2008(01)LCX0063

AUTHORITY FOR ADVANCE RULINGS (CENTRAL EXCISE, CUSTOMS AND SERVICE TAX) NEW DELHI

P.V. Reddi (Chairman), A. Sinha (Member) and Chitra Saha (Member)

Accel Frontline Limited

Versus

Commissioner of Customs (I & G), Delhi

Ruling No. AAR/01(CUS)/2008 in Application No. AAR/06(CUS)/2007 decided on 21.01.2008

Cases Quoted -

Associated Cement Companies Ltd. v. Commissioner of Customs 2001 (128) ELT 0021 (SC) (discussed)

Creg v. planque (1936) 1 KB 669) (mentioned)

Tata Consultancy Services v. State of Andhra Pradesh 2004 (178) ELT 22 (SC) (discussed)

Advocated By -

S. Murugappan, Adv R; Balaji,-Consultant R. Neelakantan, Company Secretary For the Appellant
Commissioner A.N. Sharma, Jt. CDR concerned CESTAT, New Delhi For the Respondent

RULING

Chitra Saha (Member)


1. M/s Accel Frontline Limited, a joint venture in India (hereinafter referred to as the Applicant) have filed this application under Sub-section (1) of Section 28H of the Customs Act, 1962. They state that they are engaged in the business of providing services for development of information technology infrastructure and software. In Annexure-I to their application it is stated that they propose to provide to customers in India the service of data recovery, where the data contained in floppy, Hard Disc Drive or any other hardware medium, is damaged or corrupted. The Applicant would receive the data in a defective medium from specific customers undertaking the job of recovery of data. For affecting such recovery the damaged /corrupted medium containing the data would be exported abroad, where data will be recovered and stored in a new medium. The data recovered and recorded on a new medium will be sent to India, along with the damaged medium from which the data was recovered. For rendering this service of recovering the data, the agency abroad will collect a service fee from the Applicant. Normally, if the recovered data is less than 20GB in size, it will be sent in multiple Digital Video Discs (DVDs) which will be provided by the foreign agency to the Applicant free of charge. If the data is more than 20GB, the same will be provided on a Hard Disc Drive (HDD) and the cost of such drive will be billed to the Applicant. In column 12 of the application they have posed the following questions for pronouncement of a ruling by this Authority:

(a) "What will be the classification and rates of import duties under the relevant Customs Tariff for the data recovered and reimported in different media."

(b) "What will be the assessable value as per Section 14 of Customs Act, 1962 for the goods exported from India for recovery of data and reimported after recovery of the data."

The Applicant has also claimed that Notification Nos. 24/2005-Cus dated, 1st March, 2005 and No. 94/96-Cus dated, 16th December, 1996, have a bearing on the rates of duty applicable for their imports.


2. In Annexure II containing the Applicant's interpretation of law and facts, it has been claimed that the media containing the data i.e. DVDs and HDDs are classifiable under 8523. It is stated that at the time of sending the defective media containing the data to be recovered, no duty is applicable. When the recovered data is sent back to India on new DVDs and HDDs, these imports are exempted from Basic Customs Duty under Notification No. 24/2005-Cus. dated, 1st March, 2005 and attract CV duty of 16 per cent under 85.23 of Central Excise Tariff. The Applicant have claimed total exemption from Customs Duty against Sr. No. 3 of Customs Notification No. 94/2006-Cus. dated, 16th December, 1996 for the reimportation of the DVDs and HDDs containing the damaged/corrupted data which had been exported and are proposed to be reimported, along with the new media containing the recovered data.


3. On the question of valuation of the imports of DVDs and HDDs containing the recovered data, the Applicant states that the recovered data contained in the medium being for the exclusive use of the owner of the data, will not be saleable or marketable to any buyer and will have no commercial value. If any value has to be determined for the import, it has to be only for the e medium in which the data is stored after recovery. In the case of the medium DVD, which is supplied to the Applicant free of charge, the value has to be fixed on the basis of comparable costs of such media in India. When the recovered data is sent on any other medium, then the value for such medium would be the transaction value, i.e. the price charged by the Foreign company from the Applicant for the medium.


