TMI Blog2001 (4) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... tation through Regular Customs Channels. It also imported the Software licences, stores on TK-50 cartridges cleared the same by declaring them on the Bill of Entry filed, as blank unrecorded magnetic tape cartridge, falling under Chapter Heading 8523 at a nominal value of US $ 32.40, cleared the same, on duties as applicable assessed. For subsequent period, they obtained these software licences data from DEC through ELECTRONIC MAIL NETWORK, directly at their factory. (b) The DRI officers working out on specific information, investigated the imports made and a show cause notice, dated 30-6-1993 was issued as from investigation made it appeared - From the foregoing investigations, it appears that the computer package/products imported by DEIL from DEC, USA consisted of three elements viz. Media such as a floppy disc or a tape cartridge or a tape spool on which the software data/programme is stored; documents and manuals which explains the way of using the software; and a licence to use the said computer software package/product. Therefore, all these are software package/product. The international price list of DEC, USA gives the price for software Media and documents separatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the QL part i.e. Licence PAK/Licence Certificate, which is specific and unique to a customer. These two parts of the software product were being cleared through customs after payment of appropriate customs duty. It appears that DEIL were finding this procedure difficult when a customer cancelled an order after import of a QL part, which is unique and specific to him. Therefore, it appears in order to avoid such situations, DEIL in understanding with DEC, USA, started importing a RIGHT TO USE CERTIFICATE RTUs since 1990 without any customer s name on it, in the name of QL part and cleared the same through customs. Subsequently it appears that when DEIL found a customer they used to send a request to DEC to send the requisite licence PAK/Licence certificate either through FAX or through courier, for which no payment was made and no customs clearance was done and the invoices for QL parts were made, and paid for through the respective connected RTUs; that for some period ....... mechanism for DEIL to pay for the value of QL part to and serves no other purpose. It further appears that a customer pays for the access to the software which is provided in this license PAK/Licenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be duplicated, in order to qualify for duplication of computer software. In the instant case, it appears that such software data is on the Media, which forms part of QA product, which are required to be duplicated in order to qualify for duplication of computer software, as approved by DOE. Further, it also appears that DEIL has not duplicated any QA part and therefore, it appears that DEIL has not duplicated the software as the intellectual property which is encoded on the Media. DEIL with the help of a laser printer have only taken print out of the licence PAKs from the licence PAK files received in the cartridges or through the Electronic Mail from DEC which does not amount to physical duplication of computer software products as stipulated in DOE s software duplication policy and as understood by Trade and others, discussed above. Further, it appears that each licence PAK is unique and specific to a customer and hence there is no question of duplication of such licence PAKs duplicated in the Media which has the software encoded on it, nor the documents nor the licence in view of the position explained above. Thus the activity undertaken by DEIL as far i.e., printing of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed earlier, through regular customs channels and therefore, it appears that it should form part of the value of the imported computer software product in terms of Section 14 Customs Act, 1962 read with Customs Valuation Rules, 1988. The investigation reveals that software licence which formed integral part of the imported software product had all along suffered duty when they were imported by DEIL through normal import channel; that after DOE approval, the software licences i.e. QL part is now also imported from DEC through misdeclared TK-50 cartridges/E-mail; that therefore there is no reason as to why the software license so imported from DEC through a different route/channel and which formed part of imported media and documents i.e. QA part, should not suffer duty. It further appears that but for DOE approval for duplication of computer software, which was not physically done by DEIL, DEIL would have imported the relevant QL parts of the software products at 35% of the respective USCLP and paid duty. Therefore, it appears that proper value of software so imported from DOE through TK-50 cartridges and E-mail should be 35% of the respective and USCLP and that customs duty is lev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of software licence through E-mail for certain periods. In terms of Section 28(1) of the Customs Act, 1962 read with provisions thereon and read with Rules 5 and Rule 9 of Customs Valuation (Determination of Prices) Rules, 1988. DEIL is liable to pay duty