By TIOL News Service

NEW DELHI, AUGUST 22, 2015 : AS has been widely reported, the CBEC is organising its Annual Conference of Chief Commissioners And Directors General, 2015 on 24th and 25th August and one of the points of discussion is 'Ease of Doing Business'.

Perhaps, before the shiny folders are readied, the present decision of the CESTAT may well be included as a last minute entry for rumination.

The appellant was importing packaged software (media packs) from its related group company M/s. Oracle EMEA, Dublin, Ireland. The consignments used to be imported through M/s. DHL Express and cleared on the basis of invoices sent by the supplier. These consignments used to be delivered to the home customers on the basis of the invoices issued by OIPL. On scrutiny of the said (OIPL) invoices, it was revealed that these invoices were issued by OIPL by adding licence fee to the value of the media pack. Thus, while importing and clearing the goods through Customs, OIPL declared value of the imported goods (media pack) without adding licence fee paid to the Oracle, USA, whereas while delivering the goods to the buyers, separate invoices reflecting the value of media pack and licence fee were issued. The department alleged that by not including the licence fee of the software in the import value of the media packs, OIPL was indulging in duty evasion because the said licence fee was includible in the assessable value in terms of Rule 9(1)(c)/10(1)(c) of the Customs Valuation Rules, 1988/2007 on the ground that such licence fee was a condition of sale. Even in respect of such media packs where no licence fee was actually paid by OIPL to Oracle USA, the value of the licence fee notionally payable by OIPL to Oracle, USA was computed for the purpose of computing the duty evaded. Forty-nine consignments awaiting delivery were seized on the ground that they were similarly under-valued.

Vide an O-in-O dated 12.01.2011 passed in the matter of SCN dated 02.06.2009, the Commissioner of Customs, New Delhi, inter alia, confirmed the Customs duty demand of Rs.127.35crores; consignments seized were confiscated; imposed a fine of an equivalent amount and penalty of Rs.128.23crores and also personal penalties.

Against the aforesaid order, the appellant is before the CESTAT. Elaborate submissions were made by both sides.

The Bench after considering the submissions summed up its findings thus -

(i) Whether the licence fee paid by OIPL to its parent company Oracle USA is includible in the assessable value of imported media packs in terms of rule 9(1)(c)/10(1)(c) of the Customs (Determination of Value of Imported Goods) Rules, 1988/2007 as applicable during the relevant period.

+ In every case of commercial imports, Oracle USA and Oracle Ireland were fully aware that the order has been uploaded/scanned into Oracle Order Management System only after the customer agreed to pay the licence fee for the software and this information was available to Oracle USA as well as Oracle Ireland before the shipment was made.

+ It comes out clearly that each software which was shipped was in the knowledge of Oracle USA and each shipment came for a particular Indian customer identified by the unique order number generated. In case of commercial transactions, the unique order number was generated only after the agreement was signed by the customer to pay the licence fee also. It needs to be re-emphasised that each commercial shipment, came for an identified customer as per the unique order number generated and that number was generated only after the customer signed to the agreement agreeing to pay the licence fee also. Thus, it is evident that in case of commercial imports of media packs, payment of licence fee was a condition of sale.

+ In the wake of the factual matrix of the case, we hold that in respect of commercial imports of media packs, the licence fee remitted by OIPL to Oracle USA was includible in the assessable value.

+ However, any subsequent (post importation) increase in the number of users of the software imported in the form of physical media packs was neither known at the time of import nor was it a condition of sale and therefore licence fee remitted on that account cannot be said to be a condition of sale and hence would not be includible in the assessable value and customs levy thereon would also be hit by the absence of collection mechanism as per the discussion in para 12.

(ii) Whether custom duty is payable on the software electronically downloaded and if yes, then whether the licence fee paid by OIPL to its parent company Oracle USA in respect of the software so downloaded is includible in the assessable value.

