In a recent judgement rendered last week, in Commissioner of Customs Vs. Living Media (India) Ltd., the Supreme Court had occasion to deal with the issue of the appropriate valuation of imported goods in a situation where royalties were paid by the importer to the overseas supplier of such goods. The issue before the Supreme Court was whether such royalties were includible in the transaction value of the imported goods, in the light of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (hereinafter referred to as “the Rules”) issued under Section 14 of the Customs Tariff Act, 1975, pertaining to such valuation.
In the case in point, the Supreme Court dealt with the correct determination of the transaction value of audio compact discs and cassettes in which a variety of music had already been recorded. Since this issue had come up with regard to almost every company in the music field, the Court clubbed several similar appeals that were pending for decision and passed an omnibus order. Typically, the facts before the Supreme Court were that the importers were engaged in the business of selling recorded music in the Indian market. Consequently, in all these cases, the importers were engaged in imports of music recorded in a range of media such as cassettes, compact discs, digital audio tapes and the like. The methodology adopted by the importers for valuing such recorded music in the above media differed from case to case but the important common point was that royalties were required to be paid by the importers to the overseas suppliers of such recorded music (whether or not they were related parties), over and above the declared transaction value of such media. In certain cases, in view of the adoption of the resale minus methodology for determination of the value of imported goods, the question became one of whether such royalties ought to be deducted from the retail price, in order to arrive at the value of the imported goods.
Before going to the decision of the Supreme Court, it is important to note that on the facts of the underlying cases, as discerned from the judgement, the relevant rules in question were not the 2007 Rules but the earlier 1988 Rules that were applicable during the relevant periods. However, the Court has cited the 2007 Rules but has extracted the relevant provisions of the 1988 Rules. This point is however academic since the relevant provisions relating to inclusion of royalties in the valuation of imported goods continue to remain the same under both the 1988 and the 2007 Rules. To elucidate, Rule ((1)(c) of the 1988 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 imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.”
The 2007 Rules have renumbered this Rule as Rule 10(1)(c) but the wordings remain exactly the same. It can be seen that the above provisions state that royalties and licence fees related to the imported goods need to be added to the price of such goods if the buyer is required to pay such royalties or fees as a condition of the sale of the goods being valued, provided of course that these are not already included in the price. The Court referred to its earlier decision in Commissioner of Customs Vs. Ferodo India Pvt. Ltd. reported in (2008 (4) SCC 563), wherein it had held that since the provisions required the inclusion of royalties and licence fees paid by the importer to the supplier of imported goods, directly or indirectly, the Department had the right and also the obligation to look at the pricing arrangements/agreements between the importer and the overseas supplier in order to determine whether the price of the imported goods was appropriately determined and was not influenced by the fact that royalties, licence and other fees were also payable by the importer to such supplier. Accordingly, the Supreme Court had held in the case that appropriate adjustments could undoubtedly be made under the Rules should such indirect nexus be determined between the imported goods and the royalties in question. A similar principle had also been upheld by the apex Court in its even earlier decision in Collector of Customs Vs. Essar Gujarat Ltd., reported in (1996 88 ELT 609), which was referred to in the Ferodo India case.
The Apex Court also take notice of its other decision in Associated Cement Companies Ltd. Vs. Commissioner of Customs (2001) 4 SCC 593), where it had held that in the case of a programme of any kind that had been loaded on a disc or a floppy, such as in the case of recorded music, duty will necessarily have to be discharged on the full value of such recorded media, including the value attributable to the recorded software. The Court held that customs law required the valuation of the goods in the condition in which they were imported and since, in the case in point, the imported goods were of music recorded in relevant media, the valuation ought to be done on the entire value of such imported recorded media. The Court thereafter concluded that the issue that arose for consideration appeared to have been answered in the above decision in Associated Cement. The Court held that since valuation had to be done of the recorded media and since the royalty in question was payable by the importer to the overseas supplier precisely in connection with the copyrighted music which had been recorded in such imported media, there was no doubt that under the provisions of the relevant Rule 9(1)(c), the royalties in question were includible in value.
As regards the point on condition of sale, the Court looked at the underlying agreements which, in all the cases before it, envisaged the royalty payments to become due and payable upon the post importation sales of the recorded media in India. The Court concluded that given the manner in which the royalties were envisaged in these agreements, including their computation on the basis of sales of the recorded media, it could reasonably be concluded that the payments of such royalties was a condition of sale of the imported goods i.e. the recorded media. The Court took note of the reliance placed by the importer on the commentary of the GATT Customs Valuation Code, to argue that such royalties ought not to be included in the value of the recorded media, but disregarded this reliance and simply held that the relevant sections and rules of the Customs law in India were themselves clear and unambiguous and hence the commentary could not be of any avail.
Accordingly, the Supreme Court has held that royalties payable by the importers of recorded media to the overseas suppliers were includible in the value of such imported goods. This case is an important one in that it interprets the customs law on royalties in a definitive manner, based of course on the facts of the cases before the Court and holds that the relevant provisions are not ambiguous and hence no reliance can be placed on the GATT Customs Valuation Code and the related commentary thereto.
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The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd. pwctls.nd@in.pwc.com
Supported by Rahul Renavikar