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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.6709 OF 2004

M/S. K.R.C.D. (I) PVT. LTD.     …APPELLANT               

VERSUS

COMMISSIONER OF CENTRAL  EXCISE, MUMBAI    ...RESPONDENT

J U D G M E N T

R.F. Nariman, J.

1. The facts of  the present case reveal that  the appellant

started  manufacturing  duplicate  CDs from a master  tape/CD

issued  to  them  by  a  distributor  who  had  copyright  in  the

contents of the CD.  The following chain will show exactly how

the present transaction of job work is done.  The artist/lyricist

who is  the owner  of  copyright  parts  with the copyright  for  a

certain  consideration  to  a  producer  of  music  which

music/picture  is  then  captured  on  video  CD  and  CD.   The

producer  in  turn  parts  with  such  copyright  in  favour  of  a

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distributor who, ultimately, gets the said CDs duplicated as has

been stated aforesaid by the appellant on job work basis, and

who then sells the CDs in the market to the ultimate customer.

The facts also demonstrate that the appellant/assessee is only

given  the  master  CD  from  which  it  duplicates  such  master

tape/CD on blank CDs that are owned by it and then sold to the

distributor copyright holder, having paid a lump sum royalty to

the producer of the music which is on the CD.  The process

adopted  by  the  appellant  for  duplicating  the  CDs  from  the

master  tape/CD or  DAT has  been  detailed  in  the  impugned

order of the Commissioner (Appeals).  From the DAT supplied

by  the  customers,  the  appellants  arrange  to  manufacture  a

stamper  i.e.  Nickel  plate  on  which  the  data  is  coded.   The

stamper is used as a mould to manufacture a CD, which while

manufacturing the CD, transfers data from the stamper to a CD.

The programme which is duplicated on the CD is owned by the

customer who is either himself the distributor or is a copyright

owner.  The distributor/copyright  holder then, upon receipt  of

the duplicate copies from the appellant loads part of the royalty

paid to  the music producer  on each such CD which as has

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been stated above is then sold to the ultimate customer in the

market.  The entire stock of duplicate CDs can only be sold to

the distributor/copyright holder and to nobody else.   

2. On  31.8.1998,  provisional  assessments  for  the  period

1995 to 1998 were finalised by the Assistant Commissioner of

Central  Excise  demanding  duty  inter  alia  on royalty  charges

incurred by the distributor/copyright holder.  The Commissioner

(Appeals)  by  an  order  dated  20.7.1999  set  aside  the  order

dated  31.8.1998  and  held  that  the  appellants  were  already

including a royalty of one rupee per CD in the assessable value

of  the  CD  and  remanded  the  matter  back  to  the  Assistant

Commissioner.   On  remand,  the  Assistant  Commissioner

directed the appellant to file a price declaration along with cost

break up certified by  a chartered account.  Such declaration

reads as follows:-

Declaration under  Rule 173C dated 14.3.2000 for break up of the cost of CDs.

Raw  material  and  other expenses

6.31

Inlay Card 2.00 Jewel Box 4.30 Royalty (cost of copyright) 1.00

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Royalty (Patent charge)  0.43 Total 14.43

Based  on  the  aforesaid  declaration,  the  appellant  paid

differential duty of Rs.14,31,678/- at the rate of one rupee per

CD for CDs cleared during the period 1995 to 2000, and also

paid a sum of  Rs.10,210/-  for CDs cleared for the period 1st

March  to  14th March,  2000.   On  4.12.2001,  the  Assistant

Commissioner  issued  a  show  cause  notice  proposing  to

demand differential  duty  of  Rs.5,91,45,700/-  on  CDs cleared

during  the  period  November,  2000  to  October,  2001.  This

differential  duty  consisted  of  royalty  payable  to  the

distributor/copyright  holder  which  royalty  was  calculated  at

54.81 rupees per CD.  The basis of the royalty calculation was

given in the said show cause notice.  

3. On 25.2.2002,  the Deputy Commissioner confirmed the

show cause notice and also issued a penalty of an equivalent

amount plus a penalty of Rs.1 crore on Shri Rajiv Aggarwal,

Director  of  the  Appellant  Company.   By  an  order  dated

2.8.2002,  the  Commissioner  (Appeals)  held  that  the  royalty

charges incurred by the distributor/copyright holder is liable to

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be included in the assessable value of the CDs. He remanded

the  matter  to  the  Assistant  Commissioner  to  quantify  the

demand after taking into consideration the amount of royalty to

be  apportioned,  which  had  been prescribed  under  a  circular

dated 19.2.2002.  Vide an order dated 11th June, 2004, CESTAT

confirmed the order of the Commissioner (Appeals).   

