TaxTMI 
TaxTMI 
2024 (4) TMI 243
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....as been confirmed. The Principal Commissioner has also directed recovery of interest and imposed penalty under section 114A of the Customs Act, 1962 [the Customs Act]. 2. The appellant is engaged in the marketing and distribution of products such as shoes, bags, clothing, clothing related accessories, eyewear, perfumery and cosmetics. 3. During the period from 2009 to 2015, the appellant entered into the following Distribution/License Agreements with foreign parties/ suppliers: (a) Exclusive Boutique Distribution Agreement dated 06.11.2009 with Etro Spa, Italy; (b) Distributorship Agreement dated 01.04.2011 with Tumi Inc, USA; (c) Master Store License Agreement dated 17.05.2013 with Michael Kors LLC, USA; (d) Distribution Agreement dated 27.05.2014 with G-Star Gaw C.V. Netherlands; (e) Exclusive Distributorship Agreement dated 18.06.2014 with Jimmy Choo Limited, England; (f) License Agreement dated 06.05.2015 with Paul Smith Limited, England; and (g) Distribution Agreement dated 04.11.2015 with Bottega Veneta SA, Switzerland. 4. Under the said Agreements, the foreign parties granted to the appellant the right t....
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.... proposed activity may adversely affect the reputation or the image of the Products, the Trademark or are in conflict with the marketing strategy of G-Star. The Marketing Plan as approved by G-Star (which after such consent makes part of this Agreement) shall include local advertising and promotional activities, press and public relations, events, participation at fairs and exhibitions where applicable and it shall describe in detail all aspects of the allocation of the Marketing Investment (defined below)". Article 11.2 "The cost of implementing the marketing Plan (the "Marketing Investment") shall be borne by Distributor and must be equal to 1% of the aggregate amount of purchase Volume. As long as Distributor is in full respect of the obligations assumed in this Agreement and any agreement between the parties or any affiliated companies of the parties and provided that the Distributor has always attained the Guaranteed Minimum Target for any year, G-Star shall grant a contribution to the marketing Investment of the Distributor with a maximum of 5% of the aggregate amount of the purchase volume ("Marketing Contribution"). (v) Distributorship Agreem....
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....ntent, and that any deviation shall require JIMMY CHOO's prior written approval; this shall especially apply to the use of the Trademarks and other intellectual property rights owned by JIMMY CHOO and/or the JIMMY CHOO Group. (j) JIMMY CHOO will supply to the Distributor AMP material (e.g. catalogues, look books, consumer brochures, standard display material, branded wrapping material and promotion presentation material), at first cost to be paid by the Distributor. All shipping costs shall be paid by the Distributor. The use of any AMP material in the Territory not supplied by JIMMY CHOO will require JIMMY CHOO's prior written approval. (k) To ensure uniform international advertising standards, the Distributor shall use only one (1) advertising or PR agency, in connection with this Agreement, and the agency shall be approved in writing by JIMMY CHOO in advance. JIMMY CHOO may also require the Distributor to change the advertising or PR agency. (vi) License Agreement dated 06.05.2015 with Paul Smith Limited, England Article 12 Advertising and Promotion 12.1 The Licensee shall in each of the Contract Years spend 10% of the greater of the ....
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....ter shall be have been obtained from a supplier approved by Paul Smith who will not unreasonably withhold its consent or approval. 12.10 All approved advertising matter of whatever kind shall be maintained at the expense of the Licensee who shall be responsible for obtaining any necessary planning, bye-law or other consents therefor. (vii) Distribution Agreement dated 04.11.2015 with Bottega Veneta SA, Switzerland Article 11 "Distributor hereby agrees that it shall spend for its local advertising campaign, or pay to Bottega Veneta within thirty (30) days from receiving an invoice therefor if Bottega Veneta exercises it soption to manage Distributor's local advertising plan as set forth in section 11.3 below, an amount of no less than five percent (5%) of the higher of: (i) the price of the Seasonal Minimum Purchase; and (ii) the total price of al Bottega Veneta Merchandise invoiced by Authorized Supplier for such Season ('Local Advertising Contributions")." 6. The appellant claims that pursuant to the said Agreements, the appellant imported the said products for the purpose of distribution and sale in India and the amount incurred towards expendit....
