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THE COMMERCIAL BANK OF CEYLONv
THE DIRECTOR GENERAL OF CUSTOMS AND OTHERS
COURT OF APPEALTILAKAWARDENA, J. (P/CA) ANDWIJ.EYARATNE, J.
CA NO. 218/2001AUGUST 26, 2002DECEMBER 9, 2002 ANDJANUARY 23, 2003
Customs Ordinance, No. 17 of 1869, sections 8 (1), 9, 10, 51 and 167 -Amending Act, No. 2 of 2003 – Applicability of section 10 to software installedin the computer system on a licensing agreement – Computation of the value- Sale of Goods Ordinance , sections 2 (1) and 2(3) – Is there a sale or pur-chase of goods?- Code of Intellectual Property Law, No. 52 of 1979, sections13, '44, 81 and 117 – What is a copyright? – Does it exclude goods? -Revenue Protection Act, No. 19 of 1962, section 2 – Imposition of customsduty – Applicable law.
The petitioner, a licensed Commercial Bank entered into a licensing agree-ment to use information by way of software programs. The respondent allegedthat the software installed in the petitioner’s computer system has beenimported on several tapes and C.D's through courier service without paymentof GST and other statutory dues.
The petitioner contended that the software programs do not fall within section10 and therefore duties cannot be levied.
The respondent contended that the value that has to be placed upon the goodshas to be considered as a value added to the carrier medium, viz., diskettesand disks on which the software was imported into the country and the carriermedium has a value added factor due to the additional material that had beenimported due to the value of the software that was contained therein.
Held :
The term goods, wares and medium disk have not been defined in theCustoms Ordinance. Schedule A referred to in section 10 comprised ofgroups of commodities in the rate of duties prescribed for each com-modity. Customs Authority could levy duty in terms of section 10 onlyupon such goods, wares and merchandise identified in Schedule “A".
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The Commercial Bank of Ceylon v The Director General of
Customs and others (Shiranee Titakawardena. J. (P/CA))
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On a perusal of Schedule E – section 10 it is clear that in terms of theHarmonising Code of the HS Code that software is not identified asgoods, wares or mechandise.
Clause 1 of Schedule E is the umbrella provision, which refer to thevalue of goods as the value which would fetch at the time of importa-tion on a sale in the open market. The petitioner has obtained only theright to use software through the licensing Agreement with “X” Ltd.,There is no outright purchase or sale of the software material – Clause2: 8: 2 of Schedule E is therefore not applicable.
Under the licencing agreement the provider retained the ownership ofthe software and only the right to use the software was granted by thelicencing agreement, to the petitioner
The contention that, when goods are valued – clause 2:9:2 – ScheduleE – if they are imported under a foreign copyright the value of this rightto use the copyright should also be included in the normal use, cannotbe accepted. The Brussels definition of value does not refer to the rightto use a copyright. Patents, designs and trademarks are all related toproducts, whereas copyright is related to intellectual creations. Thecopyright Law protects only the. form of expression of ideas and not theideas themselves. Copyright is excluded from the definition of goods.
Per Shiranee Tilakawardena, J., (P/CA) ■
“Off the shelf and customised software sold outright to a user are sub-ject to tax in the full value. In Licence Customs Software Packageimported as intangible personnel property on' a licencing fee should bevalued on the basis of a carrier medium only. The Licence CustomsSoftware being intangible personal property be excluded from thevalue of duty and payments for software programs stored on the carri-er Medium could only be valued on the career medium. In summarisingthe value of computer software that is imported on flexible diskettes canbe distinguished between the value of the software program and thediskette that carries the software (career media). The career media willalways affect the Customs duty.
The Petitioner is using customised software tailor made for the use ofthe petitioner Bank only and such would not attract Customs duty.
APPLICATION for a writ of certiorari.
Cases referred to:
Controller General of Customs v Lego Australia Partilim (Pvt) Ltd., (1997- 329 FCA (6.5-1997).
Deputy Minister of National Revenue v Mattel Canada INC (2001) -2SLR 100
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Elitunnel Merchanting Ltd., v Regional Collector of Customs 2000 – NZCA 270 (12.4.2000)
Mohan Pieris with T. Dharmawardena for petitioner.
