Custom, Excise & Service Tax Tribunal
Hcl Technologies Ltd vs New Delhi(Import & General) on 29 September, 2025
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH - COURT NO. 1
CUSTOMS APPEAL NO. 53102 OF 2014
(Arising out of Order-in-Original No. 79/RKB/CC/NCH/2014 dated 20.02.2014 passed by
Commissioner of Customs (Adjudication), Delhi)
M/s. HCL Technologies Ltd. .....Appellant
B-39, Sector 1,
Noida - 201301 (U.P.)
VERSUS
Commissioner of Customs (Adjudication), .....Respondent
New Customs House, IGI Airport,
New Delhi
WITH
CUSTOMS APPEAL NO. 53254 OF 2014
(Arising out of Order-in-Original No. 79/RKB/CC/NCH/2014 dated 20.02.2014 passed by
Commissioner of Customs (Adjudication), Delhi)
M/s. SAP India Pvt. Limited .....Appellant
(Formerly known as SAP India System;
Applications and Products in Data Processing
Pvt. Ltd.)
Wing A, 2nd Floor,
Tower B, Salarpuria Soft Zone,
Sarjapur Outer Ring Road,
Bellandur Post, Bangalore - 560103
VERSUS
Commissioner of Customs (Adjudication), .....Respondent
New Customs House, IGI Airport,
New Delhi
AND
(Appeals filed by M/s. SAP India Pvt. Ltd.)
C/57164/2013 C/57165/2013 C/57167/2013 C/57168/2013
C/57169/2013 C/57170/2013 C/57171/2013 C/57172/2013
C/57665/2013 C/57675/2013 C/57676/2013 C/57677/2013
C/57685/2013 C/57686/2013 C/57687/2013 C/57688/2013
C/57689/2013 C/57690/2013 C/57691/2013 C/57812/2013
C/58033/2013 C/58034/2013 C/58698/2013 C/58811/2013
C/58812/2013 C/59008/2013 C/59009/2013 C/59041/2013
C/59177/2013 C/59273/2013 C/59274/2013 C/59275/2013
C/59276/2013 C/59277/2013 C/59278/2013 C/59539/2013
C/59540/2013 C/59679/2013 C/59680/2013 C/59681/2013
C/59682/2013 C/59683/2013 C/59684/2013 C/60006/2013
C/60431/2013 C/60508/2013 C/60800/2013 C/51660/2014
C/51775/2014 C/51854/2014 C/51914/2014 C/51915/2014
C/51919/2014 C/51937/2014 C/51989/2014 C/51990/2014
C/52004/2014 C/52226/2014 C/52357/2014 C/52896/2014
C/52934/2014 C/52935/2014 C/53595/2014 C/53615/2014
2
C/53102/2014,
C/53254/2014 &
82 others
C/53616/2014 C/53617/2014 C/53842/2014 C/54011/2014
C/54012/2014 C/54013/2014 C/54014/2014 C/54015/2014
C/54110/2014 C/54130/2014 C/54472/2014 C/55635/2014
C/50080/2015 C/50139/2015 C/50281/2015 C/50332/2015
C/50976/2018
AND
(Appeal filed by M/s. Shobha Asar)
C/51614/2014
APPEARANCE:
Shri V. Lakshmikumaran, Shri Rachi Jain, Shri Ashwani Bhatia and Ms. Srishty
Bajaj, Advocates for the Appellant
Shri Nikhil Mohan Goyal and Shri Rakesh Kumar, Authorized Representative for the
Department
CORAM: HON'BLE MR. JUSTICE DILIP GUPTA, PRESIDENT
HON'BLE MS. HEMAMBIKA R. PRIYA, MEMBER (TECHNICAL)
DATE OF HEARING: 10.09.2025
DATE OF DECISION: 29.09.2025
FINAL ORDER NO's. 51379-51462/2025
JUSTICE DILIP GUPTA:
Customs Appeal No. 53102 of 2014 has been filed by HCL
Technologies Ltd. 1 to assail that part of the order dated 20.02.2014 passed
by the Commissioner of Customs (Adjudication), New Delhi 2 that confirms
the differential customs duty with interest by taking recourse to the proviso
to section 28(1) of the Customs Act, 1962 3 and also imposes penalty upon
HCL under section 112(a) of the Customs Act.
2. Customs Appeal No. 53254 of 2014 has been filed by SAP India
Pvt. Ltd. 4 to assail that part of the order dated 20.02.2014 passed by the
Commissioner that imposes penalty upon SAP India under section 112(a) of
the Customs Act.
1. HCL
2. the Commissioner
3. the Customs Act
4. SAP India
3
C/53102/2014,
C/53254/2014 &
82 others
3. SAP India has also filed 81 more appeals against separate orders
passed by the Commissioner imposing penalty upon it under section 112(a)
of the Customs Act.
4. Customs Appeal No. 51614 of 2014 has been filed by M/s. Shobha
Asar against the order dated 28.11.2013 passed by the Commissioner
confirming the demand of differential duty by taking recourse to the proviso
to section 28(1) of the Customs Act and imposing penalty under section
112(a) of the Customs Act.
5. Details of the eighty-two appeals filed by SAP India are as follows:
Appeals filed by SAP India
Sl. Appeal No. Date of order Amount of Appropriation of
No. penalty penalty from
(in Rs.) deposit of
Rs. 9,61,98,021
1. C/53254/2014 20.04.2014 15,49,506 15,49,506
2. C/50080/2015 13.10.2013 1,87,257 -
3. C/50139/2015 26.08.2014 2,28,554 -
4. C/50281/2015 12.09.2014 2,24,898 -
5. C/50332/2015 12.09.2014 2,74,396 -
6. C/50976/2018 18.01.2018 3,32,734 3,32,734
7. C/51660/2014 28.11.2013 1,33,518 1,33,518
8. C/51775/2014 13.12.2013 1,09,907 1,09,907
9. C/51854/2014 16.12.2013 4,58,074 4,58,074
10. C/51914/2014 26.12.2013 4,25,163 4,25,163
11. C/51915/2014 20.12.2013 77,085 77,085
12. C/51919/2014 30.12.2013 91,518 91,518
13. C/51937/2014 23.12.2013 79,186 79,186
14. C/51989/2014 26.12.2013 1,50,018 1,50,018
15. C/51990/2014 27.12.2013 2,95,830 2,95,830
16. C/52004/2014 31.12.2013 1,58,206 1,58,206
17. C/52226/2014 15.01.2014 2,95,400 2,95,400
18. C/52357/2014 16.01.2014 18,74,782 18,74,782
19. C/52896/2014 12.02.2014 3,49,640 3,49,640
20. C/52934/2014 13.02.2014 6,14,628 6,14,628
21. C/52935/2014 17.02.2014 9,62,704 9,62,704
22. C/53595/2014 14.03.2014 23,20,048 -
23. C/53615/2014 18.03.2014 15,32,345 -
24. C/53616/2014 19.03.2014 5,70,544 -
25. C/53617/2014 10.03.2014 2,53,86,731 2,53,86,731
26. C/53842/2014 20.03.2014 3,91,214 -
27. C/54011/2014 30.04.2014 1,24,989 -
28. C/54012/2014 28.04.2014 1,19,627 -
29. C/54013/2014 09.05.2014 2,07,985 -
30. C/54014/2014 29.04.2014 8,23,096 -
31. C/54015/2014 19.05.2014 4,27,392 -
32. C/54110/2014 08.05.2014 5,72,866 -
33. C/54130/2014 18.06.2014 1,95,947 -
34. C/54472/2014 29.11.2014 2,90,492 2,90,492
4
C/53102/2014,
C/53254/2014 &
82 others
35. C/55635/2014 07.08.2014 5,91,327 -
36. C/57164/2013 29.01.2013 3,08,294 3.08,294
37. C/57165/2013 28.01.2013 5,77,306 5,77,306
38. C/57167/2013 28.01.2013 1,49,847 1,49,847
39. C/57168/2013 31.01.2013 4,83,172 4,83,172
40. C/57169/2013 30.01.2013 6,57,672 6,57,672
41. C/57170/2013 23.01.2013 1,76,125 1,76,125
42. C/57171/2013 30.01.2013 1,11,153 1,11,153
43. C/57172/2013 29.01.2013 11,99,811 11,99,811
44. C/57665/2013 26.02.2013 83,065 83,065
45. C/57675/2013 13.02.2013 5,97,483 5,97,483
46. C/57676/2013 11.02.2013 12,02,832 12,02,832
47. C/57677/2013 08.02.2013 1,33,180 1,33,180
48. C/57685/2013 12.03.2013 1,33,086 1,33,086
49. C/57686/2013 04.03.2013 1,58,335 1,58,335
50. C/57687/2013 18.02.2013 1,14,362 1,14,362
51. C/57688/2013 21.02.2013 7,38,389 7,38,389
52. C/57689/2013 20.01.2013 23,32,852 23,32,852
53 C/57690/2013 13.03.2013 8,33,337 8,33,337
54. C/57691/2013 06.03.2013 1,58,090 1,58,090
55. C/57812/2013 05.03.2013 2,48,794 2,48,794
56. C/58033/2013 07.03.2013 2,43,547 2,43,547
57. C/58034/2013 26.03.2013 9,16,348 9,16,348
58. C/58698/2013 15.04.2013 25,000 25,000
59. C/58811/2013 18.04.2013 15,89,850 15,89,850
60. C/58812/2013 17.04.2013 3,91,568 3,91,568
61. C/59008/2013 25.04.2013 83,205 83,205
62. C/59009/2013 23.04.2013 1,45,587 1,45,587
63. C/59041/2013 29.04.2013 91,398 91,398