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.... C Patel, Ms. Shamita Patel and Ms. Shilpa Balani made the following submissions: (i) The issue on merits stands concluded in favour of the appellant by the following decisions of the Tribunal in which it has been held that the expenditure incurred by the importer towards advertising/marketing/promotion of the imported goods is not liable to be added to the transaction value of the imported goods: (a) Commissioner of Customs, Parparganj vs. Adidas India Marketing Pvt. Ltd. [2020 (374) E.L.T. 394 (Tri.- Del.)]; and (b) Giorgio Armani India (P) Ltd. vs. Commissioner of Customs, New Delhi [2018 (362) E.L.T. 333 (Tri.- Del.)] as confirmed by the Supreme Court in Commissioner vs. Giorgio Armani India (P) Ltd [2019 (365) E.L.T. A110 (S.C.)]; (ii) Interpretative Notes to rule 3(2) (b) of the 2007 Valuation Rules categorically provide that 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 those activities would not be part of the value of the imported goods nor shall such activities result in rejection of the transaction value; (iii) The....
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....d by the said foreign parties and under the Agreements the appellant was required to incur expenditure towards advertising, marketing and promotion of the said products. It is pursuant to the said Agreements that the appellant imported the said products for the purpose of distribution and sale in India and incurred expenditure towards advertisement, marketing and promotion of the said products. Thus, these activities were undertaken by the appellant on its own account. 15. The Principal Commissioner held that the expenditure was incurred by the appellant towards advertisement and promotion of the imported products pursuant to the Agreement and so it was required to be included the transaction value. The relevant findings are as follows: "29. It is apparent, in this case, that the price is not the sole consideration as the Party is under an obligation to the supplier to incur certain expenses on advertisement and promotion of various foreign branded products imported from such suppliers. Such obligation is flowing from various Distribution / Licence agreements entered into between the Party and various suppliers. I find that the expenditure incurred by the Party on behal....
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.... be made by the buyer to the seller, or by the buyer to a third Party so as to satisfy an obligation of the seller. I find that the goods under import are high value luxury goods. These are certain well known brands of various goods like apparels, handbags, wallets, footwear etc. of various brands like "Jimmy Choo", "TUMI", "Michael Kors", "Paul Smith", "Bottega Venetta" etc. These brands are very well known all over the Globe and have become so well known only because of extensive advertising and brand promotion. Thus advertisement and brand promotion is an important and essential activity in relation to such high value goods. These goods become so well known because of their extensive advertisement and endorsement by the celebrities. I am of the view that the suppliers have entered into such agreements so as to promote the branded goods in India as per their world-wide strategy to build the brand value. This view gets credence from the fact that the agreement not only prescribe minimum level of expenditure towards advertisement, marketing and sales promotions, it also provide in details, through requirement of prior approval, the manner of such advertisement and sales promotion. ....
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....annot be determined in respect of the goods being valued; (c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of rule 10 of these rules; and (d) the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purposes under the provisions of sub-rule (3) below: (3) ------ (4) If the value cannot be determined under the provisions of sub-rule (1), the value shall be determined by proceeding sequentially through rule 4 to 9. RULE 10. Cost and Services. - (1) In determining the transaction value, these shall be added to the price actually paid or payable for the imported goods, (a) ------- (b) ------- (c) ------- (d) ------- (e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not inc....
