ORDER
S.L. Peeran, Member (J)
1. This appeal arises from the order-in-appeal dated 8-7-1994 passed by Collector (Appeals), Bombay, rejecting the appeal of the importer, and confirming the order of Asstt. Collector, who has rejected their refund claim of Rs. 10,86,49,119.00.
2. The appellant imported a consignment of “computer software and Manuals” covered under Invoice No. 910701, dated 3-7-1991 and cleared the same for home consumption on payment of Customs Duty. Subsequently, they claimed refund of the above-stated amount on the grounds that the customs duty on the consignment was assessed on the full value of the invoice i.e. U.S. $ 4084475/- which included one site fee as indicated in the agreement with the suppliers, whereas duty ought to have been charged on the licence fee of the software for single site inclusive of cost of Manuals totally valued at Rs. 401047 only. In support of their contention, they had produced detailed invoice showing bifurcation and relied upon Valuation Rules 9(1)(c) and corresponding note of this Rule of G.A.T.T. Code of Valuation. Initially, their claim was rejected by the Asstt. Collector (Refund). On appeal, the Collector (Appeals) remanded the same for reconsideration.
3. The Asstt. Collector heard the appellants and thereafter has passed a detailed order-in-original giving reasons for rejecting their claim. The Asstt. Collector has noted that the goods were originally assessed and cleared in the said invoice with the heading :
“To supply of countrywide licence for India ” and the invoice shows :
“77k cost of all Manuals is included in the cost of the software” and sub-total CIF was shown as US $ 40,84,475/-.
The Asstt. Collector has observed that it is not known as to why a detailed invoice of same date was not known available at the time of original assessment. The Asstt. Collector has held that the fact that the duty has not been paid under protest at that time shows the claimant came to know of the advantage later and thus procured a detailed Invoice later, which was received somewhere between 1st and 8th August, as stated by the party before him. Therefore, the Asstt. Collector has held that the claim shows an element of ‘after thought’ with the intention of taking advantage by splitting the licence fees into two. The original Invoice giving CIF Bombay, the word “cost” had been converted into licence fee, and further split up into two as “use at single site” and “use countrywide”. He has held that it is only a split up of the total CIF amount which remains exactly the same and as such the so-called Licence Fees shown in the detailed invoice is only the price (cost+ insurance+ freight). He has observed that the amount of freight and insurance paid is spelt out also in the original invoice. Hence, he holds that this clearly shows that the total invoice fee shown in detailed invoice being the same as the total CIF in the original invoice, and it is the actual transaction value whether it is termed as licence fee or cost and further observes that the whole issue has to be viewed from this angle also.
The ld. Asstt. Collector has further held that the original invoice had been drawn for the value including countrywide licence and in the Detailed Invoice, the value is subsequently split into two types of licence fees viz. single use and countrywide use. Apart from the licensing fees, no value had been indicated for the software. He has examined the contract and observed that the software is not sold to State Bank of India, appellant herein, as such but it remains for all times to come as the property of the supplier. The price is payable only for allowing S.B.I. to use software in a limited way of their own centres for a limited period of 5 years and that is why they call the price as licence fees. He has held that the contract also shows that beyond 5 years, they are required to pay an annual recurring licence fee which amounts to fresh import at a concessional price, in view of this fact they cannot use software beyond 5 years unless they pay recurring fees. Therefore, he has held that licence fee is to be added to the transaction value under provisions of Rule 9 read with Article 8. The value itself being licence fee, and the same is split into two types, showing two separate areas, i.e. single main site and countrywide site, therefore, he has ultimately concluded that countrywide use of software and reproduction of software are two different entities and two different processes, and reproduction is the means to achieve the end of countrywide use. He has held that reproduction facilitates countrywide use and functionally they are not the same and they cannot be equated. He further holds that it can be said that countrywide use is achieved through the means of reproduction.
The ld. Asstt. Collector goes on to hold that as per contract, storage, removal etc. are under the strict control of the licensor and all the copies are property of the licensor. Hence, he comes to the conclusion that the initial payment and recurring payment are nothing but the fees charged for use of software at the licenced sites; that the initial licence fees and the recurring licence fees are paid for the permission (licence) given by the licensor to use their property by the Importer at their Branches and not for the reproduction of the software as claimed by them, that no clause in the contract says that the fees are charged for reproduction although reproduction under certain conditions is permitted; that contract says that “S.B.I. shall pay the licensor the initial licence fees and the recurring licence fees for use under the provisions of this agreement” clearly shows that the licence fees are payable for use and not for reproduction. Therefore, the Asstt. Collector has held that the amount paid for use is to be added in the transaction value under Rule 9(1)(c). The Ld. Asstt. Collector has also drawn support from para 6 to Annexure 1 to DOC 37-564 E of the Draft Commentary, which states that
“if the price actually paid or payable includes charges for the right of reproduction there is no authority in the agreement to deduct such charges”.
The ld. Asstt. Collector has further held that as per Section 149 of the Customs Act, 1962, no amendment can be authorised on a Bill of Entry, after the imported goods have been cleared for home consumption, except on the basis of documentary evidence, which was in existence at the time the goods were cleared. He observes that in the present case, the Detailed Invoice was non-existent at the time of clearance of goods – acceptance of a fresh Invoice, i.e. Detailed Invoice not attested by Customs other than the original Customs attested invoice, with different details for purposes of payment of refund will be against the spirit of Section 149 of the Customs Act. He further holds that, as per rules and procedures laid down in Central Appraising Manual on Refund payments original customs attested invoice is a basic document for granting refund; which point has also been confirmed by the Department in Standing Order No. 6875, dated 7-7-1988 and Public Notice No. 79/7-7-88 issued by Bombay Customs House. Therefore, he concludes that the substitution of the original customs attested invoice with another unattested invoice, showing different details will be unwarranted.
