CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL (FROM MUMBAI)

Appeal

C/599 to 602/2007

VODAFONE ESSAR LTD - Complainant(s)

Versus

COMMISSIONER OF CUSTOMS (ACC & IMPORT) - Opp.Party(s)

BEFORE: D N Panda, C J Mathew

T Viswanathan, P R V Ramanan

07 Dec 2017

ORDER

C J Mathew, Technical Member

[1] Appeal of M/s Vodafone Essar Ltd (formerly known as M/s Hutchinson Essar Ltd and M/s Hutchinson Max Telecom Ltd) assails order-in-original no. CC-(SP)-09/2007/ACC (Adj) dated 29th March 2007 in which Commissioner of Customs (Imports), Air Cargo Complex, Mumbai has confiscated goods valued at '4,03,92,425 imported vide bill of entry no. 23926/9.5.2001, the hardware and software valued at '2,12,40,000 imported vide bill of entry no. 264446/29.6.2001 and 263032/26.6.2001, goods valued at US $ 80,895 imported vide bill of entry no. 466496/1.8.2002 and goods valued at '94,20,000 imported vide bill of entry no. 637397/13.6.2003 under section 111 (m) of Customs Act, 1962. Fines were imposed in lieu under section 125 of Customs Act. 1962. The declared value of the goods imported against these bills was ordered to be added to that of multi-application computer system hardware by taking recourse to rule 9 of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 read with section 19 of Customs Act, 1962 besides imposing penalties on the importer and some employees of the importer. Aggrieved by these detriments, M/s Vodafone Essar Ltd and the employees are in appeal.

[2] The telecom operator entered into an agreement with M/s Inter-Voice Brite, UK for supply of equipment and technology in three phases to implement of pre-paid services over its telecom network. A purchase order for goods and services valued at US$ 1,500,000, with some optionals at additional cost, was issued on 18th January 2001 for import of multi-application platform comprising voice mail system hardware and voice mail system software. Five bills of entry were filed between May 2001 and June 2003 for clearance of various components declared as multi-application computer systems hardware, multi-application software, software for voice-mail service, voice mail service hardware and voice mail service software.

[3] Heard both sides and perused the records.

[4] On behalf of the appellants, Learned Counsel submitted that the imported goods were as per description in the bills of entry. Drawing attention to the first item in the Table titled as Annexure-A to the show cause notice, it was elaborated that bill of entry no. 239236 dated 9th May 2001 has accurately segregated the components as multi-application computer system hardware and the software described therein as multi-application software with hardware classified under heading 847110 and the software under heading 852499 of the First Schedule in the Customs Tariff Act, 1975. For the import of software, appellant claimed exemption from duty under notification no.17/2001 dated 1st March 2001. Likewise, the goods described in sl nos. 2, 3 and 5 of the Table referredwere also accurately described and benefit of notification benefit claimed only according to eligibility.

[5] It was also submitted on behalf of the appellant that the software component had been incorrectly denied separate assessment deliberately to exclude the coverage of exemption and that, instead of accepting, or appraising, value as mandated in section 14 of Customs Act, 1962 for each item of imports, rule 9 of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 was wrongly invoked along with incorrect application of section 19 of Customs Act, 1962 to adjudicate the matter.

[6] Learned Counsel for appellant submitted that the goods covered in the five bills of entry were imported for execution of a turnkey project for implementing pre-paid services. Besides elaborating on the individual characteristics of each of the consignments, their conformity with the descriptions in the bills was brought to our notice as were the billings made by the supplier; that a purchase order had been issued for setting up of the turnkey project as per referred Annexure detailing the elements for the total value of the turnkey project to be implemented in three phases; that item a and b were intended for Phase I of the project, item c and d of clause 2.0 for Phase II of the turnkey project and item e for Phase III.

[7] The contours of the scheme of implementation of the technical agreement was explained with reference to

(a) hardware, ancillary hardware and software, CDN, SMPP, Warm Standby SPU (b) software and licenses (c) configuration and acceptance testing (d) standard documentation (e) warranty for parts and software (f) set of essential spares and (g) delivery and commissioning.

[8] On the financial closure, Learned Counsel explained that pricing methodology, as laid out in the agreement, was in consonance with the segregation of the project as three phases and captioned separately in the agreement. While explaining this aspect, Learned Counsel also drew attention to the contract price mutually agreed upon for the three phases of the project. That certain services were required to implement the project is, admittedly, specified in the purchase document in relation to the hardware and software intended to be procured for the project and also implied in the scope of work detailed for the three phases of the project. It was further contended that clarifications offered vide letter dated 28th September 2001 of the exporter, which though throwing ample light on the entire transaction, was not taken into consideration by adjudicating authority.

