2013 (8) TMI 693 - AT - Customs

Valuation - import of goods - inclusion of value of software in the networking appliance - Application for adducing additional evidence assessee imported networking appliances which had certain embedded software to enable its use Revenue contended that the equipment, software and services as a single bundle sold in the trade but the assessee had sold the components separately to avoid payment Held that - The department had not given adequate opportunity to the assessee to defend its position on the questions of facts - there had been a denial of natural justice during the adjudication proceedings - Assessee should be allowed to cross-examine the persons whose statements are relied upon for proving the case against them. Appellant have a contention that some part of the money is towards updation of the software. A typical example is antivirus software. Even after the initial stage the software has to be updated for newer and newer viruses, spams, spywares etc. that is pumped into the network by criminal and anti-social elements in the society. For this purpose, the software need to be updated continuously and this service has to be paid for. It is argued that the cost of such updation of software cannot form part of assessable value of goods when imported. No effort seems to have been made to make distinction between the post-import services and the software that is embedded. Stay granted - matter remanded back.

Issues Involved:
1. Denial of natural justice during adjudication proceedings.
2. Classification and valuation of imported networking appliances with embedded software for customs duty purposes.
3. Right to cross-examine witnesses and demonstrate equipment functionalities.
4. Determination of whether post-importation services and software licensing fees should be included in the assessable value of imported goods.

Detailed Analysis:

1. Denial of Natural Justice:
The Tribunal observed that there was a denial of natural justice during the adjudication proceedings. The appellants were not allowed to cross-examine witnesses or demonstrate the functionalities of the equipment. The Tribunal noted that the adjudicating authority did not pass a separate order on the application for cross-examination and demonstration, which deprived the appellants of the opportunity to seek remedies against such denial. The Tribunal emphasized the importance of settling facts and providing adequate opportunities for the appellants to defend their position.

2. Classification and Valuation of Imported Networking Appliances:
The central dispute was whether the appellant had avoided payment of customs duty by raising separate bills for licenses to use embedded software and providing updates. The Tribunal noted that the legal position, as per the decisions of the Tribunal and Courts, is that the value of the equipment for customs duty purposes should include the value of the embedded software. The Tribunal highlighted the need for clear findings on whether the equipment could function without licenses for additional functionalities and whether the same or different prices were charged depending on the functionalities.

3. Right to Cross-Examine Witnesses and Demonstrate Equipment Functionalities:
The appellants requested to cross-examine the expert from the Electronic Test and Development Center and other persons whose statements were relied upon. The adjudicating authority denied this request, stating that the appellants had not provided reasons for cross-examination and had agreed with the expert's opinion. The Tribunal found this reasoning incorrect and directed the Commissioner to decide on the issue of cross-examination and demonstration, and if denied, to pass an order explaining the reasons. The appellants should then be given an opportunity to file evidence to counter Revenue's arguments.

4. Determination of Post-Importation Services and Software Licensing Fees:
The appellants argued that the appliance was functionally viable and commercially marketable as imported, and that support services were distinguishable from warranty, thus not forming part of the value of imported goods. The Tribunal noted that the adjudicating authority did not make an effort to distinguish between post-import services and embedded software. The Tribunal directed the adjudicating authority to consider whether licensing and payment for additional functionalities were made after importation and whether such payments were a condition for sale.

Conclusion:
The Tribunal set aside the impugned order and remanded the matter to the adjudicating authority, keeping all issues open. The Commissioner was directed to decide on the issue of cross-examination and demonstration, allow the appellants to file evidence, and complete the adjudication after hearing the appellants. The miscellaneous application for production of additional evidence and the stay applications were also disposed of, and all appeals were allowed by way of remand.

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