Customs, Excise and Gold Tribunal - Bangalore
M/S Digital Equipment (India) Ltd., ... vs Collector Of Customs, Bangalore on 8 February, 2001
Equivalent citations: 2001(75)ECC580
ORDER Shri S.S. Sekhon, Member (T)
1. Appellant No 1 is a company (here in after referred to as DEIL), engaged in manufacture, distribution of Hardware and import Software (media & documentation) catering to the Information Technology (here in after referred to IT) needs in India. It is joint venture, between Digital Equipment Holding b.v. The Netherlands (here in after referred to as DEH) which is subsidiary of Digital Equipment Corporation (hereinafter referred to "DEC") and Hinditran Group of Companies. Appellant No 2 were then the Managing Director of 'DEIL'.
2. (a) 'DEIL' imported software media & documents through Regular Customs Channels. It also imported the Software Media & Documentation through Regular Custom Channels. It also imported the Software licenses, stores on TK-50 cartridges cleared the same by declaring them on the Bill of Entry filed, as blank unrecorded magnetic tape cartridge, falling under Chapter heading 8523 at a nominal value of Us $ 32.40, cleared the same, on duties as applicable assessed. For subsequent period, they obtained these software licenses data from; 'DEC' through ELECTRONIC MAIL NETWORK, directly at their factory.
(b) The DRI officers working out a specific information. Investigated the imports made and a Show Cause Notice dt 30.6.93 was issued as from investigation made it appeared-
"From the foregoing investigations, it appears that the computer package/products imported by DEIL from DEC, USA consisted of three elements viz. Media such as a floppy disc or a tape cartridge or a tape spool on which the software data/programme is stored; documents and manuals which explains the way of using the software; and a license to use the said computer software package/product. Therefore, all these software package/product. The international price list of DEC, USA gives the price for software Media and documents separately under a product code starting with letters "QA...." also known as QA parts and the price for licenses relevant to the software products/packed under a product code starting with letters "QL...." also known as QL part. Prior to June 92 DEIL were importing software media and documents i.e. QA parts and their respective licenses ie QL part either together or separately at 35% of USCLP and were paying appropriate customs duty (to illustrate this point, few sample bill of entry and relevant invoices and a sample price list of DEC, USA are enclosed as annexure (52). It appears that the distribution of value of the Media and documents and license is about 20% and 80% respectively of their purchase price of software package. Consequent to the press note dated 17.3.92 of DOE, it appears that DEIL stopped importing 'QL' part in respect of software products approved by DOE for purpose of duplication and were only importing 'QA' part through regular customs channel and the 'QL' parts were being received either stored in cartridges or through their Electronic Mail net work. It further appears that each 'QA' part has a different types of 'QL' parts depending on the number of users and the capacity of the machine on which a particular software product is being used. It further appears that each 'QL' part is nothing but a license PAK or a license cartridge, which actually gives the KEY in the form of 'CHECKSUM' to open the software on a Media and access it (QA part). It is admitted by one and all that one cannot be used without the purchase of the other. From the pricing policy of DEO, USA it appears that though a customer may have a 'QA' part which is priced at 20% of the entire software package, he cannot use the same or access the software on the Media, unless he pays for and purchases the relevant 'QL' part which is around 80% of the value of the software package, which comes in the form of a sheet of paper on which details of checksum and other details are given as 'KEYS' to open and access the software which is already, on the MEDIA. It further appears that without relevant 'QL' part, 'QA' part is useless and that both 'QA' and 'QL' are integrally related.
Moreover, it appears that DEIL were importing as mentioned earlier 'QA' parts of the various software products/package in bulk and when ever they find a customer, they used to place order on DEC and import the 'QL' part i.e. License PAK/License Certificate, which is specific and unique to a customer. These two parts of the software product were being cleared through customs after payment of appropriate customs duty. It appears that DEIL were finding this procedure difficult when a customer cancelled an order after import of a 'QL' part, which is unique and specific to him. Therefore, it appears that in order to avoid such situations, DEIL in understanding with DEC, USA, started importing a 'RIGHT TO USE CERTIFICATE RTUs since 1990 without any customer's name on it, in the name of 'QL' part and cleared the same through customs. Subsequently is appears that when DEIL found a customer they used to send a request to DEC to send the requisite license PAK/License certificate either through FAX or through courier, for which no payment was made and no customs clearance was done and the invoices for 'QL' parts were mad and paid for through the respective connected RTUs; that for some period .....mechanism for DEIl to pay for the value of 'QL' part to and serves no other purpose. It further appears that a customer pays for the access to the software which is provided in this license PAK/License certificate which is construed as 'QL' part by DEC and that when any customer in India orders 'QL' part on DEC, he physically gets license PAK]License certificate. Further, DEIL in their letter DBK/SW/REEX/2/ACC dated 23.2.1992, addressed to the Assistant Collector of Customs, Air Cargo Complex, Bangalore have informed in para 4, that "regarding the subject re-export for some software document. Digital, USA has sent PAK and for some they have sent Right to Use. PAK and Right to use are having the same value and utility". (Ann.53).
WHEREAS, it appears that DEIL were purchasing these 'QA' parts and 'QL' parts of the software package/products at 35% of the respective USCLP of DEC, USA. This is as per the price list, invoice and the admissions made by DEIL's top executives. After receiving the DOE approvals for duplication of certain types of operating system software and layered software, DEIL continued to import the 'QA' part of the software package/products which is invoiced at 35% of the respective USCLP and got the relevant license PAKs or license certificate i.e., 'QL' part of the software products either stored in cartridges or through their Electronic Mail [4 (vi)]. The procedure of import of RTUs were dispensed with in itself formed a complete 'QL' part. It was also indicated that these licenses PAKs are relatable to the 'QA' part i.e., Media and documentation, which DEIL had imported earlier.
