Custom, Excise & Service Tax Tribunal
M/S. Repro India Ltd vs Commissioner Of Customs(Import), ... on 17 June, 2016
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. II APPEAL NO. C/88315/14 Application No. C/STAY/96311/14 [Arising out of Order-in- Original No. CAO/ CC/RS /04/ 2014/ADJ/ACC dated 16-4-2014 passed by the Commissioner of Customs (Import), Mumbai] For approval and signature: Honble Mr Ramesh Nair, Member(Judicial) Honble Mr. C.J. Mathew, Member(Technical) =======================================================
1. Whether Press Reporters may be allowed to see : No
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 Their Lordships wish to see the fair copy : seen
of the Order?
4. Whether Order is to be circulated to the Departmental: Yes
authorities?
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M/s. Repro India Ltd
:
Appellant
VS
Commissioner of Customs(Import), Mumbai
:
Respondent
Appearance
Shri. Sridharan, Sr. Advocate with Ms. Srinidhi Ganeshan and Shri. T. Vishwanathan, Advocate for the Appellants Shri. V.K. Singh, Special Counsel for the Respondent CORAM:
Honble Mr Ramesh Nair, Member(Judicial) Honble Mr. C.J. Mathew, Member(Technical) Date of hearing: 17/6/2016 Date of decision: /2016 ORDER NO.
Per : Ramesh Nair The present appeal has been filed by M/s Repro India Ltd against the Order-in-original No. CAQ/CC/RS/04/2014/ADJACC dt. 16.04.2014 passed by the Commissioner of Customs (Imports), Air Cargo Complex, Mumbai wherein a demand of 24,91,25,321/- was confirmed in terms of Section 28 of the Customs Act . Further a penalty of 50,00,000/- under Section 112 (a) and Rs. 22,70,14,658/- under section 114 A and redemption fine of Rs. 75,00,000/- under Section 125 of the act has been imposed against the Appellant. The Appellant is authorized replicator appointed by M/s Microsoft Licensing (Microsoft) a wholly owned subsidiary of M/s Microsoft Corporation to reproduce Microsoft products under certain terms and conditions. The Appellant imported kits containing CDs software from M/s Mediagate, Singapore/ Data Pulse, Singapore and COA from M/s Dealrue, UK. The COA were printed on the labels and all the three were packed in a kit for onwards sale to OEM (Original Equipment Manufacturer) or Distribution Service Partners who has licensing agreement with M/s Microsoft. Upon placing purchasing order with the Appellant and receipt of such report of purchase by M/s Microsoft, the OEM pays royalty to M/s Microsoft which is calculated as per the terms of licensing agreement between such OEMs and M/s Microsoft. The software purchased from the appellant has a product key which is used to activate the software in the computers sold by the OEM to their customers. The recovery CD is used to recover the operating system in case of hard disk crash or system breakdown. The OEM while billing to their customer charges the cost of such software packs purchased from appellant as well as Royalty amount paid by them to M/s Microsoft. Some of the OEM like M/s HCL Infosystems Ltd. and others also directly import replicated packs where the entire value is charged on invoice and no royalty is paid on such direct imports as it is included in the cost of software and they pay excise duty on same while clearing from factory. In case of sale of software kit purchased by the DSPs they further sell it to their customers. In both the case the OEM and DSPs who purchase software Kits from Appellant they directly pay loyalty to M/s Microsoft. The Appellant received enquiry and query by the Customs department on such importation of CD regarding their valuation. The goods were provisionally assessed and out of charge was given. The Appellant were later issued show cause notice proposing to reject the declared value of CD containing software in terms of Rule 4 (2) read with 10 A of the Customs Valuation (Determination of price of imported goods),Rules 1988 and to re-determine the same under Rule 8 of the said Rules; to demand and recover differential custom duty of Rs. 24,91,25,321/-; to confiscate the imported goods under Section 111 (d) and 111 (m) of the Customs Act and to recover interest under Section 18 (3) read with Section 28AB of the act; to impose penalty under section 112 (a)/ section 114A; to finally assess the Bill of entry on the basis of re-determination as proposed and to enforce the provisional duty bonds towards duty liability. The proposal were based on the premise that the transaction value of CDs imported by the Appellant cannot be accepted under Rule 4 of the Customs Act as the sale of CDs was restricted by M/s MS as there is an agreement between Appellant and M/s MSLI for disposition or use of CDs. The Appellant are required to sell the software Kits to OEM and DSPs who have prior agreement with M/s Microsoft. The revenue relied upon the retail sale price charged by DSPs to their customers in India. The show cause notice was adjudicated by the Commissioner of Customs (Import). The Appellant filed appeal before the CESTAT who vide order dt. 15.10.2012 remanded the case back to the adjudicating authority to decide the matter afresh after supplying the documents on the basis of which the duty was redetermined. The adjudicating authority vide Order-in-Original dt. 16.04.2014 again confirmed the demand against the Appellant by valuing the goods under Rule 8 of the Customs Valuation (Determination of Value of Imported goods) Rules, 1988. Being aggrieved the Appellant has filed the present appeal.
