TaxTMI 
TaxTMI 
2025 (10) TMI 499
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....357/2014, C/52896/2014, C/52934/2014, C/52935/2014, C/53595/2014, C/53615/2014, C/53616/2014, C/53617/2014, C/53842/2014, C/54011/2014, C/54012/2014, C/54013/2014, C/54014/2014, C/54015/2014, C/54110/2014, C/54130/2014, C/54472/2014, C/55635/2014, C/50080/2015, C/50139/2015, C/50281/2015, C/50332/2015, C/50976/2018 And C/51614/2014. Hon'ble Mr. Justice Dilip Gupta, President And Hon'ble Ms. Hemambika R. Priya, Member (Technical) For the Appellant : Shri V. Lakshmikumaran, Shri Rachi Jain, Shri Ashwani Bhatia and Ms. Srishty Bajaj, Advocates For the Department : Shri Nikhil Mohan Goyal and Shri Rakesh Kumar, Authorized Representative JUSTICE DILIP GUPTA: Customs Appeal No. 53102 of 2014 has been filed by HCL Technologies Ltd [HCL]. to assail that part of the order dated 20.02.2014 passed by the Commissioner of Customs (Adjudication), New Delhi [the Commissioner] that confirms the differential customs duty with interest by taking recourse to the proviso to section 28(1) of the Customs Act, 1962 [the Customs Act] and also imposes penalty upon HCL under section 112(a) of the Customs Act. 2. Customs Appeal No. 53254 of 2014 has been filed by SAP India Pvt. Ltd.[ S....
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.....03.2014 2,53,86,731 2,53,86,731 26. C/53842/2014 20.03.2014 3,91,214 - 27. C/54011/2014 30.04.2014 1,24,989 - 28. C/54012/2014 28.04.2014 1,19,627 - 29. C/54013/2014 09.05.2014 2,07,985 - 30. C/54014/2014 29.04.2014 8,23,096 - 31. C/54015/2014 19.05.2014 4,27,392 - 32. C/54110/2014 08.05.2014 5,72,866 - 33. C/54130/2014 18.06.2014 1,95,947 - 34. C/54472/2014 29.11.2014 2,90,492 2,90,492 35. C/55635/2014 07.08.2014 5,91,327 - 36. C/57164/2013 29.01.2013 3,08,294 3.08,294 37. C/57165/2013 28.01.2013 5,77,306 5,77,306 38. C/57167/2013 28.01.2013 1,49,847 1,49,847 39. C/57168/2013 31.01.2013 4,83,172 4,83,172 40. C/57169/2013 30.01.2013 6,57,672 6,57,672 41. C/57170/2013 23.01.2013 1,76,125 1,76,125 42. C/57171/2013 30.01.2013 1,11,153 1,11,153 43. C/57172/2013 29.01.2013 11,99,811 11,99,811 44. C/57665/2013 26.02.2013 83,065 83,065 45. C/5....
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.... Shobha Asar are as follows: Appeal filed by HCL 1. C/53102/2014 20.02.2014 3,87,451 27,17,465 Appeal filed by Shobha Asar 2. C/51614/2014 28.11.2013 33,380 1,33,518 7. HCL is engaged in providing Software-led IT solutions and remote infrastructure management services. To enable it to provide such services, HCL entered into a End-User License Agreement [EULA] on 31.05.2001 with SAP India to obtain non-exclusive and perpetual license to use SAP India propriety Software, Documentation and other information. 8. SAP India is 100% subsidiary of SAP AG, Germany [SAP Germany]. SAP India and SAP Germany had earlier entered into a Software Distribution Agreement [SDA] dated 01.01.1999, by which SAP India was licensed to market, sub-license and distribute the Software developed by SAP Germany, including documentation and other information, within India. A fresh Agreement was thereafter amended on 01.01.2000, 01.01.2002 and 01.01.2003. 9. The Business Model adopted to distribute SAP Software in India has been described as follows: (a) Signing of EULA and other documents: SAP India entered into EULA with end users who require SAP Software f....
