TaxTMI 
TaxTMI 
1995 (9) TMI 171
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.... whereas duty ought to have been charged on the licence fee of the software for single site inclusive of cost of Manuals totally valued at Rs. 401047 only. In support of their contention, they had produced detailed invoice showing bifurcation and relied upon Valuation Rules 9(1)(c) and corresponding note of this Rule of G.A.T.T. Code of Valuation. Initially, their claim was rejected by the Asstt. Collector (Refund). On appeal, the Collector (Appeals) remanded the same for reconsideration. 3. The Asstt. Collector heard the appellants and thereafter has passed a detailed order-in-original giving reasons for rejecting their claim. The Asstt. Collector has noted that the goods were originally assessed and cleared in the said invoice with the heading : "To supply of countrywide licence for India" and the invoice shows : "The cost of all Manuals is included in the cost of the software" and sub-total CIF was shown as US $ 40, 84,475/-. The Asstt. Collector has observed that it is not known as to why a detailed invoice of same date was not known available at the time of original assessment. The Asstt. Collector has held that the fact that the duty has not been paid under protes....
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....n site and countrywide site, therefore, he has ultimately concluded that countrywide use of software and reproduction of software are two different entities and two different processes, and reproduction is the means to achieve the end of countrywide use. He has held that reproduction facilitates countrywide use and functionally they are not the same and they cannot be equated. He further holds that it can be said that countrywide use is achieved through the means of reproduction. The ld. Asstt. Collector goes on to hold that as per contract, storage, removal etc. are under the strict control of the licensor and all the copies are property of the licensor. Hence, he comes to the conclusion that the initial payment and recurring payment are nothing but the fees charged for use of software at the licenced sites; that the initial licence fees and the recurring licence fees are paid for the permission (licence) given by the licensor to use their property by the Importer at their Branches and not for the reproduction of the software as claimed by them, that no clause in the contract says that the fees are charged for reproduction although reproduction under certain conditions is permi....
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....tents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the Customs Value" They contend that they have to reproduce the software programme imported by them and only after such reproduction they can use the said programme countrywide. This reproduction of making copies is unavoidable in their case as they have countrywide computer network which works on "LAN version" and is not a "Mainframe" system. In the case of a Main Frame, it is possible to use the programme countrywide without having to reproduce the software. Even in such a situation, they would have had to pay the licence fee for countrywide use because it is the extent of the use that determines the quantum of licence fee. The act of reproduction is only an intermediary stage in the process of putting the programme to countrywide productive use. The phrase "Productive Use" has been defined in clause 1.8 of the Agreement as productive use shall mean use of software or any part thereof to process all or part of the SBI's actual business transactions, in pa....
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....orted goods. It is evident from the above-mentioned findings that the countrywide licence fees paid by the appellants are not the same as the "charges for the right to reproduce" as envisaged in the Interpretative Note to Rule 9(1)(c). It is also clear that total cost incurred should be the transaction value on which Customs duty should be charged. Such a total cost for the purposes of assessment of customs duty would include single site licence fee as well as the country-wide licence fee in the present case. To sum up I observe that Rule 3(1) of the Valuation Rules provides that the value of the imported goods shall be the transaction value, which is defined by Rule 4 to the effect that such transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India. Here the amount payable to the supplier was US $ 40,84,475/- and was correctly taken as the assessable value by the lower authority. These discussions settle the appeal and there is no need to examine the other minor points cited by the appellants. I hold that the Asstt. Collector had rightly added the countrywide licence fee to transaction value. For the forego....
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.... goods. Ld. Advocate pointing out to the grounds of appeal, submitted that the countrywide licence fee is a fee for permission from the supplier computer firm to the appellants to distribute the software purchased by them (by reproducing or copying the same) to the various licensed sites under the agreement. The ld. Counsel submitted that ld. Collector (Appeals) has wrongly interpreted in holding that the act of reproduction is only an intermediary stage in the process of pulling the programme to countrywide production use. He submitted that the fee has been paid in effect for the right to reproduce the programme. He submitted that it is an accepted international trade practice that fees are paid on intellectual property such as software or are paid for the right to reproduce the software at diverse places. He also submitted that `the Collector (Appeals ) has wrongly drawn a distinction between the "right to reproduce" referred to in Rule 9(1)(c). The ld. Counsel submitted that appellants had not paid for and acquired the absolute and unfettered right to reproduce. He clarified that it is not necessary that the right to reproduce should be absolute or unfettered. As the right to re....