4. On appeal, the Collector (Appeals) on a careful consideration of the appellants’ pleas, has rejected their claim and confirmed the Assistant Collector’s order. The Collector (Appeals) has held :
“The main ground on which the appellants are pressing hard for the refund claim appears to be the Interpretative Notes to Rule 9(1)(c) of the Customs Valuation Rules, 1988. The said note, inter alia, prescribed as follows:
“The royalties and licence fees referred to in Rule 9(1)(c) may include among other things payments in respect to patents, trademarks and copyrights. However, 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”
They contend that they have to reproduce the software programme imported by them and only after such reproduction they can use the said programme countrywide. This reproduction of making copies is unavoidable in their case as they have countrywide computer network which works on “LAN version” and is not a “Mainframe” system. In the case of a Main Frame, it is possible to use the programme countrywide without having to reproduce the software. Even in such a situation, they would have had to pay the licence fee for countrywide use because it is the extent of the use that determines the quantum of licence fee. The act of reproduction is only an intermediary stage in the process of putting the programme to countrywide productive use. The phrase “Productive Use” has been defined in clause 1.8 of the Agreement as productive use shall mean use of software or any part thereof to process all or part of the SBI’s actual business transactions, in parallel or live mode. The amount of US $ 36,83,428/- has been paid as licence fee for countrywide use of software to process all or part of SBI’s actual business transaction and not for acquiring the right to reproduce the software programme. In this case, the appellants seem to be confusing between the “licence fee” and the “charges for the right to reproduce”. Admittedly, what they have paid is the “licence fee for countrywide use” and not “charges for right to reproduce”. After paying the licence fee, the licensee can use the imported goods as per the agreement between the licensee and the licensor. He is not free to travel beyond the scope of such agreement/contract. On the other hand, after paying for and acquiring the “right to reproduce” the importer acquires from the seller the absolute right to reproduce the goods. The interpretative note to Rule 9(1)(c) refers to such unlimited “right to reproduce” and does not cover the type of cases as in the instant case where the appellants have not paid for and acquired the absolute and unfettered right to reproduce but have only been permitted to use the impugned programme for a limited purpose as per the conditions of the contract/agreement. It is upto the user’s convenience either to use the software countrywide directly on a “Mainframe system” or by making copies of the same and then using it on the “LAN version” system as in the instant case.
I further observe that appellants have relied excessively on the Interpretative Note to Rule 9(1)(c). However, the Rules as well as the Notes both being parts of the Statute have to be read along and a harmonious construction has to be given. Examining the Valuation Rules and the Interpretative Notes with this in mind it is seen that under Rule 3, the value of imported goods shall be the transaction value. Rule 4 of the Rules defines Transaction value and Rule 4(1) says that “the transaction value of 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 these Rules”. The Interpretative Note to Rule 4, inter alia, explains the term “the price actually paid or payable” in the following language : Price actually paid or payable.
The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods.
It is evident from the above-mentioned findings that the countrywide licence fees paid by the appellants are not the same as the “charges for the right to reproduce” as envisaged in the Interpretative Note to Rule 9(1)(c). It is also clear that total cost incurred should be the transaction value on which Customs duty should be charged. Such a total cost for the purposes of assessment of customs duty would include single site licence fee as well as the countrywide licence fee in the present case.
To sum up I observe that Rule 3(1) of the Valuation Rules provides that the value of the imported goods shall be the transaction value, which is defined by Rule 4 to the effect that such transaction value of imported goods shall be the price actually paid or payable for the goods when sold for export to India. Here the amount payable to the supplier was US $ 40,84,475/- and was correctly taken as the assessable value by the lower authority. These discussions settle the appeal and there is no need to examine the other minor points cited by the appellants. I hold that the Asstt. Collector had rightly added the countrywide licence fee to transaction value.
For the foregoing reasons, I see no reason to interfere with the impugned order passed by the Asstt. Collector. I accordingly dismiss the appeal.”
5. We have heard Shri Farhad Sorabjee assisted by Shri D.B. Engineer for the appellants and Shri T.R. Malik, ld. SDR for the revenue.
6. Ld. Advocate initiated his argument by giving a background of the appellant being a largest Bank in the world and as to how they felt the need for computerising their Banking and accounting system and in this context had floated a world tender. The Bank entered into an agreement with an expert computer firm M/s. Kindle Software Ltd. for supply of computer software and manuals. The terms of contract were referred extensively before us and it was argued that there was no ‘sale’ of software but only supply of software system on licence fee and this fee paid alone should be the transaction value for charging duty and the “countrywide use” and “reproduction charge” should not be added to the value and that duty cannot be realised on these heads. As software can be made available to the countrywide branches only by reproduction at the “support centre” and the licence fee charged for the use of the said software countrywide is clearly a “reproductive charge and the same cannot be charged to duty. It was submitted that “countrywide use” and ‘reproduction’ are one and the same. Ld. Advocate submitted that the only way in which the software is distributed countrywide is by reproducing and copying the same at the support centre as per the individual specific requirements of various branches (licensed sites) and transmitting the same to those sites. This is explicitly provided for in clause 6.5(a) of the agreement, which inter alia states.
