HCL Technologies Ltd. Vs Commissioner of Customs (Adjudication) (CESTAT Delhi)
Conclusion: License fee paid by HCL to SAP India could not be included in the transaction value of the CD imported from SAP Germany under Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 as license fee was held to be a payment for the right to use the software, an intangible right and not a condition of sale of the physical CD containing the software. Penalty under Section 112(a) of the Customs Act, 1962 could not be imposed on either HCL Technologies Ltd. or SAP India Pvt. Ltd., as there was no evidence of suppression, misdeclaration, or mala fide intent.
Held: Assessee-company provided software-led IT and infrastructure management services. To facilitate its business, it entered into an End-User License Agreement (EULA) with SAP India Pvt. Ltd. for a non-exclusive, perpetual license to use SAP’s proprietary software and documentation. SAP India is a wholly owned subsidiary of SAP AG, Germany. SAP India sold licenses to Indian end-users and remitted 55% of the recognized revenue to SAP Germany. Software was usually delivered electronically through SAP’s website. Physical delivery via CD was optional and provided only upon specific customer request. In such cases, SAP Germany exported the CD directly to the end-user through DHL, declaring a nominal customs value. HCL entered into with the EULA for procuring additional software licenses worth ₹1,85,97,808. Around the same period, a CD containing SAP software was couriered by SAP Germany under Bill of Entry No. 624877 (29.06.2006) showing a declared value of ₹2,558. DRI alleged undervaluation and initiated investigation. SAP India deposited a total of ₹9.61 crore towards customs duty during the investigation, while HCL paid ₹27.17 lakh. A show cause notice was issued proposing to reject of the declared value of ₹2,558 under Rule 10A of the Customs Valuation Rules, 1988; to include the license fee of ₹1.86 crore under Rule 9(1)(c) (royalty/licence fee condition of sale); demand of differential duty and interest under Section 28, and penalties proposed under Section 112(a) against both HCL and SAP India. Commissioner of Customs accepted the department’s view and confirmed the demand, observing that the license fee and the CD formed part of a single transaction and were inseparable. Aggrieved by this order, HCL filed an appeal before the CESTAT. Assessee contended that the payment of license fee to SAP India was for the right to use software, not for purchase of the CD; CD had no commercial value, being a mere medium of delivery; EULA and CD were distinct transactions — one for intangible rights, another for physical media hence, inclusion of license fee in the value of the CD under Rule 9(1)(c) was unjustified. Department contended that the license and CD were inseparable — without license, CD could not be used; the nominal declaration of value was part of a designed mechanism to evade duty, License fee was a condition of sale and had to be included in the assessable value and SAP India and HCL acted in collusion to understate customs value. It was held that license fee paid by HCL to SAP India was for right to use the software, not for the CD itself. The software was delivered electronically, and the CD had only a symbolic or incidental role. Therefore, conditions of Rule 9(1)(c) were not satisfied, and license fee could not be added to the value of the CD. Department failed to prove any abetment or mala fide on part of SAP India. SAP India’s voluntary deposit of duty negated any intention to evade duty. Hence, penalty under Section 112(a) could not be imposed on either HCL or SAP India. Tribunal explained that the import of CDs and the payment of license fees were independent transactions, and customs duty could not be demanded on the license fee. Tribunal set aside the order of the Commissioner and allowed the appeal, granting full relief to HCL Technologies.
