Case Law Details

Case Name : Commissioner of Customs Vs Adidas India Marketing Pvt. Ltd. (CESTAT Delhi)
Appeal Number : C Appeal No. 51928 of 2018
Date of Judgement/Order : 05/03/2020
Related Assessment Year :
Courts : All CESTAT (1010) CESTAT Delhi (323)

Commissioner of Customs Vs Adidas India Marketing Pvt. Ltd. (CESTAT Delhi)

Conclusion: Sponsorship and endorsement expenses paid by Adidas India to various athletes and players in India were not includable in the assessable value of the goods imported by Adidas India by invoking rule 10(1)(e) of the Customs Valuation (Determination of Value of Imported Goods) Rules 2007.

Held: Adidas India was engaged in importing and selling adidas brand products. In terms of the License Agreement entered into between adidas Germany and adidas India, adidas India executed agreements with various sports personalities, clubs and associations for the marketing and promotional activities of the products, for which it paid certain amount. Department has sought to include this amount paid by adidas India to sport personalities and associations in the assessable value of goods imported by adidas India by taking recourse to rule 10(1)(e) of the 2007 Rules.  It was the expenses incurred by adidas India for the marketing and promotion of the products that were sought to be included by the Department in the value of the products imported under rule 10(1)(e) of the 2007 Rules for determination of the transaction value. It was held that the conditions provided for in rule 10(1)(e) were not satisfied and, therefore, no addition could have been made to the price actually paid by adidas India to adidas Germany for determination of the transaction value of the goods that were imported. Principal Commissioner had found that the amount spent by adidas India towards sponsorship/endorsement was not on behalf of adidas Germany and nor the payments were made as a condition of sale of the imported goods. In fact, the amount was spent by adidas India on its own account.

FULL TEXT OF THE CESTAT JUDGEMENT

The Commissioner of Customs, Inland Container Depot, Patparganj, New Delhi1, by order dated 19 March 2018, has dropped the proceedings initiated under the demand-cum- show cause notice dated 28 April 2017 that was issued to the respondent adidas India Marketing Pvt. Ltd2 under section 28(4) of the Customs Act 19623. It is this order that has been assailed by the Revenue in this appeal.

2. The main issue that arises for consideration in this appeal is whether the sponsorship and endorsement expenses paid by adidas India to various athletes and players in India is liable to be included in the assessable value of the goods imported by adidas India by invoking rule 10(1)(e) of the Customs Valuation (Determination of Value of Imported Goods) Rules 20074.

3. It has been stated that adidas India is engaged in importing and selling adidas brand products e. footwear, garments and sportswear goods imported from adidas International Trading BV, Netherlands5. It also transpires that adidas AG, Germany6 is the owner of certain intellectual property relating to adidas brand, including trademarks such as “adidas”, “3 stripes”, “Trefoil” and “3-Bars”, patents and know-how. A License Agreement was entered into between adidas Germany and adidas India with effect from 01 April, 2013. It was later revised on 1 April 2016. Under the agreement, adidas India was granted the non-exclusive right and license to use „know how‟ to manufacture the licensed products and the exclusive license to promote, distribute, market and sell the products and licensed products of adidas throughout the territory specified in the Agreement. A licensed product has been defined in the License Agreement to mean such products for which adidas Germany has granted adidas India the right to manufacture and a „product‟ has been defined to mean any item of the adidas branded range of products developed by or for the adidas group. The License Agreement also defines „adidas group‟ to mean adidas Germany and its affiliates. Under Article 2.3 of the License Agreement, adidas India had to use its best efforts to develop, extend and maximise the sale and distribution of the products and licensed products but all the expenses incurred by adidas India, directly or indirectly, related to the distribution, marketing and sale of the products was to be borne by adidas India and adidas India was not to create any expenses or other liabilities chargeable to adidas Germany, except those relating to legal proceedings.

4. It would, therefore, be appropriate to reproduce the relevant portions of the License Agreement that was initially to be effective from 1 April 2013 and was later revised on 1 April 2016. It needs to be noted that „Licensor‟ is adidas Germany and ‘Licensee’ is adidas India.

ARTICLE 1

DEFINITIONS

1.1 “adidas GROUP” means LICENSOR and its AFFILIATES.

1.8 LICENSED PRODUCTS means those PRODUCTS which LICENSOR grants LICENSEE the right to manufacture under the provisions herein.

1.12 “PRODUCTS” means any item of the adidas branded range of products developed by or for the adidas GROUP (other than products which either the adidas GROUP does not distribute itself including but not limited to eyewear, head and face protection, cosmetics, watches, cycling-specific products, martial arts products, stationery etc, or selected products which adidas AG or other other member of the adidas GROUP distributes by itself throughout the world, including without limitation Y-3 products, Porsche design products, and such other products as are notified to LICENSEE by LICENSOR from time to time in writing).

ARTICLE 2

GRANT OF RIGHTS

2.1 Subject to the provisions of this AGREEMENT, LICENSOR hereby grants to LICENSEE a) the non-exclusive right and licence to use the KNOW HOW to manufacture LICENSED PRODUCTS in the TERRRITORY AND b) the exclusive licence  to promote, distribute, market and sell PRODUCTS and LICENSED PRODUCTS throughout the TERRITORY under or by reference to the MARKS.

2.2 As an exception to the exclusivity granted to LICENSEE under Article 2.1 the LICENSOR reserves the right to promote, distribute, market and sell PRODUCTS in the TERRITORY through the adidas GROUP global e-commerce

2.3 LICENSEE shall use its best efforts to develop, extend and maximise sale and distribution of the PRODUCTS and LICENSED PRODUCTS in the TERRITORY.

2.5 All expenses incurred  by  LICENSEE,  directly  or  indirectly, related to the manufacture, distribution, marketing and sale of LICENSED PRODUCTS and all expenses incurred by LICENSEE related to the distribution, marketing and sale of the PRODUCTS shall be borne by LICENSEE and LICENSEE shall not create any expenses or other liabilities chargeable to LICENSOR, subject to Article 5. 10.

2.8 LICENSEE shall be entitled to grant to franchisees,  retailers and other sales partners the non-exclusive right to use the MARKS to promote, distribute, market and sell PRODUCTS and/or LICENSED PRODUCTS within the TERRITORY.

ARTICLE 4

MARKETING

4.1 LICENSEE shall submit a complete and detailed business and marketing plan as part of the annual budget process which shall include estimates of sales of PRODUCTS and LICENSED PROBUCTS for each subsequent CONTRACT YEAR.

