Relief for HCL Technologies: CESTAT Rules License Fee for Right to Use Software Not Includible in Customs Valuation of Imported CDs [Read Order]

The New Delhi Principal Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that the license fee paid for the right to use software cannot be included in the customs valuation of imported CDs.

HCL Technologies Ltd., the appellant, is engaged in providing software-led IT solutions and infrastructure management services. To enable such operations, HCL entered into an End-User License Agreement (EULA) with SAP India Pvt. Ltd. to obtain a non-exclusive and perpetual license to use SAP’s proprietary software.

SAP India, a wholly owned subsidiary of SAP AG, Germany, was authorized to sub-license the software in India.

During the relevant period, HCL imported CDs containing SAP software from SAP Germany through DHL, declaring a nominal value of Rs. 2,558. The Directorate of Revenue Intelligence (DRI) initiated an investigation and argued that the declared value was incorrect. It stated that the actual value should include the license fee of Rs. 1,85,97,808 paid by HCL to SAP India for the right to use the software.

A show cause notice was issued proposing to add the license fee to the transaction value of the CDs under Rule 9(1)(c) of the Customs Valuation Rules, 1988, and to recover the differential duty along with interest and penalty.

The Commissioner of Customs accepted the department’s view and confirmed the demand, observing that the license fee and the CD formed part of a single transaction and were inseparable. Aggrieved by this order, HCL filed an appeal before the CESTAT.

The appellants’ counsel argued that the license fee was paid only for acquiring the right to use the software and was unrelated to the import of the CD. The counsel submitted that the software could also be delivered electronically and the license fee remained payable regardless of whether a physical CD was imported. They explained that the license fee was not a condition of sale of the imported CD but a separate payment for post-import usage rights.

The revenue counsel argued that the license fee was an essential condition for the use of the software contained in the CD and must be included in the transaction value. They argued that without payment of the license fee, the imported CD could not be used, making the payment inseparable from the import transaction.

The two-member bench comprising Justice DilipGupta (President) and Hemambika R. Priya (Technical Member) observed that the license fee was paid for intangible usage rights and was not related to the import of the CD. It further observed that the payment of the license fee was not a condition of sale and that the software could be delivered electronically, which is not liable to customs duty.

The tribunal pointed out that Rule 9(1)(c) of the Customs Valuation Rules applies only when the license fee is directly related to the imported goods and is a condition of their sale. Since these conditions were not satisfied, the license fee could not be added to the value of the imported CD.

The tribunal explained that the import of CDs and the payment of license fees were independent transactions, and customs duty could not be demanded on the license fee. The tribunal set aside the order of the Commissioner and allowed the appeal, granting full relief to HCL Technologies.

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