as applicable on these software licences aforesaid in as much as they have wilfully suppressed the actual facts of import of software licences through TK-50 Cartridges or E-mail and misused the software duplication scheme to evade payment of Customs duty on the major portion of the software products value without physically duplicating the computer software products as approved by DOE as discussed above. The duty payable by DEIL in respect of the licences generated and printed and supplied to the customer in respect of the media and documentation imported earlier is as per the work sheets at Annexure 57. Whereas DEIL have rendered themselves liable to penalty under Section 112(a)(v) of the Customs Act, 1962, in as much as they have concerned themselves in importing QL parts of the software without payment of customs duty either stored in TK-50 cartridges by misdeclaring the same as BLANK TAPE CARTRIDGES which is under seizur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatement and suppression of facts and by misusing the scheme of software duplication to evade Customs duty, without actually duplicating the computer software products. (iii) Why penalty should not be imposed on each of them under Section 112(a)(v) of the Customs Act, 1962. (c) The Commissioner after concluding the hearing and considering the matter found I have carefully gone through records of the case and heard the arguments of the learned Counsel for the party. I have also gone through the records of the personal hearings, the interim and the final replies filed by the party. The issue to be decided is as to whether the TK-50 cartridges under seizure has been mis-declared and if so whether they are liable for confiscation. Further, whether the importer DEIL had evaded duty on the value of Computer Software which is attributed to the license and whether they had violated any of the provisions of Customs Act, 1962, as charged in Show Cause Notice. The TK-50 cartridges under seizure had been imported vide Bill of Entry No. 014408 dated 27-6-1992. I find that in the said bill of entry, the two TK-50 cartridges had been sought to be classified under Customs tarif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly recorded media including audio and video. I am therefore, unable to accept the contentions of the learned Counsel that, there were contradictions in the show cause notice with regard to this. The two TK-50 cartridges under seizure are rightly classifiable under chapter Heading No. 85.24 of the Customs Tariff as it contained some recorded information as discussed above, in the form of tapes. I am also unable to accept the contentions of the learned Counsel that in order to classify a product under Chapter Heading No. 85.24 there has always to be a commercial value for it, in as much as the Section notes and the chapter notes as well as the scheme of the Customs Tariff does not fix any such conditions for classification of an item under the Tariff schedule. Incidentally, the PAK information has potential commercial value as finally licences are issued and sold by DEIL to consumers based on generation of licences based on PAK information, if not why should DEIL import such PAK information at all? It is admitted fact that the software package consists of a carrier media on which the software is recorded, the accompanying user manuals and a license to use the software. In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of DEIL QA parts which consists of software media and the manuals are priced separately and the relevant licenses i.e. QLs are priced separately. This is because for a given type of QA, there are different types of QLs depending on the type of machines and the number of users. Therefore, the prices of QA is a constant for a given software and QLs are variable and hence their prices. It is evident from the statements of the executives of the company such as Shri V. Vijay, Shri O.K. Venkataramanan and Shri Ishwar Sharma that DEIL used to import QAs and keep inventory and as and when they find a customer, they order for the QLs as per the customer requirement. Keeping this in view, they were paying the customs duty on QA classifying the same under the Customs Tariff Heading No. 85.24. Further, when they ordered for relevant QLs, they had received the same either in the form of PAKs or RIGHT TO USE CERTIFICATES and were classifying the same also under Heading 85.24 and paying customs duty. As per Rule 9(1)(c) of the Customs Valuation (Determination of Price), Rules 1988 license fees related to the imported goods that the buyer is required to pay directly or indirectly, as a condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software . It can also be seen at page 2 of the Schedule B of the software license agreement under para 3.1 it is indicated that this license authorises use of DIGITALS then current versions and all DIGITAL prior versions of the software . Further, it is also indicated in para 3.2 that there are different types of licences granted by DIGITAL. The eight character in the software license model number as indicated in the licence product authorisation key (licence PAK) or licence Certificate identifies the type of licence. Further the eight character in the software licence are indicated as