1. Revenue is aggrieved partly by the impugned order dated 30.03.2017 of Principal Commissioner of Customs (Imports), New Customs House, New Delhi. After allowing the condonation of delay, the appeal is taken up.
2. The brief facts of the case are that the respondent, M/s. Luxottica India Eyewear Pvt. Ltd. ("LIEPL") was engaged in the import of Sun glass, frames, their spare parts and advertising material from their holding company M/s. Luxottica Itlay and its affiliates/subsidiaries - the owners of well-known eyewear brands like Ray Ban, Oakley, Vogue, Versace, Bulgari, Prada, etc. LIEPL (the importer) is a wholly owned subsidiary of Luxottica Itlay (the supplier). The third party involved in the case was an Indian entity and another subsidiary of M/s. Luxottica Itlay, M/s. Ray Ban Sun Optics India Ltd. (RBSOIL) who were in the business of manufacturing and distributing eyewear products under the trademark Ray Ban since October, 2000 using the technical know provided by Luxottica. RBSOIL was also distributing eyewear products imported from Luxottica or its subsidiaries without any formal agreement. The fact that three parties mentioned above being "related parties" within the meaning of Section 14 of the Customs Act, 1962
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read with the Customs Valuation Rules, 2007 - specifically Rule 2(2) and Rule 3, was not in dispute and had not been contested. The dispute is with reference to loading of certain value in the assessable value of imported goods by the respondent.
3. The contents of the two agreements were relevant to the present dispute. The first one is License and Distribution agreement dated 22.04.2008 between Luxottica, Italy and RBSOIL. The agreement granted exclusive licence to the RBSOIL to use the trade mark and technical know-how for manufacture and distribution of eyewear products as well as exclusive licence to distribute imported products supplied through the subsidiaries of Luxotica. Another agreement dated 15.03.2010 is a sub-distribution agreement between RBSOIL and the respondent. The respondent was appointed as exclusive distributor for eyeware products, Indian and imported. For such appointment, the respondent should pay RBSOIL, a sum of Rs. 2.75% of the net sales of eyeware products at the end of every financial year. In the year 2010, RBSOIL gave up its exclusive distributorship rights, which was with them, for the eyewear products bearing trade mark of Luxottica or its affiliates/subsidiaries. The said right was vested in the respondent for a consideration mentioned above.
4. The dispute now in the present appeal is with reference to payment of Rs. 5,75,22,576/- on account of trademark licence fee as a condition of sale of goods that the respondent got from RBSOIL, which RBSOIL got from Luxotica, Itlay. This amount was not being directly paid to Luxotica, Itlay, but being paid to IBSOIL. The Revenue alleged that this expense incurred by the respondent is includible in the transaction value in terms of Rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. Accordingly, proceedings were initiated against the respondent to demand differential duty on this account. It may be noted here that the demand proceedings were also for an addition of consideration of Rs. 88,69,10,274/- in the assessable value on account of advertisement, marketing and promotional activities. This amount was held to be not includible in the assessable value in the impugned order. The Revenue has not contested the said finding. The present appeal by the Revenue is restricted only to the addition of trademark licence fee of Rs. 5.71 crores in the assessable value in terms of Rule 10(1)(c) of the Customs Valuation Rules. Accordingly, we are concerned only with this part of the dispute.
5. Ld. AR elaborating the grounds of appeal by the Revenue submitted on the following lines:-
(a) The decision of the Original Authority is not correct as the sub-distribution agreement dated 15.03.2010 between RBSOIL and the respondent was entered into with the express approval of Luxottica Group. The various terms of the agreement make it clear that the consideration for being appointed the exclusive distribution of the eyewear products from RBSOIL or the Luxottica group, the respondent was required to pay RBSOIL an amount of Rs. 2.75% of the net sale value at the end of the financial year.
(b) The respondent is importing finished goods from the Luxottica Group and there is no agreement between them even for the sale of imported goods or for import of such goods. There is nothing on record to show that the respondent has imported any goods from suppliers other than Luxottica Group. Thus, 100% import appears from Luxottica Group. Hence, mere non-existence of the agreement does not give a clear indication of the arrangement between them and it appears to be a ploy to circumvent the Customs Valuation provisions.
(c) The licence fee of Rs. 2.75% to be paid by the respondent on sale/re-sale or distribution of all the goods imported from Luxottica Group appears to be directly tied to the sale/distribution of the imported goods.
(d) The trade mark licence fee is based on the sale price of the goods imported and is, therefore, the same could not be done without payment of royalty. Such royalty is indirectly a condition of sale.
(e) Payment of additional consideration to RBSOIL is mandatory, if the respondent wants to market it or sell the imported goods, which is the only purpose of importing the products in question. Thus, it is a condition for sale.
