Custom, Excise & Service Tax Tribunal
4. Whether Order Is To Be Circulated To ... vs Cce, Hyderabad Ii on 17 February, 2016
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
1st FLOOR, HMWSSB BUILDING,
REAR PORTION, KHAIRATABAD,
HYDERABAD 500 004
LARGER BENCH
DATE OF HEARING : 07-08/01/2016.
DATE OF DECISION : 17/02/2016.
Customs Appeal No. 573-575, 487-489, 491, 556, 473 of 2006 and 463 of 2004
[Arising out of the Order-in-Original No. 17/2006-CUS dated 18/08/2006 and 19/2006-CUS dated 19/09/2006 passed by The Commissioner of Central Excise, Hyderabad II and Order-in-Original No. 01/Appr./Commr./2004-05 dated 27/04/2004 passed by Commissioner of Central Excise, Goa.]
For Approval and signature :
Honble Shri Justice G. Raghuram, President
Honble Ms. Sulekha Beevi C.S., Member (Judicial)
Honble Shri B. Ravichandran, Member (Technical)
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 would 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 of the order?
4. Whether order is to be circulated to the :
Department Authorities?
M/s Bhagyanagar Metals Ltd. ]
Shri Narender Surana, M.D. ]
Shri Balasubramanian, V.P. ]
M/s Surana Telecom Ltd. ]
Shri Balasubramanian, V.P. ] Appellants
Shri Narender Surana, M.D. ]
M/s L.G. Electronics ]
M/s Huawai Technologies Co. Ltd.]
Versus
CCE, Hyderabad II Respondent
and
M/s Bhagyanagar Metals Ltd. Appellant
Versus
CCE, Goa Respondent
Appearance
Shri V. Sridharan, Senior Advocate for the appellants.
Shri Mohd. Yousaf, Authorized Representative (DR) for the Respondent.
CORAM : Honble Shri Justice G. Raghuram, President
Honble Ms. Sulekha Beevi C.S., Member (Judicial)
Honble Shri B. Ravichandran, Member (Technical)
Final No. 30110-30119/2016 Dated : 17/02/2016
Per. B. Ravichandran :-
APPEALS FOR CONSIDERATION :-
The matter relating to valuation of imported Fixed Wireless Telephones (FWT) was examined and by decided two co-ordinate Benches of the Tribunal.
Bangalore Bench of the Tribunal decided nine appeals by Final order Nos. C/760-768/2008 CU (DB) dated 09/7/2008. The details of appeals and outcome are as below :
Sl.
No.
Appeal No.
Name of the appellant
Outcome as per final order
1.
C/573/2006
M/s Bhagyanagar Metals Ltd.
Appeal rejected
2.
C/574/2006
Shri Narender Surana, M.D. of appellant at Sl. No. 1
Penalty reduced
3.
C/575/2006
Shri Balasubramanian, V.P. of appellant at Sl. No. 1
Penalty reduced
4.
C/487/2006
M/s Surana Telecom Ltd.
Appeal rejected
5.
C/488/2006
Shgri Balasubramanian, V.P. of appellant at Sl. No. 4
Penalty reduced
6.
C/489/2006
Shri Narender Surana, M.D. of appellant at Sl. No. 4
Penalty reduced
7.
C/491/2006
M/s L.G. Electronics
Penalties set aside
8.
C/556/2006
M/s L.G. Electronics
Penalties set aside
9.
C/473/2006
M/s Huawai Technologies Co. Ltd.
Penalty set aside
Mumbai Bench of the Tribunal decided appeal No. C/463/2004 filed by M/s Bhagyanagar Metals Ltd. by final order No. A/131/WZB/2007/CSTB/C.I. dated 22/02/2007. The Tribunal allowed the appeal in full.
Revenue filed civil appeal No. 5007/2007 in the Honble Supreme Court against the final order of the Mumbai Bench of the Tribunal. The appellant assessee filed six civil appeals Nos. 6718-6720/ 2008 and 6722-6724/2008 against the final order dated 09/7/2008 of Bangalore Bench of Tribunal. These civil appeals were decided by the Honble Supreme Court on 15/10/2015. After having considered the two CESTAT decisions mentioned above the Honble Apex Court observed and ruled as under :-
Having regard to the aforesaid situation, it is suggested by Mr. S.K. Bagaria, learned senior counsel appearing for the assessees, that better course of action would be to send the matters back to the CESTAT which should be decided by a Larger Bench.
We may accept the aforesaid proposal but while doing so it has to be necessarily directed that the evidence which has surfaced later on and relied upon by the Department in other show cause notices shall be considered as common evidence in all these cases.
Accordingly, the impugned decisions of the CESTAT in these appeals are set aside. The matter is remitted back to the CESTAT with request to the President, CESTAT to constitute a Larger Bench and decides the matters afresh on the lines specified above. We would appreciate if the Larger Bench decides these matters within a period of one year from the date of receipt of the copy of this order.
2. Accordingly, this Larger Bench came to be constituted to hear and decide these appeals afresh.
Background facts of the case :-
The main appellants in the case M/s Surana Telecom Ltd. and Bhagyanagar Metals Ltd. imported Fixed Wireless Terminals (FWT), a type of Cellular phones which are operated under CDMA Technology. These imports were form M/s L.G. Electronics, Korea and M/s Huawai Technologies Co. Ltd., China. Alongwith these phones the appellants also imported CD ROMS and filed B/Es separately for phones and CD-ROMS claiming phones as hardware portion of FWTs and CD-ROMS as Software Portion of the said FWTs. A dispute arose on the nature of goods imported, mainly with reference to split up of hardware and software portions of FWTs for assessment purposes. Customs duty is payable on phones but exempted on imported software. Revenue conducted detailed follow up investigations and came to the conclusion that the Software claimed to have been contained in the CD ROMS are already pre-loaded in the phones and there is no software as goods to be assessed separately for claiming exemption.
