REPORTABLE  

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 8627-8628 of 2002

COMMNR. OF CUSTOMS EXCISE, NEW DELHI                   ....Appellant  

VERSUS

M/S. LIVING MEDIA (INDIA) LTD.                     ....Respondent

WITH

CIVIL APPEAL NO. 2959 of 2008

WITH

CIVIL APPEAL NO. 4751 of 2006

     WITH

CIVIL APPEAL NO. 2832 of 2006   

AND

CIVIL APPEAL NO. 1 of 2009

JUDGMENT

Dr. MUKUNDAKAM SHARMA, J.

1. The  Civil  Appeal  Nos.  8627-8628  of  2002  are  filed  against  the  

judgment  and  order  passed  by  the  Customs,  Excise  &  Gold  

Page 1 of 19

(Control)  Appellate  Tribunal  (hereinafter  for  short  referred to  as  

“CEGAT”) on 23.1.2002, however, Civil Appeal No. 2959 of 2008,  

Civil Appeal No. 4751 of 2006, Civil Appeal No. 2832 of 2006 and  

Civil Appeal No. 1 of 2009 are filed against the judgment and order  

passed by the Customs Excise and Service Tax Appellate Tribunal  

(hereinafter  for  short  referred  to  as  “CESTAT”)  on  21.9.2007,  

2.2.2006, 2.9.2005 and 16.10.2008 respectively.  

CIVIL APPEAL NOS. 8627-8628 of 2002   

2. The facts leading to the filing of the present appeals are that the  

Respondent-company undertakes various music projects in India  

and under these projects it enters into agreements with reputed  

artists  for  composing  and  recording  musical  works.  The  music  

thus recorded is converted into DAT [Digital Audio Tape] Master  

which is then sent to Singapore for replicating the musical work on  

compact  discs.  Apart  from  this,  the  Respondent  also  renders  

service for quality production/duplication of various music titles  

on compact discs.  

3. The  Respondent  has  entered  into  an  agreement  for  rendering  

services  with  M/s.  World  Media  India  Ltd.,  New  Delhi,  which  

provides masters to the Respondent and Respondent in turn sends  

Page 2 of 19

these  masters  to  Australia  for  replicating  the  musical  work  on  

compact discs (CDs).

4. The Respondent imported a consignment of Audio Compact Discs  

from Singapore vide Bill of Entry No. 659308 dated 27.05.1998 for  

home consumption. Customs duty was paid on the invoice value of  

the replicator in Singapore and the declared value of each CD was  

USD 0.6. The Respondent had similar import of Audio Compact  

Discs  from  Australia  under  Bill  of  Entry  No.  659289  dated  

27.05.1998 for home consumption and the declared value of each  

CD  was  @  1.62  Australian  Dollar.  The  dispute  regarding  the  

valuation  of  these  consignments  imported  by  the  Respondent  

herein is the subject matter of these appeals.  

5. The Assistant  Commissioner  vide order dated 23.06.1998, while  

assessing the value of CDs imported from Singapore allowed all  

deductions  except  expenses  incurred  under  advertisement  and  

publicity and fixed the assessable value at Rs.100 per CD. For the  

CDs  imported  from  Australia,  the  assessing  authority  granted  

deductions except to the extent of those claimed towards expenses  

on  royalty  and  advertisement  and  publicity  and  the  assessable  

value was determined as Rs.199 per CD.  

Page 3 of 19

6. Aggrieved by the aforesaid order of the Assistant Commissioner,  

the Respondent – assessee filed appeals before the Commissioner  

(Appeals).  The  Commissioner  (Appeals),  vide  order  dated  

12.06.2001,  confirmed  the  order  of  the  assessing  authority.  

Aggrieved  thereby,  the  Respondent  –  assessee  appealed  to  the  

CEGAT.  The  CEGAT,  vide  order  dated  23.01.2002,  allowed  the  

appeals  and set  aside  the  order  of  the  Commissioner  (Appeals)  

dated 12.06.2001.  