4. Shri  Lakshmikumaran, learned counsel on behalf of the

appellant has argued that the job work done by the appellant

did not include any element of royalty.  In fact, the amount of

rupee  one  that  was  declared  in  the  price  list  filed  by  the

appellant was only for the music that is embedded in the CD

but not for any royalty thereon. This is clear from the fact that

the appellant  had to perform certain  job work  on blank CDs

owned by it, which is merely to copy the master tape given by

the distributor/copyright  holder, and,  as  is  apparent  from the

price list filed, the distributor/copyright holder is charged for the

raw material and other expenses, being the blank duplicate CD,

the inlay card, the royalty attributable to the music content of

the CD and the jewel box.  It is the distributor and others who

are the copyright holders who then sell these duplicate CDs in

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the  market  loading  on  to  them the  royalty  cost  paid  by  the

distributor and others in lump sum to the music producer.  Since

no part of the royalty had in fact passed, no amount of royalty

could be included in the assessable value.  

5. Shri  Rupesh  Kumar,  learned  counsel  on  behalf  of  the

Revenue argued that when the master tape was handed over

by the distributor who was also the copyright holder, obviously

what was handed over was a CD with music on it, which music

was inextricably bound with royalty that was paid for it.   It  is

clear that the master tape could not be given to the appellant

for duplication unless royalty had been paid which royalty would

form  part  of  the  cost  of  the  goods  to  be  produced  by  the

appellant and then sold to the distributor/copyright holder.   In

this view of the matter, it would be correct to say that the royalty

that is payable would also have to be loaded on to the duplicate

CDs produced by the appellant and apportioned in a manner

stated in the circular dated 19.2.2002.  This being so, there is

nothing wrong with the order of the Tribunal that is impugned in

the present case.  

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6. In the present case, Section 4(1)(a) of the Central Excise

Act will not apply for the simple reason that price is not the sole

consideration for the sale as a master tape had to be handed

over by the distributor/copyright holder to the appellant.  Since

Section  4(1)(b)  applies,  the  Central  Excise  Valuation

(Determination of Price of Excisable Goods) Rules, 2000, would

apply.  Both parties agree that Rule 6 would be applicable to the

facts of the present case.  

7. Rule 6 of the said Rules reads as follows:

“Rule 6. Where the excisable goods are sold in the circumstances specified in clause (a) of sub section (1) of section 4 of the Act except the circumstance where  the  price  is  not  the  sole  consideration  for sale, the value of such goods shall be deemed to be the  aggregate  of  such  transaction  value  and  the amount  of  money  value  of  any  additional consideration flowing directly or indirectly from the buyer to the assessee.

Explanation.-For  removal  of  doubts,  it  is  hereby clarified that the value, apportioned as appropriate, of  the  following  goods  and  services,  whether supplied directly  or  indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to the extent that such value has not been included in the price actually paid or payable, shall be treated to be the amount of money value of additional consideration flowing directly or  indirectly  from the buyer  to  the assessee  in  relation  to  sale  of  the  goods  being valued and aggregated accordingly, namely:-

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(i) value of materials, components, parts and similar items relatable to such goods;

(ii)  value  of  tools,  dies,  moulds,  drawings,  blue prints, technical maps and charts and similar items used in production of such goods;

(iii)  value  of  material  consumed,  including packaging  materials,  in  the  production  of  such goods;

(iv)  value  of  engineering,  development,  art  work, design  work  and  plans  and  sketches  undertaken elsewhere  than  in  the  factory  of  production  and necessary for the production of such goods."

