TMI Blog2012 (7) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Team-Head, which is part of the adjudication proceedings. Further, the Commissioner has permitted expert opinions of two experts to be were produced by the appellants, and considered the same as well – there is no violation of principles of natural justice in this regard. What are the nature/characteristics of goods imported by the assessee/appellants as hardware and software separately - What is the true nature of transactions involved in such imports - import is of telecom equipment system - They did not disclose preloading of software in the factory in Sweden - comprising both hardware and software units – Held that:- Not only the software has been preloaded in flash memory or hard disc but a backup of the same was taken and stored in the hardware imported - What was imported as software separately was lying in original packing condition, without being opened and therefore, without being used for a few years. That does not mean that the hardware was not put into use. Hardware was installed and tested by the officials of EIL and the system was put into operation. They did not find any need for use of the software imported separately - it is not proper to consider th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y goods in respect of which offences have been established and not necessarily to all goods which have been seized - there is no restriction under Section 124 to issue show-cause notice proposing confiscation of only the seized goods - provisions of Sections 110 and 124 are independent, distinct and exclusive of each other - imported goods are offending in nature due to deliberate misdeclaration of value of the goods, they are liable to confiscation - goods were imported over a long period August 2001 to April 2006 and that the order of confiscation was made in April 2008, and that the goods were meant for the importers own use for rendering services and not for sale, we are of the view that there is some scope for reducing the quanta of redemption fines imposed by the Commissioner Whether the quantum of duty has been correctly worked out - assessee submitted that the department, instead of valuing the software on the basis of payments made to the supplier, computed the value on a completely notional basis and the same was against the provisions of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 – Held that:- Adoption of software value for the full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 10 Crores under Section 112(a) of the Customs Act. 1.4. Six appeals Nos. C/613 to 618/2008, [one appeal each corresponding to each of six show-cause notices] filed by the department seek enhancement of penalties imposed under Section 114A of Customs Act, 1962. It is prayed that penalties should be imposed equivalent to the duty demanded plus the corresponding interest accrued under Section 28AB of the said Act instead of penalties equivalent to the duty demanded . 1.5. As all these appeals arise out of common impugned order passed by a common adjudicating authority and involve common facts and legal issues, they are being disposed of by this common order. 2.1 Stay petitions in the appeals filed by the parties were heard on 20.10.2008 and in the Stay Order dated 22.10.2008, all the appeals were ordered to be posted out-of-turn for final hearing on 25.11.2008. These appeals were heard for a few days and the order was reserved on 16.01.2009 but as the order was not pronounced within four months, the same came to be re-listed for fresh hearing. 2.2. The appeals were heard again on 05.01.2011 and 06.01.2011 and adjourned for further hearing on 1st, 2nd, 3rd and 4th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are and software undertaken by the appellants for its GSM network. The officials seized documents like supply contracts, technical literature, installation manual, O M manual, H-module etc. available at the office premises of the appellants at Bangalore, hardware equipment valued at Rs. 9.94 crores and software in CDs/ODs with a declared value of Rs. 113.50 crores lying in their godown . (e) The DRI officers, on 11.10.2004 inspected the hardware packages and recorded the proceedings in a Mahazar. The software available in CDs/ODs was scrutinized at the premises of the appellants on 18.02.2005 and the content thereof was recorded in separate printouts. The DRI officers also recorded the statements of several connected individuals during the investigations. 4.2. Proceedings were initiated by issuance of show-cause notices dated 29.03.2005, 9.3.2006, 29.05.2006 29.05.2006 to the appellant-1 wherein it was proposed to: Reject the values declared in respect of telecom equipments imported and re-determine the assessable value by adding the value of software separately imported under Rule 4 of the Customs Valuation Rules, 1998 read with Section 14 of the Customs Valuation Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the splitting of the equipment price as hardware and software by agreeing to prepare the ODs/CDs. 4.6. The Commissioner of Customs Bangalore, who was appointed as common adjudication authority, passed the impugned order dated 15.04.2008/30.04.2008 confirming demands of duty along with applicable interest under Section 28AB ibid as proposed in the show-cause notices. He also ordered confiscation of the imported goods but allowed redemption on payment of fines under Section 125 of the Customs Act as mentioned earlier. He also imposed penalties under Section 114A on the appellant/assessees equal to the duty demanded. He also imposed a penalty of Rs. 10 crores on EIL under Section 112(a) of the Customs Act. He also ordered enforcement of bank guarantees for Rs. 2,35,43, 253/- and appropriated towards the duty and other adjudication levies. Submissions on Jurisdiction 5.1. At the outset, it was contended that the impugned order of the Commissioner has been passed with out jurisdiction as the show cause notices were issued by ADG DRI who lacked jurisdiction and therefore the proceedings were ab-initio void. Shri Shiva Dass learned advocate made submissions on this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdiction , and made the following submissions: (a) The ADG DRI was duly declared as Collector of Customs by Notification No.19/90-Cus.