Custom, Excise & Service Tax Tribunal
M/S. Inflow Technologies Pvt. Ltd vs Commissioner Of Customs (Air), Chennai on 11 April, 2013
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
SOUTH ZONAL BENCH, CHENNAI
C/Misc./377/2012 and
C/S/68/2012 and C/90/2012
C/S/66/2012 and C/88/2012
C/S/67/2012 and C/89/2012
(Arising out of Order-in-Original No.121/2012 dated 15.3.2012 passed by the Commissioner of Customs (Airport & Air Cargo), Chennai)
For approval and signature:
HonbleShri P.K. Das, Judicial Member
HonbleShri Mathew John, Technical Member
1. Whether Press Reporters may be allowed to see the Order for Publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3. Whether the Members wish to see the fair copy of the Order?
4. Whether order is to be circulated to the Departmental authorities?
1. M/s. Inflow Technologies Pvt. Ltd.
2. Biju Pillai
3. Santhosh Sankunny Appellants
Vs.
Commissioner of Customs (Air), Chennai Respondent
Appearance Shri Rajesh Chandra Kumar, Advocate, for the Appellants Shri Parmod Kumar, Jt. Commr. (AR) for the Respondent CORAM HonbleShri P.K. Das, Judicial Member HonbleShri Mathew John, Technical Member Date of Hearing: 11.04.2013 Date of Decision: 11.04.2013 Final Order No. ____________ Per Mathew John In these proceedings, three appeals along with stay petitions for waiver of predeposit of dues arising from the same impugned order and a miscellaneous application for adducing additional evidence are being considered. All the appeals arise from the same impugned order. The first appellant is M/s.Inflow Technologies Pvt. Ltd., the importer of networking appliances and related software. The second appellant is Shri Biju Pillai, who is the CEO of the appellant-company and the third appellant is Shri Santhosh Sankunny, Head (Finance & Operation) of the appellant-company.
2. After hearing both sides for some time, the Bench came to the view that there has been a denial of natural justice during the adjudication proceedings and therefore we waived the requirement of predeposit of dues arising from the impugned order and proceeded to hear the appeals itself with a view to record an order as to how we came to the conclusion that natural justice was denied and to provide a few guidelinesto be followed by the adjudicating officer in denovo proceedings in this matter.
3. The appellant-company imported networking appliances which had certain embedded software to enable its use. This embedded software could be used for different functions by making payments for license to use the software for such function which software was already embedded into the system. The importer had also marketed the services of updating the software for various services.
4. Networking equipment is liable to pay customs duty. Software when imported separately was exempted from customs duty during the relevant period. Going by the decisions of the Tribunal and Courts, the legal position is that if equipment is imported along with embedded software without which the equipment cannot function, the value of the equipment for the purpose of assessment of customs duty should be the value of the equipment plus value of the embedded software and thus customs duty becomes payable on the value of such software. It is held that there is no scope for showing the value of the software separately to avail exemption that was applicable on import of software. The appellant wants to distinguish the facts of this case to be different from the facts of the case already decided. The dispute that is central to the case at hand is whether the appellant had avoided payment of customs duty on any portion of the value of hardware imported by them in cases by raising separate bills towards license to use embedded software, providing updates to the software etc. The essence of the case before us is that Revenue perceives the equipment, software and services as a single bundle sold in the trade but the appellant has sold these components separately and thereby avoided payment of customs duty on the latter two components.
5. The Directorate of Revenue Intelligence conducted detailed investigations, recorded statements of the employees of the appellant-company including the two individual appellants herein and also statements of a few persons who purchased such equipment from the appellant, marketing executives of the equipment manufacturer etc. They have also relied upon a test report from Electronic Test and Development Center, Peenya, Bangalore which reported that the equipment was basically a plug and play device implying that the software necessary to run the equipment is already embedded in the equipment.
6. The importer was given a very detailed show-cause notice and they were asked to furnish reply to the show-cause notice. They furnished a reply dated 19.9.2011, arguing that they should be allowed to cross-examine the persons whose statements are relied upon for proving the case against them. In particular, they had asked for cross-examining the expert from Electronic Test and Development Center, Peenya, Bangalore and they also wanted an opportunity for demonstrating before the adjudicating authority certain basic facts about the equipment by using a sample of the equipment under seizure. Though such request was made the adjudicating authority did not allow any cross-examination and did not give any opportunity to the appellant to demonstrate the functionalities of the equipment. The appellants appeared for personal hearing on 19/09/2011. Regarding this hearing the impugned order records as under in para 35 of the impugned order:
The noticees were granted personal hearing on 19.9.2011 which was attended to by Shri Santosh Sankunny and the advocates for the noticees. They made a request to permit cross-examination of the persons who tested the imported products and to cause testing of the seized product. They were asked to make further submissions without prejudice to their application in this regard. Accordingly, they reiterated their written submissions and also relied upon the affidavit of Shri Byju Pillai and Shri Santhosh Sankunny.
