By TIOL News Service

MUMBAI, JUNE 11, 2014: THE appellant manufactured and sold set-top boxes to M/s Thompson Holding India Pvt. Ltd. M/s THIPL had in turn an agreement to sell the STBs to Tata Sky. M/s Tata Sky supplied remote controls and viewing cards to the appellant through M/s Thompson. M/s NDS is a foreign collaborator of Tata Sky and NDS had given access to the appellant to download certain types of software from their server. M/s Tata Sky had agreement with NDS for the use of the software. The software was downloaded into a flash memory by the appellant which was then soldered to the populated printed circuit board of the set top boxes which were cleared to M/s Thompson. Tata Sky had paid royalty/licence fee to NDS for supply of the aforesaid software. The case of the department is that the value of remote control and viewing card supplied by Tata Sky should be included in the assessable value of STBs as they form an essential part of the STB. Further the amount of royalty/licence fee paid by Tata Sky to NDs for the download of the software by the appellant should also form part of the assessable value of the STBs. These two cost elements are addable to the assessable value in terms of Rule 6 of the Valuation Rules, 2000 read with section 4(1)(b) of the Central Excise Act, 1944.

Accordingly two SCNs were issued to the appellant for the period from June 2006 to May 2007and the same were confirmed by the CCE, Pune-III along with equivalent penalties and interest.

The appellant is before the CESTAT and submits -

++ For the purposes of excise duty, what is relevant is the transaction between the appellant and its customer, Thompson. Excise is not concerned with the transaction between Tata Sky and its customers. The remote control provided by Tata Sky is a universal remote control and is not specific to any particular piece of STB. STB is complete and functional without remote control.

++ The appellant is manufacturing and exporting STBs to USA and remote controls are not supplied with STBs in the case of exports. This shows that STB is complete in itself without remote control.

++ Remote control has been packed along with the STB only for convenience. No new commodity comes into existence by putting remote control along with STB and hence no duty can be demanded on the value of remote control.

++ Reliance is placed on the decision of the apex court in the case of Shriram Bearings = 2002-TIOL-47-SC-CX, Essel Propack = 2011-TIOL-112-SC-CX, Electronics Corporation = 2004-TIOL-307-CESTAT-BANG, to support their contention that value of accessories is not includible in the assessable value of main product, especially when the same are not manufactured by the appellant and supplied free of charge by the buyer.

++ Even as per Rule 6 of the Valuation Rules, value of remote control is includible in the STB only if the remote control supplied is used in the production and sale of STB. Since production of STB is complete without remote control, remote control value cannot be added to the value of STB for levy of excise duty.

++ As regards inclusion of value of the viewing card provided by Tata Sky, the viewing card carries a number printed on it. The said number is scanned into a computer which is paired with the STB to enable Tata Sky to maintain the services provided to its customers. Thus at the appellant's end, data entries are made/created linking/pairing the viewing card number with the corresponding STB number. The viewing card is merely inserted into the slot provided for it in the STB. Thus the STB is complete even without the viewing card and hence inclusion of value of viewing card in the value of STB does not arise. In the case of STBs exported, viewing card is not supplied which also proves that STB is complete in itself without the viewing cards.

++ Rule 6 of the Valuation Rules does not provide for inclusion of any royalties paid unlike Rule 9(1)(c)of the Customs Valuation Rules.

++ The law is settled that software, contained in a medium, which is residing inside hardware should be classified separately under heading 8524 and should not be classified along with the hardware in terms of Note 6 to Chapter 85. Case laws cited are - PSI Data Systems Ltd. = 2002-TIOL-46-SC-CX, Acer India Ltd. = 2004-TIOL-81-SC-CX-LB, Sprint RPG = 2004-TIOL-81-SC-CX-LB.

++ Penalty cannot be imposed u/r 25 as the case involves interpretational issues; moreover no contravention is present.

++ The entire demand in the present case is within the normal period of limitation and the appellants had paid the duty demand with interest when the objection was raised by the department, therefore, there is no suppression of facts or intention to evade payment of duty and hence imposition of equal amount of penalty is very harsh and inequitable.

Accordingly it is prayed that the appeal be allowed.

The Revenue representative reiterated the findings of the adjudicating authority and submitted that the adjudged dues need to be upheld and the appeal should be dismissed.

