2025 (1) TMI 1463 - AT - Customs

Data processing servers classified under CTH 84714190, exempt from DGFT restrictions, penalties set aside

CESTAT Kolkata held that imported data processing servers are classifiable under CTH 84714190, not as automatic data processing machines, and are exempt ... Classification of imported goods - Data Processing Server with all standard parts and accessories (second hand) - exemption under N/N. 24/2005-Customs, dated 01.03.2005, under entry No. 8 - misdeclaration of goods - confiscation of goods - import of restricted goods in violation of DGFT Notification No.05/2015-2020 dated 07.05.2019 read with Electronics And Information Technology Goods (Requirement for Compulsory Registration) order 2012 - penalty u/s 112(a) (i) of the Customs Act, 1962 for violation of Section 111(d), 111(l) and 111(m) of the Act - penalty u/s 114AA of the Customs Act, 1962 for violation of Section 111(d), 111(l) and 111(m) of the Act. Classification of imported servers - HELD THAT:- 'Servers’ are entirely different from “Automatic Data Processing Machines”. The function of a server is to receive and share data to other computer on its network. A server is an apparatus for the transmission or reception of information, image or data. The server may work in conjunction with the automatic data processing machine but a server itself never processes any data automatically like desktop, personal computer or laptop. The servers imported by the appellant are meant for specific application in a network, are entirely different from the “Automatic Data Processing Machine” including personal computers and laptop computers, which are actually stand-alone equipment. It is observed that 'servers' imported by the appellant don’t have the keyboard and monitors. Thus, the restrictions in the Exim Policy as per Para 2.31 of the Foreign Trade Policy (FTP) as notified by the DGFT Notification No.05/2015-20, dated 07.05.2019 are applicable only to computers including personal computer and laptop computer and not to 'servers' imported by the appellant. 'Servers' are classifiable under the CTH 8417. This view is supported by the decision in the case of COMMR. OF CUS., BANGALORE VERSUS MICROSOFT CORPN. INDIA PVT. LTD. [2007 (11) TMI 203 - CESTAT, BANGALORE], wherein at paragraph 3, it has been held that 'normally the servers will be the larger machines having very high memory. The processing speed also will be very high and there are various types of servers for various applications. There is no reason to exclude them from the scope of ‘Capital Goods’. So, they are not stand-alone computer. In any case, the Commissioner (Appeals) has upheld the confiscation on some other ground and he has also imposed redemption fine and penalty which is the final penalty imposed or only reduced.' The appellant has rightly classified the goods imported by them under the Customs Tariff Item No.84714190 and rightly claimed exemption under Notification No.24/2005-Customs, dated 01.03.2005, under entry No.8. Mis-declaration of goods - HELD THAT:- The goods not declared are items such as Output Power Supply, Switching Power Supply, AC-DC converter & Delta Energy system and Switches. These items are parts and accessories of the 'servers' imported by the appellant without which the 'servers' cannot function. The value of the same has already been included in the value of the 'servers' and no separate value has been paid for the parts and accessories. Thus, the findings of the lower authorities not agreed upon that the appellant has mis-declared these items. Thus, the allegation of mis declaration in the impugned order is not sustained. Accordingly, the confiscation of the goods on account of mis-declaration is not warranted. Undervaluation of goods - HELD THAT:- The value addition is mainly on account of inclusion of value of undeclared goods such as Output Power Supply, Switching Power Supply, AC-DC converter & Delta Energy system. However, these undeclared items are parts and accessories of 'Server' and their value has already been included in the value of 'servers' and hence no additional value need to be added for the undeclared items. Accordingly, the assessable value declared by the appellant is correct as there is no under valuation established. Hence, the value enhancement by the lower authorities rejected. Penalty imposed under Section 114AA of the Customs Act, 1962 - HELD THAT:- The appellant has filed the Bill of Entry with correct information and the allegation of mis declaration is not sustained. The classification of the goods as 'servers' under the CTH 8471 4190 is found to be in order - classification dispute cannot be considered as violation Section 114AA of the Act and accordingly, penalty imposed under section 114AA of the Act on