CIVIL APPEAL NO. 2959 of 2008

7. The  present  appeal  is  filed  against  the  judgment  and  order  of  

CESTAT passed on 21.09.2007 whereby the appeal filed by the  

Revenue  was  rejected  and  the  order  of  the  Commissioner  of  

Customs (Appeals) dated 18.09.2006, was upheld.  

8. The facts leading to the filing of the present appeal are that the  

case  of  import  of  goods  by  respondent  M/s  Sony  BMG  Music  

Entertainment  (I)  Pvt.  Ltd.  from  supplier  M/s  Sony  Music  

Entertainment (Hong Kong) Ltd. was examined by GATT Valuation  

Cell,  Mumbai.  The Deputy Commissioner of  Customs vide order  

dated 10.02.2006 held that the Respondent and the supplier were  

related  under  Rule  2(2)  of  Customs Valuation Rules,  1988 and  

Page 4 of 19

rejected the transaction value of goods imported and ordered that  

the royalty at the note indicated in clause 4 read with Schedule A  

to  the  International  Repertorise  License  Agreement  entered into  

between the importer and M/s Sony BMG Music Entertainment,  

New York, was to be added to the declared value in addition to  

50% for  the  purpose  of  Customs Duty  assessment.  Payment  of  

royalty was held to be condition for sale at some subsequent stage  

in the commercial history of the CDs.  

9. Being aggrieved by the said order,  the Respondent preferred an  

appeal  before  the  Commissioner  of  Customs  (Appeals).  The  

Commissioner (Appeals) vide order dated 18.09.2006 set aside the  

order of the adjudicating authority dated 10.02.2006 and held that  

the inclusion of royalty in the invoice value was not permissible.  

Aggrieved thereby, the Revenue filed an appeal before the CESTAT.  

The CESTAT vide order dated 21.09.2007 rejected the appeal of  

the  Revenue  and  upheld  the  order  of  Commissioner  (Appeals)  

dated 18.09.2006.  

CIVIL APPEAL NO. 4751 of 2006

10. The  present  appeal  is  filed  against  the  judgment  and  order  of  

CESTAT passed on 02.02.2006 whereby the appeal filed by the  

Page 5 of 19

Respondent  was  allowed  and  the  order  of  the  Commissioner  

(Appeals) dated 24.09.2004 was set aside.  

11.The facts leading to the filing of the present appeal are that the  

case of imports of CDs from M/s EMI Compact Disc, Holland by  

M/s Virgin Records (I) Pvt. Ltd. was taken up for examination. The  

Deputy  Commissioner  of  Customs  vide  order  dated  17.08.2000  

held  that  the  Respondent  and the  Supplier  are  related to  each  

other  by  virtue  of  2(2)  of  Customs  Valuation  Rules,  1988.  The  

relationship has not in any way affected the prices and the value of  

the  imports  can  be  taken  to  be  on  the  transaction  value  and  

therefore did not propose the loading of the invoice bill.  

12.Aggrieved  thereby,  the  Revenue  preferred  an  appeal  to  the  

Commissioner  (Appeals).  The Commissioner  (Appeals)  vide  order  

dated 24.09.2004 rejected the order of the assessing authority and  

held that the assessable value of the CDs should be assessed on  

the basis of the invoice price plus the copyright fees payable on the  

resale  of  records.  Aggrieved  by  the  aforesaid  order  of  the  

Commissioner (Appeals), the Respondent filed an appeal before the  

CESTAT. The CESTAT vide order dated 02.02.2006 set aside the  

order  of  the  Commissioner  (Appeals)  dated  24.09.2004  and  

Page 6 of 19

restored the order of the assessing authority dated 17.08.2000.   

CIVIL APPEAL NO. 2832 of 2006

13. The  present  appeal  is  filed  against  the  judgment  and  order  of  

CESTAT passed on 02.09.2005 whereby the appeal filed by the  

Respondent  -  assessee  was  allowed  and  the  order  of  the  

Commissioner  of  Customs  (Appeals)  dated  20.11.2002,  was  set  

aside.  

14.The facts leading to the filing of the present appeal are that the  

Respondent herein - M/s. Sony Music Entertainment (India) Ltd.,  

is a wholly owned subsidiary of Sony Music Entertainment (India)  

Inc., USA. They have a Licensing Agreement with Sony Corporation  

of  America,  New York,  U.S.A.  The Indian Company has entered  

into  various  agreements  (licensing  etc.)  with  their  foreign  

collaborator and associates.  

