2008(10)LCX0075

In the Customs, Excise & Service Tax Appellate 'Tribunal, New Delhi

Hon'ble Mr. Justice S.N. Jha, President Shri M. Veeraiyan, Member (Technical)

Best & Co.

Versus

Commissioner of Customs, New Delhi

Final Order No. 539/2008-Cus. dt. 23.10.2008 certified on 4.11.2008 in Appeal No. C/329/2005-Cus (BR)

Cases Quoted -

BBS Pens (India) Pvt. Ltd. Vs. CC, Bangalore 2002(03)LCX0169 Eq 2002 (142) ELT 0435 (Tri.-Bang.) - Referred [Para 4]

Telebrands (I) Mfg. & Assembling Indus. Vs. CC (Import), Mumbai2001 (045) RLT 0223 (CEGAT-Mum.) - Referred [Para 4]

Jindal Strips Ltd. Vs. CC, New Delhi 2001 (046) RLT 0863 (CEGAT-Del.) - Referred [Para 4]

Sunray Computers (P) Ltd. Vs. CCE, Bangalore 1997(12)LCX0338 Eq 1999 (112) ELT 0540 (Tri b.) - Referred [Para 4]

PSI Data Systems Ltd. Vs. CCE, 1997 (018) RLT 0001 (SC) - Referred [Paras 4, 7.6]

Jay Kay Exports & Industries Vs. CC (Port) Kol 2003(07)LCX0026 Eq 2004 (163) ELT 0359 (Tri.-Kol.) - Referred [Para 4]

Award Electronics Vs. CC, Chennai 2003 (055) RLT 0201 (CEGAT-Che.) - Referred [Para 4]

Sarvalakshmi Paper & Board Vs. CC, Madras 1999 (032) RLT 0152 (CEC AT) - Referred [Para 4]

Advocated By -

Shri K. Kant, Adv. for Appellant
Mrs. A.P. Tiwari, Jt. CDR & Shri Sumit Kumar, DR for Respondent

Per M. Veeraiyan:

This is an appeal against the order of the Original Authority No. 1/ Commissioner/05 dated 28.2.2005.


2. Heard both sides. After the hearing was over, a written submission was filed on behalf of the appellant.


3. The relevant facts, in brief, are as follows:-

The appellant imported a consignment as Aircargo, through Delhi and filed Bill of Entry No. 474994 dated 21.4.2003 declaring the description as "Hardware M-380 point of sale terminals with Printer" and declaring the value as 5, 50,000 Euro for thousand pieces and claimed classification under sub heading 8471.3039. The consignment consisted of 114 packages and was despatched from Italy but the invoice for the said consignment was received from Kalo Holdings Corp. L.L.C. (USA) 14, Rutland Court, London.

b) On the basis of an information, a copy of the manufacturer's invoice of M/s. Technost Systemi (Olivetti Group) No. 5023400137 dated 27.3.2003 prepared on Kalo Holdings Corporation was procured from the office of Swiss Airlines (who transported the consignment) showing the value of said consignment as Euro 17, 90,000 and the description of the goods as "Online Computer Hardware & Software".

(c). As the goods were found to have been mis-declared in description and value, the same were seized but subsequently provisionally released on execution of a bond and on collection of duty on the higher value and adopting classification under Chapter Heading 8479.9090.

d). As the investigation was getting delayed, a show cause notice dated 7.10.2003 was issued proposing extension of time limit for issuing the show cause notice in terms of Section 110 (2) of the Customs Act, 1962. An order dated 21.10.2003 was issued extending the time limit.

e). The appellant filed appeal before the Tribunal against the order dated 21.10.2003 of the Commissioner extending the time limit and some orders were passed from time to time by the Tribunal specifying certain dead lines for completion of investigation and issue of show cause notice.

f). On the basis of available evidence, show cause notice dated 16.4.2004 was issued proposing reclassification, enhancement of value, confiscation of the goods and imposition of penalty. In the said show cause notice, it was also mentioned that since overseas investigation was in progress, in case any evidence relevant to the present show cause notice was received, the department reserved its right to issue addendum.

g) An addendum dated 14.12.2004 to the show cause notice dated 16.4.2004 was issued enclosing certain evidence collected on the basis of overseas enquiry conducted at Italy through the High Commission of India at London and opportunity for making further submissions were given.

