Is Preloaded Software Part of Hardware for Customs Valuation? Supreme Court to Decide [Read Judgement]

The Supreme Court of India is set to examine whether the value of preloaded software in imported navigation devices should be included in the customs valuation as part of the hardware.

The case arises from a judgment of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, where the tribunal held that software preloaded or etched into navigation devices forms an integral part of the hardware and its value must be included in the assessable value for customs duty.

The appellant, Okoboji Global Private Limited, had imported 20,150 GPS navigation devices and 20,000 software licences in 2010. The Directorate of Revenue Intelligence alleged that the company undervalued the imports by splitting the total price into hardware and software components to claim exemption under Notification No. 21/2002-Cus, resulting in short payment of customs duty.

After investigation, the Commissioner of Customs confirmed the duty demand, imposed penalties, and ordered confiscation of the goods. Before the tribunal, the appellant’s counsel argued that the imported devices and the paper licences were covered under separate Bills of Entry and that the software was exempt under the customs notification.

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They added that the software and hardware had independent values, as recognised by earlier Supreme Court judgments in PSI Data Systems Pvt. Ltd. v. CCE and Acer India Pvt. Ltd. v. CC. The counsel also argued that the 150 extra units supplied free of cost were to offset transit losses and were not liable to duty.

The Division Bench of Dr. D.M. Misra (Judicial Member) and Mr. Pullela Nageswara Rao (Technical Member) observed that the software had already been etched into the imported devices and that the licence keys were imprinted on the hardware.

The tribunal explained that in such cases, the value of the software cannot be treated separately because it is part of the functioning unit. It pointed out that the decisions cited by the appellant related to standalone software, which was not comparable to preloaded firmware in imported goods.

The tribunal upheld the inclusion of the software value in the assessable value of the devices, confirmed the demand of differential duty and confiscation, and reduced the penalties imposed on the company’s directors to Rs. 1 lakh each.

The company has now filed an appeal before the Supreme Court. The Supreme Court has admitted the appeal and stayed the operation of the fine and penalty portions of the Tribunal’s order. It will now examine whether preloaded software in imported navigation devices forms part of the hardware and whether its value is includible in customs valuation.

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