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Banks to pay Customs Rs. 1.5 billion as software tax
Several private commercial banks are to cough up more than Rs. 1.5 billion as un-paid taxes on software imported by them for which proper duty has not been paid, following a landmark Supreme Court judgment, Customs Department officials told The Sunday Times.

The Customs Department is hoping to collect nearly Rs 1,580 million following the Supreme Court ruling that software imported by these banks was liable to duty.

The new ruling by the Supreme Court, in effect, has now deemed that any intellectual property component included into a blank Compact Disc (CD) even after it has been imported, amounts to merchandise that is dutiable, and be subject to taxation.

The dispute had been in respect of the proper value to be placed on goods which have been used as the software. The Supreme Court held that such goods must be valued with reference to the right to use that software and they could not be treated for valuation purposes in the same manner as for a blank diskette.

A senior Customs Official said these banks had been depriving the state of hundreds of millions of rupees in revenue by failing to declare the actual value of the software they imported in the form of CDs for their businesses here.
One private bank had paid Rs 2.6 million to a company in the United States to buy software, but when the recorded CDs arrived here, the bank had declared the value of 18 such CDs as Rs 2,700, thereby concealing the actual value of the CDs, the official charged.

The Customs has estimated that the total value of the software imported into the country by private banks is in the region of Rs 2,850 million from 2001. Of this amount at least Rs1,580 million should be paid as revenue to the state.
When Customs began investigations in 2001, one of the banks under investigation — the Hatton National Bank — had invoked the jurisdiction of the Court of Appeal. It sought to quash a notice dated December 22, 2000 issued by the Superintendent of Customs calling upon the bank, in terms of Section 9 (1) of the Customs Ordinance, to provide information relating to its software imports from 1990. The bank also sought a writ of prohibition restraining the Director General Customs and the Superintendent of Customs from taking any further steps.

The HNB took up the position that the type of software used by the bank are all custom-made software and such software was not available in the open market and in consideration for the use of such software a licence fee was paid to the provider as opposed to a price where there was an outright transfer of property in good.

In 2003, the Court of Appeal delivered a judgment allowing the application of the Bank. The Customs Department then appealed to the Supreme Court and raised several questions of law including whether customised software used by the bank under a licence was not dutiable under the Customs Ordinance. The Customs also wanted the Supreme Court to decide whether the Court of Appeal had erred in law in drawing a distinction between the valuation to be placed on “off the shelf and customised software” for the purpose of determining the valuation under Schedule E of the Customs Ordinance.
According to Customs officials, many of the leading private commercial banks are involved in this practice and have been able to evade paying taxes till now.

The Supreme Court held that the fundamental position as laid down in Section 10 of the Customs Ordinance was that all tangible goods, wares and merchandise whether imported or exported were liable to Customs duty. The Court also held that books, periodicals, diskettes, magnetic tapes and compact discs containing relevant software imported into Sri Lanka constituted goods, wares and merchandise.

It also said that the Court of Appeal had on an erroneous assumption proceeded to exempt the HNB from Customs duty in respect of software imported by the bank on the basis that there was only the right to use the software through the licensing agreement.

"There is no legal basis for the proposition that customized software packages imported as intangible property on a licence fee should be valued on the basis of carrier medium only, while "off-the-shelf" software sold outright to a user, is liable to Customs duty on its face value", the Supreme Court held.

The Supreme Court bench comprised Justices T. B. Weerasuriya, N. K. Udalagama and Raja Fernando.

Solicitor General C.R.De Silva P.C. with Senior State Counsel N. Pulle appeared for the Customs Department.

K.Kanag-Iswaran PC with Dilshani Wijewardena appeared for the Hatton National Bank.

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