2025 (6) TMI 556 - AT - Customs

Valuation of imported Quick Recovery (QR) CDs - value of the imported CDs be as per the declared transaction value or should it be determined under Rule 8 of the 1988 Rules or Rule 9 of the 2007 Rules as was done in the impugned order? - applicability of 1988 Rules applied until the 2007 Rules were notified and thereafter the 2007 Rules would apply - demand of diffrenetial duty - invocation of extended period of limitation under the proviso to section 28(1) - confiscation of the seized goods under section 111(m) - levy of redemption fine - levy of penalties. Value of the imported QR CDs - HELD THAT - The 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 - 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. The valuation under section 14 of the Act and the 1988 Rules or 2007 Rules are relevant to determine the value if the goods are chargeable to import duty on ad valorem basis. This value shall generally be the transaction value but there are exceptions. The question is how the value of such goods should be determined. Since the taxable event for charging the duty of customs is the act of importation of the goods and not the sale or purchase whatever goods are imported should be valued in whichever condition they are imported. Ownership of the goods is not relevant. The valuation has to be done as per Section 14 of the Act and the 2007 Rules - The proper officer may reject the declared transaction value under Rule 12 (2007 Rules) or Rule 10A (1988 Rules) if there is reasonable doubt about its truth or accuracy after following due procedure. If rejected the value must be determined sequentially under Rules 4 to 9. When and how the proper officer can reject the transaction value? - HELD THAT - Rejection of the transaction value under Rule 12 of the 2007 Rules (or Rule 10A of the 1988 Rules) is the pre-requisite for determining the value under any of the other valuation Rules. If this process was undertaken HP India would have been aware that it s transaction value may be rejected and it would have had an opportunity of seeking an opportunity of being heard and an order in writing of the reasons for rejection of the transaction value under Rule 12(2) of the 2007 Rules (or Rule 10A (2) of the 1988 Rules). Unless the transaction value is rejected the value has to be determined under Rule 3 after making adjustments as per Rule 10 of the 2007 Rules (or under Rule 4 after making adjustments as per Rule 9 of the 1988 Rules). Without rejecting the transaction value the impugned 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. Time limitation - HELD THAT - Demand of duty not paid or short paid or not levied or short levied can be raised under section 28 of the Act within the normal period of the limitation. Undisputedly the entire demand in this case was raised beyond the normal period of limitation. The proviso to section 28(1) of the Act provides for raising a demand invoking extended period of limitation if the duty was not paid or short paid by reason of collusion wilful mis- statement or suppression of facts. The entire period of demand is under the extended period of limitation. This proviso was invoked in issuing the SCN and in confirming the demand on the ground that the appellant had not disclosed the agreement which it had with Microsoft. The appellant did not suppress any information or even fail to produce any information which it had any obligation to produce. After seeing that the CDs had Windows Vista if the officer wanted any additional information and wanted to know the details of the licence which the appellant had with Microsoft for the CDs he could have asked for them. Otherwise the appellant had no reason to submit a copy of its licence agreement with Microsoft. The allegation in the SCN and the finding in the impugned order that the appellant had suppressed any facts cannot be sustained. The question of limitation also found in favor of appellant. Confiscation of the goods under section 111(m) - HELD THAT - As far as the value is concerned it has to be truthfully declared. The importer cannot import goods for say US 2, 000/- and declare the value as US 1, 000/-. The importer has to truthfully declare the transaction value and any other details which are called for. The importer has no authority or responsibility to reject the transaction value and re-determine the value using some other method. Rule 12 of the 2007 Rules and Rule 10A of the 1988 Rules empower only the proper officer to do so. It is impossible for the importer filing a Bill of Entry to anticipate if the proper officer would reject the transaction value and if so how he will re-determine the value and what would be that value and file a Bill of Entry indicating that value which the proper officer may finally determine - 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. 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 - HELD THAT - The penalties under section 112 of the Act are contingent upon the goods being liable to confiscation under section 111 of the Act. Since we have held that the goods were not liable for confiscation 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. Conclusion - i) 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. ii) The demand also cannot be sustained because the elements necessary to invoke extended period of limitation were not present in this case and the entire period of demand is beyond the normal period of limitation. iii) In the Bill of Entry the importer only has only an obligation to declare the value which it knows and has no obligation to anticipate if the proper officer or any adjudicating authority would reject the transaction value and if so what value such officer would find correct and file the Bills of Entry accordingly. Section 111(m) of the Act does not require the importer to do the impossible. Therefore confiscation of the goods under section 111(m) of the Act cannot be sustained in this case even if the re-determination of value was correct. iv) Consequently penalties under section 112 of the Act which are imposable if the goods are liable to confiscation can also not be sustained. v) Penalty under section 114A of the Act is imposable if duty is not paid or short paid by reason of collusion wilful mis-statement or suppression of facts. vi) Penalty under section 114AA of the Act is imposable for making false declarations. There is no evidence of any false declaration in this case and hence the penalty cannot be sustained. The impugned order is set aside - appeal allowed.

