2015 (9) TMI 1028 - SC - Central Excise

Valuation - Inclusion of royalty amount - Rule 5 of the Central Excise (Valuation) Rules, 1975 - Held that - A bare reading of Rule 5 would demonstrate that the additional consideration which flows directly or indirectly from buyer to the assessee can be added to the price which is charged by the seller from the buyer. On the contrary, in the present case, the royalty, which is treated as additional consideration is paid by the seller to the buyer. - The very basis of the show cause notice, in fact, was untenable and when the assessee is paying the royalty to LNL (buyer) and that too for using the brand name NOVINO which belongs to the buyer, the question of treating the same as additional consideration within the meaning of Rule 5 and adding to the price charged from the LNL for sale of the product could not arise. - Decided in favour of assessee.

Summary

Issues:
1. Application of Rule 5 of the Central Excise (Valuation) Rules, 1975 to determine transaction value.
2. Treatment of royalty paid by the seller to the buyer as additional consideration.
3. Challenge to the Order-in-Original and Tribunal's decision.

Analysis:

1. Application of Rule 5:
The case involved the interpretation of Rule 5 of the Central Excise (Valuation) Rules, 1975 to ascertain the transaction value of goods. The appellant, a torch manufacturer, was using the brand name 'NOVINO' owned by another entity, LNL, under a royalty agreement. The Commissioner relied on Rule 5 to propose adding the royalty amount to the sale price for valuation. However, the appellant contended that Rule 5 did not apply since the royalty was paid by the seller to the buyer, not the other way around. The Court agreed with this interpretation, emphasizing that Rule 5 pertains to additional consideration flowing from the buyer to the assessee, which was not the case here.

2. Treatment of Royalty as Additional Consideration:
The central issue revolved around whether the royalty paid by the appellant to LNL constituted additional consideration under Rule 5. The Court found that since the royalty was paid by the seller (appellant) to the buyer (LNL) for using the brand name 'NOVINO,' it could not be deemed as additional consideration from the buyer to the assessee. As such, the contention that the royalty should be added to the price charged from LNL for the product sale was deemed untenable, leading to the dismissal of the show cause notice.

3. Challenge to Orders:
The Order-in-Original by the Commissioner, which confirmed the demand to add royalty to the transaction value, was challenged by the appellant. Subsequently, the appeal to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) met a similar fate as it upheld the Commissioner's decision. However, the Supreme Court, upon analyzing the facts and legal provisions, set aside the impugned orders, allowing the appeal in favor of the appellant. The Court's decision was based on the inapplicability of Rule 5 in the given scenario where the royalty payment was made by the seller to the buyer for brand usage.

In conclusion, the Supreme Court's judgment clarified the interpretation of Rule 5 in the context of additional consideration in excise valuation cases, emphasizing the direction of flow of payments and setting aside the demand to add royalty to the transaction value in this particular case.