CESTAT: Preloaded Software Integral to Navigation Devices, Customs Duty Payable on Combined Value
Pranav B Prem
The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the value of preloaded software etched into imported navigation devices must be included in the assessable value of the hardware and is therefore liable to customs duty. The ruling came from a bench comprising Dr. D.M. Misra (Judicial Member) and Pullela Nageswara Rao (Technical Member), which dismissed the appeal filed by M/s Lakshmi Access Communications Systems Pvt. Ltd.
The case arose from imports made in April 2010, where the company declared 20,000 portable navigation devices under Bill of Entry No. 227023 and separately declared 20,000 “paper software licences” under Bill of Entry No. 227446, valued at ₹1.89 crore, claiming exemption under Notification No. 21/2002-Cus. Investigations by the Directorate of Revenue Intelligence (DRI) revealed that in reality, 20,150 navigation devices had been imported, with 150 supplied free of cost, and that the software was already preloaded and etched into the devices with corresponding license key numbers.
The Commissioner of Customs, Bangalore, in the 2012 adjudication, had enhanced the assessable value of the navigation devices to ₹5.60 crore by including the software cost and confirmed a differential duty demand of ₹62.89 lakh with interest. The Commissioner also ordered confiscation of seized goods under Section 111(m) of the Customs Act, 1962, with an option to redeem them on payment of a fine of ₹56 lakh, and imposed penalties under Section 112(a) on the company and its directors.
The appellants argued before the Tribunal that software licences were separately imported and were exempt under prevailing notifications. They relied on earlier Supreme Court rulings in PSI Data Systems and Acer India Pvt. Ltd., contending that software and hardware values could not be combined. They further claimed that free units supplied by the foreign vendor were merely a trade practice akin to quantity discount and should not be treated as misdeclaration.
Revenue, however, emphasized that the software was inseparable from the devices, having been etched with license keys prior to import, and thus formed an integral part of the navigation system. The Tribunal agreed with the Revenue’s position, relying on the Supreme Court’s decision in Anjaleem Enterprises Pvt. Ltd. v. CCE, Ahmedabad and the Larger Bench ruling in Bhagyanagar Metals Ltd. v. CCE, Hyderabad-II. Both precedents held that software embedded into chips or hardware cannot be treated as independent media but must be valued as part of the device.
The Tribunal observed that the directors’ own statements admitted that license numbers were already loaded onto the devices when imported, undermining the appellant’s claim of separability. It also noted that the argument based on Grasim Industries was misplaced, as that case dealt with excise valuation and not embedded software in customs assessments.
While upholding the Commissioner’s decision to include software value in the assessable value and confirm the duty demand, the Tribunal did provide partial relief. It found the penalties of ₹6 lakh each imposed on the directors to be excessive and reduced them to ₹1 lakh each. However, the company’s appeal against duty and confiscation was rejected in full.
Appearance
Counsel for Appellant/ Assessee: B.N. Gururaj
Counsel for Respondent/ Department: Maneesh Akhoury
Cause Title: M/s. Lakshmi Access Communications Systems Pvt. Ltd. V. Commissioner of Customs
Case No: Customs Appeal No.2006 of 2012
Coram: Dr. D.M. Misra (Judicial Member), Pullela Nageswara Rao (Technical Member)
