CESTAT Grants Relief to HCL Technologies: License Fee for SAP Software Not Addable to Customs Value of Imported CDs
Pranav B Prem
The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Principal Bench, New Delhi, has ruled in favour of HCL Technologies Ltd., holding that license fees paid for SAP software cannot be added to the customs value of imported compact discs (CDs). The Tribunal rejected the Directorate of Revenue Intelligence’s (DRI) allegations of duty evasion and set aside the re-determined demand.
The bench comprising Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) was dealing with an appeal arising out of a long-running customs dispute. The controversy stemmed from an investigation by the DRI, which found that HCL declared a nominal value of ₹2,558 for imported CDs containing SAP software while separately paying ₹18.59 crore as license fees to SAP India under an End-User License Agreement (EULA). According to the DRI, the CDs and license fees were inseparable, and the non-inclusion of the fees in the customs valuation amounted to misdeclaration.
HCL, however, argued that the CDs imported from SAP Germany were only physical media containing software copies, and the actual license was procured electronically under the EULA with SAP India. The company submitted that the software was accessible only through license keys and payments made directly to SAP India, and therefore, the value of license fees could not be attributed to the CDs for the purpose of customs duty.
In 2014, the Commissioner of Customs (Adjudication), New Delhi, upheld the DRI’s case and re-determined the value of the CDs to match the license fee amounts. A demand for differential duty was raised, interest was imposed, and penalties were levied under Section 112(a) of the Customs Act, 1962. The Commissioner had described the arrangement as “a larger well-designed plan to evade customs duty,” and appropriated deposits of ₹27.17 lakh from HCL and ₹9.61 crore from SAP India.
On appeal, CESTAT disagreed with the Commissioner’s reasoning. The Tribunal observed that Rule 9(1)(c) of the 1988 Customs Valuation Rules applied only when royalty or license fees are a condition of sale of imported goods. In this case, the license fees were not linked to the CDs themselves but to the right to use the SAP software, which was contractually separate from the import of discs. The bench noted: “Unless the license fee is paid, the SAP software contained in the CD could not have been accessed and used by the importer. This, however, does not imply that the license fee should be added to the value of the CDs.”
CESTAT emphasized that the CDs were only a medium for delivery, and the real consideration was for the license to use the software. Since the license agreements were executed in India with SAP India and not with SAP Germany (the exporter of CDs), the fee could not be brought within the customs valuation ambit.
The bench also held that penalties imposed under Section 112(a) could not be sustained, as there was no evidence of deliberate misdeclaration or intent to evade duty. Accordingly, the Tribunal upheld HCL’s appeal and directed that neither the license fee be included in the value of imported CDs nor penalties imposed on HCL or SAP India. The ruling provides clarity on how software imports bundled with licensing arrangements are to be treated under customs law, underscoring that electronic license payments cannot automatically be subsumed into the value of physical media imported.
Appearance
Shri V. Lakshmikumaran, Shri Rachi Jain, Shri Ashwani Bhatia and Ms. Srishty Bajaj, Advocates for the Appellant.
Shri Nikhil Mohan Goyal and Shri Rakesh Kumar, Authorized Representative for the Department.
Cause Title: HCL Technologies V. Commissioner of Customs (Adjudication)
Case No: Customs Appeal No. 53102 Of 2014
Coram: Justice Dilip Gupta (President), Hemambika R. Priya (Technical Member)
