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M/s. Bhagyanagar Metals Ltd, Shri Narendersurana, Md, Shri Balasubramanian, VP, M/s. Surana Telecom Ltd, Shri Balasubramanian, VP, M/s LG Electronics, M/s. Huawai Technologies Co Ltd Versus Commissioner of Central Excise, Hyderabad-II, CCE, Goa

2016 (2) TMI 614 - CESTAT HYDERABAD

Valuation - Claim of exemption on import of software - Alongwith import of cellular phones the appellants also imported CD ROMS and filed B/Es separately for phones and CD-ROMS claiming phones as "hardware portion" of FWTs and CD-ROMS as "Software Portion" of the said FWTs. A dispute arose on the nature of goods imported, mainly with reference to split up of hardware and software portions of FWTs for assessment purposes. Customs duty is payable on phones but exempted on imported software. Revenu .....

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ired parameters for its functioning.

The present appeals deal with Fixed Wireless phones, with PCB inside, a part of which is claimed as a recorded media for software. As examined with technical literature earlier in the order, the logic/programme loaded in the said memory unit is the fundamental necessity for the function of the FW telephone. It cannot be compared to any optional or identifiable software as a recorded media. Such software as available for computers are nowhere compar .....

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/2016 - Dated:- 17-2-2016 - G. Raghuram, President, Sulekha Beevi C S, Member (J) And B Ravichandran, Member (T) For the Appellant : Shri V. Sridharan, Senior Adv For the Respondent : Shri Mohd. Yousaf, Authorized Representative (DR) ORDER Per B Ravichandran:- APPEALS FOR CONSIDERATION :- The matter relating to valuation of imported Fixed Wireless Telephones (FWT) was examined and by decided two co-ordinate Benches of the Tribunal. Bangalore Bench of the Tribunal decided nine appeals by Final or .....

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at Sl. No. 4 Penalty reduced 6. C/489/2006 Shri NarenderSurana, M.D. of appellant at Sl. No. 4 Penalty reduced 7. C/491/2006 M/s L.G. Electronics Penalties set aside 8. C/556/2006 M/s L.G. Electronics Penalties set aside 9. C/473/2006 M/s Huawai Technologies Co. Ltd. Penalty set aside Mumbai Bench of the Tribunal decided appeal No. C/463/2004 filed by M/s Bhagyanagar Metals Ltd. by final order No. A/131/WZB/2007/CSTB/C.I. dated 22/02/2007. The Tribunal allowed the appeal in full. Revenue filed c .....

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gard to the aforesaid situation, it is suggested by Mr. S.K. Bagaria, learned senior counsel appearing for the assessees, that better course of action would be to send the matters back to the CESTAT which should be decided by a Larger Bench. We may accept the aforesaid proposal but while doing so it has to be necessarily directed that the evidence which has surfaced later on and relied upon by the Department in other show cause notices shall be considered as common evidence in all these cases. A .....

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kground facts of the case :- The main appellants in the case - M/s Surana Telecom Ltd. and Bhagyanagar Metals Ltd. imported Fixed Wireless Terminals (FWT), a type of Cellular phones which are operated under CDMA Technology. These imports were form M/s L.G. Electronics, Korea and M/s Huawai Technologies Co. Ltd., China. Alongwith these phones the appellants also imported CD ROMS and filed B/Es separately for phones and CD-ROMS claiming phones as "hardware portion" of FWTs and CD-ROMS as .....

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essed separately for claiming exemption. As earlier noticed, the Mumbai Bench of the Tribunal had decided that the inclusion of the value of the software in the value of the telephones imported by the appellants herein cannot be sustained. The Bangalore Bench, which decided another set of appeals separately, however came to the conclusion that the software necessary for functioning of the telephone is already embedded in it. Hence, there is no separate software for assessment and valuation adopt .....

