1. Customs Law

1. Whether transaction value can be rejected merely on ground that identical goods have been imported at a higher price

Held: No

2. When transactions value is arrived at after negotiating, taking into account resale price of imported goods in India, can it be rejected

Held: No

3. Does existence of distributorship agreement between supplier and importer lead to a conclusion that they are related

Held: No

The appellant dealers are manufacturers of agro chemicals, textile chemicals, etc. They also manufacture fungicide under brand name “Dithane-M-45” by diluting “Mancozeb Technical 85%” imported from M/s Rohm & Haas Company, France (now on referred to as R & H). Prior to that period, M/s. Indofil Chemicals Ltd. were importing Mancozeb Technical 85% from R & H and manufacturing fungicide in India under the brand name Dithane M-45. In November, 1995, the appellants entered into an agreement with R & H for import and distribution of Dithane M-45 in India and started importing Mancozeb T-85% from R & H since Feb 1996 at the following prices:-

1)	Feb.1996 to January,1997	US $ 2.10 per kg.
2)	Feb.1997 to Feb.1998	US $ 2.25 per kg.
3)	March.1998 toSept.1999	US $ 2.10 per kg.

Show cause notice dated 25-1-2001 was issued to the appellant company proposing to recover alleged differential duty of Rs. 7,19,84,692/- under the provision to sec. 28(1) of the Customs Act, 1962 (by applying the value @ US $ 2.85 per kg. at which M/s. Indofil Chemical Company was importing the same product from R & H) together with interest and proposing confiscation of goods. The show cause notice inter alia alleged that the appellant and R & H are related to each other, that the agreement between the two was a sole distributor agreement, that the two are interested in the activity of each other in view of the financial transactions between them and that this relationship has influenced the price of imported Mancozeb T-85%, that the sale between the appellants and the R & H is not a sale where the buyer and seller are not interested in the business of each other and the price is the sole consideration for the same as the sale of the same product is ordinarily offered for sale by R & H during the course of international trade at US $ 2.85 per kg, the price at which M/s Indofil was importing the product from R & H, that the price of Dithane M-45 sold by the appellant has systematically risen and similarly sale price of the identical product sold by M/s Indofil (who started manufacturing indigenously since 1996) had also systematically risen, that the appellant connived with R & H to misdeclare the value of the goods. The notice invoked the provision of Rule 5 of the Customs (Valuation) Rules, 1988. The appellants denied the allegations in the notice which was adjudicated by Commissioner by rejecting transaction value as per invoice by confirming demand raised there under for the period February, 1996 to March 2000 together with interest.

Tribunal on hearing both the sides gave the following observations –

• Rule 10A of the valuation can only be invoked if there is a doubt as to the genuineness of the transaction between the exporter and the importer.
   

• The fact that the transaction value cannot be rejected for the reason that identical goods have been imported into India at a higher price has been accepted by Tribunal in Finolex Industries Ltd. vs. CC 174 ELT 341, Mark Auto Industries vs. CC 162 ELT 261, Devika Trading vs. CC 167 ELT 75. In tact the value of same goods imported from the same supplier on the same day at varying price is legally acceptable, provided price is arrived at on commercial consideration.

• As regards adoption of the price at which M/s. Indofil has imported Mancozeb this cannot be done, because both the transactions are not at the same commercial level and also not at or about the same time and hence Rule 5 does not apply to the present case. The details of imports made by Indofil are as under:-

  1992	US $ 2.55 per kg.
  1993	US $ 2.81 per kg.
  Aug 1995 to Feb. 1996	US $ 2.85 per kg.

  Details of imports made by Bayer are as follows:-

  Feb. 1996 to Jan. 1997	US $ 2.10 per kg.
  Feb. 1997 to Feb.1998	US $ 2.25 per kg.
  Mar. 1998 to Mar.2000	US $ 2.1 per kg.

