Supreme Court Upholds Customs Valuation: Indusind Media & Communications Ltd. vs. Commissioner of Customs (27 September 2019)

Introduction

Date of the Judgment: 27 September 2019
Citation: Civil Appeal No. 2498 of 2018
Judges: Uday Umesh Lalit, J. and Vineet Saran, J.

When importing goods, how should customs officials determine their value, especially when software and services are involved? The Supreme Court of India tackled this question in a case concerning the import of cable TV equipment. The core issue was whether the value of software embedded in the imported equipment and the cost of related services should be included in the assessable value for customs duty. The court also had to decide if the imported items should be classified individually or as a complete “Head End” system. The judgment was delivered by a two-judge bench comprising Justice Uday Umesh Lalit and Justice Vineet Saran.

Case Background

Indusind Media & Communications Ltd. (the appellant), imported goods at the Air Cargo Complex, New Delhi, and filed a Bill of Entry on 26 June 2003. They declared the goods as Multiplexor Satellite Receivers, test and measurement equipment, etc., and provided invoices for 19 items, classifying them under Chapters 84/85 of the Customs Tariff. The customs duty was paid as per the declaration. Subsequently, information was received that investigations had commenced against the appellant for similar imports in Mumbai. This led to a provisional assessment under Section 18 of the Customs Act, 1962.

Investigations revealed that the appellant had ordered equipment from the UK, one set each for Mumbai and Delhi. These sets, when combined, formed a “Head End” for cable TV operations. The “Head End” is an equipment at a local TV office that originates cable TV services to subscribers through a Conditional Access System (CAS). The investigation also suggested that the appellant had misdeclared the value of the imported consignments by suppressing the value of embedded software and services for system integration. The purchase order was also revised to show CIF instead of FOB.

Timeline

Course of Proceedings

The Principal Commissioner of Customs (Import) issued an order on 29 December 2015, rejecting the appellant’s declaration. The Commissioner concluded that the appellant had intentionally misdeclared the value and classification of the imported goods. The goods were revalued under Rule 9(1)(e) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, and classified under Customs Tariff Heading (CTH) 85438999. A differential duty of Rs. 54,19,475 was confirmed, and the goods were confiscated with a redemption fine of Rs. 10,00,000. Penalties were also imposed under Sections 112(a) and 114AA of the Customs Act, 1962.

The appellant appealed to the Customs Excise and Service Tax Appellate Tribunal (Tribunal), arguing that there was no undervaluation, that the software and post-import services were incorrectly included, and that Note 4 to Section XVI of the Customs Tariff Act, 1975, did not apply. The Tribunal upheld the inclusion of software value but reclassified the goods under heading 8525 instead of 8543. The matter was remanded to the adjudicating authority to recompute the differential duty based on the new classification.

Legal Framework

The core legal provisions involved in this case are:

• Section 18 of the Customs Act, 1962: This section deals with the provisional assessment of customs duty.
• Section 111(m) of the Customs Act, 1962: This provision allows for the confiscation of goods if there is a misdeclaration of value or description.
• Section 112(a) of the Customs Act, 1962: This section provides for penalties for improper importation of goods.
• Section 114AA of the Customs Act, 1962: This provision deals with penalties for false declarations.
• Section 130E of the Customs Act, 1962: This section allows for appeals to the Supreme Court from orders of the Tribunal.
• Rule 9(1)(e) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988: This rule allows for the addition of all other payments made as a condition of sale to the transaction value.
• Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007: This rule is similar to Rule 9 of the 1988 Rules and deals with the inclusion of costs and services in the transaction value.
• Note 4 to Section XVI of the First Schedule to the Customs Tariff Act, 1975: This note states that if a machine (or combination of machines) consists of individual components that contribute to a clearly defined function, the whole should be classified under the heading appropriate to that function.
• Tariff Item 8525 of the Customs Tariff Act, 1975: This heading covers “Transmission apparatus for radio telephony, radio-telegraphy, radio-broadcasting or television.”
• Tariff Item 8543 of the Customs Tariff Act, 1975: This heading covers “Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this Chapter.”

The Supreme Court also considered the interplay between these provisions and the valuation principles established in previous judgments.

