2025 (8) TMI 1011 - AT - Customs

Imported portable navigation systems: preloaded software included in assessable value; differential duty, confiscation upheld; penalties reduced

M/s. Lakshmi Access Communications Systems Pvt. Ltd., Shri. Mahendra Kumar D Jain, Director, Lakshmi Access Communication Systems Pvt. Ltd., Shri. Durlabh Chand D Jain, Director, Lakshmi Access Communication Systems Pvt. Ltd. Versus Commissioner of Customs, Bangalore

M/s. Lakshmi Access Communications Systems Pvt. Ltd., Shri. Mahendra Kumar D Jain, Director, Lakshmi Access Communication Systems Pvt. Ltd., Shri. Durlabh ... ISSUES PRESENTED AND CONSIDERED 1. Whether the value of software preloaded/etched into imported navigation devices is includible in the assessable value of the hardware for customs valuation purposes. 2. Whether separate importation and assessment of paper/software licences (claimed exempt) displacing value from the hardware amounted to undervaluation/misdeclaration warranting recovery of differential duty, interest, confiscation and penalties. 3. Whether confiscation of seized goods and imposition of penalties under the Customs Act are sustainable on the facts; and if so, the quantum of penalty applicable to corporate directors who were co-noticees. ISSUE-WISE DETAILED ANALYSIS Issue 1: Inclusion of preloaded/etched software value in hardware assessable value Legal framework: Customs valuation and classification principles governing inclusion of value for composite/imported items; relevant notifications exempting stand-alone IT software; Tariff classification distinctions between recorded media/software and integrated/embedded software (e.g., headings encompassing integrated circuits, EPROM/flash memory versus recorded media). Precedent treatment: The Court considered and applied the line of authorities distinguishing removable/recorded media software (where software may retain separate identity and be non-includible) from embedded/firmware/software embodied in chips/ROM/EPROM/flash memory (where value is includible). Specific precedents discussed include: decisions treating software on removable media as separable; the Supreme Court's reasoning in Anjaleem Enterprises (embedded EPROM/firmware treated as integral to hardware); Larger Bench tribunal decisions (e.g., Bhagyanagar Metals) applying Anjaleem to similar embedded-software facts; tribunal/appellate authorities (Jabil, Avaya, Bharti Airtel, Vodafone Essar) distinguishing on facts. Interpretation and reasoning: The Court examined factual matrix showing that the navigation devices arrived with licence key numbers imprinted and the software already loaded/preloaded/etched in the devices at import. Relying on technical and precedent reasoning, the Court treated such embedded software as part of the functional hardware (an integrated system-firmware) rather than separable recorded media/software. The Court emphasized the essential character of the memory/chip as an integral functional component which cannot be equated with removable recorded media; the programme embedded in memory is a fundamental necessity for device function and not an optional add-on. The Court rejected applicability of authorities that held separable software non-includible where software retained independent identity and could be transacted separately. Ratio vs. Obiter: Ratio - where software is preloaded/embedded in hardware (evidenced by licence keys imprinted and programme residing on non-removable memory/chip), its value is includible in the assessable value of the hardware for customs duty purposes. Obiter - observations distinguishing Central Excise larger-bench jurisprudence (Grasim) as inapplicable here; ancillary comments on relevance of earlier decisions on transaction value in excise context. Conclusion: The value of software preloaded/etched into the imported navigation systems is includible in the assessable value of the devices; therefore addition of the separately declared software value to the hardware value for enhanced assessment was legally sustainable. Issue 2: Validity of treating separately filed paper/software licences (claimed exempt) as an attempt to evade duty - undervaluation and misdeclaration Legal framework: Customs valuation principles, classification rules, and notification-based exemptions for bona fide imported software; standards for determining whether separate documents/invoices legitimately represent distinct, dutiable or non-dutiable items versus artifices to segregate value to avoid duty. Precedent treatment: The Court relied on the factual-applicative trajectory of authorities which treat treatment of software as exempt only when software is genuinely distinct and transactable as software (recorded media), and which allow inclusion where software is embedded. The Court found instructive the Larger Bench tribunal's approach in factually similar imports (Bhagyanagar Metals) and the Supreme Court's Anjaleem ratio. Interpretation and reasoning: The Court relied on investigative material: recovery of multiple invoices with same numbers/dates, statements of company directors admitting that licence keys were preloaded and that separate invoices were prepared to convey 'right to use' classification, admission that extra free units were supplied and not declared, and that payment for hardware and software was made together. The Court treated these facts as evidencing deliberate segregation of value and misdeclaration aimed at claiming exemption for software while hardware indeed imported with embedded software. The Court rejected the contention that exemption applied because software was separately imported for retail sale or bona fide as standalone software when the software was functionally integrated into the devices at import. Ratio vs. Obiter: Ratio - where documentary and testimonial evidence establish that software was preloaded/embedded and appellant structured invoices to segregate value and claim exemption, such segregation does not negate inclusion of software value; separate assessment/clearance of paper licences in such circumstances may be treated as contrived for undervaluation. Obiter - rejected reliance on decisions favorable to separability where factual matrix (embedded software) differs. Conclusion: The Department's inclusion of the software value in the assessable value of the hardware and its finding of undervaluation/misdeclaration were justified on the factual record. Issue 3: Confiscation and penalties - sustainability and quantum Legal framework: Provisions permitting recovery of differential duty and interest, confiscation under Section 111(m) for misdeclaration/suppression, and penalties under Sections 112(a)/114A (and related) for importers and responsible persons/directors. Precedent treatment: The Court applied the established principle that confiscation and penalties are sustainable where misdeclaration, suppression of value or quantities is proved and where conduct is contumacious or deliberate. However, quantum of penalty may be moderated where excessive in facts. Interpretation and reasoning: Given documentary evidence and admissions indicating deliberate undervaluation and misdeclaration (including non-declaration of extra units and preloaded software), the Court upheld differential duty, interest, confiscation and penalties on the company. For penalties on individual directors, the Court found the imposed amounts excessive in light of circumstances and reduced each director's penalty to a specified lower sum, indicating proportionality review. Ratio vs. Obiter: Ratio - confiscation and imposition of penalties are sustainable where misdeclaration/suppression and documentary admissions establish intent and scheme to evade duty; discretionary relief on quantum of penalty may be exercised to avoid excessive punishment. Obiter - scope of mitigation in different fact-scenarios not exhaustively addressed. Conclusion: Confiscation of seized goods and imposition of differential duty with interest were upheld. Penalties on the corporate entity were sustained; penalties on individual directors were reduced as excessive and remitted to specified lower amounts. CROSS-REFERENCES AND NET CONCLUSION 1. Issue 1 (inclusion of embedded software value) directly informs Issue 2 (undervaluation via separate software invoices): factual findings that software was preloaded/etched and licence keys imprinted merit inclusion of software value and support finding of deliberate segregation. See Issue 1 analysis for foundational ratio. 2. Issue 3 (confiscation and penalties) rests on conclusions under Issues 1-2: proof of embedded software and deliberate invoice structuring justify recovery and confiscation; proportionality governs penalty quantum for directors.