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....2) E.L.T. 41 (vii) Collector of Customs v. Lakshmanan Isola Ltd. - 1992 (61) E.L.T. 315 (viii) Asia Foundation v. Collector of Central Excise - 1991 (56) E.L.T. 655 (ix) Herschel Rubber v. Collector of Central Excise - 1987 (30) E.L.T. 454 (x) Food Corpn. of India v. Collector of Customs - 1985 (22) E.L.T. 461 7. Ld. SDR submitted that both the authorities have given detailed findings and all the grounds given for rejecting their claim is sustainable and it requires to be upheld. He submitted that the agreement clearly disclosed that the licence fee in the form of price is being charged on the basis of its single place use or on the basis of the use nationwide. Licence fee is not for the reproduction as separate charges are incurred by the importer and such expense of reproduction, by merely transferring the details of a software to a disc, would hardly be negligible and no supplier would collect such huge fee as reproduction charge, unless it is the price, in the form of licence fee for its large and extensive use to which it is put to. He submitted that the goods were not imported for the purpose of reproduction but they were meant for use.....
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....een cited. The total duty declared is Rs. 12,04,78,699/-. The declaration stated that the contents of this Bill of Entry for goods imported against Bill of Lading No. 12310200, dated 12-7-1991 are in accordance with the Invoice No. 910701, dated 3-7-1991. The Bill of Entry was accompanied by a declaration, which gave the break-up of the value of the consignment, as under : Particulars Cost Indian Rs. 46 Diskettes and 82 Manuals US $ 14,300/- Rs. 3,76,600.17 Licencing fee for use of the software at single site US $ 3,86,747/- Rs. 1,01,85,524.00 Total cost of the software for use at one site (including Diskettes and Manuals) US $ 4,01,047/- Rs. 1,05,62,124.37 Licencing fee for use of software countrywide US $ 36,83,438/- Rs. 9,70,08,142.89 Total : US $ 40,84,475/- Rs. 10,75,70,267.00 9.The importer by their refund application dated  19-8-1991 sought refund of the excess amount of Customs Duty of Rs. 10,86,49,119/-. The letter was accompanied by Form A. The details given in Form `A' in Column 5 & 6 are filled in hand writing and the same reproduced hereinbelow : Amount of Refund claimed and how arrived at Rs. "5. 10....
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.... VAT Sd/- CIF Bombay Total US $4,084,475/- Authorised Signatory The detail invoice was also filed separately. This is also reproduced herein below : Kindle Software Ltd. State Bank of India Central Office, New Administrative Building Madame Cama Road Bombay 400021 India Invoice No. 910701 Credit No. 03/07/91 Order No. DETAIL INVOICE TO SUPPLY OF COUNTRYWIDE LICENCE FOR INDIA FOR BANKMASTER WITH THE FOLLOWING MODULES : CENTRAL BANKMASTER FOREIGN EXCHANG COMMERCIAL LENDING LIMITS MONITORING EXTENDED FINANCIAL RETURNS 1 BRANCHPOWER7 EASIXFER1 BANKMASTER QUERY GATEWAY 1 15 CENTRAL BANKMASTER TRAINING MODULE ....
