Tax Management India. Com
                        Law and Practice: A Digital eBook ...

Category of Documents

TMI - Tax Management India. Com
Case Laws Acts Notifications Circulars Classification Forms Manuals SMS News Articles
Highlights
D. Forum
What's New

Share:      

        Home        
 

TMI Blog

Home List
← Previous Next →

2020 (3) TMI 324

..... of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007 - HELD THAT:- It clearly emerges from a bare perusal of rule 10(1)(e) that it contemplates two situations when all other payments actually made or to be made can be added to the price actually paid for determination of the transaction value. The first is a situation when all other payments made by the buyer to the seller as a condition of sale of the imported goods to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid have to be added. The second is a situation when all other payments made by the buyer to a third party as a condition of sale of the imported goods to satisfy an obligation of the seller to the extent that such payments have not been included in the price have to be added. In the present Appeal, the dispute is with regard to the payment made by the buyer to the third party which would be payments made by adidas India to various sports personalities and associations for marketing and promotional activities of the products - it has been held in various decisions that the costs incurred on advertisement and promotion, even if such a .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... - 5-3-2020 - HON BLE MR.JUSTICE DILIP GUPTA, PRESIDENT AND HON BLE MR. C.L. MAHAR, MEMBER (TECHNICAL) Mr. Sunil Kumar, Authorised Representative for the Appellant Mr. B.L. Narasimhan, Advocate for the Respondent ORDER JUSTICE DILIP GUPTA : The Commissioner of Customs, Inland Container Depot, Patparganj, New Delhi the Commissioner, by order dated 19 March 2018, has dropped the proceedings initiated under the demand-cum-show cause notice dated 28 April 2017 that was issued to the respondent adidas India Marketing Pvt. Ltd adidas India under section 28(4) of the Customs Act 1962 the Customs Act. It is this order that has been assailed by the Revenue in this appeal. 2. The main issue that arises for consideration in this appeal is whether the sponsorship and endorsement expenses paid by adidas India to various athletes and players in India is liable to be included in the assessable value of the goods imported by adidas India by invoking rule 10(1)(e) of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007 the 2007 Rules. 3. It has been stated that adidas India is engaged in importing and selling adidas brand products i.e. footwear, garments and sportswear goods .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... oducts, stationery etc, or selected products which adidas AG or other other member of the adidas GROUP distributes by itself throughout the world, including without limitation Y-3 products, Porsche design products, and such other products as are notified to LICENSEE by LICENSOR from time to time in writing). ARTICLE 2 GRANT OF RIGHTS 2.1 Subject to the provisions of this AGREEMENT, LICENSOR hereby grants to LICENSEE a) the non-exclusive right and licence to use the KNOW HOW to manufacture LICENSED PRODUCTS in the TERRRITORY AND b) the exclusive licence to promote, distribute, market and sell PRODUCTS and LICENSED PRODUCTS throughout the TERRITORY under or by reference to the MARKS. 2.2 As an exception to the exclusivity granted to LICENSEE under Article 2.1 the LICENSOR reserves the right to promote, distribute, market and sell PRODUCTS in the TERRITORY through the adidas GROUP global e-commerce platform. 2.3 LICENSEE shall use its best efforts to develop, extend and maximise sale and distribution of the PRODUCTS and LICENSED PRODUCTS in the TERRITORY. 2.5 All expenses incurred by LICENSEE, directly or indirectly, related to the manufacture, distribution, marketing and sale of LICE .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... by law. LICENSEE shall execute any documents as reasonably requested by LICENSOR to confirm LICENSOR's ownership of such rights. Unless otherwise agreed with LICENSOR, all COLLATERAL MATERIAL shall bear a copyright notice in the name of LICENSOR in a format approved by LICENSOR. LICENSEE shall clear, at its own costs, all talent, agency and third party intellectual property rights for utilisation in the TERRITORY of advertising and promotional material developed by LICENSEE and LICENSEE shall permit LICENSOR, its AFFILIATES and/or its other licensees to use such material without any charge or compensation except for any technical costs of duplication. 4.5 LICENSEE shall have the non-exclusive right to conclude agreements for the sponsorship or endorsement of the adidas brand or any adidas products with any athletes, players, teams, clubs, events, federations, or other individuals or groups of individuals, committees or similar organizations ( PROMOTIONAL AGREEMENTS") within the TERRITORY. LICENSEE shall use LICENSOR's standard form promotional contracts (which shall be supplied by LICENSOR) for such PROMOTIONAL AGREEMENTS. Notwithstanding the above, if the value of any .