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lf of all the appellants explained the nature of WLL Cellular telephones and the argued that appellants are right in their claim for exemption of software imported by them. The whole thrust of the argument of the learned Counsel is based on applicability of Note 6 of Chapter 85 of the First Schedule to the Customs Tariff Act, 1975 to imports made by them. The relevant portion of the said note states: "Records, tapes and other media of heading 85.23 or 85.24 remain classified in those headin .....

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time of imports. As such the media, here the information technology software, claimed for exemption is the Flash memory card which is part of main printed circuit board of the telephone apparatus, not the CDs imported and presented with these telephones. This is entirely a new matrix of factual and legal propositions not advanced earlier in any proceedings before the lower authorities. This Tribunal nor in the appeal before the Hon'ble Supreme Court. As such, admission of such entirely new p .....

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o the main Printed Circuit Board (PCB) of the telephone apparatus. Such software is exempt as the media (memory unit) is presented with the instrument (FWT) itself. Shri V. Sridharan presented his substantive contention with special emphasis on the above-mentioned point. His elaborate arguments can conveniently be summarized as below :- (a) Even with out reference to Note 6 of Chapter 85, the Hon'ble Supreme Court in PSI Data Systems Ltd. vs. CCE reported in 1997 (89) E.L.T. 3 (S.C.) held th .....

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L.T. 289 (S.C.) specifically rejected the 'essentiality test' and held the software installed inside Computer should be separately classified under heading 85.24 and not alongwith the Computer. As per HSN Explanatory Notes recorded media (Software) assembled with constituent part of machine of Heading 84.69 to 84.72 fall under heading 85.24 ; (c) Sprint R.P.G. India Ltd. vs. CC-I, Delhi reported in 2000 (116) E.L.T. 6 (S.C.) held that the software contained in hard disk will fall in Head .....

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e value of laptop, but value of the software contained in hard disk is not includable in the value of laptop, which should be assessed separately under Heading 85.24. The Telecom software now under consideration is covered under the category of Computer software ; (e) In the present case the software resides in the Flash memory, which is a mere storage device and, hence, should be assessed separately ; (f) The decision of the CESTAT in Bharti Airtel Ltd. vs. CC, Bangalore reported in 2012 (286) .....

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case. The legal position is settled by the ruling in Jaswal Neco Ltd. vs. CC, Visakhapatnam reported in 2015 (322) E.L.T. 561 (S.C.). (h) The redemption fine imposed in the present case is legally not sustainable. The imported goods were neither seized nor released under any bond. The bond referred to in the original order is for provisional assessment under Section 18 and there is no bond for provisional release of goods under Section 110A. (i) There is no case for imposing penalty on the appe .....

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s by the appellants. First of all, he objected to the appellants taking a completely new ground in the present proceedings regarding software purportedly contained in the hardware and applicability of Note 6 of Chapter 85. This proposition was never urged either before the Adjudicating Authorities, different Benches of the Tribunal or even before the Hon'ble Supreme Court when these cases were examined and decided. When bills of entry were filed in respect of the imported CDMA mobile phones, .....

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requires to be rejected outright. On the merits of the case, the learned AR made elaborate submissions. His submissions are summarized as below :- (a) Note 6 of Chapter 85 requires that the media as goods to be presented with the apparatus. In the present case, the Cell Phones were not presented with any separate media. The appellants earlier claimed that the software was in CD-ROMs. Now they are claiming that the software is in the flash memory unit which is part of the printed circuit board in .....

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lable separately for sale. In the present case there is no separately identified software which can be treated as goods in any media. (c) The software in the present case is a basic software which gives the phone its identity and functionality. It is pre-loaded in the hardware and the appellants attempt to show separate import of software through CDs is simply a device to escape Customs duty on the full value of the imported item - WLL Cell Phones. The earlier claim of software imported in CD is .....

