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TMI Blog2017 (2) TMI 1027X X X X Extracts X X X X X X X X Extracts X X X X ..... o to others on the ground that the agreements and transactions among other two are same except for the ratio in which the revenue is shared. There has been no objection to this finding and therefore we also deal with this agreement and apply the same ratio to other appellants. Warner Bros. (F.E.)(The appellant) is appointed by WPIL as the sole distributor for territory of India. The declared value of the imports made by the appellants was challenged by the Revenue. The appellants sought valuation under Rule 8 as per earlier orders dated 12.12.80 and 6.1.88, whereas the Revenue sought to apply the Customs Valuation Rules and loaded the declared value furnished by the appellants. Aggrieved by the said order of the lower authorities, the appellants are before the Tribunal. 2. Learned counsel for the appellants explained the provisions of license and the franchise agreement. It categorically grants exclusive license to the appellant for exploitation, exhibition and distribution of the motion pictures in a specified territory including India. There is no sale involved under the said agreement. He argued that the appellants are approved by the Reserve Bank of India and imports of such c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... title to all negatives and positive prints delivered or manufactured hereunder shall at all times remain in International or in the party or parties designated by the contracts, pursuant to which International has obtained the rights herein granted with respect to said motion pictures. Distributor agrees that upon the expiration or sooner termination of this agreement or the license herein granted with respect to any motion picture, the prints delivered or manufactured hereunder, shall at Internationals option, be returned, at Distributors expense, to International at its office in New York City, or destroyed, in which latter event, Distributor shall deliver to International affidavits setting forth the facts and circumstances of such destruction. All prints shall be distributed and exhibited in their original continuity without change, interpolation or elimination except insofar as necessary to conform to the laws and customs of said territory and no changes shall be made without the consent of International and if made shall be solely at the distributors expense. Distributor agrees to disclose to International immediately upon demand, the whereabouts of each and every print ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e foreign supplier. 2.7 Learned counsel pointed out that the appellants, through the branch office in India, are importing the cineprints supplied by the foreign principal free of charge, he argued that the intrinsic value of the cineprints is actually the cost incurred to make the same. He pointed out that such cost varies from US 6 cents to US 13 cents as has been held by the earlier orders of revenue. 2.8 He argued that vide circular dated 11.12.1980, the Special Valuation Branch of Mumbai Customs, had clarified as follows:- "The Indian Firm, Warner Bros., is a fully owned subsidiary of the foreign principals viz. Warner Bros. International U.S.A. The Indian firm imports exposed cine films from the said foreign principals. All positive exposed cine films are supplied free of charge. The ownership of the film rests with the suppliers. In terms of the agreement the Indian firm shall pay a fixed percentage of the gross receipts which the distributors (Indian firm) derive by exploitation/exhibition of the cine films. The intrinsic value of the exposed cinefilms is actually the cost incurred by the laboratories which process the films, and the same includes the cost of material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircular No.11/2001-Cus. dated 23.2.2001 and Public Notice No.52/2001-Cus. dated 12.4.2001. Learned counsel argued that the said public notice does not apply to the facts and circumstances of the case as Rule 9(1)(c) and Rule 9(1)(d) do not apply to the facts and circumstances of these cases at all. By their reply to the said notice, the appellants had clearly stated that there is no element of sale involved and therefore they were not covered by the said circular. However, the Deputy Commissioner of Customs, Special Valuation Cell, passed an adjudication order dated 11.3.2002. Vide the said order, he declined to accept the value furnished by the appellants and applied Rule 7 and ordered to load the declared value. The matter was agitated by the appellant before the Commissioner (Appeals). However, the Commissioner (Appeals) upheld the impugned order and rejected the appeals. Aggrieved by the said order, the appellants are before the Tribunal. 2.10 Learned counsel argued that the impugned order has wrongly relied on CBEC circular No. 86/2002 dated 12.12.2002 as the same does not apply to the appellants case as no royalty/license fee is payable as a condition of sale. 2.11 Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply. He particularly highlighted the Interpretative Note to Rule 9(1)(c) which reads as follows:- "1. The royalties and licence fees referred to in rule 9(1)(c) may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value. 2. Payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for export to the country of importation of the imported goods." 2.13 Learned counsel further argued that the Revenue has chosen not to apply Rule 4 nor has given any justification for application of Rule 5 or 6 of the Valuation Rules. He further argued that the Revenue has wrongly applied Rule 7 which applies only to a case of sale. 2.14 Learned counsel relied on the following decisions:- i) Hoerbiger vs. CC 2003(156)ELT 62 ii) CC vs. Ferredo India Pvt. Ltd. iii) Peri India Pvt. Ltd. vs. CC, Mumbai 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following was held:- "The Indian Firm, Warner Bros., is a fully owned subsidiary of the foreign principals viz. Warner Bros. International U.S.A. The Indian firm imports exposed cine films from the said foreign principals. All positive exposed cine films are supplied free of charge. The ownership of the film rests with the suppliers. In terms of the agreement the Indian firm shall pay a fixed percentage of the gross receipts which the distributors (Indian firm) derive by exploitation/exhibition of the cine films. The intrinsic value of the exposed cinefilms is actually the cost incurred by the laboratories which process the films, and the same includes the cost of materials, processing charges etc. The cost varies from country to country and on the number of prints ordered. The rejuvenating charges of old negatives, out of which the prints are processed, also add to the cost of the prints. At present the cost varies from U.S. Cents 6 to U.S. Cents 13 per foot. On the basis of the documents/information furnished by the party, it has been decided to accept the invoice value of the exposed cine films imported from the said suppliers under Rule 8 after usual check and scrutiny. