Distribution fees paid to non-resident for rights to distribute a service not includible in Assessable Value of Imported Goods

Distribution fees paid to non-resident for rights to distribute a service has nothing to do with the Imported Goods, therefore enhancement of Assessable Value of Imported Goods to the extent of remittance of distribution fees is untenable

Multi Screen Media Pvt. Ltd., Mumbai (the Appellant) imported 72 consignments of Digi beta tapes/beta tapes/video tapes (Imported Goods) by courier through CSI Airport, Mumbai, during June to December, 2007 on payment of Customs duty.

During the Departmental investigations, it was found that the Appellant had entered into the Service Agreement namely “Programme Acquisition and Service Agreement” and the Distribution Agreement with MSM Satellite Singapore Pvt. Ltd. (Foreign Entity). Foreign Entity was engaged in broadcasting of channels from Singapore and they regularly sent foreign movies, programmes and other contents acquired by them to the Appellant for the purpose of distribution to channels, for which the Appellant remitted Rs. 19.76 Crores to Foreign Entity towards their share of distribution fees.

The Revenue contended that such distribution fees will be included in the Assessable value of Imported Goods in terms of Rule 10(1)(c) of the Customs Valuation Rules, 2007 (the Valuation Rules) as distribution fee is a condition of sale of Imported Goods. Therefore a Show Cause Notice was issued, which was adjudicated by the Commissioner of Customs, CSI, Mumbai (the Commissioner). The Commissioner ordered for re-assessment of Imported Goods resulting in enhancement of value of Imported Goods to the extent of remittance of distribution fees and confirmed the demand of differential Customs duty of Rs. 4.83 Crores along with interest, penalty and also held that the Imported Goods are liable for confiscation. Being aggrieved, the Appellant preferred an Appeal before the Hon’ble CESTAT, Mumbai.

The Hon’ble CESTAT, Mumbai held as under:

• The payment of distribution fees was for acquiring non-exclusive rights for satellite delivered, advertiser supported, and television service. Hence, payment made was for the rights to distribute a service and has nothing to do with Imported Goods;
• The letter dated December 28, 2007 addressed to the Standard Chartered Bank reveals that the Appellant remitted Rs. 19.76 Crores towards distribution fees in terms of the Distribution Agreement and this factual position was confirmed by the Chartered Accountant’s Certificate dated December 28, 2007 for remittance under Section 195 of the Income Tax Act, 1961. Hence, no evidence was adduced to support the Department’s contention;
• The Appellant was registered under the taxable category of ‘Broadcasting Services’ and distribution fees collected has been declared for payment of Service tax in their Service Tax Returns filed;
• The Commissioner mis-directed himself in including the value of a taxable service rendered in India in the value of the Imported Goods. The television programmes have been aired from Singapore and the tapes were not required for broadcasting the programmes. The requirement of the tapes was for the limited purpose of obtaining certification from Central Board of Film Certification and technical quality checks and has nothing to do with the distribution activity. Therefore, there are no records to show that the remittance made to Foreign Entity had anything to do with the Imported Goods.

Hence, the Order enhancing the value of the Imported Goods to the extent of remittance of distribution fees and demanding Customs duty thereon under the Valuation Rules was set aside by the Hon’ble Tribunal as being unsustainable in law.