M/S. K. R. C. D. (I) PVT. LTD.versusCOMMISSIONER OF CENTRAL EXCISE, MUMBAI

                   [2015]4 S.C.R. 211



              M/S. K. R. C. D. (I) PVT. LTD.                A

                            V.

    COMMISSIONER OF CENTRAL EXCISE, MUMBAI

             (Civil Appeal No. 6709 of 2004)                B

                     APRIL 23, 2015

          [A.K. SIKRI AND R. F. NARIMAN, JJ.]

Central Excise Act, 1944: s. 4 -Assessable value of goods-
                                                            c
Appellant-assessee on job work basis manufacturing
duplicate CDs from a master tape/CO supplied by distributor
who had copyright in the music of the CD having paid
lumpsum royalty to producer of music - Royalty charges o
incurred by distributor/copyright holder- Whether includible
in the assessable value of the CDs sold by assessee- Held:
Not includible - The copyright value in the duplicate CD is
not used in connection with the sale of gcods by assessee -
Assessee sold the duplicate CDs only to the distributor who E
is the owner of the copyright and, therefore, this enhancement
cannot be added as part of the value of goods sold- Central
Excise Valuation (Determination of Price of Excisable Goods)
Rules, 2000 - r. 6.
                                                            F
      Allowing the appeal, the Court

       HELD: 1.1 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 G
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.
                                                            H
                           211
212         SUPREME COURT REPORTS                 [2015] 4 S.C.R.


A     Both parties agree that Rule 6 would be applicable to
      the facts of the present case. 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
B     consideration that may flow directly or indirectly from
      the buyer to the assessee. 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
C     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 contains within it music/picture in digital form. There
      is no doubt whatsoever that the music/picture supplied
o     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. The entirety of the duplicate CDs is
      sold only to the distributor who is the copyright holder.
E     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
F     distributor who is himself the owner of the copyright.
      Clearly therefore on the assumption that the music/
      picture embedded in the master tape is inextricably
      bound with the copyright thereof, the copyright is not
G     "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.
H     [Paras 6 and 7] [217-G-H; 218-A; 219--H; 220-A-C]
 M/S K.R.C.D. (I) PVT. LTD. v. COMMNR. OF CENTRAL 213
                   EXCISE, MUMBAI

       1.2 Clause (iv) of the explanation also makes it A
clear that the value of art work or design work on goods
which is undertaken elsewhere than in the factory of the
production and nece.ssary for the production on such
goods alone must be taken into account. On the
assumption that the music/pic_ture component is the art B
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 C
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. [Para 8] [220-C-E]
                                                           D
   Joint Secretary to Government of India v. Food
   Specialties Ltd. 1985 (22) E.L.T. 324 (S.C.); Sidhosons
   & Anr. v. Union of India & Ors. 1986 (26) E.L.T. 881
   (S.C.)- relied on.
                                                          E
  Associated Cement Companies Ltd. v. Commissioner
  of Customs 2001 (128) E.L.T. 21 (S.C.) -
  distinguished.

                    Case Law Reference
                                                          F
1985 (22) E.L.T. 324 (S.C.)   Relied on.       Par~ 9

1986 (26) E.L.T. 881 (S.C.)   Relied on.       Para 10

2001 (128) E.L.T. 21 (S.C.)   Distinguished.   Para 12
                                                          .G
      CIVILAPPELLATE JURISDICTION: Civil Appeal No.
6709 of 2004.

      From the Judgment and Order no. A/402/WZB/04-C-ll
                                                          H
214        SUPREME COURT REPORTS                  [2015] 4 S.C.R.



A     dated 11.06.2004 of the Customs, Excise & Service Tax
      appellate Tribunal, Mumbai in Appeal No. E/3072/02-MUM

            V. Lakshmikumaran, M. P. Devanath, Vivek Sharma,
      L. Charanaya, Aditya Bhattacharya, R. Ramachandran,
B     Hemant Bajaj, Ambarish Pandey, Rajesh Kumar, Anandh K.,
      E. C. Agrawala for the Appellant.
            Rupesh Kumar, Ritesh Kumar, B. Krishna Prasad, for
      the Respondent.
c           The Judgment of the Court was delivered by

          R. F. NARIMAN, J. 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
D 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
E music which music/pict1.:1re is then captured on video CD and
  CD. The producer in turn parts with such copyright in favour of
  a 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
F 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.
G 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
H manufacture a stamper i.e. Nickel plate on which the data is
 M/S K.R.C.D. (I) PVT. LTD. v. COMMNR. OF CENTRAL 215
        EXCISE, MUMBAI [R. F. NARIMAN, J.]