As earlier noticed, the Mumbai Bench of the Tribunal had decided that the inclusion of the value of the software in the value of the telephones imported by the appellants herein cannot be sustained. The Bangalore Bench, which decided another set of appeals separately, however came to the conclusion that the software necessary for functioning of the telephone is already embedded in it. Hence, there is no separate software for assessment and valuation adopted for the phones. The adjudication order passed by the Commissioner was upheld. It is to be noted that the material evidence collected during detailed investigations by Revenue were available only during proceedings before Bangalore Bench. As directed by the Honble Supreme Court, while disposing of the civil appeals, the evidence on record must be considered to decide all the appeals, by us.
Submissions on behalf of appellants :-
Learned Senior Advocate Shri V. Sridharan, appearing on behalf of all the appellants explained the nature of WLL Cellular telephones and the argued that appellants are right in their claim for exemption of software imported by them.
The whole thrust of the argument of the learned Counsel is based on applicability of Note 6 of Chapter 85 of the First Schedule to the Customs Tariff Act, 1975 to imports made by them. The relevant portion of the said note states :
Records, tapes and other media of heading 85.23 or 85.24 remain classified in those headings, when they are presented with the apparatus for which they are intended.
The contention is that the software intended for FWT phones are loaded in the Flash memory unit which is to be considered as a media for such software and to be classified under CTH 85.24. The exemption to software is available even if it is preloaded in the apparatus. Learned Counsel accepted that in proposing this argument they are not concerned with the software loaded in CDs presented with the apparatus at the time of imports. As such the media, here the information technology software, claimed for exemption is the Flash memory card which is part of main printed circuit board of the telephone apparatus, not the CDs imported and presented with these telephones.
This is entirely a new matrix of factual and legal propositions not advanced earlier in any proceedings before the lower authorities. This Tribunal nor in the appeal before the Honble Supreme Court. As such, admission of such entirely new propositions, claimed on facts, is itself to be decided. Learned Counsel submits that Revenue is fully aware of the fact, and it was Revenues claim that the software preloaded or embedded in the telephone apparatus cannot be considered separately and the instrument as a whole has to be assessed and taxed as hardware. It is his contention that in order to rebutt the said assertion of Revenue, now they are specifically pleading the fact of software being embedded in the Flash memory attached to the main Printed Circuit Board (PCB) of the telephone apparatus. Such software is exempt as the media (memory unit) is presented with the instrument (FWT) itself.
Shri V. Sridharan presented his substantive contention with special emphasis on the above-mentioned point. His elaborate arguments can conveniently be summarized as below :-
(a) Even with out reference to Note 6 of Chapter 85, the Honble Supreme Court in PSI Data Systems Ltd. vs. CCE reported in 1997 (89) E.L.T. 3 (S.C.) held that the value of software is not includable in the value of Computer. Post 01/3/86, when Note 6 came into force, the CESTAT in Tata Unisys Ltd. vs. CCE, Bombay reported in 1994 (73) E.L.T. 96 (Tribunal) held that Chapter notes are relevant for the purpose of classification alone and not for valuation. This decision also was reversed by the Honble Supreme Court in PSI Data Systems Ltd. (supra);
(b) The Honble Supreme Court in CCE, Pondicherry vs. Acer India Ltd. reported in 2004 (172) E.L.T. 289 (S.C.) specifically rejected the essentiality test and held the software installed inside Computer should be separately classified under heading 85.24 and not alongwith the Computer. As per HSN Explanatory Notes recorded media (Software) assembled with constituent part of machine of Heading 84.69 to 84.72 fall under heading 85.24 ;
(c) Sprint R.P.G. India Ltd. vs. CC-I, Delhi reported in 2000 (116) E.L.T. 6 (S.C.) held that the software contained in hard disk will fall in Heading 85.24 even if such hard disk is a unit of Computer. The software retains its identity as a software in such situation also. The classification of software under Heading 85.24 even if installed in the hard disk within the Computer was affirmed in Commissioner vs. Barber Ship Management (I) Pvt. Ltd. reported in 2002 (144) E.L.T. A293 (SC) ;
(d) CC, Chennai vs. Hewlett Packard India Sales (P) Ltd. reported in 2007 (215) E.L.T. 484 (S.C.) held that the value of hard disk drive is includable in the value of laptop, but value of the software contained in hard disk is not includable in the value of laptop, which should be assessed separately under Heading 85.24. The Telecom software now under consideration is covered under the category of Computer software ;
(e) In the present case the software resides in the Flash memory, which is a mere storage device and, hence, should be assessed separately ;
(f) The decision of the CESTAT in Bharti Airtel Ltd. vs. CC, Bangalore reported in 2012 (286) E.L.T. 270 (Tri. Bang.) is not good law. The decision of Honble Supreme Court in Anjaleem Enterprises Pvt. Ltd. vs. CCE, Ahmedabad reported in 2006 (194) E.L.T. 129 (S.C.) is not applicable to the present case.
(g) There is no interest liability in the present case. There is no provision for payment of interest on differential duty assessed on finalization of provisional assessment under Section 18 (3) of the Customs Act, 1962. Interest under Section 28 AB is not applicable to the present case. The legal position is settled by the ruling in Jaswal Neco Ltd. vs. CC, Visakhapatnam reported in 2015 (322) E.L.T. 561 (S.C.).