C.R. de Silva, PC. Additional Solicitor-General with Sajeewa Samaranayakefor Attorney-General.
Cur.adv.vult
July 08, 2003
SHIRANEE TILAKAWARDENA J. (P/CA)
The petitioner is a licensed commercial bank within the meaning 01of the Banking Act No. 30 of 1988 as amended. The business activi-ties of all licensed commercial banks are regulated and monitored bythe Central Bank of Sri Lanka.
In order to improve the services afforded to the customers, thepetitioner bank had entered into a licensing agreement to use infor-mation by way of software programs. On 13th June 2000 the peti-tioner had received a letter from the Assistant Director General ofCustoms alleging that the application software installed in the peti-tioner’s computer system has been imported on several tapes and 10CD's through courier service without payment of GST and otherstatutory levies. Petitioner had made an application No. 692/00 to theCourt of Appeal and while the application was pending, the respon-dent served a notice summoning the petitioner for an inquiry undersection 8 of the Customs Ordinance.
On 15.01.2001, the petitioner has made an application in theaforesaid application seeking interim order staying the said inquiry.There the 1st and the 2nd respondents had taken the position thatthe said application relates to an order made in terms of section 9 ofthe Customs Ordinance, but the interim order sought by the petition- 20er was in relation to an order made in terms of section 8 (1) of theCustoms Ordinance. However, according to the directions given bythe Court of Appeal on 15.01.2001 the said inquiry was adjourned.
The Commercial Bank of Ceylon v The Director General of
Customs and others (Shiranee Tilakawarderia. J: (P/CA))
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Another notice dated 29.01.2001. was sent by the 2nd respondentsummoning petitioner to attend an inquiry on 08.02.2001 and the objec-tions .raised by the petitioners were overruled by the 2nd respondent.Therefore petitioner has filed this application praying for a writ of certio-rari quashing the said decision summoning the petitioner for an inquiryand the decision made on 08.02.2001 overruling the objections raisedby the petitioner. Further petitioner seeks a writ of prohibition restrainingthe respondents from proceeding with the said inquiry.
The only issue that has to be decided in this ease is whether thesoftware programs fall within the purview of Section 10 of theCustoms Ordinance insomuch as whether it includes “goods, waresand merchandise” for the purpose of levying duties thereunder.
Section 10 of the Customs Ordinance deals with the levying ofcustoms duty on goods imported into Sri Lanka and this Section readsas follows:
‘The several duties of customs, as the same are respectivelyinserted, described, and set forth in figures in the table of duties(Schedule A) shall be levied and paid upon all goods, wares andmerchandise imported into or exported from Sri Lanka”.
The term ‘goods, wares and merchandise’ has not been definedin the Customs Ordinance. Schedule ’A’ referred to in this sectioncomprised of groups of commodities or items in the rate of duties pre-scribed for each such commodity or item. This Schedule ‘A’ is basedon an International Convention on the Harmonized CommodityDescription and Coding System commonly referred to as the HSCode, which fact is considered by both parties. Accordingly theCustoms Authority could levy duty in terms of section 10 of theCustoms Ordinance only upon such goods, wares and merchandisethat had been identified by Schedule A of the Customs Ordinance.The respondents’ contention is that the value that has to be placedupon the goods has to be considered as a value added to the carriermedium, namely the diskettes or disks on which the software wasimported into the country. That the carrier medium, had a value addedfactor due to the additional material that had been imported due to thevalue of the software that was contained therein. In this regard it isimportant to peruse section 51 and the related provisions of theCustoms Ordinance which deals with the valuation of goods for the
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purpose of imposing custom duties.
Section 51 as amended by Act, No. 83 of 1988 reads as follows:
“In all cases when the duties imposed upon the importation ofarticles are charged according to the value thereof the respectivevalue of each such article shall be stated in the entry togetherwith the description and quantity of the same, and duly affirmedby declaration by the importer or his agent, and such value shallbe determined in accordance with the provisions of Schedule Eand duties shall be paid on a value so determined”.
The term “value” has been defined in section 167 which reads as 70follows:
“In relation to imported goods, whether such goods were import-ed lawfully, or otherwise, means the price of such goods, asdetermined in accordance with Schedule E’.