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... s, clubs, and associations for the marketing and promotional activities of the products. Article 4.1 of the Sponsorship Agreement provides that the Athletes shall make best efforts to exclusively wear, use and promote adidas products throughout the contract territory at the time of playing, practicing, training and attending events. The expression contract territory meant the entire world. As per Article 3.1 of the Sponsorship Agreement, adidas India paid a fixed annual retainership fee on pro-rata basis for each contract year. 6. A show cause notice dated 28 April 2017 was, however, issued to adidas India proposing to demand differential customs duty by adding the sponsorship/ endorsement expenses incurred by adidas India to the value of the imported goods under rule 10(1)(e) of the 2007 Rules. It was alleged that adidas India did not include the sponsorship and endorsement expenses in the assessable value of the goods at the time of importation of goods, nor did it declare to the Customs that it had agreed to bear the sponsorship and endorsement expenses on behalf of adidas Germany in terms of the License Agreement. The Appellant was, therefore, directed to state as to why: (i) t .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... n of the seller. - 86. From a close reading of the above clauses of the agreement, I do not find any express clause which binds or obligate AIMPL adidas India to enter into Sponsorship/ Endorsement agreements with players, athletes, teams etc. to promote the adidas branded goods and to make such expenses on behalf of the seller. Above clauses only say that licensor grants license to products. This cannot be called as an obligation on behalf of the seller, in as much as there is no quantum of sponsorship specified, no bench marking of expenses to sales and no specification as to the obligation is for what amount. I also do not find any clause to substantiate the condition of sale . If one were to ask, could importer AIMPL continue to import at the same transaction values and pricing arrangement, if they do not enter sponsorship agreement with the players. I see no clause in the agreement, which prohibits the same. I rather find that as per clause 7.1 of the same agreement, a royalty equal to 6% of the net sales of the licensed products is payable to the seller, for various rights and benefits. - 93. While it as a fact, that the sponsorship made by AIMPL would definitely help the ove .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... Commissioner of Customs, Parparganj Customs Appeal No. 51559 of 2017 decided on: 12.01.2018 supports this view; and (iii) The goods, therefore, were liable to be confiscated under section 111(m) of the Customs Act as adidas India mis-declared the value of goods by suppressing the true and actual value of the goods while filing the declaration. However, since the goods were not available for confiscation, penalty has to be levied under section 112 of the Customs Act. 10. Shri B.L. Narasimhan, learned counsel appearing for the respondent - adidas India made the following submissions: (i) The impugned order does not suffer from any illegality and, therefore, the appeal filed by the Revenue deserves to be dismissed; (ii) Rule 10 (1) (e) of the 2007 Rules could not have been resorted to by the Revenue for adding all other payments contemplated in determining the transaction value for the reason that the conditions specified in the said sub-rule were not satisfied; (iii) The payment made to the contracting players and others towards sponsorship and promotion of the products is not a condition of a sale of the imported goods nor has it been made to satisfy an obligation of the seller tow .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... marketing and promotional activities of products can be added to the value of the imported goods, it will be appropriate to examine the relevant provisions. 14. Section 14(1) of the Customs Act deals with valuation of goods. It provides that the value of the imported goods and export goods shall be the transaction value of such goods, which would be the price actually paid or payable for the goods when sold for export to India or for export from India, where the buyer and the seller of the goods are not related and the price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf. Thus, this section deals with transaction value of goods where the buyer and the seller are not related. Under the second proviso to section 14(1), the Rules may provide for the circumstances in which the buyer and the seller shall be deemed to be related and the manner of determination of value in respect of goods where the buyer and the seller are related or the price is not the sole consideration for the sale. The 2007 Rules that have been framed under Section 14 of the Customs Act do provide for determination of the transaction valu .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ts of such activities shall not, therefore, be added to the price actually paid or payable in determining the value of imported goods. The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods: (a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment; (b) The cost of transport after importation; (c) Duties and taxes in India. The price actually paid or payable refers to the price for the imported goods. Thus the flow of dividends or other payments from the buyer to the seller that do not relate to the imported goods are not part of the customs value. 