4.2 LICENSOR shall provide strategic guidance for the use of the brand. LICENSEE shall determine local strategies and direction for both the marketing and advertising of LICENSED PRODUCTS and for sports marketing and promotion, public relations, market research, point of sale activities and sales training. However, at the request of LICENSEE, LICENSOR shall provide support to LICENSEE as may be requested by the LICENSEE for marketing and advertising of LICENSED PRODUCTS and/or for sports marketing and promotion, public relations, market research, point of sale activities and sales training. LICENSEE acknowledges expressly that any expenditure incurred by the LICENSEE in connection with its sales (i.e. any local marketing and advertising expenses, any local sales promotion expenses, etc.) is solely on account of LICENSEE and that no reimbursement can be sought from LICENSOR to this extent; furthermore, it is both PARTIES understanding that the royalty rate as per Art. 7.1 has been determined at the stated level in view of LICENSEE’s prerogative to plan and undertake local activities in connection with its sales, as may be deemed appropriate by

4.3 LICENSOR may, from time to time and in writing, specify requirements relating to the manner of use of the MARKS, so as to present the public throughout the world where PRODUCTS and LICENSED PRODUCTS are marketed with a uniform, consistent, high quality global brand image. LICENSEE shall comply with all such requirements.

4.4 The copyrights and all other intellectual property rights throughout the world in all COLLATERAL MATERIAL shall belong absolutely to LICENSOR to the extent permitted by law. LICENSEE shall execute any documents as reasonably requested by LICENSOR to confirm LICENSOR’s ownership of such rights. Unless otherwise agreed with LICENSOR, all COLLATERAL MATERIAL shall bear a copyright notice in the name of LICENSOR in a format approved by LICENSOR. LICENSEE shall clear, at its own costs, all talent, agency and third party intellectual property rights for utilisation in the TERRITORY of advertising and promotional material developed by LICENSEE and LICENSEE shall permit LICENSOR, its AFFILIATES and/or its other licensees to use such material without any charge or compensation except for any technical costs of

4.5 LICENSEE shall have the non-exclusive right to conclude agreements for the sponsorship or endorsement of the adidas brand or any adidas products with any athletes, players, teams, clubs, events, federations, or other individuals or groups of individuals, committees or similar organizations (“PROMOTIONAL AGREEMENTS”) within the TERRITORY. LICENSEE shall use LICENSOR’s standard form promotional contracts (which shall be supplied by LICENSOR) for such PROMOTIONAL AGREEMENTS. Notwithstanding the above, if the value of any PROMOTIONAL AGREEMENT exceeds-USD 300,000 (for its equivalent in local currency) LICENSEE must obtain LICENSOR‟s prior consent to said PROMOTIONAL ”

ARTICLE 5

MARKS

5.10 In the event of any actual or threatened legal  proceedings against LICENSEE or its customers alleging infringement of a third party‟s intellectual property or other rights by the use of the MARKS in relation to the manufacture, use, sale or distribution of any PRODUCT or LICENSED PRODUCTS. LICENSOR shall indemnify LICENSEE from and against any cost or expense relating thereto, including reasonable out of pocket expenses (excluding managerial time) provided the PRODUCT and/or LICENSED PRODUCT has not been modified by LICENSEE or a third party and the infringement is caused by such modification by LICENSEE or such third party and LICENSEE has given LICENSOR prompt written notice of any such claim LICENSEE shall permit LICENSOR or a designee of LICENSOR in take over the defence and settlement of any such claim or proceedings and to act in LICENSEE’s name in any such proceedings. LICENSEE shall fully co-operate with LICENSOR in the defence of the claim and/or proceeding and shall make available to LICENSOR, free of charge, personnel, and all information and particulars, including original documents, in its possession or control which LICENSOR may request to assist in the defence or settlement of such claim or proceedings. LICENSEE shall not do or fail to do anything which may prejudice such defence or settlement.

ARTICLE 7

ROYALTIES

7. Subject to the provisions of Article 7.2 below, LICENSEE shall pay to LICENSOR in remuneration for the rights granted by this AGREEMENT a royalty equal in six percent (6%) of its NET SALES of LICENSED PRODUCTS.

Subject to the provisions of Article 2.1 the following rights and benefits are covered by the royalty stated above:

a. right to use the MARKS within the

b. right to use the KNOW HOW within the

c. right to distribute within the

d. right to conclude promotional agreements within the TERRITORY.

e. the right to use the endorsement, logos and/or symbols of certain international athletes, clubs, federations and/or organisations which have been provided or arranged by LICENSOR.”

5. Based on Article 4.5 of the aforesaid License Agreement, adidas India entered into agreements with various sports personalities, celebrities, clubs, and associations for the marketing and promotional activities of the products. Article 4.1 of the Sponsorship Agreement provides that the Athletes shall make best efforts to exclusively wear, use and promote adidas products throughout the contract territory at the time of playing, practicing, training and attending events. The expression ‘contract territory’ meant the entire world. As per Article 3.1 of the Sponsorship Agreement, adidas India paid a fixed annual retainership fee on pro-rata basis for each contract year.

6. A show cause notice dated 28 April 2017 was, however, issued to adidas India proposing to demand differential customs duty by adding the sponsorship/ endorsement expenses incurred by adidas India to the value of the imported goods under rule 10(1)(e) of the 2007 Rules. It was alleged that adidas India did not include the sponsorship and endorsement expenses in the assessable value of the goods at the time of importation of goods, nor did it declare to the Customs that it had agreed to bear the sponsorship and endorsement expenses on behalf of adidas Germany in terms of the License Agreement. The Appellant was, therefore, directed to state as to why:

(i) the assessable value declared by them for imports of goods made by them during the period from 1 April 2012 to 31 March 2017 should not be rejected in terms of Section 17(4) of the Customs Act, 1962 and re- assessed;

(ii) the proportionate expenditure of Sponsorship and Endorsement relatable to imported good, as reflected in the balance sheet, for the period from 1 April 2012 to 31 March 2017 should not be included in the assessable value for determination of customs duty;

(iii) the short-levied duty of customs amounting to Rs. 67,57,769/- should not be demanded from them in terms of Section 28(4) of the Customs Act, 1962 by invoking the extended period;

(iv) the interest leviable on short-levied duty should not be demanded from them under section 28AA of the Customs Act, 1962;

(v) impugned goods imported during the period from 1 April 2012 to 31 March 2017 should not be held liable to confiscation under the provisions of section 111(m) of the said Act and since the goods are not available for confiscation, why penalty should not be imposed upon them under section 112 of the said Act; and

(vi) penalty should not be imposed under section 114A of Customs Act, 1962.

7. A detailed reply was filed by adidas India to the aforesaid show cause notice. The Commissioner, by order dated 19 March 2018, accepted the contentions advanced by adidas India and dropped the proceedings initiated by the show cause notice. The Commissioner found that the payments made by adidas India to sports personalities/  associations  were  not  made as a condition of sale to satisfy any obligation of adidas Germany. It would be appropriate to reproduce the relevant portions of the order passed by the Commissioner and they are as follows:

“84. I find that for including the impugned amount7 in the transaction value under rule 10(1)(e) of the valuation rules, the following two conditions needs to be satisfied

a. The payments are made as a condition of sale by buyer to seller or to a third party to satisfy the obligation of

b. Such payments are not already included in the price actually paid or

85. It is an admitted fact that the expenses are not already included in the price paid or payable. Therefore it needs to be examined whether these expenses are made as a condition of sale and to satisfy an obligation of the seller.