h) A personal hearing was held on 20.12.2004 by the Adjudicating Authority.

i) Letter dated 22.2.2005 enclosing the report of Secretary (Trade) Indian High Commission, London was sent to the appellant and they were given opportunity to make submissions.

j) Commissioner thereafter passed his order dated 28.2.2005 ordering classification of the goods under CTH 8479.9090; enhancing the value to Euro 17,90,000 from the declared value of Euro 5,50,000; demanding the duty of Rs. 3,62,59,153/-; demanding differential duty of Rs. 12,92,609/ - due to change in classification; ordering confiscation of the goods with option to redeem the same on payment of fine of Rs. 25 lakhs; imposing a penalty of Rs. 1 crore under Section 112 of the Customs Act.


4. The learned Advocate for the appellant made the following submission:-

a) The Commissioner of Customs (Prev.) has no jurisdiction to adjudicate upon the pending bill of entry and only the Commissioner of Customs (Import and General) is competent as the Bill of Entry has been filed in 'his Custom House'. Further, the adjudicating Authority went beyond its role and involved himself in investigation; he even after conclusion of personal hearing got the evidence collected, issued addendum to fortify the case. Such a conduct throws doubt about the impartiality of the adjudicating authority.

b) The proposal to enhance the value to 17,90,000 Euro is based on an invoice issued to their supplier M/s. Kalo Holdings Corp. L.L.C. (USA), London by their supplier namely Ecnostsistemi (Olivetti Group). Reliance placed on such invoice of transaction between third parties is not proper.

c) The consignment imported at Delhi was only Hardware; the software was cleared subsequently through Chennai for a total value of 16 lakh Euro and no duty was payable on the software as the same were fully exempted.

d) Though Kalo Holdings Corp., London might have entered into a composite contract with their suppliers in May for a sum of 17, 90,000 Euro, the appellant had dealings only with Kalo Holdings Corp, London. They had a supply agreement dated 27.1.2003 and a proforma invoice dated 27.1.2003 was issued by them indicating separately the price of hardware and three types of software. In pursuance of the supply agreement, a LC was opened on 6.3.2003; the entire amount of 21, 50,000 Euro was transferred through normal banking channel on 5.5.2003.

e) Kalo Holdings Corp, London supplied the consignments in two stages i.e. Hardware (imported through Delhi) under invoice COL BEST 05A for a value of 5, 50,000 Euro and supplied the software, (imported through Chennai) covered by invoice COL Best/0513 for a value of 16, 00,000 Euro.

f) The Department has not proved that there was import of software alongwith the Delhi consignment.

g) As the supply agreement mentions the supply of software and hardware separately and supplies have been made separately, the question of treating the consignment imported at Delhi as inclusive of software and adopting a value of 17, 90,000 Euro is not justified.

h) Addition of value of software in the hardware will amount to subjecting the exempted software to duty at rates applicable to hardware.

i) The machines imported at Delhi are covered by the term data processing machine. In the condition in which they are imported, they are not capable of undertaking any function. Only after installation of the software (which were imported at Chennai), they can do the required functions for lottery. Therefore, the classification of the said terminals as parts falling under chapter more specific than the term mentioned in 8479 which deals with machines for individual function.

j) Import of identical goods through Chennai Custom has been assessed under 84719090 adopting Euro 550 per point of Sale Terminal as assessable value.

k) Reliance has been placed on the letter dated 7.2.2005 of First Secretary (Trade) High Commission of India, London, UK. But requests for supply of copies of annexures A, B and C referred to in the said report has not been acceded to.

l) An unsigned and unattested photocopy of a report from Italian Customs have been relied. However, a sworn affidavit executed before Notary Public, London by the Vice President of M/s. Kalo Holding Corporation duly authenticated by the High Commission official has been ignored.

The learned Advocate relies on the following decisions:-

BBS Pens (India) Pvt. Ltd. Vs. CC, Bangalore, 2002(03)LCX0169 Eq 2002 (142) ELT 0435 (Tri.-Bang.)

Telebrands (I) Mfg. & Assembling Indus. Vs. CC (Import), Mumbai, 2001 (045) RLT 0223 (CEGAT-Mum.) =2001(02)LCX0298 Eq 2001 (138) ELT 0745 (Tri.-Mum.)

