Case: State Bank of India Vs. Collector of Customs, Bombay

2. SBI imported a consignment of Computer Software and Manuals from Kindle Software Ltd., Dublin, Ireland (Kindle for short) of the value of US $ 4,084,475.00 (equivalent to Rs. 10,75,70,267.25). SBI filed a Bill of Entry No. 5209 dated July 19, 1991 along with the invoice of Kindle bearing No. 910701 dated July 3, 1991 for the aforesaid amount and after paying custom duty of Rs. 12,04,78,699/- on July 25, 1991 cleared the goods for home consumption. On August, 7,1991 SBI filed an application before the Additional Collector of Customs, Bombay claiming refund of custom duty of Rs. 10,86,49,119/-. It said that it had since received a detailed invoice which gave the particulars of imported Software and Manuals as under:. SBI, therefore, said that though it had paid custom duty on the total value shown in the Bill of Entry, the basic cost of software which was to be installed at one site in Bombay was US $ 401,047 while the rest of the amount of US$ 3,683,428 was payable only as licence fees for its right to use the software for the bank country-wide. SBI, therefore, said that it was required to pay custom duty for the consignment of software on an amount of US $ 401,047 only which included the cost of Manuals, Diskettes and licence fee and not on the whole amount shown in the Bill of Entry. In support of its claim SBI referred to the relevant Rules, these being Rules 2, 3, 4, 9(1) (c) and 12 of the Rules and the Interpretative Note to Rule 9 (1)(c). On the strength of the interpretative Note to Rule 9(1)(c) the SBI said that charges for the right to reproduce the imported goods in the country of importation should not have added to the price actually paid or payable for the imported goods in determining the custom value. SBI, therefore, requested that assessment made in respect of the consignment imported by it be rectified and that the breakup of the invoice amount in respect of (1) the cost of the manuals and diskettes, single site licence fee and (2) countrywide licence fee shown on the Bill of Entry earlier at the time of clearance of the goods. With this application SBI also sent a copy of another invoice from Kindle bearing the same number and date and for the same amount of US $ 4,084,475.00, now bifurcating the amount. We may set out here both the invoices, one that filed with the Bill of Entry and the other with the application seeking refund of the custom duty.. SBI stated that it corresponded with Kindle and thereafter received the second invoice showing the breakup of the single site fee and the country-wide licence fee for use by copying and on that basis filed its claim for refund of the excess amount of custom duty amounting to Rs. 10,86,49,119/-.5. By order dated February 29, 1992, the Assistant Collector rejected the refund claim of the SBI. It filed an appeal before the Collector (Appeals). In the meantime a press note2 dated March 17, 1992 was issued by the Government of India in the Department of Electronics which, according to SBI, directed that custom duty was not to be levied on reproduction charges. By order dated October 12, 1992, Collector (appeals) remanded the matter back to the Assistant Collector with the following observations:I find that Asstt. Collector has not given any reason why the countrywide use of software cannot be considered as reproduction in the present case and also why the licence fee for countrywide use should not be considered the charges for the right to reproduce the imported goods in the country of importation as mentioned in Note to Rule 9(1)(c) of the Customs Valuation Rules, 1988. This is perhaps the most vital question in the case which has to be decided after due enquiry and the finding has to be a properly reasoned one. That is missing in the impugned order. The press note No. CDD/Misc./92 dated 17.3.92 issued by the Department of Electronics has also been produced before me which was not available to the Lower Authority when he passed the impugned order in February 1992. This merits due consideration.In view of the above, I quash the impugned order and direct the Asstt. Collector to reexamine the case afresh and decide the issue.6. Now again after examining the matter in detail and after giving personal hearing to the SBI, the Assistant Collector by his order dated June 21, 1993 dismissed the claim of the SBI for refund. Appeal was taken to the Collector (Appeals) who by order dated July 7, 1994 upheld the order of the Assistant Collector. Further appeal was taken to the Tribunal which, by the impugned judgment dated September 29, 1995, dismissed the same. That is how the matter is before us.

Reasoning:
11. The agreement is dated June 29, 1991 between the SBI and Kindle (the licensor) and is for the supply and support of software. It is a detailed one runs into 30 parts with various clauses and Schedules. If we refer to some of the relevant clauses we find that Kindle is to provide a software to the SBI along with manuals for the internal requirements only of SBI which shall be entitled to use of the software or any part thereof to process all or part of the actual business transactions of SBI, in parallel or live mode. Use of the software is strictly confined to the employees of the SBI at any branch or office of SBI in India called licence site. Software and manuals are to be delivered at one place called Support center where SBI shall maintain its principal team of support personnel for licence sites in the country. Use means copying of any portion of software into a machine and then processing of the machine instructions etc. Kindle has granted to SBI a non-transferable and non-exclusive licence to use the software in India and to provide technical assistance in the implementation of the software at the licence sites. Use of the software and manual by the SBI is under terms of strict confidentiality. SBI is forbidden to copy or promote a copy of the software save as may be strictly required for delivery to the licence sites. Use of the software and manual outside the term of the agreement is also forbidden. Schedule-11 to the agreement describes the licensed software modules and single site licence fees totalling US $401,047. The whole software package consisting of 12 modules is called BANK MASTER. For this licence fee is US $ 422,322 but since all the Modules were not agreed to be supplied the licence fee for single site came to US $ 401,047. Schedule-II describes the initial licence fees and recurring licence fees. Initial licence fees for a countrywide licence in India for the software modules specified in Schedule-I for use under the terms of the agreement shall be US $ 4,084,475. This fee would be for a period of five years. Thereafter, it is the annual recurring licence fees as described in the agreement.. The case of the SBI is that only one set of diskettes was imported which comprised the software programme. This was to be kept in the Support Center at Bombay and as and when the software programme had to be made available to the branches of the Bank copies of these programmes were to be taken on blank floppies and sent to branches for use. It was stated that this process is reproduction. The agreement refers to licence fee payable in respect