———

86. From a close reading of the above clauses of the agreement, I do not find any express clause which binds or obligate AIMPL2 to enter into Sponsorship/ Endorsement agreements with players, athletes, teams etc. to promote the “adidas” branded goods and to make such expenses on behalf of the seller. Above clauses only say that licensor grants license to products. This cannot be called as an obligation on behalf of the seller, in as much as there is no quantum of sponsorship specified, no bench marking of expenses to sales and no specification as to the obligation is for what amount. I also do not find any clause to substantiate the “condition of sale”. If one were to ask, could importer AIMPL continue to import at the same transaction values and pricing arrangement, if they do not enter sponsorship agreement with the players. I see no clause in the agreement, which prohibits the same. I rather find that as per clause 7.1 of the same agreement, a royalty equal to 6% of the net sales of the licensed products is payable to the seller, for various rights and

———-

93. While it as a fact, that the sponsorship made by AIMPL would definitely help the overall brand promotion, however again the most important question to ask at this juncture would again be “whether it was a condition to sale”, and as a part of obligation to the seller. In the license agreement and in the notice, I find that there is no direct evidence coming forth to answer this question in the affirmative. The entire amount of sponsorship fee given to teams/ players by AIMPL from its own account, is sought to be added when it cannot be quantified as to what is the monetary benefit to Adidas outside the four countries. Even if there is a benefit to the Adidas brand elsewhere also, its nexus with the value of the goods imported into India needs to be established clearly. The contract territory in sponsorship agreement has been done only to retain the exclusivity, of the players when he plays for Adidas. I find this argument acceptable. Even if the territory defined in the license agreement is different, it cannot be said from the perusal of the agreement that AIMPL was cast with any obligation to spend on advertising on behalf of the principal seller to make advertisement expenses all over the world on its behalf.

———

95. In view of the above findings, I find the sponsorship/ endorsement expenses made by AIMPL in entering into sponsorship with the players cannot be added under Rule 10(1)(e) of the Valuation Rules.”

[emphasis supplied]

8. The present appeal has, accordingly, been filed by the Department to assail the aforesaid order dated 19 March 2018 passed by the

9. Shri Sunil Kumar learned Authorised Representative of the Department has made the following submissions:

(i) The transaction value was not the sole consideration as adidas India had entered into a License Agreement with adidas Germany that provided for expenses to be incurred on sponsorship/ endorsement of “adidas” branded projects as a condition of sale to satisfy an obligation of adidas Germany. This would be clear from the various agreements entered into by adidas India with players/ associations and adidas India has to incur expenses on behalf of adidas Germany for the sponsorship/ endorsement charges;

(ii) Thus, the value of the goods that were imported by adidas India had to be redetermined in terms of the provisions of rule 10(1)(e) of the 2007 Rules read with section 14 of the Customs Act. The Division Bench decision of the Tribunal in M/s Reebok India Company Vs. Commissioner of Customs, Parparganj8 supports this view; and

(iii) The goods, therefore, were liable to be confiscated under section 111(m) of the Customs Act as adidas India mis-declared the value of goods by suppressing the true and actual value of the goods while filing the declaration. However, since the goods were not available for confiscation, penalty has to be levied under section 112 of the Customs Act.

10. Shri B.L. Narasimhan, learned counsel appearing for the respondent – adidas India made the following submissions:

(i) The impugned order does not suffer from any illegality and, therefore, the appeal filed by the Revenue deserves to be dismissed;

(ii) Rule 10 (1) (e) of the 2007 Rules could not have been resorted to by the Revenue for adding all other payments contemplated in determining the transaction value for the reason that the conditions specified in the said sub-rule were not satisfied;

(iii) The payment made to the contracting players and others towards sponsorship and promotion of the products is not a condition of a sale of the imported goods nor has it been made to satisfy an obligation of the seller towards a third party.   Hence rule 10 (1) (e) of the 2007 Rules could not have been invoked; and

(iv) The extended period of limitation could not have been invoked in the facts and circumstances of the case.

11. The submissions advanced by the learned Authorised Representative of the Department and the learned Counsel for the Respondent have been

12. As noticed above, adidas India is engaged in importing and selling adidas brand products. In terms of the License Agreement entered into between adidas Germany and adidas India, adidas India executed agreements with various sports personalities, clubs and associations for the marketing and promotional activities of the products, for which it paid certain amount. The Department has sought to include this amount paid by adidas India to sport personalities and associations in the assessable value of goods imported by adidas India by taking recourse to rule 10(1)(e) of the 2007 Rules. Under Article 2.1 of the License Agreement, adidas Germany granted adidas India the exclusive license to promote, distribute, market and sell the products throughout the territory. Article 2.3 requires adidas India to use its best efforts to develop, extend and maximise sale and distribution of the products throughout the territory. Article 2.5 provides that all expenses incurred by adidas India, directly or indirectly related to the marketing and sale of products shall be borne by adidas India and it shall not create any expenses or other liabilities chargeable to adidas Germany. Under Article 4.5 adidas India has been given the non-exclusive right to conclude agreements for the sponsorship or endorsement of adidas brand or any adidas products with athletes, players, teams or other individual groups, within the territory, for which adidas India can use the standard form promotional contracts of adidas Germany subject to the condition that if the value of the promotional agreement exceeds USD 300,000, adidas India shall obtain prior consent of adidas Germany for the said promotional agreement. It is the expenses incurred by adidas India for the marketing and promotion of the products that are sought to be included by the Department in the value of the products imported under rule 10(1)(e) of the 2007 Rules for determination of the transaction value.

13. In order to appreciate whether the expenses incurred by adidas India on the marketing and promotional activities of products can be added to the value of the imported goods, it will be appropriate to examine the relevant provision.

14. Section 14(1) of the Customs Act deals with valuation of goods. It provides that the value of the imported goods and export goods shall be the transaction value of such goods, which would be the price actually paid or payable for the goods when sold for export to India or for export from India, where the buyer and the seller of the goods are not related and the price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf. Thus, this section deals with transaction value of goods where the buyer and the seller are not related. Under the second proviso to section 14(1), the Rules may provide for the circumstances in which the buyer and the seller shall be deemed to be related and the manner of determination of value in respect of goods where the buyer and the seller are related or the price is not the sole consideration for the sale. The 2007 Rules that have been framed under Section 14 of the Customs Act do provide for determination of the transaction value where the buyer and the seller are related. Rule 2(g) of the 2007 Rules provides that the ‘transaction value’ means the value referred to in sub-section (1) of section 14 of the Customs Act. In the present case, it is not in dispute that the buyer and the seller are related.