Paragraph 1 of Schedule E reads as follows:
‘The value of any imported goods shall be the normal price, thatis to say the price which they would fetch at the time of importa-tion on a sale in the open market between a buyer and a sell-er independent of each other as indicated in paragraph 2.7”.
In this regard it is imperative to ascertain whether the customized 80software used by the petitioner forms part of a sale as envisaged interms of the ambit of the paragraph 1 of Schedule E. On a perusal ofSchedule E of Section 10 it becomes clear that in terms of theHarmonizing Code of the HS Code that software is not identified asgoods, wares or merchandise. The ancillary issue that arises iswhether the value of the software should be added as a value added .factor in the valuation of the carrier medium, because by virtue of sec-tion 51 the duties had been levied upon an imported article on thebasis of the value. The contention of the respondent is that the soft-ware transaction of the petitioner falls within the ambit of Clause 2.8.2 90of Schedule E. This Clause reads as follows.
2.8.2.“When goods are valued if they are imported under a for-eign trade mark, the value of the right to use the patent, protect-ed design or trade mark shall be included in the normal price. Itfurther states that this section applies in the case of copyright or
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The Commercial Bank of Ceyldh v The Director General of
Customs and others (Shiranee Tilakawardena, J. (P/CA))
391
any other intellectual property.”
It is on this basis the respondent submits that software is a copy-right material which comes under the purview of this Clause. Howeverwhat is significant is that Clause 1 of Schedule E which is the umbrel-la provision refers to the value of goods as the value which wouldfetch at the time of importation on a safe in the open market. Underthe present circumstances the petitioner has obtained only the right touse software through the licensing agreement with Fiserve (ASPAC)Pvt. Ltd. There is no outright purchase or sale of the software materi-al that is the subject matter of this dispute.
In this context, the definition of the sale of goods or of section thedefinition of a sale contained in the Sale of Goods Ordinance section2 (1) is relevant. This section reads as follows:
“A contract of sale is a contract whereby the seller transfers oragrees to transfer the property in the goods to the buyer for amoney consideration called The price”.
Further section 2 (3) defines a sale as;
“Where under a contract of sale the property in the goods istransferred from the seller to the buyer the contract is called “asale”’’
Therefore when the petitioner obtained the right to use the soft-ware through a Licensing Agreement the provider retained the own-ership of the software and only the right to use the software was grant-ed by the Licensing Agreement. In this context, it is important to ana-lyze the relevant features contained in the Licensing Agreement.
Under the clause “Description of the software system” it is stat-ed that The ACBS system, and all modifications, enhancements,upgrades and traditions, whether made by Fiserve or by client, are thesole and exclusive property of Fiserve’s parent. Title to the ICBS sys-tem as well as all copyrights, trade secrets, and other rights shallremain in Fiserve’s parent, and client has permission to use the ICBSsystem subject to the terms and conditions of the Agreement”.
Also under “Limitations on use: Non-transferability” clause in thesaid Agreement states “ The ICBS system may not be used to provideservice bureau or time share services to third parties without the prior
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written consent of Fiserve. This Agreement, the license and the ICBSsystem to which it applies may not be assigned, sublicensed or oth-erwise transferred by the client without prior written consent fromFiserve, which consent”
On a perusal of these Clauses referred to above contained inLicensing Agreement makes it clear that only the right to use theCustomized Software was granted to the Petitioner. Therefore thiscould not be termed as a “sale” adverted to in Clause 1 ofSchedule E.