(h) The redemption fine imposed in the present case is legally not sustainable. The imported goods were neither seized nor released under any bond. The bond referred to in the original order is for provisional assessment under Section 18 and there is no bond for provisional release of goods under Section 110A.
(i) There is no case for imposing penalty on the appellant under Section 114A. In the present case, the assessments were provisional and the finalization is in terms of Section 18. Section 114A will come into play only when duty demand is under Section 28. As the question involved in the present case involves pure interpretation of statutory provisions there is no case for mis-declaration or suppression of facts. Hence, no penalty is imposable.
Submissions on behalf of the Revenue :-
The learned AR Shri Mohd. Yousaf contested strongly the averments by the appellants. First of all, he objected to the appellants taking a completely new ground in the present proceedings regarding software purportedly contained in the hardware and applicability of Note 6 of Chapter 85. This proposition was never urged either before the Adjudicating Authorities, different Benches of the Tribunal or even before the Honble Supreme Court when these cases were examined and decided. When bills of entry were filed in respect of the imported CDMA mobile phones, the appellants never claimed that the separate goods is software falling under Heading 85.24. Only CDMA mobile phones were declared with a split up value for hardware portion and software portion of the phones. The learned AR urged that the claim of the appellants is a wholly fresh assertion i.e., that there were two kinds of goods falling under different headings with separate description for assessment. This claim is made for the first time. He pleaded that this claim requires to be rejected outright.
On the merits of the case, the learned AR made elaborate submissions. His submissions are summarized as below :-
(a) Note 6 of Chapter 85 requires that the media as goods to be presented with the apparatus. In the present case, the Cell Phones were not presented with any separate media. The appellants earlier claimed that the software was in CD-ROMs. Now they are claiming that the software is in the flash memory unit which is part of the printed circuit board inside the phones. The claim of the appellant that the software was available with the flash drive as media, which is made for the first time, is also not correct ;
(b) It is not the case now that the equipment imported (CDMA WLL Cell phones) were presented with any media containing software. Note 6 will not apply. All the case laws relied upon by the appellants are in the context of computer hardware/software. The software in those cases were carried in a hard disk or other media and are also available separately for sale. In the present case there is no separately identified software which can be treated as goods in any media.
(c) The software in the present case is a basic software which gives the phone its identity and functionality. It is pre-loaded in the hardware and the appellants attempt to show separate import of software through CDs is simply a device to escape Customs duty on the full value of the imported item WLL Cell Phones. The earlier claim of software imported in CD is only to avail the otherwise ineligible exemption for the purported software as goods.
(d) The Tribunal in Bharti Airtel Ltd. (supra) elaborately examined the issue of valuation of pre-loaded software. In that case, software was parallelly imported in the CDs also. The various case laws which were relied by the appellant now were examined by the Tribunal in the said decision. The essentiality criteria as well as the applicability of Note 6 were examined. The Tribunal clearly distinguished the ratio of Vodafone Essar Gujarat Ltd. vs. CC (Imports), Mumbai reported in 2009 (237) E.L.T. 458 (Tri. Mum.).
(e) Reliance can be placed on the ratio laid down by the Honble Supreme Court in Anjaleem Enterprises Pvt. Ltd. (supra).
(f) Regarding the applicability of interest it was submitted that the interest is compensatory in character and reliance was placed on the decision in Commissioner of Trade Tax, Lucknow vs. Kanhai Ram Thekedar reported in 2005 (185) E.L.T. 3 (S.C.), Honble Allahabad High Court decision in BHEL vs. CC & CE, Kanpur reported in 2015 (323) E.L.T. 417 (All.) and Honble Karnataka High Court decision in CC, Bangalore vs. Pierre Colsun Inc. reported in 2014 (300) E.L.T. 207 (Kar.).
(g) Regarding imposition of redemption fine in respect of goods which are not available for confiscation, reliance was placed on the Honble Supreme Courts decision in Weston Components Ltd. vs. CC, New Delhi reported in 2000 (115) E.L.T. 278 (S.C.).
Points for decision :-
We have heard both the sides at considerable length. On a careful consideration of the factual, legal and technological issues, the main point for decision is whether there are two distinct goods hardware part of fixed wireless phone and the software part of the said phone for Customs duty assessment. In other words, is there, as claimed by the appellants, an identifiable goods as software in a media falling under Heading 85.24 of the Customs Tariff, in the imports by the appellants for the purpose of Customs Valuation and assessment.
There are other connected points also for decision, namely, interest liability of the appellants, sustainability of redemption fine and penalties imposed in these cases.
Discussion and findings :-
Before proceeding with examination of the merits of the case, it is necessary to address the preliminary objection raised by Revenue regarding admissibility of a totally new plea which was never raised in any of the proceedings till date. As noted earlier in this order, the appellants put up their defence mainly on the ground of applicability of Note 6 of Chapter 85 to their case; to consider the Flash memory unit inside the WLL Cell Phones imported by them as a media carrying the software and accordingly eligible for exemption. The learned Senior Counsel for the appellants admitted that they are making this submission for the first time and are abandoning earlier arguments before the lower Authorities as well as the Tribunal, i.e., regarding the CD-ROMS contained software for the WLL Phone, being eligible for clearance without payment of duty.