7. No separate order was passed on their application. Finally, the impugned order was passed without allowing cross-examination, without giving an opportunity for demonstration of the equipment and without giving a final personal hearing after cross examination and demonstration as the appellant desired. The Commissioner has recorded the reasons for rejecting their application in para 64 and 65 of the order which are reproduced below:
64. I find that the noticee had requested for cross-examination of the technical experts from the Electronics Test and Development Centre (ETDC) who had tested the equipments and given their report. I observe that the experts had certified that the subject appliances are networking equipment used in various networking applications; that the appliances are already embedded / etched with all the required software and are inseparable from the hardware; that it is a plug and play/scan type appliance signifying that no additional software is required for its functioning. I observe that the noticee had agreed with the experts opinion in its entirety and therefore, the purpose of cross-examining the experts who had given their technical opinion about the equipments after testing them is not known. Requesting to cross-examine technical persons without giving any reasons, especially when the noticee had not differed with their opinion, is not justifiable. Hence, I deny the request of the noticee to cross-examine the technical experts who tested the subject equipments.
65. I find that the noticee had requested to cross-examine all persons whose statements had been relied upon in the show cause notice. I observe that investigation had brought on record the statements of a few persons who had bought and used the subject equipments from overseas suppliers through ITPL. Their statements serve to make one understand the manner in which the orders were raised, either as a bundle or as separate items as hardware, software or support, the manner in which the goods were received through ITPL, the type of invoices under which they were received, the general working of the equipments etc. These are all basic facts of the case which had been brought on record through these persons who had bought and used the equipments. Further, the noticee had not stated anything whatsoever as to which part of which statement by which persons is incorrect or disputable but had merely requested to cross-examine all these persons without submitting any reason as to the objectives of such an exercise. I find that such a request to cross-examine all persons who had only given an objective view of the manner in which the subject equipments were ordered, invoiced, imported, cleared, sold, bought and used is not acceptable. Hence, I deny the request of the noticee to cross-examine these persons whose statements are relied upon in the notice.
8. The appellants are not contesting the fact that the equipment is a plug and play device for basic functionalities and the components of software for other optional functionalities (except the updations offered from time to time) in dispute are embedded in the equipment when it is imported. The appellants argue that the additional functionalities for which software is already embedded in the equipment, will be activated only when purchaser desires to have such functionality and makes payment for its licence. Since such licensing is not a condition for sale of equipment, they contest that the value of such optional service cannot form part of the value of the equipment. It is for proving the fact that the equipment imported is a plug and play device only for the basic functions and not for additional functions that the appellant wanted to have a demonstration of the equipment. It is also for the purpose of demonstrating that they have collected price from different buyers depending upon the functionalities that the buyers paid for, that the appellants asked for cross-examining other persons whose statements were relied upon. The further contention is that if the right to cross-examination was denied to them without informing them or passing a separate order on that issue. If such order was passed they could have sought remedy against such order by submitting documentary evidence to prove their contentions or any other remedy as was possible. In fact, there are documents now filed by the applicant before the Tribunal along with application for its admission. They argued that these additional documents could not be submitted before the adjudicating authority because the adjudicating authority never intimated them that the opportunity for cross-examination and demonstration was being denied and the reasons for such denial. The Counsel for appellant argued that such an approach by the adjudicating authority has resulted in gross miscarriage of justice.
9. The essence of the defense of the appellants is that the appliance consists of various components that have separate functions and fall under separate tariff headings for assessment purposes at the time of import and noticee has paid customs duty on the appliance which value would include, namely the hardware component of the appliance, the embedded software in it required to initiate the hardware, preloaded software and warranty, which it has correctly done at the time of import of the appliance. According to the appellants the value of the appliance at the time of import therefore included the following:-
(i) The value of the hardware
(ii) The value of the software embedded in the hardware to initiate the hardware
(iii) The value of the application softwares that are perpetually licensed and are integrated with the appliance and which continue to function the moment the appliance is plugged in without any additional requirement of an activation key/license key.
(iv) The value of the application software that are subscription based, but are activated initially for the evaluation period and which perform the complete set of functions upon activation for the specified evaluation period
(v) The value of the license key required to activate the subscription based application softwares for the evaluation period and
(vi) Charges for default warranty period.
10. The appellants argue that the appliance as such is functionally viable and commercially marketable in the form in which it is initially imported. They argue that support is clearly distinguishable from warranty and its value will not form part of the value of imported goods. Thus it is argued that the customs duty paid is in full discharge of the liability considering rule 10 (c) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and they are not required to pay duty on any post importation services or post importation licensing of software embedded in the equipment at the time of import so long as such licensing is not a condition for sale but is optional.