It is also important to consider that in Schedule E of the uoOrdinance the situation that was contemplated was where aprice was paid for a sale. In the present situation it is a licensingfee which has been paid by the petitioner merely for the use ofsuch software. In this context, the interpretation given by therespondent has also to be analyzed. The respondent stated thataccording to Clause 2.8.2 of Schedule E, software was a copy-right material. Therefore when interpreting Clause 2.8.2. whengoods are valued, if they are imported under a foreign copyright,the value of the right to use the copyright should also be includ-ed in the normal price. In this context, it is important to see iso •whether the Brussels Definition of Value on which Schedule E isbased, warrants such an interpretation. Article III of the BrusselsDefinition of Value reads when goods need to be valued are (a)manufactured in accordance with patented invention or goods towhich any protected design has been applied; or (b) are import-ed under a foreign trade mark; or (c) are imported for sale, otherdisposal or use under a foreign trade mark, the normal priceshall be determined on the assumption that it includes the valueof the right to use the patent, design or trade mark in respect ofthe goods. It is clear that the Brussels Definition of Value does 160not refer to the right to use a copyright. The definition shows thatthe patent, design and trade mark are all related to productswhereas copyright is related to intellectual creations the concept‘right to use’ in relation to patents, designs and trade marks andin relation to copyright, in order to understand it one has to dis-tinguish copyrights from other forms of intellectual rights.
CA The Commercial Bank of Ceylon v The Director General of 393
Customs and others (Shiranee Tilakawardena, J. (P/CA) )
The Copyright Law protects only the form of expression of ideasand not the ideas themselves. That law protects the form in which theoriginal work was expressed by the author. Sections 44, 81 and 117of the Code of Intellectual Property Act, No. 52 of 1979 deal with theright to use an intellectual design or patent and a trade mark. All thesesections refer to the use of a product embodying either an industrialdesign, patent or trade mark. Section 44 (1) '(b) states that the regis-tered owner of an industrial design has the exclusive right to import ofor sell or use a product embodying such industrial design.
Section 81 (3) (a) (i) which refers to exploitation of the patentedinvention refers to the act of using the product in respect of which thepatent is granted. On the other hand section 13 deals with the limitednumber of instances where protected work can be used. It is signifi-cant to note that special concept embodied in this section is fair useof a copyright. It must be emphasized that the fair use of a work pro-tected by copyright contemplates a totally different concept, whencompared with the use of a product embodying an industrial design oruse of a patented product.
David Bainbridge in Introduction to Computer Law 4**1 Edition atpage 168 states; “Contracts for the acquisition of software alone can-not be sale of goods contracts; the title to the software is not normal-ly transferred nor is a computer program or database a good”
Further states that “It seems unlikely, that even if the copyright istransferred with the computer programs, that an intangible computerprogram resident on a magnetic disk or in a computer chip is a per-sonal chattel (as opposed to the disk or chip), because copyright is a“thing in action” like company shares or a money order, to be con-trasted with the more tangible “things in possession” such as motorcars or computers. Copyright is thus excluded from the definition ofgoods.”
It has been the contention of the petitioner that the type of soft-ware used by the petitioner is specially made for the petitioner’s par-ticular and specific need and such software is not available in theopen market. Therefore the software that was obtained by the peti-tioner cannot be considered as a sale of goods contract and accord-ingly does not fall within the ambit of Schedule E and the relevant pro-visions of the Customs Ordinance, especially section 10 and section
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51. Accordingly the decision made by the respondents to call for infor-mation by documents dated 13.06. 2000 is ultra vires the powersgranted under section 9 of the Ordinance. For the Articles related tothe powers of the Director General of Customs is specifically spelt outin section 10 of Schedule A and includes only goods, wares or mer-chandise and precludes it being applied to the software which is thesubject matter of this case. It is relevant to quote at this stage the 210observation made by Michel Danet, Secretary General, CustomsOrganization, where he has stated that “From a technical perspective,the word Customs Ordinance strongly supports the WTO declarationthat imposing duties on intangible goods is not economic becauseCustoms would have to set up a control system, which would costmore than it would generate in revenue. The question of classifyingintangible goods, which have no physical equivalent, would also posemany difficulties”.
The powers given in terms of section 9 of the CustomsOrdinance is only to ascertain any matter relating to customs or with 220regard to any matter into which it is the duty of the Director General ofCustoms under this Ordinance. It is not the duty of the DirectorGeneral of Customs to decide whether the software is taxable com-modity by virtue of section 9 of the Customs Ordinance. Further, com-modities subject to custom duties are identified in Schedule E to sec-tion 10 of the Ordinance. A decision which should be made under thestatutory authority is only valid if it is made within the powers grantedby the Statute. In this context, Wade on Administrative Law 8th Editionpage 357 states as follows:
"Statutory powers conferred for public purposes is conferred as 230it were upon trust, not absolutely – that is to say, it can validly beused only in the right and proper way which Parliament whenconferring it is presumed to have intended1'.
