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2020 (3) TMI 324
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....cluded in the assessable value of the goods imported by adidas India by invoking rule 10(1)(e) of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007 ^the 2007 Rules. 3. It has been stated that adidas India is engaged in importing and selling adidas brand products i.e. footwear, garments and sportswear goods imported from adidas International Trading BV, Netherlands ^adidas Netherland. It also transpires that adidas AG, Germany ^adidas Germany is the owner of certain intellectual property relating to adidas brand, including trademarks such as "adidas", "3 stripes", "Trefoil" and "3-Bars", patents and know-how. A License Agreement was entered into between adidas Germany and adidas India with effect from 01 April, 2013. It was later revised on 1 April 2016. Under the agreement, adidas India was granted the non-exclusive right and license to use 'know how' to manufacture the licensed products and the exclusive license to promote, distribute, market and sell the products and licensed products of adidas throughout the territory specified in the Agreement. A licensed product has been defined in the License Agreement to mean such products for which adidas German....
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....reserves the right to promote, distribute, market and sell PRODUCTS in the TERRITORY through the adidas GROUP global e-commerce platform. 2.3 LICENSEE shall use its best efforts to develop, extend and maximise sale and distribution of the PRODUCTS and LICENSED PRODUCTS in the TERRITORY. 2.5 All expenses incurred by LICENSEE, directly or indirectly, related to the manufacture, distribution, marketing and sale of LICENSED PRODUCTS and all expenses incurred by LICENSEE related to the distribution, marketing and sale of the PRODUCTS shall be borne by LICENSEE and LICENSEE shall not create any expenses or other liabilities chargeable to LICENSOR, subject to Article 5. 10. 2.8 LICENSEE shall be entitled to grant to franchisees, retailers and other sales partners the non-exclusive right to use the MARKS to promote, distribute, market and sell PRODUCTS and/or LICENSED PRODUCTS within the TERRITORY. ARTICLE 4 MARKETING 4.1 LICENSEE shall submit a complete and detailed business and marketing plan as part of the annual budget process which shall include estimates of sales of PRODUCTS and LICENSED PROBUCTS for each subsequent CONTRACT YEAR. 4.....
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....ve right to conclude agreements for the sponsorship or endorsement of the adidas brand or any adidas products with any athletes, players, teams, clubs, events, federations, or other individuals or groups of individuals, committees or similar organizations ("PROMOTIONAL AGREEMENTS") within the TERRITORY. LICENSEE shall use LICENSOR's standard form promotional contracts (which shall be supplied by LICENSOR) for such PROMOTIONAL AGREEMENTS. Notwithstanding the above, if the value of any PROMOTIONAL AGREEMENT exceeds-USD 300,000 (for its equivalent in local currency) LICENSEE must obtain LICENSOR's prior consent to said PROMOTIONAL AGREEMENT." ARTICLE 5 MARKS 5.10 In the event of any actual or threatened legal proceedings against LICENSEE or its customers alleging infringement of a third party's intellectual property or other rights by the use of the MARKS in relation to the manufacture, use, sale or distribution of any PRODUCT or LICENSED PRODUCTS. LICENSOR shall indemnify LICENSEE from and against any cost or expense relating thereto, including reasonable out of pocket expenses (excluding managerial time) provided the PRODUCT and/or LICENSED PRODUCT has not been mo....
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....proposing to demand differential customs duty by adding the sponsorship/ endorsement expenses incurred by adidas India to the value of the imported goods under rule 10(1)(e) of the 2007 Rules. It was alleged that adidas India did not include the sponsorship and endorsement expenses in the assessable value of the goods at the time of importation of goods, nor did it declare to the Customs that it had agreed to bear the sponsorship and endorsement expenses on behalf of adidas Germany in terms of the License Agreement. The Appellant was, therefore, directed to state as to why: (i) the assessable value declared by them for imports of goods made by them during the period from 1 April 2012 to 31 March 2017 should not be rejected in terms of Section 17(4) of the Customs Act, 1962 and re-assessed; (ii) the proportionate expenditure of Sponsorship and Endorsement relatable to imported good, as reflected in the balance sheet, for the period from 1 April 2012 to 31 March 2017 should not be included in the assessable value for determination of customs duty; (iii) the short-levied duty of customs amounting to Rs. 67,57,769/- should not be demanded from them in terms o....
