Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise & Customs
(Tax Research Unit)
Room No. 147-A, North Block,
New Delhi-110001,
dated 4th November, 2009.
To
Chief Commissioner of Customs (All)
Chief Commissioner of Central Excise (All)
Chief Commissioner of Customs and Central Excise (All)
Commissioner of Customs (Import), Air Cargo Complex, Andheri (E),
Mumbai-4000099
Commissioner of Customs, Airport & Air Cargo Complex, Meenambakkam, Chennai –
600027.
Madam/Sir,
Subject: Applicability of indirect taxes on packaged software – regarding –
The undersigned is directed to state that ‘Packaged Software’ is a type of IT
software which caters to the needs of a variety of users and is capable of being
used for variety of hardwares. IT software is fully exempt from basic customs
duty being covered under Information Technology Agreement. So far as excise
duty/CVD is concerned, while customised software is fully exempt, the packaged
software attracts duty @ 8%.
- Shrink wrap software is a type of packaged software which consists of a box
containing software or software upgrade on media (i.e. CD/DVD), users manual and
end-user licence agreements, which is shrink wrapped in plastic cover and is
always sold as a set (without removing the plastic cover).
- Normally, cost of a software supplied in a media consists of two cost
components, namely,-
(a) the cost of the actual software, i.e. set of information which is placed on
a media; and
(b) the cost of the intellectual property right (IPR) relating thereto.
- In 2008 budget, the IPR portion of the cost of software was brought under the
service tax net under a new taxable service ‘IT Software Service’ (ITSS). As per
the definition, a service provided in relation to IT software for use in the
course, or furtherance, of business or commerce was covered under this taxable
service. In specifics, the taxable service included,-
(v) providing the right to use information technology software for commercial
exploitation including right to reproduce, distribute and sell information
technology software and right to use software components for the creation of and
inclusion in other information technology software products,
(vi) providing the right to use information technology software supplied
electronically and the term ‘service provider’ shall be construed accordingly.
- In their pre-budget representations for the 2009 budget, the IT companies and
their associations represented that if such IT software is imported, it is
likely to be subjected to double taxation. While for calculating additional
duty, the value of ‘right to use’ supplied alongwith the software would be
included (as per the provisions of the Customs Valuation Rules) by the Customs
authorities, the service tax authorities would charge service tax on the same
value (i.e. on right to use) considering it to be import of ITSS.
- Accepting their plea, in Budget 2009, two parallel notifications were issued
on the excise and customs side. Vide notification no.22/2009-CE dated 07.07.
2009, partial exemption from excise duty was provided to packaged or canned
software on that portion of the value which represents the consideration for the
transfer of the right to use for commercial exploitation, as on this portion,
service tax would be leviable under the ITSS. Similar exemption from CVD was
provided vide notification No. 80/2009-Customs dated 07.07.2009 on such
software. These exemptions were notified to ensure that while importing or
manufacturing packaged software, the importer/manufacturer is spared from paying
customs duty/excise duty on the value attributable to transfer of ‘right to
use’.
- It has been 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. It has been reported that 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.
- It may be recalled that the first proviso of the said 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 another case in Chennai, where fully packed product (FPP) was imported by
a company which produced split value (i.e., one value for media CVD 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 above 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.
- The assessment of the shrink wrapped packaged software may be done keeping
in view the above directions.
- This issues with the approval of the Member (Budget & ST).
Yours faithfully,
(Gautam Bhattacharya)
Joint Secretary (TRU-II)
F.No.354/189/2009-TRU
Tel: 23093027