15. The relevant provisions of the 2007 Rules for determination of the transaction value are as follows:

Rule 3. Determination of the method of valuation. – (1) Subject to rule 12, the value of imported goods shall be the transaction value adjusted in accordance with provisions of rule 10;

(2)     ——

(3)     ——

(4)   If the value cannot be determined under the provisions   of sub-rule (1), the value shall be determined by proceeding sequentially through rule 4 to 9.

RULE 10. Cost and Services. – (1) In determining the transaction value, these shall be added to the price actually paid or payable for the imported goods,

(a)      ——-

(b)      ——-

(c)      ——-

(d)      ——-

(e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation  of the seller to the extent that such payments are not included in the price actually paid or payable.

(2)     ——–

(3)     ——–

(4) No addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule.”

RULE 13. Interpretative notes. – The interpretative notes specified in the Schedule to these rules shall apply for the interpretation of these rules.

16. Note to rule 3 contained in the Schedule to the Interpretative Notes is as follows:

The Schedule

INTERPRETATIVE NOTES

Note to rule 3

Price actually paid or payable

The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotiable instruments. Payment may be made directly or indirectly. An example of an indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by the seller.

Activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in rule 10, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the value of imported goods.

The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods:

(a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment;

(b) The cost of transport after importation;

(c) Duties and taxes in

The price actually paid or payable refers to the price for the imported goods. Thus the flow of dividends or other payments from the buyer to the seller that do not relate to the imported goods are not part of the customs value.”

17. Section 14(1) of the Customs Act provides that the value of the imported goods and export goods shall be the transaction value of such goods, which would be price actually paid or payable for the said goods, where the buyer and the seller of the goods are not related and the price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf. The 2007 Rules have been framed in exercise of the powers conferred by section 14(1) of the Customs Act. They provide for, amongst others, determination of the method of valuation as also the cost and services.

18. It would be seen that rule 3 deals with the determination of the method of valuation. It provides that subject to rule 12, the value of the imported goods shall be the transaction value adjusted in accordance with provisions of rule 10. Rule 10 deals with cost and services. It provides that in determining the transaction value, the amount referred to in (a), (b), (c), (d) and (e) of sub-rule (1) of rule 10 shall be added to the price actually paid or payable for the imported goods. The payment referred to in (e) of sub-clause (1) of rule 10 is in issue in this appeal. It provides that in determining the transaction value, all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable shall be added. Sub-rule (4) of rule 10 stipulates that no addition shall be made to the price actually paid or payable in determining the value of the imported goods, except as provided for in rule 10.

19. It, therefore, clearly emerges from a bare perusal of rule 10(1)(e) that it contemplates two situations when all other payments actually made or to be made can be added to the price actually paid for determination of the transaction value. The first is a situation when all other payments made by the buyer to the seller as a condition of sale of the imported goods to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid have to be added. The second is a situation when all other payments made by the buyer to a third party as a condition of sale of the imported goods to satisfy an obligation of the seller to the extent that such payments have not been included in the price have to be added. For the sake of convenience, rule 10(1)(e) can be broken up into two parts for the purpose of determining the transaction value by adding :

(a) such payments actually made or to be made as a condition of sale of the imported goods by the buyer to the seller to satisfy an obligation of the seller;

Or

(b) such payment actually made or to be made as a condition of sale of the imported goods by the buyer to a third party to satisfy an obligation of the seller.

20. What also needs to be noticed is that in both the aforesaid two situations there are two requirements. The first requirement is that the payment should be made as a condition of sale and the second requirement is that they should be made to satisfy an obligation of the seller which can be towards the buyer as contemplated in (a) or towards a third party as contemplated in (b). Both the aforesaid twin requirements have  to be satisfied before any payment made by the buyer to the seller or the buyer to a third party can be added to the price actually paid by the buyer to the seller for determining the transaction value. In other words, whenever such a payment is made either by the buyer to the seller or the buyer to a third party, the payment should necessarily be made as a condition of sale of the imported goods to satisfy an obligation of the seller. As an example, the obligation of the seller could be when the seller owes a debt to the buyer or to a third party. In such a situation, the seller may require the buyer to adjust the debt. Rule 10(1)(e) requires that this requirement should be a condition of sale of the imported goods, for it is not that every debt which the seller owes to the buyer or a third party can be added to the price of the imported goods. Such an obligation of the seller has to be a condition of sale. It is only in such a situation that all other payments made as a condition of sale of the imported goods, by the buyer to the seller, or by a buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable can be added to the price actually paid for determining the transaction value.

21. In regard to the first condition that such payment should actually be made or to be made by the buyer to the seller or by the buyer to a third party as a condition of sale of the imported goods, it is also necessary that there is an enforceable right available to a seller to enforce such a condition. Thus, an option must not be available with the buyer to ignore the condition of sale. In regard to the second condition, notwithstanding the fact that such payment has to be made by the buyer as a condition of sale of the imported goods, then too unless and until it is established that the seller has a pre-existing obligation to pay the said amount to the buyer or a third party and the buyer is only discharging the said obligation of the seller, such payment cannot be added to the price actually paid by the buyer for the imported goods in terms of rule 10(1)(e). The seller must, therefore, have an obligation to pay an amount to the buyer or to a third party and the discharge of the same is by the buyer as a condition of sale of the imported goods. Any payment made by a buyer to a third party on his own account, even as a condition of sale of the imported goods in terms of a clause of the agreement between the buyer and seller, cannot be added to the value of the imported goods since such payment has not been made to satisfy an obligation of the seller.

22. The importance of sub-rule (4) of rule 10 of the 2007 Rules cannot also be lost sight of. It, in very clear terms, provides that no addition shall be made to the price actually paid or payable in determining the value of the imported goods, except as provided for in rule 10.

23. In the present Appeal, the dispute is with regard to the payment made by the buyer to the third party which would be payments made by adidas India to various sports personalities and associations for marketing and promotional activities of the products.

24. It will be useful, at this stage, to refer to cases that have discussed the requirement of rule 10(1)(e) of the 2007 Rules that payment should actually be made as a condition of sale. These decisions hold that the costs incurred on advertisement and promotion, even if such advertisement and promotion is carried out under an agreement between the buyer and seller, can be added to the amount paid by the buyer for import of goods only when there is a right with the seller to enforce such a condition on the buyer to incur such expenditure.

25. In Commissioner of Central Excise, Surat vs Surat Textile Mills Ltd9, the Supreme Court emphasized that advertisement expenditure incurred by a customer of the manufacturer can be added to the sale price for determining the assessable value only if the manufacturer has an enforceable legal right against the customer to insist on the incurring of such advertisement expenses by the customers. The relevant portion of the judgement is reproduced below:

“21. We have carefully perused the judgments and orders passed by the CEGAT which are impugned in these appeals. As righty contended by the counsel appearing on either side, the CEGAT failed to appreciate the arguments advanced before it by the counsel appearing on either party in its proper perspective. In fact, in Civil Appeal Nos. 13400/1996, 4672/1997 and 4762/1997, the CEGAT failed to appreciate that in several earlier judgments, the CEGAT consistently held that the advertisement expenditure incurred by a manufacturers‟ customer can be added to the sale price for determining the assessable value, only if the manufacturer has an enforceable legal right against the customer to insist on the incurring of such advertisement expenses by the customer.”

