2015 (4) TMI 856 - SC - Central Excise

Valuation of goods - Inclusion of royalty amount - Manufacture of duplicate CD - Held that - Section 4(1)(a) of the Central Excise Act will not apply for the simple reason that price is not the sole consideration for the sale as a master tape had to be handed over by the distributor/copyright holder to the appellant. Since Section 4(1)(b) applies, the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, would apply. - A reading of Rule 6 shows that the value of the goods referred to in the Rule shall be deemed to be the aggregate of the transaction value and the amount of money value of any additional consideration that may flow directly or indirectly from the buyer to the assessee. Both parties relied upon the explanation to further their case. Since the explanation is determinative of the present case, it is important to note that where the master tape is supplied by the distributor who is the copyright holder to the appellant, whether free of charge or at a reduced cost such master tape must be used in connection with the production and sale of goods by the assessee. What is clear from the present transaction is that the master tape contains within it music/picture in digital form. There is no doubt whatsoever that the music/picture supplied on the master tape ought to be valued and has been valued as additional consideration that flowed from the buyer to the assessee, and its value has been accepted at rupee one per CD. Copyright value in the duplicate CD is not used in connection with the sale of such goods inasmuch as no part of the copyright which may have been passed on by the distributor to the assessee is used by the assessee in selling the duplicate CDs to the distributor who is himself the owner of the copyright. Clearly therefore on the assumption that the music/picture embedded in the master tape is inextricably bound with the copyright thereof, the copyright is not used by the appellant while selling the duplicate CDs to the distributor. The distributor having paid a lump sum royalty to the producer of the music, then sells, after the job work done by the appellant, the duplicate CDs in the market with the cost of the royalty loaded thereon. Given the fact that no part of the royalty can be loaded on to the duplicate CDs produced by the appellant, the circular dated 19.2.2002 which deals with apportionment of royalty would have no application to the facts of the present case. In the circumstances, the impugned judgment is set aside - Decision in the case Associated Cement Companies Ltd. v. Commissioner of Customs 2001 (1) TMI 248 - Supreme court of India distinguished - Decided in favour of assessee.

Summary

Issues Involved:
1. Inclusion of royalty charges in the assessable value of CDs.
2. Application of Section 4(1) of the Central Excise Act and Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000.
3. Relevance of previous judgments and their applicability to the current case.

Detailed Analysis:

1. Inclusion of Royalty Charges in the Assessable Value of CDs:
The appellant was involved in manufacturing duplicate CDs from a master tape/CD provided by a distributor who held the copyright. The Assistant Commissioner of Central Excise demanded duty on royalty charges incurred by the distributor/copyright holder. The Commissioner (Appeals) initially set aside this order but later directed the inclusion of royalty charges in the assessable value. The appellant argued that the job work did not include any royalty element, as the royalty was only for the music embedded in the CD and not for any additional royalty. The Revenue contended that the royalty paid for the master tape/CD should be included in the assessable value as it formed part of the cost of goods produced by the appellant.

2. Application of Section 4(1) of the Central Excise Act and Rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000:
Section 4(1)(a) was deemed inapplicable as price was not the sole consideration for the sale. Hence, Section 4(1)(b) and Rule 6 were applied. Rule 6 states that the value of excisable goods shall be deemed to be the aggregate of the transaction value and any additional consideration flowing from the buyer to the assessee. The master tape provided by the distributor was considered additional consideration. However, the court noted that the royalty for the music/picture embedded in the master tape was not used in connection with the sale of duplicate CDs, as these were sold only to the distributor who owned the copyright. Therefore, the royalty could not be included in the assessable value.

3. Relevance of Previous Judgments and Their Applicability to the Current Case:
The appellant relied on two judgments: *Joint Secretary to Government of India v. Food Specialties Ltd.* and *Sidhosons & Anr. v. Union of India & Others*. Both cases established that the value of goodwill or brand name should not form part of the assessable value when the goods are sold only to the owner of such goodwill or brand name. The court found these judgments applicable, concluding that the enhancement in value due to copyright should not be included in the assessable value of the CDs sold to the distributor.

The Revenue cited *Associated Cement Companies Ltd. v. Commissioner of Customs*, where the value of drawings and designs was included in the assessable value. However, the court distinguished this case, noting that the appellant did not exploit the intellectual content of the CDs, as they were sold only to the copyright owner.

Conclusion:
The court concluded that no part of the royalty should be included in the assessable value of the duplicate CDs. The impugned judgment was set aside, and the appellant was allowed to claim a refund of additional duty collected. The appeal was allowed in these terms.