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
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.”
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
R.F. Nariman, J.
Citation;(2015)6 SCC397
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
1
Page 2
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
2
Page 3
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
3
Page 4
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
4
Page 5
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
5
Page 6
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.
6
Page 7
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:-
7
Page 8
(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
8
Page 9
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
9
Page 10
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.
10
Page 11
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
11
Page 12
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
12
Page 13
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.
13
Page 14
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
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.
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.
Print Page
being taxed is intellectual input. What is being taxed
under the Customs Act read with the Customs 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
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.”
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
R.F. Nariman, J.
Citation;(2015)6 SCC397
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
1
Page 2
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
2
Page 3
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
3
Page 4
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
4
Page 5
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
5
Page 6
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.
6
Page 7
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:-
7
Page 8
(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
8
Page 9
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
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.
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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