(NT) dt. 26-04-90. The Board has specifically issued Circular No. 4/99-Cus. dated 15.02.1999 empowering ADG DRI to issue show-cause notices in respect of cases investigated by the DRI. (b) The proper officers are to be nominated for performing various functions within the commissionerate by the Commissioner. Powers of proper officers, on All India basis, are to be conferred by the Board. Commissioner who has the power to declare proper officers can exercise the power of proper officer himself. (c) In support of his above submissions, he relies on the decision of the Tribunal in the case of Sundaram Finance vs. Commissioner of Customs reported in [2012 (279) E.L.T. 220 (Tri.-Chennai)]. (d) The amendment dated 08.04.2011 to Section 28 is to simplify provisions contained in erstwhile Section 28 and to align the time limit for issuance of show-cause notice to different categories of persons to a uniform period of one year. The explanation that the cases prior to amendment shall be dealt with as per provisions of erstwhile Section 28 is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be recorded in media like CDs/ODs would indicate that the preloaded software cannot be considered as embedded software. 8.3. The cost of blank CDs/ODs/Floppy Discs is insignificant. Only the software has substantial value. The software supplied comes with the licence for use of the said software. When the software was imported in CDs/ODs, the same came with the licence permitting use of the same. 8.4. The hardware which was tested by loading the software in Sweden got dismantled in convenient systems/sub-systems and after import, the same were assembled and subject to testing by the officials of IEL. The officials of IEL generally download the latest software through internet and invariably load the software as part of testing conducted at site in India even though the said software stands loaded earlier at Sweden. This will be clear from the evidence given by Shri Rajan Thomas, the Project Manager in IEL, during cross-examination. 8.5. The agreements with the supplier based in Sweden contemplate periodical updates of the software without additional costs but any upgradations shall be only on payment of additional costs. Such updates and upgradations to software have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software programming of AXE-system called the Programming Languages for Exchanges (PLEX). (d) Typical AXE-10 exchange control software contains about one million lines of PLEX codes from a global library and ten million lines of codes. (e) The technology in software programming has now advanced and an advanced version of PLEX viz., HL-PLEX has been introduced by Ericsson which has borrowed a lot from languages like C and Pascal, but retaining the old processor architecture in AXE. (f) AXE architecture is divided into several functional blocks. A functional block is a combination of the hardware, central software and regional software, the software being located in the central processor and regional processors respectively. (g) The AXE Control systems basically comprise of the operation system which carry out the international functions of the central processing in AXE which is executed mainly by micro programmes. (h) As regards the nature of software residing in a flash or a hard disk drive, it is to be noted at the outset that the file applications are the backbone of AXE exchanges and these files are loaded into RAM either from the flash memory (in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d application software which are loaded onto the flash memory would require to be independently considered as recorded media for the reasons stated above. 8.12. Even if the software imported along with the equipment is to be assessed along with the equipment, still the value of the software cannot form part of the value of the equipment. By adding the value of operating and application software to the hardware value, the department is, in effect, considering that the software has independently no value and cannot be considered as a separate commodity at all. That is to say, the department contends that the software value is zero and the entire value is attributable only to the hardware, which is contrary to all accepted norms of commerce. 8.13. The contract between JTM and Ericsson did not contemplate charging of separate prices for BTS software and BTS hardware. But it would be illegal to bind the appellants to terms of a contract, which their predecessors in business had entered into with their supplier. They cannot be barred from entering into a contract having different terms and conditions as long as the bifurcation of the supply value separately into hardware and soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xports [2005 (184) E.L.T A36 (S.C.)] b) Shiv Kripa Ispat Pvt. Ltd. vs. CCE C, Nasik [2009 (239) E.L.T 623 (Tri.-L.B.)] c) Sahil Trends Vs. Commissioner of Customs [2004 (177) E.L.T. 732 (Tri.-Del.)] d) Commissioner Vs. G.M. Exports [2004 (174) E.L.T. 101 (Tri.-Del.)] 9.1. Learned Special counsel for the department supported the order of the Commissioner confirming the demand of duty and interest and imposing penalties and, inter alia ,made the following submissions after taking as through the relevant documents : (a) The issue involved is one of valuation dispute and not a classification dispute. (b) The assessees had no option to buy hardware and software except as a package; the price negotiation was only in respect of the equipment; the split of cost of hardware and software was done without any basis as detailed in para 55 of the impugned order, thus evidencing manipulation. There was no cost for BTS software prior to September 2011. (c) Product marketing library, student manual and H-Module clearly indicate that the supplier was considering the impugned goods only as a complete entity and not consisting of hardware and software. (d) The programmes that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty for confiscation does not necessarily mean that the goods should be available in the possession of the department before ordering confiscation. 