WHEREAS, it appears that DEIL in the first place had not imported any Media masters or license Masters or documents Masters till March, 93 for the purposes of duplication, as approved by DOE. Further, it appears that application made by DEIL to DOE is ....for seeking permission to duplicate the software products and not for more license PAKs. The approvals given by DOE to DEIL is to duplicate the software product/package. The agreements entered into by DEIL with DEHAV, for the duplication of computer software product/package also explicitly mentions about the import of a Master copy of the software package inclusive of Media, documents and license, in physical form, for the purpose of duplication. Further, it also appears from the opinions given by NASSCOM, I.I.Sc., Wipro and ITC and the definitions given in the Dictionary on Computers by MACGRAWHILL and ISO 9000 standards, that software is a set of programs encoded on media, which requires to be duplicated, in order to qualify for duplication of computer software. In the instant case, it appears that such software data is on the Media, which forms part of 'QA' product, which are required to be duplicated in order to qualify for duplication of computer software, as approved by DOE. Further, it also appears that DEIL has not duplicated any 'QA' part and therefore, it appears that DEIL has not duplicated the software as 'the intellectual property' which is encoded on the Media. DEIL with the help of a laser printer have only taken print out of the license PAKs from the license PAK files received in the cartridges or through the Electronic Mail from DEC which does not amount to physical duplication of computer software products as stipulated n DOE's software duplication policy and as understood by Trade and others, discussed above. Further, it appears that each; license PAK is unique and specific to a customer and hence there is no question of duplication of such license PAKs duplicated the Media which has the software encoded on it, nor the documents nor the license in view of the position explained above. Thus the activity undertaken by DEIL as far ie., printing of the license PAKs/Certificates form cartridges imported or E. Mail received from abroad does not amount to duplication, leave alone duplication of computer software. However, it appears that DEIL has paid DEC US $ 2,57,250 towards the license fees/royalty in respect of software licenses so imported through cartridge or through E. Mail and that DEIL has receive authorisation from RBI to further remit US $ 1,47,774 towards the license fee/royalty. Whereas it appears from the position explained above, the payment already made i.e., US $ 257250 and the payment to be made i.e., IS $ 147774 and the further payment payable for the subsequent quarters are all nothing but payment towards the 'QL' parts of the software i.e., Software Licenses and not towards the royalty payable on account of duplication of computer software products as there was NO duplication of computer software by DEIL. Further, this position has been clarified by Mr. Art Fischer of DEC, in his Electronic Mail dated 13.4.92 to Mr. V. Vijal of DEIL, as discussed at para 4 (v) (6) (A).
Further, it appears that the license PAKs/License certificates printed locally, which were received either through cartridges or through their Electronic network, were supplied to DEIL's customers along with the Media and documents i.e. 'QA' part which were either imported earlier or subsequent. It also appears that one cannot be used without the purchase of other or vice versa. In other words, thee is no use of purchasing only one part i.e., 'QA' part or 'QL' part. Further, 'QL' part is nothing but an authorisation to use the 'QA' part which is the software. Therefore, it appears that each license PAK/License certificate is relatable to a 'QA' part i.e., Media and documents. Therefore, each customer has to necessarily buy both the 'QA' part and the respective 'QL' part, in order to use the software. This is further substantiated by the statement furnished by Mr. O.K. Venkatarmanan, showing the sale of 'QL' parts imported either through the Cartridges or through E.Mail along with a relevant 'QA' part imported through regular customs channel (Ann.). Therefore, it appears that the value in respect of 'QL' part of the software product is paid/payable in the guise of license fee/royalty and the same is relatable to the 'QA' part i.e., Media and documents portion of the software package, which were imported earlier, through regular customs channels and therefore, it appears that it should form part of the value of the imported computer software product in terms of Section 14 of Customs Act 1962 read with Customs Valuation Rules, 1988. The investigation reveals that software license which formed integral part of the imported software product had all along suffered duty when they were imported by DEIL through normal import channel; that after DOE approval, the software licenses i.e. QL part is now also imported from DEC through misdeclared TK 50 cartridges/E. Mail; that therefore there is no reason as to why the software license so imported from DEC through a different rout/channel and which formed part of imported media and documents ie. QA part, should not suffer duty. It further appears that but for DOE approval for duplication of computer software, which was not physically done by DEIL, DEIL would have imported the relevant 'QL' parts of the software products at 35% of the respective USCLP and paid duty. Therefore, it appears that proper value of software so imported from DOE through TK 50 cartridges and E. Mail should be 35% of the respective USCLP and that customs duty is leviable on them as they have not suffered customs duty.
WHEREAS it appears that in view of the time involved as per documents V (16), DEIL got the license PAKs for a certain period stored in TK-50 cartridges as per the request sent by Mr. O.K. Venkataramanan (Doc. VI) and imported the same and cleared through Air Cargo Complex, Bangalore, by misdeclaring the same as "MAGNETIC TAPE CARTRIDGE" and classifying the item under Chapter heading 8523.90 as BLANK/UNRECORDED MEDIA, which is contrary to the facts. It also appears that DEIL have not declared the true contents of the cartridges as also its true under Section 46 of the Customs Act, 1962.
Ii further appears that since the value of licenses PAKs/Licenses certificates contained in the said two cartridges are being paid through the royalty route, the same was not declared to the customs. Further it appears that in the normal course of import, the value of such 'QL' parts, for DEIL would have been 35% of the USCLP, for each 'QL part and that total value of the said cartridges are more than RS 1 crore and not Rs 1237 as declared. Therefore, it appears that the two cartridges seized on 1.4.93 are liable to confiscation as per the provisions of Section 111 (m) of the Customs Act, 1962.
Whereas, from the above, it appears that DEIL has willfully, suppressed the above facts of not physically duplicating the software products to the Government departments including customs department and have mis-represented the facts to DOE in order to get the approvals and have mis-utilised the DOE approvals and the software duplication scheme for evading customs duty. They have paid the DEC the license value in the guise of royalty/license fee. DEIL have neither imported the master copy of the software for the purposes of duplication nor have they duplicated the software products. In view of the above, it appears that they have also flouted the important conditions of the DOE approvals. Even the conditions appearing in the agreements entered into between DEIL and DEHBV have not been completed with as regards supply of Masters of Media, license and documentation till March, 1993 by which time the two approvals of DOE were almost exhausted. It also appears that DEIL have suppressed/misrepresented the actual contents/values of the TK-50 cartridges. It further appears that DEIL has suppressed to customs the fact of import of software license through E.Mail for certain periods. In terms of Section 28(1) of the Customs Act, 1962 read with provisions thereon and read with Rules 5 and rule 9 of Customs Valuation (Determination of Rules, 1988. DEIL is liable to pay duty as applicable on these software licenses aforesaid in as much as they have willfully suppressed the actual facts of import of software licenses through TK-50 Cartridges or E.Mail and misused the software duplication scheme to evade payment of customs duty on the major portion of the software products value without physically duplicating the computer software products as approved by DOE as discussed above. The duty payable by DEIL in respect of the licenses generated and printed and supplied to the customers in respect of the media and documentation imported earlier is as per the work sheets at Annexure 57.