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....s on behalf of the end users, pays customs duties and delivers the CD to HCL. 10. As noticed above, HCL entered into EULA with SAP India on 31.05.2001. Pursuant to this EULA, HCL entered into several Appendixes. During the relevant period i.e. from March 2006 to September 2006, HCL and SAP India signed Appendix 1.4 on 16.05.2006 [Appendix 1.4] to procure Software and Appendix 1.5 08.06.2006 [Appendix 1.5] for additional licenses to the SAP Software procured earlier. These Appendixes specifically provided delivery of Software through electronic mode only. 11. During the relevant period, SAP India raised the following invoices on HCL: Sl. No. Invoice No. and Date Amount (in Rs.) 1. 6071008839 dated 23.06.2006 8,57,808 2. 6071008862 dated 26.06.2006 1,59,40,000 3. 6071008957 dated 27.06.2006 18,00,000 Total 1,85,97,808 12. Around the same time, as per the terms of the maintenance contract with SAP India, HCL received some CDs containing SAP Software from SAP Germany under courier Bill of Entry No. 624877 dated 29.06.2006 filed by DHL, wherein value of CD was declared as Rs. 2558/-. 13. The Directorate of Revenue Int....
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.... "39. Coming to issue of valuation and the arguments that payment of license fee is not related to the imported goods; the payment of license fee is not a condition for sale of imported goods; right to use is distinct from condition of sale; EULA and CD containing the software are two distinct commodities, I find the arguments lack legal as well as factual substance. This is because the Software Distribution Agreement, the EULA and the factum of actual physical import of software CD and subsequent formalities for Customs assessment and clearance of the goods are integral part of one whole transaction. Payment of license fee of Rs.1,85,97,808/- without having CD software has no meaning. In an ordinary course of business nobody would pay such a huge amount for just obtaining the license and not being able to use the same. The license and the CD are closely interlinked and inseparable to make a meaningful and fruitful transaction. The argument that option to obtain SAP software in a physical form on CD is at the discretion of the importer, I find this argument is totally misplaced and factually wrong, in as much as the importer in their statement have clearly indicated that they....
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....n of penalty upon SAP India, the Commissioner observed: "43. M/s. SAP India Systems is well established wholly owned subsidiary company of M/s. SAP AG Germany who have all the technical legal expertise available. They very well knew that if the software is directly exported to them by their principals from Germany, they become liable for proper valuation of imported software by the Special Valuation Branch. Therefore, to evade to payment of duty, they advised their principals M/s. SAP AG Germany to directly export the software to individual vendors making them importers. Knowing fully well they are not the importers and, hence, no duty can be demanded from them, yet once investigation started they quickly deposited the duty, with a view that once investigations are abandoned and the impeding issuance of show cause notice is shelved, they would claim refund of the amount deposited by them as no duty could have been demanded from them. As a matter of fact, they did so by filing the refund claim. Had the DRI taken the bait, their nefarious design would have succeeded and the exchequer would have lost huge valuable revenue. Only because the DRI did not fell for the bait and ca....
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....aware that the software on CD being imported in India is chargeable to Customs duty, yet they carefully crafted/devised a mechanism to evade the duty. This fact is further substantiated that subsequent to the investigations carried out by the DRI, the noticees have changed the tracks and on their own are declaring proper transaction value and paying duty on the subsequent imports of software. 44. Therefore, malafide actions of the noticee makes the said imported software liable for confiscation under Section 111(m) of the Customs Act, 1962 as proposed in the show cause notice. However, I note that the goods had already been cleared from the Customs and are not physically available for confiscation. In the facts and circumstances, no confiscation can be ordered and no redemption fine can be imposed. In my view, the noticee is liable for penalty under Section 112(a) of the Customs Act, 1962 and I reject the argument raised by the noticee in this behalf." (emphasis supplied) 21. Aggrieved by the said order, HCL filed this appeal. This appeal was earlier decided by the Tribunal by an order dated 12.07.2017. The matter was remanded to the adjudicating authority for ....