26. This judgement of the Supreme Court in Surat Textiles Mills was followed by the Principal Bench of the Tribunal in Honda Seils Power Products Ltd. vs Commissioner of Central Excise, Meerut- III10. The Tribunal noticed, after perusing the agreement, that there was nothing in the agreement from which it could be concluded that the Appellant had an enforceable legal right against the dealers that they must incur certain amount of expenses on advertisement and publicity of the products of the Appellant and merely because a clause in the agreement required the dealer to make efforts for promoting sales of the products of the Appellant would not mean that a legal obligation was cast upon the dealer to incur expenses on advertisement. The observations are as follows:

“5. We have considered the submissions from both the sides and perused the records. The undisputed facts are that:-

(a) the appellant‟s agreement with their dealers only have a clause which require the dealers to make efforts for promoting the sales of the appellant‟s products; and

(b) during the period of dispute, the dealers had incurred expense on advertisement and publicity, a part of which had been reimbursed by the appellants to the

The point of dispute is as to whether the expenses on advertisement and publicity expenses incurred by the dealers, which were borne by them, are to be added to the assessable value of the goods or not.  On this point, it is seen that the Apex Court in case of C.C.E., Surat v. Surat Textile Mills Ltd., reported in 2004 (167) E.L.T. 379 (S.C) has held in clear terms that only when a manufacturer has enforceable legal right against his customers/ dealers to insist on incurring of expenses on advertisement, the advertisement expense incurred by the dealers can be added to the assessable value. Same view has been taken by the Tribunal in case of Maruti Suzuki India Ltd. reported in 2008 (232) E.L.T 566  (Tri.- Del.).

6. On going through the appellant‟s agreement with their dealers, we find that there is nothing in their agreement from which it can be concluded that appellants had enforceable legal right against the dealers to insist on incurring of certain amount of expenses on advertisement and publicity of the appellant‟s products. Just a Clause in the agreements requiring the dealers to make efforts for promoting sales of the appellant‟s products cannot be treated as a clause imposing legal obligation on the dealers to incur certain level of expenses on advertisement. In view of this, we hold that the impugned orders are not sustainable. The same are set aside. The appeals are allowed.”

[emphasis supplied]

27. In Maruti Suzuki India Ltd. vs Commissioner of Central Excise, Delhi/Bhopal11, the Appellant was a manufacturer of motor vehicles and parts thereof. The Appellant had an agreement with the dealers that they shall at all times during the currency of the agreement make efforts to promote the product and its reputation in the allotted territory. The Department formed an opinion that since the dealers incurred expenses under the terms of the agreement, such activities were carried out on behalf of the manufacturer and therefore, would have to be treated as consideration for sale and accordingly, differential duty was required to be paid. The Tribunal held that there was no enforceable legal right with the Appellant to insist on incurring such advertisement expenses and at best, failure on the part of dealer to cause advertisement, could only lead to the cancellation of the agreement. The relevant portion of the decision of the Tribunal is reproduced below:

“10. In the present case, relating to M/s. Maruti Suzuki India Limited, we find it has been claimed that the advertisements are not done by all the dealers; and even in respect of dealers undertaking such advertisements, the extent of expenses does not get linked to or proportionate to number of vehicles sold by them; it was claimed that the dealers have incurred expenses varying from 0.0070% to 0.2333% of total sale value. In view of the above, it appears that these advertisements cannot be held to have been carried out by the buyers on behalf of the manufacturer; that the assessee has no enforceable legal right to insist on incurring such advertisement expenditure. The contention of the Department that there is no option available to the dealers does not stand proved. The stand of the department that the failure on the part of the dealer may lead to the cancellation of dealership and therefore there is a enforceable legal right is (not) acceptable. Such cancellation cannot enable  recovery of dealer‟s share of cost of advertisements. Therefore, this case is squarely covered by the decisions of the Hon‟ble Supreme Court in the cases of Philips India Ltd. v. CCE, Pune reported in 1997 (91) E.L.T. 540 (S.C) and the decision of Surat Textile Mills [2004 (167) E.L.T. 379 (S.C)] cited supra wherein it has been held that “the advertisement expenditure incurred by a manufacturers‟ customer can be added to the sale price for determining the assessable value, only if the manufacturer has an enforceable legal right against the customer to insist of the incurring of such advertisement expenses by the customer.”

[emphasis supplied]

28. The same view was taken by a Division Bench of the Tribunal in M/s Giorgio Armani India (P) Ltd vs. Commissioner of Customs, New Delhi12. The observations are as follows:

“10. Lastly, we consider the loading @3% of the value of purchase. As per the agreement with the foreign buyers, the appellant is required to incur an expenditure not less than 3% towards advertising in India. Such advertisement is carried-out in India for promotion of „Giorgio Armani‟ Brands. Such expenditure is incurred after import of the goods. Even though, the appellant is required to incur such expenditure as per the agreement with the foreign principal, it cannot be said that such expenditure has been incurred to satisfy the obligation of the foreign principal. Consequently, the condition specified in rule 10 (1)(e) is not satisfied and accordingly we find no justification to load the invoice value to this extent. Such loading is  accordingly set-aside.”

[emphasis supplied]

29. It needs to be noted that against the aforesaid decision of the Tribunal in Giorgio Armani India, the Department filed a Civil Appeal13 before the Supreme Court. This Appeal was dismissed by the Supreme Court on 2 January 2019 with an observation that the Court was not inclined to interfere with the impugned order. The observations of the Supreme  Court are as follows:

“Delay condoned. We are not inclined to interfere with the impugned order. The appeal is accordingly dismissed.”

30. In Samsonite South Asia Pvt. Ltd. Vs Commissioner of Customs (Import), Mumbai14, the Tribunal held that there was nothing to establish that the advertising expenses shared by the Appellant company with Samsonite, Hong Kong had any nexus to the imports made by the Appellant from various other Samsonite Companies. The Tribunal also found that the sharing of cost towards advertising expenses was not a condition of sale for the import of goods and, therefore, the provisions of rule 10(1)(e) of the 2007 Rules would not be attracted. The observations are as follows:

“6.1 We do not find any evidence, documentary or otherwise led by the Revenue to establish that the advertising expenses shared by the appellant company with Samsonite, Hong Kong has any nexus whatsoever to the imports made by the appellant from various other Samsonite group of companies. The advertising expenses are allocated on the basis of sales turnover of the individual company to the total sales made by the entire Samsonite group as a whole. The sales turnover includes not only the materials procured from abroad but also similar items procured indigenously and the various costs incurred in the manufacture of finished goods. Thus, there is  no co-relation whatsoever between the costs of material imported from other Samsonite entities and the payment of cost towards sharing advertising expenditure.  For example, in a given year even if the appellant does not import any raw materials, they have to share the cost of advertising expenses incurred on a global basis. It is thus, clear that the expenditure incurred on advertising has no influence or nexus with the import of raw materials. Where the exporter under a corporate advertising plan reimburses the importer for the part of its advertising expenses, such payments only reduces his net expenses for advertising which is not a dutiable item in the first place. If the charge is not based on the number of units of the products imported, such a cost sharing arrangements cannot be regarded as an indirect  payment constituting an additional element of the price paid by the importer to the exporter. In the present  case, we find that there is no nexus between the imports made by the appellants and the expenditure shared by the appellants for the global advertising campaign. We also find that the sharing of cost towards advertising expenses is not a condition of sale for the import of goods. Therefore, we are of the view that the provisions of Section 10(1)(e) of the Customs Valuation Rules, 2007, are not attracted in the present case.”