2. Shri. Sridharan, Sr. Counsel with Ms. Srinidhi Ganeshan, Ld. Advocate and Shri. T. Vishwanathan, Ld Advocate appearing for the Appellant submits that the impugned order has been passed without furnishing the basis of demand made in the show cause notice even after specific direction given by the CESTAT in its Order dt. 15.10.2012 and that the request of the Appellant to supply the same was ignored by the adjudicating authority. That though the Commissioner has stated that the documents mentioned in the CESTAT remand order has been supplied and personal hearing was done in comprehensive manner, the same is incorrect. The department has adopted the sale Price of DSPs namely Ingram Micro India (P) Ltd., Redington India Ltd., and Essys Information technology Ltd. and has given 10% deduction as profit and 0.4% approx to arrive at assessable value. However the price of which the above DSPs has been adopted by the revenue is not known. The price list of Redington was not supplied and no supportive documents to establish that the profit margins and cost of expenses deducted from the DSPs Sales Price is fair and comparable with the industry profit and expenses. He further submits that the CD containing software were imported from M/s Data Pulse and Mediagate, Singapore who are not related to them or M/s MS. The price charged by them consist of cost of media and cost of recording the software on the media and the price is indicated in the invoice raised by the suppliers on the Appellants. They have presented the invoice before custom authorities for clearance of goods. This practice was adopted even before excise duty on software. He submits that the payment of royalty by OEM and DSPs is a matter between M/s Microsoft and OEM/ DSPs and the Appellants have no role to play in that transaction as the same is paid on use of software. The payment of royalty is linked to COA supplied to OEMs and the same is not known to them. That in absence of any other payment the value declared by them is the transaction value as per section 14 read with rule 4. That the onus is on the department to establish that the transaction value is incorrect and in absence of any evidence the department is bound to accept that the transaction value is correct. The provisions of Rule 4 (2) (a) of the Valuation Rules is not applicable as there is no restriction as to disposition or use of imported goods imposed by the supplier and that conditions or considerations relating to the production or marketing of the imported goods shall not result in rejection of transaction value. That therefore licence fees is not includible in value of goods. He submits that Rule 9 (1) (c) of Customs Valuation Rules can be invoked only if licence fees/ royalty is relatable to the imported goods; and licence fee/ royalty is a condition of the same of the imported goods. That the royalty is not paid by the importer to the Exporter or Microsoft nor on their behalf. That the interpretative notes clearly states that the payment made by the importer for the right to re-produce the imported goods in the country of importation shall not be included in the price of the imported goods. That the payment made by the importer alone can be added to the value of the imported goods. He further submit that the declared value represents the media value is known to the department and the present proceedings are on account of change of department and hence extended period is not invokable. He submits that there is no wilfull misstatement or suppression of fact with intention to evade duty and hence extended period cannot be invoked. He submits that the duty is determinable under Rule 7 of Valuation Rules as the price at which the goods have been sold to OEM and DSP should be taken into account instead of adopting the price at which the goods have been sold by OEM and DSPs to the ultimate customer. He submits that the CDs meant for OEMs are customized and thus exempt from CVD under Notification No. 6/2006 CE. He further submits that confiscation of goods under section 111 (d) is not legal as they were not imported contrary to any prohibition impose under the act or law, nor there is any mis-declaration and hence section 111 (m) is not applicable. That penalty under section 112 (a) is not applicable as goods cannot be confiscated and Section 114 A is not invokable as no mens rea has been established. Alternatively he also submits that it has been held by the Tribunal in case of CCU (Import) Vs. Videomax Electronics that Section 112 and Section 114A are mutually exclusive and hence penalty under both section cannot be imposed simultaneously.
