By TIOL News Service

MUMBAI, APR 17 : THE appellant imported recorded media such as beta tapes, digibeta tapes etc. during April, 2004 to October, 2007. These recorded media contained feature films/programmes and they were imported through a courier agency. The duty liability was discharged by the appellant only on the cost of media as declared by the courier agency based on the invoice submitted by the foreign supplier.

The department conducted an investigation into the matter and found that the appellant  has purchased and imported the media containing feature films/serials and paid to the overseas suppliers licence fee for exploiting the intrinsic content of the said media. However, for the purpose of Customs Valuation, they had declared only the cost of material/media and suppressed the amount of licence fee paid/payable to the overseas suppliers. It was further noticed that the recorded media were imported against either fixed amount of licence fee or against minimum guarantee amount. All these amounts were paid before the importation of the goods. It was further seen that the imported beta/digibeta tapes were sub-licenced by the appellant to various companies for replication/manufacture.

Referring to the Customs Valuation Rules 9 & 10, SCN was issued for inclusion of royalties/licence fees paid to the overseas suppliers and re-determination of the assessable values and consequential demand of differential duty of Rs.79,19,049/- etc.

The demand was confirmed by the Commissioner and hence the appellant is before the CESTAT.

The Member (Technical) after narrating the facts referred to the Tribunal decision in Indo Overseas Films upheld by the Madras High Court - 2007-TIOL-39-HC-MAD-CUS wherein it was held that the petitioner had to pay not only the cost of movie materials, but also the royalty and the rights specified in the distribution agreement as a condition of sale, as without the right of exploitation the print or trailer could not be of any use to the petitioner to enjoy theatrical or video right conferred on the petitioner and hence the consideration paid for such rights have to be included in the value of the imported goods for the purposes of assessing customs duty. The Supreme Court decision in State Bank of India - 2002-TIOL-280-SC-CUS-LB was also adverted to conclude that the entire amount of royalty/licence fee paid for the supply of goods would form part of the transaction value of the goods.The Tribunal decision in Universal Music India P. Ltd. - 2008-TIOL-2213-CESTAT-MUM was also cited in this regard along with the decision in Living Media (India) Ltd. - 2011-TIOL-81-SC-CUS and the decision in Ferodo India Pvt. Ltd. - 2008-TIOL-28-SC-CUS was distinguished on facts. Holding that in the instant case also the licence fee paid was a condition of sale/supply of imported goods and, therefore, such payments are includible in the transaction value under Rule 9(1)(c)/10(1)(c) of the Customs Valuation Rules, the demand was upheld.

The plea that the appellant was under the bona fide belief that the royalty payments need not be included in the taxable value of the goods under importation was also not accepted and the Member (T) held that such a plea is not convincing as it appears to be a purely an argument of convenience.  Holding that bona fide belief is not blind belief it was held that the invocation of the extended period of time for confirmation of duty demand by the department is correct in law and cannot be faulted.  It was also concluded that since penalty was imposed on the appellant u/s 114A, the same is not warranted on the Managing Director u/s 112(a)/(b) of the Customs Act, 1962.  Confiscation order was also upheld.

The Member (Judicial) had a differing view.

While allowing the appeal he observed -

++ As per Rule 9(1)(c) read with Explanatory Notes to the Customs Valuation (Determination of Price of Imported Goods)Rules, 1988, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value. It is further provided that the payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods, if such payments are not the condition of the sale for export to the country of importation of the imported goods.

++ The royalty payment made under the licensing agreement which is not connected to the ownership or importation of the product but rather, as copyright for the use, manufacture or sale of the products in the country of importation is not liable to be added to the transaction value.

++ I find that the royalty payment has been made by the appellant in connection with reproduction/manufacture by exploitation of the copyright, which is separate from the right to import the product (master copy) are not the condition of the sale, is not to be added to the transaction value of the master tape. In the facts, under the Valuation Rules, the license fee paid to the licensor of the films/TV programmes for the right to exhibit the films and/or for right to duplicate by way of manufacturing DVD/CD etc. by the appellant is not to be included in the transaction value, since the right of public performance is considered equal to the right to production in the country of importation.

++ The legal provisions have not provided any separate treatment for payment of copyright or license fee if paid in lump sum or if paid on actual exploitation later on.

++ Another important fact to be taken note of in the present case is that if the master piece or copy is damaged during the license period, the licensee can always ask for replacement of the same from the licensor.

++ The Commissioner has mis-construed the facts in the impugned order, at para 21.1.2, wherein it has been observed that there is no mention of any payment towards manufacture or re-production of imported goods and the payment of license fee is a pre-condition of sale and is not related to any manufacturing activity subsequent to import of goods in India; and there is no mention of payment towards royalty for distribution of the imported goods. This observation is patently wrong and contrary to the facts on record. Thus, the impugned order is perverse and fit to be set aside for the ends of justice.

++ There is no case of suppression, fraud or any contumacious conduct made out by the appellant and hence, I hold that the extended period of limitation is not available to the Revenue and the appeal also succeeds on this ground. The penalties imposed are also set aside.

In view of the difference in opinion the matter was referred to the Third Member.

The Third Member on reference, Vice President,observed -

++ The issue is now settled by the decision of the Supreme Court in Living Media (India) Ltd. - 2011-TIOL-81-SC-CUS, therefore, I agree with the view taken by the learned Member (Technical) that the licence fee / royalty is to be includible in the assessable value of the imported goods.

++ During the period when the goods in question were imported into India, there were certain decisions [Sony Music Entertainment Pvt. Ltd. vs. CC, Mumbai - 2005-TIOL-1018-CESTAT-MUM, Associated Cement Companies Ltd. - 2002-TIOL-08-SC-CUS which are against the Revenue, therefore, I find merit in the contention of the appellant that the allegation of suppression with intent to evade payment of duty is not sustainable. On the issue of time bar I agree with the view taken by the learned Member (Judicial) hence the order confirming the demand, confiscation of the goods and imposition of penalties is not sustainable hence set aside.

++ The appeals are allowed after setting aside the impugned order on the ground of limitation.

And so, the Majority decision is -

The royalties/licence fees paid for the import of beta/digibeta tapes containing films are includable in the assessable value of the said tapes. However, the demand in the present case is time barred and consequently, Customs duty demand with interest and penal consequences are not sustainable and accordingly, set aside.

(See 2014-TIOL-583-CESTAT-MUM)