This becomes more evident when perusing the proviso to sec-tion 10 wherein it provides “Parliament may from time to time, bymeans of a resolution duly passed at any public session, increase,reduce, abolish, or otherwise alter the customs duty leviable on anygoods imported into or exported from Sri Lanka".
By section 2 of the Revenue Protection Act, No. 19 of 1962, thereis provision for the cabinet by way of a Bill or resolution to impose any 240
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custom duty on any article for the time being not subject to such duty.Therefore it is only the Parliament which could decide as to which arti-cle should be identified as being subject to custom duty, and it is notthe duty of the Director General of Customs who has to only act incompliance of the powers given to him under the Statute and definedin terms of the Statute.
In terms of Section 51 of the Customs Ordinance, No. 17 of 1869it is required that the value of articles imported are to be determinedin accordance with Schedule E and for duties to be paid in accor-dance with such values. As referred to above, Schedule E in para- 250graph 1 states that the value of any imported goods shall be the nor-mal price. Paragraph 2.8 of Schedule E specifically states that thenormal price of any imported goods shall be determined on theassumption that when the goods are valued, the value of the right touse the patent, copyright etc. are included in the normal price.
Schedule E 2.8 reads:
That when goods are valued they-
are manufactured in accordance with any patented inven-
tion or are goods to which any protected design has beenapplied; or260
are imported under a foreign trade mark, the value of theright to use the patent, protected design or trade mark shallbe included in the normal price. (This provision shall alsoapply in the case of copyright or any other intellectual prop-erty rights).
This system of valuation which Sri Lanka had adopted wasbased on the Brussels Definition of Value (BDV) adopted afterConvention on the Valuation of Goods for Customs Purposes (15th ofDecember 1950 and entered into force on the 28th of July 1953)(Customs Law of Sri Lanka 2002 by P. Weerasekera and T. 270Kananathalingam) which discusses the two systems of customs valu-ation BDV and the GATT. It is important to consider that in compilingthe Brussels Definition of Value certain principles of valuation wereformulated by the European Customs Union Study Group 1947 andthese principles are as follows.
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Dutiable value should be based on equitable and simpleprinciples which do not cut across commercial practice.
The concept of dutiable value should be readily compre-hensible to the importer as well as to the custom.
The system of valuation should not prevent the quick clear- 280 'ance of goods.
The system of valuation should enable traders to estimate inadvance, with a reasonable degree of certainty, the value forcustoms purposes.
The system of valuation should protect the honest importeragainst unfair competition arising from under valuation,fraudulent or otherwise.
When the Customs consider that declared value may beincorrect the verification of essential facts to the determina-tion of dutiable value should be speedy and accurate. 290
. Valuation should be based on the greatest possible degree
on commercial documents.
The system of valuation should reduce formalities to aminimum.
The procedure for dealing with law suits between importersand the customs should be simple, speedy, equitable andimpartial.
It is important to say that whilst this article refers to definition of“value” in Articles 1, 2 and Articles 3 the interpretative notes tothe definition of value which is set out in the Addendum to Article 3°o1 reads as follows:
“Studied groups especially recommended in a generalAddendum that the concept of value expressed by the definitionand the interpretative notes be employed for the value of allgoods subject to customs declarations, including duty free goodsand goods liable to specific customs duties. Addendum to Article1 which is the note to be used for the Interpretation of theDefinition of Value has several sub notes and reads as follows.
CA The Commercial Bank of Ceylon v The Director General of 397Customs and others (Shiranee Tilakawardena, J.,(P/CA) )
Addendum to Article 1
NOTE 1
.j
The time when the duty becomes payable, referred to in para-graph (1) of Article 1, shall be determined in accordance with the leg-islation of each country and .may be, for example, the time at whichthe goods declaration for home use is duly lodged or registered, thetime of payment of customs duty or the time of release of the goods.