3. Shri. V.K. Singh, Ld. Special Counsel appearing for the revenue submits that M/s MSLI is a wholly owned subsidiary company of M/s Micrsoft. That there were two types of CD imports. One is recovery CD and second is OEM Pack for Distributors. Recovery CD is customized operating system replicated for the purpose of operating system recovery in the even of software corruption or crash for the purpose of re-installation of operating system. The recovery CD is not sold in retail but is being supplied by OEM along with computer. However both types of CD are having complete software and are being supplied with COA levels and as such directly usable. That the authorized replication services agreement shows that Appellant can sell goods only to those OEM and distributors who has valid agreement with Microsoft. Appellant cannot sell the goods to any party who does not have agreement with Microsoft and thus there is restriction on sale of goods. As per Section 4 (2) the transactional value of the goods is accepted if there is no restriction on sale of goods. In this case there is restriction on sale of goods and hence the transaction value cannot be accepted. The value declared by the Appellant at the time of importation was US$ .18 to US$ 0.46 whereas the distributor are selling the goods for Rs. 3000 to Rs. 4600/- per piece after charging royalty. He submits that as per the agreement of the Appellant with M/s Microsoft the MSLI grants licence to sell the product in the applicable region. The Customer means OEMs and Other Authorised Replicators that have current and valid license with MSLI or have been approved by MSLI. That OEM means the Original equipment manufacturer with a customer agreement with MSLI for software and is located in the applicable region. That the Appellant can import goods under reference from the authorized replicators of MSLI only. The OEM have been given limited right to order package from authorized replicator and the order for packages is listed on current royalty and price list. The OEM cannot deliver package to any other distributor who has as effective Microsoft OEM Distributor Channel Agreement. That for each individual package the OEM has to pay royalty. He submits that it is thus clear that M/s MSLI are creator of the said media and licensor have exclusive ownership rights and to protect their rights various agreements have been entered into by them and restrictions imported by them and therefore the value cannot be determined in terms of Rule 4 of Valuation Rules. The package cannot be sold to any OEM who has is not having agreement with MS during the relevant period. The value for the purpose of assessment should be the value of the media, the cost of replication and cost of software recorded on media. He places reliance on judgments in case of C.C (Import), Mumbai Vs. Excell Products Audio Visuals Pvt. Ltd 2014 (314) ELT 366 (TRI MUM) and Associated Cement Companies Ltd. Vs. Commissioner of Customs 2001 (128) ELT 21 (SC). He submits that subsequent to detection of case one of the distributor M/s Ingram Micro India started importing these goods directly and cleared the Bill of Entries by adding the royalty amount payable to Micrsoft in assessable value of goods. That in the present case the arrangement was made in such a way that the original licence holder or owner of software is ultimately paid which attracts Rule 9 (1) ( c). The importer has not included the amount of license granting the customers the right to use the same (royalty) which is a major chunk of the transaction and has declared only a fraction of the total value thus evading payment of duty on the total value. That as the quantifiable data for greatest aggregate quantity is not available, the value can not be determined in terms of Rule 7 and the Rule 8 has to be resorted to. That the authorised replicators are from whom Appellant has imported goods were appointed by M/s MSLI only and importer cannot get goods from any other person. The price to be paid by Appellant is decided by M/s MSLI, therefore for all practical/ legal purposes import is from MSLI only. That since the goods were sold to related buyers who were having agreement with the owner of licence (in this case MSLI), hence the advisory Opinion quoted by Appellant in their appeal are not sustainable. That similar submissions were made in case of Atul kaushik Vs. CCU (Exports) New Delhi 2015 (330) ELT 417 (TRI DEL) but the tribunal held that royalty charges are to be added to assessable value. He submits that looking to the facts of the case and investigation by SIIB it is clear that it was only after comprehensive investigation that the facts came to knowledge of the department and since the Appellant has made wrongful declaration they are liable for penalty and invocation of extended period. The Appellant has not produced any document that they had bonafide belief. That the original authority has confiscated only those goods which were provisionally assessed and which were released under Bond. Therefore such goods can be confiscate and Redemption fine can be imposed. He submits that there is no violations of principals of natural justice as the relied upon documents were supplied to the Appellant and they attended personal hearing.