64. C/59177/2013 26.04.2013 1,66,668 1,66,668
65. C/59273/2013 16.05.2013 3,79,170 3,79,170
66. C/59274/2013 10.05.2013 1,08,074 1,08,074
67. C/59275/2013 08.05.2013 2,66,515 2,66,515
68. C/59276/2013 08.05.2013 91,543 91,543
69. C/59277/2013 09.05.2013 7,15,006 7,15,006
70. C/59278/2013 07.05.2013 1,41,423 1,41,423
71. C/59539/2013 30.05.2013 5,07,826 5,07,826
72. C/59540/2013 04.06.2013 13,04,707 13,04,707
73. C/59679/2013 12.06.2013 22,49,793 22,49,793
74. C/59680/2013 18.07.2013 90,52,207 90,52,207
75. C/59681/2013 14.06.2013 54,16,628 54,16,628
76. C/59682/2013 14.06.2013 9,58,329 9,58,329
77. C/59683/2013 14.06.2013 13,09,2019 13,09,2019
78. C/59684/2013 11.07.2013 8,33,340 8,33,340
79. C/60006/2013 19.07.2013 17,43,217 17,43,217
80. C/60431/2013 30.08.2013 5,41,761 5,41,761
81. C/60508/2013 22.08.2013 12,92,000 12,92,000
82. C/60800/2013 06.09.2013 14,63,000 14,63,000
Total 8,48,51,721 7,60,59,236
6. Details of the two appeals filed by HCL and Shobha Asar are as
follows:
Appeal filed by HCL
1. C/53102/2014 20.02.2014 3,87,451 27,17,465
Appeal filed by Shobha Asar
2. C/51614/2014 28.11.2013 33,380 1,33,518
5
C/53102/2014,
C/53254/2014 &
82 others
7. HCL is engaged in providing Software-led IT solutions and remote
infrastructure management services. To enable it to provide such services,
HCL entered into a End-User License Agreement 5 on 31.05.2001 with SAP
India to obtain non-exclusive and perpetual license to use SAP India
propriety Software, Documentation and other information.
8. SAP India is 100% subsidiary of SAP AG, Germany 6. SAP India and
SAP Germany had earlier entered into a Software Distribution Agreement7
dated 01.01.1999, by which SAP India was licensed to market, sub-license
and distribute the Software developed by SAP Germany, including
documentation and other information, within India. A fresh Agreement was
thereafter amended on 01.01.2000, 01.01.2002 and 01.01.2003.
9. The Business Model adopted to distribute SAP Software in India has
been described as follows:
(a) Signing of EULA and other documents: SAP India entered into
EULA with end users who require SAP Software for their business.
The end users are issued licenses by SAP India for use of SAP
Software. Upon signing the necessary documents and agreements,
SAP India uploads the same onto the SAP Enterprise Resource
Planning System 8. Under EULA, the end users are provided with an
option to first procure the SAP Software of their choice and then
increase the licensee base depending on usage at a later stage.
Accordingly, at the initial stage, when the end user requests for a
particular SAP product, the agreement entered into between SAP
India and the end users is titled Appendix 1. Thereafter, whenever
the end user wishes to increase the number of licenses, SAP India
5. EULA
6. SAP Germany
7. SDA
8. SAP ERP System
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C/53102/2014,
C/53254/2014 &
82 others
enters into additional agreements with the end user. EULA
generally provides electronic delivery of the Software as the
primary mode of delivery. In addition, if the specific agreement
provides an option of physical delivery, the end users may opt for
it. Such physical delivery is provided only when the end user seeks
physical mode of delivery of SAP Software in CD form;
(b) Delivery of SAP Software to the end user: Based on the
request from the customer, the Software is delivered to the
customer. As per the terms of the agreement, the delivery of the
Software is to be made through electronic download through the
SAP Service Marketplace website. However, physical delivery of the
Software may also be given, as an option to the end users;
(c) Payment of license fee by end user to SAP India: SAP India
raises an invoice upon the end user for the amount agreed under
the EULA towards the license fee and collects the same;
(d) Payment of 55% of the license fee by SAP India to SAP
Germany: SAP India pays 55% of the recognized revenue to SAP
Germany; and
(e) Physical delivery of CD containing Software, upon request:
For physical delivery of CD (as and when opted by the end user),
upon receiving the request, SAP Germany exports CD directly to
the end user through courier agency, DHL Ltd. 9 A proforma invoice
is raised by SAP Germany in the name and address, declaring
nominal value of the CD and other documentation of end users.
The value declared in the proforma invoice is for customs purposes
only, and no amount is actually collected from the end customer
9. DHL
7
C/53102/2014,
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whether by SAP India or by SAP Germany. DHL files a courier Bill
of Entry for clearance of CD through customs on behalf of the end
users, pays customs duties and delivers the CD to HCL.
10. As noticed above, HCL entered into EULA with SAP India on
31.05.2001. Pursuant to this EULA, HCL entered into several Appendixes.
During the relevant period i.e. from March 2006 to September 2006, HCL
and SAP India signed Appendix 1.4 on 16.05.2006 10 to procure Software
and Appendix 1.5 08.06.2006 11 for additional licenses to the SAP Software
procured earlier. These Appendixes specifically provided delivery of Software
through electronic mode only.
11. During the relevant period, SAP India raised the following invoices on
HCL:
Sl. Invoice No. and Date Amount
No. (in Rs.)
1. 6071008839 dated 23.06.2006 8,57,808
2. 6071008862 dated 26.06.2006 1,59,40,000
3. 6071008957 dated 27.06.2006 18,00,000
Total 1,85,97,808
12. Around the same time, as per the terms of the maintenance contract
with SAP India, HCL received some CDs containing SAP Software from SAP
Germany under courier Bill of Entry No. 624877 dated 29.06.2006 filed by
DHL, wherein value of CD was declared as Rs. 2558/-.
13. The Directorate of Revenue Intelligence 12, Bangalore initiated
investigation against several End-Users in India, including HCL who were
importing CDs containing SAP Software with nominal value declared in the
Bills of Entry.
10. Appendix 1.4
11. Appendix 1.5
12. DRI
8
C/53102/2014,
C/53254/2014 &
82 others
14. During investigation, SAP India deposited the following amount
towards customs duty in respect of the import of CD containing SAP
Software:
Sl. Amount deposited TR-6 Challan date
No. (in Rs.)
1. 1,20,00,000 31.01.2008
2. 3,20,00,000 25.02.2008
3. 5,21,98,021 15.11.2008
15. HCL also deposited a sum of Rs. 27,17,465/- through a challan dated
04.03.2010.
16. The DRI alleged that the transaction value of Rs. 2558/- declared for
the CD containing SAP Software on which Rs. 324/- was paid as customs
duty was incorrect and it believed that the transaction value should be re-
determined to Rs. 1,85,97,808/- on the basis of the payments made by HCL
to SAP India during the relevant period. HCL contended that the license fee
paid by HCL to SAP India was only for acquiring the rights of usage of SAP
Software in India.