9.4. After recalling the nature of deception carried out, he submits that it is a fit case for invocation of extended period of limitation and imposition of penalties. 9.5. As regards the department s appeal for enhancing the penalty equal to duty involved plus the interest he reiterates the grounds of appeal. 9.6. After taking us through the order of the Tribunal in the case of Vodafone and the relevant portions of the impugned order of the Commissioner, the special counsel made detailed submissions on how the facts of the present case are distinguishable from the facts of Vodafone case. In this regard, he also relied on the decision of the Tribunal in the case of Bhagyanagar Metals Ltd. Vs. CCE, Hyderabad II [2009 (241) ELT 63 (Tri.-Bang.)] which distinguished the earlier decision of the Tribunal in the case of same party reported in 2005 (180) ELT 170 with the following findings: The Commissioner has given very detailed findings with regard to the valuation. We entirely agree with him. He has also distinguished the facts of Bh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively validate the show-cause notices and the proceedings thereafter? 11. We hold that the ADG DRI was competent to issue the impugned show-cause notices for the following reasons. (a) We find that ADG DRI has been appointed as Collector by Notification No. 19/90-Cus (NT) dated 26.4.90. We also note that the ADG DRI has been specifically empowered by the Board vide Circular No. 4/99-Cus dated 15.2.1999 to issue show-cause notices in respect of cases investigated by them. This circular has not been shown to have been rescinded. Further, subsequently, by Notification No 44/2011-Cus (NT) dated 6-7-2011 issued in exercise of powers conferred by Section 2(34), DRI officers including ADG DRI were appointed as proper officers for the purposes of Section 17 and Section 28. In other words, as far as ADG DRI is concerned, there is both appointment as Collector/Commissioner and special authorization by the Board to issue show-cause notices in respect of cases investigated by DRI. This position is valid even for the period prior to 08.04.2011. (b) We also note that ADG DRI only issued the show-cause notices which merely proposed confiscation of goods, demand of differential duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 28. The said decision did not deal with any show-cause notice issued by ADG DRI. (d) In a matter involving issue of show-cause notice by ADG DRI, the decision of the Mumbai bench of the Tribunal in the case of Chandna Impex Pvt. Ltd. was challenged before the Hon ble Supreme Court. The Hon ble Supreme court vide order dated 06.07.2011 remitted the matter to the Tribunal for fresh consideration of the issue relating to jurisdiction in the light of decision of the Hon ble Supreme Court in the case of Syed Ali. Obviously, the issue pertaining to jurisdiction of ADG DRI to issue notice was left open to be decided by the Tribunal. (e) Section 28 of the Customs Act was amended first on 08.04.2011 and then again on 16.09.2011. As per relevant notes on clauses relating to amendment dated 08.04.2011, Section 28 is being substituted so as to make the provisions more coherent and clear-as also to harmonize the demand period in normal cases to one year . Section 28 has been merely recast by eliminating provisos and bringing about greater coherence in the provisions. The explanation (2) of Section 28 reads as under: For the removal of doubts, it is hereby declared that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lved in preparing the CAIR report? 12.1. There are no submissions that ADG DRI personally participated in the investigation. Based on the investigation report, ADG DRI has issued the show-cause notice forming a prima facie view. Issue of show-cause is akin to framing of charges in a court of law. There is no prohibition to conduct the trial by the magistrate/judge who framed the charges. On the same analogy, there is no bar in adjudication of the show-cause notice, by the officer who issued the show-cause notice. Further, we find that no objection has been made during adjudication and that all the appellants have submitted to the jurisdiction of the adjudicating authority. Raising the objection at this stage, merely, because the decision taken by the learned Commissioner is against them is not justified. 12.2. There is no absolute right for cross examination of any witness in the adjudication proceedings. The same has to be considered in the facts and circumstances of each case. In the present case, the CAIR Report was based on the opinion of a group of scientists and not the opinion of a single person though the report was signed by Shri Shivashankar on behalf of the team. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by Ericsson AB in their factory located at Sweden. After manufacture, and before dispatch, Ericsson AB conducts a factory test by loading the respective software onto the equipments. In the case of MSC and BSC, the software is loaded onto the hard disks and in the case of BTS, it is loaded onto a Flash Memory card. On Software 13.2. They have separately imported software known as MSC, BSC, BTS software in the form of CDs/ODs/Floppy disks. These were classified under 8524 and cleared without payment of duty. It would be appropriate to discuss the salient features of transactions involved in respect of such imports which are as follows: (a) Whatever was contained in the ODs/CDs imported separately was undisputedly software preloaded at the factory in Sweden and subjected to testing. Not only the software has been preloaded in flash memory or hard disc but a backup of the same was taken and stored in the hardware imported. Undisputedly, the software which was preloaded (which had a backup as well) was sufficient for running the system for the intended purposes. If there was need for the software in the event of back up also crashing, the appellants could have directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch value primarily because of