[9] Contending that there is no allegation of misdeclaration of value in any of the bills of entry, the unsubstantiated assumption that services were excluded from the price of hardware and that the value of software was liable to be levied to duty at the same rate of duty as hardware was assailed for being discordant with the statutory provisions invoked in the show cause notice. The specific counters are as below:

(a) software, being goods, is liable to duties of customs under a distinct heading 8524 of First Schedule to the Customs Tariff Act, 1975 and is, consequently, eligible for the benefit of duty exemption extended by notification no.17/2001-Cus dated 1st March 2001. The inclusion of software in the hardware is, therefore, of dubious legality.

(b) that it was not in accord with law of commodity taxation to include cost of services in assessable value, and more so, as the agreement referred to by appellant was unambiguously clear.

(c) that rule 9(1) of the Customs Valuation (Determination od Price of Imported Goods) Rules, 1988 is not applicable as services are clearly distinct from the supplied goods and are to be rendered post-clearance.

(d) that recovery of duty is barred by limitation as notice was issued on 6th May 2006 for goods imported between 9th May 2001 and 13th June 2003 without allegation of suppression.

(e) that value of software should not have been included in that of hardware considering that these are distinct goods and liable to different rate of duty with eligibility to the benefits of exemption notification.

[10] Learned Counsel placed reliance on the decision of the Tribunal in Vodafone Essar Gujarat Ltd v. Commissioner of Customs (Imports) Mumbai,2009 237 ELT 458 (Tri.-Mumbai)] and submits that hardware and software should have been dealt with separately though he did concede that this decision of the Tribunal had not been followed in Bharti Airtel Ltd v. Commissioner of Customs Bangalore, 2012 286 ELT 270(Tri.-Bang.)]. Learned Counsel also informed that both these were under scan in the Hon ble Supreme Court in appeals by them as well as by Revenue. Appellant further explains that the Larger Bench of the Tribunal in Bhagyanagar Metals Ltd v. Commissioner of Central Excise Hyderabad III,2016 333 ELT 395 (Tri.-LB)] was in a different context and is also in dispute before the Hon,ble Supreme Court.

[11] Revenue, through its Special Counsel, filed a submission narrating the sum and substance of the allegations against the appellants, in relation to the five bills of entry involved in the adjudication, praying that the same may be considered as part of the arguments. These are:

a) impugned order relates to goods imported under five bills of entry as detailed in the annexure;

b) goods were imported under an agreement between M/s Vodafone Essar Ltd and M/s Inter-Voice Brite, UK and the Agreement, as well as the technical literature provided by importers, indicate that the goods were collectively known as voice service director platform the principal function of which was the providing of pre-paid telephone services with the additional feature of voice mail which are fully elaborated in paragraph 59 of the impugned order;

c) imports effected against bill of entry no. 239236 were described as (i) multi-application computer system hardware with declared value of ' 1,69,64,818 and (ii) multi application software with declared value of ' 2,34,27,607 but that its actual description of voice service director platform was not included in the bill of entry with intent to mislead and that it was only upon further investigation that exclusion of value of services required for the first phase of the project in the application software was unearthed when Shri Laxmikant Natarajan of Vodafone was summoned for recording statement under section 108 of Customs Act, 1962 and that the segregation of the amount of '2,34,27,607 into software and other services was not made available by M/s Vodafone Essar despite several requests leading to denial of benefit of exemption in notification no.17/2001-Cus for the entire amount of '2,34,27,607 and confirmation of recovery of differential duty of '90,74,918.

d) in bill of entry no. 264446, the imported goods were described as voice mail service hardware with declared value of '72,93,816 whereas the import was of the second node of voice service director platform with multiple applications for rendering pre-paid services and this wilful mis-declaration with the intent to avail the benefit of notification no.17/2001 led to confirmation of differential duty of '12,35,281.

e) in bill of entry no. 263032, the imported goods were described as voice mail service software and valued at ' 1,41,58,584 whereas the imports were second node of voice service director platform imported vide bill of entry no. 264446 for implementing the second phase of the project with intent to mislead the assessing officer as is evident from the scope of the agreement which did not cover such software as declared implying that the value so assigned was also consideration for the voice service director platform and, more so, as voice mail was not put into service even two years after the said import of hardware and software for it.

