2026 (2) TMI 343 - AT - Customs

Valuation of networking equipment imports: embedded software included in hardware value; extended limitation denied and penalty set aside.

The value of embedded or integral software must be included in the transaction value of imported networking hardware; accordingly the confirmed duty on ... Undervaluation of the networking equipment imported - artificially splitting the transaction value into hardware and software - Inclusion of value of embedded or integral software in transaction value of hardware - interpretative classification and valuation - extended period of limitation u/s 28, invoked for fraud, suppression, wilful misstatement - penalty u/s 114A and confiscation u/s 111(m) - remand for re-quantificati on of demand for the normal period of limitation - HELD THAT:- A similar issue had come up before this Tribunal in the case of Commissioner of Customs (Airport), Custom House, Chennai v. M/s. ITI Ltd. [2025 (5) TMI 1935 - CESTAT CHENNAI] Taking note of the above ratio in the case of M/s. ITI Limited case (supra) which takes note of various judgements on the same, following the same, we hold that the value of the software is includable in the value of the hardware imported and as such the confirmation of duty in this regard is upheld. It is also seen in the ITI Ltd. (supra) decision, that it has been held that there is a thin line of distinction and that the error was bonafide. Even in the present case, it is not alleged that the appellants have supressed the import of the software. Merely due to their understanding, have chosen to dissect the value of hardware from that of the software. Therefore, we are of the view that no suppression with an intent to evade payment of duty can be alleged in the facts and circumstances of the present case. In our view, the issue herein is interpretative in nature therefore there is no misstatement or suppression of facts but rather it was the bonafide belief of the Assessee that the classification and valuation of the software done separate from the hardware by them is correct; thereby extended period of limitation cannot be invoked. In this context during the dispute period, the normal period of limitation under Section 28 of the Customs Act, 1962 only can be raised, which was 1 year. Therefore, the Bill of entry and invoices considered are ranging from the period of July 2006 April 2010 whereas, the SCN is dated 03.02.2011. Therefore, other than for the period from February, 2010 to April, 2010, the demand has been raised beyond the statutory limitation and accordingly barred by limitation. Imposition of penalty - In the case of Easland Combines, Coimbatore v. Collector of Central Excise [2003 (1) TMI 107 - SUPREME COURT], the Hon'ble Supreme Court had observed that for the invocation of the extended period of limitation, duty should not have been paid because of fraud, collusion, wilful misstatement, suppression of fact or contravention of any provision. Further holding that the said ingredients postulate a positive act and therefore the mere failure to pay duty which is not due to fraud, collusion or wilful misstatement or suppression of facts is not sufficient to attract the extended period of limitation. Accordingly, penalty is set-aside. The demand for normal period is upheld and to be re-quantified for the normal period of limitation. Issues: (i) Whether the value of software preloaded on imported networking equipment is includable in the value of the hardware for customs valuation; (ii) Whether the extended period of limitation under the proviso to Section 28(1) of the Customs Act, 1962 is invokable in the facts of the case; (iii) Whether penalties and confiscation imposed can be sustained.Issue (i): Whether value attributed to software preloaded on imported networking appliances must be included in assessable value of hardware.Analysis: The issue turns on whether the software is embedded/etched firmware forming an integral part of the hardware or is a separable, preloaded software stored on a non-volatile device such as a hard disk, and on prior tribunal authority addressing the distinction and valuation consequences. The factual and technical material regarding the manner of supply and storage of the software is relevant to determine if the goods constitute a single composite product taxable as hardware including software value.Conclusion: Value of the software is includable in the value of the hardware; the demand for differential duty on that basis is upheld for the period within the applicable limitation.Issue (ii): Whether the extended period of limitation under the proviso to Section 28(1) is attracted given the factual matrix and nature of the error in valuation.Analysis: Invocation of the extended period requires a positive finding of fraud, collusion, wilful misstatement or suppression of facts. Where the valuation approach arises from a bona fide, arguable interpretation and there is no allegation or finding of intentional suppression, the extended limitation cannot be validly invoked for periods beyond the normal statutory limitation.Conclusion: Extended period of limitation under the proviso to Section 28(1) is not invokable and is set aside; demands for periods beyond the normal limitation are barred.Issue (iii): Whether penalties and confiscation imposed under Sections 114A and 111(m) can be sustained.Analysis: Penalties and confiscation predicated on a finding of culpability require demonstration of fraud, wilful misstatement or suppression. Where the deficiency arises from an interpretative, bona fide error without evidence of deliberate evasion, punitive measures are not justified and must be reconsidered.Conclusion: Penalties and confiscation imposed are set aside.Final Conclusion: The decision confirms inclusion of software value in hardware for valuation but limits revenue recovery to the normal period of limitation; extended-period demand and penalties are annulled and the matter is remitted for re-quantification of duty and interest for the normal limitation period.Ratio Decidendi: Where undervaluation arises from a bona fide, arguable interpretation without suppression or wilful misstatement, the extended period of limitation and attendant punitive measures are not permissible; valuation of composite goods requires factual and technical assessment to determine whether software is integral firmware or separable preloaded software.