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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 ..... s and the Agreement could be terminated at the discretion of the foreign supplier if the appellant did not spend the amount indicated in the Agreement. Note to rule 3(2)(b) of the Interpretation Notes also needs to be remembered. Though it provides 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 but it also provides 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 activities is not part of the value of imported goods nor shall such activities result in rejection of the transaction value. It cannot, therefore, be urged that the appellant incurred expenditure to satisfy obligation of foreign sellers. Thus, the first requirement of rule 10(1)(e) of the 2007 Valuation Rules is not satisfied. The second requirement of rule 10(1)(e) is that payment should be made by the buyer to a third party to satisfy an obligation of the seller towards the third party. A Division Bench of the Tribunal in Adidas Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing 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, perfumery and cosmetic items bearing Marks owned by the foreign parties. The said Agreements provide that the appellant shall incur expenditure towards advertising, marketing and promotion of the products. 5. The relevant Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 strategy, and that JIMMY CHOO shall advise Distributor in order to consistently enhance the brand image. (b) The Distributor shall use its best efforts to promote and develop the distribution and sale of the products throughout the Territory in such a manner that it is consisten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 avoidance of doubt this contribution is in addition to the amount to be spent by the Licensee under clause 12.1, and shall be spent on promoting and advertising the Products in the Territory. 12.3 The Licensee shall for each Season present a marketing plan to Paul Smith for approval in advance of the Season. 12.4 The Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 from them. 8. A show cause notice dated 27.10.2017 was then issued to the appellant calling upon the appellant to show cause as to why the assessable value declared by the appellant for import of goods made during the period from 01.09.2012 to 31.08.2017 should not be rejected and reassessed in terms of section 17(4) of the Customs Act and why the expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 legal position as per the GATT Customs Valuation Code that marketing/ advertising expenditure incurred by the importer even under agreement with the foreign supplier cannot form part of the transaction value of the imported goods; (vi) The show cause notice is barred by time under section 28 (1) of the Customs Act and the larger period of limitation under section 28 (4) would be inapplica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 that they have incurred an expenditure of Rs. 11,26,84,390/- towards Advertisement and Promotion of the products, out of which Rs. 8,78,42,910/- is relatable to the expenses incurred for the advertisement and promotions of the foreign branded products imported by them. ***** 31. In view of the fact that the Party is incurring substantial amount towards Advertisement and Promotion of the imported goods, the decl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in this appeal is whether the expenditure incurred by the appellant towards advertising, marketing and promotion of the goods imported by the appellant under the Agreements with the foreign suppliers is liable to be added to the transaction value of the imported goods. In order to appreciate this issue, it will be appropriate to examine the relevant provisions. 17. Section 14(1) of the Customs Act provides that the value of the imported goods a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Payment may be made directly or indirectly. An example of an indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by the seller. Activities undertaken by the buyer on his own account, other than those for which an adjustment is provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 actually made or to be made by the buyer to the seller as a condition of sale of the imported goods to the extent that such payments are not included in the price actually paid or payable, have to be added. The second is a situation when all other payments actually made or to be 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 exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 activities would not be part of the value of imported goods nor shall such activities result in rejection of the transaction value. 27. These are important factors which would have to be taken into consideration for determining whether the requirements set out in rule 10(e) of the 2007 Valuation Rules are satisfied. 28. It will also be useful, at this stage, to refer to cases that have discussed the requirement of rule 10(1)(e) of the 2007 Valuation Rules that payment should actually be made as a condition of sale. These decisions hold that the costs incurred on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions 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 value of the goods or not. On this point, it is seen that the Apex Court in case of C.C.E., Surat v. Surat Textile Mills Ltd., reported in 2004 (167) E.L.T. 379 (S.C) has held in clear terms that only when a manufacturer has enforceable legal right against his customers/ dealers to insist on incurring of expenses on advertisement, the advertisement expense incurred by the dealers can be added to the assessable value. Same view has been taken by the Tribunal in case of Maruti Suzuki India Ltd. reported in 2008 (232) E.L.T 566 (Tri.- Del.). 6. On going through the appellant s agreement with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been 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 of the incurring of such advertisement expenses by the customer. (emphasis supplied) 32. The same view was taken by a Division Bench of the Tribunal in Giorgio Armani India . The observations of the Tribunal are as follows: 10. Lastly, we consider the loading @3% of the value of purchase. As per the agreement with the foreign buyers, the appellant is required to incur an expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision 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 sale in India but the appellant had to incur, on its own account, the expenditure towards advertising, marketing and promotion of the products. In some of the Agreements the appellant was required to use its best efforts to promote and develop the distribution and sale of the products and the Agreement could be terminated at the discretion of the foreign supplier if the appellant did not spend the amount indicated in the Agreement. 37. In the decisions referred to above, it has been held that advertisement expenditure can be added to the sale price for determining the assessable value only if there is an enforceable legal right to insist on incurring of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly 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 rule 10, are not to be considered as an indirect payment to the seller even though they may be 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. 43. 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 va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not part of the customs value nor shall such activities result in rejection of the transaction value'. The treatment of advertising expenditures was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 will have to necessarily 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired 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 impugned order. However, in Reebok India, the same 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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