On the preliminary objection, the learned Senior Counsel submitted that the present plea is taken by the appellants to counter allegation of Revenue that pre-loaded software cannot be considered for separate assessment as a software in media. He further pleaded that there is no legal bar in taking a fresh ground before the Tribunal. He relied on the decision in Mahalaxmi Textile Mills Ltd. reported in AIR 68 (SC) 101. In the said case, the Honble Supreme Court held that the right of the assessee to relief is not restricted to the plea raised by him. The learned Counsel while admitting that the present plea though inconsistent with the plea raised before Departmental Authorities and Tribunal, is essential to determine the eligibility of the appellants to assessment of software as claimed by them. Since this plea raises a core issue, examination of the same is vital to the outcome of the case.
We find that in all preceding proceedings, the appellants were forcefully claiming that software contained in the CD ROMS were entitled for separate assessment and the value apportioned for such software is exempt from Customs Duty. Now, the plea is that the said software for which they are still claiming exemption is stored and carried in the Flash memory unit in the printed circuit board inside the imported WLL Cell Phones. It is apparent that the present plea is totally inconsistent with the pleas made in the first round of litigation up to the Honble Supreme Court. However, considering that such assertion is based on legal principles for classification (Note 6 of Chapter 85 and other related principles for classification) we find it fit and proper to consider this plea on merit for a decision. As the present proceedings is to look at all the available evidences and legal provisions applicable afresh, it is necessary to consider this plea, for a proper resolution of the dispute.
In order to examine appellants plea regarding eligibility of software component for separate assessment, it is necessary to understand the nature and functionality of the imported goods fixed wireless telephones.
CDMA Fixed Wireless Telephone :-
It is necessary to understand the actual nature and functioning of the FWTs (WLL Phones) relevant to this case. We have seen the instrument, perused the user manual and service manual. FWT is supplied with main unit with handset, dipole antenna, back up battery, AC/DC Power adopter and power cord.
FWT and WLL are generic terms for radio based telecommunication technologies. The CDMA WLL network consists of WLL system, BTS (Base Station Transmission sub-system) and FWT (Fixed Wireless Telephone). The WLL system is directly connected with LE (Local Exchange).
Relevant to decide the claim made by appellant regarding nature, tariff classification and thereby the exemption as available to software contained in other media (Note 6 of Chapter 85) is the nature of the memory unit which is part of the Internal RF circuit of the telephone. Learned Counsel has shown a sample of the said printed circuit board and claimed that the Flash memory unit which is attached to the PCB is to be considered as a storage media of the software. Such software should therefore be considered as a separate goods, though contained in and presented as a part of PCB inside the telephone. The exemption as available to software would thus be eligible to the same.
The block diagram will show the location of the memory unit in the PCB (U 11 Flash Memory). This memory unit is part of the digital/voice processing unit which in turn is a part of Internal RF circuit of the telephone. The memory unit is composed of Flash memory for storing main program activating MSM (Mobile Station Modem) and storing user service related data and RF calibration data, and SRAM for reading and writing data. The Flash Memory has a 1M X 16 CMOS concurrent Read/Write manufactured with high CMOS Super Flash Technology.
NATURE OF MEMORY UNIT :
The Service Manual of the telephone gives the following description of the memory unit :
The unit is composed of Flash Memory for storing main program activating MSM and storing user service related data and RF calibration data, and SRAM for reading and writing data. The Flash Memory has a 1M X 16 CMOS Concurrent Read/Write manufactured with high CMOS Super Flash technology.
This memory is dual bank architecture for concurrent read/write operation.
Bank one is stored main program activating MSM Bank Two is stored non-volatile data such as the identification number of terminal, user service related data and RF calibration data.
This memory is selected by_ROM_CS1.
_ROM_CS1 is mapped to the Flash Memory address space.
There are two SRAMs and each has 256K X 8bit space. Data generated during the terminal operation are stored temporarily in SRAM. SRAM is controlled by a _RAMCS1_and_RAM_CS2 signals.
It is to be noted that CMOS refers to complementary metal-oxide-semi conductor technology for integrated circuits. SRAM refers to static random access memory which is a type of semi conductor memory that uses bi-stable latching circuitry to store each bit. These are used for storing volatile/temporary data. Memory unit (Bank two) also stores non-volatile data such as the ID number of the phone, user service related data and RF caliberation data. Normally, there are two categories of non-volatile data storage electrically addressed systems (read-only memory) and mechanically addressed systems (hard disks, optic discs, magnetic tapes etc.). In respect of FWT circuit as in the present case, this non-volatile memory (Read Only Memory) stores data which is hard-wired as a Firmware. Such software is closely tied to specific hardware.
From the above technical details it is clear that the memory unit, which is a part of ARM7TDI Micro processor sub-system, is clearly an integral part of the internal circuit of the telephone. This contains both volatile (temporary) and non-volatile (permanent) data, without which activation of the phone is not possible. It is not correct to call such memory unit as a storage media for software. The applicability of Note 6 depends on availability of a identifiable, separate media. From the technical analysis above it cannot be said that there is any identifiable, separate media in the present case.
Relevance and applicability of Note 6 to Chapter 85 of the Schedule to Customs Tariff Act, 1975.
Note 6 to Chapter 85 of the Schedule to Customs Tariff Act, 1975 as it stood prior to 01/1/2002 is reproduced hereunder :
6. Records, tapes and other media of heading No. 85.23 or 85.24 remain classified in those headings, whether or not they are presented with the apparatus for which they are intended.
Note 6 to Chapter 85 of the Schedule Customs Tariff Act, 1975 w.e.f. 01/1/2002 is reproduced hereunder:
6. Records, tapes and other media of heading No. 85.23 or 85.24 remain classified in those headings when presented with the apparatus for which they are intended.
This Note does not apply to such media when they are presented with articles other than the apparatus for which they are intended.
There is no remote possibility for calling the memory unit in the present case as one of the media covered by above note. The memory unit is clearly part of the circuit board of the telephone and more appropriately covered under Tariff heading 85.42.