(iii) Whether in respect of the electronic software imported in the form of media packs or downloaded electronically in respect of which no licence fee was paid or required to be paid by OIPL to Oracle USA, the value of the (notional) licence fee can be included in the assessable value on the ground that same should have been paid and whether the licence fee neither paid nor required to be paid by OIPL to Oracle USA can be held to be payable in the given circumstances.

+ From the Supreme Court judgement in Tata Consultancy Services, it is clear that software even in its intangible form has been declared to be goods by the Supreme Court and therefore electronic download of software from a server located abroad would get captured in the scope of "import of goods". A Ministerial Declaration at a WTO conference does not have legal force of overruling a legislated mandate. However, in case of electronic downloads of software, it has not been ascertained whether server from where it was downloaded was actually located abroad. Even presuming it to be so, we need to see whether mechanism exists to levy and collect customs duty on such downloads.

+ From the provisions of Customs Act, 1962, it is evident that the entire Customs Act in the present form provides mechanism/procedure for levy and collection of duty only in respect of tangible goods. Software is intangible, can be downloaded anywhere, from anywhere, at any time and none of the above referred provisions of Customs Act, 1962 are capable of being applicable/ enforceable in respect of such downloads. Indeed, anyone having even a nodding acquaintance with the Customs Act, 1962 will not dispute that in its present form, it totally lacks the mechanism to levy and collect duty on electronic downloads. It is well settled principle of taxation that in absence of mechanism for collection of tax, the levy fails. Thus, we hold that electronically downloaded software is not liable to customs duty.

+ We hold that no licence fee was payable nor admittedly paid by the customers to OIPL (and no licence fee was payable nor admittedly paid by OIPL to Oracle USA) in respect of "non-commercial" media pack imports or non-commercial (software) electronic downloads and, therefore, the demand in respect of "non-commercial" supply of the impugned goods either in the form of media packs or by electronic download via internet cannot be sustained.

(iv) Whether the extended period of limitation is invokable in the given facts and circumstances of the case and whether the whole or part of the demand is hit by time bar.

+ Every misstatement need not necessarily be wilful and to evade customs duty and every 'not telling' does not necessarily mean suppression. It is relevant to note that the total demand confirmed vide the impugned order is approximately Rs.128crores out of which we have in effect held that only demand of the order of about Rs.19crores is sustainable on merit. Further, the very fact that OIPL had made complete disclosure regarding its commitment to remit 56% of licence fee to Oracle USA in its FIPB application is certainly indicative of the fact that it did not have any intention to hide this fact.

+ In fact, in January, 2007, OIPL disclosed this fact during SVB investigations (in its reply to SVB questionnaire). The seizure took place in January, 2008 when customs could hardly claim that OIPL had not disclosed the facts about its relationship with Oracle Ireland or about the remittance of licence fee to Oracle USA when these facts were made known to Customs SVB in January, 2007 in response to its (SVB's) questionnaire.

+ In the given circumstances, it sounds incredible that a professional organisation like Indian Customs should claim that it did not / could not realise that the imports by OIPL from Oracle Ireland were from a related person.

+ In any case, there is evidence on record that in September, 2005 and January, 2007 they submitted the details about OIPL's relationship with Oracle Ireland and Oracle USA to Customs and so the allegation that OIPL suppressed the fact of it being related to Oracle Ireland stands pretty much negated by this evidence alone.

+ When no penalty is held to be imposable when the issue involved is interpretational, it almost axiomatically follows that even extended period cannot be invoked in such cases. Indeed we do not find even marginal support/ evidence to sustain the charge of willful mis-statement / suppression of facts and therefore we hold that the allegation of willful mis-statement/suppression of facts is not sustainable and penalties relating thereto are not imposable. As a result, the demand even in relation to "commercial" physical imports of media packs (except those which were seized) is hit by time bar.

(v) Whether provisions of Customs Act, 1962 with regard to confiscation, interest and penalties are applicable in relation to the impugned CVD.