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....ry who either: (i) are subsidiaries or affiliates of parent companies headquartered in the Territory or (ii) are subsidiaries or affiliates that perform the data processing requirements of the parent on computer processing units located in the Territory. All other exceptions to the territorial limitations set forth in this Article 2 require the prior written consent of SAP AG. ***** Article 4: Obligations of SAP AG 4.1. Order Execution 4.1.1. Upon the execution of a license agreement by an End User, ND shall place an order for the required number of copies of the Software, number of authorized users and other relevant items determined and agreed upon in such license agreement to be provided to the End User under the procedures set forth in this Article 4.1. 4.1.2. All orders by ND for copies for the Software shall be entered into the internal SAP order entry system. SAP AG shall notify ND in writing promptly upon determining that it will not accept such order. If an order so entered has not been rejected by SAP AG within ten business days following its entry into the order entry system, ND may consider the order to have been accepted by SAP AG. With....
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.... "SAP INDIA SYSTEMS, APPLICATIONS AND PRODUCTS IN DATA PROCESSING PRIVATE LIMITED R/3 SOFTWARE END-USER VALUE LICENSE AGREEMENT DATED : 31st MAY, 2001 WITH HCL TECHNOLOGIES LTD ***** RECITAL WHEREAS, SAP desires to grant to Licensee and Licensee desires to accept from SAP, a license to Use (as defined herein) SAP's proprietary R/3 Software (as defined herein) upon the terms and conditions hereinafter set forth: ***** 1.10 "Extension" means an addition to the Software which does not require a Modification. 1.11 "Information User" means those individuals authorized to access the licensed Software solely to "read only" Software transactions. Each information User must also be licensed as a Basis/Workflow User. 1.12 "Modification" means a change to the Software which changes the source code. ***** 1.23 "Software" means: (i) all software specified in agreed upon Appendices hereto, developed by or licensed to SAP or SAP AG and delivered to Licensee hereunder, (ii) any Release, Versions, or Correction Levels of the Software as contemplated by this Agreement, and (iii) any complete or partial copies or replacements of ....
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.... OPTIONAL PACKAGES Quantity(ies) Licensed: TR-TM Treasury Management Nil Users BC/DW R/3 Data Model in ADW Format Nil Designated Site PP- EH&S Environmental, Health & Safety Nil Designated Unit PP-MES Manufacturing Execution System Nil Designated Unit 27. The relevant portion of Appendix 1.4 dated 16.05.2006 to the SAP Software End-User Value License Agreement is reproduced below: "Appendix 1.4 effective: May 16, 2006 to SAP INDIA SAP SOFTWARE END-USER VALUE LICENSE AGREEMENT with HCL Technologies Ltd ("Licensee") effective: May 31, 2001 ("Agreement") This Appendix 1.4 is hereby annexed to and made a part of the Agreement specified above. The following Articles and Provisions of the Agreement are specifically incorporated herein by reference: 1 (Definitions), 2 (License Grant), 3 (Verification), 4 (Price and Payment), 5 (Term and Termination), 6.1 (Protection of Proprietary Information), 7.2 (Express Disclaimer), 9 (Limitation of Liability), 10 (Assignment), 11 (Arbitration) and 12 (General Provisions). All other provisions of the Agreement are specifically excluded with respect to this Ap....
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....he delivery of releases and versions of the BSI Software made available to SAP, support via telephone, coordination of defect correction with BSI, and SAP's Online Software Services. Maintenance, from SAP, for the BSI Software licensed hereunder is limited to the sites previously identified in the Agreement and related Appendices, and is limited to a single Platform. In order to receive Maintenance hereunder, Licensee must make all required remote support connections to each Designated Unit, at its expense, as requested by SAP. 5.2 Maintenance at such site(s) shall commence upon the first day of the month following initial Delivery of the BSI Software. Maintenance Fees for the Software licensed under this Appendix, for the total number of Users specified above is 42% (or the then current factor) of INR 772,800/- per annum + 17% (or the then current factor) of INR 85,008 per annum. Maintenance Fees are subject to change upon Thirty (30) days notice to Licensee. Maintenance fees set forth above do not include central, state or local taxes, which shall be to Licensee's account. Maintenance Fees are invoiced on an annual basis effective January 1 of a calendar year. Any Mainte....