15.The issue for determination in the said appeal is of royalty at the  

rate  of  20%  of  MRP  minus  Sales  Tax  minus  6.5%  packaging  

deduction  payable  by  the  Respondent  herein  on  the  sale  of  

imported  recorded  compact  disc  in  India.  The  Adjudicating  

Authority, vide order dated 31.10.2000, accepted the transaction  

value declared in the invoice, holding that the payment of royalty  

Page 7 of 19

is not the condition of sale of goods and that there is no distraction  

on  the  Respondents  sourcing  CDs  from  any  

manufacturer/supplier.  The  Commissioner  (Appeals),  however,  

vide  order  dated  20.11.2002,  set  aside  the  Adjudication  order  

dated  31.10.2000,  on  appeal  by  the  Revenue,  holding  that  the  

royalty payment is a condition of sale of imported goods.

16.The CESTAT vide order dated 02.09.05, set aside the order of the  

Commissioner  (Appeals)  dated  20.11.2002  on  appeal  by  the  

Respondent  and held  that  the  Respondents  are  correct  in  their  

contention based upon the interpretative notes to Rules 9(1)(c) that  

the payment of royalty by them to Sony Corporation of America  

cannot be included in the price of the imported goods. Hence, this  

civil appeal by the Department.

CIVIL APPEAL NO. 1 of 2009

17. The  present  appeal  is  filed  against  the  judgment  and  order  of  

CESTAT passed on 16.10.2008 whereby the appeal filed by the  

Appellant  -  assessee  was  rejected  and  the  order  of  the  

Commissioner  of  Customs  (Appeals)  dated  09.04.2002,  was  

upheld.  

18. The facts leading to the filing of the present appeal are that the  

Page 8 of 19

Appellant  in  this  case  are  engaged  in  the  marketing  of  audio  

cassettes  and  CDs  imported  inter  alia  from  M/s  Universal  

Manufacturing and Logistics, Germany and associated companies.  

Their company is a 100% subsidiary of Universal Music Holding,  

Netherlands.  

19.The  issue  for  determination  in  the  said  appeal  is  whether  the  

royalty  paid  by  the  Appellant  to  Universal  Music  Holding,  

Netherlands on net sales in India can be added to the transaction  

value  of  Audio  Compact  Disc  imported  from  Universal  

Manufacturing and Logistics, Germany.  

20.As per the agreement entered into with the foreign collaborator the  

Indian company was required to pay royalty at the rate of 15% at  

the retail sale price of the goods to the foreign supplier. Since the  

importer was a 100% subsidiary company, it was considered as a  

related person and the royalty payable by it to the supplier was  

considered to be as a condition of sale and therefore required to be  

included  in  the  declared  invoice  value  to  the  extent  of  royalty  

amount for which a show cause notice was issued to the Appellant  

and  adjudicated  by  the  Deputy  Commissioner,  who  vide  order  

dated 16.10.2001, held that the value of the goods imported by the  

Page 9 of 19

Appellant is to be loaded by 15% as per Rule 9(1)(c) of Customs  

Valuation Rules, 1988.  

21.Aggrieved  thereby,  the  Appellant  preferred  an  appeal  to  the  

Commissioner (Appeals), who vide order dated 09.04.2002 rejected  

the  same  and  upheld  the  order  of  the  assessing  authority.  

Aggrieved by the aforesaid order of the Commissioner (Appeals),  

the  Appellant  filed  an  appeal  before  the  CESTAT  which  was  

rejected  vide  order  dated  16.10.2008  and  the  order  of  the  

Commissioner (Appeals) dated 09.04.2002 was upheld.  

22.Since all these appeals involve almost similar facts and the issues  

raised therein also being similar, we propose to dispose of all these  

appeals by this common judgment and order.   

23.The  learned  counsel  appearing  for  the  parties  made  extensive  

arguments and drawn our attention to the relevant materials on  

record also.   On the basis of the same, we proceed to answer the  

issue that arises for our consideration.

