By TIOL News Service

MUMBAI, SEPT 14, 2016: APPELLANT - importer distributes feature films of foreign studios in 'home-viewing formats', such as VHS, VCD and DVD in accordance with contracts entered into with such studios. In general, royalty based on gross sales in India are the recompense to the overseas entities. As a matter of trade practice, a minimum guarantee amount is remitted at scheduled intervals and which is to be recouped by the appellant from the royalty payable on sales. The agreement envisages access to a finite number of titles during the term of contract which are supplied to the appellant in 'betachem' or 'digital linear technology (DLT)' form and these are replicated by designated entities in India in the retail form for sale to customers.

The imports in question were effected through couriers at the Mumbai Airport and duty liability was discharged on the value of the media as declared by the supplier.

The SCNs sought to nullify the assessments, reject the declared value by invoking rule 10A of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988/Rules 2007 and to include the royalties payable to overseas entities by invoking rule 9(1)(c)/rule 10 of the said Rules.

The demands of Rs.2.67crores&Rs.1.86crores were confirmed with penalties etc. During pendency of investigations, appellant-importer deposited Rs.2crorestowards duty.

The appellant is against these orders whereas Revenue is in appeal against the quantum of penalty imposed. There are appeals filed by the employees too – against them penalties were imposed.

At the outset, the Member (T) writing for the Bench had the following acerbic comments reserved for the Revenue –

"…we are constrained to note that the notices and adjudication orders have been issued by officers who have either not comprehended the scheme of customs valuation in section 14 of Customs Act, 1962 read with the Rules supra or have not appreciated the context in which these were sought to be enforced in the present instances. For their sake as well as for the elucidation of other tax officials who may well be placed in similar circumstances, it devolves on us to elucidate and educate."

The CESTAT further observed -

++ It should be abundantly clear from the Rules that rule 9 is to be invoked for adjusting the declared value to reflect the components specified therein to reflect the transaction value to be adopted for assessment. Impliedly, the declared price is accepted and subjected to the adjustments when invoking rule 9. On the contrary, with the rejection of declared price under rule 10A, the transaction value under rule 4 becomes irrelevant and, in accordance with rule 3, the provisions of rule 5 to 8 are to be applied sequentially. Therein lies the nub in the present dispute: the declared price is sought to be rejected under rule10A without taking it to its logical conclusion as prescribed in rule 3 and, instead, the very same rejected price is sought to be adjusted by adding the 'royalty' component as provided in rule 9 which applies only to the transaction value in rule 4. On this ground alone, the entire proceedings would fail.

++ The adjudicating authority has also recorded a finding that, instead of using the 'air cargo' route and seeking provisional assessment, the appellant deliberately used the 'courier mode' to hoodwink the customs authorities for clearance of the goods by suppression of the licence agreements.

++ Courier is an authorized method of carriage of import articles with the procedure for clearance, including custodianship, declaration, examination and duty payment prescribed in Courier Imports & Exports (Clearance) Regulations, 1998. We see no earthly season for debarring the disputed import from being routed through this in the absence of a specific prohibition in the Regulation.

++ In the present dispute, it is the import of 'master tapes' that are to be replicated for sale for which duty is assessed. The products manufactured thereafter are the subject of royalty payments to the overseas entities. The dispute in re Living Media Ltd - 2011-TIOL-81-SC-CUS is about pre-recorded discs imported into the country with royalty payable on the sale of the imported products. The substantive difference between the two is that the 'master tapes' imported by the appellant before us is not the subject of royalty but the pre-recorded media made from these imported goods are. For this reason, the decisions sought to be relied upon by Revenue do not apply to this dispute.

++ The decision in re Essar Gujarat Ltd - 2015-TIOL-63-SC-CUS, does not impact upon such imports which can draw a distinction between royalty on goods imported and royalty as a post-importation condition. [Kinetic Technology India Ltd. - 2016-TIOL-2169-CESTAT-MUM relied upon] Of particular import are the propositions that mere existence of royalty clause in a contract which also covers import of goods does not, ipso facto, mandate adjustment of transaction value; the connection with imported goods must conform to the prescriptions in rule 9 of Customs Valuation Rules, 1988 (or rule 10 of Customs Valuation Rules, 2007). It is abundantly clear from the above narration that royalty is hinged upon post-importation manufacture and not on the imported goods per se. The impugned order has erred in including the royalty amounts in the valuation of the 'master tapes' that were imported.

The appeals of the importer and its employees were allowed with consequential relief &the Revenue appeals were dismissed.

(See 2016-TIOL-2397-CESTAT-MUM)