licence permitting use of the said ODs/CDs. To say that what has come preloaded with the machine along with a backup copy and which was actually used for running the system has no value and also not supported by the licence but the ODs/CDs which were not even opened and never used are the valuable ones and supposed to have come with the licence for use militate against even rudimentary logic! This claim should, therefore, be rejected outright. In other words, the separate import of ODs/CDs can be safely held to be totally redundant and the commercial value of such imports to be nil . The value of software, obviously, relates to the software which was preloaded (with a backup) and came along with the imported hardware and was used for the intended purpose. Telecom Equipments are not specialized computers 13.3. The appellants have claimed that the telecom equipments imported should be considered as specialized computers. This claim may be considered based on the following illustrations and grounds: (a) A cat may resemble a tiger in certain respects. The cat and the tiger may belong to the same family among animals. However, cat and tiger can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such bought-out items along with the computers. In the background of the said case, the Hon ble Supreme Court held that hardware was the computer and the programming to run it the software and that the Tribunal confused the computer with computer system. They likened the said software to ribbon used in a typewriter. It was held that, though typewriter ribbon was essential for the functioning of the typewriter, the typewriter ribbon should be treated as an accessory of typewriter and not a part inasmuch as typewriters were sold without typewriter ribbons. On the same analogy, it was held that the value of the tangible software recorded in discs, floppies, CD Roms sold along with computers was not to be included in the assessable value of the computer. b) Hon ble Supreme Court, in the decision dated 21.7.98 in the case of ORG System vs. CCE, Vadodara [1998 (102) ELT 3 .C.)], dealt with the valuation of computers manufactured on job work basis through job workers by the appellant. In that context, it was held that - The peripheral devices and other systems software were merely additional devices meant to increase the memory or storage capacity of the computers and other facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept in semipermanent memory. Firmware is used in conjunction with hardware and software. It also shares the characteristics of both. Firmware is usually stored on PROMS (Programmable Read only Memory) or EPROMs (Electrical PROMS). Firmware contains software which is so constantly called upon by a computer or phone system that it is burned into a chip, thereby becoming firmware. The computer program is written into the PROM electrically at higher than usual voltage, causing the bits to retain the pattern as it is burned in . Firmware is nonvolatile. It will not be forgotten when the power is shut off. Handheld calculators contain firmware with the instructions for doing their various mathematical operations. Firmware programs can be altered. An EPROM is typically erased using intense ultraviolet light. 21 Operating system has been defined at page 500 of . the said dictionary as under : A software program which manages the basic operations of a computer system. It figures how the computer main memory will be apportioned, how and in what order it will handle tasks assigned to it, how it will manage the flow of information into and out of the main processor, how it will get materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Union of India and Others v. Play World Electronics Pvt. Ltd. and Another, (1989) 3 SCC 181]. Xxxx xxx xxx 38. While construing a taxing statute, the existing market practice may also be taken into consideration. 39. The statute, however, should not be interpreted in such a manner which may lead to wide scale evasion of duty. The Court should adopt an interpretation which would be user friendly. If any other interpretation is made, the same would encourage the manufacturers to sell the operational computer separately as a result of which the buyers may have to incur extra charges. The customers, thus, may not be able to get the benefit of the information contained in the operational computer loaded in the factory. Furthermore, it may encourage in loading of pirated softwares in the computer. Xxxx xxxxx xxxxxx 55. It must be borne in mind that central excise duty cannot be equated with sales tax. They have different connotations and apply in different situations. Central excise duty is chargeable on the excisable goods and not on the goods which are not excisable. Thus, a goods which is not excisable if transplanted into a goods which is excisable would not together make the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legislature, in our opinion, cannot be permitted to be withered away only because the informations contained in a software are loaded in a hardware. In other words, as the central excise duty is not leviable on a software in terms of the Act, only because it is implanted in a hardware which can be subjected to the assessment of central excise under different head, the same would not attract central excise duty. Analysis: 67. While calculating the value of the computer the value of the hard disc, value of the firmware, the cost of the motherboard as also the costs for loading operating softwares is included. What is excluded from the total value of the computer is the value of the operating softwares like Windows 2000, Windows XP which are secondary softwares. Indisputably, when an operating software is loaded in the computer, its utility increases. But does it mean that it is so essential for running the computer that exclusion thereof would make a computer dead box? The answer to the said question as would appear from the discussions made hereinafter must be rendered in the negative. It is not disputed before us that even without operational softwares a computer can be put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having fallen