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TMI Blog2024 (4) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... y of interest and imposed penalty under section 114A of the Customs Act, 1962 [the Customs Act]. 2. The appellant is engaged in the marketing and distribution of products such as shoes, bags, clothing, clothing related accessories, eyewear, perfumery and cosmetics. 3. During the period from 2009 to 2015, the appellant entered into the following Distribution/License Agreements with foreign parties/ suppliers: (a) Exclusive Boutique Distribution Agreement dated 06.11.2009 with Etro Spa, Italy; (b) Distributorship Agreement dated 01.04.2011 with Tumi Inc, USA; (c) Master Store License Agreement dated 17.05.2013 with Michael Kors LLC, USA; (d) Distribution Agreement dated 27.05.2014 with G-Star Gaw C.V. Netherlands; (e) Exclusive Distributorship Agreement dated 18.06.2014 with Jimmy Choo Limited, England; (f) License Agreement dated 06.05.2015 with Paul Smith Limited, England; and (g) Distribution Agreement dated 04.11.2015 with Bottega Veneta SA, Switzerland. 4. Under the said Agreements, the foreign parties granted to the appellant the right to import for distribution and sale in India, products such as shoes, bags, clothing, clothing related accessories, eyewear, pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved by G-Star (which after such consent makes part of this Agreement) shall include local advertising and promotional activities, press and public relations, events, participation at fairs and exhibitions where applicable and it shall describe in detail all aspects of the allocation of the Marketing Investment (defined below)". Article 11.2 "The cost of implementing the marketing Plan (the "Marketing Investment") shall be borne by Distributor and must be equal to 1% of the aggregate amount of purchase Volume. As long as Distributor is in full respect of the obligations assumed in this Agreement and any agreement between the parties or any affiliated companies of the parties and provided that the Distributor has always attained the Guaranteed Minimum Target for any year, G-Star shall grant a contribution to the marketing Investment of the Distributor with a maximum of 5% of the aggregate amount of the purchase volume ("Marketing Contribution"). (v) Distributorship Agreement dated 18.06.2014 with Jimmy Choo Limited, England Article 11 ADVERTISING AND PROMOTION-MINIMUM AMP AMOUNTS (a) It is expressly understood that JIMMY CHOO shall determine the international AMP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogues, look books, consumer brochures, standard display material, branded wrapping material and promotion presentation material), at first cost to be paid by the Distributor. All shipping costs shall be paid by the Distributor. The use of any AMP material in the Territory not supplied by JIMMY CHOO will require JIMMY CHOO's prior written approval. (k) To ensure uniform international advertising standards, the Distributor shall use only one (1) advertising or PR agency, in connection with this Agreement, and the agency shall be approved in writing by JIMMY CHOO in advance. JIMMY CHOO may also require the Distributor to change the advertising or PR agency. (vi) License Agreement dated 06.05.2015 with Paul Smith Limited, England Article 12 Advertising and Promotion 12.1 The Licensee shall in each of the Contract Years spend 10% of the greater of the Minimum Order Value or the actual order value in promoting and advertising the Licensed Business in the Territory. 12.2 Paul Smith shall in each of the Contract Years contribute 2.5% of the invoiced value of the Products for the Lincensee to spend in promoting and advertising the Licensed Business in the Territory. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Bottega Veneta SA, Switzerland Article 11 "Distributor hereby agrees that it shall spend for its local advertising campaign, or pay to Bottega Veneta within thirty (30) days from receiving an invoice therefor if Bottega Veneta exercises it soption to manage Distributor's local advertising plan as set forth in section 11.3 below, an amount of no less than five percent (5%) of the higher of: (i) the price of the Seasonal Minimum Purchase; and (ii) the total price of al Bottega Veneta Merchandise invoiced by Authorized Supplier for such Season ('Local Advertising Contributions")." 6. The appellant claims that pursuant to the said Agreements, the appellant imported the said products for the purpose of distribution and sale in India and the amount incurred towards expenditure for advertising, marketing and promotion of the said products was borne by the appellant from its own account. 7. In April 2016, the Directorate of Revenue Intelligence (DRI), Lucknow investigated whether the advertising/marketing expenses incurred by the appellant in terms of the said Agreements with the foreign parties were liable to be included in the value of the products imported by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner of Customs, Parparganj vs. Adidas India Marketing Pvt. Ltd. [2020 (374) E.L.T. 394 (Tri.- Del.)]; and (b) Giorgio Armani India (P) Ltd. vs. Commissioner of Customs, New Delhi [2018 (362) E.L.T. 333 (Tri.- Del.)] as confirmed by the Supreme Court in Commissioner vs. Giorgio Armani India (P) Ltd [2019 (365) E.L.T. A110 (S.C.)]; (ii) Interpretative Notes to rule 3(2) (b) of the 2007 Valuation Rules categorically provide that if the buyer undertakes on his own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value of those activities would not be part of the value of the imported goods nor shall such activities result in rejection of the transaction value; (iii) The advertising and marketing activities are for sales in India. Therefore, the expenses related to such advertising and marketing are expenses in respect of activities carried out in India for sale of the goods in India which is post-import and, therefore, such expenses cannot be part of the value of the imported goods; (iv) Rule 10 (1) (e) of the 2007 Valuation Rules is inapplicable in the present case; (v) It is internationally an accepted l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own account. 