Tariff Heading 85.42 covers Electronic Integrated Circuits whether or not combined with memories. Such memories may be in the form of DRAMS SRAMS PROMS EPROMS EEPROMS etc. Note 5 of Chapter 85 provides that the classification of Articles defined in the said note, Headings 85.41 and 85.42 shall take precedence over any other heading in this schedule which might cover them by reference to, in particular, their function. The printed circuit board, a sample of which we have examined during the hearing, is an integrated component with various sub-circuits. As explained in the Block Diagram (supra) various sub-circuits were assigned specific logic/work and are inter-connected for the designed performance of the Cell Phones. The memory unit which identifies the individual phone as well as contains essential basic command are integrated to the said circuit board. These are not removable in normal course or inter-changeable. As such, we find there is no separate media containing software that can be presented with the phone and classified under Tariff Heading 85.24. In other words, there are no two separate, distinct goods for assessment, namely (a) CDMA Fixed Wireless Telephone and (b) a media containing software presented with such telephone.
It is further to be noted that the claim of the appellant all along, till the current proceedings, is that the software is contained in CD-ROM presented separately along the FWT cell phones at the time of import. Now, for the first time they have made this claim that the memory unit is in built and part of the main circuit inside the phone; should be considered as a media for classification and consequently eligible for exemption available to software. We have critically examined this claim. The technical literature, nature of the said memory unit and nature of the software contained in the memory unit clearly rule out the possibility of calling this part of the printed circuit board separately as a media for software. It is also not the claim of the appellant that such media carrying the software for FWT phones is anywhere available separately for trading.
It is the clearly admitted fact that the software/data loaded on the Flash memory is specific to the user/customer. It contains caller ID and caller block software. The phones imported have embedded software with required parameters for its functioning.
Analysis of case laws :
Learned Senior Counsel as well as Revenue relied on various case laws in support of their submissions. We are conscious of the fact that the present dispute involves highly dynamic technological issues relating to the nature of software, memory unit and telephone instrument. Hence, it is necessary before analyzing and applying any rulings, to have the changing technologies and concepts in mind.
The appellants relied on the decision of Honble Supreme Court in PSI Data Systems Ltd. vs. CCE (supra) to submit that the value of the software is not includable in the value of the WLL telephone. In the said case the apex Court was dealing with tangible software of the nature of discs, floppies and CD-ROMS. It was held that software sold along with the computer cannot be included in the assessable value of the computer for the purposes of excise duty. The Honble Supreme Court cited the example of cassette recorder and a cassette to state that though cassette is required for functioning of cassette recorder, these are two distinct articles. In the present case we are dealing with pre-loaded/embedded software in the memory unit which is an integral part of the Printed Circuit Board inside the Fixed Wireless phone. The reasoning and ratio of the apex court in the above decision are not applicable to the present case. In PSI Data Systems Ltd. vs. CCE (supra) it was not the contention of the appellants that the firm or etched software that is implanted into a computer is not to be taken into account in the valuation thereof for the purpose of excise duty.
In Anjaleem Enterprises Pvt. Ltd. vs. CCE, Ahmedabad (supra) Honble Supreme Court had occasion to examine the software programme which was claimed to be in the recorded medium found inside the STD PCO unit. The Honble Supreme Court held that the IC or a chip cannot be compared to a floppy which is merely a storage device similar to an empty box or suitcase. The Apex court observed :
22. The question which remains to be answered is whether a? programmed EPROM is a recorded media under CH 85.24. It was argued before us that like CD-ROM or a floppy which has a programme in it, EPROM is also a programmed device. It was argued that blank EPROMs were purchased in which the appellant embodied its programme and, therefore, the recorded EPROM constituted a recorded media under tariff item 85.24.
23. We do not find any merit in this argument. In a disk? operating system, the basic input is stored in a ROM which is transferred to RAM when the system gets started. The input/output routines are written into the IC at the factory. The point to be noted is that the ICs which contain semiconductor components like diodes etc. have got to be embedded in the mother board. The ROM chip is fixed at the factory. The chip is fixed in the computer and only then the programme works. Hence, this is basic difference between a mere floppy which is a recorded media under CH 85.24 and the IC under CH 85.42. In the former case, the program is a software because a floppy is a storage in which software plays the dominant role whereas in the case of IC the programme is embodied in the IC which can perform various functions only when fixed to the mother board and is not removable like a floppy from VCR. According to Encyclopaedia of Technology Terms by Whatis.com, an IC can function as an amplifier, oscillator, timer, microprocessor etc. On the other hand, a floppy disk is only a storage. Moreover the essential character of IC does not change with the programme being embedded in the IC and hence the IC remains classifiable under CH 85.42. This distinction is also brought out by tariff items referred to above (See: Dictionary of Computing by Prentice Hall).
24. An embedded system is a programmed hardware device.? Software written for embedded systems, especially those without a disk drive is called Firmware, the name for software embedded in hardware devices e.g. in ROM IC chips. Many embedded systems avoid mechanical moving parts, such as, disk drives, switches or buttons because they are unreliable as compared to ROM or Fast Memory IC chips. It is kept outside the reach of humans. In embedded systems, the software resides in ROM IC chips. Embedded systems are combination of hardware and software like ATMs, Cellular telephones etc. In embedded systems, the software resides in ROM IC Chip (See: www.answers.com). These chips are more than mere carriers. Example of embedded system: microwave ovens, cell phones, calculators etc. The Honble Supreme Court examined and distinguished their earlier findings in PSI Data Systems Ltd. vs. CCE (supra) and Sprint R.P.G. India Ltd. vs. CC-I, Delhi (supra) and held that in these cases the question of integrated circuit did not arise and interpretation of entry 85.42 was not at all considered.
