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2012-TIOL-746-CESTAT-BANG

(Also see analysis of the Order )

IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL

SOUTH ZONAL BENCH, BANGALORE

Customs Appeal Nos.573 to 575/2008, 613 to 618/2008

Arising out of Order-in-Original No.06/2008 Dated: 30.4.2008

Passed by the Commissioner of Customs, Bangalore

(Stay order in 2009-TIOL-654-CESTAT-BANG)

Date of Decision: 7.6.2012

M/s BHARTI AIRTEL LTD M/s BHARTI HEXACOM LTD

M/s ERICSSON INDIA PVT LTD

Vs

CC, BANGALORE

CC, BANGALORE

Vs

M/s BHARTI AIRTEL LTD M/s BHARTI HEXACOM LTD

M/s ERICSSON INDIA PVT LTD

Appellants Rep by: Mr V Lakshmikumaran & Mr G Shiva Dass, Advs. Respondent Rep by: Mr PRV Ramanan, special counsel

CORAM: P G Chacko, Member (J) M Veeraiyan, Member (T)

Customs - Valuation - Import of Telecom Hardware with software preloaded – Value of software to be included in Assessable Value

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(a) 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 involve any violation of principles of natural justice.

(b) The fact that no cross- examination was granted of the author of CAIR

report is not in violation of principles of natural justice, as further questionnaire given by the assessee stands replied on behalf of the group

of scientists. Further, the reports of two experts produced by the appellants stand admitted and examined by the Commissioner.

(c) The appellants imported telecom equipment systems and declared the

same as MSC classifiable under Chapter Heading 85.15, BSC and BTS

classifiable under Chapter Heading 85.25. They did not disclose preloading of software in the factory in Sweden. There was a single contract for

purchase of equipments; there was no option but to buy the so-called hardware and software only as a package; and no separate fixed price was

available for the software component. In fact, no price for BTS software was indicated for period prior to September 2001.

(d) The programs that make the switching equipment function are not independent software and cannot be marketed separately. Similarly, the

programs required to make the BTS functional are loaded on to flash drive and are integral part of BTS equipment.

(e) The separately imported softwares are found to be dupes copied in EIL, Gurgaon. Undisputedly, the impugned software is proprietary software. It

has not been explained as to how the same was permitted to be copied by a third party, namely, EIL. It was claimed that it might be a cost-saving

measure adopted by Ericsson AB Sweden. Allowing copying of proprietary software by a third party (even if the said party happens to be a

subsidiary) was not a "cost-saving measure" but part of a design to evade customs duty. No records were kept for such copying of software. The

copied software was sent to Sweden and dispatched back to India. The CDs/ODs were not in proper packing and not properly labelled defeating

the claimed status of the software. They were not opened and not used till

they were seized by the DRI authorities. The appellants have not chosen to ask for provisional release of the said items even though the total declared

value was Rs. 113.50 crores. This is to be contrasted with their efforts to take provisional release of seized equipments worth Rs. 9.94 crores after

furnishing bank guarantee worth Rs. 2,35,43,253/-. In fact, there was no proposal to confiscate 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.

(f) 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.



(g) 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.

(h) The dispute is not about classification of the separately imported

software which we have considered nothing more than e-waste. The

dispute is whether what was preloaded in the hard disk/flash drive at factory in Sweden before dispatch should be "pulled out" or disintegrated

from the machine and given a separate status and should be classified under 85.24 and its value should be excluded for determining the value of

the imported equipments. It is not the case that the appellants brought the software in CDs/ODs and presented the same along with the hardware and

sought classification of both hardware and software separately.

(i) The final cost of equipment included the cost of the programs in the

form of software. Equipment was imported by the assessees declaring it as hardware and declaring its value less to the extent of the corresponding

software price indicated for the software.

(j) The programs in the software define and characterize the particular

hardware and elevate the same to the functional apparatus/equipment. The software is written in a specialized language PLEX which is proprietary

in nature. The software is machine-specific and the same is mandatorily required for working of the said machine. It has not been shown that there

is separate identity for the impugned software marketable as a separate commodity. We have not been shown that there was an option to buy the

impugned software separately.

(k) There is no justification for excluding the price of preloaded software

from the value of equipments as claimed by the assessee-appellants.

(l) There is clear evidence of deliberate under declaration of value of the

imported equipments by the assessee-appellants through a grossly deceptive method with intention to evade payment of duty. In view of the

above, the invocation of extended period for demand of duty, confiscation of the imported goods, and imposition of penalties on the assessees are

justified.

Appeal decided in favour of Revenue.

Case Law Referred:

1. Acer India Ltd. vs. CCE - 2004-TIOL-81-SC-CX-LB

2. Anjaleem Enterprises - 2006-TIOL-06-SC-CX



3. Bhagyanagar Metals Ltd. Vs. CCE, Hyderabad II - 2008-TIOL-2171-CESTAT-BANG

4. BPL Mobile Communications Ltd. vs. C.C., ACC, Mumbai - 2002-TIOL-107-CESTAT-MUM

5. Commissioner of C. Ex., Pondicherry vs. Acer India Ltd. - 2004-TIOL-81-SC-CX-LB

6. Commissioner of Customs Vs. Syed Ali and another reported as -2011-TIOL-20-SC-CUS. Para 3.1

7. Commissioner of Customs, Chennai Vs. Hewlett Packard India

Sales (P) Ltd.- 2007-TIOL-154-SC-CUS

8. ITI vs. C.C., Bangalore - 2009-TIOL-302-CESTAT-BANG

9. ORG System vs. CCE, Vadodara - 2002-TIOL-183-SC-CX

10. PSI Data Systems Ltd Vs. C.C.E. - 2002-TIOL-46-SC-CX

11. Sahil Trends Vs. Commissioner of Customs - 2003-TIOL-225-CESTAT-DEL

12. Shiv Kripa Ispat Pvt. Ltd. vs. CCE&C, Nasik - 2009-TIOL-388-CESTAT-MUM-LB

13. Sprint R.P.G. India Ltd. vs. Commissioner of Customs-I, Delhi -2002-TIOL-192-SC-CUS

14. Sundaram Finance vs. Commissioner of Customs reported in -2012-TIOL-360-CESTAT-MAD

15. Union of India and Others v. Play World Electronics Pvt. Ltd. and Another - 2002-TIOL-198-SC-CX

16. Vodafone Essar Gujarat Ltd. Vs. Commissioner of Customs

(Imports) - 2008-TIOL-2861-CESTAT-MUM

17. Weston Components Ltd. Vs. Commissioner of Customs, New

Delhi - 2002-TIOL-176-SC-CUS

18. Xerox India Ltd. vs. CCE, Meerut-II - 2011-TIOL-561-HC-ALL-CX

FINAL ORDER NOS.365 TO 373/2012

Per: M Veeraiyan:

1.1. Appeal No. C/573/2008 is filed by Bharti Airtel Ltd. (formerly known as

Bharti Tele-Ventures Ltd.) hereinafter referred to as BAL or the first appellant against the order of the Commissioner No. 6/2008 dated



30.04.2008. By the above order, a demand of differential duty of Rs.

2,06,44,04,030/- along with interest stands confirmed against BAL and penalty of equal amount of duty under Section 114A of the Customs Act

imposed on BAL. In addition, the imported goods valued at Rs.

21,02,97,45,132 stand confiscated with option to redeem the same on payment of fine of Rs. 48,80,00,000/-.

1.2. Appeal No. C/574/2008 is by Bharti Hexacom Ltd. hereinafter referred

to as BHL or the second appellant against the order of the Commissioner No. 6/2008 dated 30.04.2008. By the above order, a demand of differential

duty of Rs. 9,10,94,185/- along with interest stands confirmed against BHL

and penalty of equal amount of duty under Section 114A of the Customs Act imposed on BHL. In addition, the imported goods valued at Rs

98,31,12,721/- stand confiscated with option to redeem the same on payment of fine of Rs. 2,35,00,000/-.

1.3. Appeal No. C/575/2008 is by M/s. Ericsson India Pvt. Ltd. hereinafter called EIL or the third appellant against the order of the Commissioner No.

6/2008 dated 30.04.2008 challenging imposition of penalty of 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 1 st, 2 nd, 3 rd and 4 th February 2011.

However, the hearing did not take place on those days before that bench.

3.1. The present bench extensively heard both sides on the issue of

jurisdiction as the appellants strongly contended that the ADG DRI who issued the show-cause notices had no jurisdiction to issue such show-cause

notices in the light of judgment dated 18.02.2011 in the case of

Commissioner of Customs Vs. Syed Ali and another reported as [2011 (265) E.L.T. 17 (S.C)] = (2011-TIOL-20-SC-CUS). Thereafter, the appeals

were heard on merits. The hearing was spread over 9 days (i.e. on



29.12.2011, 12.01.2012, 07.03.2012, 17.04.2012, 18.04.2012,

19.04.2012, 23.04.2012, 24.04.2012 and 25.04.2012.) The learned advocate Shri V. Laxmikumaran and Shri G. Shiva Dass appeared on behalf

of the appellants. Shri P.R.V. Ramanan special counsel appeared on behalf

of the department.

3.2. Both sides filed written submissions and synopsis of arguments both on the issues of jurisdiction and on merits and the same have also been

taken into account.

4.1. The relevant facts, in brief, are as follows:

(a) BAL and BHL are leading service providers for GSM Mobile Telephony and have necessary approval from the Department of

Telecommunication to operate GSM mobile telephony in a number of States/Circles in India.

(b) Appellants 1 & 2 imported hardware and related software

required for the GSM Network from Ericsson AB, Sweden who is

a manufacturer of telecom equipment under different contracts. They imported the said hardware and related software through

the customs formations at Bangalore, Kolkatta and Delhi. The hardware required for switching was classified under Chapter

heading 85.17 and the hardware required for transmission under Chapter heading 85.25 and their parts under sub-heading 85.29.

The appellants, paid the applicable customs duty on the hardware imported in terms of the Notification No.21/2002-Cus.

dated 1.3.2002 (Sl. No.239).