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....of sponsorship specified, no bench marking of expenses to sales and no specification as to the obligation is for what amount. I also do not find any clause to substantiate the "condition of sale". If one were to ask, could importer AIMPL continue to import at the same transaction values and pricing arrangement, if they do not enter sponsorship agreement with the players. I see no clause in the agreement, which prohibits the same. I rather find that as per clause 7.1 of the same agreement, a royalty equal to 6% of the net sales of the licensed products is payable to the seller, for various rights and benefits. ---------- 93. While it as a fact, that the sponsorship made by AIMPL would definitely help the overall brand promotion, however again the most important question to ask at this juncture would again be "whether it was a condition to sale", and as a part of obligation to the seller. In the license agreement and in the notice, I find that there is no direct evidence coming forth to answer this question in the affirmative. The entire amount of sponsorship fee given to teams/ players by AIMPL from its own account, is sought to be added when it cannot be quantifie....
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....scation, penalty has to be levied under section 112 of the Customs Act. 10. Shri B.L. Narasimhan, learned counsel appearing for the respondent - adidas India made the following submissions: (i) The impugned order does not suffer from any illegality and, therefore, the appeal filed by the Revenue deserves to be dismissed; (ii) Rule 10 (1) (e) of the 2007 Rules could not have been resorted to by the Revenue for adding all other payments contemplated in determining the transaction value for the reason that the conditions specified in the said sub-rule were not satisfied; (iii) The payment made to the contracting players and others towards sponsorship and promotion of the products is not a condition of a sale of the imported goods nor has it been made to satisfy an obligation of the seller towards a third party. Hence rule 10 (1) (e) of the 2007 Rules could not have been invoked; and (iv) The extended period of limitation could not have been invoked in the facts and circumstances of the case. 11. The submissions advanced by the learned Authorised Representative of the Department and the learned Counsel for the Respondent have been considered. ....
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.... be the price actually paid or payable for the goods when sold for export to India or for export from India, where the buyer and the seller of the goods are not related and the price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf. Thus, this section deals with transaction value of goods where the buyer and the seller are not related. Under the second proviso to section 14(1), the Rules may provide for the circumstances in which the buyer and the seller shall be deemed to be related and the manner of determination of value in respect of goods where the buyer and the seller are related or the price is not the sole consideration for the sale. The 2007 Rules that have been framed under Section 14 of the Customs Act do provide for determination of the transaction value where the buyer and the seller are related. Rule 2(g) of the 2007 Rules provides that the 'transaction value' means the value referred to in sub-section (1) of section 14 of the Customs Act. In the present case, it is not in dispute that the buyer and the seller are related. 15. The relevant provisions of the 2007 Rules for determination of t....
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....rted goods. The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods: (a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment; (b) The cost of transport after importation; (c) Duties and taxes in India. The price actually paid or payable refers to the price for the imported goods. Thus the flow of dividends or other payments from the buyer to the seller that do not relate to the imported goods are not part of the customs value." 17. Section 14(1) of the Customs Act provides that the value of the imported goods and export goods shall be the transaction value of such goods, which would be price actually paid or payable for the said goods, where the buyer and the seller of the goods are not related and the price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf. The 2007 Rules have been framed in exercise of the powers c....
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....de as a condition of sale of the imported goods by the buyer to a third party to satisfy an obligation of the seller. 20. What also needs to be noticed is that in both the aforesaid two situations there are two requirements. The first requirement is that the payment should be made as a condition of sale and the second requirement is that they should be made to satisfy an obligation of the seller which can be towards the buyer as contemplated in (a) or towards a third party as contemplated in (b). Both the aforesaid twin requirements have to be satisfied before any payment made by the buyer to the seller or the buyer to a third party can be added to the price actually paid by the buyer to the seller for determining the transaction value. In other words, whenever such a payment is made either by the buyer to the seller or the buyer to a third party, the payment should necessarily be made as a condition of sale of the imported goods to satisfy an obligation of the seller. As an example, the obligation of the seller could be when the seller owes a debt to the buyer or to a third party. In such a situation, the seller may require the buyer to adjust the debt. Rule 10(1)(e) requires t....