Arguments

Appellant’s Arguments:

• The appellant argued that the imported goods were correctly classified as individual items under various chapter headings, such as CTH 85175010, CTH 85281299, CTH 85438910, CTH 84717010, and CTH 85249112, and not as a complete “Head End” system.
• They contended that the 19 different items imported did not form a single composite “Head-end” and each item had an individual function.
• The appellant claimed that the software and post-import services should not be included in the assessable value of the goods.
• They submitted that the activities like engaging the services for appropriate software, as a result of which cards were embedded in items of import, were essentially post-import activities and could not be taken into account for the purposes of valuation.
• The appellant also argued that the 2007 Rules should not apply because the Bill of Entry was of the year 2003.

Respondent’s Arguments:

• The respondent argued that even though the invoices mentioned individual items, the dominant intent was to use them collectively as part of one apparatus, thus attracting Note 4 to Section XVI.
• They contended that the software was already embedded in the equipment at the time of import, and thus its value should be included in the assessable value.
• The respondent submitted that Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, was almost identical to Rule 10 of the 2007 Rules, and the reliance on either rule was not misplaced.
• They argued that the charges covered by the relevant invoice amounting to US $ 1,00,019 were rightly included since they pertained to charges where the software covered by the invoice was already embedded in the equipment.
• The respondent refuted the claim that there were post-import charges included in the valuation, stating that the software cards were embedded when the import took place.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court considered the following principal question:

1. Whether the CESTAT has erred in failing to consider the primary submission of the Appellant, that the 19 different items imported by the Appellant under the Bill of Entry No.2660085 dated 26.06.2003 (‘BOE’) even if taken together do not form one composite ‘Head-end’ and that each item has an individual function, and each item is to be classified under the Chapter Heading it falls mainly CTH 85175010, CTH 85281299, CTH 85438910, CTH 84717010 and CTH 85249112.

Additionally, the court dealt with the sub-issue of whether the value of the embedded software should be included in the assessable value of the imported goods.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• SET India Pvt. Ltd. vs. Commissioner of Customs, Cochin [2003 (152) ELT 190 (Tribunal – Mumbai)]: This case was relied upon by the Tribunal to classify the goods under heading 8525.
• Commissioner of Customs vs. Multi Screen Media Private Limited [2015 (322) ELT 421 (SC) = (2015) 16 SCC 263]: This case was also relied upon by the Tribunal for the classification of goods under heading 8525.
• Commissioner of Customs (Port), Chennai vs. Toyota Kirloskar Motors P. Ltd. [2007 (213) ELT 4 (SC) = (2007) 5 SCC 371]: This case was used to explain the application of Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. The court also discussed whether technical assistance fees had a direct nexus with importation of goods.
• Commissioner of Customs (Port) vs. J.K. Corpn. Ltd.: This case was cited to clarify that the value of imported goods must be determined at the time and place of importation and that post-importation services should not be included in the assessable value.
• Essar Gujarat Ltd. [ (1997) 9 SCC 738]: This case was discussed to differentiate between pre-importation and post-importation charges, clarifying that only pre-importation charges should be included in the transaction value.
• Commissioner of Customs, Ahmedabad vs. Essar Steel Ltd. [2015 (319) ELT 202 = (2015) 8 SCC 175]: This case was cited to support the principle that technical agreements related to post-importation activities should not be included in the value of imported goods.
• Commissioner of Customs (Import), Mumbai vs. Hindalco Industries Ltd. [(2015) 320 ELT 42 (SC) = (2015) 14 SCC 750]: This case followed the same principle that technical agreements involved in said cases pertained to post-importation activity.
• Commissioner of Customs, New Delhi vs. Prodelin India (P) Ltd. [2006 (202) ELT A130 = (2006) 10 SCC 280]: This case was cited to support that technical know-how fee was in respect of post-importation activities and could not be added to the value of the imported goods.

Legal Provisions:

• Note 4 to Section XVI of the First Schedule to the Customs Tariff Act, 1975: This note was crucial in determining that the imported items should be classified as a single unit based on their intended function.
• Rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988: This rule was used to determine the transaction value of the imported goods, including the cost of embedded software.
• Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007: This rule was referred to by the Tribunal, but the Supreme Court clarified that the 1988 Rules were applicable.
• Tariff Item 8525 of the Customs Tariff Act, 1975: This heading was ultimately determined to be the correct classification for the imported goods.
• Tariff Item 8543 of the Customs Tariff Act, 1975: This heading was initially used by the department but later changed by the Tribunal.