(c) EIL, the third appellant is engaged in providing the services of

installation and commissioning of telecom equipments supplied by M/s. Ericsson AB, Sweden. BAL and BHL have entered into

separate contracts with EIL for the erection, installation and commissioning of the telecom equipment and software imported

from Ericsson AB, Sweden.

(d) In and around 2004, the Directorate of Revenue Intelligence,

Bangalore conducted enquiries regarding the imports of hardware 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 Rules, 1962;

++Demand duty of Rs. 28,67,32,517/-, Rs. 53,35,28,802/-, Rs.

120,73,95,283/-, Rs. 3,67,47,428/- under the proviso to Section 28(1) of the Customs Act 1962 along with applicable interest

under Section 28AB ibid;

++ Confiscate the equipment under Section 111(m) of the

Customs Act, 1962; and

++ Impose penalty under Section 112(a)/114A of the Customs

Act, 1962.

4.3. Proceedings were initiated by issuance of show-cause notices dated 29.05.2006 and 31.05.2006 to the appellant-2 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 14 of the customs Valuation Rules, 1998 read with Section 14 of the

Customs Valuation Rules, 1962;

++ Demand duty of Rs. 5,80,10,601/- + Rs. 3,30,83,584/-

under the proviso to Section 28(1) of the Customs Act 1962 along with applicable interest under Section 28AB ibid;

++ Confiscate the equipment under Section 111(m) of the Customs Act, 1962; and impose penalty under Section 112

(a)/114A of the Customs Act, 1962.

4.4. The show-cause notices also proposed penalties on EIL, the third

appellant.

4.5. The show-cause notices mainly alleged that the software was in the nature of firmware and the same was already preloaded by Ercisson AB,

Sweden at their factory in Sweden and the import of software by BAL and BHL separately in CDs/ODs/Floppies was only with a view to apportion a

part of the hardware value to software in order to evade payment of



customs duty on that part of the value claimed to represent the value of

software imported.

Show-cause notices also alleged that "the switch software is an intrinsic

part of the hardware and these two cannot be separated. EAB themselves call the functions as hardware and software only for the purpose of having

a distinction between the two."

It was also alleged that the appellant-assessees, in collusion with Ericsson

AB, created an artificial transaction of splitting the cost of the equipment and that the value of equipment was suppressed and mis-declared to the

customs at the time of import. It was also alleged that separate import of software was only to camouflage the remittances made towards the under

invoiced amounts and evade duty. It was also alleged that EIL colluded with appellant-assessees and Ericsson AB in facilitating 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 initially and Shri Lakshmikumaran also made

submissions in this regard subsequently.

5.2. The jurisdiction was challenged on the following grounds:

(a) Though, ADG DRI has been appointed as Collector by

Notification No.19/90-Cus (NT) dt 26-04-90 issued under the Customs Act, he has not been declared as proper officer under

Section 28 of the Customs Act during the relevant period. Hon'ble Supreme Court vide the judgment dated 18.02.2011, in the case

of Commissioner of Customs Vs. Syed Ali, and another reported

in [2011 (265) E.L.T 17 (S.C)] has clearly held that conferring power of collector/commissioner on another officer and specifying

concurrent territorial jurisdiction did not ipso facto confer



jurisdiction to exercise power entrusted to the "proper officer" for the purpose of Section 28 of the Customs Act.

(b) The amendment carried out to Section 28 by the Finance Act

2011 with effect from 08.04.2011 clearly contained an explanation that the cases prior to amendment (that is prior to

08.04.2011) have to be dealt with in terms of Section 28 which

was existing prior to the said date (08.04.2011).

(c) By Notification No 44/2011-Cus (NT) dated 6-7-2011 issued in exercise of powers conferred by Section 2(34), DRI officers were

appointed as "proper officers" for the purposes of Section 17 and Section 28.

(d) The amendment dated 16.09.2011 granting the powers of the "proper officer" to the Commissioner of Customs and ADG DRI

can be held effective only from 08.04.2011 when the amended Section 28 came into effect and not for the earlier period. The

amendment carried out w.e.f. 16.09.2011 did not specifically

ratify and validate earlier action taken.

(e) The explanation 2 to Section 28 makes it very clear that any non-levy, short levy for the period prior to amendment (that is

prior to 08.04.2011) shall be governed by the provisions of Section 28 as it was prevailing during that time. Since under the

earlier section, the ADG DRI did not have the powers of "proper

officer", the show-cause notices issued by him are ab initio invalid.

(f) The ADG DRI was not invested with the powers of assessment

during the relevant period. The "proper officer", for issue of the show-cause notices under Section 28 will be only "proper officer"

who made the assessment under Section 17.

6. Learned special counsel Shri P.R.V. Ramanan contested the above

arguments on 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)] = (2012-TIOL-360-CESTAT-MAD).

(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 to prevent invoking the larger period of

one year to issue show-cause notice instead of the earlier period

of six months. The said explanation cannot have any effect on the amendment carried out on 16.09.2011 by which the ADG DRI and

Commissioner (Preventive) were given powers of proper officers retrospectively.

7. Shri Lakshmikumaran made the following submissions, in his rejoinder,

on the issue of jurisdiction.

(a) Decision of the Tribunal in the case of Sundaram Finance is

contrary to the ratio laid down by the Hon'ble Supreme Court in Syed Ali case where the apex court also considered appeal

against the decision of the Tribunal in the case of Kripa Shankar Srivastava vs. Commissioner of Customs [2005 (184) E.L.T.

198]. In the said case, the show-cause notice issued by the said

Commissioner (Prev.) was held without jurisdiction, though adjudication was carried by the jurisdictional Commissioner.

(b) ADG DRI did not have the power to issue show-cause notice

prior to 8.4.2011 and the proceedings in pursuance of such show-

cause notices are ab initio void.

(c) The ADG DRI who was in-charge of the Bangalore Zonal Unit of DRI and who issued the show-cause notices came on transfer

as the Commissioner of Customs, Bangalore and he was entrusted with the adjudication of all these show-cause notices

issued by him as ADG DRI. Adjudication of the cases by the same

person as Commissioner of Customs of show-cause notices issued by him while he was ADGDRI is in clear violation of principles of

natural justice.

Submissions on merits :

8. Learned advocate Shri Lakshmikumaran made detailed submissions

challenging the confiscation, demand of duty, invocation of extended period of limitation and imposition of penalties on the appellants and on related

issues as summarized below:

8.1. It was conceded that the required software for equipments like MSC,



BSC, BTS were preloaded in the factory at Sweden and were subjected to

"factory testing". The preloading was done into the hard disc or to the flash memory and not to the integrated chips. Further, the back up of preloaded

softwares was taken and kept in the hard disc of the respective hardwares. He claims that such preloading is not the same as etching, embedding or

burning.

8.2. Identical copies were made of the preloaded software by recording

them in CDs/ODs. The fact that the preloaded software could 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 become feasible only because the impugned software was in hard disc/flash memory and not embedded as

held by the Commissioner.

8.6. The fact that the software imported is of sophisticated nature and

meant for specific application cannot be the basis to conclude that the same is embedded.

8.7. The fact that software in question is essential to operate the hardware is not relevant to conclude that the software should be treated as part and

parcel of the hardware. The software having been imported separately along with the licence for using the same, the same requires to be classified

separately under Chapter Heading 8424 and the value of the same excluded from the value of hardware.

8.8. In this regard, he relies on the following decisions:

a. PSI Data Systems Ltd Vs. C.C.E. [1997 (89) ELT 3 (S.C.)] =

(2002-TIOL-46-SC-CX)

b. Acer India Ltd. vs. CCE [2004 (172) ELT 289 (S.C.)] = (2004-



TIOL-81-SC-CX-LB)

c. BPL Mobile Communications Ltd. vs. C.C., ACC, Mumbai [2000 (12) ELT 986 (Tri.)] = (2002-TIOL-107-CESTAT-MUM)

d. ITI vs. C.C., Bangalore [2009 (233) 277] = (2009-TIOL-302-

CESTAT-BANG)

e. Vodafone Essar Gujarat Ltd. Vs. Commissioner of Customs

(Imports) [2009 (237) E.L.T. 458] = (2008-TIOL-2861-CESTAT-MUM)

8.9. The decision in the case of Anjaleem Enterprises Pvt. Ltd. [2006 (194) ELT 129] = (2006-TIOL-06-SC-CX) can not be applied to the facts of the

present case. In that case, the assessee claimed classification of EPROM (Programmed Memory Chips) meant for STD-PCO unit under Chapter 8524

which was rejected. In the said case, the EPROM was held to be integral part of STD-PCO unit on the ground that it was in the memory chips.

8.10. It was submitted that the nature of software used in telecom hardware was not properly understood by the adjudicating authority. In

support of the same, the Technical opinion dated 16.11.2006 by Shri K.S. Ramanujan faculty member of BITS Pilani which is reportedly based on the

technology employed by Ericsson, the periodical reviews published by Ericsson, a comparison of the architecture of the telecommunication system

and the engineering involved therein with the systems was relied upon. The following are the submissions made:

(a) The essential parts of the software are resident in a non-volatile flash memory and/or RAM instead of the conventional

disk drives.

(b) AXE-10 hardware technology, provides for "hands of"

operation enabling the subscriber to move from one MSC to another without dropping the call.

(c) Ericsson built their own proprietary language for 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 BTS) or

from Hard Disks (in the case of AXE) provided in the hardware blocks which would be similar to the structure that exists in a

standard Windows based software where the Operating System and application like Microsoft Word are pulled into the RAM in the

PC and the user then uses the application.

(i) The Base Transceiver System is controlled by the parent BSC

and provides control on the traffic O & M and the network management system. The software used by the BTS can be

configured and the control of the BTS raised with the Base Station Controller (BSC).

(j) Passive flash memory storage devices do not have any capability of processing the data stored on them. Simply put,

these devices, which are non-volatile in nature, simply store the data and allow it to e read by an automatic computing device as

directed by a user through a user interface.

(k) The flash memory cards are nothing but a different and

advanced type of storage devices like a hard-disc, a floppy disc, a CD-ROM, or other media.

(l) The software used in the AXE-10 platform is in the nature of

either Operating Software or Application Software. The system

software (Operating Software) and application software used by the APZ processors are therefore not ‘firmware' or ‘burnt-in'

software.