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....shed goods. However, conditions or considerations relating to the production or marketing of the imported goods shall not result in rejection of the transaction value. For example, the fact that the buyer furnished the seller with engineering and plans undertaken in India shall not result in rejection of the transaction value for the purposes of rule 3. Likewise, 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 value of imported goods nor shall such activities result in rejection of the transaction value." (emphasis supplied) 20. It would be seen that rule 3 deals with the determination of the method of valuation. It provides that subject to rule 12, the value of the imported goods shall be the transaction value adjusted in accordance with provisions of rule 10. Rule 10 deals with cost and services. It provides that in determining the transaction value, the amount referred to in (a), (b), (c), (d) and (e) of sub-rule (1) of rule 10 shall be added to the price actually paid or payable for the imported goods. The payment refe....
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....y. In such a situation, the seller may require the buyer to adjust the debt. Rule 10(1)(e) requires that this requirement should be a condition of sale of the imported goods, for it is not that every debt which the seller owes to a third party can be added to the price of the imported goods. 24. In regard to the first condition that such payment should actually be made or to be made by the buyer to the seller or by the buyer to a third party as a condition of sale of the imported goods, it is also necessary that there is an enforceable right available to a seller to enforce such a condition. Thus, an option must not be available with the buyer to ignore the condition of sale. 25. The importance of sub-rule (4) of rule 10 of the 2007 Valuation Rules cannot also be lost sight of. It, in very clear terms, provides that no addition shall be made to the price actually paid or payable in determining the value of the imported goods, except as provided for in rule 10. 26. Equally important are the Interpretative Notes contained in the Schedule to the 2007 Valuation Rules. Note to rule 3 provides in clear terms that activities undertaken by the buyer on his own account, other than ....
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....s advanced before it by the counsel appearing on either party in its proper perspective. In fact, in Civil Appeal Nos. 13400/1996, 4672/1997 and 4762/1997, the CEGAT failed to appreciate that in several earlier judgments, the CEGAT consistently held that the advertisement expenditure incurred by a manufacturers' customer 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 customer." 30. This judgement of the Supreme Court in Surat Textiles Mills was followed by the Principal Bench of the Tribunal in Honda Seils Power Products Ltd. vs. Commissioner of Central Excise, Meerut- III [2015 (317) E.L.T. 510 (Tri. - Del.)]. The Tribunal noticed, after perusing the agreement, that there was nothing in the agreement from which it could be concluded that the appellant had an enforceable legal right against the dealers that they must incur certain amount of expenses on advertisement and publicity of the products of the appellant and merely because a clause in the agreement required the dealer to make efforts for promoting sales of the....
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....currency of the agreement make efforts to promote the product and its reputation in the allotted territory. The Department formed an opinion that since the dealers incurred expenses under the terms of the agreement, such activities were carried out on behalf of the manufacturer and therefore, would have to be treated as consideration for sale and accordingly, differential duty was required to be paid. The Tribunal held that there was no enforceable legal right with the appellant to insist on incurring such advertisement expenses and at best, failure on the part of dealer to cause advertisement, could only lead to the cancellation of the agreement. The relevant portion of the decision of the Tribunal is reproduced below: "10. In the present case, relating to M/s. Maruti Suzuki India Limited, we find it has been claimed that the advertisements are not done by all the dealers; and even in respect of dealers undertaking such advertisements, the extent of expenses does not get linked to or proportionate to number of vehicles sold by them; it was claimed that the dealers have incurred expenses varying from 0.0070% to 0.2333% of total sale value. In view of the above, it appears ....
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....ed by the Supreme Court on 02.01.2019 observing that the Supreme Court was not inclined to interfere with the impugned order. The observations of the Supreme Court are as follows: "Delay condoned. We are not inclined to interfere with the impugned order. The appeal is accordingly dismissed." 34. The provisions of rule 10(1)(e) of the 2007 Valuation 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. Article 4 of the agreement provided that the Distributor will make best endeavours to promote and extend sales of goods within the territory. Article 7 provided that the Distributor will bear all costs of marketing, advertising and promotions for the territory. The Revenue believed that the marketing, advertising, sponsorship and promotional expenses/ payments made by M/s Indo Rubber for promotion of "Li Ning" brand was a condition of sale and consequently such amount....