under 84.71 and 85.24 and must be subject to corresponding rates of duties separately. The informations contained in a software although are loaded in the hard disc, the operational software does not lose its value and is still marketable as a separate commodity. It does not lose its character as a tangible goods being of the nature of CD-ROM. A licence to use the information contained in a software can be given irrespective of the fact as to whether they are loaded in the computer or not. The fact that the manufacturers put different prices for the computers loaded with different types of operational softwares whether separately or not would not make any difference as regard nature and character of the computer . Even if the Appellants in terms of the provisions of a licence were obliged to preload a software on the computer before clearing the same from the factory, the characteristic of the software cannot be said to have transformed into a hardware so as to make it subject to levy of excise duty along with computer while it is not under the Tariff Act. 80. In other words, computers and softwares are different and distinct goods under the said Act having been cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d media or a software under CH 85.24. 17. The main components of a computer system are central processing unit, memory and disk store [See: Oxford Illustrated Encyclopaedia of Invention and Technology- 1992 Edition, page 183]. A floppy is a dumb storage box. It is different from a chip or an integrated circuit which performs intelligent functions. An integrated circuit (IC) is often referred to as a micro-chip or a chip. It is a miniaturized electronic circuit consisting of semi-conductor devices. A memory is the most regular type of integrated circuit [See: www.en.wikipedia.org]. According to www.whatis.com, an IC , sometimes called a chip or micro-chip, is a semi-conductor wafer on which thousands of capacitors and transistors, are fabricated. Unlike a floppy or a disk (which is removable from the system) an IC can function as an amplifier, timer, counter, computer memory and as a microprocessor. It is not easily removable. Therefore, an IC or a chip cannot be compared to a floppy which is merely a storage device similar to an empty box or a suitcase. 18. In the entire controversy before us, the appellant has tried to compare a floppy containing a programme with an IC in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps are written on an external programming device before being placed on the circuit board [See: www.answers.com]. The word programmable means that EPROM can be programmed with data, program or both whereas ROM means that the computer which is connected to the EPROM can only get information from the chip or IC. It cannot put information into the chip. In short, EPROM is a memory part which will not forget its program or data when power is removed. EPROM has to be programmed by a special programming product called an EPROM or a device programmer. The computer cannot store data in an EPROM because the EPROM is a READ ONLY memory part [See: www.arlabs.com]. 20. Lastly, even under the scheme of the 1985 Tariff and the HSN, ICs (85.42), data processors (84.71) and recorded media (85.24) are all separately classifiable. Under the explanatory note to HSN (2nd Edition, 1996), at page 1234, separate electrical parts have been classified under one or other of the headings of chapter 85, for example, transistors, diodes and similar semiconductor devices, stand classified under heading 85.41 while electronic integrated circuits are classified under heading 85.42. 21. The above discussion, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use they are unreliable as compared to ROM or Fast Memory IC chips. It is kept outside the reach of humans. In embedded systems, the software resides in ROM IC chips. Embedded systems are combination of hardware and software like ATMs, Cellular telephones etc. In embedded systems, the software resides in ROM IC Chip (See: www.answers.com). These chips are more than mere carriers. Example of embedded system: microwave ovens, cell phones, calculators etc. 25. In the case of Office of Patent v. Gale reported in 1991 RPC 305 the Court of Appeal held that if a programme is embodied in a floppy disk it becomes a software but where the chip with its electronic circuit embodies a programme it becomes a hardware. It has been further held that electronic circuitry in the form known as ROM is an integrated circuit or a chip. In the said case it has been observed by the Court of Appeal that ROM is an article which can be manufactured. It is an article because its structure can be altered during the manufacture so as to perform mathematical functions. It has been further observed that there is a difference between a disk containing a programme and a ROM with a particular circuitry embodying a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded operating system recorded on HDD, the said item forms an integral part of the laptop (computer system) and in which case the department is right in treating the laptop as one single unit imported by the respondent. The department has rightly classified the laptop as a unit under CTH 8471 . In the said case, the assessee wanted separate classification of software-loaded hard disc drive under CTH 85.24 separately from the laptop and claimed the benefit of Notification No. 21/2002-Cus. dated 01.03.2002. However, the department has themselves adopted the assessable value by deducting the software value from the total value of the laptop. (g) The Tribunal in their order dated 11.04.2000 in the case of BPL Communication Ltd. Vs. CCE, Mumbai [2000 (126) ELT 986] considered the issue as to whether the software imported, contained in tapes, cartridges or CD ROMs was entitled to the benefit of Notification No. 11/1997 dated 01.03.1997, and held as under: 5. Even on the assumption which the department s circular seeks to make that computer software would be available only to those computers which are classifiable under 84.71, it would be difficult to agree with the view as spelt out i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal against the order of the Tribunal was dismissed. The Tribunal decision was to the effect that the computer software contained in tapes, cartridges or CD ROMs used for different specific sectoral functions like call monitoring, base transreceiver, mobile switching centre and immediate switching in mobile telephone would be entitled to duty exemption under Sl. No. 173 of the table annexed to Notification No. 11/1997-Cus dated 01.03.1997. (h) The Tribunal in the decision dated 09.07.2008 in the case of Bhagyanagar Metals Ltd. Vs. CCE, Hyderabad-II [2009 (241) E.L.T. 63 (Tri.