of single site in Schedule-I and Schedule-II refers to the fee for the countrywide licence and both are indicated separately. The claim for refund was in respect of Schedule-II. Though the original invoice did not show the split up the detailed invoice which was received later on did show licence fee for use at single site (including cost of manuals and diskettes) and that for the right to use countrywide. It is on that account it was submitted that software could be made available to branches only by reproduction process at the support center and that licence fees charged for right to use countrywide is reproduction charges and the same, therefore, could not be charged to duty.15. It is not, however, clear as to why the second invoice giving details having the same invoice number and the date was not available at the time of original assessment. Mr. Nariman could not give clear answer to that. He, however, stressed that details were already there on the back of Bill of Entry in the form of declaration, which we have reproduced above. This does not appear to be correct. This declaration appears to have been filed subsequently at the time of claiming refund. There is no mention of split up of charges anywhere in the body of the Bill of Entry. In column 9 of the Bill of Entry assessable value under Section 14 of the Customs Act has been shown as Rs. 10,75,70,267/-. There is no indication whatsoever that any other document towards declaration was filed showing different chargesone for the use of the software at single site and the other for use of the software countrywide. This certainly appears to us to be an after thought. At the time when Bill of Entry was filed there is no doubt that what was mentioned in column 9 was the transaction value which is covered by the definition given in Clause (f) of Rule 2 of the Rules.If we refer to the agreement, software is not sold to the SBI as such but it was to remain property of Kindle. There is no other value of the software indicated in the agreement except the licence fee. Price is payable only for allowing SBI to use the software in a limited way at its own centers for a limited period and that is why the amount charged is called the licence fee. After five years SBI is required to pay only recurring licence fee. Countrywide use of the software and reproduction of software are two different things and licence fee for countrywide use cannot be considered as the charges for the right to reproduce the imported goods. Under the agreement copying, storage, removal, etc. are under the strict control of kindle and all copies are the property of the Kindle. SBI can use the software for its internal requirements only. Licence has been given to SBI to use the property of Kindle at its branches and not for reproduction of the software as claimed by the SBI. The words in the agreement are specific that SBI shall pay the licensor the initial licence fee and the recurring licence fees for use under the provisions of this agreement.17. It is difficult to accept the contention of the SBI that the countrywide licence fee paid by it is basically the reproduction charges only and by virtue of interpretative note to Rule 9(1)(c) the said charges could not be included in the assessable value for the purpose of levying of customs duty. Countrywide licence fee paid by SBI is not the same as the charges for the right to reproduce as envisaged in the interpretative note to Rule 9(1)(c). Total cost incurred would be transaction value on which customs duty has to be charged and total cost for the purpose of assessment of customs duty would include single site licence fee as well as countrywide licence fee. Rule 3(1) of the Rules provides that value of the imported goods shall be transaction value as defined by Rule 4 and which in the present case would mean the price actually paid or payable for the goods when sold for export to India. The amount payable to the supplier was US $ 4,084,475 which was correctly taken as assessable value.18. We may also take notice of the argument of the SBI that reproduction or making copies is unavoidable in its case as it has to have a countrywide computer network which works on LAN (Local Area Network) version and is not a mainframe system. In the case of mainframe it is possible to use the programme countrywide without having to reproduce software. But then even in such a situation SBI would have to pay the licence fee for countrywide use because it is the extent of the use which is determinative of the quantum of the licence fee. The act of reproduction is only the intermediary stage in the process of putting the programme to countrywide productive use. The term productive use has been defined in Clause 1.8 of the agreement which means use of software or any part thereof to process all or part of SBIs actual business transaction in parallel or live mode. The amount of US $ 3,683,428 has been paid as licence fee for countrywide use of software to process all or part of SBIs actual business transaction and not for acquiring the right to use the software programme.19. Kindle supplied to the SBI countrywide licence for India of software package containing various modules as given in the invoice and consisting of 46 diskettes and 82 manuals (including cost of insurance and freight) for US $ 4,084,475.00. This amount in the subsequent invoice was bifurcated into (I) Licence Fee for use of software package at single site (including cost of 82 manuals and 46 diskettes of US $ 14,300) - US $ 401,047 and (2) Licencing Fee for right to use countrywideUS $ 3,683,428.00 (totalling US $ 4,084,475).20. Reproduction and use are two different things. Now under the agreement user is specifically limited to licence sites. Transaction as a whole is to be seen. Press Note is of no help to the SBI. Rule 9(1)(c) and the interpretative note thereto did not apply as nothing was added to the price actually paid for the imported goods by way of royalties etc. Refund would be allowable only if there was something added on to the royalty payment which was not in the present case. The invoice originally presented was complete in itself. Second invoice was not filed along with the Bill of Entry. In the second invoice also it is licence fee for right to use countrywide and it is not right to reproduce as claimed by the SBI. Schedule I to the agreement is module and copies are modalities for the use of software by the SBI with various restrictions. If we again refer to Clause 6.4 of the agreement there is a complete restraint on SBI which says SBI shall not use, print, copy, reproduce or disclose the software or documentation in whole or in part except as is expressly permitted by the agreement nor shall SBI permit any of the foregoing. SBI is also barred from allowing access to its software or documentation except what is permitted under the agreement. Again SBI is barred from selling, charging or otherwise making the software or documentation available to any person except what is expressly permitted under the agreement. Clause 6.5 of the agreement says that SBI shall not copy or permit copying of the software supplied to it by Kindle save as may be strictly required for delivery to licence sites. The terms of the agreement also apply to the copies.