M/s. Indofil has imported 1680 MT of Mancozeb in 5 years (average of 336 MT per year) whereas Bayer has imported 3653 MT in 4 years (average of 930 MT per year). Thus, imports by Bayer are three times more than the imports by M/s. Indofil and, therefore, both imports are not at the same commercial level and also not at or about the same time, since Indofil stopped import in Feb. 1996. For this reason also the price of Indofil cannot be the basis for enhancing the value of imports made by the appellants.

• The transaction value between R&H and Bayer has been arrived at after negotiating, taking into account the resale price of imported goods in India and
  
  Such a method is acceptable under Rule 4 and it also conforms to the value arrived at as per Rule 7; i.e., deductive value method. The correspondences exchanged (pages 105 to 108, 117 to 121) shows that R & H price worked out Backward from the resale price of the goods in India for formulation products
  
  And this is the conclusive evidence that the price charged by R & H from the appellant is entirely based on commercial consideration.
  
  The mere existence of a distributorship agreement between Bayer and R & H cannot lead to the conclusion that they are related and the sole distributor is related only when he falls within any of the clauses (i) to (viii) to Rule 2(2). The Commissioner has held that R & H directly or indirectly controls Bayer. Although it may be stated that R & H is interested in the business of Bayer since Bayer is selling its goods, it cannot be said that Bayer is interested in the business of R & H as there is no cross shareholding between the two.
   

• The Commissioner has found that the price at which Mancozeb has been imported into India by others during 1994 to 2000 is steadily increasing and for this purpose, the following evidence has been cited :–
  
  Import by United Phosphorus from China and Lupin Agro Chemicals from Netherlands

  1994	Rs. 63.52 per kg
  1999	Rs. 77.93 per kg
  2000	Rs. 78.99 per kg

• We agree with the appellant that import of Mancozeb from other countries cannot be treated as import of identical goods into India as per the definition of identical goods in Rule 2(c). The cif price in US $ is being compared with the price in Indian rupees. It is, however, to be kept in mind that due to rupee devaluation and increase in exchange rate of US $, the cif price in US $ after conversion into Indian rupees always shows a higher price of the goods. Applying the exchange rate of US $ as mentioned in Ground F of the memo of appeal filed by the Bayer of US $ 2.10; i.e., the price at which Bayer has imported the goods, then the price in Indian rupees is as under :
  
  Imports from China

  1999	Rs. 91.45
  2000	Rs. 94.29

  Imports from Netherlands

  Sept. 1997	Rs. 81.40
  Dec. 1997	Rs. 89.55
  Jan. 1998	Rs. 88.51

  Further, the quantity imported either by M/s. United Phosphorus and M/s. Lupin Agro Chemicals has not been mentioned in the impugned order. Therefore, the price at which others imported Mancozeb into India cannot be treated as import of identical goods so as to reject the value declared by Bayer.
  
  Bayer India Ltd. vs. CC 198 ELT 240 (Tri-Mumbai)

7. Excise Law
   
   Whether advertisement expenses incurred by “Soft drinks & advertising market service Pvt. Ltd.” to advertise aerated products manufactured by third party bottlers can be included in the value of concentrates manufactured and sold by the dealer under agreement to various bottlers

Held : No

The issue in this case is whether the advertisement expenses incurred by M/s. Soft Drinks and Advertising Marketing Services Pvt. Ltd. (SAMS for short) to advertise the aerated products, and manufactured by the third party bottlers could be includible in the assessable costs of the non-alcoholic beverages (NABB) manufactured by the respondent. NABB is a concentrate which is sold under agreement to various bottlers throughout the country who after processing the concentrate bottle the outcome and sell the same under various brand names all of which, at the material point of time belonged to the dealer. Under the agreement between the bottlers and the dealer, the dealer was required to advertise the finished products. In 1988, SAMS was set up by the bottlers as a centralized agency for advertising finished products of the bottlers. The shareholders of SAMS are the representatives of the bottlers, its Directors are also representatives of the bottlers.