“…S.B.I. shall not copy or permit the copying of the software supplied by the licensor save as may be strictly required for delivery to licensed sites and such further sites as are referred to in this paragraph (a)…”
Referring to the Rule 9(1)(c) of the Customs Valuation Rules, 1988, the ld. Advocate argued that the first interpretative note [to] Rule 9(1)(c) makes it clear that the countrywide licence fee paid by the appellants for the right to reproduce the goods and distribute them countrywide to their branches (licensed sites) cannot be added to the prices paid or payable for the imported goods for determining the customs value of the goods. Ld. Advocate pointing out to the grounds of appeal, submitted that the countrywide licence fee is a fee for permission from the supplier computer firm to the appellants to distribute the software purchased by them (by reproducing or copying the same) to the various licensed sites under the agreement. The ld. Counsel submitted that ld. Collector (Appeals) has wrongly interpreted in holding that the act of reproduction is only an intermediary stage in the process of pulling the programme to countrywide production use. He submitted that the fee has been paid in effect for the right to reproduce the programme. He submitted that it is an accepted international trade practice that fees are paid on intellectual property such as software or are paid for the right to reproduce the software at diverse places. He also submitted that the Collector (Appeals ) has wrongly drawn a distinction between the “right to reproduce” referred to in Rule 9(1)(c). The ld. Counsel submitted that appellants had not paid for and acquired the absolute and unfettered right to reproduce. He clarified that it is not necessary that the right to reproduce should be absolute or unfettered. As the right to reproduce had been granted by the supplier under the agreement, therefore such fee charged are exempted as per Rule 9(1)(c) and its interpretative Note therein. He submitted that the software is not used directly on a main frame system and the same cannot be loaded. He submitted that even if the software were usable on a main-frame system and transmitted the same countrywide thereby, still the fee for the same could not be includable in the valuation of the said goods for the purpose of customs. Ld. Advocate also relied on the Press Note dated 17-3-1992 issued by Deptt. of Electronics, Govt. of India, which clarified that duplication of imported software would not attract customs duty and that no customs duty would be leviable on royalties paid. Ld. Counsel submitted that under Rule 4 of the Customs Valuation Rules, the transaction value should be taken as the price actually paid and adjusted in accordance with Rule 9, which on proper reading excludes Royalty Fee and reproduction charges. The appellant has made a claim for duty drawback in respect of re-export of Bank Master Query Model, which is sending before the lower authorities, the ld. Counsel did not press for this ground, as it did not form part of the refund claim of the appellant.
The Bench pointed out to the refund grounds in the refund application, and a query was posed as to whether the grounds urged were not additional grounds and whether such grounds were not hit by time bar and in this context the Bench pointed out to the ruling of the Tribunal in the case of Haryana Distillery v. Collector of Customs – 1992 (62) E.L.T. 773. Ld. Counsel submitted that the grounds urged now were merely an amplification of the grounds already urged and the grounds argued were all legal submissions and such submissions did not form new grounds of refund claim. Later ld. Counsel [gave] citations in support of his plea. They are noted here below:
(i) Nandi Metal Rolling Mills v. Collector of Central Excise -1992 (60) E.L.T. 322
(ii) Mohan B. Samtani v. Collector of Customs -1990 (50) E.L.T. 592
(iii) Dy. Commissioner (CT) v. TVL Pan Raja Mills – 1987 (43) E.L.T. 259 (Mad.)
(iv) CIT v. Gangappa Cables -1979 (116) ITR 778 (SC)
(v) Associated Millers Pvt. Ltd. v. Collector of Customs -1990 (50) E.L.T. 633
(vi) J.K. Synthetics Ltd. v. Collector of Customs – 1992 (62) E.L.T. 41
(vii) Collector of Customs v. Lakshmanan Isola Ltd. – 1992 (61) E.L.T. 315
(viii) Asia Foundation v. Collector of Central Excise – 1991 (56) E.L.T. 655
(ix) Herschel Rubber v. Collector of Central Excise – 1987 (30) E.L.T. 454
(x) Food Corporation of India v. Collector of Customs – 1985 (22) E.L.T. 461.
7. Ld. SDR submitted that both the authorities have given detailed findings and all the grounds given for rejecting their claim is sustainable and it requires to be upheld. He submitted that the agreement clearly disclosed that the licence fee in the form of price is being charged on the basis of its single place use or on the basis of the use nationwide. Licence fee is not for the reproduction as separate charges are incurred by the importer and such expense of reproduction, by merely transferring the details of a software to a disc, would hardly be negligible and no supplier would collect such huge fee as reproduction charge, unless it is the price, in the form of licence fee for its large and extensive use to which it is put to. He submitted that the goods were not imported for the purpose of reproduction but they were meant for use. Licence fee does not include copying, duplicating or reproduction charges. He referred to the agreement and pointed out that the agreement did not permit reproduction for commercial use. He further submitted that S.B.I. is a public institution and that they prepared a project report, in which the entire duty element has been worked and later paid. He submitted that the refund application filed did not disclose all these grounds urged by the Advocate and hence the grounds of refund claim cannot be enlarged to include new grounds and make out a new case. He pointed out to the Invoice, which showed only licence fee for countrywide use, meaning dearly that it was not reproduction charges but the licence fee in the shape of transaction value for the supply of software for countrywide use. He submitted that the entire emphasis in the contract is for licence fee and not for reproduction fee. He submitted that an amount of Rs. 12 crore paid as duty is not a small amount to be paid by S.B.I. and they were fully conscious that they were paying duty on the full value for the software arrived at after negotiation and as per the terms of contract and thus these pleas now raised are in the nature of fresh ground which changes the character of the refund claim and hence it should be disallowed in the context of the citation referred to by the Bench. He also cited the following judgments :
(i) Collector of Central Excise v. Shalimar Paints – 1987 (29) E.L.T. 1001
(ii) Collector of Central Excise v. B & A Plantations Ind. Ltd. – 1995 (79) E.L.T. 466 (Tribunal).
8. We have carefully considered the submissions made by both the sides and have perused the entire grounds of appeal, citations, and the impugned orders. We have extensively extracted the findings given by both the lower authorities. We are in total agreement with the reasonings arrived at by both the lower authorities and we concur with the same and they are wholly sustainable. We give our reasons for confirming the impugned orders.
The Bill of Entry No. 5209, dated 19-7-1991 described the goods as “Computer software for Bank Master”
46 Nos. Computer Diskettes (software)
82 Nos. Manuals
The Customs Tariff sub-heading shown is 8524.90 alongwith Notification 280/84 with Basic CD 62% + 50% auxiliary, for Central Excise Tariff purpose also the same sub-heading and notification has been cited. The total duty declared is Rs. 12,04,78,699/-. The declaration stated that the contents of this Bill of Entry for goods imported against Bill of Lading No. 12310200, dated 12-7-1991 are in accordance with the Invoice No. 910701, dated 3-7-1991. The Bill of Entry was accompanied by a declaration, which gave the break-up of the value of the consignment, as under:
________________________________________________________________________
Particulars Cost Indian Rs.