17. A show cause notice dated 07.04.2010 was issued both to HCL and
SAP India proposing to reject the transaction value of CD under rule 10A of
the Customs Valuation (Determination of Price of Imported Goods) Rules,
1988 13 and for inclusion of license fee in the value of CD under rule 9(1)(c)
read with rule 4 of the 1988 Valuation Rules. Differential duty under section
28 and interest under section 28AB of the Customs Act was proposed to be
recovered from HCL. Penalty was also proposed to be imposed on HCL and
SAP India under section 112(a) of the Customs Act.
18. This show cause notice was adjudicated by the order dated
20.02.2014. The transaction value of the CD as Rs. 2558/- was rejected and
13. the 1988 Valuation Rules
9
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82 others
it re-determined to Rs. 1,85,97,808/-, which is the total amount covered by
the three invoices. HCL was, therefore, directed to deposit the differential
duty and penalty was also imposed under section 112(a) of the Customs Act.
Penalty was also imposed upon SAP India under section 112(a) of the
Customs Act. However, Rs. 27,17,465/- deposited by HCL and Rs.
9,61,98,21/- deposited by SAP India were appropriated.
19. The contention of HCL that payment of license fee was not related to
the CD and that it was not a condition of sale of CD was examined by the
Commissioner in the following manner:
"39. Coming to issue of valuation and the
arguments that payment of license fee is not related
to the imported goods; the payment of license fee is
not a condition for sale of imported goods; right to
use is distinct from condition of sale; EULA and CD
containing the software are two distinct
commodities, I find the arguments lack legal as
well as factual substance. This is because the
Software Distribution Agreement, the EULA and
the factum of actual physical import of
software CD and subsequent formalities for
Customs assessment and clearance of the
goods are integral part of one whole
transaction. Payment of license fee of
Rs.1,85,97,808/- without having CD software
has no meaning. In an ordinary course of business
nobody would pay such a huge amount for just
obtaining the license and not being able to use the
same. The license and the CD are closely interlinked
and inseparable to make a meaningful and fruitful
transaction. The argument that option to obtain SAP
software in a physical form on CD is at the discretion
of the importer, I find this argument is totally
misplaced and factually wrong, in as much as the
importer in their statement have clearly indicated
that they did not place any purchase order for supply
of CD from SAP, AG Germany. As a matter of fact,
they do not have any direct linkage with SAP AG
10
C/53102/2014,
C/53254/2014 &
82 others
Germany as no agreement exists between M/s HCL
Technologies the importer of software and M/s. SAP
AG Germany, M/s. SAP AG Germany exported the
software in CD form as per the terms of agreement
of SDA entered between M/s. SAP AG Germany and
M/s. SAP India Systems. How did M/s. SAP AG
Germany fixed a nominal value which was declared
to Customs and further how did they receive the said
nominal value. M/s. SAP AG Germany on their own
raised the proforma invoice indicating the nominal
value of Rs. 3,005/- and directed the DHL Courier to
file the bill of entry on behalf of M/s. HCL
Technologies declaring the nominal value.
Important question to be considered is that
whether CD imported has an independent use
without any reference to license to use, what is
the true value of CD. Can the CD be
independently imported and effectively put to
use when there was no agreement (EULA) and
the importer had not paid the license fee as per
the EULA agreement? Admittedly not. Unless
the license fee is paid, the SAP software
contained in the CD could not have been
accessed and used by the importer. This clearly
brings out the fallacy of the argument that
supply of CD and payment of license fee are
two distinct transactions and payment of
license fee is not a condition of sale. From the
facts, it clearly emerges that all the actions are
integral part of one whole transaction for a
consideration of Rs.1,85,97,808/-. I would also
like to mention that a proforma invoice indicating the
nominal value has been mentioned by M/s. SAP AG
Germany. However, no such payment has been
made directly to the M/s. SAP AG Germany by the
importer M/s. HCL technologies. The question arises
what is the value of that CD, why did M/s. SAP AG
Germany supplied and exported the CD to the
noticee importers directly when there is no such
specific request or order from the importer. To my
mind, it is a part of larger well designed plan to
evade payment of Customs duty. The entire
11
C/53102/2014,
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82 others
transaction, by way of having series of
agreements using Distributors, Licensees, Sub-
licensees and the ultimate users, was clearly
devised in such a way to hoodwink the
exchequer from collecting its legitimate
Customs duties."
(emphasis supplied)
21. In connection with the imposition of penalty upon SAP India, the
Commissioner observed:
"43. M/s. SAP India Systems is well established
wholly owned subsidiary company of M/s. SAP AG
Germany who have all the technical legal expertise
available. They very well knew that if the
software is directly exported to them by their
principals from Germany, they become liable
for proper valuation of imported software by
the Special Valuation Branch. Therefore, to
evade to payment of duty, they advised their
principals M/s. SAP AG Germany to directly
export the software to individual vendors
making them importers. Knowing fully well
they are not the importers and, hence, no duty
can be demanded from them, yet once
investigation started they quickly deposited the
duty, with a view that once investigations are
abandoned and the impeding issuance of show
cause notice is shelved, they would claim
refund of the amount deposited by them as no
duty could have been demanded from them. As
a matter of fact, they did so by filing the refund
claim. Had the DRI taken the bait, their nefarious
design would have succeeded and the exchequer
would have lost huge valuable revenue. Only
because the DRI did not fell for the bait and carried
meticulous detailed investigations, their well thought
out design to evade Customs duty came to light. It is
interesting to note that they deposited Rs.3.20
Crores on 25.02.2008, claimed back the same as
refund on 25.08.2008. Yet again on 15.11.2008 they
12
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deposited Rs.5.21 Crores. The question arises what
was the need to indulge in such flip flop. This, to my
mind, was done to douse the heat of investigation
that had reached them. Therefore, I have no doubt
in my mind that there is no factual or legal
substance in the above argument. No cogent and
reasoned explanation whatsoever has been
advanced regarding the statuary statements of Shri
Rajiv Subramanian, their Chief Financial Officer and
why they deposited such huge amount of duties.
From the facts brought out in the show cause
notice, it clearly brings out the fact that the
noticee under a carefully devised plan created
web of agreements, licensees, sub-licensees
which resulted into suppression of material
facts having a direct bearing on the valuation
of goods and thereby suppressed the true
transaction value resulting into evasion of
Customs duty. I also find that their Chief Financial
Officer Shri Subramanian in his own statement
before the DRI has clearly admitted the suppression
of facts with regard to non-disclosure of existing
EULA between the noticee and the importer, the fact
of payment of Rs.1,85,97,808/- as a value for
procuring the SAP software, the Invoice raised in this
behalf and devising the whole mechanism in such a
way so that the Customs duty chargeable is evaded.
This admittance of evasion has neither been
questioned by the noticee company nor have they
contradicted the same. To my mind, this was not
some unintentional, isolated single action which
resulted into such an evasion. From the sequence of
events and the circumstances of case, it is clearly
established that they were fully aware regarding the
leviability of Customs duty on the import of software,
to escape from duty, they devised a complex
mechanism. M/s.SAP India Systems procured
the orders from Indian customers and received
payment for the software and created an EULA
to camouflage. The fact that when DRI initiated
investigation and called them, M/s. SAP India
Systems immediately came forward to pay the
13
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duty and actually paid the duty of Rs.9.61
Crores on their own. ***** I have no doubt in
my mind that they were well aware that the
software on CD being imported in India is
chargeable to Customs duty, yet they carefully
crafted/devised a mechanism to evade the
duty. This fact is further substantiated that
subsequent to the investigations carried out by the
DRI, the noticees have changed the tracks and on
their own are declaring proper transaction value and
paying duty on the subsequent imports of software.
44. Therefore, malafide actions of the
noticee makes the said imported software
liable for confiscation under Section 111(m) of
the Customs Act, 1962 as proposed in the show
cause notice. However, I note that the goods had
already been cleared from the Customs and are not
physically available for confiscation. In the facts and
circumstances, no confiscation can be ordered and
no redemption fine can be imposed. In my view,
the noticee is liable for penalty under Section
112(a) of the Customs Act, 1962 and I reject
the argument raised by the noticee in this
behalf."