QL-XXXXX-QA. Therefore, it is amply evident that a purchaser of QA is required to purchase the relevant QL and the condition of sale is in built and deemed. Further, the above portions of the agreements also give the definition of the QL and its types. A customer possessing/buying QA from DEIL cannot use it unless the license which is the right to use is also obtained from DEIL. Such a license is now to be generated with the help of Alpha numeric codes contained in the 2 cartridges and PAK-GEM (one time software of DEIL used for decoding). Thus licenses are generated and sold to the customers fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Customs Act, 1962, inter alia covers any kind of movable property. Further, here what is being sought to the charged is the value of the license portion of the software which is termed as QL which is separately priced and charged and relatable to the actual goods that is software imported as QAs as discussed above. DEIL themselves have given such matching of QAs for which QLs were produced out of the TK-50 Cartridges and from the E-mail facility, which is as per Annexure 54 to the show cause notice. Incidentally, as per press note dated 17.3.92 of Department of Electronics (Annexure 2 of the show cause notice) envisages the import of master copy by the party for duplication purposes as it had been mentioned that the pasty importing the master copy would have to follow the existing import procedures including payment of duty for the master copy. In view of the position above, it is very clear that DEIL have not really duplicated the software in the real sense and have only resorted to the import of QLs through a different route without the Customs knowledge. Thus the 2 TK-50 cartridges imported (which contains coded information relating to issue of licenses QLs are chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 cartridges. Besides, DEIL had been importing the QLs separately in respect of software not allowed to be duplicated and were paying Customs duty at the rate of 35% of the USCLP. Having regard to this aspect and considering the facts and circumstances of the case, I hold that the correct value for the all PAK information contained in the 2 TK-50 cartridges should be at 35% of the USCLP. This is the intrinsic potential value of the 2 TK-50 cartridges imported as authorise, DEIL would have paid 35% of the USCLP if Licenses had been imported as such without duplication of software and getting PAK information through 2 TK-50 cartridges. Accordingly, on the above value, duty has to be charged under the Heading 85.24 of the Customs Tariff. The above determination is in accordance with Section 14 (1) of the Customs Act, 1962, read with rule 3 of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 since records indicate the above price to be the transaction value for identical goods i.e. QA s imported. Since the above amount of 35% of the USCLP being not loaded on to the value of QA, the question of this amount or payment of royalty not being a condition of sale of QA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusal of the above rules, I find that PAK information relatable to software package imported into India as F Signals through E-mail cannot be classified in terms of Rules 1 to 3 in that order. Hence the above has to be classified by applying Rule 4 of General Rules for interpretation which is reproduced below :- Goods which cannot be classified in accordance with the above rules shall be classified under the heading appropriate to the goods to which they are most akin. Thus applying the kinship principle under Rule 4 as above, it is observed that in the present case, PAK information relatable to software package had been imported through recorded media i.e. Recorded tapes and through E-mail, then such information could have been imported as recorded tapes or as PAKs falling under Heading No. 85.24 of the Customs Tariff. Thus considering the above facts and circumstances of the case; the definition of Goods under Section 2(22) of the Customs Act, 1962, which inter alia covers any movable property; the scope of Heading No. 85.24 of the Customs Tariff, which inter alia covers records, tapes and other recorded media for sound or other similarly recorded phenomena, and applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecorded Media DOCUMENTATION at (i) (ii) above are termed as QA; the licence at S. No. (iii) is called QL; QA QL are supplied to the customers by DEC, either together or separately, at Published Price Lists. The Price of QA is fixed (through it shows price of DOCUMENTATION separately); the price of QL varies according to the end users configuration of Computers Hardware and use and number of users; i.e., if a customer has obtained one QA and one QL for one user and wants to increase the number of users at his end, he can ask for and get additional QL as per requirements. If there is change in QA (due to upgradation/improvement) the customer can get the new QA without changing his QL. Ensuring the Customer is using the software in terms of the Licence granted somewhere in 1989, DEL introduced a safety devise called Product Authorisation Key (here-in-after referred to PAK ) which besides having customers particulars also had an alpha