TaxTMI 
TaxTMI 
2025 (6) TMI 556
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....DRI is assailed in these four appeals by M/s. HP India Sales Private Limited HP India and its employees Shri V. Sridharan and Shri B.S. Ravishankar as well as by the Revenue. 2. In the impugned order, the Principal Commissioner confirmed the demand of duty with interest on HP India, held the seized goods to be liable for confiscation under section 111(m) of the Act and imposed redemption fine of Rs. 1,50,00,000/- under section 125 of the Act and imposed penalty on HP India under section 114A of the Act. He also imposed penalties under section 112 (a) of the Act on Shri Sridharan and Shri Ravishankar. However, he refrained from imposing penalties under section 112 and 114AA on HP and on Shri Venkata R K Nakkina, Plant head of HP India under section 112(a) of the Act. 3. Customs appeal 50203/2021 has been filed by HP India to assail the confirmation of demand of Rs. 23,98,72,726/- on it under the proviso to section 28(1) of the Customs Act, 1962 Act, imposition of redemption fine of Rs. 1,50,00,000/- under section 125 of the Act and penalty of Rs. 23,72,726/- under section 114A of the Act. 4. Customs appeal 50204/2021 has been filed by Shri V. Sridharan to assail the penalty....
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....to anyone else including Microsoft USA as a condition of sale by Mentor. As per the Agreement between HP, USA and Microsoft, it had to pay, and it paid only for downloading the software. The agreement also allowed HP to copy the Windows OS in QR CDs without paying anything extra. Therefore, the only cost of the CD to HP India was what it had paid to Mentor and it declared this price in the Bills of Entry and paid duty on it. 12. HP India has been filing Bills of Entry and clearing the QR CDs as per its declarations. The officers of DRI, Bengaluru receiving intelligence that the CDs were undervalued and full duty on them had not been paid, initiated an investigation. They searched the factory of HP India and seized QR CDs worth Rs. 7,12,33,603/- but later released them provisionally. DRI recorded statements of various persons, completed its investigation and issued two SCNs both dated 25.5.2010- the first proposing confiscation of the seized goods and imposition of penalty under section 112 of the Act and the second proposing recovery of differential duty under the proviso to section 28(1) of the Act on all CDs which HP had imported from 5.2.2007 to 25.6.2009. The proposals in bo....
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....e CD which is erroneous. (viii) The royalty attributed to the pre-installed software cannot be added to the value of the QR CD. (ix) Only the price paid or payable for the imported goods should be considered for determining the value. Reliance is placed on Eicher Tractors Ltd., Haryana versus Commissioner of Customs, Mumbai ( 2001 ) 1 SCC 315 and Ravindra Chandra Paul vs Commissioner of Customs ( Prev ) ( 2007 ) 3 SCC 93. (x) Even if value paid for pre-installed software is includible, it cannot be done under Rule 9(1) (c) of the 1988 Rules or Rule 10(1) (c) of the 2007 Rules. (xi) What cannot be done directly under Rule 9(1) (c) of the 1988 Rules or Rule 10(1) (c) of the 2007 Rules cannot be done indirectly under Rule 8 of the 1988 Rules or Rule 9 of the 2007 Rules. (xii) The software imported on QR CDs is not goods and hence is not liable to Customs duty. Reliance placed in the impugned order on Tata Consultancy Services versus State of Andhra Pradesh 2004 (178) ELT 22 (SC) is misplaced as that judgment was in the context of levy of sales tax. The QR CDs imported by the appellant do not qualify as goods because they are only a backup c....
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....or use in factory production; and (b) 459522-B23/Kti, CD ROM HP BACKUP & RESTORE VISTA (SOFTWARE) FOR USE IN FACTORY PRODUCTION. (v) There is no dispute that the appellant did not import blank CDs but imported CDs containing the original operating systems, drivers and application software. (vi) As per condition in para 2(e)(ii) of the license agreement between Microsoft and HP, HP has to distribute to each customer's system with at least one recovery solution which can be a hard disk recovery system, recovery media or both. (vii) At the time of import, HP India had not provided cross reference to the original download of software in the factory. (viii) Since the QR CDs contained the original OS, the value of the software is represented by the licence fee which was not included in the assessable value. The licence agreement is unambiguous but HP India had not produced the licence agreement at the time of import. (ix) Therefore, the submission of HP India that the value of the licence for the software cannot be included in the value of the CD is not correct. (x) The software contained in the CDs is not just a backup but i....