4. We have carefully considered the submissions made by both the sides and perused the record.
5. We find that before installation/ use/ sale of the software to the OEMs or DSPs they should have licensing agreement with M/s Microsoft so that the software installed in the machines which is brought from the Appellant can be used and the operating system can be put to work. It is only after entry of COA / product Key number in the system bought from the Appellant that the computer starts working. If the OEM or DSPs has no licensing agreement, the system will not work as it is only after agreement of royalty of OEMs and DSPs that the whole process of software loading can be initiated. Further it is only after CD kit/ software pack is purchased from the Appellant and product key issued by the Appellant is entered that the system works. Thus it is case where M/s MSLI is controlling all the prices and has control over each transaction. Only the sale of the software has been routed and bifurcated in such a way that the Royalty of the software escapes the payment of duty on its importation. We find that in case where the software is purchased directly from M/s MSLI the cost of licence is included in the sale value of CD Kit and there is no need to pay the royalty charges separately to M/s Microsoft by the OEM or the DSPs. In nut shell it shows that the royalty charges are part of the cost of software. If there is no licensing agreement for payment of royalty the software cannot be operated.
6. We find that as per Appellants Authorized Replication Service (OEM) agreement No. 5000027843 dt. 17.08.2006 Para 2 a MSLI grants company licence to deliver finished goods to customer in applicable region. As per Para 1 (g) of the same Customer has been defined as (i) OEM (ii) Other Authorized Replicators have current and valid licence agreement with MSLI or have been approved in writing by MSLI and/ or (iii)MSLI. Thus it shows that the Appellant can sell goods only to those OEM and DSPs who are having a valid agreement with MSLI which clearly shows that it is a restriction on sale of goods and the clause 4 (2) of the Customs Valuation Rules is applicable in the present case. In such case the transaction value declared by the importer cannot be accepted. Once the product key is procured by the OEM and DSPs from the Appellant there is no restriction on use of software provided they have licensing agreement with the MSLI. It is an undisputed fact that all the OEMs had agreement with the MSLI known as Microsoft Distribution channel agreement that the OEM had to sell unopened and unaltered package as received from Appellant as no further processing was required. The Distributors in turn while selling these goods added royalty paid or to be paid by them to M/s MSLI. This clearly shows that the Software package is of no use without royalty and it is the royalty payment or an undertaking/ agreement to pay royalty which is prerequisite of working of package. The goods imported by the Appellant are not merely blank CD but is loaded with the software for which key is provided by the Appellant themselves. It shows that the goods are always inclusive of royalty which is otherwise recovered by M/s MSLI from the OEMs/DSPs. It is apparent that the whole operation of royalty payment made by the OEM and DSPs to M/s MSLI is planned in a way that it may show that the Appellant, OEMS/DSPs and Microsoft are not connected even though the every benefit is accruing to M/s MSLI. The Royalty is payable on each software package sold by the Appellant and if no software is sold there would be no commensurate royalty. Thus the royalty is an integral part of the package sold by Appellant. Further as seen from the statement of General manager of M/s Ingram Micro they were importing retail packs from MSLI while purchasing OEM pack from Appellant, the price was inclusive of royalty. Only in case of goods brought from Appellant by OEM that the royalty was paid separately to M/s MSLI. From the above undisputed facts it is clear that the royalty which is for a right to use the software is includible in the value of the CD and the price declared by the Appellant cannot be accepted for custom assessment. It is also a fact on record that the transaction value declared by the Appellant is less than USD 1 per piece, the OEMs were charging Rs. 3000 to 4600 per piece after inclusion of royalty amount for the same product. This shows that the selling price of the goods was determined by the Royalty amount which in the instant case has to be added to the value of the imported goods. The goods imported by the Appellant is not blank CD but is consisting of complete software alongwith the product key and no further action is required. The value of CD is not only the value of CD but it must also include the value of the Software and the right to use such software i.e Royalty towards such charges without which the software cannot be operated. We therefore in the light of our above observations and findings hold that the declared assessable value of the imported goods is not correct and required to be re-assessed.