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....allation key to the Software if the payment stipulated in respect of this Appendix has not been received. Failure to obtain the permanent keycodes will cause the Licensee to have limited Software access until obtained. The Licensee accepts that in no event shall SAP be responsible for any damages whatsoever arising out of the software system being shut off. If the actual number of Users called off by Licensee in respect of each phase is less than the corresponding number set out above. Licensee shall not be entitled to any refund. If the actual number of Users called off b Licensee in each phase exceeds the corresponding number set out above, Licensee will be invoiced for the difference in the License Fee and such excess will be used to reduce the number of Users which Licensee is required to call off and the corresponding license fee payment in the next phase accordingly/ Licensee shall inform SAP in writing of any additional Users called off from the next phase before the invoicing of such phase. 5. For Software to be installed at a specific Licensee and/or Affiliate Designated Site within the Territory the parties hereto agree to execute Appendices to this Agre....
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....W and DATABASE Number of Users Licensed: Operational Users 100 Users Info Users 50 Users R/C Users 49 Users Enterprise Office/HR Users Nil Users D/W Users 1 Users BC Basis/Workflow System with INFORMIX Database Nil Users BC Basis/Workflow System with ORACLE Database 200 Users BC Basis/Workflow System with DB2 Common Server Database Nil Users BC Basis/Workflow System with OS/390 Database Nil Users BC Basis/Workflow System with MSSQL Server Database Nil Users BC Basis/Workflow System with Database Interface Nil Users HUMAN RESOURCE MANAGEMENT Master Records Licensed: PA Personnel Administration and Payroll 5000 PD Personnel Planning and Development 5000 6. Provided SAP is performing Maintenance Service at the above-specified Designated Site, delivery of one (1) set of CD-ROM Documentation, in the English language, to such Designated Site shall be initiated upon execution of this Appendix by the parties hereto. Additional Documentation for the above-specified Designated Site ....
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.... HER User Nil 125 50 50 Nil Nil 1.2 SPECIAL FUNCTION BLOCKS HUMAN RESOURCE MANAGEMENT Master Records Licensed: PA Personnel Administration and Payroll 8,000 PD Personnel Planning and Development 8,000 ***** 2. DELIVERY: Licensee shall not require additional copy of the above specified Software as the license granted is for additional named users. Licensee is entitled to use these additional named users as licensed under section 2 of this Appendix 1.5 on signing of this Appendix by both the parties." 32. Shri V. Lakshmikumaran, learned counsel appearing for HCL and SAP India assisted by Shri Rachi Jain, Shri Ashwani Bhatia and Ms. Srishty Bajaj made the following submissions: (i) The payments made by HCL to SAP India are not liable to be included in the transaction value of the CD. In this connection, learned counsel placed reliance on rule 9(1)(c) of the 1988 of the Valuation Rules to submit that the license fee which does not satisfy the conditions set out in the said rule shall not be added to the value of imported goods. In the present case, the payments made by HCL to SAP India and subsequent....
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....ngly, the payment of the license fee is a post importation activity and is not a condition for sale for impugned goods; (viii) In any view of the matter, only 55% of the license fee is dutiable in the present case; (ix) The extended period of limitation could not have been invoked in the facts and circumstances of the case; (x) Interest, confiscation and penalty cannot be invoked in the present case; and (xi) In the absence of the machinery provisions under section 3(12) of the Customs Tariff Act, 1975 [the Customs Tariff Act] , no penalty can imposed or interest can be recovered. 33. Shri Nikhil Mohan Goyal, learned authorized representative appearing for the department assisted by Shri Rakesh Kumar made the following submissions: (i) Article 4.6.3 of the Software Distribution Agreement between SAP Germany and SAP India provides that the Software and Documentation normally will be provided in machine readable form on CD. Further, as per EULA between SAP India and HCL, Article 3.1 provides for delivery of the licensed Software in machine readable format. The license fees paid for the right to use Software are, therefore, to be added t....