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hed the ratio of Vodafone Essar Gujarat Ltd. vs. CC (Imports), Mumbai reported in 2009 (237) E.L.T. 458 (Tri. - Mum.). (e) Reliance can be placed on the ratio laid down by the Hon'ble Supreme Court in Anjaleem Enterprises Pvt. Ltd. (supra). (f) Regarding the applicability of interest it was submitted that the interest is compensatory in character and reliance was placed on the decision in Commissioner of Trade Tax, Lucknow vs. Kanhai Ram Thekedar reported in 2005 (185) E.L.T. 3 (S.C.), Hon&# .....

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ints for decision:- We have heard both the sides at considerable length. On a careful consideration of the factual, legal and technological issues, the main point for decision is whether there are two distinct goods - hardware part of fixed wireless phone and the software part of the said phone - for Customs duty assessment. In other words, is there, as claimed by the appellants, an identifiable goods as software in a media falling under Heading 85.24 of the Customs Tariff, in the imports by the .....

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As noted earlier in this order, the appellants put up their defence mainly on the ground of applicability of Note 6 of Chapter 85 to their case; to consider the Flash memory unit inside the WLL Cell Phones imported by them as a media carrying the software and accordingly eligible for exemption. The learned Senior Counsel for the appellants admitted that they are making this submission for the first time and are abandoning earlier arguments before the lower Authorities as well as the Tribunal, i .....

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Mills Ltd. reported in AIR 68 (SC) 101. In the said case, the Hon'ble Supreme Court held that the right of the assessee to relief is not restricted to the plea raised by him. The learned Counsel while admitting that the present plea though inconsistent with the plea raised before Departmental Authorities and Tribunal, is essential to determine the eligibility of the appellants to assessment of software as claimed by them. Since this plea raises a core issue, examination of the same is vital .....

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otally inconsistent with the pleas made in the first round of litigation up to the Hon'ble Supreme Court. However, considering that such assertion is based on legal principles for classification (Note 6 of Chapter 85 and other related principles for classification) we find it fit and proper to consider this plea on merit for a decision. As the present proceedings is to look at all the available evidences and legal provisions applicable afresh, it is necessary to consider this plea, for a pro .....

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with handset, dipole antenna, back up battery, AC/DC Power adopter and power cord. FWT and WLL are generic terms for radio based telecommunication technologies. The CDMA WLL network consists of WLL system, BTS (Base Station Transmission sub-system) and FWT (Fixed Wireless Telephone). The WLL system is directly connected with LE (Local Exchange). Relevant to decide the claim made by appellant regarding nature, tariff classification and thereby the exemption as available to software contained in & .....

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software would thus be eligible to the same. The block diagram will show the location of the memory unit in the PCB (U 11 - Flash Memory). This memory unit is part of the digital/voice processing unit which in turn is a part of Internal RF circuit of the telephone. The memory unit is composed of Flash memory for storing main program activating MSM (Mobile Station Modem) and storing user service related data and RF calibration data, and SRAM for reading and writing data. The Flash Memory has a 1M .....

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ory is dual bank architecture for concurrent read/write operation. Bank one is stored main program activating MSM Bank Two is stored non-volatile data such as the identification number of terminal, user service related data and RF calibration data. This memory is selected by_ROM_CS1. _ROM_CS1 is mapped to the Flash Memory address space. There are two SRAMs and each has 256K X 8bit space. Data generated during the terminal operation are stored temporarily in SRAM. SRAM is controlled by a _RAMCS1_ .....

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categories of non-volatile data storage - electrically addressed systems (read-only memory) and mechanically addressed systems (hard disks, optic discs, magnetic tapes etc.). In respect of FWT circuit as in the present case, this non-volatile memory (Read Only Memory) stores data which is hard-wired as a Firmware. Such software is closely tied to specific hardware. From the above technical details it is clear that the memory unit, which is a part of ARM7TDI Micro processor sub-system, is clearly .....

