CESTAT Delhi, In a recent ruling held that Sponsorship and Endorsement expenses incurred by Importer not includible in transaction value of imports. [Commissioner of Customs Vs Adidas India Marketing Pvt. Ltd. (CESTAT Delhi), Dated: 05/03/2020]
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.
A division bench of the Tribunal headed by the President, Justice Dilip Gupta and a judicial member Justice C.L. Malahar, relying on the precedents held that “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. 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. 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 ORDER
The Commissioner of Customs, Inland Container Depot, Patparganj, New Delhi, 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. Ltd under section 28(4) of the Customs Act 1962. 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 2007.
3. It has been stated that adidas India is engaged in importing and selling adidas brand products ie. footwear, garments and sportswear goods imported from adidas International Trading BV, Netherlands. It also transpires that adidas AG, Germany 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.
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).
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.
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 ”
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.
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.”
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.