Jindal Strips Ltd. Vs. CC, New Delhi, 2001 (046) RLT 0863 (CEGAT-Mum.)=-2001(07)LCX0177 Eq 2001 (133) ELT 0570 (Tri.-Delhi)

Sunray Computers (P) Ltd. Vs. CCE, Bangalore, 1997(12)LCX0338 Eq 1999 (112) ELT 0540 (Trib.)

PSI Data Systems Ltd. Vs. CCE, 1997 (018) RLT 0001 (SC) =1996(12)LCX0035 Eq 1997 (089) ELT 0003 (SO

Jay Kay Exports & Industries Vs. CC (Port) Kol., 2003(07)LCX0026 Eq 2004 (163) ELT 0359 (Tri.-Kol.)

Award Electronics Vs. CC, Chennai, 2003 (055) RLT 0201 (CEGAT-Che.)=2002(12)LCX0030 Eq 2003 (153) ELT 0210 (Tri.-Che.)

Sarvalakshmi Paper & Board Vs. CC, Madras, 1999 (032) RLT 0152 (CEGAT) =1999(02)LCX0182 Eq 2000 (126) ELT 0935 (Trib.)


5. The learned DR made the following submissions:-

a) The supply agreement dated 27.1.2003 is relating to supply of "On line lottery terminal" and specifies the configurations. It also specifies the shipment schedules. The proforma invoice dated 27.1.2003 refers to specially written software on M/380 Model Terminal. Supply agreement also envisages opening of LC and supply of software within three months from the date of receipt of LC.

b) The LC has been opened in March, 2003 and the money has been transmitted on 5.5.2003. The attempt of the appellant to link the supplies to the import made in September, 2003 at Chennai to payments made in May, 2003 does not sound logical. What was imported at Chennai was one CD weighing 500 gms but declared to be 3000 CDs. Later on they explained that CD contain three software programmes and each of the software programme can be utilised in maximum of 1000 machines.

c) The entire system has come in Delhi. What was imported at Delhi is "an integrated system" and there is no justification for the break up as hardware and software.

d) He also produced information down loaded from internet relating to package of "Point of Sale Lottery System" "Lotto Sorcerer, For the serious lottery player" and submitted that the lottery system involves secrecy and involves choosing "true random numbers" and by nature it requires to be an integrated system.

e) As per the Italian Customs investigation with the supplier of the lottery system, it has been established that there is no specific value for the software; the copy rights have been transferred with unlimited rights.

6.1 We have carefully considered the submissions from both the sides. Before going into the main dispute, it would be appropriate to deal with certain preliminary issues raised by the appellant. A submission has been made that the Commissioner of Customs (Import & General) and not the Commissioner of Customs (Preventive) has jurisdiction to adjudicate upon the pending bill of entry. We find that the jurisdiction of Commissioner of Customs (Preventive) and that of Commissioner of Customs (Import & General) extend, as per Notification 2/2002 of Customs (NT) dated 7.3.2002 issued by Central Govt, under Section 4 (1) of the Customs Act, to

"The National Capital Territory of Delhi and the NOIDA Special Economic Zone in the State of Uttar Pradesh.

As both the Commissioners have concurrent jurisdiction we do not find merit in the submission that the Commissioner of Customs (Preventive) has (no) jurisdiction to adjudicate upon the pending bill of entry.

6.2 Commissioner as adjudicating authority is functioning in a quasi-judicial capacity. There is no formal representation of the case by the departmental representative in a proceeding before the Commissioner, as it is prevailing in respect of any proceeding in the Tribunal or in a Court. As adjudicating authority, he was required to give opportunity to the investigating officer to produce evidence. His role in disclosing the evidence collected by the investigating agency to the noticees and seeking their defence is an accepted method of dispute resolution in quasi-judicial proceeding. Such evidence has to be disclosed to the noticees who are likely to be affected and take their defence submissions into account before passing appropriate orders, under these circumstances, we do not agree that the adjudicating authority went beyond his role and involved himself in investigation.