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of Note 6 to Chapter 85 of the Schedule to Customs Tariff Act, 1975 . Note 6 to Chapter 85 of the Schedule to Customs Tariff Act, 1975 as it stood prior to 01/1/2002 is reproduced hereunder: "6. Records, tapes and other media of heading No. 85.23 or 85.24 remain classified in those headings, whether or not they are presented with the apparatus for which they are intended". Note 6 to Chapter 85 of the Schedule Customs Tariff Act, 1975 w.e.f. 01/1/2002 is reproduced hereunder: "6. .....

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hone and more appropriately covered under Tariff heading 85.42. Tariff Heading 85.42 covers Electronic Integrated Circuits whether or not combined with memories. Such memories may be in the form of DRAMS SRAMS PROMS EPROMS EEPROMS etc. Note 5 of Chapter 85 provides that the classification of Articles defined in the said note, Headings 85.41 and 85.42 shall take precedence over any other heading in this schedule which might cover them by reference to, in particular, their function. The printed ci .....

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h, we find there is no separate media containing software that can be presented with the phone and classified under Tariff Heading 85.24. In other words, there are no two separate, distinct goods for assessment, namely (a) CDMA Fixed Wireless Telephone and (b) a media containing software presented with such telephone. It is further to be noted that the claim of the appellant all along, till the current proceedings, is that the software is contained in CD-ROM presented separately along the FWT ce .....

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ircuit board separately as a media for software. It is also not the claim of the appellant that such media carrying the software for FWT phones is anywhere available separately for trading. It is the clearly admitted fact that the software/data loaded on the Flash memory is specific to the user/customer. It contains caller ID and caller block software. The phones imported have embedded software with required parameters for its functioning. Analysis of case laws : Learned Senior Counsel as well a .....

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the software is not includable in the value of the WLL telephone. In the said case the apex Court was dealing with tangible software of the nature of discs, floppies and CD-ROMS. It was held that software sold along with the computer cannot be included in the assessable value of the computer for the purposes of excise duty. The Hon'ble Supreme Court cited the example of cassette recorder and a cassette to state that though cassette is required for functioning of cassette recorder, these are .....

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tion thereof for the purpose of excise duty. In Anjaleem Enterprises Pvt. Ltd. vs. CCE, Ahmedabad (supra) Hon'ble Supreme Court had occasion to examine the software programme which was claimed to be in the recorded medium found inside the STD PCO unit. The Hon'ble Supreme Court held that the 'IC' or a chip cannot be compared to a floppy which is merely a storage device similar to an empty box or suitcase. The Apex court observed : "22. The question which remains to be answer .....

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o RAM when the system gets started. The input/output routines are written into the IC at the factory. The point to be noted is that the ICs which contain semiconductor components like diodes etc. have got to be embedded in the mother board. The ROM chip is fixed at the factory. The chip is fixed in the computer and only then the programme works. Hence, this is basic difference between a mere floppy which is a recorded media under CH 85.24 and the IC under CH 85.42. In the former case, the progra .....

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not change with the programme being embedded in the IC and hence the IC remains classifiable under CH 85.42. This distinction is also brought out by tariff items referred to above (See: Dictionary of Computing by Prentice Hall). 24. An embedded system is a programmed hardware device. Software written for embedded systems, especially those without a disk drive is called Firmware, the name for software embedded in hardware devices e.g. in ROM IC chips. Many embedded systems avoid mechanical movin .....

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culators etc. The Hon'ble Supreme Court examined and distinguished their earlier findings in PSI Data Systems Ltd. vs. CCE (supra) and Sprint R.P.G. India Ltd. vs. CC-I, Delhi (supra) and held that in these cases the question of integrated circuit did not arise and interpretation of entry 85.42 was not at all considered. The Apex Court further examined the decision in CCE, Pondicherry vs. Acer India Ltd. (supra) and distinguished the same as not applicable to facts of the case of STD - PCO t .....

