Royalty and assessable value: payment by the assessee to the buyer cannot be treated as additional consideration under Rule 5.

Royalty paid by an assessee to a brand owner could not be added to the sale price as additional consideration under Rule 5 of the Central Excise (Valuation) Rules, 1975. The SC held that only consideration flowing directly or indirectly from the buyer to the assessee can be included in assessable value; a payment made by the assessee to the buyer for use of the buyer's brand name does not meet that requirement. On that basis, the show cause notice and demand founded on inclusion of the royalty were unsustainable.

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Issues: Whether royalty paid by the seller to the buyer for use of the buyer's brand name could be treated as additional consideration and added to the sale price under Rule 5 of the Central Excise (Valuation) Rules, 1975.

Analysis: Rule 5 permits inclusion only of additional consideration flowing directly or indirectly from the buyer to the assessee. On the facts, the royalty was paid by the assessee to the brand owner, who was also the buyer in part, for use of its brand name. Such a payment does not satisfy the statutory requirement of consideration flowing from buyer to seller. The foundation of the show cause notice and the demand based on inclusion of royalty in assessable value was therefore unsustainable.

Conclusion: The royalty could not be added to the transaction value as additional consideration under Rule 5, and the demand was not sustainable.

Ratio Decidendi: Only consideration flowing from the buyer to the assessee can be included in assessable value under Rule 5 of the Central Excise (Valuation) Rules, 1975; a royalty payment made by the assessee to the buyer cannot be treated as such additional consideration.

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