________________________________________________________________________
46 Diskettes and 82 Manuals US$ 14,300/- Rs. 3,76,600.17
Licencing fee for use of the US$3,86,747/- Rs. 1,01,85,524.00
software at single site ____________________________________
Total cost of the software for use US$4,01,047/- Rs. 1,05,62,124.37
at one site (including Diskettes
and Manuals)
Licencing fee for use of software US$36,83,438/- Rs. 9,70,08,142.89
countrywide _____________________________________
Total: US $ 40,84,475/- Rs. 10,75,70,267.00
_____________________________________
9. The importer by their refund application dated 19-8-1991 sought refund of the excess amount of Customs Duty of Rs. 10,86,49,119/-. The letter was accompanied by Form A. The details given in Form ‘A’ in Column 5 & 6 are filled in hand writing and the same reproduced hereinbelow:
"5. Amount of Refund claimed and how arrived at Rs. 10,86,49,119/- *
Customs duty payable over single site Licence Fee of Software (US $ 4,01,047 + 1% landing charges Rs. 1,05,62,124.37. The Customs duty thus calculated comes to Rs. 1,18,29,580.00
Calculated Rs. 1,18,29,580/-
Actual paid Rs. 12,04,78,699/-
____________________
Excess duty paid Total: Rs. 10,86,49.119.00*
____________________
6. Ground of claim vide note to Rule No. 9(1)(c) of the grant + code of valuation – “Duty for the right to reproduce the imported computer software 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”. Hence excess duty paid”.
It has been submitted by the appellant that they received a detailed invoice dated 5-7-1991 from M/s. Kindle in early August showing the break-up for the fees charged. The said details given in this Invoice are reproduced herein below:
"State Bank of India Kindle Software Ltd. Central Office, New Administrative Building, Madame Cama Road, Bombay-400021, India ______________________________________________________________________ Invoice No. 910701 Credit No. 03/07/91 ______________________________________________________________________ Your Order No. ______________________________________________________________________ TO SUPPLY OF COUNTRYWIDE LICENCE FOR INDIA FOR BANKMASTER WITH THE FOLLOWING MODULES: 7 CENTRAL BANKMASTER 1 FOREIGN EXCHANGE 1 COMMERCIAL LENDING 1 LIMITS MONITORING 1 EXTENDED FINANCIAL RETURNS 7 BRANCHPOWER 1 EASIXFER 1 BANKMASTER QUERY 1 GATEWAY 15 CENTRAL BANKMASTER TRAINING MODULE 9 IBSNET MODULE 1 DOS BOOT DISK QUANTITY OF GOODS: 46 DISKETTES 82 INSURANCE PAID IR £ 76.50 FREIGHT PAID IR £429.40 THE COST OF ALL IS INCLUDED IN THE COST OF THE SOFTWARE Sub Total US $4,084,475/ ________________ KINDLE SOFTWARE LIMITED VAT ________________ Sd/- CIF Bombay Total US$4,084,475/- Authorised Signatory ______________________________________________________________________ The detail invoice was also filed separately. This is also reproduced herein below: State Bank of India Kindle Software Ltd. Central Office, New Administrative Building Madame Cama Road Bombay 400021 India ______________________________________________________________________ Invoice No. 910701 Credit No. 03/07/91 ______________________________________________________________________ Order No. ______________________________________________________________________ DETAIL INVOICE TO SUPPLY OF COUNTRYWIDE LICENCE FOR INDIA FOR BANKMASTER WITH THE FOLLOWING MODULES: 7 CENTRAL BANKMASTER 1 FOREIGN EXCHANGE 1 COMMERCIAL LENDING 1 LIMITS MONITORING 1 EXTENDED FINANCIAL RETURNS 7 BRANCHPOWER 1 EASIXFER 1 BANKMASTER QUERY 1 GATEWAY 15 CENTRAL BANKMASTER TRAINING MODULE 9 IBSNET MODULE 1 DOS BOOT DISK QUANTITY OF GOODS 46 DISKETTES 82 INSURANCE PAID IR £ 76.50 FREIGHT PAID IR £ 429.40 LICENCING FEE FOR USE AT SINGLE SITE (INCLUDING COST OF AND DISKETTES - US$ 401,047.00 US $14,300) LINCENCING FEE FOR FREIGHT TO USE COUNTRY - US $ 3,683,428.00 WIDE _____________________ Sub Total US$4,084,475.00 KINDLE SOFTWARE LIMITED VAT _____________________ Sd/- Total US$4,084,475.00 Authorised Signatory ______________________________________________________________________
It is further submitted that the consignment of the software comprised of 11 modules one of which is the Bankmaster Query. The said Bankmaster Query was not acceptable to the appellants, as during the acceptance test the Bankmaster Query Module was not found to be functioning satisfactory Hence they rejected this module and it necessitated its return. They conveyed their non-acceptance to M/s. Kindle Software Ltd. by their letter dated 23-9-1992. They mutually agreed to withdraw the same from the contract and the amount paid for it would be adjusted against the other payments due to the supplier.
10. On a perusal of the agreement, the following details would be necessary to be extracted for the purpose of examining the pleas of the appellant:
DEFINITIONS:
“1.3 “Documentation” shall mean the standard user manuals for the software supplied from time to time by the Licensor, together with agreed functional requirement documents for modifications.
1.5 “Licensed Module” shall mean a module of the Software licensed in accordance with this Agreement.
1.6 “Licensed Site” shall mean any branch or office of SBI in India.
1.7 “Operating Environment” shall mean any combined hardware platform and operating system specified in Schedule I approved by the Licensor for use of the Software.
1.8 “Productive use” shall [mean] use of the software or any part thereof to process all or part of SBI’s actual business transactions, in parallel or live mode.
1.9 “Program Services” shall mean the services detailed in Article 10.
1.10 “SBI” shall mean State Bank of India, its successors and permitted assigns.
1.11 “Software” shall mean the computer programme in object code form listed in schedule thereto.
1.12 “Support Centre” shall be the designated single building in India to which all software and Documentation are delivered and at which SBI shall maintain its principal team of support personnel for the Licensed Sites in India.
1.13 “Use” shall mean copying any portion of the software into a machine and /or transmitting them to a machine for processing of the machine instructions, statements, or data contained in such materials or the use, of any Documentation”.