Whereas DEIL have rendered themselves liable to penalty under Section 112 (a) (V) of the Customs Act, 1962, in as much as they have concerned themselves in importing 'QL' parts of the software without payment of customs duty either stored in TK-50 cartridges by mis declaring the same as 'BLANK' TAPE CARTRIDGES' which is under seizure, or through E-Mail facility. Therefore they have concerned themselves in dealing with the goods which are liable to confiscated under Section 111 (m) of the Customs Act, 1962, as well as Evasion of substantial customs duties on that portion of the value of the software which is attributable to the 'QL' part of the software.
Whereas Mr. Mike A Shah, the Managing Director of DEIL, has masterminded the entire scheme of duplicate of computer software, signed the software duplication and distribution agreements, corresponded with the foreign supplier DEC, and was aware of the govt., requirement with regard to duplication of computer software. Further, he has admitted in his statement that DEIL has not duplicated the computer software. Entire correspondence discussed earlier indicates that he was aware of the minimum requirements of the duplication of computer software and that DEIL is not fulfilling them, which led to substantial evasion of customs duties as also rendered the seized cartridges (which were mis-declared to the customs), liable to confiscation under section 111 (m) of the Customs Act 1962. Therefore, as a Managing Director of DEIL, and in view of his involvement in the scheme of things discussed above, Sri Mike Shah is responsible for commission of the acts on behalf of the company DEIL, directly or indirectly, which has rendered the goods liable to confiscation under Section 111 (m) of the Customs Act, 1962 and thereby Sri Mike Shah has rendered himself penalty under Section 112 (a) (v) of the Customs Act, 1962.
NOW, THEREFORE, DEIL and Mr Mike A Shah are hereby called upon to Show Cause to the Collector of Customs, Karnataka Region as to :-
(i) Why the two TK-50 Cartridges containing licenses for the Q3 and Q4 period of FY 92 which was mis-declared to the Customs Authorities as 'BLANK TAPE CARTRIDGES', but the time of its clearance at Air Cargo Complex, Bangalore, vide B/E No 014408 dated 27.6.92 valued at Rs 2,21,51,348/- should not be confiscated under the provisions of Section 111 (m) of the Customs Act, 1962 for the reasons stated above.
(ii) Why an amount of Rs 4,57,27,947/- being the duty on the software value which was attributed to the 'QL' parts should not be demanded from them under the provision of Section 28 (1) of the Customs Act, 1962 being the duty short levied due to willful mis-statement and suppression of facts and by mis-using the scheme of software duplication to evade customs duty, without actually duplicating the computer software products.
(iii) Why penalty should not be imposed on each of them under section 112 (a) (v) of the Customs Act, 1962"
(c) The Commissioner after concluding the hearing and considering the matter found-
"I have carefully gone through records of the case and heard the arguments of the learned Counsel for the party. I have also gone through the records of the personal hearings, the interim and the final replies filed by the party.
The issue to be decided is as to whether the TK-50 cartridges under seizure has been mis-declared and if so whether they are liable for confiscation. Further, whether the importer - DEIL had evaded duty on the value of Computer Software which is attributed to the license and whether they had violated any of the provisions of Customs Act, 1962, as charged in Show Cause Notice.
The TK-50 cartridges under seizure had been imported vide Bill of Entry NO 014408 dated 27-6-92. I find that in the said bill of entry, the two TK-50 cartridges had been sought to be classified under Customs tariff heading No 85.23. Heading 85.23 of the customs tariff covers prepared unrecorded media for sound recording or similar recording of other phenomena. Whereas I find from the mahazar drawn for the seizure of the two cartridges that they were recorded tape cartridges and out of this, several license PAKs were printed and seized. The learned counsel had also admitted that TK-5- cartridges under seizure contained information in the form of Alpha numeric codes. Therefore, it is amply evident that the TK- 50 cartridges under seizure contained recorded phenomena and hence the importer ought to have been rightly classified the cartridges under Customs tariff heading No 82.24 and not under heading No 85.23 as declared and assessed. I, therefore, find that there is a clear misdeclaration of the description of the items at the time of import, contrary to the provisions of Section 46 of the Customs Act, 1962. The various E-Mail received by the importer in this regard and relied upon in the Show Cause Notice amply prove that the importer was aware of the contents of the two TK-50 cartridges are liable for confiscation under the provisions of Section 111 (m) of the Customs Act, 1962. It is seen that the learned counsel had argued that there were contradictory charges in the Show Cause Notice with regard to the classification of the two TK-50 cartridges. It was further argued that if the case of the Department was that this was an issue of classification of import of goods viz., TK-50 Cartridges and its valuation. Then it was necessary for the Department first to establish that the PAK information contained in the TK-50 cartridges is 'SOFTWARE" classifiable under heading No 85.24 and thereafter it was necessary for the department to establish that this PAK information made a value. I have carefully one through the Show Cause Notice, it was a alleged that the two TK-50 cartridges under seizure contained software. But, at the same time it had been alleged that, it was a recorded media and hence should have been classified under heading No 85.24 of Customs tariff instead of heading No 85.23. Further, I am unable to accept the contention of the learned counsel that the Department should prove that the TK-50 cartridges contained software, to classify under heading No 85.24 because, the customs tariff heading No 85.24 not only covers software, but also covers any other similarly recorded media including audio and video. I am therefore, unable to accept the contentions of the learned counsel that, there were contradictions in the Show Cause Notice with regard to this. The two TK-50 cartridges under seizure are rightly classifiable under chapter heading No 85.24 of the Customs Tariff as it contained some recorded information as discussed above, in the form of tapes. I am also unable to accept the contentions of the learned counsel that in order to classify a product under Chapter heading No 85.24 there has always to be a commercial value for it, in as much as the Section notes and the chapter notes as well as the scheme of the Customs Tariff does not fix any such conditions for classification of an item under the Tariff schedule. Incidentally, the PAK information has potential commercial value as finally licenses are issued and sold by DEIL to consumers based on generation of licenses based on PAK information, if not why should DEIL import such PAK information at all?