6.3 Another submission has been made that addendum to the show cause notice has been issued after the personal hearing was held. It is seen that the appellant has moved the Tribunal against the order of the Commissioner dated 21.10.03 extending time limit for issue of show cause notice and the Tribunal issued orders fixing deadlines for issue of show cause notice, even though the overseas investigation was underway. Faced with deadline fixed by the Tribunal for issue of show cause notice and the need to gather evidence through overseas investigation, the Department has followed the via media and issued the show cause notice with right to issue addendum. Without commenting on the orders passed by the Tribunal, we find that when the evidence have been received in overseas investigation, the same have been made available to the noticee before decision is taken by the adjudicating authority. We do not find anything wrong in this. If the evidence was relied without disclosing to the noticee, then that would have been in serious violation of principles of natural justice.

6.4 A submission has been made that unsigned and unattested photocopy of a report of Italian Customs have been relied. Documents have been obtained through Govt. Agencies of other Countries in pursuance of mutual arrangements for assistance in investigation and the documents have been received through diplomatic channel. Such documents, even if they are in the form of a message cannot be ignored and can be admitted as evidence. These evidences can be taken into consideration along with other evidences in the matter and the evidentiary value of the same- can be evaluated.

7.1 The appellant, entered into the supply agreement dated 27.1.2Q03. The relevant portion of the supply agreement is reproduced below:

1. Terminals

Supplier will sell to purchaser 1,000 On-line Lottery Terminals model Mael 380 (hereinafter referred to as 'Terminal') as per the following configuration: CPU: Intel Celeron 566 MHz (or Via Cyrix C3 800 MHz), RAM: 128 MB, Flash Mem: 64 MB: 12.1 Display, Thermal printer, operating system: Win CE.

2. Terms of payment

Purchaser will issue an irrevocable and confirmed letter of credit (hereinafter referred to as the 'LC'), in favour of supplier, issued by a primary international bank, for the total amount as per our proforma invoice.

3. Shipment plant of the Terminals:

The lot of 1,000 Terminals will be shipped within 30 days after supplier receives the relevant LC.

4. Software application of the Terminal

Supplier agrees to develop two Data processing applications that run on the terminals: Lotto 6/49 and Pick-3. The integration of the above said two applications with the hardware of the Terminals is under the responsibility of the supplier.

5. Central System

1). Software of the central system for Database and transaction servers

a). Supplier agrees to develop Data processing software that run on the Database and transaction servers. This software of the central system will be provided to purchaser along with functional documentation.

b). Supplier authorises the purchaser to use such software in order to set up the central system to be connected to the terminals.

b) The software of the central system will be provided by supplier to purchaser under an unlimited software licence for use as described in above point b)

2) Hardware of the central system

a). Supplier agrees to indicate to purchaser the list of equipment necessary to set up a scaleable central system.

6. Shipment plant for software

The software for both the terminals and the servers will be shipped within 60 days after supplier receives the LC.

7. Prices

This purchase is for 1000 terminals at the unitary special price of Euro 550, 00 and software at Euro 400, 00 per terminal for the terminal applications. Euro 600, 00 per terminal for the Database server, and Euro 600, 00 per terminal for the transaction server." 7.2 In pursuance of the agreement proforma invoice dated 27.1.2003 was issued which gives the break-up of the prices as follows:

7.3 A perusal of the agreement and the proforma invoice indicates that the agreement envisages supply of central system and the terminals which are capable of being connected to the central system. It could be seen that the point of sale terminals are parts of specialised systems for specialised application. This involves selection of random numbers and said selection should be done maintaining secrecy. Under these circumstances to say that the entire software required has come independently at Chennai at a later point of time is not convincing. As regards the software for the terminals it refers to "Specially written software for data processing on M380 model Terminal (including ownership rights)". There is reference to two software applications that run on the terminals. The software for connecting the terminals to the central system requires to be procured from other sources. Software for the central system is required to be developed and supplied within the stipulated time frame. From the above it is clear that there is specially written software on the terminal itself. The claim that three software programmes were separately imported runs contrary to the specifications in the agreement and the proforma invoice.

7.4 In pursuance of the agreement dated 27.1.03 and proforma invoice dated 27.1.2003 LC was opened on 6.3.03 and the entire amount of Rs. 21, 50,000 Euro was transferred on 5.5.03. Under these circumstances, the claim that only part of the consignment was supplied and imported in April, 2003 in Delhi and the balance was imported through Chennai in September 2003 lacks credibility. Further, what was claimed to be 3,000 CDs in the import consignment in Chennai were found to be only one CD weighing about 500 gms. said to contain 3 software programmes and each of the software programme useable up to a maximum of thousand machines. It appears that there were also other contracts and what was imported in Chennai was possibly part of such contracts.

