IN DDT 1220 -21.10.2009, we commented,

In his Budget, the Finance minister said, “The IT industry has pointed out that it is facing difficulties in the assessment of software which involves transfer of the right to use after the levy of service tax on IT software service. To resolve the matter, I propose to exempt the value attributable to the transfer of the right to use packaged software from excise duty and CVD.”

And Notification No. 80/2009-Cus., Dated: July 7, 2009 exempted packaged software or canned software, falling under Chapter 85 of the First Schedule of the Customs Tariff Act, 1975 (51 of 1975), from so much of the additional duty leviable thereon under sub-section (1) of section 3 of the said Customs Tariff Act, as is equivalent to the duty payable on the portion of the value of such goods determined under section 14 of the said Customs Act, or the rules made thereunder, read with sub-section (2) of section 3 of the said Customs Tariff Act, which represents the consideration paid or payable for transfer of the right to use such goods.

Windows 7, one of the most anticipated launches in recent times from Microsoft, is ready for a worldwide launch tomorrow, but India may miss the launch because of the above beneficial notification.

Now the Board has come up with a very important clarification in this regard.

It was brought to the notice of the Board that some of the importers of shrink wrapped software have faced certain difficulties in availing of Notification No. 80/2009-Customs dated 7.07.2009. Their live consignments are held up, especially at Mumbai and Chennai cargo complexes. From the documents submitted by them it appears that two major objections have been raised at Mumbai and Chennai respectively.

The first proviso of the notification states that the exemption would be limited to that much of value which is towards right to use such software for commercial exploitation including the right to reproduce, distribute and sell such software and the right to use software components for creation of and inclusion in other information technology software products.

In Mumbai, a view has been taken that the benefit of the notification is available only if all the activities, viz., right to reproduce, right to distribute, right to sell and right to use the software component for creation of and inclusion in other IT software products are fulfilled. Thus a conjunctive meaning of the term ‘and' has been taken and it has been held that since the importer did not fulfill all the conditions, they should be denied the benefit of the notification.

In Chennai, where fully packed product (FPP) was imported by a company which produced split value (i.e., one value for media and other for right to use software) in a single invoice shown separately, the jurisdictional authorities have refused to accept such split value for the purpose of claiming notification No.80/2009-Customs and taken the view that CVD should be charged on entire amount.

The Board feels that these instances show that the field formations have failed to appreciate the scope of the said notification.

In the first case, the view taken by officers is legally untenable because the phrase used in notification No.80/2009-Cus is inclusive in nature and it is a well-known principle that in an inclusive expression, the word ‘and' is to be understood as ‘or' and that even if one of the activities (such as right to reproduce, right to distribute, right to sell etc.) mentioned in the said inclusive portion is carried out, it would satisfy the condition of commercial exploitation, thus making the import eligible for notification No.80/2009-Customs.

As for the second case, the notification No.80/2009-Cus itself envisages splitting of the value of the imported goods into that pertaining to software on media and the one pertaining to right to use. In such cases, there is no rationale for the department to deny splitting of value unless there are reasons to believe that such a splitting has been done in order to evade payment of duty.

Board wants assessment of the shrink wrapped packaged software to be done keeping in view the above directions.

Such an important clarification and the Board is again shy of a public circular and this clarification is contained in a private letter to Chief Commissioners and Commissioners and now some of the Commissioners may even take a view that it is not even a Board Circular and is not binding on them!

CBEC Letter in F.No.354/189/2009-TRU Dated: November 04, 2009

Service Tax on Tour operator service in connection with Haj & Umrah pilgrimage

Is Service Tax leviable on tour operator service in connection with Haj & Umrah Pilgrimage? The amount charged to the pilgrims in India undertaking Haj and Umrah pilgrimage, is for services provided by the Government of Saudi Arabia and the tour takes place outside India.

CBEC has clarified that as per Rule 3 (1) (ii) of the Export of Services Rules, 2005, (and Circular No. 111/05/2009 – ST dated 24.02.2009), the service in respect of tour operator is export if such service is performed outside India. It is also provided therein that where such taxable service is partly performed outside India, it shall be treated as performed outside India.

Therefore, it is clarified that service tax is not chargeable on the services provided in respect of tour undertaken for carrying out Haj and Umrah Pilgrimage in Saudi Arabia by Indian pilgrims considering these as export of service, provided they fulfill the other conditions of export as provided in Export of Service Rules.