f) based on these facts, the adjudicating authority has concluded that the value declared in bill of entry no. 263032 did not relate to any software but represented payment to overseas supplier for second node for voice service director platform and liable to duty thereof instead of the nil rate claimed in the bill of entry leading to confirmation of differential duty of ' 54,84,469.

g) compact discs containing software for data migration with a declared value of Rs 39,92,237 were imported free of duty against bill of entry no. 466496 whereas, from the quotation/proposal IVB Ref. 2002-40-036 dated 5th April 2002 for migration of prepaid subscriber data from OMVIA to Ericsson IN seized from premises of M/s Vodafone Essar, it was seen that this amount included payment towards services such as benchmark analysis, remote back-up during migration, project management, documentation, technical consultancy and, as per internal memo dated 29th April 2002, US$ 10,500 was agreed to be paid to supplier for site support during actual migration based on which it was held that Rs 20,98,218 was not eligible for duty free clearance but includible in the value of hardware in accordance with rule 9(i)(e) of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 and confirmation of differential duty of Rs 8,12,766.

h) voice mail service software valued at Rs 95,14,200 imported against bill of entry no. 637397 and cleared free of duty appeared to be intended for third phase of implementation which, as per Appendix II of the Agreement between M/s Vodafone Essar Ltd and M/s Inter-Voice Brite envisages, inter alia, supply of application software for prepaid service, voice mail, fax mail and short messaging service but the invoice refers only to voice mail service software as evidenced by admission of Shri Laxmikant Natarajan along with the apparent unwillingness to segregate the values of these several inclusions along with further admission this software was not required for operating the pre-paid system. Holding that these facts were sufficient to conclude that the contracting parties connived to misdeclare in bill of entry no. 637397 for availment of exemption notification no.17/2001 leading to inclusion in the value of voice software director platform in accordance with rule 9(i)(e) of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.

[12] Reiterating the findings in the impugned order, it was contended that the appeals should be dismissed. Learned Special Counsel for Revenue submits that willful misdeclaration on the part of the appellants with intent to evade duty by claiming ineligible exemption, and failure to furnish particulars that had been called for, leaves no other alternative but the recovery of differential duty and consequences of confiscation and penalty. According to him, falsifying the description of goods was intended to conceal the true nature of the goods and this compounded by obduracy in submitting technical details and literature that would throw light on about the nature and character of the goods was intended to divert the attention of assessing officers from the utilization of imported goods for a turnkey project as well as the non-introduction of voice mail service.

[13] Referring to bill of entry no.264446/29.6.2001, he contends that investigation revealed the objective of establishing voice software director platform as a turnkey project. Likewise, he submitted that the description of goods in bill of entry no. 263032/20.6.2001 had been falsified with intention to mislead. According to him, the deliberate misdescription in bill of entry no. 264446 to avail benefit of notification by this modus operandi was made apparent during investigation. Urging us to confirm the impugned order, it was pointed out that the software was essential to make the hardware operable and that their inextricable linkage rendered all components to be interdependent with no segregatable consideration justifying levy of duty on the whole. The failure to provide segregation of the value agreed upon between the buyer and seller other than an unscientific declaration of value is, according to Revenue, contrary to established procedure of law.

[14] We take on record that the show cause notice, in addition to seeking imposition of section 111(m) and section 112 of Customs Act, 1962 for misdeclaration, invokes rule 9(1)(e) of Customs Valuation (Determination of Price of Imported Goods), 1988 read with section 19 of Customs Act, 1962. The notice also seeks to deny eligibility to claim the benefit of exemption available to software and to hardware for voice mail service.

[15] The impugned order has dealt with the charge of misdeclaration thus:

66. In view of the foregoing discussions, I hold that the importers misdeclared the description of goods as Multi Application Computer System Hardware in Bill of Entry No. 239236 dated 09.05.2001 and Voice Mail Service Hardware in the Bill of Entry No. 264446 dated 29.06,2001. Node 2 of the Voice Service Director Platform was misdeclared as Voice Mail Service Hardware in bill of entry Nos. 264446 dated 29.06.2001 for the sake of availing the Notification No. 17/01-Cus Sr. No. 239 and 285. The said misdeclaration renders the goods liable for confiscation under Section 111(m) of the Customs Act, 1962 and I hold the goods liable for confiscation under Section 111(m) of the Act, ibid.