It is admitted fact that the software package consists of a carrier media on which the software is recorded, the accompanying user manuals and a license to use the software. In the case of DEEc and DEIL, the software generally imported consists of two parts ie. QA part and QL part. The QA part consists of the Media on which software is record along with the user manuals. The QL part is nothing but the license. Both of them from the integral part of a computer software. I find from the price list of DEC that, QA part is separately priced and QL part is separately priced. This is because if studied carefully, the price lists and other documents relied upon, for a particular QA Part, there can be a number of QLs depending upon the capacity of the machine used and the number of users. That is to say that for a particular software package, the price of QA is constant and the respective QL price varies on the above count. I find that DEIL were importing the above two parts of the computer software separately at 35% of the USCLP and were classifying both under the chapter heading No 85.24, whenever imported either together or separately, as one is compliment to the other. It is seen that DEIL obtained permission from the department of Electronics (DOE) for duplication of computer software. Subsequent to this, they had imported only the QA parts of such permitted software through customs channel and claimed that they have duplicated the QL parts locally. But I find that DEIL have duplicated that QL parts locally. But I find that DEIL have neither imported the masters of the software duplication nor have done any duplication in as much as QL parts which is a license and specific to a customer cannot be duplicate. It is seen that they have resorted to the import of such QLs either stored in the TK-50 cartridges or through E-Mail facility in the factory instead of importing through the regular customs channels. The seizure of the two TK-50 cartridges and subsequent print outs taken has amply proved the allegation. For such imports, they have paid for in the royalty route of 20% of the USCLP.
It is also an admitted fact that for a certain period they had obtained the PAKs through the E-Mail, for also they had paid for under the said royalty route.
It is argued by the learned Counsel that the PAK "product authorisation key" received is nothing but a printed paper and should have been classified under chapter hading 49 and that the payment of duty on such QLs at the time of import earlier was incorrect and same cannot be taken advantage of for alleging that the value of Qas is to be enhanced. In the case of DEIL QA parts which consists of software media and the manuals are priced separately and the relevant licenses ie. QLs are priced separately. This is because for a given type of QA, there are different types of QLs depending on the type of machines and the number of users. Therefore, the prices of QA is a constant for a given software and QLs are variable and hence their prices. It is evident from the statements of the executives of the company such as Shri V. Vijay, Shri O.K. Venkataramanan and Shri Ishwar Sharma that DEIL used to import Qas and keep inventory and as and when they find a customer, they order for the QLs as per the customer requirement. Keeping this in view, they were paying the customs duty on QA classifying the same under the Customs Tariff Heading No 85.24. Further, when they ordered for relevant QLs, they had received the same either in the form of PAKs or RIGHT TO USE CERTIFICATES and were classifying the same also under heading 85.24 and paying customs duty.
As per Rule 9 1) (SIC) of the Customs Valuation (Determination of Price), Rules 1988 license fees related to the imported goods that the buyer is required to pay directly or indirectly, as a condition of sale of the goods being valued shall be added to the price of the goods imported. In the case of DEIL, the situation is totally different in as much as "QA" & "QL"s are separately priced and ordered separately and also imported separately. Further the value of QA is constant and the value of the relevant QLs varies depending on the customer's order. Therefore, at the time of import of QA the type of QL that would be imported are not known and as they are being separately priced and charged. Further, they were being classified under the Customs Tariff Heading No 85.24 and charged to customs duty. Thus being the case, the value of QAs were not disputed by the department and hence there was no provisional assessment of the same. It is argued that by the learned counsel that, if it is assumed that, there was import of goods in the import of TK-50 cartridges, then the allegation of misdeclaration and under valuation are pertaining to the goods under import viz., the two TK-50 cartridges. If this charge is to be sustained, then there cannot be an allegation of under valuation of QAs imported. As discussed above, the department never disputed the value of QAs as it was a constant and separately priced and charged to customs duty. It had also not been alleged in the show cause notice that the value of QAs had been under valued. Therefore, the assumption of the learned counsel is unfounded. It also argued by the learned Counsel that sale of QA and QL are independent and that sale of QA is not a condition for sale of QL. It is an admitted fact that a software package consists of media containing software, its user manuals and license to use the same. The software is an intellectual property and what is being traded is only its usage and the ownership of the intellectual property still rests with original copy right owner. The license ie QL part permits the user to only the software and cannot own the same. In the given scenario, it is very clear that in the case of DEIL a buyer of QA cannot use the same unless he has the relevant QL supplied to him. This fact has been admitted by the representatives of the company both in their statements and during the course of personal hearing. A careful reading of the software duplication agreements entered into by DEIL with DEC. It is very indicated that "Licenses must be purchased for all modes that will use the software".
It can also be seen at page 2 of the schedule B of the software license agreement under para 3.1 it is indicated that "this license authorises use of DIGITALs then current versions and all DIGITAL prior versions of the software". Further it is also indicated in para 3.2 that there are different types of licenses granted by DIGITAL. The eight character in the software license model number as indicated in the license product authorisation key (license PAK) or license Certificate identifies the type of license. Further the eight character in the software license are indicated as QL-XXXXX-QA. Therefore, it is amply evident that a purchaser of QA is required to purchase the relevant QL and the condition of sale is in built and deemed. Further, the above portions of the agreements also give the definition of the QL and its types. A customer possessing/buying QA from DEIL cannot use it unless the license which is the right to use is also obtained from DEIL. Such a license is now to be generated with the help of Alpha numeric codes contained n the 2 cartridges and PAK-GEM (one time software of DEIL used for decoding). Thus licenses are generated and sold to the customers for a price. Based on licenses generated, royalty at 20% was being paid by DEIL to DEC. Without the information in TK cartridges, licenses cannot be used. As indicated earlier, the ultimate use of QA is dependent on the license to be generated which is generated ultimately based on the information contained in the 2 recorded cartridges imported and through such information received through E-Mail in respect of some more licenses. Although the price of QA is constant, its ultimate usage is dependent on licenses to be generated with the help of information in 2 TK-50 cartridges. Thus indirectly, the purchase of license is implied with the purchase of QA as a condition of purchase since QA cannot be used without a relevant license. Thus getting licenses as such as information which helps in generating license by DEIL is implied as a condition for the purchase of QAs first by DEIL and accordingly later by customers from DEIL.