Part II of the Agreement deals with General aspect like –
(a) Licensor/Supplier to furnish Software and Documentation for use by SBI.
(b) Grant to SBI a non-transferable and non-exclusive licence to use the Software in India.
(c) Provide technical assistance to SBI in the implementation of the Software at the Licensed Sites in accordance with the provisions of Article 8. Any other assistance will be on the Licensor’s standard terms for service, including payment by SBI of the fees specified in Schedule II Part 2. It also deals about [providing] training in the operation of the Software for suitable qualified persons etc.
Part 2.2 of Part II states that SBI shall accept the software and the services referred to in 2.1 above and pay fees and reimburse expenses to the Licensor in accordance with the provisions of this Agreement.
Part III of the agreement deals about the LICENCE. Para 3.1 states that the Licensor hereby licenses SBI to use the Software and Documentation in India for the internal requirements of SBI only on a non-exclusive and non-transferable basis at the Licensed Sites in the Operating Environments specified in Schedule I. It also states that SBI shall be permitted to authorise use of the Software and Documentation under the terms and conditions of this Agreement to its subsidiaries carrying out banking activities in India for the internal requirements of such subsidiaries as if such use by such subsidiaries was [use] by SBI itself, and further that branches or offices of such subsidiaries shall be deemed to be those of SBI itself for the purpose of this Agreement so that the same shall constitute Licensed Sites.
Part IV deals about the ‘FEES’ and Part V deals about ‘PAYMENT TERMS’. Part VI deals about the ‘USE’. The understanding of these terms [is] necessary in order to appreciate the controversy raised by the appellants ‘SBI’ and therefore, the entire terms are reproduced herein below:
‘FEES’
SBI shall pay the Licensor the initial licence fees and the recurring licence fees specified in Schedule II to this Agreement for a countrywide licence for India for the Software Modules specified in Schedule I in accordance with and for use under the provisions of this Agreement.
SBI shall pay such other fees and expenses as arise in this Agreement at the rates specified in or in accordance with Schedule II.
Any assistance or services required by SBI and subsequently agreed to by the Licensor to deal with any matter not specifically undertaken in this Agreement (other than those provided at the Licensor’s then current standard rates) inter alia,
(a) to instal or implement Software or any new release (except as provided for in Article 8); or
(b) required as a result of user error or negligence during Productive Use will be charged separately on a per diem basis on the Licensor’s standard terms and conditions of service (including but not limited to payment terms). The Licensor’s per diem rates are specified in Schedule II.
Reasonable requests from SBI for such support or assistance shall not be unreasonably refused.
The Licensor will keep SBI informed on an on-going basis of its standard terms and conditions of service and current standard rates (which rates shall be those ordinarily charged to other Licensees).
Fees stated in this Agreement are stated and payable net of any withholding or other applicable taxes and also exclude any duties and charges so that, insofar as this may lawfully be done, the amounts stated as payable to the Licensor will be received in full by the Licensor on the due date.
Without prejudice to the generality of the foregoing, customs and import duties and octroi if any leviable, on the Software and Documentation imported into India under this Agreement shall be paid by SBI, as will any bank charges associated with any payments.
Any taxes, duties, or levies imposed by the authorities in Ireland, England (or such other place as any payment may be mutually agreed to be received by the Licensor) on the Licensor whether in respect of the Software or Documentation fees or otherwise will be borne by the Licensor.
PAYMENT TERMS:
5.1 The initial licence fees specified in Schedule II shall be paid as follows :
(a) 10% on signature of this Agreement against a bank guarantee;
(b) 35% on the earlier of commencement of delivery of the Documentation and Software to the Support Centre or 30th June, 1991;
(c) 35% on the earlier of Acceptance of the Software (including the BRANCHNET module) or 31st December, 1991;
(d) 25%, less US $ 100,000, on the earlier of the first commencement of live running at a Licensed Site or 30th April, 1992;
(e) US $ 100,000 on delivery by the Licensor to the support Centre of a six digit customer number facility;
(f) 25% on the earlier of commencement of live running at the tenth Licensed Site or 10th April, 1993. However if delivery of the aforementioned six digit number facility and the modifications referred to in Article 11.3 of this Agreement has not occurred by such date due to the fault of the Licensor then such 25% payment may be delayed by SBI until such delivery occurs.
5.2 The recurring licence fees commence on 1st October, 1991 and are payable quarterly in advance.
5.3 Training fees (specified in Schedule HI) shall be paid on a course by course basis. On presentation of the Licensor’s invoice in advance of each course. Training fees (as specified in Schedule II, for any further training shall be paid on presentation of the Licensor’s invoice in advance of the provision of such training.
5.4 Fees for implementation assistance shall be paid quarterly in advance (at the rates specified in Schedule II) in accordance with the Licensor’s estimate which shall be based on the work programmes agreed from time to time by the Licensor and SBI). Any work in any quarter exceeding that estimate shall be payable at the start of the next succeeding quarter; where work done in any quarter is less than had been estimated, the excess fees shall be credited against the estimate for the next succeeding quarter..
5.5 SBI shall have no obligation to make any payment of fees or expenses to the Licensor except those which are stipulated or provided in this Agreement or otherwise agreed to by SBI.
VI. ‘USE’
6.1 Subject to the further provisions of this Agreement, SBI shall be permitted Use of the Software and Documentation for its internal requirements only and shall be entitled to Productive Use of the Software and Documentation on Acceptance.
6.2 (a) Access to and use of the Software shall be under conditions of confidentiality and confined to employees of SBI, to the Licensed Sites and the Operating Environments.
For the purposes of this Article 6, employees of SBI shall be deemed to include such persons as may be engaged by SBI from time to time in the use pursuant to this Agreement of the Software, provided always that all such persons shall be subject to binding and enforceable non-disclosure undertakings, prohibiting (save for the purpose of this Agreement) and direct or indirect disclosure or use of the Software, Documentation or any confidential information. SBI shall be responsible for adherence by persons to such undertakings by taking appropriate action in respect of breach of any of them.