4. Advance ruling in the application has been sought in respect of classification and valuation of the following imports:

(a) New DVDs and HDDs in which the data recovered from the DVDs and HDDs exported from India, have been stored;

(b) The DVDs and HDDs containing the corrupted/damaged data which were earlier exported from India and from which the data recovery was affected.


5. The Commissioner of Customs, Chennai (hereafter referred to as the Commissioner) has submitted his comments on the Application vide his letters dated, 16th August, 2007 and 14th September, 2007. The Commissioner states that imports of the damaged/cqrrupted DVDs and HDDs exported from India for the purpose of effecting recovery by an agency abroad, of the data contained therein, can be accepted to be a case of reimportation entitled to "nil" rate of Basic and Additional Customs Duty against Sr. No. 3 of Notification No. 94/96-Cus. Dated, 16th December, 1996, so long as these can be identified to be the same as those exported. However, bringing into India of new DVDs and HDDs containing the recovered data has to be considered as fresh imports, not eligible for exemption as reimportation under Notification No. 94/96-Cus., as in the process of retrieving the data, the media on which the data was originally contained has been changed. He further states that the recorded DVDs and the HDDs are classifiable under 8523 40 80 a,nd 8471 70 20 respectively, under the Customs as well as the Central Excise Tariffs. The recorded DVDs and the HDDs attract "nil" rate of Basic Customs Duty as per Sr. Nos. 15(b) and 8 respectively of Notification No. 24/2005-Cus. dated, 1st March, 05. The above media, i.e., DVDs and the HDDs, are liable to "nil" rate of additional Customs Duty in terms of Sr. Nos. 22(c) and 17(c) respectively of Central Excise Notification No. 6/2006-CE dated, 1st March, 2006. In respect of Special Additional Duty, while the DVDs are totally exempted as per Sr.No. 1 of Notification No. 20/006-Cus. dated, 1st March, 2006, the HDDs attract a duty of4 per cent in view ofpara 2 ofthe said Notification, read with Sr.No. 17 of Notification No. C.E. 6/2006.


6. In the comprehensive compilation on the application submitted at the time of hearing, the Joint Chief Departmental Representative (JCDR) Shri A.N. Sharma has reiterated the above comments of the Commissioner.

With respect to the submissions made by the Applicant in the application, Shri Sharma has strongly rebutted the claim of the Applicant that the data contained on the media which is being retrieved, has no commercial value. He states that data is a saleable commodity, that a data loss episode can cause a company dearly in terms of money and time. In this context, he has filed a hard copy of a website named Fundoo Data Web Site which quotes the price at which data relating to top companies in different states in India are being sold to marketing companies. He asserts that the value of the data has to be included in the assessable value of the DVDs and HDDs containing the recovered data when they are imported. He states that as the importer in the instant case is doing a job work and is procuring from the foreign service provider, the data after recovery of the same, on a different media, the value of the imports may be determined in terms of Rule 3 read with Rule 7A and Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. In particular, he emphasizes that the following elements mentioned in Rule 9 should form a part of the assessable value:

(i) commissions and brokerage under Rule 9(l)(a) (i).

(ii) the cost of packing whether for labour or materials in terms of Rule 9(l)(a)(iii).

(iii) Since corrupted data is a material supplied by the importer/agent, therefore, its cost in terms of Rule 9(l) (b) (i) & (iii).

(iv) Any element of cost and profit which the agent/importer/job worker charges from the owner ofthe goods in terms of Rule 9(l) (d)&(e).


7. Shri Sharma has also drawn attention to a news item appearing in Channel Times Staff, Mumbai, March 26, 2007 which mentions that M/s Seagate, Singapore International Headquarters Private Limited is to partner with M/s. Accel Frontline to provide professional data recovery service in the Indian market. The news item goes on to state that Seagate software solution and recovery services employing patented technology will enable M/s Accel Frontline service engineers to recover data from media, regardless of size or forms that have undergone severe physical damage, liquid damage, fire damage, software corruption, systems sabotage and accidental file deletion.