15. The Principal Commissioner held that the expenditure was incurred by the appellant towards advertisement and promotion of the imported products pursuant to the Agreement and so it was required to be included the transaction value. The relevant findings are as follows: "29. It is apparent, in this case, that the price is not the sole consideration as the Party is under an obligation to the supplier to incur certain expenses on advertisement and promotion of various foreign branded products imported from such suppliers. Such obligation is flowing from various Distribution / Licence agreements entered into between the Party and various suppliers. I find that the expenditure incurred by the Party on behalf of foreign Luxury Brands, towards Advertisement and Promotion of the imported goods was also reflected in the Balance Sheets and Profit & Loss Accounts of the company which substantiates the fact that the Party is incurring expenses on the promotion of the goods in compliance of the condition of sale mentioned in the various Distribution / License Agreements. Actually, the Balance Sheets and Profit & Loss Accounts of the Party for the last five years reflects tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us advertisement and brand promotion is an important and essential activity in relation to such high value goods. These goods become so well known because of their extensive advertisement and endorsement by the celebrities. I am of the view that the suppliers have entered into such agreements so as to promote the branded goods in India as per their world-wide strategy to build the brand value. This view gets credence from the fact that the agreement not only prescribe minimum level of expenditure towards advertisement, marketing and sales promotions, it also provide in details, through requirement of prior approval, the manner of such advertisement and sales promotion. I am of the view that if the Party was not put under obligation, by the supplier, to incur the substantial expenses on advertisement and promotion in India, the supplier would have to incur such expenses to build their brand value in India. This being the case, I am of the view that the second condition laid down in Rule 10(1)(e) of the CVR that the payment should have been incurred to satisfy an obligation of the seller also stands satisfied." (emphasis supplied) 16. The main issue that arises for consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-rule (1), the value shall be determined by proceeding sequentially through rule 4 to 9. RULE 10. Cost and Services. - (1) In determining the transaction value, these shall be added to the price actually paid or payable for the imported goods, (a) ------- (b) ------- (c) ------- (d) ------- (e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the 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. (2) -------- (3) -------- (4) No addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule." RULE 13. Interpretative notes. - The interpretative notes specified in the Schedule to these rules shall apply for the interpretation of these rules." (emphasis supplied) 19. Note to rule 3 contained in the Schedule to the Interpretative Notes is as follows: The Schedule (see rule 13) INTERPRETATIVE NOTES Note to rule 3 Price actually paid or payable The price actually paid or payable is the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 payment referred to in (e) of sub-clause (1) of rule 10 is in issue in this appeal. It provides that in determining the transaction value, all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the 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 shall be added. Sub-rule (4) of rule 10 stipulates that no addition shall be made to the price actually paid or payable in determining the value of the imported goods, except as provided for in rule 10. 21. It, therefore, clearly emerges from a bare perusal of rule 10(1)(e) that it contemplates two situations in which all other payments actually made or to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n very clear terms, provides that no addition shall be made to the price actually paid or payable in determining the value of the imported goods, except as provided for in rule 10. 26. Equally important are the Interpretative Notes contained in the Schedule to the 2007 Valuation Rules. Note to rule 3 provides in clear terms that activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in rule 10, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. In fact, the note to rule 3 (2)(b) states that if the sale or price is subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued, the transaction value shall not be acceptable for customs purposes. However, conditions or consideration relating to the production or marketing of the imported goods shall not result in rejection of the transaction value. As an example, it has been stated that if the buyer undertakes on his own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using the agreement, that there was nothing in the agreement from which it could be concluded that the appellant had an enforceable legal right against the dealers that they must incur certain amount of expenses on advertisement and publicity of the products of the appellant and merely because a clause in the agreement required the dealer to make efforts for promoting sales of the products of the appellant would not mean that a legal obligation was cast upon the dealer to incur expenses on advertisement. The observations of the Tribunal are as follows: "5. We have considered the submissions from both the sides and perused the records. The undisputed facts are that:- (a) the appellant's agreement with their dealers only have a clause which require the dealers to make efforts for promoting the sales of the appellant's products; and (b) during the period of dispute, the dealers had incurred expense on advertisement and publicity, a part of which had been reimbursed by the appellants to the dealers. The point of dispute is as to whether the expenses on advertisement and publicity expenses incurred by the dealers, which were borne by them, are to be added to the assessable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not done by all the dealers; and even in respect of dealers undertaking such advertisements, the extent of expenses does not get linked to or proportionate to number of vehicles sold by them; it was claimed that the dealers have incurred expenses varying from 