Remote site access shall also be permitted to bona fide customers of SBI in the ordinary course of its business through such remote site facilities as may be or may become available (and agreed to by the parties hereto).
(b) Access to and use of the Documentation shall be under conditions of confidentiality, and shall be confined to employees of SBI and the Licensed Sites.
(c) In addition to the foregoing, SBI’s auditors shall be permitted access under conditions of confidentiality to the Software and Documentation at the Licensed Sites to facilitate audit for SBI.
6.3 SBI shall not maintain or use the Software or Documentation or any part or copy of either of them or permit any of the foregoing for any purpose whatsoever other than for the internal requirements of SBI.
6.4 (a) Without prejudice to the generality of the foregoing, SBI shall not use, print, copy, reproduce or disclose the Software or Documentation, in whole or in part, except as is expressly permitted by this Agreement; nor shall SBI permit any of the foregoing.
(b) Save as is expressly permitted in this Agreement SBI shall not, directly or indirectly, disclose, transmit, share or otherwise allow access to the Software or Documentation in whole or in part, without the written consent of the Licensor, nor shall SBI permit any of the foregoing.
(c) SBI shall not sell, charge or otherwise (save to the extent expressly permitted by this Agreement) make the Software or Documentation available to any person..
6.5 (a) SBI shall not copy or permit the copying of the Software supplied by the Licensor save as may be strictly required for delivery to Licensed Sites and such further sites as are referred to in this paragraph (a), and for operational security and back-up purposes. The terms of this Agreement shall apply to any copies. SBI shall reproduce the Licensor’s intellectual property notices on all such copies. Copies may not be stored… other than at licensed Sites or the Support Centre nor may any copy be removed therefrom without the express written permission of the Licensor. Provided that SBI shall also retain copies for operational security and back-up purposes at designated disaster recovery sites in India, the designation of which shall be notified to the Licensor.
(b) SBI may use a copy of the Software on a back-up processor during breakdowns on the normal machine provided that such use shall only be in an Operating Environment at a Licensed Site and that such use shall be notified in writing to the Licensor as soon as practicable.
6.6 SBI shall be permitted to copy the Documentation supplied for use solely
in connection with the Software under the provisions of this Agreement. All such copying shall be managed and controlled from the Support Centre. SBI shall be entitled to hold such quantity of Documentation at each Licensed Site and at the Support Centre as shall be strictly necessary for operation security and use. SBI shall reproduce the Licensor’s intellectual property notice on all such Documentation.
Save to the extent strictly necessary for the use of the Software and Documentation under this Agreement, Documentation may not be stored other than at premises controlled by SBI nor, without the Licensor’s express written permission, may any Documentation be removed from any such premises except for transfer to another such premises.
6.7 SBI shall not attempt, cause or permit the reverse compilation or reverse assembly of the Software or any part thereof for any purpose whatsoever, nor shall it otherwise endeavour to create or recreate any source program( s) of the Software.
6.8 (a) Where any unauthorised use of the Software or Documentation occurs and the same is attributable to the negligence or lack of reasonable precautions (or failure to maintain the same) by SBI, then without prejudice to the Licensor’s other rights and remedies, SBI shall be liable to pay to the Licensor an amount equal to the loss it has suffered, (which shall be no less than the charges which the unauthorised user would have been obliged to pay to the Licensor under its then standard software licence terms had such user been properly licensed from the beginning of the unauthorised use).
(b) SBI shall notify the Licensor promptly on becoming aware of any unauthorised possession or use of any part of the Software or Documentation supplied hereunder by any third party.
6.9 Productive Use of the Software or any part thereof shall not be permitted prior to Acceptance. Where Productive Use occurs prior to Acceptance contrary to this prohibition, the Software shall be deemed to have met the Acceptance Tests.
6.10 The terms of this Article shall apply with equal force to modifications and new releases prior to Acceptance.
Part VII of the agreement deals about the SITE & SUPPORT CENTRE PREPARATION. Part VIII deals about the DELIVERY. Part IX deals about ‘ACCEPTANCE’ Part X deals about ‘SUPPORT’, Part XI deals about ‘MODIFICATIONS’, Part XII deals about ‘SECURITY & CONFIDENTIALITY, Part XIII deals about ‘DEFINITION OF MODULES ‘, Part XIV deals about ‘TRAINING’. Part XV about INTELLECTUAL PROPERTY; The same is required to be understood also. Hence para XV pertaining to ‘INTELECTUAL PROPERTY’ is reproduced :
“XV. INTELLECTUAL PROPERTY
15.1 The Licensor warrants that it has the right to licence the Software in India. The Licensor shall have the right to control and direct the defence of any claim that the Software infringes any copyright or patent, and will indemnify SBI against direct expenditures incurred in defending any such claim, SBI shall endeavour to give the Licensor adequate cooperation and assistance in any such claim.
Where any dispute arises between the Licensor and any supplier of third party software duly licensed under this Agreement to SBI then the Licensor shall nonetheless use all its reasonable endeavours to allow SBI to be supplied with such new releases of such software as would ordinarily be made available by the Licensor hereunder.
15.2 The Licensor will, on a continuing basis, defend or settle any third party action brought against SBI based on a claim that the Software as supplied to SBI infringes, an existing Indian or any International patent, provided that the Licensor shall first be promptly notified in writing of such claim and given complete authority, information and assistance required for the defence. The Licensor shall pay damages and costs (if any) awarded in such a claim against SBI, but shall not be responsible for any cost, expense or compromise incurred or made by SBI without the Licensor’s prior written consent.
15.3 Where, in consequence of a claim of patent infringement in respect of the Software, SBI is permanently enjoined from using the same Licensor will, at its expense, either procure for SBI the right to continue using the item under constraint or modify it to become non-infringing, or substitute another item of substantially the same functionality to the satisfaction of SBI.
15.4 SBI acknowledges that the Licensor owns or has been duly authorised to license and will continue to own or be so duly authorised to license the copyright and other intellectual property rights in the Software, Documentation, modifications and new releases and that it neither has nor will it acquire any interest in them of any kind save to the extent expressly granted and then only for the duration of this Agreement.