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arent that for the period after the notification was rescinded, the valuation needs to be done in terms of Section 14 of the Customs Act read with the Rules. 5. It is clear from the agreement that the appellants are receiving the said goods just on payment of Transportation, insurance and other related costs (excluding cost of print materials)in terms of clause 3(a) of the agreement. They do not become the owners of the goods by virtue of this payment as the imports are conditional, not only with reference to the use the imported goods can be put to, but also the manner they have to be disposed of after use. As a condition of import the appellants are also required to pay the foreign entity amounts as specified in clause 3 thereof. It is apparent from the Clause 3 of the agreement that the appellants are obliged to pay the foreign entity, as follows:- "3. As consideration for the rights herein granted to Distributor, Distributor shall pay to International in the manner hereinafter specified, the following: Sixty-five percent (65%) of all gross proceeds derived and collected from the distribution, exploitation and exhibition in the territory of the feature motion pictures, trai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the contract between the appellants and the foreign supplier. It is seen that the agreement has been entered into between the two parties located abroad viz. Warner Bros. Pictures International Corporation, New York (first party) and Warner Bros. (F.E.) International Pictures, Inc., Delaware (second party). The first party grants the sole and exclusive license to distribute and to license theatres to exhibit for the terms and conditions specified in the contract, in the territory of India, Nepal, Ceylon and Afghanistan (referred to as Territory). It can be seen that the agreement is between the two foreign entities wherein one entity grants the other entity the sole and exclusive right to distribute license theatres to exhibit throughout the territory consisting of 4 countries. From the said clause of the agreement, it is obvious that the said rights are granted subject to the terms of the agreement. In other words, if the terms of the agreement are not agreed and adhered to, the said imports cannot be made or the said rights cannot be exercised. The Hon High Court of Madras in the case of Indo Overseas Films 2007 (210) ELT 348 has observed as under:- "5. The value of the imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S $. So, the value of the imported goods, i.e., feature film is 1020 US $. Apart from that royalty including one new print and one trailer with the right of reproduction and distribution of public performance for the territories of India had been valued at 12500 US $. The payment of 1020 US $ for the print and trailer and 12500 US $ towards royalty for exploitation of the film is condition precedent in the importation. Though the value has been splitted out as royalty and the cost of materials, as per the agreement, the petitioner imported the feature film for exploitation only and without exploitation there is no purpose for importing the feature film. On the other hand, the purpose of importation of the film is only for exploitation. For the purpose of exploitation the charges is stated to 12500 US $. As per Rule 19(1)(c) the royalty and licence fee relating 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. 7. In the case on hand, the petitioner had to pay not only the cost of movie materials, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-rule (1) above shall be accepted: Provided. (a) there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which - (i) are imposed or required by law or by the public authorities in India; or (ii) limit the geographical area in which the goods may be resold; or (iii) do not substantially affect the value of the goods;" It prescribes that any import where there are restrictions on use of goods the price paid cannot be the assessable value. In the instant case there are restrictions on the use of goods which travel beyond the exclusions provided in the proviso. For instance the appellants cannot continue to use the goods after a certain period. The appellants cannot dispose of the goods in the manner they want. The appellants cannot use the goods in any medium other that cine theatres, like television etc. they cannot sell, assign or sublet their rights in respect of these goods. 7.3 Proviso (c) (later renumbered as (g)) to Rule 4(2) of the CVR reads as follows: "(2) The transaction value of imported goods under sub-rule (1) above shall be accepted: Provided. (c) no part of the proceeds of any subsequent resal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... needs to be included in the Assessable Value. The Original adjudicating authority as well as the Commissioner (Appeal) both included in the Assessable Value the amount of license fee remitted by the appellant to the supplier of cine prints. In doing so one relied on rule 7 of CVR while other relied on rule 7 read with rule 8 of CVR. The revenue has relied on the decision of Hon Apex court in the case of Pradyumna Steel Ltd. [1996 (82) ELT 441 (SC)] to assert that mere mention of wrong rule does not vitiate the proceedings. Hon'ble Apex court in the said case has observed as follows:- "3. It is settled that mere mention of a wrong provision of law when the power exercised is available even though under a different provision, is by itself not sufficient to invalidate the exercise of that power. Thus, there is a clear error apparent on the face of the Tribunals order dated 23-6-1987. Rejection of the application for rectification by the Tribunal was, therefore, contrary to law." It is apparent that the sole dispute in all these cases is if the amounts paid by appellants in connection with imports made by them are includible in the assessable value or not in terms of the CVR. The n ..... 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