8.11.1. The classification of non-volatile storage devices in the form of flash memory cards already stands conclusively decided by the World

Customs Organization under Heading 85.23 as unrecorded media and

when recorded under Heading 85.24.

8.11.2. Chapter Note 6 to Chapter 85, prior to its amendment in 2002 and after its amendment in 2002 are as under:



Pre-amendment:

"6. Records, tapes and other media of heading nos. 85.23 and

85.24 remain classified in those headings, whether or not they

are presented with the apparatus for which they are intended".

Post-amendment:

"6. Records, tapes and other media of heading 85.23 or 85.24

remain classified in those headings when presented with the apparatus for which they are intended.

This Note does not apply to such media when they are presented with articles other than the apparatus for which they are

intended."

8.11.3. By virtue of this chapter note 6 to chapter 85, the media containing the software even if it has formed part of the machine, the media can never

be classified under any heading other than Heading 85.24. The operating

and 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 software was legally permissible.

8.14. The H-Module lists the approved procedures for factory testing and

details how the software is loaded for testing and the start-up procedures are listed in sequence. It is also important to note that this document also

indicates how application software is prepared and initialization of the IOG units.

8.15. The AXE-10 architecture which is in use in Ericsson AB's GSM technology runs on a combination of Operation System software and

Application Software and that at the first level, processors like Pentium are



used. It is only these processors that contain any embedded software, if

any.

8.16. The required operating software and application software are already

available in the hardware and only a licenced copy of the software was sent along with the equipment.

8.17. The expert opinion relied upon by the department was so glaringly inaccurate, it will be erroneous to reply on the same without subjecting the

witness to a proper cross examination.

8.18. The Commissioner has also compared the AXE system to PDA, Mobile

phone and STD-PCO units. The comparison, is completely inappropriate. The character of firmware and software is not dependent on its essentiality

to a particular machine.

On Limitation & Penal Action:

8.19. In respect of all the consignments imported and for which the Bills of

Entry were filed, the appellants have duly declared the correct description of the products as given in the invoices and the packing lists. At no point of

time, in any of the Bills of Entry, the appellants have made any incorrect declaration and that too willfully. The appellants, always entertained a bona

fide belief that software imported separately, even though loaded onto the hardware was liable to be assessed separately to duty. At best, the present

case is a case of change in the basis of assessment and opinion of the

Customs Department. For such a change in the basis of assessment based on a classification dispute, extended period of limitation cannot be invoked.

On the same grounds, it was submitted that no penalties could be sustained.

On Confiscation

8.20. Goods valued only Rs.9.94 Crores has been seized but goods valued over 2200 crores stand confiscated. Confiscation of goods which are not

seized is not justified. In this regard, he relies on the following decisions:

a) Commissioner vs. Chinku Exports [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.)] = (2009-TIOL-388-CESTAT-MUM-LB)

c) Sahil Trends Vs. Commissioner of Customs [2004 (177) E.L.T. 732 (Tri.-Del.)] = (2003-TIOL-225-CESTAT-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 make the switching equipment function

are not independent software and cannot be marketed separately. Programmes required to make BTS functional are

loaded on to flash drives. Flash drives are a form of EEPROM originally used for loading firmware.

(e) Software that was imported by BAL was actually dumps

copied at EIL office, in Gurgoan, sent to Sweden and re-imported.

The manner of preparation of CDs/ODs, packing, labeling, nominal value declared at the time of export, exorbitant value

declared at the time of import etc would show that the separate import of software was not a genuine transaction but was created

only for the purpose of reducing the assessable value of equipments imported.

(f) The appellant-assessees have never declared the preloading of software into the equipments along with the back up contained in

the equipments. The opinion given by CAIR would confirm that the programmes are to be treated as embedded software. Even

according to the appellants, the software of switching systems was written in a language called PLEX and the software was a real

time operating software which needs expertise for loading and the same was done at the manufacturer's premises.

9.2. Learned special counsel also gave his understanding of various decisions sought to be relied upon on behalf of the appellants. He

submitted that the reliance placed by the Commissioner on the decision in the case of Anjaleem India Pvt. Ltd. was appropriate.

9.3. Relying on the decision of the Hon'ble Supreme Court in the case of Harbans Lal Vs. Collector of Central Excise as reported in equivalent citation



in [AIR 1993 (SC) 2487], the decision of the Hon'ble High Court of Gujarat in the case of J.K. Bardolia Mills Vs. M.L. Khunger, Dy Collector of Customs

as reported in [ 1975 (16) GLR 119] and the decision of the Hon'ble High Court of Bombay in the case of Mohanlal Devdanbhaichoksey and others

Vs. M.P. Mondkar and others reported in [1988 (37) ELT 528 (Bom.)], he submits that Sections 110 and 124 are independent, distinct and exclusive

of each other. Therefore, it is not a must that there should be seizure of

offending goods preceding confiscation. In the present case, the impugned goods were found to have been mis-declared in respect of value and

therefore, have been rightly confiscated as the goods were available with the appellant/assessees for confiscation. Availability 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.)] = (2008-TIOL-2171-CESTAT-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 Bhagyanagar case decided by the Mumbai Bench. In the case before the Mumbai Bench, such

detailed investigation was not carried out. Therefore, the said decision cannot be applied blindly when the investigations

revealed the artificial splitting of values into hardware portion and software portion."

Findings

10.1. We have carefully considered the submissions from both sides and

perused the voluminous records with the assistance of both sides.

10.2. We find that the following main issues arise for consideration.

(a) Whether ADG DRI was competent to issue the impugned

show-cause notices? If the ADG DRI had no jurisdiction, during the relevant time, to issue the show-cause notices under Section



28 of the Customs Act, whether the retrospective amendment dated 16.09.2011 to Section 28 of the Customs Act validates the

show-cause notices and the proceedings thereafter?

(b) Whether adjudication of the show-cause notices by the specially nominated Commissioner, who was earlier the ADG DRI

and who issued the show-cause notices was in violation of

principles of natural justice? Whether there is violation of principles of natural justice in not allowing the cross-examination

of the group of scientists involved in preparing the CAIR report?

(c) 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?

(d) Whether the value of software preloaded at factory in

Sweden before shipment took place requires to be excluded from the value of hardware as claimed by the assessees or to be

included as held by the department?

(e) Whether decision of the Tribunal in the case of Vodofone is

applicable to the facts of the present case or not?

(f) Whether all the imported goods are liable to confiscation even

though only part of goods were seized? Whether the imported goods are liable to confiscation even when they were not seized?

(g) Whether the quantum of duty has been correctly worked out?

(h) Whether extended time limit is applicable and whether penalties are imposable?

(a) Whether ADG DRI was competent to issue the impugned show-cause notices? If the ADG DRI had no jurisdiction to issue the

show-cause notices under Section 28 of the Customs Act whether amendment dated 16.09.2011 to Section 28 of the Customs Act

retrospectively 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, and imposition of penalties. The adjudication as

such was not undertaken by the ADG DRI. Only in the adjudication proceedings, the determination of duty as proposed

in the show-cause notices arise. Only when the work of determination is undertaken, the need for exercising the powers

under Section 17 arises.

(c) The Hon'ble Supreme Court dated 18.2.2011 in the case of

Syed Ali dealt with two appeals, one against the order of the Tribunal in the case of Syed Ali reported as [2003 (159) ELT 235

(Tri.-Mum.)] and the other against the decision of the Tribunal in the case of Kripa Shankar Srivastava dated 4/1/2005 reported as

[2005 (184) ELT 198 (Tri.-Mum.)].

In the first case, the Asst. Collector of Customs (Prev.), Mumbai issued

show-cause notice alleging violation of provisions of Section 111(d) of the Act and adjudicated the said show-cause notice dated 3/2/93 confirming

the demand raised in the show-cause notice. The Collector of Customs (Appeals) set aside the order and granted liberty to the department to re-

adjudicate the case by issuing a proper show-cause notice. Thereafter, Collector of Customs (Prev.) issued the show-cause notice dated 16.4.94

proposing confiscation of the goods and demanding Customs duty in terms

of Section 28 (1) of the Act. The Collector confirmed the demand of duty under Section 28(1) of the Act. He also ordered confiscation of the goods

and imposed redemption fine. The Collector while adjudicating overruled the objection questioning his jurisdiction. On appeal by the party, the

Tribunal vide the order dated 4-1-2005….. allowed the appeal holding as follows:

"It is very clear that the Commissioner of Customs (Preventive) does not have jurisdiction to issue the impugned show-cause

notice and in view thereof he could not have the jurisdiction to adjudicate the matter when imports have taken place at Bombay

Customs House."

In the Kripa Shankar case, the show-cause notice was issued by the

Commissioner of Customs (Prev.) but the adjudication was done by the Commissioner of Customs. The Tribunal held that the show-cause notice

was issued by a proper officer under Section 28 of the Customs Act.

The Hon'ble Supreme Court in the combined decision dated 18.02.2011 in



the case of Syed Ali and Kripa Shankar has held that merely appointing a

person as an officer of Customs is not sufficient for issuance of notice under Section 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 non-levy, short-levy or erroneous refund before the date on which the

Finance Bill receives the assent of the President shall continue to be governed by the provisions of section 28 as it stood

immediately before the date on which such assent is received."

This explanation was necessitated to ensure that the rights of category of

assessees in cases where the normal time limit of six months was applicable prior to amendment dated 08.04.2011 was protected, so that

demand invoking higher time limit of one year was not issued in those cases.

On the other hand, as per the statement of objects and reasons, appended to the Customs (Amendment and Validation) Bill, 2011, intention

underlying the insertion of sub-section (11) of section 28 was to "clarify the true legislative intent that show-cause notices issued by Customs Officers,

i.e. officers of the Commissionerates of Customs (Preventive), Directorate-General of Revenue Intelligence (DRI), Directorate-General of Central

Excise Intelligence (DGCEI) and Central Excise Commissionerates for

demanding customs duty not levied or short levied or erroneously refunded in respect of goods imported are valid, irrespective of the fact that any

specific assignment as proper officer was issued or not. It is therefore



proposed to amend retrospectively and to validate anything done or any

action taken under the said Act in pursuance of the provisions of the Act at all material times irrespective of issuance of any specific assignment on 6

th July, 2011."