A reading of Rule 6 shows that the value of the goods

referred to in the Rule shall be deemed to be the aggregate of

the transaction value and the amount of money value of any

additional consideration that may flow directly or indirectly from

the  buyer  to  the  assessee.  Both  parties  relied  upon  the

explanation  to  further  their  case.   Since  the  explanation  is

determinative of the present case, it  is important to note that

where the master tape is supplied by the distributor who is the

copyright holder to the appellant, whether free of charge or at a

reduced cost such master tape must be used in connection with

the production and sale of goods by the assessee.  What is

clear  from  the  present  transaction  is  that  the  master  tape

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contains  within  it  music/picture  in  digital  form.   There  is  no

doubt whatsoever that the music/picture supplied on the master

tape ought  to  be  valued  and has  been valued  as additional

consideration that flowed from the buyer to the assessee, and

its value has been accepted at rupee one per CD.  So far as the

royalty payable for such music is concerned, even if we agree

with the learned counsel for the Department that such royalty is

inextricably connected with the music and therefore would be

used in connection with the production of the duplicate CDs, yet

the explanation requires that such use must not merely be in

connection with production but must also be in connection with

the sale of such duplicate CDs.  As has been pointed out earlier

in this judgment, the entirety of the duplicate CDs is sold only to

the distributor who is the copyright holder.  Obviously therefore

the  copyright  value  in  the  duplicate  CD  is  not  used  in

connection with the sale of such goods inasmuch as no part of

the copyright which may have been passed on by the distributor

to the assessee is used by the assessee in selling the duplicate

CDs to the distributor who is himself the owner of the copyright.

Clearly  therefore  on  the  assumption  that  the  music/picture

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embedded in  the  master  tape  is  inextricably  bound with  the

copyright thereof, the copyright is not “used” by the appellant

while selling the duplicate CDs to the distributor.  The distributor

having paid a lump sum royalty to the producer of the music,

then  sells,  after  the  job  work  done  by  the  appellant,  the

duplicate CDs in the market with the cost of the royalty loaded

thereon.  

8. Clause (iv) of the explanation also makes it clear that the

value of art work or design work on goods which is undertaken

elsewhere than in the factory of the production and necessary

for  the  production  on  such  goods alone  must  be  taken  into

account. On the assumption that the music/picture component

is the art work in the master CD, that alone is to be taken into

account as it  is necessary for the production of the duplicate

CDs.  Royalty payable for such music/picture cannot extend to

art work that is necessary for the production of duplicate CDs,

as  no  part  of  it  is  in  fact  taken  into  account  by  either  the

distributor who is the copyright holder or the appellant in the job

work done by the appellant.  

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9. Shri Lakshmikumaran relied upon two judgments of this

Court.  The first is Joint Secretary to Government of India v.

Food Specialties Ltd., 1985 (22) E.L.T. 324 (S.C.).  The facts

in this case were that the respondent entered into a number of

agreements with M/s. Nestle Products (India) Limited and M/s.

Nestle Holdings Limited, to manufacture for and on behalf of

M/s Nestle Products (India) Limited sweetened condensed milk

and other food products for sale in India by Nestle under certain

trademarks in respect of  which Nestle was registered as the

sole  registered  user  in  India.   The  entire  production  of  the

respondent was purchased by Nestle and Nestle alone.  Since

the  respondent  enjoyed  no  interest  in  the  trademarks  and

labels, this Court held that such trademarks and labels cannot

form a component of the value of the goods for the purpose of

assessment of excisable duty.  

10. Similarly,  in  Sidhosons  &  Anr.  v.  Union  of  India  &

Others,  1986  (26)  E.L.T.  881  (S.C.),  the  appellants  were

manufacturing  electrical  goods  which  were  labeled  with  the

brand  name  “Bajaj”  and  sold  by  the  appellant  only  to  Bajaj

Electricals Limited and to none else.  The price fetched by the

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goods  manufactured  by  the  appellant  was  the  price  of  the

electrical goods without the brand name.  It was held:-

“….The enhancement in the value of the goods by reason  of  the  application  of  the  brand  name  is because  of  the  augmentation  attributable  to  the value of the goodwill of the brand name which does not belong to the manufacturers and which added market  value  does  not  accrue  to  the  petitioner company  or  go  into  its  coffers.  It  accrues  to  the buyers  to  whom the  brand name belongs  and  to whom the fruits of the goodwill belong. Excise duty is payable in the market value fetched by the goods, in  the  wholesale  market  at  the  factory  gate manufactured  by  the  manufacturers.  It  cannot  be assessed on the basis of the market value obtained by  the  buyers  who  also  add  to  the  value  of  the manufactured goods the value of their own property in the goodwill of the “brand name”. The petitioners are therefore right and the respondents wrong.”