15.5 All copies of the Software provided by the Licensor or made by SBI (including, without prejudice, translations or compilations or partial copies within modifications, derivative works and updated works) are the property of the Licensor or have been duly authorised to the Licensor and may not be distributed, disclosed, or used in any way whatsoever by SBI without the Licensor’s prior written consent save to the extent expressly permitted by this Agreement. SBI will reproduce and include any copyright and restricted rights notices on any copies made by SBI in accordance with the instructions of the Licensor;
15.6 SBI will not provide or otherwise make available any Software in any form without the Licensor’s written consent except to SBI employees or the Licensor’s employees (and to such other persons as are expressly permitted access and use in this Agreement and only to the extent so permitted) and only for purposes specifically related to SBI’s permitted use of the Software.
Part XVI deals about ‘SOURCE CODE; Part XVII deals about ‘EXPORT LICENCE’, Part XVIII deals about ‘LIABILITY’, Part XIX ‘ARBITRATION’, Part XX ‘GOVERNING LAW Part XXI ‘NOTICES’, Part XXII deals about ‘FORCE MAJEURE’, Part XXIII ‘TERMINATION’, Part XXIV ‘WORLDWIDE OPTION’, The same is noted herein below :
XXIV. WORLDWIDE OPTION
Where SBI requests licences for use the Software for its branches or subsidiaries outside of India at any time within five years of the date of execution of this Agreement it shall be entitled to receive a discount of 80% per site per module from the per site list price specified in Schedule I for such of the licensed modules as are so marked in Schedule I.
Part XXV deals about ‘ENTIRE AGREEMENT’, Part XXVI ‘ENFORCEMENT, Part XXVII ‘NON-WAIVER’, Part XXVIII ‘STAMP DUTY’, Part XXIX ‘ASSIGNMENT’ and Part XXX ‘EFFECTIVE DATE’.
As noted earlier, the SBI had found that one of the items of Software namely Bankmaster Module was not as per the requirements. Therefore, they had returned the same to the supplier and had brought about an amendment to the Agreement. The amended terms of the Agreement only refer to the changes pertaining to the re-supply of the item and schedule of payment. However, the value of the software for the entire supply has remained the same without any change in the main clauses of the Agreement except for some mutual standing occurred between them, regarding the terms of payment.
11. The appellants had written a letter dated 3-12-1992 to the Jt. Controller, Exchange Control Department, Reserve Bank of India for re-exporting of software module. In this letter, they have clearly specified the value of the entire software imported by them for the branches countrywide on US $ 4,084,475.00. After re-export, they have filed before the Asstt. Collector of Customs, an application for re-export of the “Bankmaster Query Module” of the software Under Section 74 of Customs Act. They have intimated about the deposit of Customs Duty of Rs. 12,04,78,699.00 paid by them on the total invoice amount of US $ 40,84,475.00 on account of countrywide licence for use of the software. In this letter, they have not stated that they have paid reproduction charges but have clearly stated that their invoice value for use of the software as per invoice value is US $ 4,084,475.00. They have been given an Annexure of split-up of values in this letter. They again wrote another letter dated 19-7-1993 to the Asstt. Collector of Customs, wherein also they have requested for granting permission of re-export BM Query Module. This letter also speaks about the detail break-up of the various modules to RBI. They have stated that they estimate that the present market value will be definitely at least 10% more than the cost at which they had procured from the supplier as they had obtained special concession for the countrywide licence and that two years have elapsed since then. They filed their claim for duty drawback Under Section 74 of Customs Act. By their letter dated 20-6-1994 wherein also they have stated that they paid the said customs duty under the said invoice amount of US $ 40,84,475.00 on account of countrywide licence for use of the software in respect of the software modules received. In the Annexure also, they have given the split-up value and cost of software – all modules “countrywide”, cost of software – all modules (single site). In this letter, they have not mentioned about anything about the reproduction charges being different in the assessable value of the software. They again filed a letter dated 20-9-1994 claiming duty drawback Under Section 74 of 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 presently. This was followed by another letter dated 30-9-1994 pertaining to duty drawback on the said export of the claim. In this letter, there is no mention about the value being duty.
12. The supplier by their letter dated 31-7-1991 to Shri B.B. Saksena, General Manager, State Bank of India has informed them about having mutually signed copy of the detailed invoice No. 910701, dated 3-7-1991 covering the software consignment despatched to them on 17-7-1991, as per the terms of the Software Licence Agreement dated 29-6-1991. A letter further states that in terms of the Schedule II of the said Agreement, upon delivery of a copy of the Software to the Support Centre (Single site), the next instalment of US $ 1,429,566.25 has also become due and payable representing 35% of the licence fee specified in the above Schedule in respect of those of the Software modules as have already been delivered to the Support Centre. It also states that the above amount also covers the charges for copying/reproducing the Software and Documentation that SBI being used as per the terms of the Agreement. It also states that SBI would be entitled to copy/reproduce the software and documentation, a copy of which software and five copies of which documentation are to be delivered by them to the Support Centre under the said Agreement and thereby use these copies for its internal requirements as per the terms of the said Agreement (emphasis supplied). By their letter dated 17-9-1991 to the said Mr. B.B. Saksena, they have informed them that with reference to the telephonic clarification sought by them, that as per the Agreement dated 29-6-1991 executed between them, they hereby clarify and confirmed that the amount of the licence fee mentioned in the Schedule II of the said Agreement means the licence fee payable by them in respect of the copy of the software modules (excluding the IQ Module) and the copies of the Documentation supplied to the Support Centre (single site) and charges payable by SBI for making/reproducing and further copies thereof as per the terms of the said agreement to be used by SBI at any of the licenced site in India (countrywide licence) as per the terms of the said Agreement.