Therefore, the contention of the learned Counsel that the PAK imported should have been classified under chapter heading 49 of the Customs Tariff is not correct. Hence though the QAs and QLs are priced separately imported separately and invoiced separately, they are rightly classifiable under Customs Tariff Heading No 85.24 and charged to duty appropriately. In view of the position above, the contentions of the learned Counsel that the value of QAs have not been disputed and that there was no condition of sale at the time of sale of QAs and QLs cannot be accepted. Therefore, I am unable to take into consideration the cross examination report of Shri Loney Antony, Shri V. Vijay and others as also the case laws cited by the Counsel in reply to the Show Cause Notice.
In the reply to the Show Cause Notice with regard to the dutiability of QLs, the learned Counsel had argued that as no tangible goods entered into India through the Customs barriers and the question of levying any duty cannot at all arise. This is not correct position. DEIL have imported the PAK information ie. QLs stored in coded form in the two TK-50 cartridges and have cleared the same through customs by willfully misdeclaring the same as blank cartridges. Further, they have also got the further PAK information for some more licenses through their E-Mail facility at the factory without customs knowledge. It could be seen that the definition of 'goods' under Section 2 (22) of the Customs Act, 1962, interalia covers any kind of movable property.
Further, here what is being sought to the charged is the value of the license portion of the software which is termed as QL which is separately priced and charged and relatable to the actual goods that is software imported as QAs as discussed above. DEIL themselves have given such a matching of QAs for which QLs were produced out of the TK-50 cartridges and from the E-Mail facility, which is as per Annexure 54 to the Show Cause Notice. Incidentally, as per press note dated 17.3.92 of Department of Electronics (Annexure 2 of the Show Cause Notice) envisages the import of master copy by the party for duplication purposes as it had been mentioned that the party importing the master copy would have to follow the existing import procedures including payment of duty for the master copy. In view of the position above, it is very clear that DEIL have not really duplicated the software in the real sense and have only resorted to the import of QLs through a different route without the customs knowledge.
Thus the 2TK 50 cartridges imported (which contains coded information relating to issue of licenses QLs) are chargeable to duty of customs as the appropriate rate and on appropriate value. It is argued by the learned Counsel that out of the 890 PAK information contained in the 2 TK-50 cartridges. PAK information only 845 was used and license were issued locally. In respect of the remaining 45 unused PAK information no license was issued. It is an admitted fact that total information for all PAK information was received and therefore, the entire PAKs are chargeable to duty. For leviability of customs duty, it is no where stated either in the Customs Act, 1962 or in the Customs Tariff Act, 1975 that the goods imported should be ultimately used fully.
It is now clear that the PAK information contained in 2 TK-50 cartridges relatable to QLs is to be charged to duty under Heading No 85.24. With the help of PAK information, finally QLs are generated and sold. It is thus a part and parcel of the software package which finally consists of a carrier Media on which software is recorded besides the user manuals and a license to use the software. As regards the value of the 2 TK-50 cartridges attention is invited to Royalty Agreement between DEC and DEIL, by which royalty is ultimately paid or payable at 20% of USCLP for the licenses issued. The Department of Electronics had vide letter No D (0003) CMP/4/91-CCD dated 01.12.93 (Annexure 4 (4) of the Show Cause Notice) addressed to DEIL had clearly stated in para 3 that DEIL will be required to import the master copy of the software, which is required to be duplicated/reproduced as per the prevailing Import Export Policy, and the proof of the same to be submitted to the Department. On this basis, DOE had approved the remittance of foreign exchange at the rate of 20% of USCLP from DEIL to their Principal. Such a transaction value of royalty at 20% USCLP is applicable, if the above conditions are fulfilled. As discussed earlier, DEIL had neither imported the master copy, nor had submitted the proof of import of master copy. As such, it is observed that no duplication of software had taken place in letter and principle of the agreement and also as per DOE's policy, which was enumerated in Press Note dated 17.3.92 (Annexure 2 of the show cause notice). That being the case, it is difficult to accept the payment of 20% of USCLP as the correct potential price for the PAK information relatable to package information received through 2 TK-50 cartridges. Besides, DEIL had been importing the QLs separately in respect of software not allowed to be duplicated and were paying customs duty at the rate of 35% of the USCLP. Having regard to this aspect and considering the facts and circumstances of the case, I hold that the correct value for the all PAK information contained in the 2 TK-50 cartridges should be at 35% of the USCLP. This is the intrinsic potential value of the 2 TK-50 cartridges imported as authorise, DEIL would have paid 35% of the USCLP if Licenses had been imported as such without duplication of software and getting PAK information through 2 TK-50 cartridges. Accordingly, on the above value, duty has to be charged under the Heading 85.24 of the customs Tariff. The above determination is in accordance with Section 14 (1) of the Customs Act, 1962, read with rule 3 of Customs Valuation (Determination of Price of Imported Goods)Rules, 1988 since records indicate the above price to be the transaction value for identical goods i.e. QA's imported. Since the above amount of 35% of the USCLP being not loaded on to the value of QA, the question of this amount or payment of royalty not being a condition of sale of QA in terms of Rule 9 (1) (SIC) of the Customs Valuation Rules, 1988, as argued by the Counsel is not relevant in the present case. The question of duplication of software or not by DEIL as per Department of Electronics Poly of duplication had been looked into and discussed only for the fixation of the correct value of TK-50 cartridges imported containing the PAK information.