(emphasis supplied)
20. Aggrieved by the said order, HCL filed this appeal. This appeal was
earlier decided by the Tribunal by an order dated 12.07.2017. The matter
was remanded to the adjudicating authority for deciding whether the officers
of DRI had the jurisdiction to issue the show cause notice under the Customs
Act. The department challenged this order before the Delhi High Court. The
Delhi High Court, by order dated 27.03.2019, remanded the matter to the
Tribunal. The Supreme Court, in the judgment dated 07.11.2024, passed in
Commissioner of Customs vs. Canon India 14 settled the issue of
14. R.P. (C) No. 400 of 2021 decided on 07.11.2024 in Civil Appeal No. 1827 of
2018
14
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jurisdiction holding that the officers of DRI had the power to issue show
cause notice under section 28 of the Customs Act for the period pre and post
2011.
21. This appeal has, therefore, been heard.
22. Before adverting to the submissions made on behalf of the parties, it
would be useful to reproduce the various Agreements involved in the appeal.
23. The first Agreement is the Software Distribution Agreement dated
04.03.2003 between SAP Germany and SAP India. SAP Germany is referred
to as SAP AG and SAP India is referred as ND. The relevant portions are
reproduced below:
"Software Distribution Agreement
between
SAP Aktiengesellschaft
(hereinafter: SAP AG)
and
SAP India Systems
(hereinafter: ND)
RECITALS
WHEREAS, SAP AG owns rights to
certain computer software listed in Exhibit 1
hereto;
WHEREAS, ND markets, licenses, sells
and/or distributes software and provides
support to software End Users;
WHEREAS, SAP AG desires to grant to ND,
and ND desires to accept, a license to market and
sublicense the Software in the Territory;
WHEREAS, SAP AG and ND entered into a
Software Distribution Agreement dated as of January
1, 1996, which was superseded by a Software
Distribution Agreement dated as of January 1, 1999
which was amended twice as of January 1, 2000 and
January 1, 2001, and
15
C/53102/2014,
C/53254/2014 &
82 others
WHEREAS, SAP AG and ND wish to
amend and restate the Software Distribution
Agreement effective as of January 01, 2003, as
already discussed during the recent past and
agreed between the parties;
*****
Article 2: Grant Of Rights 2.1 Grant of License. Subject to the terms of this Agreement, SAP AG hereby grants to ND, and ND hereby accepts, a non-exclusive license to use, market, and sublicense the Software, Documentation, Third Party Database and Third-Party Software to End Users in the Territory and to End Users outside the Territory who either: (i) are subsidiaries or affiliates of parent companies headquartered in the Territory or
(ii) are subsidiaries or affiliates that perform the data processing requirements of the parent on computer processing units located in the Territory. All other exceptions to the territorial limitations set forth in this Article 2 require the prior written consent of SAP AG.
***** Article 4: Obligations of SAP AG 4.1. Order Execution 4.1.1. Upon the execution of a license agreement by an End User, ND shall place an order for the required number of copies of the Software, number of authorized users and other relevant items determined and agreed upon in such license agreement to be provided to the End User under the procedures set forth in this Article 4.1.
4.1.2. All orders by ND for copies for the Software shall be entered into the internal SAP order entry system. SAP AG shall notify ND in writing promptly upon determining that it will not accept such order. If an order so entered has not been rejected by 16 C/53102/2014, C/53254/2014 & 82 others SAP AG within ten business days following its entry into the order entry system, ND may consider the order to have been accepted by SAP AG. With the order, ND shall indicate the End User's type of computer(s) and operating system(s) on which the Software is to be installed, and the location(s) where the End User will use the Software. SAP AG will only accept such order if the computers and operating systems have been found previously by SAP AG to meet the minimum system requirements for properly running the Software.
***** 4.6 Delivery 4.6.1. SAP AG will deliver the Software ordered by ND free of shipping costs, except for all ancillary costs, including but not limited to customs duties and fees, which will be borne by ND. Delivery shall be made either directly to the End Users or to ND for redelivery to the End User, as requested by ND.
4.6.2. ***** 4.6.3 The Software and Documentation normally will be provided in machine readable form on CD-ROM; the R/2 Software may be provided on magnetic tape. The Documentation for either system will be provided on paper upon written request from the End User.
***** Article 6: Prices and Payment 6.1. Software License Fees and Payment 6.1.1. For each license agreement for the Software entered into by ND with an End User, ND shall pay to SAP AG a license fee in an amount as determined in accordance with the formula provided in Exhibit 6 hereto. Payment shall be made in the currency of ND's Territory unless otherwise agreed in writing by SAP AG and ND. Payment shall be considered to 17 C/53102/2014, C/53254/2014 & 82 others have been made when the payment is received in the bank account designated by SAP AG for such payments.
***** Article 7: Proprietary Information 7.1. Ownership of Proprietary Information 7.1.1. ND acknowledges and agrees that ownership of and title in and to all intellectual property rights, including patent, copyright, trade secret, trademark, service mark, and domain name rights, in the SAP AG Proprietary information are and shall remain in SAP AG and its licensors. ND acquires only the right to use the SAP AG Proprietary Information under the terms and conditions of this Agreement and does not acquire any ownership rights or title in or to the SAP AG Proprietary Information and that of its licensors."
(emphasis supplied)
24. The second Agreement is the R/3 Software End-User Value License Agreement dated 31.05.2001 between SAP India and HCL. The relevant portions are reproduced below:
"SAP INDIA SYSTEMS, APPLICATIONS AND PRODUCTS IN DATA PROCESSING PRIVATE LIMITED R/3 SOFTWARE END-USER VALUE LICENSE AGREEMENT DATED : 31st MAY, 2001 WITH HCL TECHNOLOGIES LTD ***** RECITAL WHEREAS, SAP desires to grant to Licensee and Licensee desires to accept from SAP, a license to Use (as defined herein) SAP's proprietary R/3 Software (as defined herein) upon the terms and conditions hereinafter set forth:
***** 18 C/53102/2014, C/53254/2014 & 82 others 1.10 "Extension" means an addition to the Software which does not require a Modification.
1.11 "Information User" means those individuals authorized to access the licensed Software solely to "read only" Software transactions. Each information User must also be licensed as a Basis/Workflow User.
1.12 "Modification" means a change to the Software which changes the source code.
***** 1.23 "Software" means: (i) all software specified in agreed upon Appendices hereto, developed by or licensed to SAP or SAP AG and delivered to Licensee hereunder, (ii) any Release, Versions, or Correction Levels of the Software as contemplated by this Agreement, and
(iii) any complete or partial copies or replacements of any of the foregoing.
*****
2. LICENSE GRANT 2.1 Grant of License
(a) Subject to this Agreement, SAP grants and Licensee accepts a non-exclusive license to Use the Software, Documentation, other SAP Proprietary Information and Third- Party Database provided by SAP to Licensee at specified site(s) within the Territory for Productive and Non-Productive Uses. This license does not permit Licensee to: (i) Use the Software and Third- Party Database for a service bureau application; or
(ii) sublicense, or rent the Software or Third-Party Database.
*****
4. PRICE AND PAYMENT 4.1 License Fees: In consideration of the license granted hereunder, Licensee shall pay to SAP license fees for the Software as set 19 C/53102/2014, C/53254/2014 & 82 others forth in Appendices hereto ("License Fees"). Fees for Maintenance Service ("Maintenance Fees") shall be paid as set forth in Appendices hereto. Any fees Licensee does not pay when due shall accrue as set out in the Appendices hereto, but shall in no event exceed the maximum amount allowed by law. Licensee also agrees to pay SAP reasonable costs and expenses of collection, including attorney's fees."