24.In order to appreciate the contentions of the parties, we propose to  

extract  the  provisions  of  Section  14  of  the  Customs  Act,  1962  

which deals with valuation of goods for the purpose of assessment.  

The said section reads as follows:-

Page 10 of 19

“14. Valuation of goods. – (1) For the purposes of  the Customs Tariff Act,  1975 (51 of 1975), or any  other law for the time being in force, the value of the   imported  goods  and  export  goods  shall  be  the   transaction value of such goods, that is to say, the   price actually paid or payable for the goods when   sold for export to India for delivery at the time and   place  of  importation,  or  as  the  case  may  be,  for  export from India for delivery at the time and place   of  exportation  where  the  buyer  and  seller  of  the   goods  are  not  related  and  price  is  the  sole  consideration  for  the  sale  subject  to  such  other   conditions as may be specified in the rules made in   this behalf;

Provided that such transaction value in the case of  imported  goods  shall  include,  in  addition  to  the   price as aforesaid, any amount paid or payable for  costs  and  services,  including  commissions  and  brokerage, engineering, design work, royalties and  licence fees, costs of transportation to the place of   importation,  insurance,  loading,  unloading  and  handling charges to the extent and in the manner   specified in the rules made in this behalf:

Provided further that the rules made in this behalf   may provide for, -  

(i) the circumstances in which the buyer and the  seller shall be deemed to be related;

(ii) the  manner  of  determination  of  value  in  respect of goods when there is no sale, or the  buyer and the seller are related, or price is not   the  sole  consideration  for the  sale  or  in  any  other case;

(iii) the manner of acceptance or rejection of value  declared  by the  importer  or  exporter,  as  the  case  may  be,  where  the  proper  officer  has  reason to doubt the truth or accuracy of such  value,  and  determination  of  value  for  the  purposes of this section:

Page 11 of 19

Provided also  that  such  price  shall  be  calculated  with reference to the rate of exchange as in force on  the date on which a bill of entry is presented under  section 46, or a shipping bill of export, as the case  may be, is presented under section 50.

(2)   Notwithstanding  anything  contained  in  sub- section  (1),  if  the  Board  is  satisfied  that  it  is   necessary  or  expedient  so  to  do,  it  may,  by  notification in the Official Gazette,  fix tariff  values  for any  class  of  imported  goods  or  export  goods,   having regard to the trend of value of such or like   goods, and where any such tariff values are fixed,   the duty shall be chargeable with reference to such  tariff value.”

25.In  exercise  of  the  power  vested  under  the  Customs  Act,  the  

Central Government has made Customs Valuation (Determination  

of  Value  of  Imported  Goods)  Rules,  2007  (hereinafter  for  short  

called “the Rules”).

26.Rule  2(f)  of  the Rules  defines “transaction value”  where it  says  

that it means the value determined in accordance with rule 4 of  

the Rules. Rule 3 of the Rules deals with the determination of the  

method of valuation where it states as follows:-

“Determination of the method of valuation.-   For the purpose of these rules –

(i)  subject to rules 9 and 10-A the value of import- ed goods shall be the transaction value;

(ii)   if  the value cannot be determined under the  provisions of Cl. (i) above, the value shall be deter-

Page 12 of 19

mined by proceeding sequentially through rule 5 to   8 of these rules.”

27.What  is  transaction  value  is  stated  in  Rule  4  in  the  following  

manner:-

“4.    Transaction value  – (1) The transac- tion value of imported goods shall be the price ac- tually paid or payable for the goods when sold for  export to India,  adjusted in accordance with  the   provisions of Rule 9 of these rules.”

28.Rule 9(1)(c) of the Rules states as follows:-

“9.   Costs and services (1)  In  determining the  transaction  value,  there  shall  be  added  to  the   price  actually  paid  or  payable  for  the  imported   goods -  

***** ***** ***** ***** ***** ***** ***** *****

(c)  – royalties and license fees related to the im- ported goods that the buyer is required to pay, di- rectly or indirectly, as a condition of the sale of the   goods being valued, to the extent that such royal- ties and fees are not included in the price actually   paid or payable.”