[emphasis supplied]

31. The provisions of rule 10(1)(e) of the 2007 Rules also came up for interpretation before a Division Bench of this Tribunal in M/s Indo Rubber And Plastic Works vs Commissioner of Customs, Inland Container Depot, Tughlakabad, New Delhi15. M/s Indo Rubber entered into an agreement with Sunlight Sports for the purpose of import and sale of “Li Ning” brand sports goods within India. Article 4 of the agreement provided that the Distributor will make best endeavours to promote and extend sales of goods within the territory. Article 7 provided that the Distributor will bear all costs of marketing, advertising and promotions for the territory. The Revenue believed that the marketing, advertising, sponsorship and promotional expenses/ payments made by M/s Indo Rubber for promotion of “Li Ning” brand was a condition of sale and consequently such amount was liable to be included in the value of the imported goods in terms of rule 10(1)(e). The Tribunal held that the Appellant was not obliged to incur any particular amount or percentage towards sales, promotion/ advertisement as a condition of sale and that the activity of advertisement and sales promotion was a post import activity incurred by the Appellant on its own account and not for discharge of any obligation of the seller under the terms of

32. The relevant portion of the decision of the Tribunal is reproduced below :

“16. Having considered the rival contentions, we find that in the facts and circumstances of the present case there is nothing in the agreement that a fixed amount or fixed percentage of the invoice value of the imported goods, is obliged to be spent by the appellant as a condition of sale/ import. As per the stipulation in the agreement, the appellant is obliged to or responsible for sales and distribution in its territory of distribution and further to make such expenditure in consultation with the seller, does not attract the provisions of Rule 10(1)(e) of CV Rules. We find that there is total absence of the prescribed condition precedent as the appellant is not obliged to incur any particular amount or percentage of invoice value towards sales promotion/ advertisement. Further, we find that the activity of advertisement and sales promotion is a post import activity incurred by the appellant on its own account and not for discharge for any obligation of the seller under the terms of sale.”

[emphasis supplied]

33. In the instant case, a perusal of the Licence Agreement indicates that adidas Germany had granted to adidas India the non-exclusive rights and license to use the know how to manufacture the licensed products which are those products for which adidas Germany has granted to adidas India the right to manufacture. This apart, adidas Germany had also granted to adidas India the exclusive license to promote, distribute, market and sell the products which are adidas brand range of products developed by or for adidas group. The agreement also required adidas India to use its best efforts to develop, extend and maximise sale and distribution of the products in the territory. It is also clear from the agreement that all the expenses incurred by adidas India, directly or indirectly, relating to the distribution, marketing and sale of the products were to be borne by adidas India and adidas India was not to create any expense or liability chargeable to adidas

34. It is in the light of the provisions of the Licence Agreement and the decisions referred to above that it has to be examined whether payments made by adidas India to third  parties (sports personalities and clubs and associations) for marketing and promotional activities of the products can be said to be a condition of sale of the imported goods by adidas Germany. As noted above, to examine this aspect what is required to be seen is whether adidas Germany has an enforceable legal right under the License Agreement that would compel the buyer to incur such expenditure. The clauses of the Licence Agreement do not, in any manner, even remotely suggest that adidas Germany has such a right which can be enforced. Article 2.1 of the Licence Agreement grants exclusive licence to adidas India to sell the products and article 2.3 merely provides that adidas India shall use its best efforts to develop, extend and maximise the sale and distribution of the products in the territory. At the same time, article 2.5 clearly stipulates that all such expenses incurred by adidas India in relation to the distribution, marketing and sale of the products shall be borne by adidas India and adidas India shall not creatre any expenses or other liabilities chargeable to adidas India. Article 4.5 also gives non-exclusive right to adidas India to conclude agreements for sponsorship or endorsement of the adidas brand or any adidas products with athletes, players, teams and clubs. There is no stipulation in any of the articles of the Licence Agreement as to what would happen if adidas India does not make any effort for maximising sale and distribution of the products by causing advertisement or promotion. It can, therefore, safely be  concluded that adidas Germany is not possessed with a right which can be enforced to compel adidas India to incur expenditure on advertisement and promotion. This requirement set out in  Rule 10(1)(e) of the 2007 rules is, therefore, not satisfied.

35. The second requirement of rule 10(1)(e) is that payments contemplated under the first requirement should be made by the buyer to the seller or by the buyer to the third party to satisfy an obligation of the seller towards the buyer or the third party

36. The contention of the Appellant is that even if payment is made by the buyer to a third party as a condition of sale of the imported goods, then too it has to be established that the seller had a pre-existing obligation to pay the said amount to such third party, which obligation of the seller is being discharged by the buyer. If any payment is made by a buyer to a third party on his own account, then the condition would not be met and this amount cannot be added to the value of the imported goods since it has not been made to satisfy a pre-existing obligation of the seller.

37. In this connection it would be important to refer to the Interpretative Notes contained in the Schedule to rule 13 as such notes can be applied for the interpretation of the rules. Note to rule 3 deals with “price actually paid or payable”, which expression finds place in rule 10(1) dealing with cost and services for determining the transaction value. It is this “price actually paid or payable” that has been explained in the Note to rule 3 to mean the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. Such payments can be made directly or indirectly and an example of indirect payment would be the settlement by the buyer, whether in whole or in part, of a debt owed by a seller. It has  also been provided that in the Note that activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in rule 10, are not to be considered as an indirect payment to the seller even though they may be regarded as of benefit to the seller. The cost of such activities cannot, therefore, be added to the price actually paid or payable in determining the value of the imported goods.