7.5 From the above, it is reasonable to conclude that M380 point of sale terminals have come with specially written software for data processing on M380 model terminal along with ownership rights. Therefore, the value of 400 Euro per terminal relating to Specially written software for data processing on M380 model Terminal (including ownership rights) requires to be included in the assessable value. Thus, the deliberate undervaluation of the goods imported at Delhi is evident from the supply agreement and proforma invoice. The document recovered from the Airlines office and overseas investigations corroborate the same.

7.6 However, Hon'ble Supreme Court in the case of P.S. Data Systems Ltd. Vs. CCE - 1996(12)LCX0035 Eq 1997 (089) ELT 0003 (SC) has held as under:

"11. Learned Counsel for the respondent, fairly, did not dispute that the value of the software that the appellants might sell with their computers, if so ordered by the purchasers thereof, could not be included in the assessable value of the computers. He was, however, at pains tourge that this did not apply to the firm software that was etched into the computer, this is not even the appellant's case.

12. In the first place, the Tribunal confused a computer system with a computer, what was being charged to excise duty was the computer.

13. Second, that a computer and its software are distinct and separate is clear, both as a matter of commercial parlance as also upon the material on record. A computer may not be capable of effective functioning unless loaded with software such as discs, floppies and CD. rhoms, but that is not to say that these are part of the computer or to hold that, if they are sold along with the computer, their value must form part of the assessable value of the computer for the purpose of excise duty. To give an example, a cassette recorder will not function unless a cassette is inserted in it; but the two are well known and recognised to be different and distinct articles. The value of the cassette, if sold along with the cassette recorder, cannot be included in the assessable value of the cassette recorder. Just so, the value of software, if sold along with the computer, cannot be included in the assessable value of the computer for the purpose of excise duty".

Though the claim that the entire software required has come independently at Chennai at a later point of time is not convincing, in view of the above decision of the Hon'ble Supreme Court, the value relating the two other types of software mentioned in the proforma invoice shall not includable whether the same was imported along with the terminals at Delhi or separately imported at Chennai.


8. As regards the issue of classification, the heading 8479 90 90 proposed by the Department reads as under:

Chapter 8471, claimed by the importer, deals with data of processing machine and reads as under:

"8471 Automatic data processing machines and units thereof;

magnetic or optical readers, machines for transcribing data on to data media in coded form and machines for processing such data, not elsewhere specified or included."

However, Section Note 5 (E) which reads as follows:

"Machines performing a specific function other than data processing and incorporating or working in conjunction with an automatic data processing machine are to be classified to the headings appropriate to their respective functions or, failing that, in residual headings."

It could be seen that the point of sale terminals are specialised systems for specialised application. This involves selection of random numbers and said selection should be done maintaining secrecy. It is not as if all data processing machines fall under 84.71. Its scope is limited by the exclusion provided by Section Note 5 (E). From the above, the same clearly excludes machines having individual specific functions other than data of processing. Therefore, the classification adopted by the Department under Heading 8479.9090 is more appropriate than the heading 8471.3039. Therefore, the Commissioner's decision in treating the said lottery terminals which are meant for lottery automation as one having individual function and hence liable to be classified under 8479.9090 cannot be faulted.


9. Taking the entire facts and circumstances into account, the appeal is disposed of as follows:

a) The classification adopted by the Department under heading 8479.9090 is upheld.

b) The enhancement of the value of the consignment is upheld only to the extent of 950000 EURO. The value shall thus be enhanced to 950000 EURO only (as against 550000 EURO claimed by the importer and as against 17, 90,000 EURO adopted by the Department)

c) The demand of differential duty shall be worked out as above.

d) The redemption fine is reduced from Rs. 25 lakhs (rupees twenty five lakhs) to Rs. 10 lakhs (rupees ten lakhs).

e) The penalty is reduced from Rs. 1 crore (rupees one crore) to Rs. 10 lakhs (rupees ten lakhs).

Pronounced in the Court on 23.10.2008.

Equivalent 2009 (090) RLT 0530 (CESTAT-Del.)

Equivalent 2009 (239) ELT 0294 (Tri. - Del.)