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....he 1988 Rules or Rule 9 of the 2007 Rules as was done in the impugned order? It needs to be noted that the 1988 Rules applied until the 2007 Rules were notified and thereafter, the 2007 Rules would apply but they are more or less similar. b) Consequently, can the differential duty be demanded? c) Has the extended period of limitation under the proviso to section 28(1) been correctly invoked in this case? d) Is the confiscation of the seized goods under section 111(m) correct and consequently, if the redemption fine imposed under section 125 fair and proper? e) Were the penalties correctly imposed on HP India under section 114A? f) Did the Commissioner err in not imposing penalty on HP India under section 114AA as asserted by the Revenue? g) Were the penalties correctly imposed on Shri Sridharan and Shri Ravishankar under section 112? h) Did the Commissioner err in not imposing penalty on Shri Nakkina under section 112 as asserted by the Revenue? Value of the imported QR CDs 19. According to HP India, it declared its transaction value honestly and it had not paid any extra amount to Mentor for the CDs. Mentor and H....
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....s imported into India shall, in addition, be liable to a duty (hereafter in this section referred to as the additional duty) equal to the excise duty for the time being leviable on a like article if produced or manufactured in India and if such excise duty on a like article is leviable at any percentage of its value, the additional duty to which the imported article shall be so liable shall be calculated at that percentage of the value of the imported article: 23. What is evident from the above charging sections is that the taxable event for charging the basic customs duty is either import of goods into India or export of goods out of India and for the additional duty of customs it is the import of goods into India. Thus, if goods are not imported into India, no customs duty is chargeable even if there was a sale of goods. For example, if one imports the goods and before they cross the Customs frontiers, re-exports them, no duty of customs is chargeable. 24. Conversely, if there is an import of goods even if there is no sale, duty of customs is chargeable because the pith and substance of duty of customs is import or export and not sale. 25. The measure of tax can be anyth....
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.... in the software and therefore, the value must be re-determined. 31. A question which may arise is why did Mentor sell to HP India the CDs with all the software including the Windows Vista for the price of a blank CD and a little towards the cost of copying the software when Mentor and HP India are not related persons and nothing is paid to either to Mentor or to anyone else as a condition for sale? To put it in perspective, what HP India declared was less than US$1 per CD while (as per the documents produced by the learned counsel for HP India during hearing) the cost of Windows Vista on CD during the relevant period was about US$175. 32. The reason is simple. The software, including the Window Vista OS which was copied on the CDs by Mentor belonged to HP India either being its own software or it having been obtained a licence from Microsoft. The blank CD and the effort in copying the software was the only contribution of Mentor. HP India imported CDs with the software but the transaction value reflected only the value of the blank CDs (and cost of copying) and not the value of the software. Therefore, the transaction value of the CDs in this case is less than 1% of the valu....
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....2007 and the 2007 Rules apply to the rest of the period of dispute. We, therefore, proceed to examine the 2007 Rules including the relevant portions of 1988 Rules as required. 36. Section 14 of the Act reads as follows: Section 14. Valuation of goods. - (1) For the purposes of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may be, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf: Provided that such transaction value in the case of imported goods shall include, in addition to the price as aforesaid, any amount paid or payable for costs and services, including commissions and brokerage, engineering, design work, royalties and licence fees, costs of tr....
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....o five conditions: a) Buyer and seller are not related. b) Price is for delivery at the time and place of importation, i.e., all costs up to the point of import are to be included. For instance, if the sale is on Free on Board basis, the costs of transportation to the place of import, transit insurance, etc. will have to be added. c) Price is the sole consideration for sale. d) Some amounts indicated in the first proviso to sub-section (1) of section 14 must be included. e) Valuation will be as per any other conditions as may be specified in the Rules. 38. The first proviso to sub-section (1) of section 14 provides for some additions to the transaction value. The second proviso to this sub-section provides for Rules to be made in this behalf to provide for : a) the circumstances in which the buyer and the seller shall be deemed to be related; b) the manner of determination of value in respect of goods when there is no sale, c) the manner of determination of value in respect of goods if the buyer and the seller are related, d) the manner of determination of value in respect of goods where price is no....