Shri Sharma states that the Applicant need to disclose their relationship with M/s Seagate to determine whether they should be deemed to be related for the purpose of Section 14 of the Customs Act, specially since the said news item reveals that Seagate and Accel Frontline will be partners.


8. In response to the issues raised by the JCDR Shri Sharma, the Applicant vide a communication received on 2nd November, 07 has made the following submissions:

that the Applicant and M/s Seagate are not related persons within the meaning of the Customs Valuation Rules 1988/2007; that Rule 2 of the Customs Valuation Rules 1988 defines "related persons" and that the Applicant and M/s Seagate do not come within the purview of the definition of "related persons" given in this rule. The expression "partners in business" has been used in the news item in a commercial sense and not in a legal sense which would lead to the two entities becoming related in terms of the Customs Valuation Rules. A copy of the agreement proposed to be signed by M/s Accel with M/s Seagate, has boon enclosed with the communication; that the Applicant currently proposes to deal with recovery of data only from Hard Disks and DVDs.

on the nature of the data being recovered, it has been mentioned that the same "is proprietary in nature created by the user and generated within the country on account of the fact that no installable software can be re-installed/recovered. As an importer in the present case, the Applicant does not own the data as it is only doing a third party recovery. Also the existing data can be of two types. One is self-generated in India and the other could be imported. Self-generated data is not liable for import duty. If the data is imported, the same has already suffered duty at the time of original import and cannot be liable for duty again.

If any installable software is also there in the defective media sent for recovery, the same could only be condemned as no installable software can either be recovered or re-installed. that the value of the invoice raised by M/s Seagate on the Applicant is inclusive of media costs, packing costs, freight charges etc. The Counsel of the Applicant also stated that commissions paid, if includible in assessable value in terms of the Valuation Rules, will be made part of value on which duty is paid. that the recovered data that has been copied into DVD will not contain any sound or visual data.

The above submissions were reiterated during the hearing on 13th November, 2007 when the JCDR was also present.


9. In the course of the hearing on 13th November, 2007, the question was put forward to the Counsel of the Applicant as to whether they would disclose the nature of the data that was being exported and imported to the Customs, in Order to establish the identity of the data being exported and imported. The Counsel stated that they would disclose the nature of the data being exported and imported to the assessing Customs Officers.


10. We have considered the submissions made in the application, as also the comments thereon submitted by the Commissioner and his representative. We agree with the classifications in the Customs and Central Excise Tariffs put forward by the Commissioner i.e.8523 40 80 for the recorded Digital Video Discs and 8471 70 20 for the recorded Hard Disc Drives. We also agree that the imports of the DVDs and HDDs containing the damaged data, exported for recovery of the data contained therein, are exempted from Basic Customs Duty and Additional Duties of Customs leviable under Section 3 of the Customs Tariff Act, 1985, against Sr. No. 3 of Notification No. 94/96-Cus. dated, 16th December, 1996, provided the fact of reimport of the same damaged data is established. We also agree that the imports of the Hard Disc Drives and the recorded DVDs (not containing any sound or visual data) containing the recovered data, are fully exempted from Basic Customs Duty under Notification No. 24/2005-Cus. dated, 1st March, 05 and from Additional Duty of customs leviable under Section 3( 1) of the Customs Tariff Act by virtue of Notification No. 6/2006-CE dated, 1st March, 2006. We further endorse the Commissioner's stand that no Additional Duty of customs on the imports of DVDs, containing the recovered data is leviable under Sub-section (5) of Section 3 of the Customs Tariff Act by virtue of Sr.No. 1 of Notification No. 20/2006-Cus. dated, 1st March, 2006. The imports of the Hard Disc Drives containing the recovered data, however, attract four per cent Additional Duty leviable under Section 3(5) of the above Act as per Notification No. 19/2006-Cus. dated, 1st March, 2006 as the exemption under Notification No. 20/2006- / Cus is not available in view of Para 2 of the latter notification.