Further, the amendment to Section 28 was by way of inserting sub-section

(11) which reads as under:

"Notwithstanding anything to the contrary contained in any

judgment, decree, or order of any court of law, Tribunal or other authority, all persons appointed as officers of Customs under sub-

section (1) of Section 4 before the 6 th day of July, 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 the proper officers for the purposes of this section."

(b) Whether adjudication of the show-cause notices by the specially nominated Commissioner, who was earlier the ADG DRI and who

issued the show-cause notices was in violation of principles of natural justice? Whether there is violation of principles of natural

justice in not allowing the cross-examination of the group of scientists involved 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. When cross examination was sought for, apparently, not all the

members of the Team were available with CAIR. Therefore, the cross examination of the Team from CAIR was not given. Instead, BAL was

requested to give a questionnaire, which was answered by the Team-Head, which is part of the adjudication proceedings. Further, the Commissioner

has permitted expert opinions of two experts to be produced by the

appellants, and considered the same as well. Therefore, we do not find any violation of principles of natural justice in this regard.

(c) 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?

On Hardware

13.1. Before considering the core issue, it would be appropriate to record the salient features of the imported equipment, based on the documents

presented before us, including opinion of experts and elaborate

submissions from both sides referring to various technical literature and documents which are as follows.

(a) The import is of telecom equipment system referred to as

AXE -10 system. AXE-10 system is based on Programming Languages for Exchanges (PLEX) and an advanced version known

as HL-PLEX. It consists of two major sub-systems which are

referred to as switching system and control system.

(b) The telephone sub-system of AXE is called APT. APT comprises of switches, multiplexers, interface components etc. In

other words, APT switching system contains all sub-systems

dealing with traffic handling, operation and maintenance, charging and other switching oriented tasks.

(c) The control sub-system is called APZ. APZ comprises of

microprocessors, application specific circuits designed for switching, logic devices specifically programmed for the

concerned equipment etc. APZ system, comprising both

hardware and software units, controls not only the operation of APT but the whole system. APZ employs Application Specific

Integrated Circuits, memories, programmable logic devices, microprocessors and digital processors to control and monitor the

operations of a MSC or BSC or BTS.

(d) The equipments imported have been described as Base

Transceiver System (BTS), Base Station Controller (BSC) and Mobile Switching Centre (MSC). All these equipments form part

of the mobile telecommunication network manufactured 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

downloaded the said software through internet for use.

(b) 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. Obviously, the software imported separately

in ODs/CDs etc. was a redundant item and perhaps can be described as e- waste.

(c) We are reminded of an overcautious passenger traveling by bus who purchased two tickets though he was traveling alone.

When a curious co-passenger enquired as to why he was purchasing two tickets when he was traveling alone, he clarified

that it was to avoid embarrassment before the ticket examiner in the event of one of the tickets being lost. The co-passenger

further queried as to what would happen if both the tickets

purchased by him were lost or misplaced and thereupon, the overcautious passenger confided that he was already having a

monthly pass!

(d) The import of software separately in ODs/CDs reminds the

comically overcautious passenger. The only difference is that the passenger has spent thrice the money for buying tickets unlike

the present appellants who have not paid any excess amount towards "purchase" of software. The software is undisputedly in

the system imported as hardware along with a backup. It was also available for downloading through internet. Under these

circumstances, the need for import of such software separately in ODs/CDs has not been satisfactorily explained!

(e) This is not the end of the story. In certain cases, EIL has undertaken copying of ODs/CDs in their office in Gurgaon and

dispatched the said ODs and CDs to Sweden for re-despatch to India. No valid reason has been given as to why the same could

not be copied in Sweden itself. While sending the ODs/CDs, the value declared was very nominal. When the said ODs and CDs



came on the return journey, the value declared was very huge

though the said CDs and ODs were destined to lie unopened and unused.

(f) Appellants claim that the software which was preloaded in the

hard disc/flash memory contained in the imported hardware equipments has no commercial value and that what was

imported in ODs/CDs only has such 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 cannot be treated to be identical on all

respects.

(b) A computer with a printer performs all the functions of a

typewriter. However, computer is much more than a mere typewriter.

(c) The telecom equipments may resemble in certain aspects a

computer. The computer has hardware and software and the

telecom equipment also has hardware and software. But the computers have many general applications unlike the telecom

equipments in question. Software meant for specific computer applications can also be separately procured from the market

and used in the computer. The software for different applications can also be downloaded from the internet and used in the

computer. Considering the nature of equipments and the software required to run the same, as discussed earlier, it is not

proper to consider the telecom equipments as a specialized computer as claimed by the appellants. Therefore, the decisions

in respect of classification/valuation of hardware and software of



computers cannot be mechanically applied to hardware and

software relating to telecom equipments.

(d) Whether the value of software preloaded at factory in Sweden before shipment took place requires to be excluded from the value

of hardware as claimed by the assessees or to be included as held by the department?

Analysis of Decisions Relied upon:

14.1 Both sides have relied upon a few decisions of the Hon'ble Supreme

Court and also the decisions of the Tribunal, (some of them relating to computer and its software and others relating to electronic equipments

(other than computer) and their software) to canvass their respective points of view on the crucial issue as to whether the value of impugned

software should be excluded while determining the value of equipments (hardware). It may be appropriate to discuss the decisions relied upon by

both sides at this juncture (by highlighting relevant portions) to understand the ratios of the decisions and also draw guidelines to decide the said issue.

a) Hon'ble Supreme Court in the decision dated 17.12.96 in the case of PSI Data System Ltd. vs. CCE [1997 (89) ELT 3 (S.C.)]

dealt with tangible software recorded in discs, floppies, CD Roms which were "sold along with computers". In the said case, it has

been noted that the said software were either bought out or imported. In the said case, the assessee who was manufacturing

computers, was supplying 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.)] =

(2002-TIOL-183-SC-CX), 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

facilities"



With the above observations/findings and after taking note of the

fact that the peripheral devices involved were sold along with computers, Hon'ble Supreme Court set aside the order of the

Tribunal holding that the value of those supplies should also be

included in the value of computer supplied.

(c) Hon'ble Supreme Court in decision dated 20.1.2000 in the case of Sprint R.P.G. India Ltd. vs. Commissioner of Customs-I,

Delhi [2000 (116) ELT 6 (S.C.)] = (2002-TIOL-192-SC-CUS) dealt with a case of import of 7 Nos. of hard disc drives loaded with

software. The department sought to classify the imported items

under 8471 whereas the party claimed the same as software under 8524. Hon'ble Supreme Court has noted that what was

imported was software on containers (i.e. hard discs) totally valued around Rs. 60,000/- to 65,000/- whereas the value of

computer software was roughly Rs. 67 lakhs. Hon'ble Supreme Court has also taken note of the fact that computer software

could be bought in the form of printed books, picture, manuscripts, and type scripts covered under Chapter 49 and that

the same could also be brought either on a floppy or a magnetic tape or in hard disc or in printed form. On the said facts, Hon'ble

Supreme Court held that the software received in hard disc drives

was classifiable under chapter 8524. This is a case wherein the hardware loses its identity and becomes part and parcel of

software.

d) Hon'ble Supreme Court vide the decision dated 24.9.2004 in

the case of Commissioner of C. Ex., Pondicherry vs. Acer India Ltd. [2004 (172) ELT 289 (S.C.)] = (2004-TIOL-81-SC-CX-LB)

dealt with the case of valuation of computers supplied after loading certain operational software which was meant to enhance

the efficiency of the computer and consequently the issue of excluding the value of such software from the total value of

computers supplied to the customers, and elaborately dealt with the meaning of certain terms relating to computer:

"A Computer:

18. Before adverting to consider the rival submissions at the bar, we may notice the meaning of certain terms

as also the functioning of a computer.

19. In Newton's Telecom Dictionary, "Application

Program" has been defined at page 54 as under:

"A computer software program designed for a

specific job, such as word processing, accounting, spreadsheet, etc."

20. In the said dictionary, "Firmware" has been defined



at pages 281-282 as under:

"Software kept in semi permanent 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 material

to the printer for printing, to the screen for viewing, how it will receive information from

the keyboard, etc. In short, the operating system handles the computer's basic

housekeeping MS-DOS, UNIX, PICK, etc., are operating systems."

22. Thus, there are different operating systems.

23. Computers of various models and types with different configurations including Servers and Personal

Computers are manufactured by the Respondent. They

are classifiable under Chapter Sub-heading 8471.00 of the Central Excise Tariff Act, 1985 (Tariff Act) as

automatic data processing machines.



24. In the computers there exists a flash memory chip in the motherboard. The software that is

essential to the starting of the computer which is the Basic Input Output Software is etched on to

this memory chip. This Basic Input Output Software which is etched or burnt into the Electrically Erasable

Programmable Read Only Memory (EEPROM) is called

firmware. The firmware provides for interactions with the microprocessor to enable it to access the operating

software contained in the hard disc.

25. As is the general practice in the computer industry, the value of the firmware etched on to

the EEPROM is always included in the assessable

value of the computers.

26. A customer may place a specific order upon the manufacturers of computers for supply of CDs which

contain operating softwares like Windows 2000,

Windows XP etc. as also the right to use the same under licence. The said softwares indisputably can be

purchased separately and loaded in the computer by the purchasers themselves. They can be loaded even at

the premises of the purchasers and by persons other than the manufacturers. The computers, however, are

also loaded with different types of softwares on to the hard disc along with licence to use, if and when

specifically ordered by the customers. Computers and operational softwares admittedly are available in the

market separately. For the purpose of this case,

however, we would proceed on the premise that all the computers are cleared with the softwares loaded onto

the hard disks and with the CDs containing the softwares along with the licence to use.

xxxx xxxx xxxx

35. The taxing authorities cannot ignore the legal character of the transaction and tax it on the basis of

what may be called ‘substance of the matter'. One must find the true nature of the transaction. [See Union of

India and Others v. Play World Electronics Pvt. Ltd. and Another, (1989) 3 SCC 181] = (2002-TIOL-198-SC-CX).