[16] In leading up to this conclusion, the adjudicating authority has reasoned that appellant 65 (ii) ..had not furnished any concrete evidence to refute the allegations in the SCN, while the department has supported the allegation with confessional statements of the officials of the importers corroborated by documentary evidence like manufacturer s catalogues and quotations .In this regard, I place reliance on the decision in the case of K.I. Pavunny Vs. Asst. Collr. (HQ.). C.EX. Collectorate, Cochin, 1997 90 ELT 241 (SC)] wherein it was held by the Hon'ble Supreme Court that confessional statement of accused, if found to be voluntary, can form the sole basis for conviction; if retracted, Court is required to examine whether it was obtained by threat, duress or promise and whether the confession is truthful If found to be voluntary and truthful, inculpatory portion of the retracted confession could be relied upon to base conviction. I observe that there is sufficient corroboration available in this case and none of the notices has retracted the statement

[17] The charge is one of misdeclaration of goods. That these goods are for the purpose of providing pre-paid services to customers is undisputed. We take notice of the specific finding, on the basis of statements and catalogues, that the voice mail hardware was an alternative node to be used as back-up and had been misdescribed in terms of one of its potential uses with intent to avail the benefit of exemption available to imports of voice mail service hardware. In the grounds of appeal and in submissions of Learned Counsel, we do not find any contrarian explanation to this conclusion.

[18] Besides that conclusion supra, the other charges of misdeclaration are based on a statement and certain catalogues that admit to a description other than that recorded in the bill of entry. It is, however, moot whether existence of an alternative nomenclature would justify a conclusion of misdeclaration unless it can be established that such variations compelled a classification that was incorrect or did convince customs officers of claim to a particular classification. Neither of the two descriptions are to be found in the First Schedule to Customs Tariff Act, 1975 and both require fitment within one or other of the legislated descriptions. The impugned order has not rendered any finding that applicable rate of duty on multiple application computer system hardware in bill of entry no. 239236/9.5.2001 has undergone any change in the light of the description admitted to in the statements. Consequently, the finding of misdeclaration in relation to this bill of entry is not backed by a reasonable explanation. Appellant claims that their submissions have not been considered in the impugned order.

[19] The second aspect that has been dealt with in the impugned order is, in the words of the adjudicating authority, 77. From the above facts, it was concluded by the department that value of software was manipulated, inflated and declared arbitrarily and the value shown for different software should form the part of the value of the Multi-Application platform in terms of Rule 9 (1)(e) of the Customs Valuation Rules, 1988, read with section 19 of the Customs Act, 1962. This proposal of the department is based on the fact that the Contract and P.O. is for the entire project consisting of hardware, software and services and there existed no value for individual item. Proceeding to render findings on this aspect, the impugned order has assumed that section 19 of Customs Act, 1962 confers authority to value goods and, in conjunction with rule 9(1)(e) of Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, empowers clubbing values of imports under the different bills of entry and also of the different goods in a bill of entry.

[20] Rule 9(1)(e) pertains to valuation and derives its existence from section 14 of Customs Act, 1962 without the need for any other prop. Once the rate of duty, if ad valorem, is ascertained in consequence of the authority vested by section 12 of Customs Act, 1962, section 14 and its attendant rules suffice to complete the assessment. A perusal of the impugned order does not indicate such a flow. On the contrary, reliance has been placed on section 19 of Customs Act, 1962 as the authority to invoke the rule referred to; undoubtedly, section 19 is not without utility in such a situation. However, it is imperative that section 19 be utilized in the manner and sequence that was intended in the legislative enactment. We hold that the adjudicating authority was incorrect in presuming that section 19 conferred the authority to value goods in the manner undertaking.

[21] Section 19 empowers the ascertainment of rate of duty when goods are presented as a set of articles for clearance. That it is not a provision for valuation should be apparent from the reference within it to specific and ad valorem as the two mutually exclusive possibilities. It empowers the application of the highest rate of duty that would be leviable on the various articles in the set to all the articles. Impliedly, this is to be resorted to when a single value is declared for the set as a whole and it is merely the most appropriate rate of duty that is to be determined from among the varied rates for each article in the set. The proviso in section 19 does not justify the conclusion that it is a valuation provision but is intended to permit separate assessment for such article in the set for which distinct is evidenced by the importer. Contrary to that belief of the adjudicating authority, the converse is not the empowerment by the proviso.