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examined with technical literature earlier in the order, the logic/programme loaded in the said memory unit is the fundamental necessity for the function of the FW telephone. It cannot be compared to any optional or identifiable software as a recorded media. Such software as available for computers are nowhere comparable to the programme software pre-loaded in the memory chip of the PCB. The appellants further relied on decisions of Hon'ble Supreme Court in CC, Chennai vs. Hewlett Packard In .....

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ard disk as a storage device/recorded media in a computer. The decision of the Tribunal in Vodafone Essar Gujarat Ltd. vs. CC (Imports), Mumbai (supra), relied upon by the appellant, is regarding software presented in a recorded media in the form of tapes/CDs as well as in the hard disk contained in the hardware. The software in that case is not embedded or contained in ROM or EEPROM or in the microprocessor chips. The reasoning given in the said decision is therefore inapplicable to the facts o .....

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for valuation. The item of import is FWT and as such should be subjected to classification and assessment accordingly. Revenue relied on the decision of the Tribunal in Jabil Circuit India Pvt. Ltd. vs. CCE, Pune reported in 2014 (307) E.L.T. 891 (Tri. - Mumbai), where the Tribunal considered inclusion of the cost of software loaded in the Flash memory chip inside the Set Top Boxes (STB). The Tribunal observed : "5.12 The next question for consideration is with regard to the inclusion of co .....

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aded on to it. It is in this factual context, the decisions relied upon by the appellant have to be examined. The appellant has relied on the decisions of the Apex Court in the case of PSI Data Systems and Acer India Ltd. wherein it was held that software has independent existence and has to be classified separately as a recorded media falling under CETH 85.24. It is also contended that Note 6 to Chapter 85 also provides that "records, tapes and other media of Heading 8523 or 8524 remain cl .....

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ong with the computer is not includible in the assessable value of the computer since there is a distinction between a computer and its software. However, these decisions of the Hon'ble Apex Court later on came to be examined in the case of Anjaleem Enterprises Pvt. Ltd. by the Hon'ble Apex Court where the software was recorded on an EPROM. The Hon'ble Apex Court held that EPROM cannot be compared to a floppy which is only a dump box. EPROM is basically an integrated circuit or chip .....

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y of recorded media under CETH 8424. In view of the above position, the ratio of the decision of the Hon'ble Apex Court in the case of Anjaleem Enterprises Pvt. Ltd. would be more appropriate and correct in the facts of the case before us. This ratio of the Apex Court was followed by this Tribunal in the case of Avaya Global Connect Ltd. (supra) wherein also it was held that software supplied along with system, namely, EPROM, as embedded in the system becomes an integral part and the value o .....

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g systems software in the Hard Disk Drive of the laptop forms an integral part of the laptop and therefore, the cost of such pre-loaded software forms part of the value of the laptop. Accordingly, the Hon'ble Apex Court held that when a laptop is imported with inbuilt preloaded operating system recorded on the hard disk, the said item forms an integral part of the laptop and has to be classified as laptop and not as computer software separately. Applying the ratio of these decisions to the f .....

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classified and assessed as phones with no segregation of value assignable to the software separately, as claimed by the importers. Interest Liability :- The appellants contested the interest liability in the present case. The imports took place in 2003-2004. The goods were assessed provisionally to duty and were allowed to be cleared in terms of Section 18 of the Customs Act, 1962 on execution of PD Bonds. Learned Counsel for the appellants emphasized that prior to 13/7/2006, there was no provis .....

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p; CE, Kanpur (supra) and Hon'ble Karnataka High Court decision in CC, Bangalore vs. Pierre Colsun Inc. (supra). We find that the impugned goods in both the sets of appeals were released on payment of provisionally assessed duty in terms of Section 18 of the Customs Act, 1962. Sub-Section (3) of the said Section was incorporated by Section 21 of the Taxation Laws (Amendment) Act, 2006. The said sub-Section reads as under :- Section 18 (3):- The importer or exporter shall be liable to pay int .....