numeric code (here-in-after referred Checksum ) which was given at no additional cost to the customer having QA QL. DEIL were importing QA QL with PAK and clearing the same through customers on payment of duty. (b) the appellants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter. Thus, the contradictory charges persisted and the appellants were forced to continue with their submissions. Since two diametrically opposite charges cannot be made, the show cause notice pursuing such charges, vitiates the show cause notice and consequently the proceedings are contrary to the principles of natural justice. The appellants relied upon the following decisions and submitted before the original adjudicating authority that the show cause notice was not maintainable in view of the fact that it pursues two diametrically opposite charges. (a) Charandas Malhotra v. A.C. Customs - AIR 1968 CAL 28 (b) B. Lakshmichand v. Govt. of India - 1983 (12) E.L.T. 322 (c) K.R. Steel Union Pvt Ltd. v. C.C.E. C. - 1987 (31) E.L.T. 924 In spite of the above, the authorities proceeded with the adjudication without clarifying the charge that is being proposed to be pursued. There is thus violation of principles of natural justice which goes to the root of the proceedings. The impugned order is therefore liable to be set aside. We find that adjudication in the impugned order has found that it is not the case of the Department to dispute the value of QA as it appears fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. It is separately priced depending upon the number of users or the speed of the machine. The PAK is an alpha numerical code which is given to the customer who has bought the software (QA) and has obtained the licence (QL) for accessing the software on to his machine. The PAK is therefore neither the QA nor the QL. It is also evident from the PAK itself where it specifically says that, this document does not constitute a software licence. Hence to construe PAK as either software or as licence cannot at all arise. Since the impugned order has been passed misconstruing the character of PAK, the same is liable to be set aside. It is common knowledge that software is contained in a carrier medium viz, a floppy, cartridge, diskette, tape, etc. The set of instructions known as progammes encoded on such carrier medium is transferred on to the computer hard disc and the same is used for analysing information or data. The software is thus a programme with which the intended activities are carried on by using the computer. The instruction manual, the printed book, helps to understand the scope and operational effect of the software programmed and also for trouble shooting, if any. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he license and therefore the value of QL (licence) should be assumed and declared for the TK-50 Cartridges, is incorrect and unsustainable. Whenever the appellants imported QAs or QLs, they paid for the same according to them the price for the respective QAs and QLs. Even in such circumstances, the appellants received the alpha numerical numbering, PAK, for giving the same to the customer who has purchased the QL. In those circumstances, the duty was paid on the QA imported and the QL imported. The receipt of PAK information was neither considered as import of QL nor any other payment other than the payment of QL was made for the PAK. Hence, construing the value of the licence as the value of PAK is incorrect and unsustainable. The fact that the information contained in the TK-50 cartridges viz, alpha numerical codes (PAKs) have no value is also evident from the fact that no payment is occasioned against such PAKs. The payments, if any, are made only against the licences, if any, issued by the appellants. If no licences were issued, no payments were required to be made. No payment is to be made with reference to the total number of PAK information contained in TK-50 cartridges. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t only the value of the Tapes etc. but also of the contents therein will be relevant for the purpose of valuation. Therefore, value of the recordings is required to be determined and added to the declared value of US $ 32.40 on the Bills of Entry and thereafter a decision arrived at as regards misdeclaration. The rate of duty under the two headings may be same but by not declaring the Recording thereon, an attempt at clearing the goods as misdeclared value could be established invoking the provisions of Section 111(m) of the Customs Act, 1962, provided the value determined by the Department exceeds on such re-assessment the declared value. Since we are not determining the valuation aspect, the same being left open in the remand proceeding, we are leaving the question of misdeclaration under Section 111(m) open. Since no market price is available or determined, and the TK-50 cartridges are admittedly for Actual User import, we cannot determine the adequacy or otherwise of the Redemption fine under Section 125 of the Customs Act, 1962. We direct that the same shall be determined keeping in mind the above requirement i.e. market price and import for Actual Use, if the TK-50 cartri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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