[22] For a clearer appreciation, we reproduce that provision of Customs Act, 1962 19. Determination of duty where goods consist of articles liable to different rates of duty.Except as otherwise provided in any law for the time being in force, where goods consist of a set of articles, duty shall be calculated as follows:

(a) articles liable to duty with reference to quantity shall be chargeable to that duty;

(b) articles liable to duty with reference to value shall, if they are liable to duty at the same rate, be chargeable to duty at that rate, and if they are liable to duty at different rates, be chargeable to duty at the highest of such rates;

(c) articles not liable to duty shall be chargeable to duty at the rate at which articles liable to duty with reference to value are liable under clause

(b): Provided that,

(a) accessories of, and spare parts or maintenance and repairing implements for, any article which satisfy the conditions specified in the rules made in this behalf shall be chargeable at the same rate of duty as that article;

(b) if the importer produces evidence to the satisfaction of the proper officer regarding the value of any of the articles liable to different rates of duty, such article shall be chargeable to duty separately at the rate applicable to it.

[23] That section 19 is an empowerment for classification, and not valuation, is also apparent from the decision of the Hon'ble Supreme Court in Commissioner of Customs Bangalore v. Acer India Pvt Ltd [Appeal (Civil) 2321 of 2007] which dealt with the attempt of Revenue to bring computer notebooks within the ambit of section 19 of Customs Act, 1962 for levy of additional duty of customs of 7% envisaged on CPU with monitor, mouse and keyboard imported as a set in Computers (Additional Duty) Rules, 2004. Their Lordships made particular note of the decision of the Hon'ble High Court of Bombay in Godrej Soaps Private Ltd v. AK Bandyopadhyay and others, 1981 8 ELT 555 (Bom)] by extracting the relevant portion of that judgment

12.Now Section 19 of the Customs Act speaks of a case where goods consist of set of articles. In the present case, the goods viz. the animal compound feed does not consist of a set of articles for, as stated above, there is only one identifiable article viz. animal compound feed. In order to attract the provisions of Section 19 there must be a collection of articles or otherwise there must be a collection or aggregation of two or more individual and severally identifiable articles, which is not the case here. In the present case, the goods are made up of several ingredients, which have all lost their identities and have become inseparable even by common processes, and have in fact emerged as a single marketable product. Section 19 of the Customs Act has, therefore, no application whatsoever, and if this is the position, then there is no question of holding that it comes within the compass of Item No. 19 of the Indian Customs and Central Excise Tariff.

13.I may here add that in interpreting Section 19 of the Customs Act along with Item No. 19 of the Indian Customs and Central Excise Tariff, the Respondents pressed into service the two notifications referred to in the impugned orders and it was strenuously contended by the Respondents that on construing these notifications, it must be held that the goods in question were covered under Section 19 of the Customs Act and came within the scope of Item No. 19 of the Indian Customs and Central Excise Tariff. Ordinarily, I would have dealt with this argument of the Respondents in detail, but Mr. Taraporewala, the learned Counsel for the Petitioners pointed out that the said notifications applied to Item No. 21 of the Indian Customs and Central Excise Tariff and the language thereof could not be stretched to interpret either Section 19 of the Customs Act or Item No. 19 of the Indian Customs and Central Excise Tariff. Mr. Taraporwala's contention was and is in order and I accept the same. In view of this, it is not necessary for me to deal with the said argument. before holding that Tribunal had correctly decided that the coverage for additional duty of 7% on the articles under heading 8471 of First Schedule to Customs Tariff Act, 1975 specified in the said Rules would not be applicable to notebooks.

[24] The impugned order has referred to proviso in section 19 of Customs Act, 1962 as the authority to club the values of the various goods. There is no finding as to the applicability of section 19 of Customs Act, 1962 to the facts pertinent to the dispute. Such finding should necessarily decide if the goods are presented as a set of articles with a unified, non-separable value, enumerate the various articles that comprise the set, ascertain the rate of duty applicable to each and then compute the duty liability of the unified value by applying that identified rate of duty. Without such an exercise, invoking of section 19 of Customs Act, 1962 is not consummated.

[25] To enable this to be done, we set aside the impugned order and direct the adjudicating authority to decide the matter afresh after considering the allegations, pleading of appellant and evidence on misdeclaration and by application of the invoked provisions in the manner prescribed.

[26] Appeals are disposed off by way of remand.

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