CESTAT Chennai Holds Software Part Of Hardware Value, Reduces Duty Demand On Wipro

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that the value of software supplied along with imported networking equipment by Wipro (Infotech Group) is includible in the assessable value of the hardware for the purpose of levying customs duty.

The Bench, comprising Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao, partly allowed the appeal by restricting the demand to the normal period of limitation, while setting aside the extended period and penalties imposed on Wipro.

The Bench opined:

"The issue herein is interpretative in nature; therefore, there is no misstatement or suppression of facts, but rather it was the bona fide belief of the Assessee that the classification and valuation of the software done separately from the hardware by them is correct; thereby extended period of limitation cannot be invoked."

The dispute arose from imports of networking equipment made by Wipro from Radware Ltd., Israel, during the period July 2006 to April 2010.

In the Bills of Entry, Wipro declared the transaction value by bifurcating it into hardware and software, classifying them separately and paying customs duty accordingly.

The Customs Department alleged that the software supplied along with the equipment was embedded or etched firmware forming an integral part of a single ready-to-use networking appliance, and therefore, the bifurcation of value amounted to undervaluation. On this basis, a demand for differential duty amounting to Rs. 39.77 lakh was confirmed, along with interest and penalty.

Wipro contended that the software was only pre-loaded on the hard disk and was neither embedded nor etched firmware forming an inseparable part of the hardware. The company argued that the bifurcation of value was made on a bona fide understanding of law, with full disclosure in the Bills of Entry and supporting documents, and that there was no suppression or wilful misstatement warranting invocation of the extended period of limitation or imposition of penalty.

Relying on its earlier decision in a similar matter, the Tribunal held that the software formed an integral part of the networking equipment and that its value was required to be included in the assessable value of the hardware.

At the same time, the Bench noted that the dispute lay on a "thin line" of legal interpretation and that the appellant had disclosed all particulars to the Department. It was therefore held that the extended period of limitation under Section 28 of the Customs Act, 1962, could not be invoked.

Accordingly, the Tribunal restricted the demand to the normal period of limitation, set aside the penalties imposed under Section 114A of the Customs Act, and remitted the matter to the adjudicating authority for re-quantification of the duty demand for the normal period along with applicable interest.

For Appellant: Advocate, S. Muthu

For Respondent: Authorised Representative, O.M. Reena