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 same excisable goods so as to make the assessee liable

to pay excise duty on the combined value of both. Excise duty, in other words, would be leviable only on

the goods which answer the definition of "excisable goods" and satisfy the requirement of Section 3. A

machinery provision contained in Section 4 and that too

the explanation contained therein by way of definition of ‘transaction value' can neither override the charging

provision nor by reason thereof a ‘goods' which is not excisable would become an excisable one only because

one is fitted into the other, unless the context otherwise requires.

Xxxx xxxx xxxx

64. The softwares, thus, whether they are cleared with the apparatus for which they are intended, viz., with

the computer or not they remain classified under the

same heading. By reason of the provisions of the Tariff Act, the rate of duties specified becomes part of a

Parliamentary Act. Chapter Note 6 of Chapter 85 being the legal text must be taken aid of for the purpose of

interpretation of the different headings in preference to the interpretation rules. Suffice it to point out that once

‘no duty' is payable on softwares being classified under 8524.20 being a magnetic tape, the recorders whereof

is classified under 8520.00, a duty would not be payable only because the informations contained

therein are loaded in the hardware.



65. It is not in dispute that operational softwares are available in the market separately. They are separately

marketable commodities. The essentiality test or the functional test cannot be applied for the purpose of levy

of central excise inasmuch as the tax is on manufacture

of "goods". The Act being a fiscal legislation an attempt must be made to read the provisions thereof

reasonably. Computer comes within the definition of excisable goods. So is a software. They find place in

different classifications. The rate of duty payable in relation to these two different goods is also different.

66. In terms of Chapter Note 6 of Chapter 85, as noticed hereinbefore, a software retains its character

irrespective of the fact as to whether it is sold with the apparatus, viz., the computer. Once it is held that the

essential characteristic of a software is not lost by reason of its being loaded in the hardware; having

regard to the different sub-headings contained in different chapters of the Tariff Act, the intent and

purport of 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 to use although by loading the same its utility is enhanced. Computers loaded with different



operational softwares cater to the specific needs of the

buyer wherefor he is required to place definite orders on the manufacturer. It is also not in dispute that an

operating software loaded on the hard disc is erasable.

It is also accepted that the operating software despite being loaded on to the hard disc is usually supplied

separately to the customers. It is also beyond any controversy that operating software can be updated

keeping in view the development in the technology and availability thereof in the market without effecting the

data contained in the hard disc. Concededly, even in the case of hard disc crash the software contained in

the CDs is capable of being reloaded on to the hard disc and its utility by the users remain the same. An

operational software, therefore, does not form an

essential part of the hardware.

Xxx xxxx xxxx

70. The functional test or the essentiality test, thus,

had been given a complete go by therein and, thus, it is not possible to agree that without an operating

software, the computers would become disfunctional.

Xxx xxxx xxxxx

77. Once it is held that the computer is complete

without the operating softwares, the question of adding the cost of software therewith would not arise since

what is under assessment is only the computer. To the

same effect is the judgment in Photopone Industries Pvt. Ltd. v. CCE, Goa, [1999 (108) E.L.T. 523].

Xxxx xxxx xxxx

Conclusion:

79. Computer and operative softwares are different

marketable commodities. They are available in the market separately. They are classified differently. The

rate of excise duty for computer is 16% whereas that of a software is nil. Accessories of a machine promote the

convenience and better utilization of the machine but nevertheless they are not machine itself. The computer

and software are distinct and separate, both as a matter of commercial parlance as also under the

statute. Although a computer may not be capable of

effective functioning unless loaded with softwares, the same would not tantamount to bringing them within the

purview of the part of the computer so as to hold that if



they are sold along with the computer their value must

form part of the assessable value thereof for the purpose of excise duty. Both computer and software

must be classified 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 classified differently and in that view of the matter, no central excise duty would be leviable upon

determination of the value thereof by taking the total

value of the computer and software. So far as, the valuation of goods in terms of ‘transaction value'

thereof, as defined in Section 4(3)(d) of the Act is concerned, suffice it to say that the said provision

would be subject to the charging provisions contained in Section 3 of the Act as also Sub-Section (1) of

Section 4. The expressions "by reason of sale" or "in connection with the sale" contained in the definition of

‘transaction value' refer to such goods which is excisable to excise duty and not the one which is not so

excisable. Section 3 of the Act being the charging

section, the definition of ‘transaction value' must be read in the text and context thereof and not de'hors the

same. The legal text contained in Chapter 84, as explained in Chapter Note 6, clearly states that a

software, even if contained in a hardware, does not lose its character as such. When an exemption has been

granted from levy of any excise duty on software whether it is operating software or application software

in terms of heading 85.24, no excise duty can be levied



thereupon indirectly as it was impermissible to levy a

tax indirectly. In that view of the matter the decision in PSI Data Systems (supra) must be held to have

correctly been rendered."

(e) Hon'ble Supreme Court in the decision dated 16.01.2006 in

the case of Anjaleem India Pvt. Ltd. Vs. CCE, Ahmedabad considered the issue as to whether a programmed or designed

EPROM was an integral part of STD-PCO unit and held that the said chip was classifiable as an integral part of STD-PCO unit

under heading 85.17 and that the value of the same was includible in the assessable value of STD-PCO unit. The

submission of the assessee was noted that the said STD-PCO unit was a computer based equipment. The blank EPROMs were

classifiable under chapter heading 8542 as an integral circuit;

they were purchased from the market at Rs. 149/- each; the programme for STD-PCO unit was recorded on EPROM which was

sold at Rs. 6,450/-; the STD-PCO unit was sold at Rs. 8,453/-. The Hon'ble Supreme Court recorded the following findings:

"16. The controversy on classification, therefore, is: whether the essential character of the programmed

EPROM, in the present case, as an IC changed to become a "recorded 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 which the programme is electronically



embodied. The functions which an IC performs, as

enumerated above, are intelligent functions which are not performed by a floppy. A floppy cannot be used as

a timer or amplifier. An IC is more than a storage device.

19. " EPROM" stands for Erasable Programmable ROM.

The word ‘ROM' is an acronym for ‘Read Only Memory',

a type of unchangeable memory residing in chips or the ICs on the mother board. ROM contains bare minimum

of instructions needed to start a computer. It is used for critical functions. It is similar to municipal utilities

such as gas and electricity. If a different configuration is required, one has to move to a different computer. ROM

is sometimes wrongly compared to a storage media such as CD-ROMs [See: utut.essortment.com ]. ROM

chips have programmes built into them at the factory. ROM chips are not volatile. The expression, "Read Only"

means that CPU can read or retrieve the programmes

written on the ROM chips. ROM chips contain special instructions for detailed computer operations. For

example, ROM instructions may start the computer, give keyboard keys their special control capabilities,

and put characters on the screen. ROMs are generally called as Firmware [See: " Computing Essentials " by

Timothy J. O'Leary & Linda I. O'Leary - 2002 Edition]. According to the Illustrated Dictionary of Computing by

Jonar C. Nader - 3rd Edition, "ROM" is a hardware which is used to store permanent instructions for the

computer's general housekeeping operations. A user

can read and use the data stored in ROM, but cannot change them. When a computer is turned on, ROM

supplies a series of instructions to CPU which in turn performs a series of tests. EPROM, on the other hand,

according to the same dictionary, is an erasable programmable ROM. Initially, users had to supply ROM

vendor with an inter-connected program so that the vendor could build the ROM. To avoid this high set-up

charge, manufacturers developed a user-programmable ROM (PROM). A ‘PROM' is just like a ROM. Similarly, as

an alternative, with the development of technology, in

the year 1973 Intel Corporation came out with EPROM. When the chip was exposed to ultra violet radiation the

memory could be erased and replaced by a new memory. Therefore, EPROM is a re-writable memory

chip. The only difference between ROM and EPROM is that EPROM holds its content without power. EPROM

chips 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, therefore, shows that EPROM

cannot be compared to a floppy. As stated above, floppy is a dumb box. That is not the case with EPROM.

EPROM is basically an integrated circuit or a chip. We agree with the department. EPROM is, therefore,

classifiable as an integrated circuit under tariff item 85.42.

22. The question which remains to be answered is whether a programmed EPROM is a recorded media

under CH 85.24. It was argued before us that like CD-ROM or a floppy which has a programme in it, EPROM is

also a programmed device. It was argued that blank EPROMs were purchased in which the appellant

embodied its programme and, therefore, the recorded

EPROM constituted a recorded media under tariff item 85.24.

23. We do not find any merit in this argument. In a disk

operating system, the basic input is stored in a ROM

which is transferred to 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 program is a software

because a floppy is a storage in which software plays

the dominant role whereas in the case of IC the programme is embodied in the IC which can perform

various functions only when fixed to the mother board and is not removable like a floppy from VCR. According

to Encyclopaedia of Technology Terms by Whatis.com, an IC can function as an amplifier, oscillator, timer,

microprocessor etc. On the other hand, a floppy disk is only a storage. Moreover the essential character of IC

does 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 moving parts, such as, disk

drives, switches or buttons because 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 programme. In the former case,



the disk carries the programme whereas in the latter

case, a programme is used as the basis for altering the structure of ROM. ROM is more than a carrier and,

therefore, it cannot be compared to a floppy or a disk. We may clarify that Gale's case was on two aspects,

viz., patent and difference between ROM and the floppy disk. What is stated herein is on the second aspect

which the Court of Appeal decided. To the same effect

is the ratio of the judgment of the US Supreme Court in the case of Robert Gottschalk, Acting Commissioner of

Patents v. Gary R. Benson 409 US 63.

26. Even under HSN, entry 84.71 covers Data Processors, however, under the explanatory note it is

clarified, at page 1403, that devices working in

conjunction with such processors have to be classified not under 84.71 but with reference to their specific

function. Therefore, devices like ICs, as in the present case, which help the processor to function can only fall

under 85.42 (in cases where such ICs are the final products) and where they form an integral part of a

machine like STD-PCO unit, they have to be classified under heading 85.17, hence, it will not fall under

heading 85.24 as claimed by the appellant (See: page 1408 of HSN -2nd Edition, 1996). As stated above, a

disk with a programme is a software. However, a ROM

with a particular circuit in which a programme is structured remains an IC.