The Apex Court further examined the decision in CCE, Pondicherry vs. Acer India Ltd. (supra) and distinguished the same as not applicable to facts of the case of STD PCO telephones. It was held that the software loaded in the IC Chip, constitutes the brain of the system. The levy is on the unit and not on the programmed EPROM. The programme embedded is not easily removable. Hence, the Apex court held that it will not fall in the category of recorded media under Tariff item 85.24 and remains an IC under Tariff Item 85.42.
The present appeals deal with Fixed Wireless phones, with PCB inside, a part of which is claimed as a recorded media for software. As examined with technical literature earlier in the order, the logic/programme loaded in the said memory unit is the fundamental necessity for the function of the FW telephone. It cannot be compared to any optional or identifiable software as a recorded media. Such software as available for computers are nowhere comparable to the programme software pre-loaded in the memory chip of the PCB.
The appellants further relied on decisions of Honble Supreme Court in CC, Chennai vs. Hewlett Packard India Sales (P) Ltd. (supra) and Commissioner vs. Barber Ship Management (I) Pvt. Ltd. (supra). Both these cases dealt with classification of software installed in hard disk within computer. These decisions are not applicable to the facts of the present case as already explained above with specific reference to Honble Supreme Courts order in Anjaleem Enterprises Pvt. Ltd. vs. CCE, Ahmedabad (supra). We are dealing with a memory unit which is part of the main PCB of the telephone, not a hard disk as a storage device/recorded media in a computer.
The decision of the Tribunal in Vodafone Essar Gujarat Ltd. vs. CC (Imports), Mumbai (supra), relied upon by the appellant, is regarding software presented in a recorded media in the form of tapes/CDs as well as in the hard disk contained in the hardware. The software in that case is not embedded or contained in ROM or EEPROM or in the microprocessor chips. The reasoning given in the said decision is therefore inapplicable to the facts of the present case.
As held by the Tribunal in Bharti Airtel Ltd. vs. CC, Bangalore (supra) and by the Honble Supreme Court in Anjaleem Enterprises Pvt. Ltd. vs. CCE, Ahmedabad (supra), in the matter of valuation, one of the important aspects to be taken into account is the condition of the goods at the time they leave the factory. The memory unit/chip is an essential part of PCB inside the telephone and is an integral functional component. Hence, in the present case there are no two items for valuation. The item of import is FWT and as such should be subjected to classification and assessment accordingly.
Revenue relied on the decision of the Tribunal in Jabil Circuit India Pvt. Ltd. vs. CCE, Pune reported in 2014 (307) E.L.T. 891 (Tri. Mumbai), where the Tribunal considered inclusion of the cost of software loaded in the Flash memory chip inside the Set Top Boxes (STB). The Tribunal observed :
5.12 The next? question for consideration is with regard to the inclusion of cost of software which were downloaded and incorporated in the flash memory chip which was soldered onto the PCB of the STB. As per the literature available, flash memory is EPROM (Erasable Programmable Read Only Memory) and is an integrated chip. Thus, it is a rewriteable memory chip on which programmes are written with an external programming device before being placed on the PCBs. Thus, the flash memory is an integral part of the STB and therefore, its cost would include the cost of software loaded on to it. It is in this factual context, the decisions relied upon by the appellant have to be examined. The appellant has relied on the decisions of the Apex Court in the case of PSI Data Systems and Acer India Ltd. wherein it was held that software has independent existence and has to be classified separately as a recorded media falling under CETH 85.24. It is also contended that Note 6 to Chapter 85 also provides that records, tapes and other media of Heading 8523 or 8524 remain classified in those headings, when they are presented with the apparatus for which they are intended. The said note was deleted with effect from 1-1-2007 and no longer applies. The PSI Data System and Acer India Ltd. cases dealt with a situation where computer software was stored in a Hard Disk of the computer and the question arose whether the value of software could be included in the value of the hardware. In that context, the Honble Apex Court held that the value of software sold along with the computer is not includible in the assessable value of the computer since there is a distinction between a computer and its software. However, these decisions of the Honble Apex Court later on came to be examined in the case of Anjaleem Enterprises Pvt. Ltd. by the Honble Apex Court where the software was recorded on an EPROM. The Honble Apex Court held that EPROM cannot be compared to a floppy which is only a dump box. EPROM is basically an integrated circuit or chip and classifiable under CETH 8542. Accordingly, it was held that the value of software embedded in the programmed EPROM, which is an integral part of the system is includible in the value of the goods supplied. In the case before us, the flash memory is not the goods under clearance but it is the STB. The memory chip has been soldered onto the PCB of the STB and is not easily removable. The programme embedded in the flash memory is also not removable. Therefore, it will not fall under the category of recorded media under CETH 8424. In view of the above position, the ratio of the decision of the Honble Apex Court in the case of Anjaleem Enterprises Pvt. Ltd. would be more appropriate and correct in the facts of the case before us. This ratio of the Apex Court was followed by this Tribunal in the case of Avaya Global Connect Ltd. (supra) wherein also it was held that software supplied along with system, namely, EPROM, as embedded in the system becomes an integral part and the value of such software is includible in the assessable value of the system supplied. This Tribunal further held that when the software is embedded in the system and becomes an integral part of the equipment, it is not a case of charging duty on software but it is a case of charging duty on the equipment which includes the value of such basic software. In the Hewlett Packard Sales (P) Ltd. case, the Honble Apex Court once again reiterated the above view, wherein it was held that pre-loaded operating systems software in the Hard Disk Drive of the laptop forms an integral part of the laptop and therefore, the cost of such pre-loaded software forms part of the value of the laptop. Accordingly, the Honble Apex Court held that when a laptop is imported with inbuilt preloaded operating system recorded on the hard disk, the said item forms an integral part of the laptop and has to be classified as laptop and not as computer software separately. Applying the ratio of these decisions to the facts of the present case, it becomes abundantly clear that the cost of software which has been loaded on to the flash memory which in turn has been soldered onto the PCB of the STB forms an integral part of the STB and therefore, the value of the STB shall include the value of such software also.
