Legal principle

A royalty clause in a contract that also covers import of goods does not, ipso facto, permit addition to transaction value under rule 9(1)(c) of the Customs Valuation Rules, 1988 (rule 10 of the 2007 Rules); only payments that are a condition of sale of the imported goods as a pre-importation component are includible, while royalties hinged on post-importation manufacture or sales are excludible.

Court decision

The Tribunal allowed the importers' appeals (C/01 to 03 & 5/2011) with consequential relief, holding that the impugned orders erred in including royalty amounts in the valuation of the imported master tapes, and dismissed Revenue's appeals (C/10 & 11/2011) against the quantum of penalty; the cross-objection was disposed of accordingly.

Facts

M/s Saregama India Ltd (and similarly Sony Pictures Home Entertainment India) imported feature-film content on master tapes, digi-beta masters and stampers through the courier mode at Mumbai Airport under licence agreements with overseas studios, paying duty on the declared value of the physical media while royalty based on gross Indian sales (against a remitted minimum guarantee) was payable to the studios. The Commissioner of Customs, Airport, Mumbai, by Orders-in-Origin of 25.10.2010 and 06.10.2010, demanded differential customs duty of Rs 2,66,75,664 (against Saregama and two officials, for imports from 22.08.2003 to 17.08.2007) and Rs 1,85,63,704 (against Sony Pictures, for 2005-06 to part 2007-08), with interest and penalty, by rejecting the declared value under rule 10A of the Customs Valuation Rules, 1988 and adding royalties under rule 9(1)(c). The importer had deposited Rs 2,00,00,000 towards duty during investigation. Revenue separately appealed seeking enhancement of penalty.

Key provisions

• Section 14, Customs Act, 1962 — Valuation of goods
• Rule 9, Customs Valuation (Determination of value of Imported goods) Rules, 2007 — Residual method
• Rule 10, Customs Valuation (Determination of value of Imported goods) Rules, 2007 — Cost and services
• Section 12, Customs Act, 1962 — Dutiable goods
• Section 28, Customs Act, 1962 — Recovery of duties not levied or not paid or short-levied or short- paid or erroneously refunded