CESTAT Delhi Upholds Inclusion Of Downloaded Software Licence Value In Imported Dongles' Customs Value

The Principal Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), New Delhi, has upheld the inclusion of the value of software licences downloaded from the internet in the assessable value of imported hardware locks (dongles).

It held that the downloaded software formed an integral part of the imported product and that its value formed part of the transaction value.

A coram of Officiating President Dr. Rachna Gupta and Technical Member Hemambika R. Priya dismissed the appeal filed by Solution Infotech (I) Pvt. Ltd.

Observing that each DCM software licence formed an integral and specific part of the imported product, the tribunal held:

"Each DCM software being the integral and specific part of the respective imported product, both being purchased from the same supplier at same point of time. It is, accordingly, held that the transaction value in the present case is the value of hardware as well as respective software. Hence, the value of software is includible in the assessable value.", the tribunal ruled.

Solution Infotech imported HASP hardware locks (dongles) from Aladdin Knowledge Systems Ltd., Israel, declaring a value of US$3 per dongle. During an inquiry, the company informed the Customs Department that it had been regularly downloading DCM software licences for the imported dongles from the same supplier over the internet. It also disclosed that it had not paid customs duty on the value of those software licenses.

The Bill of Entry was thereafter reassessed by enhancing the value of each dongle to US$8 after including the value of the downloaded software license. The company paid the differential customs duty and interest under protest. The department later found that similar imports made between April 2007 and June 2009 had also excluded the value of the downloaded software licences from the assessable value.

A show cause notice was subsequently issued demanding differential customs duty of about ₹23.73 lakh, along with interest and penalty.

Before the tribunal, the company argued that the software licence fee was not a condition for the sale of the dongles. It contended that the licence fee could not therefore be added to the assessable value under the Customs Valuation Rules. The company also submitted that the downloaded software merely protected software developed by its customers from unauthorised copying.

Relying on Oracle India Pvt. Ltd. and Kruger Ventilations Industries (North India) Pvt. Ltd., it further argued that the demand was barred by limitation because it had informed the department about the software downloads.

The Revenue argued that the imported hardware locks could not be activated without the corresponding DCM software licences downloaded from the same supplier. It submitted that the hardware and software were specific to each other and that the software formed an integral part of the imported product.

Relying on the Supreme Court's decision in Commissioner of Customs v. Hewlett Packard India Sales (P) Ltd., the Revenue contended that the value of the software was liable to be included in the assessable value.

Agreeing with the revenue, the tribunal noted that it was an admitted position that each DCM software licence was specific to a particular hardware lock. It also noted that the hardware and software were imported from the same supplier, though at different points of time, and were customised and specific to each other.

Holding that the downloaded software formed an integral part of the imported product, the tribunal observed,

"The software herein is equally an integral part of the imported product. Both goods have been imported from the same supplier. The hardware has no existence in the absence of the downloaded software. Relying upon Hewlett Packard India Sales (P) Ltd. (supra), the value of downloaded software has rightly been included in the assessable value."

On limitation, the tribunal held that the company had sent the intimation regarding the software downloads to an authority that was not competent to receive such information. It observed that this justified invoking the extended period of limitation.

Finding no infirmity in the order under challenge, the tribunal upheld the demand for remaining customs duty

For Revenue: Shri Girijesh Kumar, Authorised Representative