……..

30. Before concluding, we reiterate that in the present case, the levy is on a computer based embedded

system. The software embedded in the programmed EPROM, which is an IC chip, constitutes the "brain" of

the system. The programmed EPROM is an integral part of the system. The levy is on the unit. The levy is not

on the programmed EPROM. The programme

embedded is not an easily removable. Hence, it will not fall in the category of recorded media under tariff

item 85.24 and remains an IC under tariff item 85.42."

(f) Hon'ble Supreme Court in the decision dated 30.08.2007 in

the case of Commissioner of Customs, Chennai Vs. Hewlett Packard India Sales (P) Ltd. [2007 (215) E.L.T. 484 (S.C)] =

(2007-TIOL-154-SC-CUS) considered the issue of valuation of laptop and particularly the issue as to whether the preloaded

operating system recorded in HDD in the laptop formed an integral part of the laptop, and approved the department's stand

and held that "when a laptop is imported with inbuilt preloaded



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 in the 4th paragraph of the circular, seeking to deny exemption to software required for

operation of any machine performing a specific function other than data processing and incorporating or

working in conjunction with an automatic data processing machine. (There is clearly an error in the

second sentence of that paragraph. The word ‘not',

which should be present between the terms ‘machines' and ‘performs' is absent). This is in line with the

provisions of Note 5(E) to chapter 84 of the tariff. The object of this note is to ensure that machines which are

intended for purposes other than data processing, but which incorporate, or work in conjunction with data

processing machines are to be classified, not as such data processing machines but in terms of their

functions. Thus for example a machine tool and which incorporates a computer would be classifiable as a

machine tool, not as a computer. Similarly a

navigational apparatus for an aircraft which is computer controlled would be classified as such apparatus and

not as a computer.

6. However, that does not detract from the very fact

that the data processing machines which are incorporated, in or used with such machines, are by

themselves data processing machines. If they were separately imported, for example, such data processing



machines would be classifiable as data processing machines and not with reference to the machines in

which they may be incorporated on in conjunction with they may work. The software for such machines would

be in any case be software for data processing

machines. We must also note that the tariff nowhere provides for classification of ‘computers'. The terms it

uses are data processing machines and equipment therefor. In construing the meaning of the term in

notification which is not found in the tariff, we must apply its meaning as generally understood. That is what

we have done. This is made clearer by the fact that the notification was amended by notification 103/98. After

the amendment software required for operation of any machine performing a specific function of data process

by incorporating or working in conjunction with an

automatic data processing machine is specifically excluded by the explanation. However, this explanation

was not present when the software in question was imported. The software in question was entitled to

exemption under notification."

The department's appeal against the order of the Tribunal was

dismissed. The Tribunal's 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 the claim for deduction was not allowed.

(i) The Tribunal in the decision dated 08.10.2008 in the case of

Vodofone Essar Gujarat Ltd. reported in [2009 (237) E.L.T 458] considered the issue of valuation of MSC, BSC, and BTS with

preloaded software imported from Nokia, Finland and held that the value of software could not be added to the value of



hardware. The Tribunal held that the software imported was not of a type which was embedded or etched. They specifically noted

that the software in question was recorded in Winchester disks. The Tribunal relied on the decisions of the Hon'ble Supreme Court

in the cases of Acer India Ltd., Hewlett Packard and BPL Communications but did not consider the decision rendered in the

case of Anjaleem India Pvt. Ltd.

14.2. On a close analysis of the decisions relied upon by both sides, in

matters relating to classification/valuation, the following important guidelines/principles emerge apart from the meanings of various relevant

technical terms:

(a) In classification of products, the commercial understanding is

more relevant than technical specifications except in respect of commodities for which such specifications are prescribed

requiring the assistance of experts in the respective fields. In other words, the method to be adopted for classification is to be

based on easily understandable parameters.

(b) The decisions in respect of software and hardware in relation

to computer are to the effect that if any software is embedded/etched/burnt then it has to be included as part of the

hardware and cannot be treated as stand-alone software and that the value of such embedded software should be part of the value

of computer. However, it cannot be concluded that only the value

of software which is embedded/etched/burnt is to be included in the value of the computer.

(c) It is not as if essentiality is an irrelevant criterion for

determining the classification/valuation and at the same time

essentiality is not the sole criterion for deciding the classification or determination of value.

(d) In the matter of valuation, one of the important aspects to be

taken into account is the condition of the goods/product at the time the goods leave the factory (as held by Hon'ble Supreme

Court in para 13 of Anjaleem case). Similarly, in respect of

imported goods, the condition of the goods/product at the time of import is relevant.

(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 vehicle.

(c) The typewriter ribbon is essential for running the typewriter.

However, the typewriter ribbons are separately sold in the

market. A person using typewriter can purchase the typewriter ribbon in a spool and fit it to the typewriter and use the

typewriter. In spite of the fact that the typewriter ribbon is essential without which the typewriter cannot be used, the

typewriter ribbon has been held to be only an accessory and not an integral part of typewriter.

15.2. Computers are excisable goods and the software meant for computers are also excisable goods. It is not as if every software is to be

treated separately for the purpose of classification and valuation. It depends upon various factors like the nature of products and the purpose

for which the software is to be used, whether the said software is marketable separately, whether the software is so essential to give the

identity to the computer and without which the same becomes dysfunctional or whether the software is meant to enhance its utility. With

the above in mind, we may proceed to consider the ratio of case law relating to computers.

(a) ‘Basic Input Output Software' (BIOS) which is etched onto the memory chip or burnt into EEPROM and is called a ‘firmware'

is treated as integral part of computer and there is no question of separate classification or excluding the value of the same from

the computer (as could be inferred from para 24 & 25 of the

judgment in the case of Acer). This is a case where the software loses its identity and becomes part of hardware.

(b) However, the software in the form of disks, floppies, CDs sold

along with the computer is not to be included in the assessable value of the computer as such software is distinct and separate

from the computer and is also being sold independently in the



market (as held in the case of PSI Data Systems ).

(c) Hard disc loaded with software installed in a laptop, has to be

treated as integral part of the laptop and cannot be subject to

separate classification and grant of exemption (as held in the case of Hewlett Packard case ).

d) Tangible software recorded in disks, floppy, CD Rom are being

bought and sold in the market separately. A person may separately buy this software and use the same in his computer.

On certain occasions, such tangible software can be "sold along

with computers". In such a situation, the software 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 separately for providing additional features to the existing system should be dealt with separately for the

purpose of classification and extending the benefit of the exemption as held in the case of ‘BPL Communications'.

b) Software for ‘distributed control system' supplied through

floppies, CDs is separately classifiable under 8524.24 and the

value thereof is not includible while valuing the distributed control system (as held in the case of Asia Brown Bovery ).

c) Software imported and recorded into CD ROMs for use in OCB

Exchanges are not to be included in the value of the OCB

Exchanges (as in the case of ITI).

d) A washing machine contains software for its operation and the



same is clearly meant for specific performance of the said

machine and forms integral part of the washing machine. The question of excluding the value of such software does not arise.

Similarly, Cell Phone contains certain basic software, without

which it cannot be considered as cell phone. Such software has to be considered as part and parcel of the cell phone. A cell

phone can also have added facility like camera, etc. There can be doubt about software relating to such add -on functions as to

whether they are part and parcel of cell phone, but not about the software which gives the cell phone its identity.

16.1. Scientists and engineers work hard to invent more and more complicated systems and devices so that the life of customers who use

them become more and more simple.

16.2. In particular, improved versions of crucial storage device ROM (read only memory) namely PROM, EPROM, EEPROM and flash memory have

been invented. ROM stands for "read only memory". ROM became

programmable by the user himself leading to the emergence of PROM which stands for "programmable read only memory". Further development

led to discovery of method for erasing the programme in ROM using ultraviolet light and thus "EPROM" (Erasable, Programmable Read Only

Memory) came to be invented. From EPROM which was erasable using ultraviolet light, electrically erasable PROMs came to be invented and thus

EEPROM came into existence. Flash memory is a specific type of EEPROM.

16.3. The storage devices meant for storing data/programmes have thus

evolved over a period of time. What was considered permanent became erasable either by using ultraviolet light or electrically. What was usable

once has become usable 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.



17.3. Without the preloaded software, the imported equipments cannot get

the identity as telecom equipments and cannot serve the purpose. The preloaded software has to be considered as essential for its functioning and

not meant for enhancing the efficiency unlike in the Acer case wherein the software considered was meant for only enhancing the efficiency.

17.4. The software preloaded in the equipments imported and which is undisputedly essential not only for its functioning but for giving identity to

the equipments cannot be treated as "presented with the equipments". It was not as if some CDs/ODs containing the software were "presented with

the equipments". On the other hand, what was preloaded was not even declared and claimed for separate classification.

17.5. In the above circumstances, there is absolutely no justification to "pull out" or disintegrate the preloaded software from the imported

equipment and grant it separate status and to classify it under Chapter sub-heading 85.24 and to exclude its value (which was artificially split from

the composite value of the equipment) to arrive at the value of the equipment.

17.6. As already held, this is not a case where the equipments have been "presented" with software. On the other hand, it is a case of importing

equipments which contained essential software/intrinsic software giving the functional identities to the imported equipments. In view of the above, the

chapter note 6 to Chapter 85 of the Indian Customs Tariff has no relevance to the present case.

(e) Whether the decision of the Tribunal in the case of Vodafone is applicable to the facts of the present case or not?

18.1. It is the contention of the appellants that the facts of the case in the present appeals are substantially the same as the facts of the Vodafone

case. Therefore, the Tribunal should follow the decision of the coordinate Bench. However, if the Bench forms a different opinion, the matter requires

to be referred to a Larger Bench. In this regard, the learned advocate has relied on the decision of the Hon'ble High Court of Allahabad in the case of

Xerox India Ltd. vs. CCE, Meerut-II : 2011 (270) ELT 651 (All.) = (2011-TIOL-561-HC-ALL-CX)

18.2. On the other hand, the department is of the view that the present case is based on certain facts discovered during investigation, technical

material recovered/obtained from BAL/Ericsson, technical references 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)] = (2006-TIOL-06-SC-CX) 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/HLR/BSC/BTS were embedded

systems and hence the software was also known as "firmware".

