2013 (5) TMI 603 - AT - Customs

Valuation - Rule 2(2) of Customs Valuation Rules, 1988 - inclusion of license/royalty in the invoice value - Whether licence fee and royalty paid by the respondent to the licensor is includable in the value of the goods purchased from the replicator(s) Respondent is importing replicators as designated by the licensor from time to time pursuant to their agreement. Respondent was also locally purchasing DVDs from replicators/vendors in India. Thus there were two sets of transactions, first with the licensor under the license agreement and second with the vendors by means of purchase orders. Held that - The ratio of decision in CCE, New Delhi vs. M/S. Living Media (India) Ltd. 2011 (8) TMI 41 - SUPREME COURT OF INDIA squarely applicable to the facts of the present case. In the said case it was held that Customs duty is liable to be paid not only on the cost of the media but also on the value including the contents of the media. It is for the contents of the VCD/DVDs that the respondent is paying licensee fee/royalty to the licensor. Thus, it may be seen that the value for the purpose of levy of Customs duty is not only the cost of the media but also the cost of matter contained in the media, that is, the content of the media. Since a replicated CD contains the artistic intellectual inputs, the cost of the same has to be considered while charging Customs duty. It is not the case of respondent herein that the cost of the contents has already been included in the value charged by the replicator. If that was so, there was no need for payment of licence fee/royalty to the Licensor separately. Thus, the licence fee and royalty paid by the respondent to the licensor is includable in the value of the goods purchased from the replicator(s). Therefore, the impugned order is set aside and the appeal is allowed.

Issues Involved:
1. Valuation of imported DVDs.
2. Inclusion of license fee/royalty in the transaction value of imported goods.
3. Relationship between the respondent and vendors.
4. Applicability of precedents and legal interpretations.

Issue-wise Detailed Analysis:

1. Valuation of Imported DVDs:
The core issue revolves around the valuation of DVDs imported by the respondent, M/s. Excel Productions Audio Visuals Pvt. Ltd. The Special Valuation Cell initially determined that the respondent was not related to the vendors and that the license fee/royalty paid to the licensor was not a condition of sale in the contract with the vendors. Consequently, these payments were not included in the taxable value of the imported goods. However, the Revenue challenged this decision, arguing that the license fee/royalty should be included in the transaction value.

2. Inclusion of License Fee/Royalty in the Transaction Value:
The Revenue contended that the payment of royalties/license fees had a direct bearing on the purchase prices and thus should be included in the transaction value of the imported goods under Rule 9 (1) (c) of the Customs Valuation Rules. They highlighted that the licensor controlled the transaction, including the prices and the replicators from whom the DVDs were purchased. The respondent, on the other hand, argued that there were two independent transactions: one with the licensor for the right to distribute and resell DVDs, and another with the vendors for purchasing the DVDs. They cited Canadian case laws to support their stance that the payment of royalties was not a condition of sale.

3. Relationship Between the Respondent and Vendors:
The agreement between the respondent and the licensor included several conditions that indicated the licensor's control over the transactions with the vendors. These conditions included the licensor's approval of purchase orders, negotiation of prices, and selection of replicators. The tribunal found that these conditions meant the respondent was not free to negotiate the terms independently, thus making the payment of royalties a condition of sale.

4. Applicability of Precedents and Legal Interpretations:
The respondent relied on Canadian case laws and the interpretation of the term "condition of sale" under the Indian Sale of Goods Act. However, the tribunal distinguished these cases based on the specific conditions present in the agreement between the respondent and the licensor. The tribunal also referred to the Supreme Court's decision in the Living Media India Ltd. case, which held that royalties paid for the contents of imported media are includable in the transaction value. The tribunal concluded that the conditions in the agreement made the payment of royalties a condition of sale, thus includable in the transaction value under Rule 9 (1) (c).

Conclusion:
The tribunal set aside the lower appellate authority's order and allowed the Revenue's appeal, holding that the license fee and royalty paid by the respondent to the licensor are includable in the value of the goods purchased from the replicators. This decision was based on the interpretation of Rule 9 (1) (c) of the Customs Valuation Rules and the specific conditions in the agreement that indicated the licensor's control over the transactions.

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