(emphasis supplied)
25. The relevant portion of Appendix 1 to SAP India R/3 Software End-User Value License Agreement with HCL effective from 31.05.2001 is reproduced below:
"Appendix 1 to SAP INDIA R/3 SOFTWARE END-USER VALUE LICENSE AGREEMENT with HCL Technologies Ltd effective May 31, 2001 ("Agreement") ***** USERS, BASIS/WORKFLOW Number of and DATABASE Users Licensed:
Operational Users __124___Users Info Users ___62___Users R/C Users ___62___Users Enterprise Office/HR Users ___Nil___Users D/W Users ____2___Users BC Basis/Workflow System ___Nil___Users with INFORMIX Database BC Basis/Workflow System ___250___Users with ORACLE Database BC Basis/Workflow System ___Nil___Users with DB2 Common Server Database BC Basis/Workflow System ___Nil___Users with OS/390 Database BC Basis/Workflow System ___Nil___Users with MSSQL Server Database BC Basis/Workflow System ___Nil___Users with Database Interface 20 C/53102/2014, C/53254/2014 & 82 others HUMAN RESOURCE Master Records Licensed:
MANAGEMENT PA Personnel Administration ___5000_ and Payroll PD Personnel Planning and ___5000_ Development OPTIONAL PACKAGES Quantity(ies) Licensed:
TR-TM Treasury ___Nil__Users
Management
BC/DW R/3 Data Model in ___Nil__Designated Site
ADW Format
PP- Environmental, Health ___Nil__Designated Unit
EH&S & Safety
PP-MES Manufacturing ___Nil__Designated Unit
Execution System
26. The relevant portion of Appendix 1.4 dated 16.05.2006 to the SAP Software End-User Value License Agreement is reproduced below:
"Appendix 1.4 effective: May 16, 2006 to SAP INDIA SAP SOFTWARE END-USER VALUE LICENSE AGREEMENT with HCL Technologies Ltd ("Licensee") effective: May 31, 2001 ("Agreement") This Appendix 1.4 is hereby annexed to and made a part of the Agreement specified above. The following Articles and Provisions of the Agreement are specifically incorporated herein by reference: 1 (Definitions), 2 (License Grant), 3 (Verification), 4 (Price and Payment), 5 (Term and Termination), 6.1 (Protection of Proprietary Information), 7.2 (Express Disclaimer), 9 (Limitation of Liability), 10 (Assignment), 11 (Arbitration) and 12 (General Provisions). All other provisions of the Agreement are specifically excluded with respect to this Appendix. In each instance in which provisions of this Appendix contradict or are inconsistent with the incorporated provisions of the Agreement, the provisions of this Appendix shall prevail and govern 21 C/53102/2014, C/53254/2014 & 82 others in relation to Software licensed by Licensee from SAP hereunder.
1. LICENSE GRANT:
1.1 Software licensed by Licensee from SAP hereunder is as follows:
BSI SOFTWARE PRODUCT LICENSED:
U.S. Payroll Tax Master Records Licensed Processing (TaxFactory) 3,000 1.2 ***** 1.3 DATABASE: ORACLE
2. LICENSE FEE AND PAYMENT: The total Net License Fee to Licensee for the BSI Software licensed in item 1 above is INR 857,808/- shall be invoiced on or before May 31, 2006 and is due and payable by the Licensee within 30 days of invoice date.
In the event Licensee exceeds the License Grant specified herein, and/or Licensee desires to expand the License Grant to additional Affiliates, divisions or business units not identified herein, Licensee agrees to provide written notification to SAP. SAP reserves the right to modify the Agreement to reflect such increase in the License Grant, recalculate the Net License Fee and Maintenance Fee accordingly and invoice Licensee for such increased license and maintenance fees, based on SAP's then current pricing in effect.
Upon SAP's reasonable request, Licensee shall deliver to SAP a report, as defined by SAP, evidencing Licensee's usage of the Software licensed under this Agreement.
*****
4. DELIVERY: Delivery of the BSI Software is available only by electronic download. Initial delivery of the above-specified BSI Software shall take place in May, 2006 for planned use on the following Platform:22
C/53102/2014, C/53254/2014 & 82 others Operating System Sun Solaris, Machine type
- Sun4u Database System Oracle Release 9.2.0.4.0 Server Solaris 8 Client Software Windows ***** Delivery of the Software and Documentation would be through electronic download that is accessible via the SAP Service Marketplace. SAP will provide the access details for the Delivery by May, 2006.
5. MAINTENANCE FEE AND PAYMENT:
5.1 To the degree BSI makes such services generally available to SAP, Licensee may request and SAP shall provide maintenance service ("Maintenance") with respect to the BSI Software. Maintenance currently includes the delivery of releases and versions of the BSI Software made available to SAP, support via telephone, coordination of defect correction with BSI, and SAP's Online Software Services. Maintenance, from SAP, for the BSI Software licensed hereunder is limited to the sites previously identified in the Agreement and related Appendices, and is limited to a single Platform. In order to receive Maintenance hereunder, Licensee must make all required remote support connections to each Designated Unit, at its expense, as requested by SAP.
5.2 Maintenance at such site(s) shall commence upon the first day of the month following initial Delivery of the BSI Software. Maintenance Fees for the Software licensed under this Appendix, for the total number of Users specified above is 42% (or the then current factor) of INR 772,800/- per annum + 17% (or the then current factor) of INR 85,008 per annum. Maintenance Fees are subject to change upon Thirty (30) days notice to Licensee. Maintenance fees set forth above do not include central, state or local taxes, which shall be to Licensee's account.
Maintenance Fees are invoiced on an annual basis 23 C/53102/2014, C/53254/2014 & 82 others effective January 1 of a calendar year. Any Maintenance Fees due prior to January 1 are invoiced on a pro-rata basis for the given calendar year in effect.
5.3 In the event Licensee elects not to commence Maintenance upon the first day of the month following initial delivery of the BSI Software, or Maintenance is otherwise declined for some period of time, and is subsequently requested or reinstated, SAP will invoice Licensee the accrued Maintenance Fees associated with such time period plus a reinstatement fee."
(emphasis supplied)
27. The relevant portion of Appendix 1.5 dated 08.06.2006 to the R/3 Software End-User Value License Agreement is reproduced below:
"Appendix 1.5 effective: June 08, 2006 to SAP INDIA R/3 SOFTWARE END-USER VALUE LICENSE AGREEMENT with HCL Technologies Ltd ("Licensee") effective: May 31, 2001 ("Agreement") This Appendix 1.5 is hereby annexed to and made a part of the Agreement specified above. In each instance in which provisions of this Appendix 1.5 contradict or are inconsistent with the provisions of the Agreement, the provisions of this Appendix 1.5 shall prevail and govern, and the contradicted or inconsistent provisions of the Agreement shall be deemed amended accordingly.
***** 2.6 DATABASE: Oracle
3. The total Net Price License Fee to Licensee for the Software specified in Sections 2, above is INR 15,940,000, provided the following Use 24 C/53102/2014, C/53254/2014 & 82 others restrictions are observed by Licensee and its Affiliates for the licensed Software. The use restrictions are:
A. In the case of Users licensed in this Appendix ("Existing Users"), not more than the total number of Named Users, Personnel Master Records, Software Engines, third-party software, applicable country versions, Industry Solution Software or any other software licensed by Licensee from SAP as specified in Sections 2 above, are accessed, created and/or Used as specified in the Agreement; and *****
4. The above specified Net License Fee of INR 15,940,000 shall be invoiced in June 30, 2006 and is due and payable within 30 days from date of invoice.
The Software licensed under this Appendix is licensed subject to receipt of payment within the stipulated terms. The Licensee understands that SAP shall issue a temporary license key for the Productive system that will shut off the system within forty five (45) days of issue of installation key to the Software if the payment stipulated in respect of this Appendix has not been received. Failure to obtain the permanent keycodes will cause the Licensee to have limited Software access until obtained. The Licensee accepts that in no event shall SAP be responsible for any damages whatsoever arising out of the software system being shut off.
If the actual number of Users called off by Licensee in respect of each phase is less than the corresponding number set out above. Licensee shall not be entitled to any refund. If the actual number of Users called off b Licensee in each phase exceeds the corresponding number set out above, Licensee will be invoiced for the difference in the License Fee and such 25 C/53102/2014, C/53254/2014 & 82 others excess will be used to reduce the number of Users which Licensee is required to call off and the corresponding license fee payment in the next phase accordingly/ Licensee shall inform SAP in writing of any additional Users called off from the next phase before the invoicing of such phase.
5. For Software to be installed at a specific Licensee and/or Affiliate Designated Site within the Territory the parties hereto agree to execute Appendices to this Agreement, in a form similar to Appendix 2 hereto, prior to SAP's delivery of such Software to such Designated Site.