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....ird party which would be payments made by adidas India to various sports personalities and associations for marketing and promotional activities of the products. 24. It will be useful, at this stage, to refer to cases that have discussed the requirement of rule 10(1)(e) of the 2007 Rules that payment should actually be made as a condition of sale. These decisions hold that the costs incurred on advertisement and promotion, even if such advertisement and promotion is carried out under an agreement between the buyer and seller, can be added to the amount paid by the buyer for import of goods only when there is a right with the seller to enforce such a condition on the buyer to incur such expenditure. 25. In Commissioner of Central Excise, Surat vs Surat Textile Mills Ltd 2004 (167) E.L.T. 379 (S.C.), the Supreme Court emphasized that advertisement expenditure incurred by a customer of the manufacturer can be added to the sale price for determining the assessable value only if the manufacturer has an enforceable legal right against the customer to insist on the incurring of such advertisement expenses by the customers. The relevant portion of the judgement is reproduced below: ....
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....T. 379 (S.C) has held in clear terms that only when a manufacturer has enforceable legal right against his customers/ dealers to insist on incurring of expenses on advertisement, the advertisement expense incurred by the dealers can be added to the assessable value. Same view has been taken by the Tribunal in case of Maruti Suzuki India Ltd. reported in 2008 (232) E.L.T 566 (Tri.- Del.). 6. On going through the appellant's agreement with their dealers, we find that there is nothing in their agreement from which it can be concluded that appellants had enforceable legal right against the dealers to insist on incurring of certain amount of expenses on advertisement and publicity of the appellant's products. Just a Clause in the agreements requiring the dealers to make efforts for promoting sales of the appellant's products cannot be treated as a clause imposing legal obligation on the dealers to incur certain level of expenses on advertisement. In view of this, we hold that the impugned orders are not sustainable. The same are set aside. The appeals are allowed." [emphasis supplied] 27. In Maruti Suzuki India Ltd. vs Commissioner of Central Excise, Delhi/Bhopal 2008 (23....
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.... only if the manufacturer has an enforceable legal right against the customer to insist of the incurring of such advertisement expenses by the customer." [emphasis supplied] 28. The same view was taken by a Division Bench of the Tribunal in M/s Giorgio Armani India (P) Ltd vs. Commissioner of Customs, New Delhi 2018-VIL-248-CESTAT-DEL-CU The observations are as follows: "10. Lastly, we consider the loading @3% of the value of purchase. As per the agreement with the foreign buyers, the appellant is required to incur an expenditure not less than 3% towards advertising in India. Such advertisement is carried-out in India for promotion of 'Giorgio Armani' Brands. Such expenditure is incurred after import of the goods. Even though, the appellant is required to incur such expenditure as per the agreement with the foreign principal, it cannot be said that such expenditure has been incurred to satisfy the obligation of the foreign principal. Consequently, the condition specified in rule 10 (1)(e) is not satisfied and accordingly we find no justification to load the invoice value to this extent. Such loading is accordingly set-aside." [emphasis supplied] 29. It needs to....
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....his net expenses for advertising which is not a dutiable item in the first place. If the charge is not based on the number of units of the products imported, such a cost sharing arrangements cannot be regarded as an indirect payment constituting an additional element of the price paid by the importer to the exporter. In the present case, we find that there is no nexus between the imports made by the appellants and the expenditure shared by the appellants for the global advertising campaign. We also find that the sharing of cost towards advertising expenses is not a condition of sale for the import of goods. Therefore, we are of the view that the provisions of Section 10(1)(e) of the Customs Valuation Rules, 2007, are not attracted in the present case." [emphasis supplied] 31. The provisions of rule 10(1)(e) of the 2007 Rules also came up for interpretation before a Division Bench of this Tribunal in M/s Indo Rubber And Plastic Works vs Commissioner of Customs, Inland Container Depot, Tughlakabad, New Delhi 2020-VIL-85-CESTAT-DEL-CU. M/s Indo Rubber entered into an agreement with Sunlight Sports for the purpose of import and sale of "Li Ning" brand sports goods within India. A....
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....had also granted to adidas India the exclusive license to promote, distribute, market and sell the products which are adidas brand range of products developed by or for adidas group. The agreement also required adidas India to use its best efforts to develop, extend and maximise sale and distribution of the products in the territory. It is also clear from the agreement that all the expenses incurred by adidas India, directly or indirectly, relating to the distribution, marketing and sale of the products were to be borne by adidas India and adidas India was not to create any expense or liability chargeable to adidas Germany. 34. It is in the light of the provisions of the Licence Agreement and the decisions referred to above that it has to be examined whether payments made by adidas India to third parties (sports personalities and clubs and associations) for marketing and promotional activities of the products can be said to be a condition of sale of the imported goods by adidas Germany. As noted above, to examine this aspect what is required to be seen is whether adidas Germany has an enforceable legal right under the License Agreement that would compel the buyer to incur such e....
