2000 Supreme(SC) 72

2000(1) Supreme 211
SUPREME COURT OF INDIA
(From Central Excise, Customs and Gold (Control) Appellate Tribunal, New Delhi)
S.P. Bharucha, D.P. Wadhwa & N. Santosh Hegde, JJ.
State Bank of India -Appellant
versus
Collector of Customs, Bombay -Respondent
Civil Appeal No. 2935 of 1996
Decided on 11-1-2000
Counsel for the Parties :
For the Appellant : Soli J. Sorabjee, R.F. Nariman, Sr. Advocates, Ravinder Narain, Ferd Sorabjee, Ms. Amrita Mitra, Ms. Yasmin Godrey, Ranjan Narain, Ms. Sonu Bhatnagar, Asish Gupta, Janesh Baweja, Ms. Padmini Kumari, Advocates for M/s. JBD & Co., Advocates.
For the Respondent : Harish N. Salve, Solicitor General, Ms. Nish Bagchi, P. Parmeshwaran, Advocates.

IMPORTANT POINT
Licence fee paid for countrywide use of imported software in importer s own establishment cannot be considered as charges for right to reproduce imported goods so as to exclude licence fee from dutiable value within meaning of Rule 9(1)(c) Customs Valuation Rules, 1988 r/w Press Note dated 17.3.1992.

Headnote:Customs Act, 1962-Section 14 r/w Section 27-Customs Valuation (Determination of Price of Imported Goods) Rules, 1988-Rules 3(1) and 9(1)(c) r/w Press Note dated 17.3.1992-Valuation of imported goods-Exemption from duty on reproduction charges-Press Note dated 17.3.1992 would apply when there is commercial exploitation of software-Appellant Bank imported software for its use-Charges included licencing fee for countrywide use of software-Appellant s claim that licencing fee was for reproduction of software and could not be included in value of imported software-Agreement revealed copying, removal and storage are under strict control of licensor-All copies are properties of licensor-Appellant can only use software for its internal requirements -Appellant is barred from selling copies or making documentation available to any body-Held : licence fee for countrywide use cannot be considered as charge for right to reproduce imported goods-Value of licence fee rightly included in value of imported goods imported.

       SBI imported a consignment of Computer Software and Manuals from Kindle Software Ltd., Dublin, Ireland ( Kindle for short) of the value US $ 4,084,475.00 (equivalent to Rs. 10,75,70,267.25). SBI filed a Bill of Entry No. 5209 date 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/-. The case of SBI was that 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. It was claimed 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.

       Held : If we refer to the Interpretative Note relating to Rule 9(1)(c) it says that royalties and licence fees may include, among other things, payments in respect to patents, trade marks and copyrights. There is, however, an exception which says that 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. Further payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for the exports to the country of importation of the imported goods. (Para 9)

       The purpose for the Press Note is two fold : (1) to bring down the prices of the imported software and (2) to save precious foreign exchange outflow on several copies of imported software. With this object in view, Central Government decided to allow duplication/reproduction of imported software in India. That being so, duplication will not attract any excise duty. The royalty payable on duplicate copies of the software will be paid with the foreign exchange arranged by the party. No custom duty will be leviable on the royalty paid. But then the Indian party will ensure that the royalty paid for each copy is not more than what is being charged by the manufacturer/owner from other customers elsewhere in the world. Master Copy imported for duplication purposes will be assessed to customs duty as per existing procedure. From the reading of the press note, it is apparent that it would apply when there is commercial exploitation of the imported software. (Para 10)

       The question that arises for consideration is if licence fee charged towards countrywide use of software in the second invoice could be the charges for the right to reproduction and were these added to the price actually paid or payable for the imported goods. If we refer to the agreement, software is not sold to the SBI as such but it was to remain the 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 centres 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". (Para 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 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 provided 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. (Para 18)

       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 whole or in part except as is expressly permitted by the agreement nor shall SBI permit any of the forgoing. 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. (Para 21)

       Held, consequently the stand of the revenue is correct. The State Bank of India is not entitled to any refund of the custom duty paid. (Para 22)