-Bang.)] considered the claim for exclusion of value of software meant for telephones. In the said case, the telephones were imported with the software needed for the functioning of the telephone already embedded in it. The assessee also imported separately CD ROMs containing software already embedded and needed for upgradation. The value of CD ROMs was taken as 30% of total composite value for the telephone. The Tribunal, taking note of the fact that with each telephone instrument, no CD ROM was supplied to the ultimate customer, held that there was no justification for splitting the value and accordingly th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant. (e) In certain circumstances, software loses its identity as software and becomes part and parcel of hardware and similarly, in certain circumstances, hardware loses its identity as hardware and becomes part and parcel of software. 14.4. The above is being elaborated by illustrations and examples in the following paragraphs. On Essentiality Criteria 15.1. Essentiality criteria can be appreciated by some examples/illustrations firstly relating to goods which are neither computers nor electronic goods. (a) An IC engine meant for a motor vehicle and the motor vehicle are two different commodities for the purpose of classification/valuation. However, an IC engine fitted to make a motor vehicle loses its identity as an IC engine and becomes an integral part of the motor vehicle for the purpose of classification/valuation. (b) Similarly, tyres meant for motor vehicles and the motor vehicles are distinct commodities and such tyres are accordingly bought and sold separately in the market. However, the tyres fitted to make a motor vehicle loose their identity as tyres for the purpose of classification/valuation as the tyres become integral part of the motor vehi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in disk, floppy, CD Rom has separate identity and even if sold along with computers, treated separately from the computers both for the purpose of classification and valuation. e) There are peripheral devices and systems software which are meant to increase the memory or storage capacity of the computers and other facilities which are bought and sold separately as well as with the computers. Such peripheral devices and systems software are to be treated independently. f) Computer software which is separately bought and sold and usable in any computer is stand-alone software and its value requires to be excluded from the value of computer even if such software is cleared along with the computer. 15.3. Computer and telecom equipments come under a broad heading (which we may call a family) referred to as data processing machines/equipments . Computer has very many general applications. Some machineries/equipments may be computer-aided but such machineries and equipments cannot be treated as computers as such. With the above in mind, we may, now, proceed to consider the ratio of case law relating to electronic equipments other than computers: a) Software imported separat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... many a times. Therefore, the meanings of these terms have to be understood in proper perspective. 17.1. The imported telecom equipments form a sophisticated system. It contains different functional blocks. It contains central processor and regional processors. When they were imported, the software required was undisputedly preloaded in the system either on to the hard disk or on to a flash memory card. The testing module which contains detailed instructions stagewise nowhere indicates that any software is to be loaded on to the machine during installation after importation. 17.2. It is not in dispute that the impugned software is essential for running the telecom equipments. The show-cause notices alleged that the software in the case of BTS was intrinsic software . The show-cause notices also alleged that the entire impugned software was essential and therefore, should be treated as part and parcel of hardware. On the other hand, on behalf of the appellants, it was canvassed that the essentiality criterion was not relevant to determine whether the impugned software could be treated as embedded software and to include the value of the software in the value of the hardware. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erences and findings and several crucial evidences which were not available before the Bench in the Vodafone case as listed below. (a) EIL, as per the show-cause notice and the order-in-original has been found to have indulged in copying of ODs/CDs in their office at Gurgaon and exporting them by declaring very nominal value, to Ericcson AB, Sweden for re-despatch to India. (b) There is mismatch of CDs/ODs imported by the appellants said to contain the software meant for MSC/BSC/BTS. (c) As per the evidence given by Shri Aravindan, the engineer who has undertaken the installation, no software was loaded while undertaking the installation and testing. (d) The opinion of an expert team from the Centre for Artificial Intelligence and Robotics (CAIR) was obtained and relied upon. (e) In the present case, the Commissioner has relied on the decision of the Hon ble Supreme Court in the case of Anjaleem Enterprises [2006 (194) ELT 129 (S.C)] whereas in the Vodafone case, the decision has been rendered without reference to the said decision in the case of Anjaleem Enterprises. (f) The show-cause notice in the present case specifically alleged that the equipments for MS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed software and is not contained in ROM, EPROM or EEPROM of the hardware or the micro processor chip . The Tribunal in the Vodafone case, after taking into consideration the decisions of the Hon ble Supreme Court in the cases of Acer India, Hewlett Packard and BPL Communications, came to the conclusion that the impugned software is not of the type which is embedded or etched and therefore need not be included in the assessable value of hardware namely MSC/BSC/BTS. 18.4. The following findings of the Tribunal in the case of Vodafone require to be noted: We note that importing software in CDs separately besides being preloaded on hardware is not something done unusual and is a trade practice and no evidence has been cited by the revenue to show that this is not a trade practice. The software in question was not an embedded software or a etched software and is contained only in the Winchester hard disc and therefore this plea is to be outrightly rejected and has even not been acted upon by the Commissioner in her order. Since the software in the present case has come in the form of tapes/CDs, separately also, it is clear that it is not of the type, which is embedded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liberately undervalued by splitting part of the value towards software and accordingly, rejected the assessable value declared by them and, enhanced the assessable value and held that the entire goods were liable tor confiscation and accordingly, confiscated the same. However, he allowed redemption of the confiscated goods valued at Rs. 98,31,12,721/- imported by BAL on payment of redemption fine of Rs. 2.35 crores. Similarly, he ordered confiscation of goods valued at Rs. 21,02,97,45,132/- imported by BEL but allowed the same to be redeemed on payment of fine of Rs. 48.8 crores. 19.2. No goods imported by BHL was seized by the department. In the case of BAL, hardware equipments valued at about Rs. 9.94 crores and software in CDs/ODs with a declared value of Rs. 113.50 crores were seized. Out of the seized hardware equipments valued at Rs. 9.94 crores, goods worth Rs 3.29 crores related to Microwave equipments and the balance of Rs. 6.65 crores only related to the disputed hardware like MSC, BSC, and BTS. Therefore, it was claimed that, at the most goods valued at Rs. 6.65 crores only were liable to confiscation and not the entire goods valued at Rs. 2,103/- crores imported by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable time as may be specified in the notice against the grounds of confiscation or imposition of penalty mentioned therein; and (c) is given a reasonable opportunity of being heard in the matter : Provided that the notice referred to in clause (a) and the representation referred to in clause (b) may, at the request of the person concerned be oral. SECTION 125. Option to pay fine in lieu of confiscation. - (1) Whenever confiscation of any goods is authorised by this Act, the officer adjudging it may, in the case of any goods, the importation or exportation whereof is prohibited under this Act or under any other law for the time being in force, and shall, in the case of any other goods, give to the owner of the goods or, where such owner is not known, the person from whose possession or custody such goods have been seized, an option to pay in lieu of confiscation such fine as the said officer thinks fit: Provided that, without prejudice to the provisions of the proviso to sub-section (2) of section 115, such fine shall not exceed the market price of the goods confiscated, less in the case of imported goods the duty chargeable thereon. (2) Where any fine in lieu o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Chinku Exports Vs. Commissioner [1999 (112) E.L.T.) 400] which was upheld by the Hon ble Supreme Court s decision reported as Commissioner Vs. Chinku Exports [2005 (184) E.L.T. A36 (S.C)]. 19.7. In the present case, the goods are offending in nature and they are liable to confiscation. The whereabouts of the goods are clearly known and they are within the jurisdiction of the adjudicating authority. Therefore, the order of confiscation of the entire goods including goods not seized is valid. 19.8. It is not out of place to note that Section 110 of the Customs Act envisages that, when the proper officer has reason to believe that any goods are liable to confiscation, he may seize such goods . On the other hand, the provisions related to confiscation of illegally imported goods (Section 111) are to the effect that the offending goods brought from a place out of India shall be liable to confiscation . In other words, the seizure is discretionary and in some cases it may not be necessary as mentioned earlier. 19.9. The decision of the Hon ble Supreme Court in the case of Harbans Lal vs. Collector of Central Excise as reported in [AIR 1993 SC 2487], the decision of the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V. Dakshina Murthy. MSC software - On the basis of per ETC card GMSC software - On a consolidated price HLR software - On the basis of per 1000 subscribers BSC software - On the basis of per Transmission Receiver Card (TRX card) PPS licence fees - On the basis of per 1000 subscribers It was submitted that the department, instead of valuing the software on the basis of payments made to the supplier, computed the value on a completely notional basis and the same was against the provisions of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. It was also the contention that the software value was taken for the full capacity of the imported hardware and not on the basis of corresponding software orders. According to the importers, they made payments for the imported hardware and software on a price model based on the concept of pay as you grow . Accordingly, the payments were calculated after the hardware and related software were installed at site and they started radiating. 20.2. This alternative submission regarding what is referred to as incorrect method followed by the department is being raised for the first time before the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the relevant contracts . The Commissioner has confirmed the demands of differential duty as proposed in the show-cause notices. 