The department on the allegation that the dealer was in fact deriving benefit from the sale of the final product and also that the respondent was in some cases insisting on the bottlers to pay their contribution to SAMS towards the advertisement expenses issued show cause notices to the respondent in respect of clearances of NABB made for the period 1-3-1989 to November, 1993.

Both the departmental authorities relied on the decision of this court in Union of India & Ors. etc. vs. Bombay Tyre International Ltd. etc. -1984 (1) SCR 347 as well as Philips India vs. C.C.E.-1997 (1) E.L.T. 540 to hold that the advertisement costs incurred by SAMS under its agreement with the bottlers was includible in the assessable coats of the NABB for the purposes of Section 4 of the Central Excise and Salt Act, 1944 (as it then stood).

The Hon'ble court observed that decision of Tribunal in case of Pepsi Food Ltd. 82 ELT 33 cannot be distinguished from the present case on any reasonable basis. The Tribunal had held :–

“Advertisement expenses incurred for soft drinks products manufactured by the bottlers cannot be included in the assessable value of concentrate manufactured by the appellants even by applying the ratio of Supreme Court judgment in the Bombay Tyre International case (supra) according to which it is only the advertisement and sales promotion expenses incurred for the goods under assessment that can be added to the assessable value. A perusal of the dealers agreement with the bottlers also shows that the bottler is enjoined to undertake appropriate advertising and sales promotion activities for the beverage which again indicates that the obligation cast on the bottler as per the agreement does not extend to or cover the concentrates manufactured by the dealer. In the circumstances, it is held that department has failed [to] established their case for adding the advertisement expenses to the assessable value of concentrates manufactured by the appellants with satisfactory evidence, and, as such, the orders of the lower authorities in this regard or not sustainable. The demand on this count is, therefore, set aside.”

Thus the appeal of the department was dismissed

CCE (Mumbai) vs. Parle International Ltd. 198 ELT 486 (SC)

8. Duplicating and recording of CDs on behalf of music companies from stamper made from master known as DAT supplied by music companies, method of valuation as prescribed by board circular to be taken ?

Held : Yes

Whether the values can be compared with the CDs prepared of other music companies as comparable goods?

Held : No

The dealer 'a' is engaged in manufacture of exciseable goods viz, Compact discs (referred to as CDs), the process is actually duplicating and recording the CD for and on behalf of music companies.

The valuation of this CDs so duplicated were questioned on the ground that the following costs were not included; i.e., copyright of DAT master, Positive art work, Inlay cost, jewel box for packing, showcause which was issued and the Deputy Commissioner adjudicated these notices.

The Deputy Commissioner observed that

“……. CDs sold in the wholesale market by music companies at very high prices and since the wholesale price is known to music companies at the time and the place of clearance, the manufacturer in this case M/s. Jet Speed Audio Pvt. Ltd., should have obtained the wholesale price from music companies and paid the duty accordingly ……..”

It was held that price of CD should be Rs. 140/- based on the price declared by M/s. Zee Music (Music Co.) on CDs manufactured by appellant dealer. M/s Zee Music has paid the differential duty on the CDs manufactured by appellant dealer.

The facts of the case as explained before the Commissioner are that the dealer is merely engaged in the activity of duplicating of CDs from the master for and behalf of various music companies / parties. The said music companies got the CDs prerecorded from the assessee. The said music companies own the copy right of the music titles recorded on the CDs and the assessee was not authorized to sell the prerecorded CDs manufactured for and on behalf of the music companies, in the market in the course of wholesale trade since the assessee did not own the copyright in respect of music prerecorded on CDs, The assessee was required to supply the quantity of the prerecorded CDS to the music companies.

It was also explained that to manufacture the pre-recorded CDs stamper CD master is required without which the pre-recorded CDs cannot be manufactured. These CDs have been got manufactured by the assessee from abroad by exporting DAT master cost of which was separately recovered by the assessee from the customer by way of issue of debit notes and the value of which not in the assessable value declared by the assessee.