Summary

The core legal questions considered in this judgment include:

1. Whether the value of the imported Quick Recovery (QR) CDs should be accepted as declared by the appellant (transaction value) or re-determined under the Customs Valuation Rules;

2. Whether differential customs duty can be demanded on the basis of re-determined value;

3. Whether the extended period of limitation under the proviso to section 28(1) of the Customs Act was correctly invoked;

4. Whether the confiscation of the seized goods under section 111(m) of the Customs Act was justified;

5. Whether the redemption fine imposed under section 125 was fair and proper;

6. Whether penalties under sections 114A, 114AA, and 112 of the Customs Act were correctly imposed on the appellant and its employees;

7. Whether the Commissioner erred in not imposing penalty under section 114AA on the appellant and under section 112 on the plant head, as asserted by the Revenue.

Issue-wise detailed analysis:

1. Valuation of the imported QR CDs

Legal framework and precedents: The valuation of imported goods is governed by section 14 of the Customs Act, 1962 and the Customs (Determination of Value of Imported Goods) Rules, 1988 (1988 Rules) and 2007 (2007 Rules). The transaction value is the primary basis for valuation, defined as the price actually paid or payable for the goods when sold for export to India, subject to certain conditions. The proper officer may reject the declared transaction value under Rule 12 (2007 Rules) or Rule 10A (1988 Rules) if there is reasonable doubt about its truth or accuracy, after following due procedure. If rejected, the value must be determined sequentially under Rules 4 to 9.

Precedents cited include Eicher Tractors Ltd. v. Commissioner of Customs and Ravindra Chandra Paul v. Commissioner of Customs (Prev.), which emphasize the primacy of transaction value and conditions for its rejection.

Court's interpretation and reasoning: The Court noted that the appellant declared the transaction value as the cost paid to the overseas supplier (Mentor Media Ltd., Singapore) for the blank CDs and copying charges, excluding the value of the software embedded on the CDs. Mentor and HP India were unrelated parties, and no additional payments or conditions of sale existed beyond the declared price. The declared value was less than US$1 per CD, whereas the market value of the Windows Vista OS software on a CD was about US$175.

The Court explained that the software on the CDs belonged to HP India or was licensed from Microsoft, and Mentor's contribution was limited to the blank CD and copying effort. The transaction value thus reflected only the supplier's portion of the imported goods' value.

The Court emphasized that the charging section for customs duty is the import of goods, not the sale, and that valuation rules apply to determine the value for duty purposes. However, the proper officer must follow the procedure under Rule 12/10A to reject the declared transaction value before applying other valuation methods.

In this case, neither the Show Cause Notice nor the impugned order recorded any reason to doubt the truth or accuracy of the declared transaction value, nor was any information or opportunity to be heard provided to the appellant before rejecting the transaction value. The re-determination of value under Rule 9 (residual method) without rejecting the transaction value was therefore unsustainable.

Application of law to facts: Since the transaction value was not rejected as per the statutory procedure, the declared value had to be accepted. The addition of the license fee paid to Microsoft was not part of the transaction value for the imported CDs, as the license fee was for downloaded software, not a condition of sale of the CDs from Mentor. The Court found no basis to include the software's value in the CD's customs value without rejecting the transaction value first.

