MUMBAI, APRIL 25, 2013: THE respondent is engaged in the business of importing and selling of DVDs. They entered into a licensing agreement with Buena Vista Home Entertainment Inc (the Licensor in short) under which the respondent acquired license/right to import and sell/distribute DVDs in respect of which the licensor held the copy right. Under the said agreement, the respondent was given the right to import from “Replicators” namely, U-Tech Medi Corporation of Taiwan and such other Replicators as the licensor may from time to time designate, DVDs for the purpose of distribution/re-sale in India. The respondent was also locally purchasing DVDs from replicators/vendors in India. In consideration of the right granted to the respondent to distribute/re-sell the DVDs in India, the respondent was required to pay to the licensor, a license fee and further a royalty upon the sale of the DVDs in India. Such royalty was paid both in respect of imported DVDs as well locally procured DVDs and the same was payable to the Licensor in view of the copy right held by the licensor and in view of the right granted by the licensor as holder of the copy right to the respondent to distribute /re-sell in India. Thus there were two sets of transactions, first with the licensor under the license agreement and second with the vendors by means of purchase orders.

The issue of valuation was examined by the Special valuation Cell the Deputy Commissioner vide his order of January, 2005 held that the respondent was not related to the Vendors within the meaning of Rule 2(2) of the Customs Valuation Rules, 1988 and the payment of license fee/royalty to the licensor was not a condition of sale in the contract with the vendors and accordingly, the said payments are not includable in the taxable value of the imported goods.

The appeal filed by the Revenue was also dismissed by the Commissioner (A) in December, 2005 by placing reliance on the decision in Living Media India Ltd., Vs New Delhi, reported in 2002 (148) ELT 441 (Tri Del).

Against this order, the Revenue is in appeal before the CESTAT.

The Revenue representative relied on the apex Court decision in the case of Living Media India Ltd. [2011-TIOL-81-SC-CUS] and requested that the order of the lower appellate authority be set aside.

The respondent submitted that there are two independent sets of transaction involved viz. one with the licensor for purchasing the copyrights in the DVDs and as per which they are paying license fee and royalty; the second with the vendor by means of purchase orders wherein there is no condition in the purchase order regarding payment of royalty. It is also inter alia submitted that the decision in Living Media India Ltd. case cannot be an authority or precedent for an issue which did not arise before the Court and hence the order of the lower authority needs to be upheld. Reliance is placed on the note to Rule 9(1)(c) of the Valuation Rules and the decisions of the Canadian Federal Court of Appeal and Supreme Court of Canada, namely Reebok Canada Vs. Canada (Deputy Minister of National Revenue) - 2002 (FCA 133 (CanLII) and Canada (deputy Minister of National Revenue ) vs. Mattel Canada Inc - 2001 SCC 36.

The Bench while noting that the conditions of sale were not in existence in the case laws relied upon by the respondent and are, therefore, distinguishable observed -

+ From clause 12 of the agreement entered into by the respondent with the licensor it is clear that the replicators from whom the DVDs have been bought are decided by the licensor.

+ Thus, the respondent is not free to choose any replicator but the goods have to be bought from a specific replicator as determined by the licensor. Secondly, as per sub-clause (i) of clause 12.2, the licensee shall consult fully with the licensor with respect to the prices payable to replicator and, upon the licensee's request licensor shall seek to negotiate such prices on Licensee's behalf. In other words, the licensee is not free to negotiate with the replicator for the prices for the sale of the goods. Further, under sub-clause (ii) of clause 12.2, the purchase order placed with the vendors requires the prior written approval of the licensor. There is also an additional condition under clause (iii) with regard to the minimum number of DVDs for which purchase orders have to be placed and these are also time limits for placing the order. The agreement also stipulates that the amounts due to the replicators (vendor) shall be paid within thirty days of the receipt of the relevant invoices. From the above terms and condition, it is clear that the entire transaction of sale of the DVDs by the replicator to the respondent is controlled, regulated and closely monitored by the licensor and the licensor has the ultimate say in the matter. In addition to the above, the clause 6 of the agreement prescribes payment of a non-refundable license fee of USD 25,000, which has to be paid in advance even before the import of the goods.

+ As regards the payment of royalty there is a minimum amount stipulated per DVD/VCD of the order on Rs.27/- and Rs.130/- respectively. Otherwise, the royalty is 25% of the gross invoice amount for the VCD distributed and 35% of the gross invoice amount for the DVDs distributed. Thus, the payment of royalties is not related not only to the sale price of DVDs/VCDs in India, but there is a stipulation as to the minimum royalty to be paid to the licensor. It is in these circumstances, one has to examine provisions of Rule 9 (1) (c) of the Customs Valuation Rules.

+ Conditions in the license/royalty agreement make it amply clear that neither the replicator/vendor (foreign supplier) nor the respondent the importer has any freedom to decide the price and both are under the control of the licensor and the transaction value is virtually determined/decided by the licensor. If that be so, the licence fee/royalties paid to the licensor becomes a condition of sale and, therefore, in terms of Rule 9(1)(c), the said amount of licence fee/royalty is includable in the price actually paid or payable for the imported goods.

Noting that the facts of the case closely resemble that in the Living Media India Ltd. case [ 2011-TIOL-81-SC-CUS], the Bench held that the said decision is squarely applicable.

The Bench also referred to the apex Court decision in Associated Cement Co. Ltd. 2002-TIOL-08-SC-CUS and concluded -

"6.10 Thus, it may be seen that the value for the purpose of levy of Customs duty is not only the cost of media but also the cost of matter contained in the media, that is, the content of the media. Since a replicated CD contains the artistic/intellectual inputs, the cost of the same has to be considered while charging Customs duty. It is not the case of respondent herein that the cost of the contents has already been included in the value charged by the replicator. If that was so, there was no need for payment of licence fee/royalty to the Licensor separately."

Holding that the licence fee and royalty paid by the respondent to the licensor is includable in the value of the goods purchased from the replicator(s), the CESTAT set aside the order of the Commissioner(A) and allowed the Revenue appeal.

(See 2013-TIOL-647-CESTAT-MUM)