17. Section 14(1) of the Customs Act provides that the value of the imported goods and export goods shall be the transaction value of such goods, which would be price actually paid or payable for the said goods, where the buyer and the seller of the goods are not related and the price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made i .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... ; Or (b) such payment actually made or to be made as a condition of sale of the imported goods by the buyer to a third party to satisfy an obligation of the seller. 20. What also needs to be noticed is that in both the aforesaid two situations there are two requirements. The first requirement is that the payment should be made as a condition of sale and the second requirement is that they should be made to satisfy an obligation of the seller which can be towards the buyer as contemplated in (a) or towards a third party as contemplated in (b). Both the aforesaid twin requirements have to be satisfied before any payment made by the buyer to the seller or the buyer to a third party can be added to the price actually paid by the buyer to the seller for determining the transaction value. In other words, whenever such a payment is made either by the buyer to the seller or the buyer to a third party, the payment should necessarily be made as a condition of sale of the imported goods to satisfy an obligation of the seller. As an example, the obligation of the seller could be when the seller owes a debt to the buyer or to a third party. In such a situation, the seller may require the buyer .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... payment made by the buyer to the third party which would be payments made by adidas India to various sports personalities and associations for marketing and promotional activities of the products. 24. It will be useful, at this stage, to refer to cases that have discussed the requirement of rule 10(1)(e) of the 2007 Rules that payment should actually be made as a condition of sale. These decisions hold that the costs incurred on advertisement and promotion, even if such advertisement and promotion is carried out under an agreement between the buyer and seller, can be added to the amount paid by the buyer for import of goods only when there is a right with the seller to enforce such a condition on the buyer to incur such expenditure. 25. In Commissioner of Central Excise, Surat vs Surat Textile Mills Ltd 2004 (167) E.L.T. 379 (S.C.), the Supreme Court emphasized that advertisement expenditure incurred by a customer of the manufacturer can be added to the sale price for determining the assessable value only if the manufacturer has an enforceable legal right against the customer to insist on the incurring of such advertisement expenses by the customers. The relevant portion of the jud .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... n clear terms that only when a manufacturer has enforceable legal right against his customers/ dealers to insist on incurring of expenses on advertisement, the advertisement expense incurred by the dealers can be added to the assessable value. Same view has been taken by the Tribunal in case of Maruti Suzuki India Ltd. reported in 2008 (232) E.L.T 566 (Tri.- Del.). 6. On going through the appellant s agreement with their dealers, we find that there is nothing in their agreement from which it can be concluded that appellants had enforceable legal right against the dealers to insist on incurring of certain amount of expenses on advertisement and publicity of the appellant s products. Just a Clause in the agreements requiring the dealers to make efforts for promoting sales of the appellant s products cannot be treated as a clause imposing legal obligation on the dealers to incur certain level of expenses on advertisement. In view of this, we hold that the impugned orders are not sustainable. The same are set aside. The appeals are allowed. [emphasis supplied] 27. In Maruti Suzuki India Ltd. vs Commissioner of Central Excise, Delhi/Bhopal 2008 (232) E.L.T. 566 (Tri. - Del.), the Appell .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... right against the customer to insist of the incurring of such advertisement expenses by the customer. [emphasis supplied] 28. The same view was taken by a Division Bench of the Tribunal in M/s Giorgio Armani India (P) Ltd vs. Commissioner of Customs, New Delhi 2018-VIL-248-CESTAT-DEL-CU The observations are as follows: 10. Lastly, we consider the loading @3% of the value of purchase. As per the agreement with the foreign buyers, the appellant is required to incur an expenditure not less than 3% towards advertising in India. Such advertisement is carried-out in India for promotion of Giorgio Armani Brands. Such expenditure is incurred after import of the goods. Even though, the appellant is required to incur such expenditure as per the agreement with the foreign principal, it cannot be said that such expenditure has been incurred to satisfy the obligation of the foreign principal. Consequently, the condition specified in rule 10 (1)(e) is not satisfied and accordingly we find no justification to load the invoice value to this extent. Such loading is accordingly set-aside. [emphasis supplied] 29. It needs to be noted that against the aforesaid decision of the Tribunal in Giorgio Arma .