6. Maintenance Service under the Maintenance Schedule for the Software at such Designated Site(s) licensed hereunder, for the above- specified number of Users, shall commence July 01, 2006 and shall be priced at 17% (or the then current factor) of INR 15,940,000. This Maintenance Fee shall be payable annually in advance by Licensee to SAP within 30 days of invoice date.
*****
8. LICENSE KEYCODES. Each Productive Use copy and Non-Productive Use copy of the Software licensed hereunder requires a license keycode. For each installation of the Software keycodes shall be provided upon written request by Licensee-provided that only ; quantity one (1) license keycode will be provided for the Productive Use of the Software per Designated Site. The license keycodes will be issued by SAP AG within four (4) weeks from the date of installation of the Software on each Designated Unit. The required form to receive the license keycodes from SAP AG must be executed by Licensee and faxed to SAP AG within the four (4) week period following installation of the Software. The applicable form and fax number will be included in each installation kit provided 26 C/53102/2014, C/53254/2014 & 82 others to Licensee upon delivery of the Software. Licensees that subsequently change Designated Units for Use of the licensed Software must be re-issued license keycodes for each respective copy of the licensed Software. Failure of Licensee to obtain necessary license keycodes for the licensed Software within four (4) weeks of installation of such Software, will cause the Software to have limited User access until such time as the license keycodes are issued."
28. The relevant portion of Appendix 2 dated 31.05.2001 to R/3 Software End-User Value License Agreement is reproduced below:
"Appendix 2 to SAP INDIA R/3 SOFTWARE END-USER VALUE LICENSE AGREEMENT with HCL Technologies Ltd effective May 31, 2001 ("Agreement") ***** Designated Site(s): HCL Technologies Ltd 3, Udyog Vihar, Phase-1, Gurgaon 122 016
1. Software licensed to Licensee pursuant to the above-referenced Agreement consists of the following Software which is to be installed on the above referenced Designated Unit(s) at the specified Designated Site.
*****
USERS, BASIS/WORKFLOW Number of
and DATABASE Users Licensed:
Operational Users __100___Users
Info Users ___50___Users
R/C Users ___49___Users
Enterprise Office/HR Users ___Nil___Users
D/W Users ____1___Users
BC Basis/Workflow System ___Nil___Users
with INFORMIX Database
BC Basis/Workflow System ___200___Users
27
C/53102/2014,
C/53254/2014 &
82 others
with ORACLE Database
BC Basis/Workflow System ___Nil___Users
with DB2 Common Server
Database
BC Basis/Workflow System ___Nil___Users
with OS/390 Database
BC Basis/Workflow System ___Nil___Users
with MSSQL Server
Database
BC Basis/Workflow System ___Nil___Users
with Database Interface
HUMAN RESOURCE Master Records
Licensed:
MANAGEMENT
PA Personnel Administration ___5000_
and Payroll
PD Personnel Planning and ___5000_
Development
6. Provided SAP is performing Maintenance
Service at the above-specified Designated Site, delivery of one (1) set of CD-ROM Documentation, in the English language, to such Designated Site shall be initiated upon execution of this Appendix by the parties hereto. Additional Documentation for the above-specified Designated Site may be ordered by License at SAP's then current prices in effect."
29. The relevant portion of Appendix 2.1 dated 31.05.2001 to R/3 Software End-User Value License Agreement is reproduced below:
"Appendix 2.1 Effective May 31, 2001 to SAP INDIA R/3 SOFTWARE END-USER VALUE LICENSE AGREEMENT with HCL Technologies Ltd effective: May 31, 2001 ("Agreement") ***** Designated Site(s): HCL Comnet Systems & Services Ltd.
A-10-11, Sector-3, Noida 201 301, UP 28 C/53102/2014, C/53254/2014 & 82 others
1. Software licensed to Licensee pursuant to the above-referenced Agreement consists of the following Software which is to be installed on the above referenced Designated Unit(s) at the specified Designated Site.
*****
USERS, BASIS/WORKFLOW Number of
and DATABASE Users Licensed:
Operational Users ___24___Users
Info Users ___13___Users
R/C Users ___12___Users
Enterprise Office/HR Users ___Nil___Users
D/W Users ____1___Users
BC Basis/Workflow System ___Nil___Users
with INFORMIX Database
BC Basis/Workflow System ___50___Users
with ORACLE Database
BC Basis/Workflow System ___Nil___Users
with DB2 Common Server
Database
BC Basis/Workflow System ___Nil___Users
with OS/390 Database
BC Basis/Workflow System ___Nil___Users
with MSSQL Server
Database
BC Basis/Workflow System ___Nil___Users
with Database Interface
*****
6. Provided SAP is performing Maintenance
Service at the above-specified Designated Site, delivery of one (1) set of CD-ROM Documentation, in the English language, to such Designated Site shall be initiated upon execution of this Appendix by the parties hereto. Additional Documentation for the above-specified Designated Site may be ordered by License at SAP's then current prices in effect."
30. The relevant portion of Appendix 2.5 dated 08.06.2006 to the R/3 Software End-User Value License Agreement is reproduced below:
"Appendix 2.5 Effective June 08, 2006 to SAP INDIA 29 C/53102/2014, C/53254/2014 & 82 others R/3 SOFTWARE END-USER VALUE LICENSE AGREEMENT with HCL Technologies Ltd ("Licensee") effective: May 31, 2001 ("Agreement") ***** Designated Site(s): HCL Technologies Ltd A-5 Sector, 24 Noida - 201 301, India ***** 1.1 GENERAL FUNCTION BLOCKS:
DW OP IU R/C Basis User HER
User User User User (Standalone) User
incl. incl. incl. incl.
Basis Basis Basis Basis
Nil 125 50 50 Nil Nil
1.2 SPECIAL FUNCTION BLOCKS
HUMAN RESOURCE Master Records
Licensed:
MANAGEMENT
PA Personnel Administration ___8,000_
and Payroll
PD Personnel Planning and ___8,000_
Development
*****
2. DELIVERY: Licensee shall not require
additional copy of the above specified Software as the license granted is for additional named users. Licensee is entitled to use these additional named users as licensed under section 2 of this Appendix 1.5 on signing of this Appendix by both the parties."
31. Shri V. Lakshmikumaran, learned counsel appearing for HCL and SAP India assisted by Shri Rachi Jain, Shri Ashwani Bhatia and Ms. Srishty Bajaj made the following submissions:
(i) The payments made by HCL to SAP India are not liable to be included in the transaction value of the CD. In this connection, learned counsel placed reliance on rule 9(1)(c) 30 C/53102/2014, C/53254/2014 & 82 others of the 1988 of the Valuation Rules to submit that the license fee which does not satisfy the conditions set out in the said rule shall not be added to the value of imported goods. In the present case, the payments made by HCL to SAP India and subsequently by SAP India to SAP Germany, pertain to receiving intangible rights for use of Software and/or distribution, as the case may be, and do not relate to import of CD;
(ii) SAP India entered into EULA with HCL for the purposes of sub-licensing of SAP Software. The EULA grants HCL a non- exclusive license only to use the Software, Documentation, and Third-Party Database at specified site(s) within the Territory. The license fee paid by HCL to SAP India is for acquiring the aforementioned rights of usage of SAP Software in India and not for import of the CD containing SAP Software. Thus, the license fee is not liable to be included in the value of CD since it is not related to the import of CD;
(iii) The Commissioner has included Rs. 1,85,97,808/- in the value of the CD on the basis of three separate invoices raised by SAP India on HCL. None of the three invoices are related to the import of the CD, and the impugned order has not referred to, let alone rely upon any evidence in this regard;
(iv) The license fee is not associated with the import of CD, as the primary mode of delivery of the SAP Software is electronic. The license fee remains payable irrespective of whether the CD is obtained physically or not. Thus, the value 31 C/53102/2014, C/53254/2014 & 82 others of the license fee paid by HCL is not includible in the value of the imported CD;
(v) HCL is not required to pay the license fee at the time of import of goods. SAP India provides about four weeks period during which HCL can test run the SAP Software. Up-to the expiry of four weeks, HCL will have limited access to the SAP Software and payment of the license fee arises only if the HCL decides to convert the Software into a full version, post- trial. Thus, HCL is not required to pay the license fee for the import of the impugned goods;
(vi) It is settled law that license fee paid in respect of post import activities is not liable to be included in the value of the imported goods;
(vii) The payment of license fee to SAP India by HCL does not constitute a condition of sale of the imported goods. HCL is permitted to import the impugned goods without any prerequisite to pay the license fee at the time of importation. The obligation to pay the license fee arises only subsequently i.e. for the purpose of obtaining the license key required to access the full functionality of the SAP Software. Accordingly, the payment of the license fee is a post- importation activity and is not a condition for sale for impugned goods;
(viii) In any view of the matter, only 55% of the license fee is dutiable in the present case;
(ix) The extended period of limitation could not have been invoked in the facts and circumstances of the case;
(x) Interest, confiscation and penalty cannot be invoked in the present case; and 32 C/53102/2014, C/53254/2014 & 82 others
(xi) In the absence of the machinery provisions under section 3(12) of the Customs Tariff Act, 1975 15, no penalty can imposed or interest can be recovered.