0.0070% to 0.2333% of total sale value. In view of the above, it appears that these advertisements cannot be held to have been carried out by the buyers on behalf of the manufacturer; that the assessee has no enforceable legal right to insist on incurring such advertisement expenditure. The contention of the Department that there is no option available to the dealers does not stand proved. The stand of the department that the failure on the part of the dealer may lead to the cancellation of dealership and therefore there is a enforceable legal right is (not) acceptable. Such cancellation cannot enable recovery of dealer's share of cost of advertisements. Therefore, this case is squarely covered by the decisions of the Hon'ble Supreme Court in the cases of Philips India Ltd. v. CCE, Pune reported in 1997 (91) E.L.T. 540 (S.C) and the decision of Surat Textile Mills [2004 (167) E.L.T. 379 (S.C)] cited supra wherein it has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istributor 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 activity of advertisement and sales promotion was a post import activity incurred by the appellant on its own account and not for discharge of any obligation of the seller under the terms of sales. 35. The relevant portion of the decision of the Tribunal is reproduced below: "16. xxxxxxx. Further, we find that the activity of advertisement and sales promotion is a post import activity incurred by the appellant on its own account and not for discharge for any obligation of the seller under the terms of sale." (emphasis supplied) 36. In the present case, it clearly transpires from the Agreements entered into between the appellant and the foreign suppliers that the foreign suppliers had granted to the appellant the right to import the products for distribution and sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is being discharged by the buyer. If any payment is made by a buyer to a third party on his own account, then the condition would not be met and this amount cannot be added to the value of the imported goods since it has not been made to satisfy a pre-existing obligation of the seller. 42. In this connection it would be important to refer to the Interpretative Notes contained in the Schedule to rule 13 as such notes can be applied for the interpretation of the rules. Note to rule 3 deals with "price actually paid or payable", which expression finds place in rule 10(1) dealing with cost and services for determining the transaction value. It is this "price actually paid or payable" that has been explained in the Note to rule 3 to mean the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. Such payments can be made directly or indirectly and an example of indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by a seller. It has also been provided that in the Note that activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id or payable for the goods when sold for export to the country of importation' adjusted in accordance with Article 8 and provided that none of the grounds for rejecting Transaction Value applies. (C8-15) 1. The Price (a) ---- (b) ---- (c) ---- (d) ACTIVITIES BENEFITING BOTH BUYER AND SELLER; ADVERTISING, WARRANTY, ETC. "Activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in Article 8, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the customs value'. The most important of such activities are advertising and warranty and other marketing and promotion efforts which benefit both the exporter and the importer by increasing sales and by making the trademark, if there is one, more valuable. As to these expenditures, the Notes go on to say: '...if the buyer undertakes on his own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value of these activities is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sale of the imported goods and cannot form part of the value of the imported goods. 47. Learned authorised representative of the Department has, however, placed reliance on the decision of the Tribunal in Reebok India to contend that advertising and promotion expenses have to be added to the price of the imported goods for determining the transaction value. The relevant portion of the decision of the Tribunal in Reebok India is reproduced below: "The crux of the dispute is whether such expenditure incurred by the appellant in terms of the above clause will incur the mischief of rule 10(1)(e) of the Customs Valuation Rules. For such payments to be added to the price actually paid, the same should be made as a condition of sale by the buyer to seller or by the buyer to the third party to satisfy the obligation of the seller and such payments are not already included in the price actually paid. There is no doubt that the amount is not already included in the price actually paid or payable. The appellant is allowed to import goods from the principal in terms of the above agreement only subject to the terms of the entire agreement. In terms of this agreement the appellant wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses incurred by the M/s. Samsonite towards advertising. However, after a careful perusal of the case we note that such expenses were charged to the account of M/s. Samsonite by their principal as a share of the global expenditure. Consequently we are of the view that facts of that case is distinguishable and will not be applicable to the present facts of the case." (emphasis supplied) 48. It needs to be noticed that the same Members of the Bench that decided Reebok India on 12 January, 2018 also later decided Giorgio Armani on 05 April, 2018. In Giorgio Armani, the appellant was required to incur an expenditure of not less than 3% towards advertising in India for promotion of "Giorgio Armani Brands". The Bench noticed that even though the agreement required such expenditure to be incurred, but it could not be said that such an expenditure was required to be incurred to satisfy an obligation of the seller and therefore, the condition specified in rule 10(1)(e) was not satisfied. The decision of the Tribunal was assailed by the Department before the Supreme Court. The Supreme Court dismissed the Civil Appeal holding that the Court was not inclined to interfere with the impu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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