NOTE 2
The “costs, charges and expenses” mentioned in Article 1, para-graph (2) (b) include, inter alia, any of the following:
carriage and freight;insurance;commission;brokerage;
costs, charges and expenses of drawing up outside thecountry of importation documents incidental to the introduc-tion of the goods into the country of importation, includingconsular fees;
duties and taxes applicable outside the country of importa-tion except those from which the goods have been exempt-ed or have been or will be delivered by means of refund;
costs of containers excluding those which are treated asseparate articles for the purpose of levying duties of cus-toms, cost of packing (whether for labour, materials or oth-erwise);
loading charges.
NOTE 3
The normal price shall be determined on the assumption that thesale is a sale of the quantity to be valued.
NOTE 4
Where the determination of the value or of the price paid orpayable depends upon factors which are expressed in a currencyother than that of the country of importation, the foreign currency shall
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be converted into the currency of the importing country at the officialrate of exchange of that country.
NOTE 5
The object of the Definition of Value is to make it possible in allcases to calculate the duties payable on the basis of the price at whichimported goods are freely available to any buyer on a sale in the openmarket at the port or place of introduction into the country of importa-tion. It is a concept for general use and is applicable whether or notthe goods are in fact imported under a contract of sale, and whatever 350the terms of that contract.
But the application of the Definition implies an inquiry into currentprices at the time of valuation. In practice, when imported goods arethe subject of a bona fide sale, the price paid or payable on that salecan generally be considered as a valid indication of the normal pricementioned in the Definition. This being so, the price paid or payablecan reasonably be ■ used as a basis for valuation, and CustomsAdministrations are recommended to accept it as the value of thegoods in question, subject:
to proper safeguards aimed at preventing evasion of duty by 360means of fictitious or colourable contracts or prices; and
to such adjustments of that price as may be considered nec-essary on account of circumstances of the sale which differfrom those envisaged in the Definition of Value.
Adjustment under paragraph (b) above may in particular berequired with reference to freight and other expenses dealt with inparagraph (2) of Article 1 and Note 2 of the Addendum to Article 1, orwith reference to discounts or other reductions in price granted infavour of sole agents or sole concessionaires, or to any abnormal dis-count or any other reduction from the ordinary competitive price. 370
Thereafter consequently on an Agreement for theImplementation of Article 7 (VII) of the General Agreement of Tariffsand Trade in 1994 the primary basis for customs value under thisAgreement was defined in Article 1 as the transaction value. As aresult of the World Trade Organization Valuation Agreement formallyknown as the agreement on the Implementation of Article 7 of theGeneral Agreement of Tariffs and Trade 1994 (GATT) replaced the
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GATT Valuation Code. As a result of the Uruguay Round Multi LateralTrade Negotiations which created the WTO in 1994. But theAgreement -established a customs valuation system that primarily 380based the customs value on the transaction value of the importedgoods. It is significant and of importance to note that Sri Lanka whowas an original GATT member joined the WTO on the 1st of January1995 and thereby undertook obligations under the GATT (1994) -including the customs valuation'system. This agreement provided aset of valuation rules, expanding and giving greater position to theprovisions on customs valuation in the original GATT.-However, SriLanka repeatedly delayed the passing of necessary laws in order toimplement the WTO Customs Valuation Agreement in 2000 and 2001(World Trade Organization GA/AL7N/4/LKA/1) which is a notification 390concerning a decision under paragraph 1 of annexure 3 of theAgreement on Implementation of Article VII of the General Agreementon Tariffs and Trade 1994 dated 14th August 2000 and also the WorldTrade Organization GA/AL/N/4/LKA/1 /Corr. 11, a second notificationconcerning a decision under paragraph 1 of annexure 3 of theAgreement on Implementation of Article VII of the General Agreementon Tariffs and Trade 1994 dated 17th August 2000.
Most importantly Sri Lanka by an Act of Parliament bearing No.
2 of 2003 amending the Customs Ordinance (Bill No. 77-2002) incor-porated the GATT Customs Valuation Rules in Schedule E which pro- 400vides for the customs value of imported goods to be the “transactionvalue” that is the price actually paid or payable for goods when soldfor export. Further Article 8 (c) adds to the transaction value the roy-alties and licensing fees related to the goods being value which thebuyer must pay as a condition of sale. In the amending Act Article' 8states that;
Article 8.1 – "In determining the customs value under the provi-sions of Article 1 there shall be added to the price actually paidor payable for the imported goods(c) roy-
alties and license fees related to the goods valued that the buyer 410must pay, either directly or indirectly, as a condition of sale ofthe goods being valued to the extent .that such royalties andfees are not included in the price actually paid or payable.