The adjudicating authority has specifically given a finding that equipments were embedded systems as the software was

embedded. Such a finding was not given in the Vodafone case by the adjudicating authority.

(g) In the present case, the adjudicating authority also relied

upon journal articles and technical literature/material in the

public domain. Further, substantial technical literature which was recovered/obtained from EIPL and BAL were also relied upon.

(h) The Tribunal, in the Vodafone case has held that importing

software in CDs separately besides being preloaded on hardware

was not something unusual and the same was a trade practice. The evidence relied upon in the present case would show that it

was a case of manipulation to show as if software was being imported in ODs/CDs.

(i) In Vodafone case, in view of Chapter Note 6 to Chapter 85 of

Indian Customs Tariff, it has been held that the software for

MSC/BSC/BTS would be classifiable under heading 8524. The machines/equipments under import are undisputedly classified

under heading 85.17/85.25, and the software for the same is closely integrated and assembled with the constituents of the

machines/equipments, more tightly than even the laptops.

18.3. We have carefully considered the submissions from both sides on the

issue as to whether the facts of Vodafone case and the present case are substantially the same or different. No doubt, in the Vodafone case also,

the equipments imported are MSC classifiable under Chapter Heading 85.15, BSC and BTS classifiable under Chapter Heading 85.25. They came



with preloaded software required for operating the said equipments. They also imported the same software in media in the form of CDs/tapes

separately and sought classification under Chapter Heading 85.24 and claimed the benefit of exemption under Sl. No.157 of Notification No.21/02-

Cus. The imported CDs/tapes were not even opened for more than six years and it was held that the same was never required and was not of any

use. However, in the present case some of the evidences relied upon are

significantly different from what was relied upon in Vodafone case. The Tribunal has specifically noted the following submission made on behalf of

the assessees:

"The software in question is not etched software or embedded

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 out rightly 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 or etched."

The submission noted by the Tribunal was that the software in question was not contained in ROM or EEPROM of the hardware or the micro process

chip and therefore, was not etched software or embedded software. This is contrary to the finding of the Hon'ble Supreme Court in the case of

Anjaleem that flash memory is a kind of EEPROM. The ratio of the decision of the Hon'ble Supreme Court in the case of Anjaleem is more appropriate

to the facts of the present cases. However, it is to be noted that the decision of the Hon'ble Supreme Court in the case of Anjaleem was not

before the Tribunal in the Vodafone case.

The Tribunal also came to the conclusion that the import of software in CDs



separately was nothing unusual and was a trade practice. Such findings

have been given on the ground that "no evidence has been cited by the revenue to show that this is not a trade practice". However, in the

present case, we have been shown enough evidence of planned deception

in making the CDs/ODs of proprietary software in India without specific authority and dispatching the same to Sweden and getting the same back

as if a genuine import and allowing the same to gather dust as e-waste.

Further, we find that the Tribunal in the case of Vodafone came to the conclusion that the software was contained only in "Winchester hard disc"

and therefore, could not be considered as embedded or etched software. In

the present case, we find that the software meant for BTS is contained in the flash memory which is a form of EEPROM. Therefore, in the light of

evidence produced, we find, the facts of the present cases are different from the facts of Vodafone case.

Similarly, the Tribunal in the said case came to the conclusion that the

software in the form of tapes/CDs having come separately in CDs and

Tapes was not embedded or etched. In the present case, we have noticed that there is fraud in preparation of ODs and CDs and sending them to

Sweden and re-importing the same to be dumped as e-waste. (It is settled law that fraud nullifies everything.) This crucial fact also distinguishes the

present case from Vodafone case.

(f) Whether all the imported goods are liable to confiscation or only

goods which were seized by the department are liable to confiscation?

19.1. The Commissioner in his impugned order held that the value of

telecom equipments imported had been deliberately 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 for 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 BAL (as per the re-determined

value) were liable for confiscation.



19.3. There was no proposal in the show-cause notice issued by the department, to confiscate the seized software in CDs/ODs and the same

were also not returned to them. Appellants have also not sought return of the seized CDs/ODs apparently because they were of no use to them.

19.4. Section 110 of the Customs Act deals with seizure of offending goods

both on the import and export side; Section 111 of the Customs Act deals

with confiscation of the offending goods on the import side after issue of show-cause notice under Section 124 of the Customs Act. Section 125 of

the Customs Act provides for grant of option of redemption of the confiscated goods. At this juncture, it would be appropriate to reproduce

the relevant portions of Sections 110, 111, 124, and 125 of the Customs Act:

SECTION 110: Seizure of goods, documents and things. – (1) If the proper officer has reason to believe that any goods are

liable to confiscation under this Act, he may seize such goods:

Provided that where it is not practicable to seize any such goods, the proper officer may serve on the owner of the goods

an order that he shall not remove, part with, or otherwise deal with the goods except with the previous permission of such

officer.

…………….

SECTION 111: Confiscation of improperly imported goods,

etc. – The following goods brought from a place outside India shall be liable to confiscation: –

(a) to (1)………………..

(m) any goods which do not correspond in respect of value or in

any other particular with the entry made under this Act or in the case of baggage with the declaration made under section 77 in

respect thereof, or in the case of goods under transhipment, with the declaration for transhipment referred to in the proviso to

sub-section (1) of section 54;

(n) to (p) ……………………

SECTION 124. Issue of show cause notice before

confiscation of goods, etc. – No order confiscating any goods or imposing any penalty on any person shall be made under this

Chapter unless the owner of the goods or such person -

(a) is given a notice in writing with the prior approval

of the officer of Customs not below the rank of an Assistant Commissioner of Customs, informing him of



the grounds on which it is proposed to confiscate the

goods or to impose a penalty;

(b) is given an opportunity of making a representation

in writing within such reasonable 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 of confiscation of goods is imposed

under sub-section (1), the owner of such goods or the person referred to in sub-section (1), shall, in addition, be liable to any

duty and charges payable in respect of such goods.

19.5. A close reading of the above provisions of law indicates that seizure

in effect is taking possession of the goods pending confiscation and the confiscation involves taking over the ownership of the goods. It is not

necessary that every case of takeover of the ownership should be preceded by takeover of possession as taking possession is by way of precaution to

avoid disposal of the goods.

19.6. There could be different situations as follows:

(a) The whereabouts of the goods imported is not known having changed more than one hand and, therefore, investigators have

not found and seized the offending goods. In such a situation, the question of confiscating the said goods does not arise as the

provision for grant of option of redemption under Section 125 will



be rendered meaningless.

(b) The offending goods are in the safe custody of agencies like

Port Trust, Airport Authority of India or like custodians and such goods shall not be allowed clearance even in the normal course

without grant of "out of charge" by the customs authorities. In such a situation, the offending goods can be confiscated without

effecting seizure but after issuing show-cause notice under

Section 124.

(c) The offending goods are seized and provisionally released on execution of bond with security like bank guarantee, etc. In

respect of goods which were seized and provisionally released in the said manner to the owner before adjudication, the owner of

the goods is liable to return the goods at the time of adjudication

in terms of his undertaking and, in the event of failure to produce the same, fine in lieu of confiscation can be imposed as settled by

the Hon'ble Supreme Court in the case Weston Components Ltd. Vs. Commissioner of Customs, New Delhi [2000 (115) E.L.T. 278

(S.C.)] = (2002-TIOL-176-SC-CUS)

(d) The offending goods may be outside the jurisdiction of Indian

Customs authorities as in the case of goods which have been illegally exported. In such a situation, the authorities may not be

able to pass an order of confiscation as the same is not practicable and further the decision may not be legally

enforceable. This is in line with the decision of the Tribunal in the case 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 Hon'ble High Court of Gujarat in the case of J.K. Bardolia

Mills vs. M.L. Khunger, Dy. Collector of Customs as reported in [(1975) 16



GLR 119]; and the decision of the Hon'ble High Court of Bombay in the case of Mohanlal Devdanbhai Choksey and Others vs. M.P. Mondkar and

Others reported in [1988 (37) ELT 528 (Bom.)] relied upon by the department make it clear (a) that confiscation under Section 111 applies to

any goods in respect of which offences have been established and not necessarily to all goods which have been seized; (b) that there is no

restriction under Section 124 to issue show-cause notice proposing confiscation of only the seized goods; and (c) that the provisions of

Sections 110 and 124 are independent, distinct and exclusive of each other.

19.10. In view of the above, inasmuch as the imported goods are offending

in nature due to deliberate mis-declaration of value of the goods, they are liable to confiscation. Therefore, the order of confiscation requires to be

upheld.

19.11. While upholding the confiscation, however considering that the

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.

19.12. It was pointed out during arguments that, out of the seized

equipments of value Rs. 9.94 Cr., approximately Rs. 3.30 Cr related to Microwave equipment, against which there was no proposal for confiscation

as conceded by the Department. This fact is also being taken into account while reducing the redemption fines.

(g) Whether the quantum of duty has been correctly worked out?

20.1. The appellants, alternatively, submit that the duty demand computed

is based on a highly excessive and arbitrarly value. It is claimed that the average value of the software imported is approximately 25% of the

aggregate value of imports of hardware and software during the period 2003 to 2006. It is the contention that, at the time of import, the

equipments were imported by declaring unit price, i.e., the price listed in the contract between the appellants and Ericsson AB. However, payments

for software were determined as under as clarified in the statement dated 9.3.2005 of Shri 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 Tribunal. The appellants have claimed that the correct value of software would be approximately 25% of the aggregate value of imports of

hardware and software. However, the statement on hardware assessable value, software assessable value and the combined assessable value as

presented by the appellants gives a different story.

(a) In respect of show-cause notice dated 29.03.2005 issued to

BAL, it is claimed that assessable value of hardware is Rs.1,64,43,47,499; assessable value of software is

Rs.1,40,05,66,542 and thus the combined assessable value to be Rs.3,04,49,14,041.

(b) In respect of show-cause notice dated 09.03.2006 issued to

BAL, it is claimed that assessable value of hardware is

Rs.2,63,68,56,112; assessable value of software is Rs.2,60,21,92,946 and thus the combined assessable value to be

Rs.5,23,90,49,058.