29. In the case of  Commissioner of Customs Vs. Ferodo India Pvt.  

Ltd. reported in  2008 (4)  SCC 563 this Court  had occasion to  

analyze the aforesaid relevant provision of Rule 9(1)(c) with which  

we are also concerned in the present appeals. The relevant portion  

of which is extracted herebelow: -

Page 13 of 19

“16. Under Rule 9(1)(c), the cost of technical know- how and  payment  of  royalty  is  includible  in  the  price of the imported goods if the said payment con- stitutes a condition prerequisite for the supply of the   imported  goods by the  foreign supplier.  If  such a  condition  exists  then  the  payment  made  towards  technical know-how and royalties has to be includ- ed in the price of the imported goods. On the other  hand, if such payment has no nexus with the work- ing of the imported goods then such payment was   not includible in the price of the imported goods.

17. In Essar Gujarat Ltd. the condition prerequi- site,  referred to  above,  had direct  nexus with  the   functioning of the imported plant and, therefore, it   had to be loaded to the price thereof.

18. Royalties and license fees related to the im- ported goods is the cost which is incurred by the   buyer in addition to the price which the buyer has  to pay as consideration for the purchase of the im- ported goods. In other words, in addition to the  price for the imported goods the buyer incurs  costs  on  account  of  royalty  and  license  fee  which the buyer pays to the foreign supplier  for using information, patent, trade mark and  know-how in the manufacture of the licensed  product  in  India. Therefore,  there  are  two  con- cepts which operate simultaneously, namely, price  for the  imported goods and the  royalties/license  fees which are also paid to the foreign suppli- er.

19.  Rule 9(1)(c)  stipulates  that  payments  made   towards  technical  know-how must  be  a  condition   prerequisite for the supply of imported goods by the  foreign supplier  and  if  such condition  exists  then  such royalties and fees have to be included in the   price of the imported goods. Under Rule 9(1)(c) the  cost of technical know-how is included if the same  

Page 14 of 19

is to be paid, directly or indirectly, as a condition of   the sale of imported goods. At this stage, we would  like to emphasize the word indirectly in Rule 9(1)(c).   As  stated  above,  the  buyer/importer  makes  pay- ment of the price of the imported goods. He also in- curs the cost of technical know-how. Therefore, the   Department  in  every  case  is  not  only  required to   look at TAA, it is also required to look at the pricing  arrangement/agreement between the buyer and his  foreign collaborator. For example, if on examination   of  the  pricing  arrangement  in  juxtaposition  with   TAA, the Department finds that the importer/buyer  has misled the Department by adjusting the price of   the imported item in guise of increased royalty/li- cense fees then the adjudicating authority would be  right  in  including  the  cost  of  royalty/license  fees  payment in the price of the imported goods. In such  cases the principle of attribution of royalty/license  fees to  the  price  of  imported  goods  would  apply.   This is because every importer/buyer is obliged to   pay not only the price for the imported goods but he  also incurs the cost of technical know-how which is  paid to the foreign supplier. Therefore, such adjust- ments would certainly attract Rule 9(1))(c).”

30. While  laying   down  the  aforesaid  proposition  this  Court  has  

considered the case of Collector of Customs (Prev.), Ahmedabad  

Vs.  Essar Gujarat Ltd. reported in  1996 88 ELT 609 (S.C.)  to  

which  also  reference  was  made  at  the  time  of  hearing  of  the  

appeals.

31. There is yet another decision on the aforesaid issue rendered by  

three  Judges’  Bench  of  this  Court  in  the  case  of  Associated  

Cement Companies Ltd. Vs. Commissioner of Customs reported  

Page 15 of 19

in  (2001)  4  SCC  593.   Having  referred  to  the  case  of  Essar  

Gujarat (supra) and after having noted Rules 3, 4 and 9 of the  

Rules, this Court has stated thus in paragraph 42, 43 and 44 as  

follows:-

“42. ………………………… Therefore, the intellectual   input in such items greatly enhances the value of   the paper and ink in the aforesaid examples. This  means that the charge of a duty is on the final prod- uct,  whether  it  be  the  encyclopaedia  or  the  engi- neering or architectural drawings or any manual.