38. In this connection, it would also be useful to refer to “Commentary on the GATT Customs Valuation Code” by the noted authors Saul L. Sherman and Hinrich Glashoff on Customs Valuation for analyzing the provisions of rule 10(1)(e). Chapter III deals with Transaction Value of the Imported Goods (Article 1 and 8). Article 1 states that the customs value of the imported goods shall be the transaction value, that is “the price actually paid or payable for the goods when sold for export to the country of importation” adjusted in accordance with Article 8. In the context of the activities benefitting both the buyer and seller, like advertising, it has been stated that activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in Article 8, are not to be considered as an indirect payment to the seller, even though they might be of benefit to the seller. The cost of such activities, therefore, have not be added to the price actually paid or payable in determining the customs value. It has been noted by the authors that the most important of such activities are advertising and marketing and promotion efforts, which tend to benefit both the exporter and the importer by increasing sales. Initially, treatment of advertising expenditure was controversial, but subsequently such advertising and promotion warranty costs and similar expenses have been excluded from the transaction value if paid by the importer, even if he is obliged to make the expenditure under an agreement with the seller and even though the activities also benefit the foreign seller. It has also been emphasized that the phrase “undertaken by the buyer on his own account” means expenses incurred and paid for by the buyer. The relevant provisions contained in Chapter III of the book dealing with ‘Transaction Value of the Imported Goods (Articles 1 and 8)’ are reproduced below:

“A. The price for the goods when sold for export to the country of importation

Article 1 states that the customs value of imported goods shall be the Transaction Value (TV) that is

‘the price actually paid or payable for the goods when sold for export to the country of importation’

adjusted in accordance with Article 8 and provided that none of the grounds for rejecting Transaction Value applies. (C8-15)

The Price

a) —-

b) —-

c) —-

d) ACTIVITIES BENEFITING   BOTH   BUYER   AND   SELLER; ADVERTISING, WARRANTY,

‘Activities undertaken by the buyer on his own account, other than those for which an adjustment is provided in Article 8, are not considered to be an indirect payment to the seller, even though they might be regarded as of benefit to the seller. The costs of such activities shall not, therefore, be added to the price actually paid or payable in determining the customs value‟.

The most important of such activities are advertising and warranty and other marketing and promotion efforts, which benefit both the exporter and the importer by increasing sales and by making the trademark, if there is one, more valuable. As to these expenditures, the Notes go on to say:

‘…if the buyer undertakes on his own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value of these activities is not part of the customs value nor shall such activities result in rejection of the transaction value’.

The treatment of advertising expenditures was highly controversial in the negotiation of the Code. The BDV had been widely interpreted as requiring many such expenditures to be included in the customs value even if the payment was made by the buyer, for the expenditures were often regarded as an indirect benefit to the exporter which, under the notional concept of the BDV, ought to be included in the ‘normal price. Sometimes a sophisticated split of bundled activities into trademark advertising (deemed to benefit only the foreign trademark owner) and advertising of the importing distributor’s name (deemed to be non-dutiable) was necessary. This view was rejected in the Code. Advertising, warranty costs and similar expenses are excluded from the Transaction Value if paid for by the importer, even if he is obliged to make the expenditure under his agreement with the seller and even though the activities benefit the foreign seller.

If the exporter chooses to pay for the advertising and recover the expense through his pricing, the cost is included in his price, and there is no provisions in the Code for excluding it from Transaction Value. The result is the same if the exporter bills the importer separately for the advertising expense, which would then be an indirect payment for the goods. We are speaking here, of course, about advertising which clearly relates to the imported product being valued. The amount of advertising cost attributable to each unit of the goods may have to be determined.

The phrase “undertaken by the buyer on his own account‟ means very simply expenses incurred and paid for by the buyerx.”

[emphasis supplied]

39. There is nothing on the record in the present case that may indicate and nor is it a charge in the show cause notice that the payment that was made by adidas India to a third party for promotion and advertisement of the products was because adidas Germany had a pre-existing obligation to pay to such third party the said amount and adidas India was only discharging this obligation of adidas Germany towards the third party. It may be that the promotion and advertisement of the products by adidas India benefit adidas Germany also, but this would not in any manner mean that the payments made for promotion and advertisement satisfy any pre-existing obligation of adidas Germany towards the parties to whom payment is made for such promotion or advertisement. The amount that is paid by adidas India for promotion and advertisement of the products is an amount incurred by adidas India on its own account and not for discharging any obligation of adidas Germany.

40. Learned Authorised Representative of the Department has, however, placed reliance on the decision of the Tribunal in M/s. Reebok India Company vs Commissioner of Customs, Patparganj16 to contend that advertising and promotion expenses have to be added to the price of the imported goods for determining the transaction value. The Appellant – M/s. Reebok India Company (Reebok India) has been described to be a subsidiary of M/s. Reebok International Ltd. (Reebok International). Reebok India imported various sports goods from Reebok International, which goods bear the brand name “Reebok”. Reebok India also entered into a „distribution agreement‟ with Reebok International as well as „buying agency agreement‟ with M/s. Adidas International Trading. The Department issued a show cause notice alleging that the Reebok India was importing goods from Reebok International but was not including the costs pertaining to advertisement and promotion in the assessable value of the goods at the time of export. The Adjudicating Authority confirmed the demand of differential duty. Article 13.4 of the distribution agreement entered into between Reebok India and Reebok International came up for consideration before the Tribunal for determining whether the costs incurred on advertisement and promotion could be included in the transaction value under rule 10(1)(e) of the 2007 Rules. The Tribunal noted that for such payments to be added to the price actually paid, the payment should have been made as a condition of sale by the buyer to the seller or by a buyer to a third party to satisfy an obligation of the seller and such payment should not have already been included in the price actually paid. The Tribunal found that though the amount was not included in the price actually paid but Reebok India was allowed to import goods subject to a term in the agreement requiring it to necessarily spend 6% of the invoice value on advertisement and promotion. This was considered by the Tribunal to be an obligation of the Appellant towards Reebok International for import of goods. The Tribunal also examined, for this purpose, the condition set out in clause 4.9 of the agreement under which Reebok India was required to submit marketing and business plan, advertising budget and to even get the endorsement and promotion contract exceeding a certain amount vetted by the seller. From these conditions of the agreement, the Tribunal concluded that Reebok International was controlling every aspect of promotion and as such expenses were made on behalf of Reebok International. Thus, the advertising and promotion expenses were found to have been incurred as a condition of sale on behalf of the seller for satisfying the obligation of the seller. The decision of the Tribunal in Samsonite South Asia was distinguished for the reason that the expenses in that case were charged to the account of Samsonite by the seller as a share of the global expenditure. The relevant portion of the decision of the Tribunal in Reebok India is reproduced below :

“7. It is not in dispute that the appellant and Reebok International Ltd, England (RIL) are related, within the meaning of Rule 2(2) of the Customs Valuation Rules, 2007. The dispute has arisen in the context of Article 4.13.4 of the Distribution Agreement entered into by the appellant with RIL England. The wording of the Agreement is reproduced below for a ready reference:-

“Distributor agrees to spend on advertising and promotions a sum not less than six percent (6%) of its total net invoiced sales of PRODUCTS. As a guidelines, at least half of this expenditure shall be in the form of media (print, radio and/or television)  advertising. Details of such expenditure shall be reported quarterly to REEBOK and are subject to annual verification by independent audit.”