32. Shri Nikhil Mohan Goyal, learned authorized representative appearing for the department assisted by Shri Rakesh Kumar made the following submissions:
(i) Article 4.6.3 of the Software Distribution Agreement between SAP Germany and SAP India provides that the Software and Documentation normally will be provided in machine readable form on CD. Further, as per EULA between SAP India and HCL, Article 3.1 provides for delivery of the licensed Software in machine readable format. The license fees paid for the right to use Software are, therefore, to be added to the value of the CD containing SAP Software. This is because the payment of the license fee is directly related to the supply of the CD and is a condition of sale of the said CD, forming an integral part of a single transaction. The physical media and the license to use the Software are inseparable components of one commercial transaction, and the value of the license fee should be included in the assessable value of the imported goods;
(ii) To support this contention, learned authorized representative placed reliance on the decision of the Tribunal in Shri Atul Kaushik, Shri Krishan Dhawan, M/s Oracle India Pvt. Ltd. vs. C.C. (Export), New Delhi 16; and
15. the Customs Tariff Act
16. 2015 (330) E.L.T. 417 (Tri. - Del.) 33 C/53102/2014, C/53254/2014 & 82 others
(iii) Penalty could be imposed in view of the decision of the Tribunal in Satish Nandlal Rathi vs. CCE, Aurangabad 17.
33. The submissions advanced by the learned counsel for HCL and SAP India and the learned authorized representative appearing for the department have been considered.
34. To appreciate the issues, it would be useful to first refer to the various Agreements. SAP India entered into a Software Distribution Agreement dated 01.01.1999 with SAP Germany. This Agreement was amended in 2001, 2002 and ultimately w.e.f 01.01.2003. SAP Germany granted to SAP India a non-exclusive license to use, market, and sub-license the Software to End-Users. Upon execution of the License Agreement by an End-User, SAP India had to place an order upon SAP Germany for the required number copies of the Software, the number of authorized users and other relevant items determined and agreed upon in the License Agreement. All orders by SAP India for copies for the Software were required to be entered into the internal SAP order entry system and if SAP Germany did not reject the order within 10 business days, SAP India could consider the order to have been accepted by SAP Germany. With the order, SAP India was required to indicate the End-User's type of computer(s) and operating system(s) on which the Software was to be installed and the location(s) where the End- Users will use the Software. SAP Germany was then required to deliver the Software ordered by SAP India and the customs duty and fees was to be borne by SAP India. The delivery was required to be made directly to the End-User or to SAP India for re-delivery to End-User as requested by SAP India. The ownership was to remain with SAP Germany and SAP India
17. 2014 (308) E.L.T. 696 (Tri. - Mumbai) 34 C/53102/2014, C/53254/2014 & 82 others acquired only the right to use the SAP Germany proprietary information under the terms and conditions of the Agreement.
35. SAP India also entered into R/3 Software End-User Value License Agreement dated 31.05.2001 with HCL. SAP India granted a non-exclusive license to HCL to use the Software at the specified site in consideration of license granted. HCL was required to pay license fee for the Software as set forth in the Appendices. Fees for maintenance services also had to be paid as set forth in the Appendices.
36. Appendix 1 to this R/3 Software End-User Value License Agreement dated 31.05.2001 provides for the users, basis/workflow and database as also human resource management and optional packages. It gives the number of operational users, info users, R/C users and basic/workflow system with oracle database. It also gives the personal administration and payroll, and personal planning and development.
37. With effect from 16.05.2006 an amendment was made through Appendix 1.4 in the SAP Software End-User License Agreement dated 31.05.2001. The total net license fee for the BSI Software was mentioned as Rs. 8,57,808/-. With effect from 08.06.2006, Appendix 1.5 was made part of the R/3 Software End-User Value License Agreement. Eight thousand master records were licensed and the total net price license fee was Rs. 1,59,40,000/-.
38. The issue that arises for consideration is whether the payments made by HCL to SAP India for the three invoices can be included in the transaction value of the CD.
39. As noted above, HCL and SAP India signed Appendix 1.4 on 16.05.2006 and Appendix 1.5 on 08.06.2006 to the R/3 Software End-User 35 C/53102/2014, C/53254/2014 & 82 others License Agreement to procure Software and additional licenses, respectively. These Appendices specifically provided delivery of Software through electronic mode. SAP India raised three invoices on HCL. The first invoice dated 23.06.2006 is for Rs. 8,57,808/-. The second invoice dated 26.06.2006 is for Rs. 1,59,40,000/-. The third invoice dated 27.06.2006 is for Rs. 18,00,000/-. The total amount of these three invoices is Rs. 1,85,97,808/-.
40. Around the same time, as per the terms of maintenance contract between SAP India and HCL (Appendix 2.1), HCL received a CD containing SAP Software from SAP Germany under a courier Bill of Entry dated 29.06.2006 filed by DHL showing declared value of Rs. 2558/-.
41. The Commissioner, in the impugned order, observed that payment of license fee of Rs. 1,85,97,808/- without having CD Software has no meaning and posed a question whether could CD be independently imported and effectively put to use when there was no EULA and the importer had not paid the license fee. The Commissioner answered this question by observing that unless the license fee is paid, the SAP Software contained in the CD could not have been accessed and used by the importer. The Commissioner, therefore, concluded that all the actions are integral part of one whole transaction for a consideration of Rs. 1,85,97,808/-. For this reason, the Commissioner rejected the transaction value of CD under rule 10A of the 1988 Valuation Rules and thereafter included the license fee in the value of CD under rule 9(1)(c) of the 1988 Valuation Rules.
42. It would, therefore, be necessary to examine rule 9(1)(c) of the 1988 Valuation Rules and the relevant portion is reproduced below: 36
C/53102/2014, C/53254/2014 & 82 others "9. Cost and services. - (1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods,-
(a) *****
(b) *****
(c) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable."
43. A perusal of rule 9(1)(c) would show that the following conditions have to be satisfied to add license fee in the transaction value:
(i) The license fees should related to the imported goods;
(ii) Buyer/importer is required to pay, directly or indirectly;
(iii) The same is paid as condition of the sale of the goods;
and
(iv) Such license fee is not included in the price actually paid or payable.
44. License fee which does not satisfy the conditions set out in rule 9(1)(c) cannot be added to the value of the CDs. The aforesaid four conditions can now be considered.
FIRST CONDITION
45. The first condition is that the license fee should relate to import of CD that contains the SAP Software.
46. The payments made by HCL to SAP India and subsequently by SAP India to SAP Germany pertain to receiving intangible rights for use of Software and/or distribution, as the case may be, and do not relate to import of CD. It is seen from Article 2 to Software Distribution Agreement 37 C/53102/2014, C/53254/2014 & 82 others dated 01.01.2003 between SAP Germany and SAP India that the license rights granted by SAP Germany to SAP India provide for a non-exclusive license to use, market, and sub-license the Software, Documentation, Third Party Database and Third Party Software to End Users in the Territory. The license fee paid by SAP India to SAP Germany pertains to the sub-licensing of the Software by SAP India to HCL. Under Article 6 of the aforesaid Agreement, SAP India has to pay SAP Germany 55% of the recognized revenue as license fee for sub-licensing rights to End-Users. It is, therefore, clear that this fee is not for the import SAP Software in India through a CD.
47. It is also seen from the Agreement entered into between SAP India and HCL and that HCL was granted a non-exclusive license only to use the Software. The license fee paid by HCL to SAP India is for acquiring the right to use SAP Software in India and not for import of CD containing the SAP Software.