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.... if the valuation is done as per Rule 3. Rule 11 requires the importer to make a declaration. Rule 12 lays down the provision for rejection of transaction value. Rule 13 provides for interpretative notes for the Rules. 41. To sum up, valuation has to be done as per Section 14 of the Act and the 2007 Rules sequentially as follows: a) If a tariff value is fixed by the Board, it is the value (sub- section (2) of Section 14); b) If no tariff value is fixed by the Board, valuation is as per the transaction value, if necessary, with some additions (as per the first proviso to sub-section (1) of section 14 and as per Rule 10); c) If the transaction value is rejected as per Rule 12 by the proper officer, valuation has to be done as per the value of identical goods (Rule 4); d) If transaction value is rejected and there is no value of identical goods, then it must be as per the value of similar goods (Rule 5); e) If transaction value is rejected and there is no value of identical goods or similar goods, value must be determined through Deductive method (Rule 7) f) If transaction value is rejected and there is no value of identical goo....
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....ave the powers to raise doubts on the truth or accuracy of the declared value based on certain reasons which may include - (a) the significantly higher value at which identical or similar goods imported at or about the same time in comparable quantities in a comparable commercial transaction were assessed; (b) the sale involves an abnormal discount or abnormal reduction from the ordinary competitive price; (c) the sale involves special discounts limited to exclusive agents; (d) the mis-declaration of goods in parameters such as description, quality, quantity, country of origin, year of manufacture or production; (e) the non declaration of parameters such as brand, grade, specifications that have relevance to value; (f) the fraudulent or manipulated documents. 43. Thus, if the officer has reason to doubt the truth and accuracy of the transaction value, he can call for information including documents and evidence. If the information and evidence is presented and after examining it or if no information or evidence as called for is presented, if the proper office has reasonable doubt, then it shall be deemed that the value cannot....
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....ue of imported goods shall be the transaction value adjusted in accordance with provisions of rule 10; (2) Value of imported goods under sub-rule (1) shall be accepted: Provided that - (a) there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which - (i) are imposed or required by law or by the public authorities in India; or (ii) limit the geographical area in which the goods may be resold; or (iii) do not substantially affect the value of the goods; (b) the sale or price is not subject to some condition or consideration for which a value cannot be determined in respect of the goods being valued; (c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of rule 10 of these rules; and (d) the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purposes under the provisions of sub-rule (3) below. (3) (a) Where the bu....
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....sed in the production of the Imported goods; (iii) materials consumed in the production of the imported goods; (iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods; (c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable; (d) The value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller; (e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable. Explanation.- Where the royalty, licence fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses ....
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....arges. (3) Additions to the price actually paid or payable shall be made under this rule on the basis of objective and quantifiable data. (4) No addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule. 12. Rejection of declared value. - (1) When the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any imported goods, he may ask the importer of such goods to furnish further information including documents or other evidence and if, after receiving such further information, or in the absence of a response of such importer, the proper officer still has reasonable doubt about the truth or accuracy of the value so declared, it shall be deemed that the transaction value of such imported goods cannot be determined under the provisions of sub-rule (1) of rule 3. (2) At the request of an importer, the proper officer, shall intimate the importer in writing the grounds for doubting the truth or accuracy of the value declared in relation to goods imported by such importer and provide a reasonable opportunity of being he....
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....n value. (e)there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which, - (i) are imposed or required by law or by the public authorities in India; or (ii) limit the geographical area in which the goods may be resold; or (iii) do not substantially affect the value of the goods; (f) the sale or price is not subject to same condition or consideration for which a value cannot be determined in respect of the goods being value; (g) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller unless an appropriate adjustment can be made in accordance with the provisions of rule 9 of these rules; (h) the buyer and seller are not related, or where the buyer and seller are related, that transaction value is acceptable for customs purposes under the provisions of sub-rule (3) below. (3)(a)Where the buyer and seller are related, the transaction value shall be accepted provided that the examination of the circumstances of the sale of the imported goods indicate that the relationship did not influence t....