7. The Appellant has also contended that the CDs are exempted from CVD in terms of Notification No. 6/2006- CE and therefore said exemption is extendable to them. We find that the exemption under serial No. 27 of said notification is available only to software which are developed from basic building blocks resulting in emergence of new software product. However in this case it is a customized software and not specific software and hence not eligible for exemption under the said notification.
8. As regard the method to be adopted for re-asssement of the assessable value, we find that the Appellant has objected the method of valuation under Rule 8 adopted by the adjudicating authority. It is their objection that deduction as contemplated in Rule 7 was not given. However we find that since the identical goods of greatest aggregate quantity are not imported, the recourse to Deductive Value Method i.e Rule 7 of Customs Valuation cannot be taken and therefore recourse has to be taken of Rule 8 (Residual method) of Customs Valuation (Determination of Price of Imported goods) Rules, 1988 by giving reasonable flexibility. The price list of M/s Esys Information technologies and M/s Ingram Micro have been given to the Appellant as relied upon document which acts as a bench mark to calculate the assessable value. We therefore direct the lower authorities that while arriving at assessable value in terms of Rule 8 the appropriate adjustment towards expenses, taxes and profit margins has to be given to the Appellant.
9. As regard imposition of penalty we find that the adjudicating authority has imposed penalty on the ground that in column of Bill of Entries - condition on restriction attached with the sale Rule 4 (2), the Appellant had stated no condition and that it was only after comprehensive investigation by Special Investigation Branch that the complex nature of payments arrangements was unearthed which shows violation of Section 46 (4) read with Rule 10 (3) of the Customs Valuations Rules, 1988. He has therefore held that the Appellant has given willful misstatement and have suppressed the facts with an intent to evade payment of duty and provision to Section 28 (1) are applicable. Further he has also held that since there is violation of Section 11 of the Customs Act, and Foreign Trade Regulation Act hence the goods are liable for confiscation. We find that the confiscation has been ordered in respect of only those Bill of Entries which were provisionally assessed. Further penalty under Rule 112 (a) and Section 114 A has been imposed on the ground of misdeclaration of goods. We find that there is no infirmity in the above observation of the adjudicating authority and therefore uphold the confiscation of goods as well as imposition of redemption fine and penalties.
10. In view of our above findings and observation, we remand the case back to the adjudicating authority only for the limited purpose of re-quantification of duty by determining the assessable value in terms of Rule 8 of Central Excise Valuation Rules, 1988 after taking into consideration the Appellants submission on appropriate adjustment towards expenses, taxes and profit margins.
11. The appeal is disposed of by way of remand to the original adjudicating authority. Accordingly, stay application is also disposed of.
(Order pronounced in court on _______________) C.J. Mathew Member (Technical) Ramesh Nair Member (Judicial) sk 16 C/88315/14