48. The Commissioner has included Rs. 1,85,97,808/- in the value of the imported goods on the basis of three separate invoices raised by SAP India on HCL as can be seen from paragraph 39 of the order, which has been reproduced above. The linking of the three invoices to the import of the CD is not justified as it is not borne out from any of the Agreements. The invoice details show that none of the three invoices relate to the import of CD. The details of the three invoices are as follows:
Sl. Invoice Details Agreement
No.
Invoice Amount Description Appendixes
date (in Rs.)
1. 23.06.2006 8,57,808 "In accordance with the Appendix 1.4 dated
above order, we invoice 16.05.2006 you for SAP Standard software" Clause 2: "2. LICENSE FEE AND PAYMENT... INR 857,808/-..."
Clause 4: "4. DELIVERY:
38
C/53102/2014, C/53254/2014 & 82 others Delivery of the BSI Software is available only by electronic download"
2. 26.06.2006 1,59,40,000 "In accordance with the Appendix 1.5 dated above order, we invoice 08.06.2006 read with you for SAP Standard Appendix 2.5 software"
Clause 3 of Appendix 1.5:
"3. The total Net Price License Fee to Licensee for the Software specified in Section 2. above is INR 15,940,000..."
Clause 5 of Appendix 1.5:
"...the parties hereto agree to execute Appendices to this Agreement, in a form similar to Appendix 2 hereto, prior to SAP's delivery of such Software to such Designated Site..."
Clause 2 of Appendix 2.5:
"2. DELIVERY: Licensee shall not require additional copy of the above-specified Software... of this Appendix 1.5"
3. 27.06.2006 18,00,000 "Demo License Renewal The invoice pertains to for Services Partner for renewal of demo licenses for Period 1st January 2006 period 01.01.2006 to to 31st December 2006 31.01.2006. This indicates on my SAP Business that the CD, if at all Suite; imported, would have been imported prior to 01.01.2006 SAP Utilities and SAP i.e., prior to the introduction Retail demo licenses. of CVD on the import of IT Software.
In accordance with the above order, we invoice you for SAP Standard software"
49. It transpires that the license fee paid under Invoice No's 1 and 2 relates to electronic supply of software and the additional licenses. The license fee paid under Invoice No. 3 relates to renewal of Demo licenses on SAP Software for the period 01.01.2006 to 31.12.2006, which implies the supply of SAP Software took place much prior to that.
50. It needs to be noted that rule 9(1)(c) of the 1988 Valuation Rules has not been invoked against the transmission of SAP Software under Appendix 1.4 and Appendix 1.5 but against the SAP Software that was imported in CD 39 C/53102/2014, C/53254/2014 & 82 others under the courier Bill of Entry dated 29.06.2006. In any case, customs duty is not leviable on electronic download of Software.
51. What, therefore, follows is that the license fee is not associated with the import of the goods, as the primary mode of delivery of the SAP Software is electronic, and delivery of goods is not specified in the Appendix. The license fee remains payable irrespective of the fact whether CD is obtained physically or not. Thus, the license fee is not related to the CD and, therefore, the value of the license fee paid by HCL is not includible in the value.
52. The first condition contained in rule 9(1)(c) of the 1988 Valuation Rules is, therefore, not satisfied.
SECOND CONDITION
53. The second condition of rule 9(1)(c) of the 1988 Valuation Rules is also not satisfied. HCL is not required to pay the license fee at the time of import of goods. SAP India provides about four weeks period during which HCL can test run the SAP Software. Up-to the expiry of four weeks, HCL will have limited access to the SAP Software and instance for the payment of the license fee arises only if the HCL decides to convert the Software into a full version, post-trial. Thus, HCL is not required to pay the license fee for the import of the goods.
THIRD CONDITION
54. The third condition of rule 9(1)(c) of the 1988 Valuation Rules is also not satisfied.
55. The license fee is not paid as condition of the sale of goods. The payments made by HCL to SAP India are in relation to the rights obtained for 40 C/53102/2014, C/53254/2014 & 82 others the post-importation activities i.e., to obtain license keycodes. HCL is permitted to import goods, install SAP Software and access it during the initial four weeks period without payment of the license fee. However, only a limited access is allowed. Full access is contingent upon payment of the license fee post-import. The aforementioned payment of license fee to SAP India by HCL does not constitute a condition of sale of the imported goods. HCL is permitted to import the goods without any prerequisite to pay the license fee at the time of importation. The obligation to pay the license fee arises only subsequently for the purpose of obtaining the license key required to access the full functionality of the SAP Software. Accordingly, the payment of the license fee is a post-importation activity and is not a condition for sale for goods. This apart, right to use the Software is different from a sale of goods. In the present case, HCL is only provided a non- exclusive right to use the SAP Software. Article 6 clearly restricts the rights of HCL to only those permitted by SAP India and HCL does not acquire the title to the intellectual property in the SAP Software. Thus, the transaction between SAP India and HCL does not amount to sale of Software.
56. The Commissioner, therefore, committed an error in holding that the license fee is a condition of sale.
FOURTH CONDITION
57. The fourth condition is also not satisfied as the payments made by HCL to SAP India are not liable to be included in the transaction value of the CDs.
58. The inevitable conclusion, therefore, that follows is that license fee paid by HCL to SAP India cannot be included in the value of CDs under rule 9(1)(c) of the 1988 Valuation Rules. Penalty, therefore, could not have been imposed upon the appellant, nor interest could have been charged. 41
C/53102/2014, C/53254/2014 & 82 others
59. In this view of the matter, it may not be necessary to examine the contention raised by learned counsel for HCL that extended period of limitation contemplated under section 28(4) of the Customs Act could not have been invoked, nor is it necessary to examine whether interest could have been charged or penalty imposed in the absence of any machinery provisions under section 3(12) of the Customs Tariff Act.
SAP India
60. It would now be necessary to examine whether penalty could have been imposed upon SAP India under section 112(a) of the Customs Act.
61. As can be seen from paragraph 43 of the impugned order, penalty has been imposed upon SAP India for the reason that SAP India carefully devised a plan of having Agreements which had a direct bearing on the valuation of CDs and thereby suppressed the true transaction value resulting into an evasion of customs duty. The Commissioner has observed that SAP India was well aware that Software on CD imported into India is chargeable to customs duty, yet it devised a mechanism to avoid duty in a mala fide manner.
62. While discussing the matter of HCL, it has been found as a fact that license fee could not have been included in the value of CD under rule 9(1)(c) of the 1988 Valuation Rules. Thus, penalty under section 112(a) of the Customs Act could not have been imposed upon SAP India.
63. Even otherwise, the department has failed to place any evidence on record to show that SAP India abetted any acts and/omission to evade payment of duty. Only a bald statement has been made that SAP India advised SAP Germany to directly export the Software to End-Users making them importers, so as to evade payment of duty. SAP India deposited the 42 C/53102/2014, C/53254/2014 & 82 others amount of differential duty and interest on behalf of HCL. The same was with bona fide intention to protect the interest of the End-Users, their relationship with customers, and also to avoid litigation. In absence of any evidence, no mala fide intent can be attributed to SAP India and thus, no penalty could have been imposed.
64. It also needs to be noted that Bills of Entry were filed prior to the self- assessment regime and so the burden was on the department to examine and assess the duty. In the present case, the customs authorities had examined the description of goods and the value declared in the Bills of Entry. The order alleges that SAP India, under a carefully devised plan created Agreements which resulted in suppression of material facts which had a direct bearing on the value of CDs and thereby resulting in evasion of customs duty. There can be no suppression on the part SAP India as the customs authorities had allowed clearance after examining CDs and after examination of the papers. Penalty is, therefore, not imposable on SAP India.
65. What follows from the aforesaid discussion is that neither could the license fee paid by HCL to SAP India be included in the value of CDs under rule 9(1)(c) of the 1988 Valuation Rules nor could penalty have been imposed upon HCL or SAP India under section 112(a) of the Customs Act.
66. In the result, all the orders impugned in the 84 appeals are set aside. Consequently, the 84 appeals deserve to be allowed and are allowed.
(Order Pronounced on 29.09.2025) (JUSTICE DILIP GUPTA) PRESIDENT (HEMAMBIKA R. PRIYA) MEMBER (TECHNICAL) Shreya