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....the buyer is required to pay, directly or indirectly as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable; (d) the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller, (e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller, to the extent that such payments are not included in the price actually paid or payable. (2) For the purpose of sub-section (1) and sub-section (1-A) of Section 14 of the Customs Act, 1962 (52 of 1962), and these rules, the value of the imported goods shall be the value of such goods, for delivery at the time and place of importation and shall include - (a) the cost of transport of the imported goods to the place of importation; (b) loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation; and (c) the cost of insura....
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....gned order re-determined the value under the residual provision of Rule 9 of the 2007 Rules (and Rule 8 of the 1988 Rules). The re- determination of the value, therefore, cannot be sustained on merits. 48. Learned counsel for the appellant also submitted that the demand cannot also be sustained because it is based on adding the amount of licence fee which HP paid to Microsoft invoking Rule 9 of the 2007 Rules. Such addition, according to the learned counsel, is not correct because of two reasons. Firstly, no amount was paid at all to Microsoft for the copy of Windows OS which was copied on the imported CDs and the amount was paid only for the downloaded copy of Windows. Secondly, the payment to Microsoft was not a pre-condition for sale and therefore, it was not includible in the value as per Rule 10(1)(c) read with Rule 3 of the 2007 Rules. According to the learned counsel, if the licence fee cannot be included under Rule 10(1)(c), it cannot also be included as per Rule 9 of the 2007 Rules. According to the learned special counsel for the Revenue, no demand was made at all invoking Rule 3 read with Rule 10(1) (c) of the 2007 Rules and the demand was made under Rule 9 of the 200....
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.... that they did not correspond in value to the declaration in the Bill of Entry. This allegation is based on the re- determination of the value which we have already found cannot be sustained. Section 111(m) reads as follows : Section 111. Confiscation of improperly imported goods, etc. - The following goods brought from a place outside India shall be liable to confiscation: - ********* (m) any goods which do not correspond in respect of value or in any other particular with the entry made under this Act or in the case of baggage with the declaration made under section 77 in respect thereof, or in the case of goods under trans-shipment, with the declaration for trans-shipment referred to in the proviso to sub-section (1) of section 54; 53. The entries made under the Act are the Bills of Entry filed under section 46 of the Act in this case. The case of the Revenue is that the values declared in the Bills of Entry do not correspond to the values re-determined in the impugned order. Such an interpretation of section 111(m) cannot be countenanced. The importer is required by law to make an entry by filing a Bill of Entry under section 46 of the Act and is a....
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....y finally determine. It is even more impossible for any importer to anticipate if after the goods are cleared, DRI will one-day start an investigation into its imports and then propose to re-determine the value as something other than the transaction value and file the Bill of Entry accordingly indicating the anticipated future value which DRI may find correct if it investigates the matter. The responsibility of the importer is confined to truthfully declaring the transaction value in the Bill of Entry. If the transaction value is not indicated correctly, the goods will be liable for confiscation under section 111(m) and NOT if the value declared in the Bill of Entry do not match with some value determined later by the proper officer during re- assessment or in any investigation or adjudication proceedings. 56. Therefore, de hors the re-determination of value, the confiscation of the goods under section 111(m) cannot be sustained and needs to be set aside. Penalties 57. Penalties have been imposed under section 114A of the Act on HP India and under section 112 of the Act on Shri Sridharan and Shri Ravishankar. According to the Revenue penalties should also have been impose....
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....n under section 111 of the Act for multiple reasons, the penalties under section 112 of the Act cannot be sustained. Penalty under section 114A of the Act is imposable if duty is not paid or short paid by reason of collusion, wilful misstatement or suppression of facts. Since we have found the demand of duty itself is not sustainable either on merits or on limitation, the penalty under section 114A of the Act also cannot be sustained. Penalty under section 114AA of the Act is imposable for wilfully making wrong declaration. HP India made no wrong declaration. It is the case of the Revenue that the value should be re- determined which we have found against the Revenue. Therefore, no penalty was imposable under section 114AA of the Act. In short, all penalties need to be set aside. 59. To sum up: (a) The re-determination of the value of the CDs imported by HP India cannot be sustained because the transaction value was not rejected under Rule 12 of the 2007 Rules and Rule 10A of the 1988 Rules. Consequently, the entire demand deserves to be set aside on merits. (b) The demand also cannot be sustained because the elements necessary to invoke extended period of limi....