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TMI Blog2020 (3) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... sfy 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 imported from adidas International Trading BV, Netherlands adidas Netherland . It also transpires that adidas AG, Germany adidas Germany is the owner of certain intellectual property relating to adidas brand, including trademarks such as adidas , 3 stripes , Trefoil and 3-Bars , patents and know-how. A License Agreement was entered into between adidas Germany and adidas India with effect from 01 April, 2013. It was later revised on 1 April 2016. Under the agreement, adidas India was granted the non-exclusive right and license to use know how to manufacture the licensed products and the exclusive license to promote, distribute, market and sell the products and licensed products of adidas throughout the territory specified in the Agreement. A licensed product has been defined i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rves 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 LICENSED PRODUCTS and all expenses incurred by LICENSEE related to the distribution, marketing and sale of the PRODUCTS shall be borne by LICENSEE and LICENSEE shall not create any expenses or other liabilities chargeable to LICENSOR, subject to Article 5. 10. 2.8 LICENSEE shall be entitled to grant to franchisees, retailers and other sales partners the non-exclusive right to use the MARKS to promote, distribute, market and sell PRODUCTS and/or LICENSED PRODUCTS within the TERRITORY. ARTICLE 4 MARKETING 4.1 LICENSEE shall submit a complete and detailed business and marketing plan as part of the annual budget process which shall include estimates of sales of PRODUCTS and LICENSED PROBUCTS for each subsequent CONTRACT YEAR. 4.2 LICENSOR shall provide strategic guidance for the use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rand 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 PROMOTIONAL AGREEMENT exceeds-USD 300,000 (for its equivalent in local currency) LICENSEE must obtain LICENSOR s prior consent to said PROMOTIONAL AGREEMENT. ARTICLE 5 MARKS 5.10 In the event of any actual or threatened legal proceedings against LICENSEE or its customers alleging infringement of a third party s intellectual property or other rights by the use of the MARKS in relation to the manufacture, use, sale or distribution of any PRODUCT or LICENSED PRODUCTS. LICENSOR shall indemnify LICENSEE from and against any cost or expense relating thereto, including reasonable out of pocket expenses (excluding managerial time) provided the PRODUCT and/or LICENSED PRODUCT has not been modified by LICENSEE or a third party and the infringement is caused by such modification by LICENSE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) the assessable value declared by them for imports of goods made by them during the period from 1 April 2012 to 31 March 2017 should not be rejected in terms of Section 17(4) of the Customs Act, 1962 and re-assessed; (ii) the proportionate expenditure of Sponsorship and Endorsement relatable to imported good, as reflected in the balance sheet, for the period from 1 April 2012 to 31 March 2017 should not be included in the assessable value for determination of customs duty; (iii) the short-levied duty of customs amounting to ₹ 67,57,769/- should not be demanded from them in terms of Section 28(4) of the Customs Act, 1962 by invoking the extended period; (iv) the interest leviable on short-levied duty should not be demanded from them under section 28AA of the Customs Act, 1962; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 overall brand promotion, however again the most important question to ask at this juncture would again be whether it was a condition to sale , and as a part of obligation to the seller. In the license agreement and in the notice, I find that there is no direct evidence coming forth to answer this question in the affirmative. The entire amount of sponsorship fee given to teams/ players by AIMPL from its own account, is sought to be added when it cannot be quantified as to what is the monetary benefit to Adidas outside the four countries. Even if there is a benefit to the Adidas brand elsewhere also, its nexus with the value of the goods imported into India needs to be established clearly. The contract territory in sponsorship agreement has been done only to retain t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 towards a third party. Hence rule 10 (1) (e) of the 2007 Rules could not have been invoked; and (iv) The extended period of limitation could not have been invoked in the facts and circumstances of the case. 11. The submissions advanced by the learned Authorised Representative of the Department and the learned Counsel for the Respondent have been considered. 12. As noticed above, adidas India is engaged in importing and selling adidas brand products. In terms of the License Agreement entered into between adidas Germany and adidas India, adidas India executed agreements with various sports personalities, clubs and associations for the marketing and promotional activities of the products, for which it paid certain amount. The Department has sought to include t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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 value where the buyer and the seller are related. Rule 2(g) of the 2007 Rules provides that the transaction value means the value referred to in sub-section (1) of section 14 of the Customs Act. In the present case, it is not in dispute that the buyer and the seller are related. 15. The relevant provisions of the 2007 Rules for determination of the transaction value are as follows: Rule 3. Determination of the method of valuation. (1) Subject to rule 12, the value of imported goods shall be the transaction value adjusted in accordance with provisions of rule 10; (2) ------ (3) ------ (4) If the value cannot be determined under the provisions of sub-rule (1), the value shall be determined by proceeding sequentially through rule 4 to 9. RULE 10. Cost and Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ller 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 in this behalf. The 2007 Rules have been framed in exercise of the powers conferred by section 14(1) of the Customs Act. They provide for, amongst others, determination of the method of valuation as also the cost and services. 18. It would be seen that rule 3 deals with the determination of the method of valuation. It provides that subject to rule 12, the value of the imported goods shall be the transaction value adjusted in accordance with provisions of rule 10. Rule 10 deals with cost and services. It provides that in determining the transaction value, the amount referred to in (a), (b), (c), (d) and (e) of sub-rule (1) of rule 10 shall be added to the price actually paid or payable for the imported goods. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to adjust the debt. Rule 10(1)(e) requires that this requirement should be a condition of sale of the imported goods, for it is not that every debt which the seller owes to the buyer or a third party can be added to the price of the imported goods. Such an obligation of the seller has to be a condition of sale. It is only in such a situation that all other payments made as a condition of sale of the imported goods, by the buyer to the seller, or by a buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable can be added to the price actually paid for determining the transaction value. 