Friday, 28 August 2015

CESTAT rules that licence fees shall be included in the assessable value of commercial import of packaged software under Customs Act, 1962


We are pleased to release a Tax Alert on the recent decision of the Customs, Excise and Service Tax Appellate Tribunal  (CESTAT) regarding, inclusion of royalty / licence fee in the assessable value of import of packaged software under the Customs Act, 1962.

Assessee was involved in importing packaged software (commercial and non-commercial) from the group company. Licence fee was collected from the Indian buyer and a percentage of the same was remitted to the parent company situated in USA only in case of commercial software. It was alleged that assessee was indulged in duty evasion since the declared value of packaged software did not include the value of licence fee.

CESTAT held that licence fees remitted outside India shall be included in the assessable value in case of commercial import of packaged software. It also held that customs duty was not chargeable on electronic download of the software via internet.

The judgment would have a significant impact on the software industry, since most of the software companies follow a similar royalty model for distribution of software products in India. Further, it may result in hardship for these companies since based on this decision, both Service tax and customs duty may be levied on the royalty payments. At the same time, the CESTAT has held that customs duty should not be levied on electronic download of software, which is a relief.

Also, recently CESTAT in the case of United Shippers Ltd  gave an opposite view, that Service tax and customs duty are mutually exclusive, which was subsequently affirmed by the Supreme Court. While that judgment was in a different context (pertaining to the logistics sector), the contrary decisions on mutual exclusivity of Service tax and customs duty are likely to result in ambiguity on this point.

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