As regards PAK information received through E-Mail, it is chargeable to duty also on the value equivalent to 35% of USCLP in respect of all PAK information received through E- Mail as the definition 'Goods' under Section 2 (22) of the Customs Act, 1962 interalia, covers any other kind of movable property apart from items enumerated therein such as vessels, Aircraft's, stores, Baggage etc. The Supreme Court while examining the definition of 'Goods' in the M.P. General Sales Tax Act observed that the definition included all kinds of movable property and held that electrical energy capable of being transmitted, transferred, delivered, stored, possessed etc., had all the attributes of movable property even though it is not tangible. [Commissioner of S.T M.P Vs M.P. Electricity Board-Air 1970 SC (732)]. Applying the ratio decided of the above Hon'ble Supreme Court's order, it can be said that PAK information relatable to licenses imported through E-Mail are 'Goods' for the purpose of the Customs Act, 1962, whether tangible or not, and are leviable to Customs duty in terms of Section 12 of the Customs Act, 1962. Hence all PAK information received through 'E' Mail has all the ingredients of movable property and are 'goods' under Section 2 (22) of the Customs Act, 1962. Customs duty is to be charged on the importation of all PAK information through 'E' Mail in terms of Section 12 of the Customs Act, 1962. As regards classification of such PAK information imported through 'E' Mail, it is observed that such PAK information is relatable to issue of licenses which are ultimately forming part of the software package as software package consists of the actual software on a media and a license to use it. Thus PAK information relatable to the license, which is a part of the software package has been imported in the form of Bit Stream/RF signals (E. Mail) through satellite link ups are to be classified applying the 'General Rules for interpretation of Customs schedule for the purpose of duty liability. On perusal of the above rules, I find that PAK information relatable to software package imported into India as F Signals through 'E' Mail cannot be classified in terms of Rules, 1 to 3 in that order. Hence the above has to be classified by applying Rule 4 of General Rules for interpretation which is reproduced below:-
"Goods which cannot be classified in accordance with the above rules shall be classified under the heading appropriate to the goods to which they are most akin."
Thus applying the kinship principle under Rule 4 as above, it is observed that in the present case, PAK information relation relatable to software package had been imported through recorded media i.e. Recorded tapes and through 'E' Mail, then such information could have been imported as recorded tapes or as PAKs falling under Heading No 85.24 of the Customs Tariff. Thus considering the above facts and circumstances of the case; the definition of 'Goods' under Section 2 (22) of the Customs Act, 1962, which interalia covers any movable property; the scope of Heading No 85.24 of the Customs Tariff, which inter-alia covers records, tapes and other recorded media for sound or other similarly recorded phenomena, and applying the kinship principle in terms of Rule 4 of interpretative Rules of the Customs Tariff, I am of the view that PAK information imported through 'E' Mail in the present case would be classifiable under Heading No 85.24 of the Customs Tariff. Accordingly, Customs Duty is to be charged on all PAK information imported through 'E' Mail under Heading No 85.24 of the Customs Tariff on the value equivalent to 35% of USCLP for this PAK information. The same argument for rejecting the value of 20% of USCLP and adoption of 35% of USCLP (as in the case of 2 TK-50 Cartridges) would equally apply to all PAK information received through 'E' Mail. Incidentally even, electrical energy imported is treated as 'Goods' under the Customs Tariff and gets classified under Heading No 27.16 of the Customs Tariff and even under the earlier Central Excise Tariff, Central Excise Duty was charged on Electricity for some time under Tariff item 11E since 1978 up to September 1984."
and confirmed the duty of Rs 4,57,27,847/- pm 813 PAK information imported on the 2 TK-50 cartridges on 27.6.92 (Bill of Entry No 14408 dt 27.6.92 and 805 PAK information received through 'E' Mail on various dates as indicated in the worksheets, and demanded the same. He confiscated the 2 TK 50 cartridges under Section 111(m) of the Customs Act 1962 and gave an option to redeem the same on fine of Rs 25 lakhs only and finding DEIL & the Managing Director liable for penalty under Section 112 (a) (v) of the Customs Act, 1962 he imposed a penalty of Rs 90 lakhs on DEIL and Rs 10 lakhs on Shri Manoj (Mike) A Shah, a Managing Director. These appeals are against the above findings and orders.
3. We have heard learned Advocate for the Appellants and the SDR for the Department, the SDR has submitted a written letter dt. 08.2.2001 from the Dy. Commissioner of Customs to the SDR to defend these a case of "valuation" as spelt out in the Show Cause Notice as well as the Order-in-Original. After considering the matter we find -
(a) the uncontested position is, Internationally all over the world, as also to India DEIL supplies software products consisting of -
(i) Media as Cartridge or CD-ROM on which software is recorded (termed 'Recorded Media')
(ii) Manuals and printed book containing operational instructions (termed 'DOCUMENTATION')
(iii) License authorising use of software.
While 'Recorded Media' & 'DOCUMENTATION' at (i) & (ii) above are termed as QA; the license at S. no (iii) is called QL; QA & QL are supplied to the customers by DEC, either together or separately, at Published Price Lists. The Price of QA is fixed (through it shows price of DOCUMENTATION separately); the price of QL various according tot he end users configuration of Computers Hardware and use and number of users; i.e., if a customer has obtained one QA and one QL for one user and wants to increase the number of users at his end, he can ask for and get additional QL as per requirements. If there is change in QA (due to upgradation/improvement) the customer can get the new QA without changing his QL. Ensuing the Customer is using the software in terms of the License granted; somewhere in 1989, 'DEL' introduced a safety devise called 'Product Authorisation Key' (here-in-after referred to 'PAK') which besides having customers particulars also had an alpha numeric code (here-in-after referred 'Checksum') which was given at o additional cost to the customer having QA & QL. DEIL were importing QA & QL with PAK and clearing the same through customers on payment of duty.
(b) the appellant somewhere in March/April/May 1992, pursuant to Department of Electronics, Government of India (here-in-after referred as 'DOE') guidelines, entered into a phased programme software duplication locally, which would in phase-I would be issuance of QL's locally, in phase-II reproduction of QAs was programmed from Master Copy were imported in March 1992, this resulted in lowering end user price for software.
(c)We find that the Revenue is pleading this to be a case of valuation and the SDR is strongly relying upon the case of State Bank of India 2000 (115) ELT 596 SC indicates that the Revenue is not happy with the order. They should have therefore filed on appeal against the same, as prescribed under the law and not tried to convert this appeal into Revenue's appeal. The Advocate for the appellants was trying to seek out the mind and purpose of the Show Cause Notice to effectively defend the matter. On this account itself, the Appellants have taken the first ground to be the violation of principle of natural justice, which is as follows-
"VIOLATION OF PRINCIPLES OF NATURAL JUSTICE - In the show cause notice on the one hand TK-50 cartridges was considered as import of goods and the classification and the valuation was disputed. It further considered the PAK information in alpha numerical code contained in the TK-50 cartridges as software itself. On the other hand the notice alleged short-payment of duty on account of under valuation of the software (QA) imported and proposed to demand a differential duty by taking into account the valuation of licenses issued as if it is the condition of sale of QA and therefore to be added in terms of Rule 9 (1) (SIC) and Rule 9 (1) (e) read with Rule 5 of the Customs Valuation Rules. The first adjudicating authority clearly appreciated the contradictory charges in the show cause notice and also took note of the clarification issued by the investigating agency representative, Mr. Pakshirajan, from DRI that the issue is only of under-valuation and not classification. However; in order to have a specific clarification from the DRI, the Commissioner adjourned the proceedings breaking the cross-examination of the witness at the said stage. The appellants also wrote a letter seeking the said clarification. However, when the adjudicating authority changed, the subsequent adjudicating authorities were not inclined to clarify the matter. Thus, the contradictory charge persisted and the appellants were forced to continue with their submissions. Since two diametrically opposite charges cannot be made, the show cause notice pursuing such charges, vitiates the show cause notice and consequently the proceedings are contrary to the principles of natural justice.