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... d on the number of units of the products imported, such a cost sharing arrangements cannot be regarded as an indirect payment constituting an additional element of the price paid by the importer to the exporter. In the present case, we find that there is no nexus between the imports made by the appellants and the expenditure shared by the appellants for the global advertising campaign. We also find that the sharing of cost towards advertising expenses is not a condition of sale for the import of goods. Therefore, we are of the view that the provisions of Section 10(1)(e) of the Customs Valuation Rules, 2007, are not attracted in the present case. [emphasis supplied] 31. The provisions of rule 10(1)(e) of the 2007 Rules also came up for interpretation before a Division Bench of this Tribunal in M/s Indo Rubber And Plastic Works vs Commissioner of Customs, Inland Container Depot, Tughlakabad, New Delhi 2020-VIL-85-CESTAT-DEL-CU. M/s Indo Rubber entered into an agreement with Sunlight Sports for the purpose of import and sale of Li Ning brand sports goods within India. Article 4 of the agreement provided that the Distributor will make best endeavours to promote and extend sales of goo .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... f products developed by or for adidas group. The agreement also required adidas India to use its best efforts to develop, extend and maximise sale and distribution of the products in the territory. It is also clear from the agreement that all the expenses incurred by adidas India, directly or indirectly, relating to the distribution, marketing and sale of the products were to be borne by adidas India and adidas India was not to create any expense or liability chargeable to adidas Germany. 34. It is in the light of the provisions of the Licence Agreement and the decisions referred to above that it has to be examined whether payments made by adidas India to third parties (sports personalities and clubs and associations) for marketing and promotional activities of the products can be said to be a condition of sale of the imported goods by adidas Germany. As noted above, to examine this aspect what is required to be seen is whether adidas Germany has an enforceable legal right under the License Agreement that would compel the buyer to incur such expenditure. The clauses of the Licence Agreement do not, in any manner, even remotely suggest that adidas Germany has such a right which can .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... lace in rule 10(1) dealing with cost and services for determining the transaction value. It is this price actually paid or payable that has been explained in the Note to rule 3 to mean the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. Such payments can be made directly or indirectly and an example of indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by a seller. It has also been provided that in the Note that activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in rule 10, are not to be considered as an indirect payment to the seller even though they may be regarded as of benefit to the seller. The cost of such activities cannot, therefore, be added to the price actually paid or payable in determining the value of the imported goods. 38. In this connection, it would also be useful to refer to Commentary on the GATT Customs Valuation Code by the noted authors Saul L. Sherman and Hinrich Glashoff on Customs Valuation for analyzing the provisions of rule 10(1)(e). Chapter III deals with Transaction Value of the Imported Goo .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... not, therefore, be added to the price actually paid or payable in determining the customs value . The most important of such activities are advertising and warranty and other marketing and promotion efforts, which benefit both the exporter and the importer by increasing sales and by making the trademark, if there is one, more valuable. As to these expenditures, the Notes go on to say: …if the buyer undertakes on his own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value of these activities is not part of the customs value nor shall such activities result in rejection of the transaction value'. The treatment of advertising expenditures was highly controversial in the negotiation of the Code. The BDV had been widely interpreted as requiring many such expenditures to be included in the customs value even if the payment was made by the buyer, for the expenditures were often regarded as an indirect benefit to the exporter which, under the notional concept of the BDV, ought to be included in the 'normal price. Sometimes a sophisticated split of bundled activities into trademark advertising (deemed to be .