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2025 (4) TMI 1198 - AT - CustomsClassifictaion of imported goods - software license in paper form imported along with the Distributed Control System (DCS) hardware - to be classified under Customs Tariff Heading (CTH) 8538 9000 or not - applicability and interpretation of Note 2 to Section XVI of the Customs Tariff Act 1975 - HELD THAT - The admitted facts are Distributive Control Unit AC460 BOT system and the software imported are embedded in the hardware. It is also not in dispute that the software license in paper form is also received along with this hardware. The impugned Order-in-Appeal No.21/2011-Cus dated 31.03.2011 is a common order against Order-in-Original 284/2009 dated 12.10.2009 and No.417/2009 dated 26.12.2009. Both these Order-in-Originals have been considered by Commissioner (Appeals) in Order No.33/2009 dated 30.03.2009 wherein it was held that the software and the license fees goes hand-in-hand and are classifiable together the software to be classified along with the hardware and the claim of the appellant under CTH 4907 or 8523 was rejected . Accordingly the impugned order confirmed the classification of the software paper license as part of hardware under 8538 9000. The decision relied upon by the Original Authorities based on which the Commissioner (Appeals) also confirmed the demands was set aside by this Tribunal in 2019 (9) TMI 80 - CESTAT BANGALORE . The case before the Tribunal was regarding classification of software under CTH 49 or 8524 which attracted Nil rate of duty are to be classified under CTH 8471 and it was held that the CBEC has also clarified vide Circular 15/2011 that documents conveying the right to use software do not merit classification under CTH 8523 8020 but merits classification under CTH 4907. Conclusion - There are no reason to uphold the classification of the software license in paper form under CTH 8538 9000. Appeal allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Classification of Software License in Paper Form as Part of Hardware under CTH 8538 9000 Relevant legal framework and precedents: The Customs Tariff Act, 1975, specifically Chapter Heading 8538 9000, covers parts suitable for use solely or principally with the apparatus of heading 8537 (electrical apparatus for switching or protecting electrical circuits). Note 2 to Section XVI of the CTA provides that software embedded in hardware and integral to the system should be classified along with the hardware. The Commissioner (Appeals) relied on this note to hold that the software license is an integral part of the hardware and thus classifiable together. Court's interpretation and reasoning: The Commissioner (Appeals) observed that the software supplied is specifically designed for the hardware and cannot be used independently. The software license paper is merely a key to use the embedded software, and thus the software and license fees "go hand-in-hand." The Tribunal noted that the impugned goods were classified under CTH 8538 9000 by the original authorities and the Commissioner (Appeals), relying on the interpretation that the software license is inseparable from the hardware. Key evidence and findings: The hardware imported was pre-loaded with the software, and the software license was in paper form containing a key to use the software. The Bill of Entry and purchase orders listed the paper license and hardware as separate line items. The appellant admitted that the software was embedded in the hardware and its value was included in the hardware's value. Application of law to facts: The Tribunal examined whether the software license paper could be considered an inseparable part of the hardware under the Customs Tariff Act and the Board's Circulars. The Tribunal found that although the software is embedded in the hardware, the license paper itself is a document conveying the right to use the software and is distinct from the hardware. Treatment of competing arguments: The Revenue argued that the software license is integral to the hardware and thus liable to be classified together under CTH 8538 9000. The appellant contended that the paper license is a separate item and should be classified independently under CTH 8523 8020 or 4907 0030, relying on Supreme Court decisions and Board Circulars. The Tribunal noted that the original authorities relied on a decision in the Hewlett Packard India Sales Pvt. Ltd. case which was subsequently set aside by the Tribunal, weakening the Revenue's position. Conclusions: The Tribunal concluded that the software license in paper form is not an integral part of the hardware for classification purposes and cannot be merged with the hardware classification under CTH 8538 9000. Issue 2: Appropriate Classification of Software License in Paper Form under CTH 8523 8020 or CTH 4907 0030 Relevant legal framework and precedents: CTH 8523 8020 covers "Discs, tapes, solid-state non-volatile storage devices, 'smart cards' and other media for the recording of sound or of other phenomena, whether or not recorded, including matrices and masters for the production of discs." CTH 4907 0030 covers "Documents of title conveying the right to use Information Technology software." The CBEC Circular No. 15/2011-Cus dated 18.03.2011 clarified that documents conveying the right to use software merit classification under CTH 4907, not under CTH 8523 8020. Precedents cited include:
Court's interpretation and reasoning: The Tribunal referred to the CBEC Circular and the above precedents to hold that the software license in paper form is a document conveying the right to use embedded software and hence merits classification under CTH 4907 0030. The Tribunal emphasized that classification must be based on the form in which goods are imported and their commercial identity. Key evidence and findings: The appellant's paper licenses were separate line items in the Bill of Entry and purchase orders. The software was pre-loaded in the hardware, and the license paper was merely a key or document conveying the right to use the software. The Tribunal noted that duty had already been paid on the embedded software included in the hardware's value. Application of law to facts: Applying the CBEC Circular and the precedents, the Tribunal held that the paper license is not software itself but a document conveying the right to use software, thus falling under CTH 4907 0030. This classification is distinct from hardware classification and carries a different duty implication. Treatment of competing arguments: The Revenue's argument that the software license should be classified as part of hardware was rejected based on the binding precedents and Board Circular. The appellant's reliance on Supreme Court decisions and Tribunal rulings was accepted as authoritative. Conclusions: The Tribunal concluded that the software license in paper form is rightly classifiable under CTH 4907 0030 as a document conveying the right to use software and not as part of hardware under CTH 8538 9000. Issue 3: Valuation and Duty Implications Relevant legal framework and precedents: Customs valuation principles require that the value of imported goods be assessed for duty based on the transaction value and classification. The inclusion of software license value in hardware valuation depends on whether the license is integral to the hardware or a separate item. Court's interpretation and reasoning: Since the Tribunal held that the software license paper is a separate document conveying the right to use software, its value should not be merged with the hardware value for customs duty assessment under CTH 8538 9000. The duty on embedded software in hardware was already paid. Key evidence and findings: The appellant admitted that the value of embedded software was included in the hardware value and duty paid. The dispute was only about the paper license's classification and valuation. Application of law to facts: The Tribunal applied valuation principles and classification rules to conclude that the software license paper's value should be assessed separately under CTH 4907 0030, not included with hardware. Treatment of competing arguments: The Revenue's position to include the license value with hardware for duty was rejected in light of classification findings and precedents. Conclusions: The Tribunal held that the valuation of software license paper should be separate from hardware and duty assessed accordingly. 3. SIGNIFICANT HOLDINGS The Tribunal's crucial legal reasoning and core principles established include:
The Tribunal's final determinations were:
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