The appellants relied upon the following decisions and submitted before the original adjudicating authority that the show cause notice was not maintainable in view of the fact that it pursues two diametrically opposite charges.
(a) Charandas Malhotra Vs. AC Customs AIR 1968 CAL 28
(b) B. Lakshmichand vs Govt. of India 1983 (12) ELT 322
(c) K.R. Steel Union Pvt. Ltd. Vs CCE & C 1987 (31) ELT 924 In spite of the above, the authorities proceeded with the adjudication without clarifying the charge that is being proposed to be pursued. There is thus violation of principles of natural justice which goes to the root of the proceedings. The impugned order is therefore liable to be set aside."
We find that adjudication in the impugned order has found that it is not the case of the Department to dispute the value of QA as it appears from the following findings ni his order-
(i) At internal page 39 of the order -
"As discussed above the department never disputed the value of QA'a as it was a constant and separately priced and charged to Customs duty. It had also not been alleged in the show cause that the value of QA's had been under valued".
(ii) & at page 42 of the order-
"Since the above amount of 35% USCLP being not loaded on the value of QA the question of this amount of payment of royalty not being a condition of sale of QA in terms of rule 9 (1) (c) of the Customs Valuation Rule 1988, as argued by the Counsel, is not relevant in the present case."
We find therefore that the Adjudicator should have given a specific finding on the issue raised and recorded by the Adjudicator and not let it to the interpretation of this order. We find that impugned order suffers denial of principles of natural justice.
(d) We find pursuant to DOE guidelines since QLs were generated locally, the appellants were required to pay royalty license fees to 'DEL' and imports of QLs stopped. However, it is Revenue's contention that PAK's which continued to be sent by 'DEC' and imported by 'DEL', and used as QL's; for this purpose, the appellants on 27.6.92 filed a BE at Bangalore Customs House for clearance of 2 TK-50 cartridges which had recording of 850 'PAK's on them, where value was declared to be US $ 32.40. They were declared only as 'Magnetic Tape Cartridge' classified as unrecorded media under 8523 of Tariff and were assessed as such. This import was pursuant o correspondence exchanged, as found and relied upon by the DRI officers in the show cause notice, between 'DEIL's in USA to send them "PAK' requirements for the quarter Jan - March 1992 and April -- June 92 stored on TK-50 cartridges with the invoice for US $ 16.20 per cartridge. the Commissioner has found these two TK-50 cartridges under seizure to be liable for confiscation under section 111(m).
(e) The appellants have strongly contested the liability under Section 111(m) of misdeclaration, valuation and confiscation of these cartridges on the grounds of -
"PAK IS NEITHER LICENCE NOR SOFTWARE AND IT IS NOT QL. : It is an admitted position that the software (QA) is encoded i the media (cartridge, tape, etc.) and is supported by documentation in the form of operating instructions contained in the manual that is a printed material. It has a separately priced depending upon the number of users of the speed of the machine. The PAK is an alpha numerical code which is given to the customer who has bought the software (QA) and has obtained the licence (QL) for accessing the software on to his machine. The PAK is therefore neither the QA not the QL. It is also evident from the PAK itself where it specifically says that, "this document does not constitute a software licence." Hence to construe PAK as either software or as licence cannot at all arise. since the impugned order has ben passed misconstruing the character of PAK, the same is liable to be set aside.
It is common knowledge that software is contained in a carrier medium viz, a floppy, cartridge, diskette, tape, etc. The set of instruction known as programmes encoded on such carrier medium is transferred on to the computer hard disc and the same is used for analysing information or data. The software is thus a programme with which the intended activities are carried on by using the computer. The instruction manual, the printed book, helps to understand the scope and operational effect of the software programmed and also for trouble shooting, if any. The license (QL) is for using the said software legally. The items which are priced are software (QA) and the license (QL). The customer who has purchase QA and QL pays for QA and QL as the case may be. However, there is no price or payment made for the PAK, the alpha numerical code, which is only to ensure that proper QL is obtained by the customer and to enable him to access the software. Hence, the PAK is neither QA nor QL and there is no price for the PAK. The impugned order is therefore liable to be set aside.
The Commissioner has not noted the fact that the method of giving such Product Authorisation Key (PAK) for having access is akin to the personal identification number given to a Credit Card holder for drawing money from Automatic Teller Machine. The credit card is paid for and obtained by the customer. However, for drawing money from the ATM after inserting the credit card, the customer has to punch the personal identification number given to him. The combination of which alone would activate the ATM to recognise the customer and draw the cash. In such circumstances, assuming the personal identification number as the credit card or personal identification number as a substitute for credit card etc, are totally erroneous.The Commissioner has fallen into a similar error i.e. construing a personal identification number as the credit card itself.
VALUE OF TK-50 HAS BEEN CORRECTLY DECLARED : The impugned order proceeds on the erroneous assumption that PAK is QL or part of software and the royalty paid for QL is the payment made for or the value of PAK. These assumptions are erroneous, further inferences and conclusions drawn are liable to be set aside as incorrect and unsustainable.
The TK-50 cartridges contain the alpha numerical code i.e. PAK information. This could have been simply typed on a piece of paper and mailed or could have been conveyed over phone or could have been faxed to the appellants. For the sake of convenience, it was sent through TK-50 cartridges. This information has no price, no value and no payment was expected to be made by the appellants to the supplier. Consequently, the value of TK-50 cartridges was declared. Since this information has not value, the question of valuing the same and declaring it as the value for TK-50 cartridges cannot at all arise. The impugned order assuming that that PAK has the same value as that of the license and therefore the value of QL (Licence) should be assumed and declared for the TK-50 cartridges, is incorrect and unsustainable.