Close analysis of the ratio and finding in the several precedents placed before us, lead to the compelling conclusion that in the present case, the Fixed Wireless phones as imported require to be classified and assessed as phones with no segregation of value assignable to the software separately, as claimed by the importers.
Interest Liability :-
The appellants contested the interest liability in the present case. The imports took place in 2003-2004. The goods were assessed provisionally to duty and were allowed to be cleared in terms of Section 18 of the Customs Act, 1962 on execution of PD Bonds. Learned Counsel for the appellants emphasized that prior to 13/7/2006, there was no provision authorizing collection of interest on differential duty arising on finalization of a provisional assessment. He relied on the decision of Honble Supreme Court in Jaswal Neco Ltd. vs. CC, Visakhapatnam (supra). Learned AR on the other hand submitted that interest liability is compensatory in character and relied on the decision of Honble Supreme Court in Commissioner of Trade Tax, Lucknow vs. Kanhai Ram Thekedar (supra) and Honble Allahabad High Court decision in BHEL vs. CC & CE, Kanpur (supra) and Honble Karnataka High Court decision in CC, Bangalore vs. Pierre Colsun Inc. (supra).
We find that the impugned goods in both the sets of appeals were released on payment of provisionally assessed duty in terms of Section 18 of the Customs Act, 1962. Sub-Section (3) of the said Section was incorporated by Section 21 of the Taxation Laws (Amendment) Act, 2006. The said sub-Section reads as under :-
Section 18 (3) :- The importer or exporter shall be liable to pay interest, on any amount payable to the Central Government, consequent to the final assessment order [or re-assessment order] under sub-section (2), at the rate fixed by the Central Government under Section 28AB from the first day of the month in which the duty is provisionally assessed till the date of payment thereof.
We find that the Honble Supreme Court decision in Jaswal Neco Ltd. vs. CC, Visakhapatnam (supra) ruled that levying interest can only be by a substantive provision, thereby making it clear that such levy can only be prospective. The Honble Apex Court referred approvingly to the decision of Honble Gujarat High Court in CC (Preventive) vs. Goyal Traders reported in 2014 (302) E.L.T. 529 (Guj.) as under :-
17.?In the present case, we find that prior to introduction of sub-section (3) of Section 18 of the Act in the present form, there was no liability to pay interest on difference between finally assessed duty and provisionally assessed duty upon payment of which the assessee may have cleared the goods. It was only with effect from 13-7-2006 that such charging provision was introduced in the statute. Upon introduction therefor such provision created interest liability for the first time w.e.f. 13-7-2006. In absence of any indication in the statute itself either specifically or by necessary implication giving retrospective effect to such a statutory provision, we are of the opinion that the same cannot be applied to cases of provisional assessment which took place prior to the said date. Any such application would in our view amount to retrospective operation of the law.
We also find that the Tribunal in Sterlite Industries (India) Ltd. vs. CC, Trichy reported in 2014 (311) E.L.T. 91 (Tri. Chennai) held that in respect of provisional assessment prior to 13/7/2006 interest would not be leviable by invoking Section 18 (3) of the Customs Act, 1962.
We find that precedents referred to by Revenue are not applicable to the facts of the present case. In Commissioner of Trade Tax, Lucknow vs. Kanhai Ram Thekedar (supra) the Honble Supreme Court was dealing with need for issuing separate demand for recovery of interest. In BHEL vs. CC & CE, Kanpur (supra) the Honble Allahabad High Court was dealing with provisions of Rule 7 (4) of Central Excise Rules, 2002 readwith Section 37 (2) of the Central Excise Act, 1944, the Honble High Court held that the interest is compensatory in nature and becomes due when the duty payment was not made in time. In CC, Bangalore vs. Pierre Colsun Inc. (supra), the Honble Karnataka High Court was dealing with the obligation to pay interest in terms of Section 28AA. We find that in the present case, there was provisional assessment which was later finalized. Since, at the time of resorting to the provisional assessment there was no statutory provision authorizing imposing of interest on the differential duty, (the provision which was introduced w.e.f. 13/07/2006) there is no interest liability in these cases.