coded. The stamper is used as a mould to manufacture a 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 B
appellant loads part of the royalty paid to the music producer
on each such CD which as has 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 C
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           D
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         E
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:-
                                                                   F
 / Declaration under Rule 173C dated 14.3.2000 for break
   up of lhe cost of CDs.
 rR.a.Nmaterial-and other-expenses- -- "6.31 - -
 1




 [l~[~y ¢ard------~-      __ - ___- - _-_ _ - -      --2.()o
 ~J~I~)(__ _________                   _              4.30
 ' Royalty (cost of copyright)                        1.00         G
     rataI · .-(Patent
     "R6yalty            chargef
                 --- -- ----- . --- ---·- -- ·- - --· -- o.4-3 -
                                                         14.43--


                                                                   H
216         SUPREME COURT REPORTS                     [2015] 4 S.C.R.



 A            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.2QOO, and also
      paid a sum of Rs.10,210/- for CDs cleared for the period 1•t
      March to 14th March, 2000. On 4.12.2001, the Assistant
 8    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/
 C    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
 D  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
. E liable to 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,
  F CESTATconfirmed 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
G 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
H
 M/S K.R.C.D. (I) PVT.• LTD. v. COMMNR. OF CENTRAL 217
        EXCISE, MUMBAI [R. F. NARIMAN, J.]

the distributor/copyright holder, and, as is apparent from the A
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
"'!ho are the copyright holders who then sell these duplicate B
CDs in 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.
                                                                   c
          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, D
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. E
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 F
impugned in the present case.

       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 G
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
                                                                   H
218         SUPREME COURT REPORTS                     [2015] 4 S.C.R.



 A    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)
 B
        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
 c      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
 D      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
 E      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:-

_F      (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
 G      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
 H
  M/S K.R.C.D. (I) PVT. LTD. v. COMMNR. OF CENTRAL 219
         EXCISE, MUMBAI [R. F. NARIMAN, J.]

    work and plans and sketches undertaken elsewhere than               A
    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        B
· 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       C
  where the master tape is supplied by the distributor who is the
  copyright holder to the appellant, whether fre;;: 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           D
  is clear from the present transaction is that the master tape
  contains within it music/picture in digital form. There is no doubt
  whatsoeverthatthe music/picture suppiied on the master tape
  ought to be valued and has been valued as additional
  consideration that flowed from the buyer to the assessee, and         E
  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      F
  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.             G
  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            H
220         SUPREME COURT REPORTS                    [2015] 4 S.C.R.


A     selling the duplicate CDs to the distributor who is himself the
      owner of the copyright. Clearly therefore on the assumption
      that the music/picture 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
B     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.

C          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
D 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
E 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.

         9. Shri Lakshmikumaran relied upon two judgments of
F 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
G 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
H
 M/S K.R.C.D. (I) PVT. LTD. v. COMMNR. OF CENTRAL 221
        EXCISE, MUMBAI [R. F. NARIMAN, J.]

Nestle alone. Since the respondent enjoyed no interest in the   A
trademarks and labels, this Court held that such trademarks
and labels cannot form a component of the value of the goods
forthe purpose of assessment of excisable duty.

        10. Similarly, in Sidhosons & Anr. v. Union of India B
& 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
goods manufactured by the appellant was the price of the C
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     D
  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
                                                                E
  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           F
  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."
                                                                G
       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 cor.tained in a brand name would not form part of
the assessable value of goods that are produced and sold        H
222         SUPREME COURT REPORTS                      [2015) 4 S.C.R.



A     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 owner of the copyright, and this enhancement cannot
      be added as part of the value of the goods sold in such cases.

B             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 abro3d as part of
      technical collaboration and/or knowhow. The value of these
C     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
0
      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.
E       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
F       intellectual input in such items greatly enhances the value
        of the paper and ink in the ~foresaid 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.
G
        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
H       a blank cassette. However, if a pre-recorded music


                                                                              /',
                                                                        . (    /
MIS K.R.C.D. (I) PVT. LTD. v. COMMNR. OF CENTRAL 223
       EXCISE, MUMBAI [R. F. NARIMAN, J.]

 cassette or a popular film or a musical score is imported      A
 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,         B
 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
                                                                c
 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            D
 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     E
 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       F
 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        G
 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
                                                                H
224         SUPREME COURT REPORTS                   [2015] 4 S.C.R.


A       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
B       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
c       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."
D
              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
E     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
F     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
G 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
H
 MIS K.R.C.D. (I) PVT. LTD. v. COMMNR. OF CENTRAL 225
        EXCISE, MUMBAI [R. F. NARIMAN, J.)

claimed by the appellant in accordance with law. The appeal     A
is allowed in the aforesaid terms.

Devika Gujral                                 Appeal allowed.


                                                                B