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... to be added to the price of the imported goods for determining the transaction value. The Appellant - M/s. Reebok India Company (Reebok India) has been described to be a subsidiary of M/s. Reebok International Ltd. (Reebok International). Reebok India imported various sports goods from Reebok International, which goods bear the brand name Reebok . Reebok India also entered into a distribution agreement with Reebok International as well as buying agency agreement with M/s. Adidas International Trading. The Department issued a show cause notice alleging that the Reebok India was importing goods from Reebok International but was not including the costs pertaining to advertisement and promotion in the assessable value of the goods at the time of export. The Adjudicating Authority confirmed the demand of differential duty. Article 4.13.4 of the distribution agreement entered into between Reebok India and Reebok International came up for consideration before the Tribunal for determining whether the costs incurred on advertisement and promotion could be included in the transaction value under rule 10(1)(e) of the 2007 Rules. The Tribunal noted that for such payments to be added to the pri .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... hether such expenditure incurred by the appellant in terms of the above clause will incur the mischief of rule 10(1)(e) of the Customs Valuation Rules. For such payments to be added to the price actually paid, the same should be made as a condition of sale by the buyer to seller or by the buyer to the third party to satisfy the obligation of the seller and such payments are not already included in the price actually paid. There is no doubt that the amount is not already included in the price actually paid or payable. The appellant is allowed to import goods from the principal in terms of the above agreement only subject to the terms of the entire agreement. In terms of this agreement the appellant will have to necessarily spend 6 per cent of the invoice value on advertisement and promotion. It is an obligation of the appellant to its principal for import of goods. The other related question is whether such amounts have been spent by the appellant to satisfy an obligation of the seller i.e. RIL England. 8. In addition to para 4.13.4 further conditions are mentioned in clause 4.9. In terms of this clause, we note that the appellant is not only required to spent on advertising, but is .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... later decided Giorgio Armani on 05 April, 2018. In Giorgio Armani, the Appellant was required to incur an expenditure of not less than 3% towards advertising in India for promotion of Giorgio Armani Brands . The Bench noticed that even though the agreement required such expenditure to be incurred, but it could not be said that such an expenditure was required to be incurred to satisfy an obligation of the seller and therefore, the condition specified in rule 10(1)(e) was not satisfied. The decision of the Tribunal was assailed by the Department before the Supreme Court. The Supreme Court dismissed the Appeal holding that the Court was not inclined to interfere with the impugned order. However, in Reebok India, the same Bench which decided Giorgio Armani, also examined the provisions of rule 10(1)(e) of the 2007 Rules. The Bench noted that under article 4.13.4, the distributor had agreed to spend on advertisement and promotion a sum not less than 6% of its total net invoice sale of products and under article 4.9, the distributor was required to submit marketing and business plan, advertising budget and even the draft of any endorsement or promotion contract exceeding a certain value .....

X X X X X X X

Full Text of the Document

X X X X X X X

..... Sports, incurred by them, unless such expenditure is incurred at the instance of M/s Sunlight Sports under stipulation of reimbursement. Further, we find that the interpretative note to Rule 3(b) provides, that activity undertaken by the buyer on its own account, even though by agreement, are not considered as direct payment, even though they might be regarded as benefit to the seller also. 44. Thus, even the second requirement of rule 10(1)(e) that payments should be made by the buyer to a third party to satisfy an obligation of the seller is also not satisfied. 45. The show cause notice has only made reference to rule 10(1)(e) of the 2007 Rules for adding the payments made for promotion and expenditure to the price actually paid for determining the transaction value. It has been found that the conditions provided for in rule 10(1)(e) are not satisfied and, therefore, no addition could have been made to the price actually paid by adidas India to adidas Germany for determination of the transaction value of the goods that were imported. 46. The Principal Commissioner has found that the amount spent by adidas India towards sponsorship/endorsement was not on behalf of adidas Germany a .....

X X X X X X X

Full Text of the Document

X X X X X X X

 

 

← Previous Next →

 

 

|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || Database || Members || Refer Us ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.
|| Blog || Site Map - Recent || Site Map ||