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TMI Blog2000 (1) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... ete 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. Having thus examined the terms of the agreement between M/s. Kindle Software Ltd., Dublin, Ireland and the State Bank of India for supply of software and the Rules regarding valuation as contained in Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 and the Press Note, we are of the opinion that the stand of the revenue is correct. The State Bank of India is not entitled to any refund of the custom duty paid. We upho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untry-wide US $ 3,683,428 Total US $ 4,084,475 3. 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 countrywide. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO USE COUNTRYWIDE US $ 3,683,428.00 Sub Total US $ 4,084,475.00 VAT Total US $ 4,084,475.00 4. SBI stated that it corresponded with Kindle and thereafter received the second invoice showing the break-up 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 Note 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s behalf. 8. The whole thrust of Section 14 is to find out the value of the goods being imported for the purpose of assessment of duty of customs. In view of sub-section (1A) of Section 14 Rules have been framed. In the present controversy we are only concerned with the Interpretation of Rule 9(1)(c) read with the Note of the Rules. These Rules apply to imported goods where a duty of customs is chargeable by reference to their value. Transaction value under clause (f) of Rule 2 has been defined to mean the value determined in accordance with Rule 4. Rule 3 says that for the purposes of these Rules the value of imported goods shall be the transaction value. Under Rule 4 transaction value of the imported goods shall be the price actually paid or payable for the goods when sold for export to India, adjusted in accordance with the provisions of Rule 9 of the Rules. Rule 9 provides, insofar as it is relevant, that in determining the transaction value there shall be added to the price actually paid or payable for the imported goods, royalties and licence fees that the buyer is required to pay, directly or indirectly, as a condition of the sale of goods being valued, to the extent th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement 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 SB! in India called licence site. Software and manuals are to be delivered at one place called Support Centre 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the annual Recurring Licence Fee for the IQ Module shall be US $22.50 per site 13.Mr. R.F. Nariman, learned Counsel appearing for the appellant, submitted with reference to various clauses of the agreement, the Press Note dated March 17, 1992 and Rule 9(1)(c) read with the interpretative note thereto that the refund claim was valid and ought to have been allowed. According to him only 46 diskettes and 82 manuals were imported for which there was separate price list and that was only liable to duty and not for the use of software at other places called the licensed places in the country. Reference was also made to two letters one dated July 31, 1991 and the other dated September 17, 1991 from Kindle to SBI. With the letter dated July 31, 1991 detailed Invoice No. 910701, dated July 3,1991 was sent. It was stated in the letter that in terms of Schedule-II of the agreement, upon delivery of a copy of the software to the Support Centre (single site), the next installment of US $ 1,429,566/25 had also become due and payable representing 35% of the licence fee in respect of those of the software modules as had already been delivered to the Support Centre. It was further sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the argument was raised, it was brushed aside without proper consideration. In short, argument of Mr. Nariman is that licence fee for right to use software countrywide at licence sites under the agreement is nothing but charges for the right to reproduce the imported software which charges shall not be added to the price actually paid or payable for the imported software in determining the customs value. The Press Note clarifies that no custom duty will be leviable on the royalty paid. 15. Mr. Salve, learned Solicitor General, said that if true meaning of the agreement is seen, SBI has no right of reproduction of the software. The word reproduction is a term of art and is used in commercial sense. Right to reproduce is not for the convenience of the user but for the purpose of distribution. Reproduction in any case is a post importation event. Rules and the Press Note referred to commercial transaction where reproduction is meant for sale. In the present case, copies are only modalities for the use of the software by the SBI with various restrictions. It is fee for right to use. There are restrictive clauses negatively built up in the agreement. What SBI has imported is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Customs Act in respect of the said Bankmaster Query. In this letter, they have given the entire details of the agreement as well as the cost of the entire project but they have not raised the dispute as well. 16. 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 Centre 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . 19. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try. 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. 23. Having thus examined the terms of the agreement between M/s. Kindle Software Ltd., Dublin, Ireland and the State B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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