21. In regard to the first condition t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur 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 judgement is reproduced below: 21. We have carefully perused the judgments and orders passed by the CEGAT which are impugned in these appeals. As righty contended by the counsel appearing on either side, the CEGAT failed to appreciate the arguments advanced before it by the counsel appearing on either party in its proper perspective. In fact, in Civil Appeal Nos. 13400/1996, 4672/1997 and 4762/1997, the CEGAT failed to appreciate that in several earlier judgments, the CEGAT consistently held that the advertisement expenditure incurred by a manufacturers customer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equiring 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 Appellant was a manufacturer of motor vehicles and parts thereof. The Appellant had an agreement with the dealers that they shall at all times during the currency of the agreement make efforts to promote the product and its reputation in the allotted territory. The Department formed an opinion that since the dealers incurred expenses under the terms of the agreement, such activities were carried out on behalf of the manufacturer and therefore, would have to be treated as consideration for sale and accordingly, differential duty was required to be paid. The Tribunal held that there was no enforceable legal right with the Appellant to insist on incurring such advertisement expenses and at best, failure on the part of dealer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure 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 Armani India, the Department filed a Civil Appeal Diary No. 41388 of 2018 decided on 02.01.2019. before the Supreme Court. This Appeal was dismissed by the Supreme Court on 2 January 2019 with an observation that the Court was not inclined to interfere with the impugned order. The observations of the Supreme Court are as follows: Delay condoned. We are not inclined to interfere with the impugned order. The appeal is accordingly dismissed. 30. In Samsonite South Asia Pvt. Ltd. Vs Commissioner of Customs (Import), Mumbai 2015 (327) E.L.T. 528 (Tri. Mumbai), the Tribunal held that there was nothing to establish that the advertising expenses shared by the Appellant company with Samsonite, Hong Kong had any nexus to the impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 goods within the territory. Article 7 provided that the Distributor will bear all costs of marketing, advertising and promotions for the territory. The Revenue believed that the marketing, advertising, sponsorship and promotional expenses/ payments made by M/s Indo Rubber for promotion of Li Ning brand was a condition of sale and consequently such amount was liable to be included in the value of the imported goods in terms of rule 10(1)(e). The Tribunal held that the Appellant was not obliged to incur any particular amount or percentage towards sales, promotion/ advertisement as a condition of sale and that the activity of advertisement and sales promotion was a post import activity incurred by the Appellant on its own a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be enforced. Article 2.1 of the Licence Agreement grants exclusive licence to adidas India to sell the products and article 2.3 merely provides that adidas India shall use its best efforts to develop, extend and maximise the sale and distribution of the products in the territory. At the same time, article 2.5 clearly stipulates that all such expenses incurred by adidas India in relation to the distribution, marketing and sale of the products shall be borne by adidas India and adidas India shall not creatre any expenses or other liabilities chargeable to adidas India. Article 4.5 also gives non-exclusive right to adidas India to conclude agreements for sponsorship or endorsement of the adidas brand or any adidas produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Goods (Article 1 and 8). Article 1 states that the customs value of the imported goods shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation adjusted in accordance with Article 8. In the context of the activities benefitting both the buyer and seller, like advertising, it has been stated that activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in Article 8, are not to be considered as an indirect payment to the seller, even though they might be of benefit to the seller. The cost of such activities, therefore, have not be added to the price actually paid or payable in determining th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 benefit only the foreign trademark owner) and advertising of the importing distributor's name (deemed to be non-dutiable) was necessary. This view was rejected in the Code. Advertising, warranty costs and similar expenses are excluded from the Transaction Value if paid for by the importer, even if he is obliged to make the expenditure under his agreement with the seller and even though the activities benefit the foreign seller. If the exporter chooses to pay for the advertising and recover the expense through his pricing, the cost is included in his price, and there is no provisions in the Code for excluding it from Transaction Value. The result is the same if the exporter bills the importer separately for the adve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 price actually paid, the payment should have been made as a condition of sale by the buyer to the seller or by a buyer to a third party to satisfy an obligation of the seller and such payment should not have already been included in the price actually paid. The Tribunal found that though the amount was not included in the price actually paid but Reebok India was allowed to import goods subject to a term in the agreement requiring it to necessarily spend 6% of the invoice value on advertisement and promotion. This was considered by the Tribunal to be an obligation of the Appellant towards Reebok International for import of goods. The Tribunal also examined, for this purpose, the condition set out in clause 4.9 of the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arily 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 required to submit marketing and business plan, advertising budget, and even is required to get vetted by Principal draft of any endorsement or promotion contract exceeding the value of US dollar 25 per cent year. These stipulations lead us to conclude that RIL UK is controlling every aspect of such promotion. RIL UK is the owner of the brand name Reebok and it is obvious that such promotion, and advertising is towards promotion of their brand as a whole and not only in respect of goods being imported by the appellant. Therefore, from these agreements it is evident that the appellant is carrying out such brand promotion on behalf of RIL England and such expenses were made on behalf of RIL UK. Hence we conclude that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 was required to be approved. It is from a reading of these two provisions of the agreement that the Bench concluded that the advertisement was caused by the distributor on behalf of the seller and, therefore, the expenses had been incurred as a condition of sale on behalf of the seller and could be considered to be an obligation of the seller. The decision rendered in Samsonite South Asia by the Tribunal was distinguished for the reason that in that case the expenses were charged to the account of Samsonite as a share of global expenditure. Though the Bench did notice that the amount paid by the buyer to a third party should be paid to satisfy an obligation of the seller and in this context referred to the Interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X
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