2026 (2) TMI 1349 - AT - Customs

Software Valuation: separately invoiced or identifiable software must not be aggregated into hardware assessable value; reopening needs statutory grounds.

Whether software value is includable in assessable value: the tribunal applied precedents distinguishing software from hardware and examined invoicing and ... Transaction value - Includability of software value in assessable value of imported goods - ggdistinctness of hardware and software for customs valuation - principle in PSI Data Systems [1996 (12) TMI 47 - SUPREME COURT] and its subsequent approval - re-opening / reassessment of finalised customs assessment - invocation of extended period and requirement of fraud/misrepresentation - penalty and redemption fine where no prohibition or regulatory violation is shown Includability of software value in assessable value of imported goods - distinctness of hardware and software for customs valuation - principle in PSI Data Systems and its subsequent approval - Whether value of software loaded into or supplied with diamond scanning machines is includable in the assessable value of the machines for customs duty - HELD THAT: - The Tribunal recognised the settled precedent that software sold with computer hardware is distinct from the hardware and ordinarily not includable in the assessable value of the hardware (noting PSI Data Systems and its subsequent approval). It examined the Commissioner's conclusion that the software formed part of a composite price and was artificially bifurcated into separate invoices for hardware and software, and noted evidentiary material including statements and price lists. The Tribunal found that, while the Commissioner accepted that software per se is not dutiable, he sought to include software value because the machines allegedly could not function without the software and invoicing showed an all-inclusive price subsequently split. Apart from decisions of Division Bench of this Tribunal, learned Special Counsel has placed on record a decision passed by Larger Bench of this Tribunal in the case of Bhagyanagar Metals Ltd. [2016 (2) TMI 614 - CESTAT HYDERABAD] to justify that when software could not be presented as a separate media and identifiable from the computer, assessment has to be done without any segregation of the value of software considering them as single goods for assessment. He further justified applicability of these decisions, though passed in case of Fixed Wireless Telephone with CDMA FWT Mechanism, into the instant case as the Larger Bench had rightly taken note of the order passed in PSI Data Systems Ltd. [1996 (12) TMI 47 - SUPREME COURT] as well as ACER India Ltd. [2004 (9) TMI 106 - SUPREME COURT] that was subsequently approved by the Constitution Bench and had given the findings which is squarely applicable to this case and therefore, inclusion of value of software in the value of diamond scanning machine is the proper way of assessment that was rightly concurred by the Commissioner. On the facts before it, and in light of higher judicial precedent which treats software and hardware as distinct for valuation unless the jurisprudential tests for treating them as a single assessable good are satisfied, the Tribunal held that the Larger Bench precedents relied on by the Department cannot override binding Supreme Court authority and therefore the inclusion of software value in the machine's assessable value was not sustainable. [Paras 5] Value of the software cannot be treated as part of the assessable value of the diamond scanning machines on the facts and legal precedent relied upon; the Commissioner's inclusion of software value is not sustained. Legality of initiation of reassessment, invocation of extended period by the Department without resorting to appeal provision in these cases when assessment was done by proper officer, duties were duly discharged and goods were released and it is not a case of the Department that invoice price is not correct or any additional sum is paid to the foreign supplier over and above the invoice price or similar or identical goods have been sold to other buyers at a price higher than the invoice price of the Noticees/Appellants and therefore, they are justified in claiming that redetermination of assessable value of diamond scanning machine under Rule 3(1) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 is not sustainable. Penalty and redemption fine where no prohibition or regulatory violation is shown - HELD THAT:- No specific provision under Rule 3 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 was pressed into service in the show-cause notice to effect such re-valuation which we find to be not without substance and also we fully endorse his views that penalties and redemption fine imposed in lieu of confiscation are not in conformity to law for the reason that goods proposed to be confiscated were not imported in violation of DGFT Regulations, or EPCG Scheme or Foreign Trade Development Act or Exim Policy or in violation of Customs Act in the sense that softwares, be embedded in the machines or subsequently installed into the same post importation clearance, are not subjected to levy of Customs duty. Hence the order. Issues: (i) Whether the value of software must be included with the hardware value to determine the transaction/assessable value of imported diamond cutting and scanning machines; (ii) Whether reassessment/redetermination of assessable value and invocation of extended limitation for finally assessed and cleared imports was legally sustainable.Issue (i): Whether the value of software is includable in the assessable value of the imported machines.Analysis: The authorities and parties agree that imported standalone software transmitted electronically is not ordinarily subject to Customs duty. The dispute concerns whether software sold or supplied as part of the imported machine must be treated as part of a single composite good for valuation where separate invoices or distinct pricing exist. Precedents of the Supreme Court distinguishing computer hardware from software (including PSI Data Systems and subsequent authoritative decisions) and Tribunal decisions rejecting automatic clubbing of software value with hardware were considered alongside Tribunal Larger Bench authority treating certain goods as inseparable where no separate identifiable software/media existed. The factual record, including price lists, negotiated lump-sum values, and admissions about invoicing practice, was examined to determine whether the software formed an inseparable component of the imported machine or whether separate invoicing and identification undermined any justification for aggregation of software value into the machine value.Conclusion: The value of software is not to be included with the hardware value where legal precedent distinguishes software from hardware and where separate invoices and identifiable pricing exist; therefore software value cannot be automatically aggregated into the assessable value of the imported machines in the present cases.Issue (ii): Whether reassessment/redetermination of assessable value and invocation of extended period for imports already assessed and cleared was sustainable.Analysis: The legal framework for reopening assessments and invoking extended limitation requires specific statutory grounds (such as fraud, collusion, or wilful misstatement). The record was considered for evidence of such grounds and for compliance with procedural requirements for rejection of declared value or preferring appeal before initiating reassessment. Judicial authorities restricting reopening to specified grounds and timelines were reviewed, and the factual record was found to lack conclusive evidence of fraud or the statutory conditions permitting extended reassessment; contemporaneous documentation presented at the time of clearance was available to the department and no appeal had been pursued to challenge the original assessments prior to reopening.Conclusion: Reassessment and invocation of extended limitation for finally assessed and cleared imports were not sustainable in law in the absence of requisite statutory grounds and proper procedural course; the redetermination of assessable value is not maintainable on the facts of these appeals.Final Conclusion: The combined legal and factual findings dispose of the appeals in favour of the importers by rejecting inclusion of the software value in the assessable value on the present record and by holding the reassessment and extended-period invocation unsustainable; consequential orders set aside.Ratio Decidendi: Where software is legally distinguishable from imported hardware and is separately invoiced or otherwise identifiable, its value is not to be aggregated into the assessable value of the hardware for Customs valuation; further, reopening or redetermination of assessable value for imports finally assessed and cleared is impermissible absent statutory grounds such as fraud, collusion or applicable provisions permitting invocation of extended limitation.