Bharti Airtel Ltd. v. Commissioner Of Customs, Bangalore

[Order per : T.K. Jayaraman, Member (T)]. - In terms of the impugned order, the appellants are required to pre-deposit the duty/penalty as indicated in the following tabular column :-

2. S/Shri V. Lakshmikumaran and G. Shiva Dass, the learned Advocates, appeared on behalf of the appellants and Shri P.R.V. Ramanan, the learned Special Counsel, appeared for Revenue.

3. We heard both sides.

4. The appellants are leading service providers for GSM Mobile Telephones in a number of States/Circles in India. The first two appellants imported hardware and related software for their requirements for Circles situated in several parts, of India from M/s. Ericsson AB, Sweden, under contracts. M/s. Ericsson India (P) Ltd. (Appellant 3) are engaged in providing the services of installation and commissioning of telecom equipment supplied by M/s. Ericsson AB, Sweden for Rajasthan and North-East Circles, during the year 1996. The issue in short is whether the value of the software is includible in the value of the equipment for assessment purposes. The learned Advocate, after giving a brief outline of the cellular technology, urged the point that the software imported by them along with the equipment, cannot be considered as embedded software. In other words, he stated that the said software is not etched in the Microprocessors. Moreover, the hardware and software were supplied and priced separately. The licenced software was supplied on compact disc or optical disc by Ericsson AB, Sweden to the appellant who got the software installed/loaded on to the hardware at the client’s premises customizing it to the requirement of the Circle to which the hardware was to cater. During October, 2004, the DRI conducted certain investigations. On the basis of the investigations, proceedings were initiated leading to the demand of duties and imposition of penalties. The allegation is that the software, which was in the nature of ‘firmware’ was already pre-loaded by the supplier at their factory and as a result, the software imported by the appellants separately in CDs/ODs/Floppies by claiming assessment under Chapter heading 85.24 at NIL rate of duty 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 the software imported.

5. Shri Lakshmikumaran made the following submissions :-

(i)      This issue has been settled in favour of the appellants by the latest decision of the Hon’ble Tribunal, Mumbai, in the case of M/s. Vodafone Essar Gujarat Ltd. v CC (Imports), Mumbai vide Final Order  No. A/531/08/CSTB/C-II, dated 8-10-2008 [2009 (237) E.L.T. 460 (Tri. - Mumbai]. Shri Lakshmikumaran drew parallels between the factual situation in the ‘Vodafone’ case and the present case.

(ii)    The Apex Court, in the case of CCE, Pondicherry v. Acer India Ltd. - (S.C.) has affirmed that the value of the operating software is not includible in the assessable value of computers.

(iii)   This very same Bench, in Final Order No. 1188/08 dated 14-10-2008 in the case of M/s. ITI Ltd., has dealt with similar issue by relying on the Apex Court’s decision in the ACER India case. In the said decision, it was observed that though the software is very essential for the functioning of any computer or machine, so long as software is separately identified as an excisable commodity in the tariff, its value cannot be included in the value of the main equipment.

(iv)   The Commissioner of Customs, New Delhi, in the matter of M/s. Gas Authority of India Ltd. (GAIL), on a similar issue, held that the value of software though pre-loaded was not in the nature of embedded software and its value would not be includible in the value of hardware. He dropped the demand vide OIO No. 14/Adjn./RSS/2004 dated 6-7-2004. The said decision was accepted by the Department.

(v)     Reliance was also placed on the following decisions :-

(a)     Birla Corporation Ltd. v. CCE - (S.C.)

(b)     CCE, Navi Mumbai v. Amar Bitumen & Allied Products Pvt. Ltd. - (S.C.)

(c)      CCE v. Bigen Industries Ltd. - (S.C.)

(d)     CCE v. Novapan Industries Ltd. - (S.C.)

(e)      Indian Oil Corporation Ltd. v. CCE - (S.C.)

(f)      M/s. Jyothy Laboratories Ltd. v. CCE - 2007 (78) RLT 276

(vi)   Reliance was also placed on the technical opinion of Shri K.S. Ramanujam, a leading expert in the field of GSM Technology and Faculty Member of the Birla Institute of Technology and Sciences at Pilani in Rajasthan. In terms of the above opinion, the software cannot be considered as embedded. According to him, the solid-state semiconductor storage is known as ‘flash memory’.

(vii)  Further, he referred to the World Customs Organisation(WCO)’s classification opinion and the amendment to HSN Explanatory Notes to Heading 85.23 with regard to solid-state, non-volatile data storage devices for recording data from an external source. He urged the point that Flash Memory Cards (Unrecorded) would fall under Heading 85.23 and the Recorded Flash Memory Cards would fall under Heading 85.24 as recorded media.

(viii) He stated that even though software was pre-loaded at the factory, they are again loaded at the site/location in India by Ericsson India (P). Ltd.

(ix)   Reliance was placed on the Public Notice issued by Mumbai Customs in Public Notice No. 39/2007 dated 3-12-2007 on the subject of Valuation and Classification of Software after the deletion of Chapter Note 6 in Chapter 85 and after taking note of the decision of the Hon’ble Apex Court in the case of CCE v. Hewlett Packard India Sales Pvt. Ltd. [ (S.C.)] Further he stated that the  licenced version of software were also imported separately for a valid consideration.

(x)     It was also pleaded that the demand of duty is barred by limitation of time. The appellant had not suppressed any facts with an intention to evade payment of duty. They were under the bona fide belief that the value of software cannot be added in the value of equipment.

5.2 In view of the above, he stated that prima facie, the appellants have strong case in their favour.

6. The learned Special counsel stated that the facts of the Vodafone case and those of the present appeals are not exactly identical. It was urged that the Hon’ble Mumbai Bench has not given due consideration to some of the issues which are germane to the present appeals.

6.1 He stated that DRI had information that the subject equipment had embedded software and that the value of the equipment was split into hardware and software to undervalue the hardware. It was stated that purported import of software was a dummy transaction. This has been revealed by the elaborate investigations of the DRI.

6.2 He has also referred to the technical opinion obtained by DRI from CAIR, which confirms the fact that the programs are embedded software.

6.3 Shri Ramanan distinguished the facts of the case relied on by the appellants from those of the present case. He strongly urged that there is ample evidence to show that the software is embedded and its value is includible in the cost of the equipment. He also stated that the investigations revealed the collusion of the appellant with EAB in artificial transaction of splitting the cost of the equipment. Therefore, he requested the bench to put the appellants to strict terms.

7. On a very careful consideration of the issue, we find that the matter has to be gone in depth to appreciate the various issues involved in the appeal. On a similar issue, the Mumbai Bench has decided in favour of the assessee. In the case of M/s. ITI Ltd. v. CCE & C, this bench also has held that the value of the software is not includible in the value of the telecom equipment. Moreover, the appellants have cited a large number of decisions in their favour. In these circumstances, in our view, prima facie, it appears that the appellants have a strong case. However, we are unable to categorically give a definite ruling on the issue at this stage. We order full waiver of the duties/penalties imposed till the disposal of the appeal. As the revenue involved is more, the matter to come up for final hearing on 25th November, 2008.

(Pronounced in open Court on 22 Oct. 2008)