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....r as requested by SAP India. The ownership was to remain with SAP Germany and SAP India acquired only the right to use the SAP Germany proprietary information under the terms and conditions of the Agreement. 36. SAP India also entered into R/3 Software End-User Value License Agreement dated 31.05.2001 with HCL. SAP India granted a non-exclusive license to HCL to use the Software at the specified site in consideration of license granted. HCL was required to pay license fee for the Software as set forth in the Appendices. Fees for maintenance services also had to be paid as set forth in the Appendices. 37. Appendix 1 to this R/3 Software End-User Value License Agreement dated 31.05.2001 provides for the users, basis/workflow and database as also human resource management and optional packages. It gives the number of operational users, info users, R/C users and basic/workflow system with oracle database. It also gives the personal administration and payroll, and personal planning and development. 38. With effect from 16.05.2006 an amendment was made through Appendix 1.4 in the SAP Software End-User License Agreement dated 31.05.2001. The total net license fee for the BSI Soft....
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.... for the imported goods,- (a) ***** (b) ***** (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." 44. A perusal of rule 9(1)(c) would show that the following conditions have to be satisfied to add license fee in the transaction value: (i) The license fees should related to the imported goods; (ii) Buyer/importer is required to pay, directly or indirectly; (iii) The same is paid as condition of the sale of the goods; and (iv) Such license fee is not included in the price actually paid or payable. 45. License fee which does not satisfy the conditions set out in rule 9(1)(c) cannot be added to the value of the CDs. The aforesaid four conditions can now be considered. FIRST CONDITION 46. The first condition is that the license fee should relate to import of CD that contains the SAP Software. 47. The payments made by HCL to SAP India and subsequently by SAP India to SAP Germany pertain to rec....
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.... 15,940,000..." Clause 5 of Appendix 1.5: "...the parties hereto agree to execute Appendices to this Agreement, in a form similar to Appendix 2 hereto, prior to SAP's delivery of such Software to such Designated Site..." Clause 2 of Appendix 2.5: "2. DELIVERY: Licensee shall not require additional copy of the above-specified Software... of this Appendix 1.5" 3. 27.06.2006 18,00,000 "Demo License Renewal for Services Partner for Period 1st January 2006 to 31st December 2006 on my SAP Business Suite; SAP Utilities and SAP Retail demo licenses. In accordance with the above order, we invoice you for SAP Standard software" The invoice pertains to renewal of demo licenses for period 01.01.2006 to 31.01.2006. This indicates that the CD, if at all imported, would have been imported prior to 01.01.2006 i.e., prior to the introduction of CVD on the import of IT Software. 50. It transpires that the license fee paid under Invoice No's 1 and 2 relates to electronic supply of software and the additional licenses. The license fee paid under Invoice No. 3 relates to renewal of Demo licenses on SAP Software for the period 01.01.2006 to 31.12.2006, which imp....
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....ion to pay the license fee arises only subsequently for the purpose of obtaining the license key required to access the full functionality of the SAP Software. Accordingly, the payment of the license fee is a post-importation activity and is not a condition for sale for goods. This apart, right to use the Software is different from a sale of goods. In the present case, HCL is only provided a nonexclusive right to use the SAP Software. Article 6 clearly restricts the rights of HCL to only those permitted by SAP India and HCL does not acquire the title to the intellectual property in the SAP Software. Thus, the transaction between SAP India and HCL does not amount to sale of Software. 57. The Commissioner, therefore, committed an error in holding that the license fee is a condition of sale. FOURTH CONDITION 58. The fourth condition is also not satisfied as the payments made by HCL to SAP India are not liable to be included in the transaction value of the CDs. 59. The inevitable conclusion, therefore, that follows is that license fee paid by HCL to SAP India cannot be included in the value of CDs under rule 9(1)(c) of the 1988 Valuation Rules. Penalty, therefore, could not....