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.... as such notes can be applied for the interpretation of the rules. Note to rule 3 deals with "price actually paid or payable", which expression finds place in rule 10(1) dealing with cost and services for determining the transaction value. It is this "price actually paid or payable" that has been explained in the Note to rule 3 to mean the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. Such payments can be made directly or indirectly and an example of indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by a seller. It has also been provided that in the Note that activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in rule 10, are not to be considered as an indirect payment to the seller even though they may be regarded as of benefit to the seller. The cost of such activities cannot, therefore, be added to the price actually paid or payable in determining the value of the imported goods. 38. In this connection, it would also be useful to refer to "Commentary on the GATT Customs Valuation Code" by the noted authors Saul L.....
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....dertaken by the buyer on his own account, other than those for which an adjustment is provided in Article 8, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the customs value'. The most important of such activities are advertising and warranty and other marketing and promotion efforts, which benefit both the exporter and the importer by increasing sales and by making the trademark, if there is one, more valuable. As to these expenditures, the Notes go on to say: '...if the buyer undertakes on his own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value of these activities is not part of the customs value nor shall such activities result in rejection of the transaction value'. The treatment of advertising expenditures was highly controversial in the negotiation of the Code. The BDV had been widely interpreted as requiring many such expenditures to be included in the customs value even if the payment ....
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....or discharging any obligation of adidas Germany. 40. Learned Authorised Representative of the Department has, however, placed reliance on the decision of the Tribunal in M/s. Reebok India Company vs Commissioner of Customs, Patparganj 2018-VIL-49-CESTAT-DEL-CU to contend that advertising and promotion expenses have to be added to the price of the imported goods for determining the transaction value. The Appellant - M/s. Reebok India Company (Reebok India) has been described to be a subsidiary of M/s. Reebok International Ltd. (Reebok International). Reebok India imported various sports goods from Reebok International, which goods bear the brand name "Reebok". Reebok India also entered into a 'distribution agreement' with Reebok International as well as 'buying agency agreement' with M/s. Adidas International Trading. The Department issued a show cause notice alleging that the Reebok India was importing goods from Reebok International but was not including the costs pertaining to advertisement and promotion in the assessable value of the goods at the time of export. The Adjudicating Authority confirmed the demand of differential duty. Article 4.13.4 of the distribution agreement ....
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.... six percent (6%) of its total net invoiced sales of PRODUCTS. As a guidelines, at least half of this expenditure shall be in the form of media (print, radio and/or television) advertising. Details of such expenditure shall be reported quarterly to REEBOK and are subject to annual verification by independent audit." The crux of the dispute is whether such expenditure incurred by the appellant in terms of the above clause will incur the mischief of rule 10(1)(e) of the Customs Valuation Rules. For such payments to be added to the price actually paid, the same should be made as a condition of sale by the buyer to seller or by the buyer to the third party to satisfy the obligation of the seller and such payments are not already included in the price actually paid. There is no doubt that the amount is not already included in the price actually paid or payable. The appellant is allowed to import goods from the principal in terms of the above agreement only subject to the terms of the entire agreement. In terms of this agreement the appellant will have to necessarily spend 6 per cent of the invoice value on advertisement and promotion. It is an obligation of the appellant to its....
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....ch expenses were charged to the account of M/s. Samsonite by their principal as a share of the global expenditure. Consequently we are of the view that facts of that case is distinguishable and will not be applicable to the present facts of the case." [emphasis supplied] 41. It needs to be noticed that the same Members of the Bench that decided Reebok India on 12 January, 2018 also later decided Giorgio Armani on 05 April, 2018. In Giorgio Armani, the Appellant was required to incur an expenditure of not less than 3% towards advertising in India for promotion of "Giorgio Armani Brands". The Bench noticed that even though the agreement required such expenditure to be incurred, but it could not be said that such an expenditure was required to be incurred to satisfy an obligation of the seller and therefore, the condition specified in rule 10(1)(e) was not satisfied. The decision of the Tribunal was assailed by the Department before the Supreme Court. The Supreme Court dismissed the Appeal holding that the Court was not inclined to interfere with the impugned order. However, in Reebok India, the same Bench which decided Giorgio Armani, also examined the provisions of rule 10(1)(....