43.  Similar would be the position in the case  of a programme of any kind loaded on a disc  or a floppy. For example in the case of music  the value of a popular music cassette is sever- al times more than the value of a blank cas- sette.  However,  if  a  pre-recorded  music  cas- sette or a popular film or a musical score is  imported into India duty will necessarily have  to be charged on the value of the final prod- uct.                         

……………………………………………… ……………………………………………..

44. It is a misconception to contend that what is   being  taxed  is  intellectual  input.  What  is  being  taxed  under  the  Customs Act  read with  the  Cus- toms Tariff Act and the Customs Valuation Rules is  not the input alone but goods whose value has been  enhanced by the said inputs. The final product at   the time of import is either the magazine or the en- cyclopaedia  or  the  engineering  drawings  as  the  case may be. There is no scope for splitting the en- gineering drawing or the encyclopaedia into intellec- tual input on the one hand and the paper on which   it is scribed on the other. For example, paintings are   

Page 16 of 19

also to be taxed. Valuable paintings are worth mil- lions. A painting or a portrait may be specially com- missioned or an article may be tailor-made. This as- pect  is  irrelevant  since  what  is  taxed  is  the  final  product as defined and it  will  be an absurdity  to   contend  that  the  value  for  the  purposes  of  duty  ought to be the cost of the canvas and the oil paint   even though the composite  product,  i.e., the paint- ing, is worth millions.”

32. The issue that arises for our consideration is therefore appears to  

be  answered  by  the  aforesaid  decision  in  Associated  Cements  

Companies Ltd.  (Supra).    In the said decision this  Court  had  

stated clearly that if a pre-recorded music cassette or a popular  

film or musical score is imported into India, duty will necessarily  

have to be charged on the value of the final product.   As per Rule  

9, in determining the transaction value there has to be added to  

the price actually paid or payable for the imported goods, royalties  

and the license fees related to the imported goods that the buyer is  

required  to  pay,  directly  or  indirectly,  as  a  condition of  sale  of  

goods.  Therefore, when pre-recorded music cassette is imported  

as against the blank cassette, definitely its value goes up in the  

market which is in addition to its value and therefore duty shall  

have to be charged on the value of the final product.   Therefore,  

there can be no dispute with regard to the fact that value of the  

royalty paid is to be included in the transaction value.

Page 17 of 19

33.In all  these cases, there is no dispute that the cassettes under  

question  are  brought  to  India  as  pre-recorded  cassettes  which  

carry  the  music  or  song  of  an  artist.   There  is  an  agreement  

existing in all the matters that royalty payment is towards money  

to  be  paid  to  artists  and  producers  who  had  produced  such  

cassettes.   Such  royalty  becomes  due  and  payable  as  soon  as  

cassettes  are  distributed  and  sold  and  therefore,  such  royalty  

becomes  payable  on  the  entire  records  shipped  less  records  

returned.   It  could therefore,  be concluded that the payment of  

royalty  was  a  condition  of  sale.    Counsel  appearing  for  the  

Respondent  relied upon the  commentary on the  GATT Customs  

Valuation  Code.    We  failed  to  see  as  to  how  the  aforesaid  

commentary on the GATT Customs Valuation Code could be said  

to be applicable to the facts of the present case.   The specific  

sections  and the  rules  quoted  hereinbefore  are  themselves  very  

clear and unambiguous. We are required only to give interpretation  

of the same and apply the same to the facts of the present case.

34. Considering/Looking at the decision of this Court in the case of  

Associated Cement Companies Ltd. [supra] and also to the clear  

and unambiguous provisions of law discussed above we set aside  

the orders passed by the Tribunal in matters, i.e., Civil Appeal No.  

Page 18 of 19

8627-8628 of 2002, Civil Appeal No. 2959 of 2008, Civil Appeal No.  

4751 of 2006, Civil Appeal No. 2832 of 2006 and restore the order  

passed by the Department, whereas Civil Appeal No. 1 of 2009 is  

dismissed. We leave the parties to bear their own costs.

          ............................................J                                          [Dr. Mukundakam Sharma]

............................................J                   [Anil R. Dave]

New Delhi August 17, 2011

Page 19 of 19