Whenever the appellants imported QAs or QLs, they paid for the same according to them the price for the respective QAs and QLs. Even in such circumstances, the appellants received the alpha numerical numbering, PAK, for giving the same to the customer who has purchase the QL. In those circumstances, the duty was paid on the QA imported and the QL imported. The receipt of PAK information was neither considered as import of QL nor any other payment other than the payment of QL was made for the PAK. Hence, construing the value of the licence as the value of PAK is incorrect and unsustainable.
The fact that the information contained in the TK-50 cartridges viz, alpha numerical codes (PAKs) have not value is also evident from the fact that no payment is occasioned against such PAKs. The payments, if any, are made only against the licences, if any, issued by the appellants. If no licences were issued, no payments were required to be made. No payment is to be made with reference to the total number of PAK information contained in TK-50 cartridges. Hence the impugned order assuming the value of QL against which the PAK information was used, was incorrect and unsustainable.
For the PAK there is no part number. There is no list price for PAK. The question of ordering for PAK by any customer also does not arise. All these would show that PAK has not value much less commercial value.
For the same reasons, the question of assuming the value of QL to that of PAK information received through E-Mail is also incorrect and unsustainable.
The Commissioner has raised a doubt as to the necessity for importing PAK except for generating licenses locally based on PAK information. Unfortunately, the factual position i s totally different. No license is generated using PAK information. Licenses are printed locally and issued. Only to the customers who had obtained the license (QL) the PAK information is given. Hence the Commissioner was incorrect in assuming that licenses were generated using PAK information. Since the assumption erroneous, the conclusions reached thereon are liable to be set aside as incorrect and unsustainable.
The Commissioner failed to take not of the entire purpose and use of PAK. PAK is nothing but a safety device introduced to prevent misuse of software as already indicated. PAK is akin to the Personal Identification Number given for accessing ATM using credit card."
We find, in view of the admitted position that these 2 TK cartridges were having recordings thereon, even if these recordings did not meet purposes and mean anything, to any one else, they are valuable and essential for operating the QAs by the Customers and are having Data details to be generated by the appellants and used thereafter as Customer specific. They to our mind, carry valuable information and rights therein, they convey ideas, are admittedly recorded on a media i.e. TK-50 tapes. They would therefore qualify to be "Recorded Media" classifiable under 84.24 of the Custom Tariff. We follow, the decision of the Hon'ble Supreme Court in the case of Associated Cement Companies Ltd. (2001 (128) ELT 21 (SC) to hold that the import of 'PAK' Dateas recorded on TK-50 cartridge is import of goods i.e. recorded media, which has been incorrectly declared, as regards description, to be as 'Unrecorded Media' under 85.23. The valuation of the goods has to be reckoned as per this decision of Supreme Court (Supra) to be not only the value of the Tapes etc. but also of "the contents therein will be relevant for the purpose of valuation." Therefore, value of the recordings is required to be determined and added to the declared value of US $ 32.40 on the Bills of Entry and thereafter a decision arrived at as regards misdeclaration. The rate of duty under the two headings may be same but by not declaring the Recording thereon, an attempt at clearing the goods as misdeclared value could be established invoking the provisions of Section 111(m) of the Customs Act 1962, provided the value determined by the department exceeds on such re-assessment the declared value. Since we are not determining the valuation aspect, the same being left open in the remand proceeding. We are leaving the question of misdeclaration under Section 111(m) open. Since no market price is available or determined, and the TK-50 cartridges are admittedly for 'Actual User' import, we cannot determine the adequacy or otherwise of the Redemption fine under Section 125 of the Customs Act 1962. We direct that the same shall be determined keeping in mind the above requirement i.e. market price and import for Actual Use, if the TK-50 cartridges are found liable for such confiscation under Section 111 (m) of Customs Act.
(f) However, we find that there is no force in the findings of the learned Adjudicator to hold the "information transmitted via E-Mail about the other PAK's" to be akin to import of recorded media under 85.23. In para 24 of the Supreme Court decision in the case of Associated Cement Companies (supra), it has been laid down, after reading the definition of goods in Customs Act 1962 under Section 2 (22) as follows -
Para 24 - "..... Whether movable article comes as a part of baggage, or is imported in to the Country by any other manner, for the purposes of Customs Act, the provision of Section 12 would be attracted. Any media whether in the form of books or computer disks or cassettes which contain information technology or ideas would necessarily be regarded as goods under the aforesaid provisions of the Customs Act. ......."
following the same, we find, since in an E-Mail transfer, no media as movable article, is crossing the international boundaries, no movable property movement is involved, the transfer of information and or ideas, knowledge on E-Mail transfers would, therefore, not be covered under the terms "goods" of the Customs Act. Therefore, once such transfers are not 'goods', there classification cannot be effected, merely because they have value. Therefore, we set aside the findings as regards the classification of the E-Mail transfers as arrived at by the Adjudicator.We find that the learned Advocate has relied on The Geneva Ministrial Declaration on global electronic commerce document WT/MIN (98)/DEC/2 dt. 25 May 1998 (98-2148) which is declaration of intent by Members of WTO that they would continue their current practice of not imposing of Customs Duties on electronic transactions. Since it is only a declaration of intent and indicator of current practice, and nothing contrary is shown by learned SDR for Revenue, we find in it, an echo of our view, that E-Mail transfers are not dutiable under Customs Act 1962.
(g) In view of our findings,m we would set aside the order and Remand the matter back to the Adjudicator to determine the value of 2TK-50 cartridges as per the valuation of such media as laid down by the Supreme Court in Associated Cement Company case 2000 (128) ELT 21 (SC), and thereafter determine the liability for confiscation of the same under Section 111 (m) of the Customs Act, 1962 and determine the redemption fine thereon. We make it clear that the above determination should be arrived at after putting the parties to a notice as regards the valuation to be adopted and hearing them.
(h) The penalty on the Company as well as other notices require redetermination subject to outcome of the decision and duty liability if any in pursuance of this order.
4. Appeals disposed off in above terms.
(Pronounced in the court on 10/4/2001)