant which rendered it a pre-import transaction, the Hon ble Court went on to lay down the scope for resolution of such disputes thus: 8…....In the present appeal, arguments have veered around the applicability of Rule 9(1)( .....

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import transaction for additions to be effected to the price adopted under rule 4 for assessment to duty. Consequently, it would appear that legislative intent did not envisage every declared transaction value to be subject to further adjustments merely because rule 9 is the adjustment provision moored to rule 4. This decision has taken note of Commissioner of Customs (Port), Kolkata v. JK Corporation Limited [(2007) 9 SCC 401 = 2007 (208) ELT 485 (SC)] to distinguished the judgment in re Essar .....

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e. It is in the afore-mentioned fact situation, this Court held: "13[12]. Reading all these agreements together, it is not possible to uphold the contention of Mr. Salve that the pre-condition of obtaining a licence from Midrex was not a condition of sale, but a clause inserted to protect EGL. Without a licence from Midrex, the plant would be of no use to EGL. That is why this overriding clause was inserted. This overriding clause was clearly a condition of sale. It was essential for EGL to .....

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al was in error in holding that the payments to be made to Midrex by way of licence fees could not be added to the price actually paid to TIL for purchase of the plant." 17. The Court noticed several curious aspects of the Agreement stating that it started with the recital that "the Purchaser and the Seller have today respectively purchased and sold a Direct Reduction Iron Plant, on the following terms and conditions", which, according to this Court , indicated that the purchase a .....

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e to Rule 4 and held: "The part of the Interpretative Note to Rule 4 relied on by the Tribunal has been couched in a negative form and is accompanied by a proviso. It means that the charges or costs described in clauses (a), (b) and (c) are not to be included in the value of imported goods subject to satisfying the requirement of the proviso that the charges were distinguishable from the price actually paid or payable for the imported goods. This part of the Interpretative Note cannot be so .....

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goods would be the payment required to be made as a condition of sale. Assessment of customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia, by way of transfer of licence or technical know-how for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post- .....

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