11. We however disagree with the Commissioner's contention that benefit for reimported goods under Customs Notification No. 94/96-Cus. cannot be extended to the imports of the hard discs drives containing recovered data, and that these should be treated as fresh imports and charged to the four per cent Additional Duty of customs under Section 3(5) of the Customs Tariff Act on the full transaction value of the goods, as determined under the Customs Valuation Rules. The Commissioner states that import of the new medium, DVD or Hard Disc Drive, containing the recovered data, cannot be treated as reimport of the DVDs/HDDs containing the damaged data exported earlier, since the medium on which the data is recorded has been changed. Such an interpretation is unacceptable. What is being imported is not an empty medium but one on which the recovered data has been engraved and it is this data which determines the identity of the imported or exported goods. The JCDR has referred to a web site where different Ed.: The Hon'ble Judge might have meant "Customs Tariff Act, 1975" instead of "Customs Tariff Act, 1985". rates have been quoted for sale of data relating to different clusters of companies in India. Similarly there would be other rates for sale of, say, agricultural data relating to production per hectare in different states of the country. Different data will have different uses, different prices and will cater to the needs of different categories of consumers. It is the nature of the data recorded that determines the identity of the goods and this identity will not be changed if the medium on which it is recorded, changes.


12. In the case of Associated Cement Companies Ltd. v. Commissioner of Customs (2001) 4 SCC 593, the Supreme Court examined the question whether Customs Duty was leviable on technical material supplied in the form of drawings, manuals and computer discs etc. and if so, what was the value on which the duty was to be paid. In the above context, the Apex Court made the following observations which are relevant:

The value of an encyclopaedia or a dictionary or a magazine is not only the value of the paper. The value of the paper is in fact negligible as compared to the value or price of an encyclopaedia. Therefore, the intellectual input in such items greatly enhances the value of the paper and ink in the aforesaid examples. This means that the charge of a duty is on the final product, whether it be the encyclopaedia or the engineering or architectural drawings or any manual.

Xxx xxx xxx

It is a misconception to contend that what is being taxed is intellectual input. What is being taxed under the Customs Act read with the Customs Tariff Act and the Customs Valuation Rules is not the input alone but goods whose value has been enhanced by the said inputs. The final product at the time of import is either the magazine or the encyclopaedia or the engineering drawings as the case may be. There is no scope for splitting the engineering drawing or the encyclopaedia into intellectual input on the one hand and the paper on which it is scribed on the other.

(emphasis supplied).


13. In the case of Tata Consultancy Services v. State of Andhra Pradesh (2004 (178) ELT 22), the Supreme Court while holding canned software recorded on floppy/CD/hard drives to be goods on which sales tax was leviable made the following observations:

A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, if becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become "goods." We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the Paper or Cassette or Disc or CD.
(emphasis supplied).


14. The conclusions emerging from the above pronouncements of the Apex Court which are relevant for the present application are that software recorded on a cassette or the encyclopaedia Britannica on a DVD, is identified as software or encyclopaedia, that the encyclopaedia recorded on a different make of DVD will continue to be identified as encyclopaedia Britannica, that the encyclopaedia or the software is a single product whose identity cannot be segregated in terms of the intellectual input and the medium in which it is stored.


15. Following the above logic, data recorded on a medium has to be regarded as a. composite good and it cannot be given a dual identity, once as data, and then separately in terms of the medium on which it happens to be recorded. It is the nature of the data recorded, that imparts the identity to the goods and not the medium on which it is recorded. In the instant case, the data exported, albeit in a damaged condition, and the recovered data imported, have to be considered as the same goods, provided the Identity of the data exported and imported is established. The identity of this data does not change because of a change in the receptacle on which it is contained. The Commissioner's stand that the exported goods i.e. damaged data on DVDs/HDDs are different from the imported goods, viz. recovered data contained on new DVDs/HDDs, only because the medium on which the data has been recorded has been changed, cannot therefore be accepted.


