CESTAT Kolkata Sets Aside Service Duty On Sterling Meta-Plast, Excludes Franchise Fees, AMP From Value

The Kolkata Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) on 26 May held that franchise fees, advertisement and promotional expenses, and corporate marketing fees paid under brand licensing arrangements for Tommy Hilfiger and French Connection eyewear are not includible in the assessable value of imported goods.

Judicial Member Ashok Jindal and Technical Member K. Anpazhakan reasoned that the expenses are not linked to the import transaction or a condition of sale under the Customs Valuation Rules, 2007 and set aside a customs duty demand against Sterling Meta-Plast India Pvt. Ltd. The Bench held:

“The appellant neither makes payment to the overseas suppliers nor to any third party under the directions of the suppliers and it is not a condition of sale of imported goods. These expenses are to promote the sale of its products and as per the franchise agreement to incur this expenditure by the appellant is to safeguard the brand value of the licensor so that the product or brand is marketed adequately and effectively. Therefore, the Advertisement & Promotional Expensenses (AMP) is not includible in the assessable value of the imported goods by the appellant.”

The dispute arose from imports of branded eyewear and sunglasses that Sterling Meta-Plast procured from Hong Kong-based suppliers Elegance Optical Mfg. Ltd., Arts Optical Company Ltd., and K. Deekay International (HK) Ltd. The company marketed and distributed fashion eyewear in India under owned, licensed, and distribution brands.

Under separate licensing agreements, Sterling Meta-Plast obtained rights to manufacture, market, distribute and promote Tommy Hilfiger and French Connection branded eyewear in India and paid franchise fees to the licensors for these rights. It also incurred advertisement, marketing and promotion (AMP) expenses in India and paid Corporate Marketing Fees (CMF) for Tommy Hilfiger products toward global branding initiatives undertaken by the franchisor.

The Directorate of Revenue Intelligence (DRI) initiated an investigation and alleged that these payments formed part of the import transaction and should be added to the assessable value under Rule 10(1)(c) and Rule 10(1)(e) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.

The Department contended that franchise fees constituted royalty linked to the imported goods and treated them as a “condition of sale”. It further alleged that AMP expenses and CMF payments also represented indirect payments connected to the import transaction and therefore attracted customs duty.

An Order-in-Original dated 30 September 2020 confirmed the differential duty demand along with penalties, interest and redemption fine, prompting Sterling Meta-Plast to approach the Tribunal.

The Bench held that franchise fees were not linked to the importation of goods but were paid for post-importation rights such as sale, marketing and distribution of branded products in India. It found that Sterling Meta-Plast procured goods from unrelated Hong Kong suppliers on a principal-to-principal basis and not from the licensors.

It further held that even if the importer did not pay franchise fees, it could still import the goods, though it would lose the right to market or distribute them under the licensed brands in India. Therefore, it ruled that such payments did not qualify as a “condition of sale” under Rule 10(1)(c).

The Tribunal reiterated that royalty or franchise payments relating to post-import activities cannot form part of customs valuation unless directly linked to the import transaction. On AMP expenses, the Bench held that Sterling Meta-Plast incurred the expenditure on its own account to promote domestic sales and expand its business in India. It observed:

"The Corporate Marketing Fee is also not includible in the assessable value in terms of Rule 10(1)(e) of the Valuation Rules, 2007 as it is neither paid to the overseas suppliers nor to a third party as per the direction of the seller of the imported goods."

The Bench also noted that customs authorities were aware of the licensing arrangements and that some imports of Tommy Hilfiger products were provisionally assessed in 2011 and later finalised without any valuation additions. It further recorded that the Special Valuation Branch (SVB) had earlier examined similar arrangements involving other eyewear brands and accepted the declared values.

Accordingly, the CESTAT held that the extended period of limitation could not be invoked as there was no suppression or misstatement by the importer. It concluded that Sterling Meta-Plast had not under-valued the imports and set aside the entire demand along with confiscation, redemption fine, interest and penalties.

For Appellant: S/Shri B.L.Narasimhan, Sr.Advocate & Rahul Tangri & Shovit Betal, Advocates

For Respondent: Shri Subrata Debnath, Authorised Representative