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making it clear that such levy can only be prospective. The Hon'ble Apex Court referred approvingly to the decision of Hon'ble Gujarat High Court in CC (Preventive) vs. Goyal Traders reported in 2014 (302) E.L.T. 529 (Guj.) as under :- "17. In the present case, we find that prior to introduction of sub-section (3) of Section 18 of the Act in the present form, there was no liability to pay interest on difference between finally assessed duty and provisionally assessed duty upon paym .....

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sment which took place prior to the said date. Any such application would in our view amount to retrospective operation of the law". We also find that the Tribunal in Sterlite Industries (India) Ltd. vs. CC, Trichy reported in 2014 (311) E.L.T. 91 (Tri. - Chennai) held that in respect of provisional assessment prior to 13/7/2006 interest would not be leviable by invoking Section 18 (3) of the Customs Act, 1962. We find that precedents referred to by Revenue are not applicable to the facts o .....

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he duty payment was not made in time. In CC, Bangalore vs. Pierre Colsun Inc. (supra), the Hon'ble Karnataka High Court was dealing with the obligation to pay interest in terms of Section 28AA. We find that in the present case, there was provisional assessment which was later finalized. Since, at the time of resorting to the provisional assessment there was no statutory provision authorizing imposing of interest on the differential duty, (the provision which was introduced w.e.f. 13/07/2006) .....

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l Authority in his order dated 18/8/2006 is for the clearance of goods on payment of provisional duty. In the present case in the absence of any seizure thereafter provision release of goods under bond, confiscation or imposition of redemption fine are not sustainable. We find that reliance placed by Revenue on the decision of Hon'ble Supreme Court in Weston Components Ltd. vs. CC, New Delhi (supra) is misconceived. In the said case, there was a seizure and provisional release against a bond .....

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issioner of Customs, New Delhi (supra), the goods were released to the assessee on an application made by it and on the execution of a bond by the assessee and in those circumstances, the Hon'ble Apex Court held that the mere fact that the goods were released on the bond being executed would not take away the power of custom authority to levy redemption fine. A reading of the judgment/order of the Hon'ble Apex Court in M/s. Weston Components Ltd. v. Commissioner of Customs, New Delhi (su .....

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other irregularity, even then redemption fine could be imposed. We are, therefore, not inclined to accept the contention raised by the appellant on this issue and set aside the redemption fine. 13. The reliance of learned counsel for the revenue upon the provisions of Section 125 of the Act is also misconceived. Section 125 of the Act is applicable only in those cases which have been cleared by the concerned authorities subject to furnishing undertaking/bond etc. However, in the present case, a .....

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der bond and, hence, the question of payment of redemption fine either to release the goods or in terms of the bond does not arise. We find that there can be no redemption fine in the absence of any seizure or provisional release of such seized goods under proper bond. In the present case in the absence of such events, redemption fine imposed is not sustainable. Penalties :- Learned Counsel contested imposition of various penalties on different appellants. He submitted that no penalty can be imp .....

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ed was only regarding classification of software and assessment thereof. We find that at the time of original proceedings before the Commissioner, Goa or during further appellate proceedings before the CESTAT, Mumbai, the detailed investigation and the evidences gathered therefrom by the Department are not available for consideration. As seen from the impugned order dated 18/8/2006 of the Commissioner, Hyderabad II, the Department collected various evidences after detailed investigation involvin .....

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w cause notice to the appellants relating to imports invoked the penal provisions. In a case before the investigation, the Commissioner, Goa, did not impose penalty. In the case of Hyderabad, the Commissioner impose penalties on the appellant/assessee in terms of Section 114A and on the various individuals under Section 112 of Customs Act. We find that the penalty imposed under Section 114A was equivalent to the differential duty payable which was worked out in terms of Rule 5 of Customs Valuati .....

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