Whether royalty paid for use of brand name is to be treated as additional consideration and liable to excise duty?

PJ/CASE LAW/2015-16/2896

Case:-LAKHANPAL LTD.VERSUS COMMISSIONER OF C. EX. & CUS, VADODARA

Citation:- 2015 (323) E.L.T. 645 (S.C.)

Brief facts:- The assessee was engaged in business of manufacturing torches, apart from other goods. These torches were manufactured and marketed under the brand name ‘NOVINO’. Indubitably, this brand name belonged to one M/s. Lakhanpal National Ltd. (hereinafter referred to as ‘LNL’). The said LNL has entered into an agreement with the assessee under which, the LNL has allowed the assessee to use the aforesaid brand name. For this purpose, the assessee was also paying royalty @2.5% in respect of sales of the aforesaid product to buyers, other than LNL. In fact, approximately 50% of the sales of the product ‘NOVINO’ manufactured by the assessee were sold to other buyers and approximately 50% were sold to LNL.
The assessee received a show cause notice dated 2-10-1999 from the Commissioner of Central Excise in which it was mentioned that the assessee was paying royalty @2.5% for the use of the brand name to LNL and the assessee was asked to show cause as to why the amount of royalty be not added to the price which was charged by the assessee in the sale of the aforesaid product, to arrive at transaction value. The show cause notice indicated that while proposing such a step, the Commissioner had relied upon Rule 5 of the Central Excise (Valuation) Rules, 1975.
The assessee questioned the veracity of this show cause notice taking number of pleas/contentions. However, none of those contentions found favour with the assessee. The Commissioner, who passed the Order-in-Original dated 2-8-2000, confirmed the demand made in the show cause notice. The appeal of the appellant preferred against that order before the CESTAT met the same fate as the tribunal had also relied upon the order of the Commissioner thereby dismissing the appeal.

Appellant’s contention:- Submission was made by the learned counsel for the appellant that Rule 5 will have no application on the facts of the present case. It was submitted that a bare reading of Rule 5 would demonstrate that the additional consideration which flows directly or indirectly from the buyer to the assessee can be added to the price which is charged by the seller from the buyer. On the contrary, in the present case, the royalty, which was treated as additional consideration was paid by the seller to the buyer.

Respondent’s contention:-The respondent reiterated the reasons as to why the amount of royalty be added to transaction value.

Reasoning of judgement:- Contention of the learned counsel for the appellant was preferred which was clear from the bare reading of Rule 5 which reads as:

“Where the excisable goods are sold in the circumstances specified in clause (a) of sub-section (1) of Section 4 of the Act except that the price is not the sole consideration, the value of such goods shall be based on the aggregate of such price and the amount of the money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.”

The very basis of show cause, in fact, was untenable and when the assessee was paying the royalty to LNL (buyer) and that too for using the brand name ‘NOVINO’ which belongs to the buyer, the question of treating the same as “additional consideration” within the meaning of Rule 5 and adding to the price charged from the LNL for sale of the aforesaid product couldn’t arise.

Decision:- Appeal allowed.

Comment:- The question of additional consideration arises only when the price paid for the goods is not the sole consideration and some additional consideration must flow directly or indirectly from the buyer to the seller. Amount paid by the seller to the buyer by any way can never be considered as additional consideration. In the present case, amount of royalty was being paid by the seller to the buyer for using the brand name ‘NOVINO’. Hence, the amount paid by the seller could not be treated as additional consideration in any circumstances.

Prepared By:- Sharad Bang

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PJ/CASE LAW/2015-16/2896

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