11. Opposing the prayer of the learned counsel for the appellant, the learned AR for Revenue submits that though statements of many persons have been relied upon in the show-cause notice, the adjudicating authority has not relied upon such statements for arriving at his finding. He has only relied upon the statements of the employees of the company and also documentary evidences like parallel invoices raised. So according to him, the adjudication proceeding is not vitiated. He also submits that the adjudicating authority has recorded the reason for denial for cross-examination in paragraphs 64 & 65 of the adjudication order (already reproduced in this order). He prays that the Tribunal may consider these facts recorded by the adjudicating authority and the difficulty in arranging the cross-examination of government officers who gave the expert opinion as also various persons whose statements figure in the show cause notice. He was of the view that the experts opinion should be taken as correct because he is a Government officer having no vested interest and the case can be proved without relying on statements of any third party and proceedings should not be further prolonged by remanding the matter to the adjudicating authority.
12. We have considered submissions on either side.
13. Any case can be decided only after settling facts. On facts, Revenue has to give a clear finding whether the equipment is capable of functioning as networking equipment even without licences for the additional facilities for which separate licensing fee may have to be paid. It is also necessary to find out whether the same price or comparable prices were charged from parties who bought the hardware irrespective of functionalities or different prices were charged for parties depending on the functionalities that the buyer asked for. It is also necessary to demonstrate whether the licensing of all the embedded software was a condition for sale of the goods. It is necessary to come to finding whether each of the buyers opted for all the functionalities and also paid for it since the appellants are contesting to the contrary. Unless clear findings are given on these facts after hearing all the defense arguments it may not be possible to apply the relevant laws. It appears that there is some agreement on both sides that most of the components of the software except those relating to updations are embedded in the equipment. But there are other issues. Without license can the embedded software be used? This is a question of fact to be answered. If the importer asks for licensing additional functionalities after importation is complete and pays for it will such payment be part of the value of the imported goods? This is a legal question to be answered. But the relevant fact whether such licensing and payment were made after importation and whether such payments were made by all the customers and whether such payments were condition for sale are relevant facts to be determined. We find that the adjudicating authority has not given adequate opportunity to the appellant to defend its position on these questions of facts.
15. It is also seen that the appellant have a contention that some part of the money is towards updation of the software. A typical example is antivirus software. Even after the initial stage the software has to be updated for newer and newer viruses, spams, spywares etc. that is pumped into the network by criminal and anti-social elements in the society. For this purpose, the software need to be updated continuously and this service has to be paid for. It is argued that the cost of such updation of software cannot form part of assessable value of goods when imported. No effort seems to have been made to make distinction between the post-import services and the software that is embedded.
16. We have perused the submissions of the appellants before the adjudicating authority on 19/09/2011 and we are of the considered view that the reasoning given by the Commissioner that the appellants have not submitted the reasons for requesting for cross-examination is not correct. If the Commissioner was not in agreement with the reasons given, he should have necessarily intimated his stand to the importer so that they could have filed evidence before the Commissioner by way of additional documents to prove their point. When such documents are filed directly before the Tribunal such evidence is legally not admissible but refusal to bring on record such evidence results in denial of justice to the appellants. Therefore, we direct the Commissioner to first decide on the issue whether he wants to allow cross-examination and demonstration of equipment and if not he shall pass an order explaining the reasons. Thereafter, the appellant should be given an opportunity to file evidences as they deem fit to counter Revenues arguments. By and far it should be kept in mind that denial of opportunity to cross examine a witness or author of a report can substantially reduce its value as evidence. The Tribunal may not without prima facie reasons doubt the correctness of what is written in the report given by a government agency. But the Tribunal may have doubt about aspects which are relevant for deciding the issue but not written in the report. After communicating his decision on the aspect of cross-examination and demonstration of the functionalities before the adjudicating authority the appellants should be given adequate opportunity to file evidence as they consider necessary and then the adjudication should be completed after hearing the appellants.
17. We make it clear that we are not giving any directions as to which witness should be allowed to be cross-examined and whether the adjudicating authority should allow demonstration of the equipment which are matters left to the reasoned discretion of the Commissioner considering the interests of both sides in this case.It may be advisable to give a hearing also to the investigating agency which knows best which evidence is crucial to their case and which witnesses are available for cross-examination.
18. In the circumstances, we set aside the impugned order and remand the matter to the adjudicating authority keeping all issues open. The miscellaneous application for production of additional evidence and the stay applications are also disposed of. All the appeals are allowed by way of remand.
(Operative portion of the order was
pronounced in open court)
(Mathew John) (P.K. Das)
Technical Member Judicial Member
Rex
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