the appellant is not sustainable. Penalty imposed under Section 112(a) of the Customs Act - HELD THAT:- Penalty under Section 112(a) relates to violations in regard to situation where goods are liable for confiscation under Section 111. In the instant case, the imported goods are not ‘restricted goods’. These goods are duty free goods and can be imported freely. In the instant case, confiscation of the goods is made on erroneous premises of law, by mis-interpreting the DGFT Notification No.05/2015-20, dated 07.05.2019, as the authority below has mixed up the ‘server’ with Desktops Computer and Personal Computers / Laptop and considered the same as “Automatic Data Processing Machine” and erroneously confiscated the server. Thus, the confiscation in the impugned order is not sustainable. For the same reason, the penalty imposed on the appellant under Section 112(a) of the Act is not sustainable. Conclusion - i) The confiscation of the imported ‘server’ falling under CTH 84714190 is not warranted, as the goods imported by the appellant are not ‘restricted goods’ and there is no violation of DGFT Notification No.05/2015-2020 dated 07.05.2019 read with the Electronics And Information Technology Goods (Requirement for Compulsory Registration) Order, 2012. ii) Imposition of penalty of Rs.20,00,000/- under Section 112(a)(i) of the Customs Act, 1962 is set aside. iii) Imposition of penalty of Rs.30,00,000/- under Section 114AA of the Customs Act, 1962 is set aside. The impugned order set aside - appeal allowed. The judgment revolves around the import of second-hand 'Data Processing Servers' by the appellant, M/s. Eastern Lights Industries Pvt. Ltd., and the subsequent legal challenges regarding classification, valuation, and penalties under the Customs Act, 1962.1. Issues Presented and ConsideredThe core issues considered by the Tribunal were:(i) Whether the confiscation of the imported 'servers' under CTH 84714190 was warranted, based on the allegation that they were restricted goods under the Foreign Trade Policy (FTP) and DGFT Notification No.05/2015-20.(ii) Whether the imposition of a penalty of Rs.20,00,000/- under Section 112(a)(i) of the Customs Act, 1962 for violation of Section 111(d), 111(l), and 111(m) was justified.(iii) Whether the imposition of a penalty of Rs.30,00,000/- under Section 114AA of the Customs Act, 1962 for alleged mis-declaration was justified.2. Issue-Wise Detailed Analysis(i) Confiscation of Imported 'Servers'The Tribunal examined whether the imported goods were correctly classified as 'servers' or if they were mis-declared as 'Automatic Data Processing Machines' (ADP), which are restricted under the FTP. The appellant argued that servers are distinct from ADP machines and are not restricted under the cited DGFT notification. The Tribunal agreed, noting that servers function differently from standalone computers and are meant for network applications, not automatic data processing. The Tribunal referenced previous decisions, such as the cases involving Microsoft Corp. and Dell India, to support the classification of servers under CTH 84714190 and their exemption under Notification No.24/2005-Customs.(ii) Imposition of Penalty under Section 112(a)(i)The Tribunal addressed the penalty imposed under Section 112(a)(i) for alleged violations leading to confiscation. It found that the confiscation was based on an erroneous interpretation of the DGFT notification, which did not apply to servers. Since the goods were not restricted, the penalty was deemed unjustified.(iii) Imposition of Penalty under Section 114AAThe Tribunal examined the penalty under Section 114AA, which pertains to mis-declaration. It found that the appellant had correctly declared the goods as servers, and the classification dispute did not constitute a violation warranting this penalty. The Tribunal cited the decision in the case of Sri Krishna Sounds and Lightings, which clarified that Section 114AA is primarily for fraudulent exports, not classification disputes.3. Significant HoldingsThe Tribunal held that the confiscation of the imported servers was not warranted, as they were not restricted goods and there was no violation of the DGFT notification. It set aside the penalties under Sections 112(a)(i) and 114AA, finding no mis-declaration or justification for the penalties. The Tribunal's decision was grounded in the distinction between servers and ADP machines and supported by relevant precedents.The final determinations were:(i) The confiscation of the imported 'servers' was not justified.(ii) The penalty of Rs.20,00,000/- under Section 112(a)(i) was set aside.(iii) The penalty of Rs.30,00,000/- under Section 114AA was set aside.The Tribunal allowed the appeal, providing consequential relief to the appellant as per law.