(c) In respect of show-cause notice dated 29.05.2006 issued to

BHL, it is claimed that assessable value of hardware is Rs.36,61,08,454; assessable value of software is

Rs.35,98,45,026 and thus the combined assessable value to be Rs.72,59,53,480.

(d) In respect of show-cause notice dated 29.05.2006 issued to

BAL, it is claimed that assessable value of hardware is

Rs.6,18,79,96,612; assessable value of software is Rs.5,91,01,78,996 and thus the combined assessable value to be

Rs.12,09,81,75,608.

(e) In respect of show-cause notice dated 31.05.2006 issued to

BAL, it is claimed that assessable value of hardware is Rs.14,97,33,088; assessable value of software is

Rs.19,96,12,962 and thus the combined assessable value to be



Rs.34,93,46,050.

(f) In respect of show-cause notice dated 31.05.2006 issued to

BHL, it is claimed that assessable value of hardware is Rs.9,41,98,927; assessable value of software is Rs.16,29,60,315

and thus the combined assessable value to be Rs.25,71,59,242.

20.3. From the above, it is clear that the claim of the appellants for the first

time before the Tribunal that the value of software is about 25% of the composite value is contradictory to the figures furnished by them and thus

their claim is unsubstantiated.

20.4. We find that the show-cause notices proposed to reject the declared

value and the value was proposed to be "redetermined by adding the corresponding values of the software separately imported or as indicated 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 and that software was fully exempted; that it was the

practice, in the industry, of excluding the value of software preloaded in the MSC, BSC, and BTS and that the practice followed by them was in line with

the decisions of the Hon'ble Supreme Court as in the cases of PSI Data

Systems (supra); Sprint RPG India Limited vs. CC (supra); Sprint India Ltd. vs. CC (T); and Barber Ship Management (I) Pvt. Ltd. vs. CC (supra) and

Acer India (supra). Therefore, they were under a bona fide belief that the value of software was not includable in the value of hardware as they were

two distinct commodities and that software was fully exempted. This plea of bona fide belief is not acceptable. The conduct of the assessees does not

show that they were under any such bona fide belief. The hardware of telecom equipment imported by them contained the required software

either in the hard disk or in the flash memory. If they felt that such preloaded software was a separate commodity, it was incumbent on them

to declare the same as software and claim separate classification and claim



the benefit of ‘nil' rate of duty/exemption notification. This was not the case. They have not declared the fact of importing the equipments with

preloaded software. On the other hand, they have followed a highly deceptive practice of importing software in CDs/ODs declaring high values

and then dumping them ‘as waste'. The said CDs/ODs were lying in original packing, unopened and unused as they did not find any need for use of the

software so imported separately. The imported telecom equipments contained the necessary software along with backup, and it was also

claimed that the latest software was available to be downloaded through internet. In these circumstances, the assessee-appellants' deceitful

intention to underdeclare the value of imported goods is evident and their

plea of bona fide belief is bereft of bona fides as there was no justification for them to hold an opinion that the practice followed by them was covered

by the ratio of any of the cited decisions. Therefore, the invocation of extended period of limitation and imposition of penalties on the appellant-

assessees are eminently justifiable.

21.2. At this stage, the appeals by the department on the quantum of

penalties imposed on the appellant-assessees can be considered. In the said appeals, the prayer is for imposition of penalties equivalent 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 where "the person who is liable to pay the duty or interest, as the

case may be, as determined …………" It appears that Section

114A deals with penalty on the person who is liable to pay duty or the person who is liable to pay interest.

21.3. We find that the show-cause notices specifically indicated only



amounts of duty proposed to be demanded but did not (and could not) indicate the quantum of interest proposed to be demanded. Apparently,

the duty demand itself was to be determined subject to the outer limit of amounts mentioned in the show-cause notices. The interest payable

depends not only on the duty so determined but also the actual date of

payment of the duty so determined. Only then, the actual interest payable will be ascertainable. Obviously, in the present cases, the Commissioner at

the time of adjudication of the case could not have determined the actual amounts of interest to be included in penalties under Section 114A. Further

Section 114A envisages penalty "on 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". The Commissioner was not in a position to determine the interest amount at the time of passing the impugned order. Therefore, his

imposing penalties equal to the duty determined is in order.

21.4. The role of EIL, as per the show-cause notice and the order-in-

original is limited to copying of ODs/CDs in their office at Gurgaon and dispatching them to Ericcson AB, Sweden for re-despatch to India. The

filing of Bills of Entry has been done by appellants (1) and (2) based on split invoices issued by Ericcson AB. Appellants (1) and (2) have failed to

declare that the equipments imported by them contained preloaded software. They have also devised a deceptive practice in importing totally

redundant CDs/ODs said to contain the same software which was

preloaded in the imported equipments. In all these activities, the role of EIL is only limited to copying of the software in ODs and CDs at the

instance of Ericcson AB of Sweden. No other evidence which could indicate that EIL had knowledge of intention of the importers or that, by any

omission or commission, EIL rendered the imported goods liable to confiscation has been relied upon. Further, the CDs/ODs in relation to

which EIL had a role to play were not even proposed for confiscation. Therefore, there is no justification for 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 involve any violation of

principles of natural justice.

(c) The fact that no cross- examination was granted of the

author of CAIR report is not in violation of principles of natural justice as further questionnaire given by the assessee stands

replied on behalf of the group of scientists. Further, the reports of two experts produced by the appellants stand admitted and

examined by the Commissioner.

(d) The appellants (1) and (2) imported telecom equipment

systems and declared the same as MSC classifiable under Chapter Heading 85.15, BSC and BTS classifiable under Chapter

Heading 85.25. They did not disclose preloading of software in the factory in Sweden. There was a single contract for purchase

of equipments; there was no option but to buy the so-called hardware and software only as a package; and no separate fixed

price was available for the software component. In fact, no price

for BTS software was indicated for period prior to September 2001.

(e) The programs that make the switching equipment function

are not independent software and cannot be marketed separately. Similarly, the programs required to make the BTS

functional are loaded on to flash drive and are integral part of

BTS equipment.

(f) The separately imported softwares are found to be dupes copied in EIL, Gurgaon. Undisputedly, the impugned software is

proprietary software. It has not been explained as to how the

same was permitted to be copied by a third party, namely, EIL. It was claimed that it might be a cost-saving measure adopted

by Ericsson AB Sweden. Allowing copying of proprietary software by a third party (even if the said party happens to be a

subsidiary) was not a "cost-saving measure" but part of a design to evade customs duty. No records were kept for such copying of

software. The copied software was sent to Sweden and dispatched back to India. The CDs/ODs were not in proper

packing and not properly labelled defeating the claimed status of the software. They were not opened and not used till they were

seized by the DRI authorities. The appellants have not chosen to

ask for provisional release of the said items even though the total declared value was Rs. 113.50 crores. This is to be

contrasted with their efforts to take provisional release of seized equipments worth Rs. 9.94 crores after furnishing bank

guarantee worth Rs. 2,35,43,253/-. In fact, there was no proposal to confiscate 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 considered nothing more than e-waste. The dispute is whether what was preloaded in the hard

disk/flash drive at factory in Sweden before dispatch should be "pulled out" or disintegrated from the machine and given a

separate status and should be classified under 85.24 and its value should be excluded for determining the value of the

imported equipments. It is not the case that the appellants brought the software in CDs/ODs and presented the same along

with the hardware and sought classification of both hardware and

software separately.

(j) The final cost of equipment included the cost of the programs in the form of software. Equipment was imported by the

assessees declaring it as hardware and declaring its value less to the extent of the corresponding software price indicated for the

software.

(k) The programs in the software define and characterize the

particular hardware and elevate the same to the functional apparatus/equipment. The software is written in a specialized

language PLEX which is proprietary in nature. The software is

machine-specific and the same is mandatorily required for working of the said machine. It has not been shown that there is

separate identity for the impugned software marketable as a separate commodity. We have not been shown that there was an

option to buy the impugned software separately.

(l) There is no justification for excluding the price of preloaded



software from the value of equipments as claimed by the assessee-appellants.

(m) There is clear evidence of deliberate under declaration of

value of the imported equipments by the assessee-appellants through a grossly deceptive method with intention to evade

payment of duty. In view of the above, the invocation of

extended period for demand of duty, confiscation of the imported goods, and imposition of penalties on the assessees are justified.

23. In view of the above, the issues framed in para 10.2 are to be

answered as follows:

(a) ADG DRI had jurisdiction to issue the show-cause notices and

the show-cause notices have been validly issued.

(b) There is no violation of principles of natural justice by the

adjudicating authority while passing the impugned order.

(c) The equipments imported by the assessee-appellants form an

integrated system with preloaded software with associated licence for use of the same. The separate import of software in

CDs/ODs was a 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 imposable on the appellant-assessees. However, in the absence of evidence no penalty can be imposed



on EIL.

24. In view of the above, the appeals are disposed of as follows:

(a) Appeal No.C/573/08 by Bharti Airtel Ltd. is disposed of by

upholding the demand of duty along with interest and penalty of amount equal to duty imposed on them. While upholding the

confiscation of the goods imported by the appellant the

redemption fine imposed is reduced from Rs. 48.8 crores to Rs.20 crores.

(b) Appeal No.C/574/08 by Bharti Hexacom Ltd. is disposed of by

upholding the demand of duty along with interest and penalty of amount equal to duty imposed on them. While upholding the

confiscation of the goods imported by the appellant, the

redemption fine imposed is reduced from Rs. 2.35 crores to Rs. One crore.

(c) Appeal No.C/575/08 filed by Ericsson India Pvt. Ltd is allowed

with consequential relief as per law.

(d) Appeals Nos.C/613 to 618/08 filed by the department

seeking enhancement of penalties are rejected.

(Pronounced in the open court on 7.6.2012)

(DISCLAIMER: Though all efforts have been made to reproduce the order

correctly but the access and circulation is subject to the condition that

Taxindiaonline are not responsible/liable for any loss or damage caused to

anyone due to any mistake/error/omissions.)

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