Preloaded Software Must Be Included in Customs Valuation of Imported Navigation Devices: CESTAT [Read Order]

The Bangalore Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that the value of preloaded software must be included in the customs valuation of imported navigation devices.

Lakshmi Access Communications Systems Pvt. Ltd., the appellant, imported 20,150 GPS navigation devices and 20,000 paper software licences under separate bills of entry in April 2010. The supplier also provided 150 units free of cost, which were not declared to customs.

The Directorate of Revenue Intelligence (DRI) investigated the imports, alleging undervaluation by splitting hardware and software invoices and claiming exemption for the software. Based on the investigation, a show cause notice was issued demanding differential duty of Rs. 62,89,752 along with confiscation of goods and penalties.

The appellant’s counsel argued that paper licences for software were exempt from basic customs duty under Notification No. 21/2002-Cus and that their value could not be added to hardware.

The appellant’s counsel relied on Supreme Court rulings in PSI Data Systems and Acer India to submit that software had an independent identity and its value was not includable in the hardware. They further argued that the extra 150 units were provided free as replacement stock and not chargeable to duty.

The revenue counsel countered that the software was already etched and preloaded into the navigation devices and licence keys were imprinted on the hardware. They explained that the separate invoices for hardware and software were prepared only to claim exemption wrongfully.

The revenue counsel pointed out that statements recorded from the directors showed they had accepted that the value of software was not included, leading to undervaluation. They relied on the Larger Bench ruling in Bhagyanagar Metals and the Supreme Court’s decision in Anjaleem Enterprises, which held that embedded software forms part of the hardware for valuation.

The two-member bench comprising Dr. D.M. Misra (Judicial Member) and Pullela Nageswara Rao (Technical Member) observed that the software was preloaded into the navigation devices and the licence keys were already imprinted, making the software an integral part of the hardware.

The tribunal held that the commissioner was right in enhancing the value by including the software component, confirming the duty demand, interest, and confiscation. However, it reduced the penalty on each of the directors from Rs. 6 lakh to Rs. 1 lakh, finding the earlier penalty excessive.

The company’s appeal was dismissed, and the directors’ appeals were partly allowed to the extent of penalty reduction

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