2020 (3) TMI 324 - AT - Customs

Valuation of goods imported by adidas India - inclusion of sponsorship and endorsement expenses paid by adidas India to various athletes and players in India in assessable value - rule 10(1)(e) 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 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. In Commissioner of Central Excise, Surat vs Surat Textile Mills Ltd 2004 (4) TMI 81 - SUPREME COURT , 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. There is nothing on the record in the present case that may indicate and nor is it a charge in the show cause notice that the payment that was made by adidas India to a third party for promotion and advertisement of the products was because adidas Germany had a pre-existing obligation to pay to such third party the said amount and adidas India was only discharging this obligation of adidas Germany towards the third party. It may be that the promotion and advertisement of the products by adidas India benefit adidas Germany also, but this would not in any manner mean that the payments made for promotion and advertisement satisfy any pre-existing obligation of adidas Germany towards the parties to whom payment is made for such promotion or advertisement. The amount that is paid by adidas India for promotion and advertisement of the products is an amount incurred by adidas India on its own account and not for discharging any obligation of adidas Germany - the 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. 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. Appeal dismissed - decided against Revenue.

Summary

Issues Involved:
1. Whether the sponsorship and endorsement expenses paid by adidas India to various athletes and players in India should be included in the assessable value of the goods imported by adidas India under rule 10(1)(e) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
2. Whether the Commissioner was correct in dropping the proceedings initiated under the demand-cum-show cause notice.
3. Whether the extended period of limitation could be invoked.
4. Whether the goods imported should be held liable to confiscation and penalty should be imposed under the Customs Act, 1962.

Issue-wise Detailed Analysis:

1. Inclusion of Sponsorship and Endorsement Expenses in Assessable Value:
The primary issue was whether the sponsorship and endorsement expenses paid by adidas India should be included in the assessable value of the imported goods under rule 10(1)(e) of the 2007 Rules. The Tribunal examined the License Agreement between adidas Germany and adidas India, which granted adidas India the exclusive license to promote, distribute, market, and sell the products. The agreement required adidas India to bear all expenses related to marketing and sales without creating any liabilities chargeable to adidas Germany. The Tribunal noted that for payments to be included under rule 10(1)(e), they must be made as a condition of sale and to satisfy an obligation of the seller. The Tribunal concluded that the expenses incurred by adidas India were not a condition of sale and did not satisfy any obligation of adidas Germany, as there was no enforceable legal right compelling adidas India to incur such expenses.

2. Dropping of Proceedings by the Commissioner:
The Commissioner dropped the proceedings initiated under the show cause notice, finding that the payments made by adidas India to sports personalities and associations were not made as a condition of sale to satisfy any obligation of adidas Germany. The Commissioner emphasized that there was no express clause in the License Agreement obligating adidas India to enter into sponsorship or endorsement agreements on behalf of adidas Germany. The Tribunal upheld this finding, agreeing that the expenses were incurred by adidas India on its own account and not to satisfy any pre-existing obligation of adidas Germany.

3. Invocation of Extended Period of Limitation:
The Tribunal did not specifically address the issue of the extended period of limitation in detail, as the primary focus was on whether the expenses should be included in the assessable value under rule 10(1)(e). However, the Tribunal's conclusion that the expenses were not a condition of sale and did not satisfy any obligation of the seller implicitly supports the view that there was no suppression or misdeclaration warranting the invocation of the extended period of limitation.

4. Liability to Confiscation and Penalty:
The show cause notice also proposed the confiscation of goods and imposition of penalties under sections 111(m), 112, and 114A of the Customs Act, 1962. The Tribunal, having found that the expenses were not includible in the assessable value under rule 10(1)(e), implicitly rejected the grounds for confiscation and penalties. The Tribunal upheld the Commissioner's finding that the expenses were incurred by adidas India on its own account and not as a condition of sale or to satisfy any obligation of adidas Germany, thus negating the grounds for confiscation and penalties.

Conclusion:
The Tribunal dismissed the appeal filed by the Department, upholding the Commissioner's order that the sponsorship and endorsement expenses incurred by adidas India were not includible in the assessable value of the imported goods under rule 10(1)(e) of the 2007 Rules. The Tribunal found no enforceable legal right compelling adidas India to incur such expenses as a condition of sale or to satisfy any obligation of adidas Germany, and thus, the expenses were incurred on adidas India's own account. Consequently, the Tribunal also negated the grounds for invoking the extended period of limitation and for confiscation and penalties under the Customs Act, 1962.