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.... transactions, in parallel or live mode. 1.9 "Program Services" shall mean the services detailed in Article 10. 1.10 "SBI" shall mean State Bank of India, its successors and permitted assigns. 1.11 "Software" shall mean the computer programme in object code form listed in schedule thereto. 1.12 "Support Centre" shall be the designated single building in India to which all software and Documentation are delivered and at which SBI shall maintain its principal team of support personnel for the Licensed Sites in India. 1.13 "Use" shall mean copying any portion of the software into a machine and/or transmitting them to a machine for processing of the machine instructions, statements, or data contained in such materials or the use, of any Documentation". Part II of the Agreement deals with General aspect like - (a) Licensor/Supplier to furnish Software and Documentation for use by SBI. (b) Grant to SBI a non-transferable and non-exclusive licence to use the Software in India. (c) Provide technical assistance to SBI in the implementation of the Software at the Licensed Sites in accordance with the provisions of Article 8. Any other ....
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....oductive Use will be charged separately on a per diem basis on the Licensor's standard terms and conditions of service (including but not limited to payment terms). The Licensor's per diem rates are specified in Schedule II. Reasonable requests from SBI for such support or assistance shall not be unreasonably refused. The Licensor will keep SBI informed on an on-going basis of its standard terms and conditions of service and current standard rates (which rates shall be those ordinarily charged to other Licensees). Fees stated in this Agreement are stated and payable net of any withholding or other applicable taxes and also exclude any duties and charges so that, insofar as this may lawfully be done, the amounts stated as payable to the Licensor will be received in full by the Licensor on the due date. Without prejudice to the generality of the foregoing, customs and import duties and octroi if any leviable, on the Software and Documentation imported into India under this Agreement shall be paid by SBI, as will any bank charges associated with any payments. Any taxes, duties, or levies imposed by the authorities in Ireland, England (or such other place as any payme....
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....bject to the further provisions of this Agreement, SBI shall be permitted Use of the Software and Documentation for its internal requirements only and shall be entitled to Productive Use of the Software and Documentation on Acceptance. 6.2 (a)  Access to and use of the Software shall be under conditions of con-    fidentiality and confined to employees of SBI, to the Licensed Sites and the Operating Environments. For the purposes of this Article 6, employees of SBI shall be deemed to include such persons as may be engaged by SBI from time to time in the use pursuant to this Agreement of the Software, provided always that all such persons shall be subject to binding and enforceable non-disclosure undertakings, prohibiting (save for the purpose of this Agreement) and direct or indirect disclosure or use of the Software, Documentation or any confidential information. SBI shall be responsible for adherence by such persons to such undertakings by taking appropriate action in respect of breach of any of them. Remote site access shall also be permitted to bona fide customers of SBI in the ordinary course of its business through such remote site ....
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....hat such use shall be notified in writing to the Licensor as soon as practicable. 6.6 SBI shall be permitted to copy the Documentation supplied for use solely in connection with the Software under the provisions of this Agreement. All such copying shall be managed and controlled from the Support Centre. SBI shall be entitled to hold such quantity of Documentation at each Licensed Site and at the Support Centre as shall be strictly necess-ary for operation security and use. SBI shall reproduce the Licensor's intellectual property notice on all such Documentation. Save to the extent strictly necessary for the use of the Software and Documentation under this Agreement, Documentation may not be stored other than at premises controlled by SBI nor, without the Licensor's express written permission, may any Documentation be removed from any such premises except for transfer to another such premises. 6.7 SBI shall not attempt, cause or permit the reverse compilation or reverse assembly of the Software or any part thereof for any purpose whatsoever, nor shall it otherwise endeavour to create or recreate any source program( s) of the Software. 6.8 (a) Where an....
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....the Licensor hereunder. 15.2 The Licensor will, on a continuing basis, defend or settle any third party action brought against SBI based on a claim that the Software as supplied to SBI infringes, an existing Indian or any International patent, provided that the Licensor shall first be promptly notified in writing of such claim and given complete authority, information and assistance required for the defence. The Licensor shall pay damages and costs (if any) awarded in such a claim against SBI, but shall not be responsible for any cost, expense or compromise incurred or made by SBI without the Licensor's prior written consent. 15.3 Where, in consequence of a claim of patent infringement in respect of the Software, SBI is permanently enjoined from using the same Licensor will, at its expense, either procure for SBI the right to continue using the item under constraint or modify it to become non-infringing, or substitute another item of substantially the same functionality to the satisfaction of SBI. 15.4 SBI acknowledges that the Licensor owns or has been duly authorised to license and will continue to own or be so duly authorised to license the copyright and ....