Many of the Commonwealth countries have accepted this trans-action value method as is seen in many of the decisions of those
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countries. In the Administrative Appeals Tribunal Decision FederalPublishing Company of Australia and Collector of Customs No.N89/695 AAT No. 5919 Customs where it was held that the customsvalue of the subject goods was assessed under the transaction valuemethod and this was taken to by the Collector of Customs to be the 420total consideration passing under the contract of sale and it was heldthat the customs value of goods to be valued is the transaction valueof the goods and that was the appropriate method of valuing the sub-ject goods. In that case it was submitted that it was only one set of rel-evant imported goods, namely, the positive trends. Other goods exist-ed like negative trends that they were not imported. The transactionvalue was held to be the price paid in relation to other services andgoods. In the Federal Court of Australia also in the case of ControllerGeneral of Customs v Lego Australia Partilim (Pty) Ltdp) readily ithad been held that the primary method was the determination of the 430transaction value and this was on the basis of implementation ofArticle VII of the General Agreement of Tariffs & Trade to whichAustralia was a signatory and that as far as the customs vvere con-cerned as the value having regard to the transaction value method. Inthe case of Deputy Minister of National Revenue v Mattel Canada <2>(Canadian case) it was held that it was a valuation method that wasto be followed and it was the price paid or payable for the goods whenthe goods were sold for export to Canada and that the relevant salefor export is a sale by which title to the goods passes to the importer,if the royalties were not as a condition of sale, if the royalties were in 440the sale of contract the separate and distinct mark.. It was held that itwas not within the meaning of the transaction value method in termsof their Customs Act. In the case of Court of Appeal of New Zealand“Elitunnel Merchanting Limited v The Regional Collector of Customs!3)it was decided that was the transaction value method which was rel-evant. It is important to mention that at this stage certain Indian caseshad been cited as authorities. However it is important to note thatIndia has specific and several Acts that deal directly with computersand software programs and these differ from State to State. Thereforesuch cases would be inapplicable in Sri Lanka.450
Next matter to be determined by this Court is how software val-uation is determined. According to the Trade Information CentreDocumentation under Article VII of 1984 General Agreement on Tariffs
CA The Commercial Bank of Ceylon v The Director General of
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& Trade (GATT) it was declared that software valuation either may beinclusive or exclusive of the cost or value for the intellectual propertycomponent of the product. However it was recommended that soft-ware valuation to be based on the value or cost of the carrier medium(that is the optical) rather than the “intellectual property within” embed-ded in the medium. The United States maintains the practice of valu-ing software on the carrier medium and General Canada, WesternEurope and many Asian countries also adhere to this method of valu-ation.
An additional consideration with software is-the assessment oftaxes on the product. Unlike tariffs, taxes are imposed in the UnitedStates “eg. Value added taxes imposed at the board “are alwaysassessed on the full value of the software including intellectual prop-erty unless there is a special tax treaty with the particular country.However it has been recommended that the software valuation bebased on the value or cost of the carrier medium, rather than on theintellectual property embedded on the medium. (Trade InformationCentre Harmonized Tariff System (HTS) Category on GATT) and(Decisions adopted by the WTO Valuation Committee at its firstMeeting on the 12 May 1995).
During the 10th Meeting held on the 24th of September 1984 theCommittee on Customs Valuation re-affirmed that the transactionvalue was the primary basis of the transaction under the Agreementon Implementation of Article VII of the General Agreement on Tariffs &Trade. In determining the customs value of imported carrier mediawherein data or instruction only the cost or value of the carrier medi-um itself shall be taken into account. The customs value shall nottherefore include the cost or value of the data or instructions providedthat this is distinguished on the cost or value of the carrier medium. Inthe statement made by the Chairman at the Meeting of the Committeeon Customs Valuation of 24th September 1984, it was stated that if thetechnical facilities are available to the parties to the transaction, thesoftware could be transmitted by wire or satellite in which case thequestion of custom duties does not arise. In addition the carrier medi-um is usually a temporary means of storing the instructions or data. Inorder to use it the buyer has to transfer or reproduce the data orinstructions into the memory or data base of his own system. Furtherit was recommended that it will be consistant with the agreement if the
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cost or value of the carrier medium itself in determining the customsvalue of imported carrier media bearing data or instructions. Manyreasons can be adduced why the intellectual property component thatshould be excluded from the transaction value and therefore not besubject to customs duty.
