Royalty pad by distributor to music producer for copyright use is not an additional consideration to assessee a job worker

Brief of the case:

The Hon’ble Supreme court in the case of K.R.C.D Pvt. Ltd. held that the royalty paid by the principal manufacturer to some other person for use of any copyright is not includible in the assessable value of the final goods cleared from the factory of job worker as the royalty paid by the principal manufacturer do not flow any additional consideration to the job worker.

Facts of the case:

• The assessee was engaged in manufacturing of duplicate CDs from a master tape/CD issued to them by a distributor under a job work. The distributor was engaged by the producer who has the copyright of the contents of the master CD.
• The assessee had to sale entire stock of duplicate CDs only to the distributor/copyright holder and to anybody else. The distributor/copyright holder upon receipt of the duplicate copies from the assessee used to sale the ultimate customer in the market.
• Central Excise demanding duty inter alia on royalty charges incurred by the distributor/copyright holder. (i.e. payable to producer).The Assistant Commissioner issued a show cause notice proposing to demand differential duty of Rs.5, 91, 45,700/- for royalty payable to the distributor/copyright holder which royalty was calculated at 54.81 rupees per CD (which were not included in arriving at the assessable value of duplicated CDS). The royalty amount includible in assessable value was worked upon as per the formula stated in circular dated 19.02.2002.
• CESTAT confirmed the order of CCE (Appeals). Aggrieved by the same assessee is in appeal before the Supreme Court.

Contention of the Assessee:

• The amount of rupee one that was declared in the price list filed by the assessee was only for the music that is embedded in the CD and not for any royalty thereon.
• No part of royalty have been passed on (charged) to assessee, therefore, it also cannot load (include) the same in the assessable value. It is the distributor who have been charged royalty by the producer.

Contention of the Revenue:

• The master tape could not be given to the assessee for duplication unless royalty had been paid to music producer which would form part of the cost of the goods to be produced by the assessee and then sold to the distributor/copyright holder.
• Revenue relied on Explanation to Rule 6 of Central Excise (Determination of Value of Excisable Goods), 2000 which provides that 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 treated to be the amount of money value of additional consideration flowing directly or indirectly from the buyer to the assessee and thus, to be included in the assessable value as per Rule 6.
• Thus, the royalty paid on master tape by the distributor is includible in the assessable value by virtue of explanation to Rule 6.
  

Held by Hon’ble Supreme Court:

• The point of dispute is that whether the master tape used in connection with the production and sale of goods by the assessee so that the value the royalty paid thereon could be included in the assessable value.
• The assessee has itself accepted the music content of master CD as an additional consideration flowing from buyer and included its value as Re. 1 per CD duplicated.
• The explanation to Rule 6 requires that such use of goods & services supplied free of cost or reduced at prices not only to be used in connection with production but must also be in connection with the sale of such duplicate CDs.
• The agreement between the assessee and distributor clearly provide that the assessee had to sale entire stock of duplicate CDs only to the distributor/copyright holder and to anybody else.
• Therefore, the copyright value in the duplicate CD is not used in connection with the sale of such goods as assessee is selling the duplicate CDs to the distributor only who is himself the owner of the copyright.
• On the basis of the above observations , the court concluded that the royalty paid by the distributor to producer is not an additional consideration flowing to the assessee and thus, its value need not to be include in the assessable value.