Authorities Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court followed the principles laid down in Commissioner of Customs (Port), Chennai vs. Toyota Kirloskar Motors P. Ltd. [2007 (213) ELT 4 (SC) = (2007) 5 SCC 371]* regarding the application of Rule 9 of the 1988 Rules and the distinction between pre- and post-importation charges.
• The Court distinguished the facts from Essar Gujarat Ltd. [ (1997) 9 SCC 738]*, emphasizing that the software was embedded before import and not a post-import activity.
• The Court relied on SET India Pvt. Ltd. vs. Commissioner of Customs, Cochin [2003 (152) ELT 190 (Tribunal – Mumbai)]* and Commissioner of Customs vs. Multi Screen Media Private Limited [2015 (322) ELT 421 (SC) = (2015) 16 SCC 263]* for the classification of goods under heading 8525.
• The Court used Note 4 to Section XVI of the First Schedule to the Customs Tariff Act, 1975* to support the classification of the imported items as a single unit based on their intended function.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Intended Function: The Court emphasized that the imported items were intended to function together as a “Head End” system for cable TV operations. This was a crucial factor in applying Note 4 to Section XVI of the Customs Tariff Act, 1975.
• Pre-Importation Embedding: The Court noted that the software was embedded in the equipment before import, making it a part of the imported goods rather than a post-import service.
• Rule 9 of 1988 Rules: The Court found that Rule 9 of the 1988 Rules was applicable, and the value of the embedded software should be included in the transaction value.
• Consistency with Previous Judgments: The Court sought to maintain consistency with previous judgments while distinguishing the facts of this case from those involving post-importation services.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The Court’s reasoning was a mix of factual analysis (such as the nature of the imported goods and the timing of software embedding) and legal interpretation (application of Note 4, Rule 9, and relevant case law).

Logical Reasoning Flowchart:

The Court rejected the appellant’s argument that the software was a post-import activity. They reasoned that the software was embedded before the import, making it a part of the imported goods. The Court also rejected the argument that the 2007 Rules should apply, clarifying that the 1988 Rules were the applicable rules for the case.

The Court quoted from the judgment:

• “The facts also disclose that out of 19 items indicated in the Bill of Entry, only 8 items were physically presented while the rest were already embedded in the main unit.”
• “These facts are not only reflective that the individual components were intended to contribute together and attain a clearly defined function as dealt with in Note 4 of Section XVI as stated above, but also indicate that software that was embedded through cards in the main unit, was not any post-importation activity.”
• “The value of the software and the concerned services were therefore rightly included and taken as part of the importation.”

There was no dissenting opinion in this case.

Key Takeaways

• Classification of Goods: When imported items are intended to function together as a single unit, they should be classified under the heading appropriate to that function, as per Note 4 to Section XVI of the Customs Tariff Act, 1975.
• Valuation of Embedded Software: If software is embedded in imported goods before the import, its value should be included in the transaction value as per Rule 9 of the Customs Valuation(Determination of Price of Imported Goods) Rules, 1988.
• Distinction between Pre- and Post-Import Activities: Only pre-importation costs and services should be included in the assessable value of imported goods. Post-importation activities should not be added to the transaction value.
• Applicability of Rules: The relevant rules for valuation are those in force at the time of import. In this case, the 1988 Rules were applicable, not the 2007 Rules.
• Burden of Proof: Importers must accurately declare the value and classification of imported goods. Misdeclarations can lead to penalties and confiscation of goods.

Conclusion

The Supreme Court’s judgment in the case of Indusind Media & Communications Ltd. vs. Commissioner of Customs upheld the decision of the Tribunal. The Court affirmed that the imported items were correctly classified as a single unit based on their intended function as a “Head End” system for cable TV operations. The Court also held that the value of the embedded software was rightly included in the assessable value of the goods because it was embedded before the import. The judgment underscores the importance of accurately declaring the value and classification of imported goods and highlights the distinction between pre- and post-importation activities. This case serves as a significant precedent for determining the valuation of imported goods when software and related services are involved and emphasizes the need to consider the intended function of imported items as a whole.