Softcell Technologies Limited
Mumbai, India
There has been extensive coverage in the media about investigations by the DRI on Softcell for Microsoft imports. Livemint is the only newspaper that has contacted Softcell for verifying the facts prior to publishing the story. Softcell bonafide believes that any unbalanced media reports and views that raise issues concerning the credibility and integrity of its business, should be appropriately clarified.
The issue
Microsoft offers software licences to customers under their licensing programs called Select and Enterprise Agreement (EA). The agreement provides option for customers to receive media, free of cost from Microsoft.
The Microsoft importers are of the view that (i) the CD/DVD (media) containing Software and (ii) Licence(s), are separately recognizable items under the Customs Tariff and as such are valued and classified separately under Customs Valuation Rules / Tariff Act.
- Customs Duty and Additional Duty (called Counter Vailing Duty or CVD) for Licence(s) under Heading 49.07 is at present nil.
- Customs Duty for CD/DVD (recorded media) under Chapter 85 is nil and CVD was applied since 01.03.2006 (at present 12.36%).
Since 1998, in general, the Microsoft importers have been classifying and valuing the imports as described above. Customs duty in the form of CVD for CD/DVD (media) has been imposed only from 01.03.2006. The practice followed for classifying and valuing the imports, both pre 01.03.2006 and post 01.03.2006 remains unchanged.
Softcell has been following the above process since the year 2005 when it became an importer. Softcell, based on industry practice and legal advice, is of the view that Licence(s) issued by Microsoft is only for the ’right to use the software by the customer’ (in India) and the same is not a condition of sale of the CD/DVD (media). According to Softcell, the value of Licence(s) is not includible in the value of CD/DVD (media) containing the Software.
The DRI is of the view that under the Customs Valuation Rules, licence fee is also to be added to the value of imported software media. According to the DRI, CD/DVD (media) on which CVD is paid, is the seed of a licence and therefore the value of the licence should be added to the CD/DVD (media). Therefore the DRI’s contention is that CVD that is paid on value of CD/DVD (media) should also be paid on the value of licence.
Softcell’s position:
Softcell firmly and bonafide believes it has done no wrong. The methods and processes adopted by Softcell are based on sound legal advice and are consistent with the prevalent and long-standing industry practices. Softcell is of the opinion that there is nothing illegal or untoward in the process adopted for the imports. Softcell has neither mis-declared any information to Customs department nor mis-interpreted laws to deprive revenue to the government. A genuine dispute between the tax payer and the Revenue can arise at any stage, but cannot be a reason to hold the tax payer as the wrong doer.
Softcell further believes that any disagreement or issues between the department and importers should be adjudged and settled as per due process of law and procedures established by law for such matters. In this context, Softcell believes that it has been unfairly singled out and targeted by the DRI for deterrent action (in the form of judicial custody) and the facts of this case have been framed to justify the DRI’s actions.
Softcell has till date been fully cooperating with the DRI and has acted in good faith and bonafide since the time the investigation started. Before the arrest, Softcell’s Managing Director, Mr. Sunil Dalal, personally attended and appeared at all six summonses issued by the DRI between April 08 to September 08. He is the only Managing Director among all LARs (Microsoft importers) to have personally attended and appeared, responding to all summonses. The agency recorded copious depositions in the course of more than thirty hours of questioning done as a part of the summonses. In seeking judicial custody of the Managing Director from the Courts for further questioning, Softcell thinks the action of the agency was inappropriate, excessive, harsh and avoidable.
Q&A about the issue:
Q. Press reports indicate that Softcell got a fabricated certificate from a Chartered Accountant to make remittances to Microsoft Singapore.
A. A Chartered Accountant's certificate is required under FEMA related guidelines to remit money for import of Software licenses that are imported in non-physical form (i.e. electronically). Softcell like a number of other importers adopted this practice for electronic import of Microsoft Software licenses. Softcell has neither fabricated any Chartered Accountant’s certificate nor mis-informed its Chartered Accountant about its use. The expression ’software' mentioned in the FEMA guidelines and 'imports electronically' would cover not only the media contained in the software but also licences and documents related to the software. This is the meaning attributable to ’software' in standard commentaries worldwide. The remittances to Microsoft were done through an RBI forex Authorised Dealer (HDFC Bank & Calyon Bank in our case). RBI has clearly prescribed forms for remittances and only these forms have been used by the Authorised Dealer to make remittances to Microsoft Regional Sales Corporation, Singapore.
Q. Why is Softcell being singled out and why are other Microsoft importers not being targeted by the DRI?
A. All Microsoft importers are under investigation. The DRI has issued several summonses to the gallery of all the importers and has understood from them the method of import being followed. Softcell is the smallest of the Microsoft importers. The other importers under investigation are Ingram Micro (now Tech Pacific ), Redington, Sonata, Wipro, CMC, HCL Infosystems, Dell and TCS. This investigation on Microsoft imports is being conducted by the DRI from its Mumbai Zonal office. Even Microsoft itself is being examined by the DRI.
Q. How are all the Microsoft importers and Softcell in particular dealing with the situation.
A. Since the time the DRI investigation started, Softcell has kept Microsoft informed about the developments. After news of the arrest of Softcell’s Managing Director was leaked to the media, the other importers when summoned again by the DRI, decided to pay a part of the disputed amount 'under protest' to forestall harsh penal action. Following the payments to the DRI by the other Microsoft resellers, Softcell also decided to pay a part of the amount 'under protest' to buy peace with the DRI. Softcell along with other importers now awaits a show cause notice from the DRI and will contest the notice in accordance with law.
Q. How is Microsoft dealing with this situation that the Microsoft importers are facing?
A. Microsoft is aware of the developments that are happening. Softcell, we are told continues to be a valued partner for Microsoft. If you as a customer have any concerns on this issue or about Softcell as a Microsoft partner, you may speak to the senior management of Microsoft India for further clarifications.
Q. Who is the lawyer advising you on this issue ?
A. Softcell is being advised by M/s. Lakshmi Kumaran & Sridharan, a leading law firm that specialises in indirect taxes. They also act as counsel to Microsoft.
Softcell’s position on certain media reports which appeared about DRI Investigation