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....seller, activities relating to the marketing of the imported goods, the value of these activities is not part of the value of imported goods nor shall such activities result in rejection of the transaction value. 39. It cannot, therefore, be urged that the appellant incurred expenditure to satisfy obligation of foreign sellers. Thus, the first requirement of rule 10(1)(e) of the 2007 Valuation Rules is not satisfied. 40. The second requirement of rule 10(1)(e) is that payment should be made by the buyer to a third party to satisfy an obligation of the seller towards the third party. 41. The contention of the learned counsel for the appellant is that even if payment is made by the buyer to a third party as a condition of sale of the imported goods, then too it has to be established that the seller had a pre-existing obligation to pay the said amount to such third party, which obligation of the seller is being discharged by the buyer. If any payment is made by a buyer to a third party on his own account, then the condition would not be met and this amount cannot be added to the value of the imported goods since it has not been made to satisfy a pre-existing obligation o....
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....the exporter and the importer by increasing sales. Initially, treatment of advertising expenditure was controversial, but subsequently such advertising and promotion warranty costs and similar expenses have been excluded from the transaction value if paid by the importer, even if he is obliged to make the expenditure under an agreement with the seller and even though the activities also benefit the foreign seller. It has also been emphasized that the phrase "undertaken by the buyer on his own account" means expenses incurred and paid for by the buyer. The relevant provisions contained in Chapter III of the book dealing with "Transaction Value of the Imported Goods (Articles 1 and 8)" are reproduced below: "A. The price for the goods when sold for export to the country of importation Article 1 states that the customs value of imported goods shall be the Transaction Value (TV) that is "the price actually paid or payable for the goods when sold for export to the country of importation' adjusted in accordance with Article 8 and provided that none of the grounds for rejecting Transaction Value applies. (C8-15) 1. The Price (a) -....
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.... would then be an indirect payment for the goods. We are speaking here, of course, about advertising which clearly relates to the imported product being valued. The amount of advertising cost attributable to each unit of the goods may have to be determined. The phrase 'undertaken by the buyer on his own account' means very simply expenses incurred and paid for by the buyer...................." (emphasis supplied) 44. A Division Bench of the Tribunal in Adidas India examined almost similar terms of the Agreements and held that the requirements of rule 10(1)(e) of the 2007 Valuation Rules are not satisfied. 45. In view of the aforesaid decision the second criterion is also not satisfied. 46. This apart, advertising and marketing activities are for sale of the imported goods in India and, therefore, expenses related to such advertising and marketing are expenses in respect of activities carried out in India for sale of the goods in India post-import. Such expenses cannot, therefore, be said to conditions of sale of the imported goods and cannot form part of the value of the imported goods. 47. Learned authorised representative of the Department has, however, place....
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....isfying the obligation of the seller. 9. The interpretative Note of Rule 3 (2) (b) of the Customs Valuation Rules forbids loading the expenses incurred relating to marketing of the imported goods, if such expanses are incurred by the buyer on his own account even though by agreement with the seller. It is clear from the discussion above that the appellant has incurred such expenses on the expression obligation of RIL England and as a clear condition of the sale of goods for disputing them in India. It cannot be concluded, in the facts of the present case, that the expenditure has been incurred by the appellant on their own account. 10. We have also considered the various case laws cited by the Appellant in the appeal as well as argued. Most of the case laws deal with including in the transaction value with amounts paid towards royalty and other expenses. In the specific case cited by the assessee, Samsonite 2015 (327) ELT 528 Tribunal- Mumbai, the Tribunal has set aside the demand made by the Department by including certain expenses incurred by the M/s. Samsonite towards advertising. However, after a careful perusal of the case we note that such expenses were....