20.5. The present claim of the appellants that the value of the software was not definite at the time of import and it depends on pay as it grow model cannot be appreciated. It is not the case of the appellants that they claimed such flexible arrangement in prices even in respect of separately imported software (which we have held to be no better than e-waste) and hence sought provisional assessment. Therefore, adoption of software value for the full capacity of the imported hardware based on the appellants own documents cannot be held to be erroneous. The appellants claim to rely on value mentioned in corresponding software orders is not acceptable as we have already held that the appellants have deliberately split the value of equipments between hardware and software without any basis. (h) Whether extended time limit is applicable and whether penalties are liable to be imposed? 21.1. It is the contention of the appellant-assessees that the value of software was not includable in the value of hardware as they were two distinct commodities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quivalent to the duty demanded plus the corresponding interest accrued under Section 28AB of the Act instead of restricting the penalties to duty demanded . Section 114A reads as under: SECTION 114A. Penalty for short-levy or non-levy of duty in certain cases. - Where the duty has not been levied or has been short-levied or the interest has not been charged or paid or has [xxx] been part paid or the duty or interest has been erroneously refunded by reason of collusion or any wilful mis-statement or suppression of facts, the person who is liable to pay the duty or interest, as the case may be, as determined under [sub-section (8) of section 28] shall also be liable to pay a penalty equal to the duty or interest so determined: Section 114A of the Customs Act envisages that the penalty thereunder should be equal to the duty or interest so determined . Section 28 requires the proper officer to determine the amount of duty or interest due from such person not being in excess of the amount specified in the notice . It is to be noted that the demand of duty to be confirmed has to be either below or equal to the duty demanded in the show-cause notices. Section 114A refers to cases wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty on them. 22. From the foregoing, the following emerges: (a) The ADG, DRI has only issued the show-cause notices and did not adjudicate the cases. ADG, DRI had been duly appointed as Collector by Notification No.19/90-Cus. (NT) dated 26.4.1990. Further, he had been specifically empowered by the Board vide Circular No.4/99 Cus. dated 15.2.1999 to issue show-cause notices and the said Circular has not been withdrawn. ADG, DRI had been duly appointed as Commissioner under Notification No 17/2002-Cus. (NT) dated 25.10.2002. Subsequently, Notification No.44/2011 confers the functions of proper officers for the purposes of Section 17 and Section 28 of the Customs Act. Further, amendment (dated 16.09.2011) to Section 28 makes it clear that all persons appointed as officers of customs under sub-section 1 of Section 4 before 16.07.2011 shall be deemed to have and always had the power of assessment under Section 17 and shall be deemed to have been and always had been proper officers for the purpose of Section 28. (b) The issuance of show-cause notice by ADG, DRI and its adjudication by the same officer on being transferred and posted as Commissioner of Customs do not invol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfiscate the said seized software with declared value running to hundreds of crores. In other words, the Department has treated the said goods as unworthy of confiscation and the appellant has treated the same as unworthy of retrieval. (g) The equipment imported had the software preloaded, in fact, with a backup. In addition, undisputedly, the appellants could have downloaded the software through internet if the backup also crashes. Under these circumstances, what was separately imported as software classified under 85.24 can be appropriately considered only as e-waste. (h) The claim that the permission to use the software i.e., licence for use of the software was associated with the software separately imported in CDs/ODs has not been substantiated. The licence granted for use of software obviously should be associated with the software preloaded in the factory, along with backup, which alone was utilized/used for the intended purpose. To say that the licence was associated with the unused software and not to the software actually used is not logical, to say the least. (i) The dispute is not about classification of the separately imported software which we have consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deceitfully devised method to evade customs duty by hiding the preloading of necessary software in the imported hardware system. (d) There is no justification whatsoever to pull out or disintegrate the preloaded software from the equipments and grant it separate status and to classify it under Chapter sub-heading 8524 and to exclude the value of such software from the assessable value of the imported equipments. (e) The facts and evidences in the present cases are significantly different from the facts of the case of Vodafone and the decision of the Hon ble Supreme Court in the case of Anjaleem India Pvt. Ltd. was not before the Tribunal in Vodafone case. Therefore, the decision of the Tribunal in the case of Vodafone cannot be applied to the facts of the present case. (f) All the imported goods are liable to confiscation in view of the deliberate misdeclaration of value irrespective of whether the goods were seized or not. (g) We do not find any error in the method adopted for determining the quantum of duty evaded. (h) In view of the deliberate misdeclaration with intention to evade duty, the extended period of limitation is invocable. Penalties are also impos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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