+ It is evident from Section 3(8) of the Customs Tariff Act, 1975 that all the provisions of Customs Act, 1962 and the rules and regulations made thereunder have been clearly borrowed into the said Section 3 to apply to the impugned CVD and so it is obvious that provisions relating to fine, penalty and interest contained in Customs Act, 1962 are expressly made applicable with regard to the impugned countervailing duty.

(vi) Whether the value of software on which service tax has been charged can be included in the assessable value of media packs imported for the purpose of assessment under Customs Act, 1962.

+ Coming to the contention that from 2008 OIPL was paying service tax on the licence fee paid by it to Oracle USA and, therefore, the value of the licence fee could not be added in the value of the media packs imported, we find that OIPL has relied upon the judgement of Supreme Court in the case of Imagic Creative Private Ltd. in support of this contention.

+ We are not even for a moment suggesting that mutual exclusivity of customs duty and service tax can be logically deduced from the Supreme Court judgement in the case of Imagic Creative Pvt. Ltd.). No constitutional provision is brought to our notice inhibiting levy of taxes under different statutes on the same transactions. It is axiomatic that the same transaction may inhere distinct taxable events, exigible to different taxes. The licence fee being a condition of sale is includible in the assessable value of the media packs in terms of the Customs Act, 1962 and the Rules made thereunder and there is no provision warranting exclusion from the assessable value for customs purposes, on the ground that service tax has become chargeable on such licence fee under a different statute.

(vii) Whether redemption fine can be imposed in respect of goods which were released without any bond and are not available for confiscation.

+ Imposition of redemption fine in lieu of confiscation when the goods cannot be confiscated on account of not being available for confiscation is an empty, non-executable and meaningless exercise (except when there had been provisional release of goods on execution of bond). Confiscation of goods requires physical presence there of.

+ Accordingly we hold that redemption fine cannot be imposed in respect of goods which had already been cleared and were not available for seizure/confiscation. In any case, the Show Cause Notice did not propose any redemption fine on goods already cleared and it is settled law that adjudicating authority cannot travel beyond the Show Cause Notice.

(viii) Whether, in the given facts and circumstances, confiscation and penalties are warranted in respect of seized goods.

+ It has been clearly brought that this case involves interpretation regarding includiblity of the licence fee remitted by OIPL to Oracle USA in the assessable value of media packs and is devoid of mensrea. Thus, essentially, as it turns out, it is not a case involving "evasion" of duty but a case of mere possible short payment of duty in respect of commercial imports of media packs involving a purely interpretational issue. Such cases devoid of mensrea are simple "demand" cases involving bona fide interpretational difference of opinion. Non-desirability of imposing of penalty in such cases can be inferred from the case laws discussed and when penalty is not justified, then as a corollary nor is confiscation.

Customs' tendency:

We may observe in passing that the Customs' tendency, often noticed, to raise a pure interpretational disagreement regarding valuation to the status of an offence case of evasion alleging suppression, etc. does not augur well for the image of taxation department and negatively impacts the ease-of-doing-business environment of the country and, therefore, even in public interest such tendencies need to be discouraged.

Conclusion:

- The extended period of limitation is not invokable.

- No Customs duty is chargeable on electronic download of the software via internet.

- Even in respect of "physical" imports of software, licence fee on notional basis is not includible in the assessable value where no licence fee was actually paid or required to be paid.

- The demand of differential duty as would arise by adding 56% of the licence fee to the assessable value of only those goods (out of the 49 consignments which were seized) in respect of which licence fee was actually charged from the customers is sustainable and sustained. The assessing officer shall compute the differential duty accordingly after hearing OIPL only on this limited aspect and inform it of the amount of differential duty so computed.

- Rest of the impugned demands, redemption fines and penalties on the appellants are set aside.

(See 2015-TIOL-1766-CESTAT-DEL)