Software Preloaded in Imported Hardware Includible in Customs Value: CESTAT Upholds Duty Demand, Drops Penalty against Wipro [Read Order]
The tribunal found that the issue involved a thin line of interpretational difference and that Wipro had disclosed the bifurcation in the Bills of Entry. There was no allegation that the import of software itself was concealed.
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai has held that the value of software preloaded in imported networking equipment is includible in the assessable value of hardware for customs duty purposes.
In the appeal filed by Wipro (Infotech Group), the Tribunal upheld the differential duty demand for the normal period but dropped penalties, noting that the dispute was interpretational and based on a bona fide belief.
Wipro imported networking equipment from a foreign supplier during July 2006 to April 2010. In the Bills of Entry, the importer declared separate values for hardware and software, classifying them under different tariff headings and paying duty accordingly.
The Department issued a show cause notice alleging undervaluation on the ground that the software was embedded or etched firmware forming an integral part of the equipment and that the product was a ready-to-use composite system.
According to the Revenue, the transaction value could not be split and the entire value including software had to be assessed together for customs duty. The adjudicating authority confirmed differential duty of about ₹39.77 lakh with interest, ordered confiscation, and imposed equal penalty.
Before the appellate tribunal, Wipro argued that the software was merely preloaded on the hard disk and not embedded firmware stored in ROM/EEPROM chips.
It contended that preloaded software is distinct from etched or embedded software and therefore its value should not be added to hardware value.
The assessee also submitted that the split values were transparently declared in import documents and customer records, and the valuation approach was based on a bona fide, negating any allegation of suppression.
CESTAT noted the similar case of Commissioner of Customs (Airport), Custom House, Chennai v. M/s. ITI Ltd. where it was held that when imported equipment is supplied as a ready-to-use system and cannot function without the accompanying software, the software value is includible in the hardware value for assessment.
The bench of Vasa Seshagiri Rao (Technical member) and P. Dinesha (Judicial member) held that the networking appliances imported by Wipro were composite functional systems and the software forming part of such systems could not be artificially segregated for valuation. It therefore upheld inclusion of software value and confirmed the duty demand on merits.
At the same time, the Tribunal found that the issue involved a thin line of interpretational difference and that Wipro had disclosed the bifurcation in the Bills of Entry. There was no allegation that the import of software itself was concealed.
Accordingly, the Tribunal upheld the duty demand only for the normal limitation period along with interest, set aside invocation of the extended period, and completely dropped penalties. The matter was remitted for re-quantification of duty limited to the normal period.
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