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....s of the Agreement only refer to the changes pertaining to the re-supply of the item and schedule of payment. However, the value of the software for the entire supply has remained the same without any change in the main clauses of the Agreement except for some mutual standing occurred between them, regarding the terms of payment. 11. The appellants had written a letter dated 3-12-1992 to the Jt. Controller, Exchange Control Department, Reserve Bank of India for re-exporting of software module. In this letter, they have clearly specified the value of the entire software imported by them for the branches countrywide on US $ 4,084,475.00. After re-export, they have filed before the Asstt. Collector of Customs, an application for re-export of the "Bankmaster Query Module" of the software under Section 74 of Customs Act. They have intimated about the deposit of Customs Duty of Rs. 12,04,78,699.00 paid by them on the total invoice amount of US $ 40,84,475.00 on account of countrywide licence for use of the software. In this letter, they have not stated that they have paid reproduction charges but have clearly stated that their invoice value for use of the software as per invoice value....
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....of the Software modules as have already been delivered to the Support Centre. It also states that the above amount also covers the charges for copying/reproducing the Software and Documentation that SBI being used as per the terms of the Agreement. It also states that SBI would be entitled to copy/reproduce the software and documentation, a copy of which software and five copies of which documentation are to be delivered by them to the Support Centre under the said Agreement and thereby use these copies for its internal requirements as per the terms of the said Agreement (emphasis supplied). By their letter dated 17-9-1991 to the said Mr. B.B. Saksena, they have informed them that with reference to the telephonic clarification sought by them, that as per the Agreement dated 29-6-1991 executed between them, they hereby clarify and confirmed that the amount of the licence fee mentioned in the Schedule II of the said Agreement means the licence fee payable by them in respect of the copy of the software modules (excluding the IQ Module) and the copies of the Documentation supplied to the Support Centre (single site) and charges payable by SBI for making/reproducing and further copies t....
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....or the IQ Module shall be US $ 22.50 per site. Therefore, on a careful reading of this Schedule II, it becomes very clear that the Licensor had granted the Licence to SBI to use the software and Documentation in India for the internal requirements of SBI only on a non-exclusive and non-transferable basis at the licence site in operating environments specified in Schedule I. The licensor had granted to SBI authority to use of the software and Documentation - its subsidiaries carrying out bank activity in India for the internal requirements of such subsidiaries and further the branches and offices of such subsidiaries shall be deemed to be those of SBI itself, which also specified that they shall constitute licence site. Therefore, Part IV of the Agreement dealing `FEES' clearly specifies that SBI shall pay the licence fees and the recurring licence fees and the recurring licence fees specified in Schedule II of the Agreement for a countrywide licence for India for the Software Modules specified in Schedule I in accordance with and for use under the provisions of this Agreement. The supplier has sent five copies, as can be noticed from the letter dated 31-7-1991 addressed by the M/s.....
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....isclose that what they have paid is only licence fee and not reproduction charges. On being queried by the Bench on these documents, the ld. Advocate explained that the Project Report is a secret document and it cannot be divulged. It clearly discloses that the appellant is not willing to part with this crucial document, pertaining to the negotiation, which would clinch the issue in the matter. However, even on going through the documents produced and interpreting the terms of the agreement, it is very clear that the supplier has charged the licence fee for the entire supply of the software and the Invoice Value correctly represents the transaction value, which is the price actually paid by the appellants as per Rule 4(1) of the Customs Valuation Rules. The Rule 9(1)(c) grants deductions for royalties and licence fees referred to in Rule 9(1)(c), which may include among other things payments in respect to patents, trademarks and copyrights. The rule further states that the charges for the right to reproduce the imported goods in the county of importation shall not be added to the price actually. paid or payable for the imported goods in determining the Customs Value. In this cas....