Sunil Dalal of Softcell arrested

The Directorate of Revenue Intelligence (DRI) has arrested Sunil Dalal,
Founder and Director of Softcell Technologies. The DRI alleged that Softcell
imported embedded software from Microsoft Singapore in the form of CDs and DVDs
and it paid customs duty only for the software, which was present in CD format.
It claimed that this tax was just five percent of the value of the software
shipment, while the tax for software imported in the form of paper licenses was
unpaid.

But D Venkatesh, Director of Softcell revealed that for the past 18 months,
DRI has been interrogating them. “We received a notice from DRI in February
2007. The actual dispute is on the confusion of zero percent duty for license
software. Now the government claims that it attracts 12.5 percent tax,” he
added.

He continued, “We never refused to pay the tax, but we asked the DRI to give
us a notice which clearly stated how much tax was to be paid and under which
section of the tax laws. Till date we have not received any such notice. Without
giving much information DRI arrested Dalal, which is very saddening.”

Needless to say, this news came as a shock to the channel community and they
fear that similar instance can have a debilitating effect on the software
business in the country.

The DQ Week spoke to partners across the country about this instance and how
they are geared for a similar event concerning their business.

Rajesh Kothari of Blue Chip Computers, Mumbai said, “Practically speaking,
there is no clarity regarding custom duty, service tax and income tax that can
be imposed on software sales. Firstly, the government has to clarify this before
it takes any actions against traders. Channel partners should also be informed
about what is payable from their end because all of us are ready to pay.
Softcell runs a genuine business and there is no smuggling involved. It's just
an interpretation of the law that put Dalal behind bars.”

Explaining the system followed by the channel in this business, Kothari said,
“A very important aspect of the issue is that checking happens at every level.
If people commit mistakes they should be punished then and there itself. Why DRI
is taking action at such a later stage is a big question. Putting a person in
jail is an extreme step. I don't think that Softcell ever tried to evade tax.”

For the past few months, the software channel in the country has been trying
to come to terms with the various taxes applicable in this business. Recently
the government decided to levy sales tax on software business. Kothari mentioned
that there is a lot of confusion about the same in the market. “The confusion is
surrounding the two different taxes applicable on the same product,” shared
Kothari.

Harinder Salwan of Mumbai-based Tricom International agreed with the above
statement and said, “The interpretation of the law is the key reason for the
arrest. Dalal has been arrested for not paying taxes on paper licenses imported
by him. Everyone in the business has been operating on the premise that there is
no tax on paper licenses. The DRI should have taken steps to educate software
partners about this long ago.”

Sudarshan Ranganathan of Veeras Infotech, Chennai, is equally perturbed by
this incident. “It is not fair on the part of DRI to put Dalal in jail without
giving him a justification on the grounds he was arrested. At this time we
expect Microsoft India to support its partners to keep business continuity in
the country,” said Ranganathan.

Microsoft officials claimed that they are in touch with their legal
department about this situation to see how they can give a clarification about
the nature of tax to be levied on their importers in India. They hope to be able
to present this information later next week.

As the news of Dalal's arrest spread partners were found trying to get a
clarification, because it was rumored that DRI was asking all major Microsoft
partners importing or selling software licenses to give an account of the taxes
they have paid.

Hemant Chabria of Kolkata's Chabria Infotech said, “We are trying to
understand who will be the next target of DRI. We can expect only two results if
the government takes similar steps with other software sellers. First, the
industry will collapse within no time. Secondly, if the parameters of the
industry continuous to be so high, people will definitely stop selling software
licenses.”

Alok Gupta, CEO of Delhi-based Softmart Solutions mentioned, “I am fully
supporting Dalal as there is some misunderstanding on the part of DRI. Dalal has
strictly being following the parameters of the industry and this incident has
taken place because there is a lot of confusion and misunderstanding around the
software tax structure. I hope that the law will be in favor of him.”

ISODA offers support

In the meantime most of the partners spoken to were unanimous in their
support to Dalal. The Indian Software Dealers Association (ISODA) is discussing
the issue with its members as well as with legal advisors to take further
decision.

Prabhakar Kini, Vice-Chairman of ISODA, Bengaluru Chapter said, “We never
thought that such a thing would happen to someone like Dalal who has been
running this business of software import for so many years. As an association we
definitely extend our support to Dalal. One of our members is visiting
Softcell's office to understand what exactly happened. We are trying to
understand the facts from all directions to come up with a solution to protect
Dalal as well as other software license resellers.”

As per ISODA executive members, anybody can be sued for interpreting the
taxation laws differently. Sometime ago, ISODA members tried to hold a
discussion with the government to seek clarification for the confusion
surrounding software taxes payment and are awaiting results. The board is
talking to legal experts and on the basis of the advice from the same they may
go to court for a clarification.

Meanwhile, the question raised in the channel community is why was Softcell
targeted? Why were other big players in the same business not targeted instead?
Or are they next in the crosshairs of DRI? That remains to be seen.