(f) Reliance was place on the decisions of the Hon'ble Supreme Court in Ferodo India (P) Ltd. - : 2008 (224) ELT 23 (SC), Essar Gujarat Ltd.: 1996 (88) ELT 609 (SC), Living Media India Ltd. 2011 (271) ELT (SC) and Agro Tech Foods Pvt. Ltd.- 2015 (330) ELT 448 (T-M).
6. Ld. Counsel for the respondent strongly contested the grounds of appeal by the Revenue. In the oral as well as written submissions, he emphasized the following points:-
(a) The Original Authority carefully examined the facts of the case, agreements and other materials on record and applying the provisions of Rule 10(1)(c) of the Valuation Rules held categorically that payment for distribution rights had no relationship to imports.
(b) The consideration paid by the respondent to RBSOIL is for being appointed as a sub-distributor and not towards any fee or royalty.
(c) The reliance placed by the Original Authority on Feroda India (supra) is correct. If the appellant has no nexus with the work of imported goods, then the same cannot be included in the value of imported goods.
(d) The payments made can be included in the value only on fulfillment of conditions under Rule 10(1)(c). The decision of the Apex Court in Living Media (supra) is not appropriate. In the said case, the agreements specified that royalty payment is towards money to be paid to the artists and distributors, who had produced such cassettes and the royalty is payable directly on distribution and sales of cassettes. Payment of royalty is pre condition of sale. The other decisions relied upon by the Revenue are clearly distinguishable on facts.
7. We have heard both the sides and perused the appeal records.
8. On careful consideration of the impugned order, we note that the Original Authority has given specific attention to all the facts relevant to the case and applied the provisions of Rule 10(1)(c) appropriately. With reference to dispute at hand, the Original Authority proceeded to examine the legal provisions in the following manner:-
"26.1 The relevant sub-rule for this issue is Rule 10(1)(c) which is the only sub-rule that deals specifically with the inclusion of royalties and licence fees. The relevant extract of the sub-rule reads as under:
"Rule 10. Cost 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 licence 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 reasoning or rationale for the inclusion of the aforesaid 'trademark licence fee' is contained in paragraph 16.6 of the Show Cause Notice which states that this amount was paid "as a condition of sale". It has further been stated that "the assessee got the rights from RBSOIL which RBSOIL got from Luxottica Sra Itlay. This amount though is not being paid directly to Luxottica Sra Itlay but being paid to RBSOIL against the imported goods".
26.2 From a plain reading of Rule 10(1)(c), it is evident that the following conditions must be satisfied for the rule to apply:
(i) the royalty and licence fees should be related to the imported goods and the buyer should be required to pay the same;
(ii) the payment could be direct or indirect;
(iii) the requirement to pay must be a condition for sale; and
(iv) such royalty or licence fees should not have been included in the price actually paid or payable.
It is only when all these conditions are fulfilled that an amount paid or payable by the buyer as royalty or licence fees can be included in the assessable value of the imported goods."
9. The Original Authority proceeded to examine each one of the above conditions with reference to the facts of the present case. He held that the first and fourth conditions mentioned above are fulfilled in the present case. On the second condition regarding the payment could be direct or indirect, he relied on the decision of the Hon'ble Supreme Court in Ferodo India Pvt. Ltd. (supra) to interpret the term "directly". We are in agreement with the analyses made by the Original Authority with reference to non-fulfillment of conditions No. 3 viz. payment being not direct or indirect. The payment would be considered "indirect" where the pricing arrangement is such that the price of imported goods is "adjusted" downwards and the royalty or licence fee is inflated suitably to make up for that. It is clear that payment of licence trade mark fee by the respondent to RBSOIL would not merit as "indirect" payments within the ambit of Rule 10(1)(c).
10. One of the conditions for addition of value under Rule 10(1)(c) is that payment of licence fee should be "condition of the sale of the imported goods". This aspect has been examined in great detail by the Original Authority. Relying on the terms of the agreement, it was concluded that the respondent accepted and acquired exclusive distributorship rights for the sale of the imported eyewear products with the express approval of the seller of those goods "Luxottica" subject to the terms and conditions mentioned therein. We note that the Original Authority correctly concluded that the considerations to be paid by the respondent is for the distribution rights and not for their imports. Even if the licence fee is not paid by the respondent, the consequence would be that they would lose the right to distribute the goods in India and not to import. The Original Authority observed that even if the distributorship agreement was not there, the respondent would have imported the goods as done prior to 2010. Accordingly, the conclusion drawn by the Original Authority that it is the distribution of goods in India that is linked to the payment of licence fee and not to the import. Finally, we note that the payment made by the respondent for the right to distribute or resell the imported goods should not be added to the price paid or payable for such goods, if such payments are not a condition of the sale for export to the country of importation of the said goods. We are in agreement with the conclusion drawn by the Original Authority in this regard. As correctly contested by the respondent, the grounds of appeal or case law relied upon by the Revenue do not support to the case for such addition in the import value.
11. In view of the above finding, there is no merit in the appeal by the Revenue. The same is dismissed.
[pronounced on 18.01.2018