16. Serial No. 2 of Notification No. 94/96-Cus. dated, 16th December, 1996 provides exemption from duty on goods reimported after repairs abroad, The term "repair" has been defined in dictionaries as follows:

Concise Oxford English Dictionary: "restore (something damaged, worn or faulty) to a good condition.

The New International Webster's Dictionary and Thesaurus: "to restore to sound on good condition after damage, injury, decay etc.

The Judicial Dictionary (13th Edition) compiled by K.J. Aiyer gives the following definition of the term:

The word "repair" conveys the idea of replacing worn, broken, or lost parts in a thing or restoring the thing to a good condition." In Creg v. Planque {(1936} 1 KB 669}, the word "repair" was taken to mean "the making good of defects, including renewal where that is necessary.

It was then observed: 'Therefore, whenever a thing or a part from a thing is worn out and a new thing is replaced in its place, such replacement of a new thing amounts to repair of the thing".

"Repair" thus implies restoring defective, worn out goods to a good condition, if need be, by replacement of defective parts. Sr. No. 2 of Notification No. 94/96-Cus exempts goods exported and reimported after repairs abroad, from so much of Basic Customs Duty and additional customs duties leviable under Section (3) of the Customs Tariff Act as is in excess of the amount calculated on a value equivalent to the sum total of "the fair cost of repairs carried out including cost of materials used in repairs (whether such costs are actually incurred or not), insurance and freight charges, both ways." By including "cost of materials" in the value on which duty is to be charged in case of re-imported goods received back after repairs abroad, the notification implies that incorporation of new material in the course of repairs is permissible. The cost of repair and materials in the present case will, inter alia, include the cost of the DVD/HDD on which the recovered data is recorded as also the service charges paid by the Applicant for recovery of the data. In the instant case, data which is damaged, is worn out and had become faulty, has been exported abroad where it has been restored to its original quality and has thereafter been reimported. In the process, the medium on which it was contained has been replaced. Incorporation of such new material in the process of repair does not make the repaired goods different from what was exported, so long as the original nature of the data is restored. In the instant case, the data recovered cannot be held to be different from the data received simply because the medium has been replaced in the process of restating the original quality of the data. We therefore hold that import of the data recovered from the defective data exported and reimported after restoration of the original quality, cannot be denied duty exemption against Sr. No. 2 of Notification No. 94/96-Cus. on the ground that the data exported are different from the data re-imported. To avail of the duty exemption for the importation under the above Notification, the Applicant, will however have to reveal the nature of the data to the Customs in Order to establish that the data imported is the same as that exported.


17. Both the Applicant as well as JCDR has made forceful submissions about the value to be attached to the data while calculating the assessable value of the DVD/HDD when they are reimported. The Applicant's Counsel contends that the data being proprietary in nature and created by the user for his own use, has no commercial value and therefore cannot be added to the assessable value. The JCDR on the other hand, claims .that data has value, which needs to be included in the assessable value of the DVD/HDD. As we have held that the reimported HDD will be eligible for duty exemption against Sr. No. 2 of Notification No. 94/96-Cus., its assessable value will be determined as per column 3 of Sr. No. 2 and it is therefore not necessary to take a view on the above issue.


18. To conclude, the classifications under the Customs and Central Excise Tariffs and the rates of duty chargeable on the recorded Digital Video Discs and Hard Disc Drives proposed to be imported will be as outlined in Para 13. The Additional Duty of customs of four per cent leviable under Section 3(5) of Customs Tariff Act 1975 read with Notification No. 19/2006-Cus. dated, 1st March, 2006 on the imports of the Hard Disc Drives containing the recovered data, will be charged on the value as determined as per Column 3 of Sr. No. 2 of Notification No. 94/96-Cus dated, 16th December, 1996 subject to fulfillment of all conditions specified in the latter Notification.

Pronounced in the open Court of the Authority on this 21st day of January,2008.

Equivalent 2008 (126) ECC 0207

Equivalent 2008 (152) ECR 0207 (AAR)

Equivalent 2008 (227) ELT 0313 (A.A.R.)