13. On a careful consideration of the entire terms and conditions of the agreement, and also the details furnished by the appellants to the Asstt. Collector of Customs for Duty Drawback, it is very clear that the licence fee for the supply of computers software was correctly arrived at by the parties as per the terms of Agreement as US $ 40,84,475.00. This is the correct assessable invoice value and it does not represent a different connotation and meaning inasmuch as the cost of the software for single site inclusive of cost of manuals totally valued at US $ 401,047/- only. As the lower authorities have observed, it is clearly an after-thought which is unsupportive and totally uncorroborated by any piece of evidence. The supplier has not come forward to clarify and support the appellant’s claim that the value of the entire software supplied to them is not US $ 40,48,475/- but is only US $ 401,047/-. They are giving a different meaning to the words reproduction charges to mean that the value of the software is only US $ 401,047/- and that they are paying the balance of huge amount as only reproduction charges and it is not the invoice value for supply of the software. This is totally unbelieveable, unsupportive and uncorroborated and in contradiction to the terms of the Agreement. The Agreement clearly specifies the licence fee and the Recurring Fee specified in the Schedule II of the Agreement. The Schedule II of the Agreement in para 1 states that the Initial Licence Fee for a countrywide licence for India for the Software Modules specified in Schedule I (excluding the IQ Module) for use under the provisions of the Agreement shall be US $ 4,710,000/-. The Initial Licence Fee for IQ Module shall be US $ 125 per site. Para 1.2 of the Schedule II states that from 1-10-1991 until the expiry of five years from the date of receipt by the Licensor of the payment referred to in Article 5.1(d) of this Agreement, the annual Recurring Licence Fee for India for the Software Modules specified in Schedule I (excluding the IQ Module) (for use under the provisions of the Agreement) shall be US $ 435,000. Thereafter the annual Recurring Licence Fee shall be US $ 217,500. The annual Recurring Licence Fee for the IQ Module shall be US $ 22.50 per site. Therefore, on a careful reading of this Schedule II, it becomes very clear that the Licensor had granted the Licence to SBI to use the software and Documentation in India for the internal requirements of SBI only on a non-exclusive and non-transferable basis at the licence site in operating environments specified in Schedule I. The licensor had granted to SBI authority to use of the software and Documentation – its subsidiaries carrying out bank activity in India for the internal requirements of such subsidiaries and further the branches and offices of such subsidiaries shall be deemed to be those of SBI itself, which also specified that they shall constitute licence site. Therefore, Part IV of the Agreement dealing ‘FEES’ clearly specifies that SBI shall pay the licence fees and the recurring licence fees and the recurring licence fees specified in Schedule II of the Agreement for a countrywide licence for India for the Software Modules specified in Schedule I in accordance with and for use under the provisions of this Agreement. The supplier has sent five copies, as can be noticed from the letter dated 31-7-1991 addressed by the M/s. Kindle Software Ltd. to Shri B.B. Saksena. The term use of the Software Modules as that of SBI can only mean that SBI are having several branches all over India and for the use of software Modules supplied, they can make copies of any portion of software by feeding it in a machine or support or transmitting them to a machine for processing of the same for instructions, statements or data contained in such materials or the use, of any Documentation. The term productive use has also been explained in the Agreement to mean use of software or any part thereof to process to part of SBI’s actual business transactions in parallel or live mode. The terms ‘use’ ‘productive use’ and ‘Use’ ‘Licensed Module’ denotes that the licence fee is being paid separately other than the reproduction charges and that the reproduction charges [do] not represent the value of the software. The terms of the Agreement clearly show that the appellants are not making any payments towards reproduction charges separately to the supplier. The licence fee represents the value of the goods as can be seen clearly from the terms of the agreement and the same is paid in terms of the Agreement and not on the basis of copies, which are being taken out by SBI for use for their different branches. The licence fee represents the transmission value of intellectual property. It represents the charges of the appellants for the entire technical work supplying the software and for its use for five years. For subsequent use, the suppliers are giving them concession, and on such concessions as indicated the use of software is extended. The suppliers are not collecting reproduction charges but collecting licence fee for the use of their intellectual property.
14. Both the lower authorities have rightly construed, understood and applied the definition of transaction value as appearing in Rule 4 of the Customs Excise Rules1 read with Rule 9(1)(c) of the Customs Valuation Rules, 1988. Rule 4(1) clearly states that the price actually paid or payable for the goods when sold for export to India. In this case the transaction value is Invoice Value indicated by the appellants as US $ 4034,475/-. They have maintained this figure throughout in their correspondence to the RBI as well as to the Asstt. Collector (Drawback). In fact, the appellants have not produced documents like project report etc. which would disclose that what they have paid is only licence fee and not reproduction charges. On being queried by the Bench on these documents, the ld. Advocate explained that the Project Report is a secret document and it cannot be divulged. It clearly discloses that the appellant is not willing to part with this crucial document, pertaining to the negotiation, which would clinch the issue in the matter. However, even on going through the documents produced and interpreting the terms of the agreement, it is very clear that the supplier has charged the licence fee for the entire supply of the software and the Invoice Value correctly represents the transaction value, which is the price actually paid by the appellants as per Rule 4(1) of the Customs Valuation Rules.
The Rule 9(1)(c) grants deductions for royalties and licence fees referred to in Rule 9(1)(c), which may include among other things payments in respect to patents, trademarks and copyrights. The rule further states that the charges for the right to reproduce the imported goods in the county of importation shall not be added to the price actually. paid or payable for the imported goods in determining the Customs Value. In this case as per the agreement, the licence fee for the supply of software alongwith five copies of documentation cost US $ 40,84,475/-. The bank is making subsequent copies and reproduction of the software for use in the branches and subsidiaries, which is a subsequent event and the same is not added at all to the invoice value by the Customs Deptt. The supplier is also not charging any licence fee for such reproduction of software copy and Documentation, as the same is being done by the SBI for the use in their branches and subsidiaries as per the terms of the agreement. The SBI are holding licence for use of software in their branches by making its copies as it is not possible for the bank to use the software in condition in which it has been imported to be used simultaneously in all the branches without making copies. The licence fee clearly represents the invoice value declared by them and not the reproduction charges and the claim of the appellants is not borne out from the terms of the agreement or from the correspondence in this case. In that view of the matter, we do not find any merits in this appeal. Therefore, while confirming the reasons given by both the authorities below, we reject this appeal.