11. Both the aforesaid judgments, though decided before the

Central Excise Valuation (Determination of Price of Excisable

Goods) Rules of 2000, go to show that the value of goodwill

contained  in  a  brand  name  would  not  form  part  of  the

assessable value of goods that are produced and sold only to

the owner of the goodwill.  In the present case, the appellant

also sells the duplicate CDs only to the distributor who is the

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owner of the copyright, and this enhancement cannot be added

as part of the value of the goods sold in such cases.  

12. The  Tribunal  relied  upon  a  customs  case  reported  in

Associated  Cement  Companies  Ltd.  v.  Commissioner  of

Customs,  2001 (128) E.L.T. 21 (S.C.).   In that case, certain

drawings and designs were received from abroad as part  of

technical  collaboration and/or  knowhow.  The value of  these

drawings and designs was declared at a nominal value of one

dollar  because  according  to  the  appellant  the  drawings  by

themselves have no value and it is only the cost of the paper on

which they are made that would have any value. On a reading

of  Rule  9(1)(b)(iv)  which  is  similar  to  Rule  6  of  the  Central

Excise Rules, this Court held:-

“39. To put  it  differently,  the  legislative  intent  can easily  be  gathered  by  reference  to  the  Customs Valuation  Rules  and  the  specific  entries  in  the Customs Tariff Act. The value of an encyclopaedia or a dictionary or a magazine is not only the value of the  paper.  The  value  of  the  paper  is  in  fact negligible as compared to the value or price of an encyclopaedia.  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 duty is on the final product, whether it be  the  encyclopaedia  or  the  engineering  or architectural drawings or any manual.

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40. 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 several times more than the  value  of  a  blank  cassette.  However,  if  a pre-recorded music cassette 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  product.  In  this  behalf  we  may  note  that in State  Bank  of  India v. Collector  of Customs [(2000) 1 SCC 727 : (2000) 1 Scale 72] the Bank had, under an agreement with the foreign company,  imported  a  computer  software  and manuals,  the  total  value  of  which  was  US  $ 4,084,475. The Bank filed an application for refund of customs duty on the ground that the basic cost of software was US $ 401.047. While the rest of the amount of US $ 3,683,428 was payable only as a licence fee for its right to use the software for the Bank countrywide. The claim for the refund of the customs duty paid on the aforesaid amount of US $ 3,683,428 was not accepted by this Court as in its opinion,  on  a  correct  interpretation  of  Section  14 read  with  the  Rules,  duty  was  payable  on  the transaction  value  determined  therein,  and  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 licence fee for which the buyer is required to pay, directly or indirectly, as a condition of sale of goods to the extent  that  such royalties and fees are not included in the price actually paid or payable. This clearly goes to show that when technical material is supplied  whether  in  the  form  of  drawings  or manuals the same are goods liable to customs duty on the transaction value in respect thereof.

41. 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 Customs Tariff

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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 encyclopaedia or the engineering drawings as the case  may be.  There  is  no  scope for  splitting  the engineering  drawing  or  the  encyclopaedia  into intellectual input on the one hand and the paper on which  it  is  scribed  on  the  other.  For  example, paintings are also to be taxed. Valuable paintings are worth millions. A painting or a portrait may be specially  commissioned  or  an  article  may  be tailor-made. This aspect 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 painting, is worth millions.”

13. This case is clearly distinguishable.  What was imported

by  the  appellant  was  not  merely  paper  but  drawings  and

designs on paper whose value had to be added for the reason

that the appellants/importers were themselves going to exploit

the  intellectual  content  of  the  goods  that  were  imported

themselves.  In the facts before us the appellants, as has been

pointed out above, do not exploit the intellectual content in the

CDs produced by them by way of sale as the sale by them can

only be to the copyright owner himself.  It is clear therefore that

this case would have no bearing on the present case.  

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14. Given the fact that no part of the royalty can be loaded on

to  the duplicate  CDs produced by the appellant,  the circular

dated  19.2.2002  which  deals  with  apportionment  of  royalty

would have no application to the facts of the present case. In

the circumstances, the impugned judgment dated 11.6.2004 is

set  aside.   Refund,  if  any,  to  be  made  of  additional  duty

collected pursuant to the impugned judgment may be claimed

by the appellant in accordance with law.  The appeal is allowed

in the aforesaid terms.  

…………………….J. (A.K. Sikri)

…………………….J. (R.F. Nariman)

New Delhi; April 23, 2015.  

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