2025 (5) TMI 1935 - AT - Customs

Software Import Valuation: Transparent Duty Declaration Prevails, No Intentional Misrepresentation Found in Hardware-Software Pricing

Commissioner of Customs (Airport), Custom House, Chennai Versus M/s. ITI Ltd.

The SC examined the customs duty valuation of software imported with hardware. The Tribunal found no deliberate misdeclaration by the importer, who had ... Value of software - preloaded or imported separately - mistake or the misdeclaration - clearance on payment of CVD by availing exemption from payment of BCD - HELD THAT:- The Commissioner has observed that upon verification of Bill of Entry No. 4079 dated 03.07.2004, it was found that the software value had already been declared at Sl. No.15 which was referred to DRI, Bangalore for clarification and vide reply letter S/IV/26/04 (Chennai Air/B) dated 10.02.2006, it was stated that an error had occurred by adding the software value component again to the already declared value of ₹1,56,95,868/- that, the actual value was only ₹1,56,95,868/- and that the duty was correctly calculated only on the value of software which was required to be added to the value of hardware and hence, only ₹11,37,404/- was demandable. The mistake or the misdeclaration alleged by the Revenue, according to us, is on a very thin line; it is the case of the importer that they under good faith believed that the software was liable to rate of duty and its value was not required to be included in the value of the software imported by them but it is not the case that they did not declare the value and remit the duty. On the other hand, it is the case of the Revenue that the software which is embedded/etched on the hardware which is a firmware/embedded software, is different from the add-on or independent software which are traded independently. The exemption in the notification is not extendable to the subject software, in order to avail the above exemption, the importer had deliberately misdeclared the software component. The Revenue has relied upon the decision of Hon’ble Apex Court in Anjaleem Enterprises Private Limited Vs CCE Ahmedabad [2006 (1) TMI 271 - SUPREME COURT], wherein the decision of Acer India Ltd. Vs CCE [2004 (9) TMI 106 - SUPREME COURT] was distinguished by the Apex Court itself. From the perusal of the Grounds of Appeal as well as the Review Order, however, we do not see any whisper about reply dated 10.02.2006 by the DRI, admitting the payment of duty by the assessee and that an error had occurred by adding the software value component again. In view of the specific observation which goes to the root of the issue, we are of the view that the question of adding the value of software separately as declared in Acer India Ltd. (supra) or Anjaleem Enterprises Private Limited (supra) does not arise. Thus, we do not find any merit in the appeal filed by the Revenue and hence, we dismiss the same. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Tribunal was whether the value of software, when imported either preloaded on hardware or brought separately in the form of media, should be excluded from the customs duty valuation of the hardware and assessed separately under Heading 8524 of the Customs Tariff.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether the value of software, preloaded or imported separately, is to be excluded from the hardware value and assessed independently under Heading 8524Rs.Relevant Legal Framework and Precedents: The Customs Act, 1962, along with Customs Notification No. 21/2002 dated 01.03.2002, governed the applicable exemption and duty rates. The valuation rules under Rule 4 of the Customs Valuation Rules, 1988, were invoked for determining the correct assessable value. The Revenue relied on judicial precedents, notably the decisions in Anjaleem Enterprises Private Limited vs CCE and Acer India Ltd. vs CCE, where the Supreme Court distinguished between embedded firmware and independent software for customs valuation purposes.Court's Interpretation and Reasoning: The Tribunal examined the facts that the importer had declared the software value separately and had paid customs duty including CVD on the combined hardware and software value. The Revenue alleged that the importer had deliberately split the invoice value to evade customs duty on the software component, contending that software embedded in hardware (firmware) should not be exempted under the notification and that the exemption claimed was not applicable.The Tribunal noted that the importer had voluntarily paid the differential customs duty on the software value after the Directorate of Revenue Intelligence (DRI) enquiry and that the duty was correctly calculated and paid. Importantly, a communication from the DRI dated 10.02.2006 acknowledged an error in the valuation by double counting the software value and clarified the actual value and duty payable. This communication was not contested or addressed in the Revenue's grounds of appeal.Key Evidence and Findings: The Bill of Entry No. 4079 dated 03.07.2004 showed the software value declared separately. The importer's statements and DRI's investigation revealed no concealment or misdeclaration but a genuine confusion regarding the valuation of software embedded in hardware. The importer's voluntary payment of duty on the software component under Section 28(2B) of the Customs Act further supported good faith compliance.Application of Law to Facts: The Tribunal applied the Customs Valuation Rules and considered the judicial precedents cited. The decisions in Anjaleem Enterprises and Acer India were examined; however, the Tribunal found that these were distinguishable as the present case involved a software component already declared and duty paid, with no deliberate undervaluation. The Revenue's contention of deliberate misdeclaration was not substantiated by evidence.Treatment of Competing Arguments: The Revenue argued that the software was preloaded and hence should be valued as part of the hardware, denying exemption. The importer contended that the software was liable to duty and its value was declared and duty paid accordingly. The Tribunal gave weight to the importer's voluntary compliance and the DRI's acknowledgment of the valuation error, finding the Revenue's argument unsubstantiated.Conclusions: The Tribunal concluded that the software value was properly declared and duty paid, and that the question of excluding software value separately as per the cited judgments did not arise. The Revenue's appeal was dismissed for lack of merit.3. SIGNIFICANT HOLDINGS'The mistake or the misdeclaration alleged by the Revenue, according to us, is on a very thin line; it is the case of the importer that they under good faith believed that the software was liable to rate of duty and its value was not required to be included in the value of the software imported by them but it is not the case that they did not declare the value and remit the duty.''From the perusal of the Grounds of Appeal as well as the Review Order, however, we do not see any whisper about reply dated 10.02.2006 by the DRI, admitting the payment of duty by the assessee and that an error had occurred by adding the software value component again. In view of the specific observation which goes to the root of the issue, we are of the view that the question of adding the value of software separately as declared in Acer India Ltd. (supra) or Anjaleem Enterprises Private Limited (supra) does not arise.'The Tribunal established the principle that where software value is declared and duty paid, and no deliberate undervaluation is proven, the Revenue cannot disallow exemption or demand differential duty on the basis that software was preloaded or separately imported.Final determination: The appeal filed by the Revenue was dismissed, affirming the Original Authority's order dropping proceedings and accepting the importer's valuation and duty payment on software and hardware components combined.