The music companies referred to above were buying music copyrights from the film producers and artist under Copyright Act, 1957 and after transferring the music on Digital Audio Tape (DAT) in the recording studio, the same were supplied to assessee free of cost for making CD stamper.

It was further explained that handsome amount of money was paid to producers and artists (singers) to buy copyrights of the music. The copyright purchase agreement were made between film producers, artists and music companies either buy the copyrights on outright basis or obtain right to use the same on payments of royalties, the same was not transferable without the consent of music companies. This music was subsequently transferred on DAT masters and stampers for manufacturing pre-recorded (CDs) cost of which is a part of manufacturing cost and the same were not taken in consideration while arriving at the assessable value under section 4 of the Act as declared by the assessee on their invoices as required under Rule 173C.

The music companies have also supplied positive art work, containing the contents recorded on CDs including the names of the music directors, copyright owners, singers and artist, price etc, free of cost for screen printing on body of CDs so as to make CDs marketable, without the screen printing on the pre-recorded CDs, the same cannot be sold in the course of wholesale trade. It is revealed that for each title of CD a “Positive art work” is required. Whenever any correction in the positive art work is required the cost of the same was separately recovered from the music companies by the assessee. The cost of the positive art work and the correction charges have not been taken into consideration in the assessable value declared on the invoices by the assessee.

There is a vast difference between the assessable value of the goods as declared by the assessee on their invoices and the price of the goods in the course of wholesale traded. This is mainly due to the various costs, like cost of copyright, costs of DAT master, positive art work inlay costs etc. which were not taken into consideration and not included in the assessable value declared by the assessee on their invoices.

It is an admitted fact that the CDs were made from stampers and the allegation is that these stampers were got made abroad from DAT supplied free and recovery of stamper costs was separately made. Since DAT is not, admittedly directly used it is the value/cost of stamper which has to be amortised and not the value/cost/copyright expenses procurement on DAT which are being proposed to be added.

The Commissioner (Appeals), after considering the decisions of the Apex Court in the case of Ujagar Prints – 1988 (38) E.L.T. 535(SC) and the clarificatory orders and the boards instructions and clarifications issued dated 31-12-1993. held as under:

The lower authority has not properly appreciated the submission and hence has erroneously held that the cost of royalty/copyright, cost of DAT master, stampers, cost of positive art work etc should be included in the assessable value and duty should be levied on the wholesale price sold by the music companies. This view is not in keeping with the provisions of sec 4(1) (a) which indeed is applicable in the applicants case and I find no need to go to sec 4(2)(b).Manufacture of the CDs in question is said to be completed at the job workers factory (here the appellant) and the relationship between them is obliviously that of one principal to another principal and not of principal to agent. The ratio of the Supreme Court’s Judgment in the case of M/s Ujagar Prints would therefore come in to foregoing in this case besides the ratio of apex court in Pawan Biscuits 120 ELT 24.
 
Revenue aggrieved by the findings of CIT(A) appealed before the Tribunal. Tribunal refused to approve the findings of the lower authorities considering the charges laid out in showcause notice and judgment of Supreme Court. They further observed that in respect of taking the price as sale price of Zee Music, the mandate of the constitution bench in the apex court in Ujagar Prints is clear and explicit. The traders sale price can never be the valuation for the goods manufactured on job work. Besides goods by their very nature cannot be comparable goods since the intellectual contribution of music director, singers and other artist cannot be valued as comparable with the cost/valuation of another song and music composition or film by another set of artist.The have to be comparable to adopt comparable prices. No case is brought out to prove that intellectual property cost in Zee Music is comparable with that of the other company. The Deputy Commissioner has travelled beyond the showcause notice and are contrary to the decision of the court and hence they cannot be upheld.

Jet Audio Pvt. Ltd. vs. CCE (TRI-Mumbai) 198 ELT 296

NOTE: (In the budget for 2007 the law has been amended to overrule the findings of Supreme Court in Ujagar Prints.)