What is the difference between Haj and Umrah ?

The Prophet is believed to have said, “ Alternate between Hajj and `Umrah because both rid one of poverty and sins just as the blacksmith's bellows remove all impurities from metals like iron, gold and silver. The reward for Hajj mabrur is nothing short of Paradise¶

Haj, Umrah or maybe tour operator for any occasion abroad is not taxable in India.

CBEC No. 117/2009 Dated: October 30, 2009

Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 - manufacturer to file Monthly return

The Government has amended the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 to provide for a monthly return to be filed by the manufacturer.

Notification No. 160/2009 - Cus.,( N.T.), Dated: October 30, 2009

Grant of VKGUY and FPS/FMS benefits against self attested EP copy of Shipping Bills – DGFT clarifies

Requests have been received from a few firms stating that original EP-cum-Exchange Control copy of Shipping Bill have been submitted to the Bank by them for negotiation purpose and the same is not receivable from the Bank and they have requested to consider their claims under VKGUY and FMS/FPS Schemes on the basis of submission of self attested copies of the Shipping Bills.

The matter has been examined in the DGFT. It has been decided that before granting benefits under these Schemes, the following documents may be furnished by the applicant:

1. An Affidavit and Indemnity Bond, where the applicant clearly states that the original EP copy was handed over to the Bank for negotiation purpose, along with a letter from the Bank confirming the same;

2. Self attested photocopy of the Shipping Bill be submitted by the applicant.

RA will impose a cut of 2% on the entitlement as indicated in Para- 2.60 of HBP v1.

DGFT Policy Circular No. 15/2009-14 Dated: November 5, 2009

Jurisprudentiol – Monday's cases

Income tax

Special Audit – Principles of Natural Justice essential, but only from date of Supreme Court order in Sahara India - 2008-TIOL-73-SC-IT-LB - Not applicable to cases prior to 11 04 2008 – ITAT Special Bench

In Rajesh Kumar and Others vs. DCIT, 2006-TIOL-140-SC-IT the Supreme Court held that it was mandatory to follow the principles of Natural justice before ordering Special Audit.

The Supreme Court itself doubted this and observed in another case, “The effect of these observations appear to be that in every case where the Assessing Officer issues a direction in terms of Section 142 (2A) of the Act, the assessee has to be heard before such order is passed. This does not appear to us to be the correct position of law. Therefore, we refer the matter to a larger Bench.”

And so the case went to a Larger Bench and the Supreme Court in Sahara India (Firm) vs. CIT 2008-TIOL-73-SC-IT-LB held that principles of natural justice were indeed required to be followed. However the Court said that the ruling would apply prospectively from the date of judgement.

Now what is the fate of the appellants who won the case as per Rajesh Kumar – does this prospective application of principles of natural justice apply to them? Yes, says the Tribunal. But Sahara India did not overrule Rajesh Kumar ; in fact it confirmed it – that is beside the point?

Central Excise

Tired of trips to Tribunal, assessee accepts duty demand but claims MODVAT credit set off – Following ratio of Apex Court judgment in Formica India case 2002-TIOL-599-SC-CX , MODVAT credit allowed by CESTAT – MODVAT set off nullifies duty demand and assessee has the last laugh

The appellants were engaged in manufacture of machinery which were claimed to be agricultural implements. They did not register with the department as the said products were exempt from payment of excise duty. Departmental authorities proceeded against them for non-registration and non-payment of excise duty on the ground that the said products are hand tools and articles of iron and steel classifiable under Chapters 82 and 73 of CETA, 1985 and cannot be classified as agricultural implements.

Customs

Mis-declaration in Shipping Bill to secure undue DEPB credit – Malfeasance cannot go unpunished – since no finding given that the goods were prohibited or dutiable, section 113(h)/113(i) of Customs Act mis-applied – Confiscation not sustainable – Exporter liable to be mulcted with penalty u/s 117 of Customs Act – CESTAT.

The only point pressed by the appellant is as to whether the goods could be confiscated under section 113 of the Customs Act on the ground of violation of section 50(2) of the Customs Act and, if so, whether the exporter could be penalized under section 114 of the Act. These questions arose, the appellant contended, since there is no finding by any of the lower authorities to the effect that the goods were either prohibited or dutiable and moreover neither of the lower authorities specified any alphabetical clause of section 113 while effecting the confiscation.

See our columns Monday for the judgements

Until Monday with more DDT

Have a nice Weekend.

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