Redemption fine :-
Learned Senior Counsel for the appellants contested confiscation of impugned goods and imposition of redemption fine on the same. He submitted that there was no seizure at all or ever, either of the phones or the CD-ROMS imported by the appellants. Appellants had not executed any bond for provisional release of any goods in terms of Section 110A of the Customs Act, 1962. He further submitted that the bond mentioned by the Original Authority in his order dated 18/8/2006 is for the clearance of goods on payment of provisional duty. In the present case in the absence of any seizure thereafter provision release of goods under bond, confiscation or imposition of redemption fine are not sustainable. We find that reliance placed by Revenue on the decision of Honble Supreme Court in Weston Components Ltd. vs. CC, New Delhi (supra) is misconceived. In the said case, there was a seizure and provisional release against a bond, undertaking to produce the goods when called for. In such situation, the Honble Supreme Court held that redemption fine can be imposed if the goods are already cleared. Since, such release of goods is on execution of bond such fine was justified. We find that the Honble Punjab & Haryana High Court in CC, Amritsar vs. Raja Impex (P) Ltd. reported in 2008 (229) E.L.T. 185 (P&H) held :-
12.?It may also be noticed here that in the case of M/s. Weston Components Ltd. v. Commissioner of Customs, New Delhi (supra), the goods were released to the assessee on an application made by it and on the execution of a bond by the assessee and in those circumstances, the Honble Apex Court held that the mere fact that the goods were released on the bond being executed would not take away the power of custom authority to levy redemption fine. A reading of the judgment/order of the Honble Apex Court in M/s. Weston Components Ltd. v. Commissioner of Customs, New Delhi (supra), would show that the Apex Court has taken the view that redemption fine can be imposed even in the absence of the goods as the goods were released to the appellant on an application made by it and on the appellant executing a bond. Since the goods were released on a bond the position is as if the goods were available. The ratio of the above decision cannot be understood that in all cases the goods were permitted to be cleared initially and later proceedings were taken for under-valuation or other irregularity, even then redemption fine could be imposed. We are, therefore, not inclined to accept the contention raised by the appellant on this issue and set aside the redemption fine.
13.?The reliance of learned counsel for the revenue upon the provisions of Section 125 of the Act is also misconceived. Section 125 of the Act is applicable only in those cases which have been cleared by the concerned authorities subject to furnishing undertaking/bond etc. However, in the present case, admittedly, the goods were cleared by the respondent-authorities without execution of any bond/undertaking by the assessee. Thus, in view of the fact and circumstances of the case, we find no error in the impugned orders. No substantial question of law arises for our determination in the present appeal and the same is hereby dismissed.
Further, learned Counsel pleaded that the fine is payable, if at all, only on redemption of goods. Here there is neither a seizure nor provisional release under bond and, hence, the question of payment of redemption fine either to release the goods or in terms of the bond does not arise. We find that there can be no redemption fine in the absence of any seizure or provisional release of such seized goods under proper bond. In the present case in the absence of such events, redemption fine imposed is not sustainable.
Penalties :-
Learned Counsel contested imposition of various penalties on different appellants. He submitted that no penalty can be imposed under Section 114A of the Customs Act, 1962 as the present impugned orders can only be considered as relatable to Section 18. Section 114A can apply when there is a demand under Section 28. He further submitted that the issue involved is one of pure interpretation of statutory provisions and as such there could be no ground for imposing penalty. Learned Counsel mentioned that the Commissioner of Central Excise, Goa in his order dated 27/4/2004 did not impose any penalty, as the issue involved was only regarding classification of software and assessment thereof.
We find that at the time of original proceedings before the Commissioner, Goa or during further appellate proceedings before the CESTAT, Mumbai, the detailed investigation and the evidences gathered therefrom by the Department are not available for consideration. As seen from the impugned order dated 18/8/2006 of the Commissioner, Hyderabad II, the Department collected various evidences after detailed investigation involving contract documents, correspondence, E-mails, statements of various persons involved in the import etc. These evidences were examined in the impugned order passed by the Commissioner, Hyderabad II, which was carried in appeal to CESTAT, Bangalore Bench. In both original and the appellate proceedings these evidences have been examined. Regarding the statement of learned Senior Counsel that it is a case of finalization of provisional assessment, we find that after a detailed investigation the show cause notice to the appellants relating to imports invoked the penal provisions. In a case before the investigation, the Commissioner, Goa, did not impose penalty. In the case of Hyderabad, the Commissioner impose penalties on the appellant/assessee in terms of Section 114A and on the various individuals under Section 112 of Customs Act. We find that the penalty imposed under Section 114A was equivalent to the differential duty payable which was worked out in terms of Rule 5 of Customs Valuation Rules, 1988 readwith Section 14 (1) of Customs Act, 1962. Penalty under Section 114A is imposable in cases where duty has not been levied or has been short levied by reason of collusion or any willful mis-statement or suppression of facts. The person who is liable to pay duty as determined under sub-Section (8) of Section 28 shall be liable to pay penalty equal to the duty so determined. We find in the present case, the duty has not been determined under Section 28 of the Customs Act. The differential duty was determined in terms of Section 14 (1) [without any reference to Section 28] of the Customs Act for which invoking Section 114A is not legally tenable. As such, considering that the main appellants are held to be not liable for penalty in view of the above legal position, we find that the individual appellants are also not liable for penalty. Here we note that the Original Authority had imposed a penalty of Rs. 20,00,000/- on M/s L.G. Electronics and Rs. 1,00,000/- on HUAWEI under Section 112 of the Customs Act. These two companies were the exporters of the impugned goods from Korea and China. Against the original order, on their appeal the Tribunal set aside the penalties on them. They were not parties to the further appeals before the Honble Supreme Court. We find that these two appellants in the first round of decision by the Tribunal are not liable to any penalty as there was no justification for the same.
Summing up :-
For the reasons and on the analysis above;
(a) We uphold the impugned orders in so far as they relate to valuation and assessment of imported Fixed Wireless Telephones (FWT) considering them as single goods for assessment without any segregation of value for software ;
(b) the appellant/assessees are not liable to interest, redemption fine and penalties ; and
(c) Penalties on other appellants (individuals and the exporting companies) are also found unsustainable.
All the appeals are disposed of in the above terms.
(Order pronounced in the open court on 17/02/2016.) (Justice G. Raghuram) President (Sulekha Beevi C.S.) Member (Judicial) (B. Ravichandran) Member (Technical) PK 2