If facilities are available the software/intellectual proper-
ty can anyway be sent through the internet or by satellite,in which case the issue of customs duties would notarise.500
The carrier medium is usually a temporary means of stor-age only.
In any event, there would be taxes (VAT, Sale taxes) onthe full value of the product.
Internet delivery also provides for expeditious delivery tothe customer.
Internet delivery would also eliminate shipping and han- ■dling charges.
The value of the intellectual property can be many timesgreater than the value of the carrier medium and the high 510duties could cripple business and trade.
Indeed the World Trade Organization’s Information TechnologyAgreement was negotiated in 1996 and entered into force in 1997. Itis in fact by which customs duties on information technology productscan be eliminated and Sri Lanka however is not a signatory to thisagreement.
However through out the Commonwealth it is the common prac-tice a common policy has been followed. Canada Values Software onits carrier medium alone for purposes of customs duty and this is theposition for sales of customs made software as is the subject matter 520of this case. The intellectual property is taxed with the GST and thishas been set out in the Ottawa April 17th 2001 Memorandum D13 -11-6. The guidelines and general information in determining value forduty on computer software was that the customs duty is not the basison the value of the instructions or data content as because it was a
CA The Commercial Bank of Ceylon v The Director General of 403
Customs and others (Shiranee Tilakawardena, J. (P/CA))
signatory country to the GATT Valuation Agreement.
In considering the salient matters in the present case it is impor-tant to note that it is only a copy of the computer software which is acustom defined program which has been provided under a license
agreement for an initial (up front charge) within an on going fee foruse. In such cases ownership and control of the software is not trans-ferred. to the receiving party. In other words, there is no sale. Thelicense or lease fee has been paid to the owner for the right to use thesoftware for an agreed period.
In all the circumstances of this case, it is the Opinion of this Courtthat off the shelf and customized software sold outright to a user aresubject to tax in their full value. However in License CustomsSoftware Package imported as intangible personnel property on alicensing fee should be valued on the basis of a carrier medium only.Therefore the License Customs Software being intangible personnelproperty be excluded from the value of duty and payments for soft-ware programs stored on the carrier medium could only be valued onthe carrier medium. In this context, carrier medium mean goods.capa-ble of storing software, whereas software or other instructions or datato be processed by data processing agreement.
The goods as far as taxation regarding to software are con-cerned would be the actual medium containing the software or infor-mation. For eg. the magnetite’s, the disk, diskettes, compact disks(CD’s) or read only “CD Videos”. If the items are off the shelf or cus-tomized both determine a difference in the customs duties. In this con-text, “normalized” are mass produced (off the shelf which are avail-able to all customers) and useable by them independently after instal-lation and limited training in a standard form to carry out the sameapplications and functions. They are made up of a coherent set ofprograms and support materials and include the service of installation,training and maintenance. In summarising the value of computer soft-ware that is imported on flexible diskettes can be distinguishedbetween the value of the software program and the diskette that car-ries the software (a carrier media). The carrier medium will alwaysattract the customs duty. In the present circumstances the petitioneris using customized software tailor-made for the use of the petitionerBank only and such would not attract customs duty.
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540
550
560
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''In all the circumstances of this case therefore the application ofthe Petitioners is allowed and the Court issue writs of certiorari toquash the order summoning the petitioner for an inquiry underCustoms Ordinance and the decision dated 8.2.2001 which overruledthe objections raised by the petitioner at the said Inquiry. Also a Writof Prohibition is granted restraining the respondents from taking anysteps under the Customs Ordinance. No costs.
WIJEYARATNE, J. – I agree
Application allowed.
