In the context of valuation for customs purposes, the West Zonal Bench of the Customs, Excise and Service Tax Appellate Tribunal has, in a recent decision in Star Entertainment Pvt Ltd v Commissioner of Customs (Adjudication), Mumbai, considered the issue of whether royalties/licence fees paid in respect of films/serials, contained in imported beta/digibeta tapes, should be included in the assessable value of the tapes, in terms of erstwhile rule 9(1)(c)/present rule 10(1)(c) of the Customs Valuation (Determination of Value of Imported Goods) Rules 1988/2007 (CVR).

Erstwhile rule 9(1)(c)/present rule 10(1)(c) warrants addition of royalty payments to the assessable value of imported goods in situations where such payments: (i) are related to the goods being imported and valued; and (ii) constitute a “condition of sale” for such goods. The term “condition of sale” has not been defined under the Customs Act, 1962, or the CVR but has been judicially interpreted (in Commissioner of Customs, Ahmedabad v Essar Gujarat Ltd, 1996) to mean a pre-condition for the sale, non-fulfilment of which would cause the sale to fall through.


In the Star Entertainment case, the appellant had imported pre-recorded master tapes containing feature films/serials and paid customs duty on the value of the tapes, as declared on the invoice issued by the foreign supplier. The tribunal was required to determine whether the royalty/licence fee paid for procuring cinematic, television, video and ancillary rights in respect of the films/serials was a condition for the sale of the imported media containing such films/serials and should form part of the latter’s transaction value, when the amounts towards royalty/licence fees were paid prior to importation of the tapes/media.

On behalf of the appellant, it was contended that the royalty was paid to acquire rights to reproduce the films/ serials in India and in accordance with the explanatory notes to erstwhile rule 9(1)(c)/present rule 10(1)(c), payment for such reproduction rights was not liable to be included in the transaction value of the imported tapes.

The Customs Department asserted that the royalty was a condition of sale of the imported master tapes since payment of the royalty had to be made prior to supply/import of the tapes and the CVR did not provide for exclusion of royalty paid for licence rights, including the right to manufacture, vend and sell or rent out new goods.


The member (technical) of the tribunal relied on the contractual terms between the parties and the timing of payment (i.e. prior to import of the tapes) to hold that the royalty was indeed a condition of sale of the tapes. The royalty had no nexus with the number of copies reproduced post-importation and was paid not solely for grant of reproduction rights but for a bundle of rights, which could not be bifurcated.

The member (judicial), however, differed and held that the royalty was for rights of reproduction/manufacture by exploitation of the copyright in the films/serials, payment in relation to which was not liable for inclusion in the assessable value as per the explanatory notes to erstwhile rule 9(1)(c)/ present rule 10(i)(c) of the CVR and that such payment was not a condition for sale and import of the tapes into India.

Upon reference, the third member of the tribunal confirmed inclusion of the royalty in question in the transaction value of the imported master tapes, relying on the Supreme Court’s decision in the Living Media (India) case (2011), which upheld inclusion of royalty/licence fee in the assessable value of imported pre-recorded cassettes carrying the music or song of an artist on the basis that the royalty accrued to artists and producers who had produced such cassettes and that it became due and payable as soon as the cassettes were distributed and sold.

However, the demand for differential duty on the royalty, confirmed by the majority decision of the tribunal in the current case, was dropped on the ground that the extended period of limitation was not invocable on the facts of the case.


In light of the above decision, while determining whether any royalty payments constitute a condition of sale of the imported goods for the purposes of rule 10(1)(c) of the CVR in similar circumstances, the following aspects may require consideration: (a) contractual arrangement between the parties; (b) nature and purposes of royalty payment and whether it is in any way co-related to the import of goods; (c) timing and manner of such royalty payment; and (d) whether such royalty payment is for a single right, such as the right of reproduction, or a lump-sum payment for a bundle of rights.

Disclaimer: This article was first published in the June 2014 issue of the India Business Law Journal magazine. It has been authored by Karthik Sundaram, who is an associate partner and Anuradha Mohanty, who is an associate manager at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at [email protected] or [email protected] for any comment or query. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. The contents of this article/update are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.