The crux of the dispute is whether such expenditure incurred by the appellant in terms of the above clause will incur the mischief of rule 10(1)(e) of the Customs Valuation Rules. For such payments to be added to the price actually paid, the same should be made as a condition of sale by the buyer to seller or by the buyer to the third party to satisfy the obligation of the seller and such payments are not already included in the price actually paid. There is no doubt that the amount is not already included in the price actually paid or payable. The appellant is allowed to import goods from the principal in terms of the above agreement only subject to the terms of the entire agreement. In terms of this agreement the appellant  will have to necessarily spend 6 per cent of the invoice value on advertisement and promotion. It is an obligation of the appellant to its principal for import of goods. The other related question is whether such amounts have been spent by the appellant to satisfy an obligation of the seller i.e. RIL England.

8. In addition to para 4.13.4 further conditions are mentioned in clause 4.9. In terms of this clause, we note that the appellant is not only required to spent on advertising, but is required to submit marketing and business plan, advertising budget, and even is required to get vetted by Principal draft of any endorsement or promotion contract exceeding the value of US dollar 25 per cent year. These stipulations lead us to conclude that RIL UK is controlling every aspect of such promotion. RIL UK is the owner of the brand name „Reebok‟ and it is obvious that such promotion, and advertising is towards promotion of their brand as a whole and not only in respect of goods being imported by the appellant. Therefore, from these agreements it is evident that the appellant is carrying out such brand promotion on behalf of RIL England and such expenses were made on behalf of RIL UK. Hence we conclude that advertising and promotion expenses have been incurred as a condition of sale and on behalf of seller and may be considered as satisfying the obligation of the seller.

9. The interpretative Note of Rule 3 (2) (b) of the Customs Valuation Rules forbids loading the expenses incurred relating to marketing of the imported goods, if such expanses are incurred by the buyer on his own account even though by agreement with the seller. It is clear from the discussion above that the appellant has incurred such expanses on the expression obligation of RIL England and as a clear condition of the sale of goods for disputing them in India. It cannot be concluded, in the facts of the present case, that the expenditure has been incurred by the appellant on their own account.

10. We have also considered the various case laws cited by the Appellant in the appeal as well as argued. Most of the case laws deal with including in the transaction value with amounts paid towards royalty and other expenses. In the specific case cited by the assessee, Samsonite 2015 (327) ELT 528 Tribunal- Mumbai, the Tribunal has set aside the demand made by the Department by including certain expenses incurred by the M/s. Samsonite towards advertising. However, after a careful perusal of the case we note that such expenses were charged to the account of M/s. Samsonite by their principal as a share of the global expenditure. Consequently we are of the view  that facts of that case is distinguishable and will not be applicable to the present facts of the”

[emphasis supplied]

41. It needs to be noticed that the same Members of the Bench that decided Reebok India on 12 January, 2018 also later decided Giorgio Armani on 05 April, 2018. In Giorgio Armani, the Appellant was required to incur an expenditure of not less than 3% towards advertising in India for promotion of “Giorgio Armani Brands”. The Bench noticed that even though the agreement required such expenditure to be incurred, but it could not be said that such an expenditure was required to be incurred to satisfy an obligation of the seller and therefore, the condition specified in rule 10(1)(e) was not satisfied. The decision of the Tribunal was assailed by the Department before the Supreme Court. The Supreme Court dismissed the Appeal holding that the Court was not inclined to interfere with the impugned order. However, in Reebok India, the same Bench which decided Giorgio Armani, also examined the provisions of rule 10(1)(e) of the 2007 Rules. The Bench noted that under article 4.13.4, the distributor had agreed to spend on advertisement and promotion a sum not less than 6% of its total net invoice sale of products and under article 4.9, the distributor was required to submit marketing and business plan, advertising budget and even the draft of any endorsement or promotion contract exceeding a certain value was required to be approved. It is from a reading of these two provisions of the agreement that the Bench concluded that the advertisement was caused by the distributor on behalf of the seller and, therefore, the expenses had been incurred as a condition of sale on behalf of the seller and could be considered to be an obligation of the seller. The decision rendered in  Samsonite South Asia by the Tribunal was distinguished for the reason that in that case the expenses were charged to the account of Samsonite as a share of global expenditure. Though  the Bench did notice that the amount paid by the buyer to a third party should be paid to satisfy an obligation of the seller and in this context referred to the Interpretative Notes also, but the Bench failed to examine whether the seller was indebted to the third party, which obligation of the seller was being satisfied by the buyer. It also needs to be remembered that the Civil Appeal filed by the Department against the decision of the Tribunal in Giorgio Armani was dismissed by the Supreme Court on 02 January, 2019.

42. In any view of the matter, the terms of the agreement in this  Appeal are quite The amount required to be spent by the buyer (though it may not be necessary) is not indicated in the agreement between adidas Germany and adidas India. This apart, article 2.5 specifically mentions that such expenses on marketing and promotion shall be borne by adidas India and adidas India shall not create any expenses chargeable to adidas Germany.

43. The decision of the Tribunal in Reebok India was also distinguished by a Division Bench of the Tribunal in Indo Rubber, as the facts were found to be different since in Reebok India, a fixed expenditure towards sales and promotion was required to be incurred as a pre-condition of sale unlike that in Indo Rubber. The relevant portion of the decision of the Tribunal in Indo Rubber is reproduced below :

“The ruling of this Tribunal in the case of Reebok India Company (supra) is not applicable, as the facts in the present case are totally different and unlike Reebok India Company, nowhere provides for any fixed expenditure towards sales and promotion as a pre-condition of sale. Further, in the instant case, the parties are not related to each other. Further, the appellant importer is not obliged to give any account of expenditure incurred by it to M/s Sunlight Sports, incurred by them, unless such expenditure is incurred at the instance of M/s Sunlight Sports under stipulation of reimbursement. Further, we find that the interpretative note to Rule 3(b) provides, that activity undertaken by the buyer on its own account, even though by agreement, are not considered as direct payment, even though they might be regarded as benefit to the seller also.”

44. Thus, even the second requirement of rule 10(1)(e) that payments should be made by the buyer to a third party to satisfy an obligation of the seller is also not

45. The show cause notice has only made reference to rule 10(1)(e) of the 2007 Rules for adding the payments made for promotion and expenditure to the price actually paid for determining the transaction value. It has been found that the conditions provided for in rule 10(1)(e) are not satisfied and, therefore, no addition could have been made to the price actually paid by adidas India to adidas Germany for determination of the transaction value of the goods that were imported.

46. The Principal Commissioner has found that the amount spent by adidas India towards sponsorship/endorsement was not on behalf of adidas Germany and nor the payments were made as a condition of sale of the imported goods. In fact, it has been found that the amount was spent by adidas India on its own account. For the reasons stated above, there is no infirmity in the findings recorded by the Principal

47. The appeal filed by the Department is, therefore, liable to be dismissed and is, accordingly,

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