Treatment of competing arguments: The appellant argued that the transaction value was correctly declared and no additional amount was paid for the software on the CDs. The Revenue contended that the software value should be included as the CDs contained original operating systems and the license fee represented the value of the software embedded in the CDs. The Court rejected the Revenue's contention, noting the absence of procedure followed for rejection of transaction value and the nature of the transaction.

Conclusion: The declared transaction value must be accepted. The re-determination of value and consequent demand for differential duty cannot be sustained.

2. Demand of differential duty

Since the re-determination of value was unsustainable, the demand for differential customs duty based on such re-determined value also failed. The Court held that demand must be based on the accepted transaction value unless rejected following due procedure.

3. Invocation of extended period of limitation

Legal framework: Section 28(1) of the Customs Act provides for a normal limitation period for raising demands. The proviso allows an extended period if duty was not paid or short paid due to collusion, wilful misstatement, or suppression of facts.

Court's reasoning: The Revenue invoked the extended limitation period on the ground that the appellant suppressed the license agreement with Microsoft. The Court examined the evidence and found that the CDs and their contents were clearly described and visible. The appellant had no obligation to disclose the license agreement unless asked. The department did not seek such information during import clearance. Therefore, no suppression or misstatement was established.

Conclusion: The invocation of the extended period of limitation was incorrect; the demand was barred by limitation.

4. Confiscation of seized goods under section 111(m)

Legal framework: Section 111(m) provides for confiscation of goods that do not correspond in value or other particulars with the entry made under the Customs Act.

Court's reasoning: The Court held that the importer is required to declare the value known to it truthfully in the Bill of Entry. The importer cannot anticipate if the proper officer will reject the declared transaction value and re-determine the value differently in future proceedings. The Bill of Entry includes matters of opinion such as classification, which cannot be deemed false or incorrect merely because the officer or adjudicating authority holds a different view.

Since the re-determination of value was unsustainable, the confiscation based on non-correspondence of value was also unsustainable.

Conclusion: Confiscation under section 111(m) cannot be sustained and is set aside.

5. Redemption fine under section 125

Since confiscation was set aside, the redemption fine imposed under section 125, which is contingent upon confiscation, also cannot be sustained.

6. Penalties under sections 114A, 114AA, and 112

Legal framework: Section 114A penalizes short levy or non-levy of duty due to collusion or wilful misstatement. Section 114AA penalizes use of false or incorrect material. Section 112 penalizes improper importation of goods liable to confiscation.

Court's reasoning: Since the demand of duty was not sustainable on merits or limitation, penalties under section 114A could not be imposed. No false declaration was made by the appellant, so section 114AA penalty was not applicable. Penalties under section 112 depend on confiscation, which was set aside. The Revenue's argument for imposing penalty under section 114AA on the appellant and under section 112 on the plant head was rejected for lack of evidence of wilful fault or fraudulent conduct.

Conclusion: All penalties imposed were set aside.

7. Penalty on employees and plant head

The penalties on Shri Sridharan and Shri Ravishankar under section 112 were set aside due to absence of confiscation. The Revenue's appeal to impose penalty on the plant head under section 112 was rejected for lack of evidence that he knowingly abetted improper importation.

Significant holdings and core principles:

"The importer is required by law to make an entry by filing a Bill of Entry under section 46 of the Act and is also required to self-assess duty under section 17 of the Act... The importer has no authority or responsibility to reject the transaction value and re-determine the value using some other method. Rule 12 of the 2007 Rules and Rule 10A of the 1988 Rules empower only the 'proper officer' to do so."

"Without rejecting the transaction value, the impugned 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."

"The allegation in the SCN and the finding in the impugned order that the appellant had suppressed any facts cannot be sustained."

"Section 111(m) of the Act does not require the importer to do the impossible."

"Since we have held that the goods were not liable for confiscation under section 111 of the Act for multiple reasons, the penalties under section 112 of the Act cannot be sustained."

The Court finally determined that the declared transaction value must be accepted, the demand for differential duty is unsustainable, the invocation of extended limitation period was incorrect, confiscation and penalties were unjustified, and set aside the impugned order in its entirety, allowing the appeals filed by the appellant and its employees and rejecting the Revenue's appeal.