2013 (5) TMI 603 - AT - Customs

Tribunal includes license fee in goods value based on Customs Valuation Rules

The tribunal allowed the Revenue's appeal, holding that the license fee and royalty paid by the respondent to the licensor are includable in the value of ... Royalties and license fees includable in transaction value - Condition of sale - Control of vendor selection and pricing by licensor - Rule 9(1)(c) of the Customs Valuation Rules, 1988 - Value of imported media includes intellectual/content componentRoyalties and license fees includable in transaction value - Condition of sale - Control of vendor selection and pricing by licensor - Rule 9(1)(c) of the Customs Valuation Rules, 1988 - Value of imported media includes intellectual/content component - Whether the license fee and royalty paid by the importer to the licensor are includable in the transaction value of imported DVDs under Rule 9(1)(c). - HELD THAT: - The Tribunal found that the licence/royalty agreement placed the licensor in decisive control over key aspects of the purchase from the foreign replicator: the replicator to be used was designated by the licensor; prices payable to the replicator were to be consulted with and negotiated by the licensor; purchase orders required the licensor's prior written approval; minimum order quantities and timing were prescribed; and a non refundable license fee was payable in advance. Royalties were fixed by minimum per unit amounts or as specified percentages irrespective of domestic resale price. These terms meant neither the replicator nor the importer had independent freedom to determine price, and the licensor effectively determined the transaction value. Applying Rule 9(1)(c), which requires addition of royalties and licence fees that the buyer is required to pay as a condition of sale, the Tribunal held the payments were a condition of sale and therefore includable. The Tribunal relied on the apex Court's decision in Living Media India Ltd., and Associated Cement Co., which recognise that the value of imported media includes the content (intellectual input) and that duty must be charged on the final product. Foreign decisions cited by the respondent were held distinguishable on facts because those cases lacked the degree of licensor control present here. On these grounds the licence fee and royalties were held includable in the price actually paid or payable for the imported DVDs.License fee and royalty paid to the licensor are includable in the transaction value of the imported DVDs under Rule 9(1)(c); Revenue's appeal allowed and the lower order set aside.Final Conclusion: The Tribunal allowed the Revenue's appeal, holding that under the factual matrix the licensor's control over replicator selection, pricing and purchase terms made the licence fee and royalties a condition of sale and therefore includable in the customs valuation of the imported DVDs. Issues Involved:1. Valuation of imported DVDs.2. Inclusion of license fee/royalty in the transaction value of imported goods.3. Relationship between the respondent and vendors.4. Applicability of precedents and legal interpretations.Issue-wise Detailed Analysis:1. Valuation of Imported DVDs:The core issue revolves around the valuation of DVDs imported by the respondent, M/s. Excel Productions Audio Visuals Pvt. Ltd. The Special Valuation Cell initially determined that the respondent was not related to the vendors and that the license fee/royalty paid to the licensor was not a condition of sale in the contract with the vendors. Consequently, these payments were not included in the taxable value of the imported goods. However, the Revenue challenged this decision, arguing that the license fee/royalty should be included in the transaction value.2. Inclusion of License Fee/Royalty in the Transaction Value:The Revenue contended that the payment of royalties/license fees had a direct bearing on the purchase prices and thus should be included in the transaction value of the imported goods under Rule 9 (1) (c) of the Customs Valuation Rules. They highlighted that the licensor controlled the transaction, including the prices and the replicators from whom the DVDs were purchased. The respondent, on the other hand, argued that there were two independent transactions: one with the licensor for the right to distribute and resell DVDs, and another with the vendors for purchasing the DVDs. They cited Canadian case laws to support their stance that the payment of royalties was not a condition of sale.3. Relationship Between the Respondent and Vendors:The agreement between the respondent and the licensor included several conditions that indicated the licensor's control over the transactions with the vendors. These conditions included the licensor's approval of purchase orders, negotiation of prices, and selection of replicators. The tribunal found that these conditions meant the respondent was not free to negotiate the terms independently, thus making the payment of royalties a condition of sale.4. Applicability of Precedents and Legal Interpretations:The respondent relied on Canadian case laws and the interpretation of the term 'condition of sale' under the Indian Sale of Goods Act. However, the tribunal distinguished these cases based on the specific conditions present in the agreement between the respondent and the licensor. The tribunal also referred to the Supreme Court's decision in the Living Media India Ltd. case, which held that royalties paid for the contents of imported media are includable in the transaction value. The tribunal concluded that the conditions in the agreement made the payment of royalties a condition of sale, thus includable in the transaction value under Rule 9 (1) (c).Conclusion:The tribunal set aside the lower appellate authority's order and allowed the Revenue's appeal, holding that the license fee and royalty paid by the respondent to the licensor are includable in the value of the goods purchased from the replicators. This decision was based on the interpretation of Rule 9 (1) (c) of the Customs Valuation Rules and the specific conditions in the agreement that indicated the licensor's control over the transactions.