The Bench extracted the provisions of rule 6 of the Valuation Rules, 2000 and observed -

+ A plain reading of the said Rule makes it obvious that the expression "and" is used between 'production' and 'sale' is used not in conjunctive sense but in a disjunctive sense. This is obvious from clauses (ii) to (iv) to the Explanation where the items specified therein are used in or for production of goods. They are not required for the sale of such goods. Thus the expression "and" has to be read as "or" in a disjunctive sense. The word 'or' is normally disjunctive and 'and' is normally conjunctive but at times they are read as vice versa to give effect to the manifest intention of the Legislature as disclosed from the context. In the present case, from the context, it is obvious that the word 'and; has been used in a disjunctive sense. Secondly a legal fiction has been created to include the money value of goods supplied free of charge or at reduced cost by the buyer which shall be treated as an additional consideration flowing directly or indirectly from the buyer to the assessee. It is in this light the said Rule has to be applied to the facts of the case in hand.

After visiting the MOU between Tata Sky and Thompson and the product specifications the Bench concluded that the conditional access system (CAS) is a key feature of the STB and the subscriber access card (smart card) is the key component of the CAS; the smart card is the system's active security device; in other words, the smart card is an integral part of the STB and it is not an accessory. Therefore, the cost of the same has to be included in the assessable value of the STB in terms of Rule 6 of the CE Valuation Rules.

So also, after poring over the statement of work between Tata Sky, NDS and Thompson, the Bench summarized that both the smart card (viewing card) and the software are an integral part of the STB manufactured and supplied by the appellant. Adverting to the definition of "flash memory" as available on the website of Princeton University, the CESTAT observed that the flash memory used in the present case is an integrated chip consisting of Voltage generators, voltage detectors, timers, decoders, gates and so on and thus it is an integrated circuit and not merely a media for storage of software.

In the matter of addition of cost of remote control supplied free of charge by the buyer in the value of STBs supplied by the appellant to the buyer, the Bench distinguished the case laws cited by the appellant as being dealing with the situation prior to 01.07.2000. By referring to the apex court decision in Frick India Ltd. = 2007-TIOL-164-SC-CX the Bench concluded -

"…The remote control supplied along with STB may be an accessory supplied free of charge to the buyer by the assessee. But nevertheless it is an additional feature providing value addition. Therefore, in respect of an STB supplied with remote control, the cost of remote control has to be added to the assessable value of the STB supplied and we hold accordingly."

Further, in the matter of inclusion of cost of software which were downloaded and incorporated in the flash memory chip which was soldered onto the PCB of the STB, the Bench relied on the apex court decision in Anjaleem Enterprises Pvt. Ltd. & observed -

"…Applying the ratio of these decisions to the facts of the present case, it becomes abundantly clear that the cost of software which has been loaded on to the flash memory which in turn has been soldered onto the PCB of the STB forms an integral part of the STB and therefore, the value of the STB shall include the value of such software also. In these circumstances, we uphold the confirmation of duty demand against the appellant by including the value of remote control, smart card and software in the value of STB. Consequently, the appellant shall also be liable to interest on the said duty demand confirmed."

In the matter of imposition of penalty u/r 25 of CER, the Bench observed -

"5.13 The last question for consideration is whether the appellant is liable to penalty under Rule 25 of the Central Excise Rules, Rule 25 provides that if a manufacturer removes any excisable goods in contravention of any or the provisions of these rules or with an intent to evade payment of duty, the manufacturer shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed or Rs.2,000/- whichever is greater. Rule 4 of the Central Excise Rules, 2002 mandates that the goods have to be removed on payment of duty as provided under Rule 8. Rule 6 of the Rules provide that the assessee shall himself assess the duty payable on the excisable goods. Therefore, it is the responsibility of the assessee to correctly determine the duty liability and remove the goods on payment of correct amount of duty. In the present case, the assessee has failed to discharge this statutory obligation and therefore, provisions of Rule 25 are clearly attracted. The non-disclosure of the various elements of cost and the existence of various agreements in respect of the transaction also lends credence to the allegation of mensrea on the part of the appellant."

On the quantum of penalty imposable, the Bench held -

"The question is whether the penalty should be imposed equal to the duty sought to be evaded or not. The issue involved in this case is the valuation of goods under clearance. No doubt, the assessee did not declare or reveal to the department the cost of items supplied free by the buyer and the non-inclusion of cost of such free supply in the assessable value of the STB manufactured and cleared by them. The appellant also did not inform or declare to the department the existence of various agreements relating to the design, manufacture and supply of the STB which could have supported its contention that it did not have any intention to evade payment of duty. Since the issue entailed interpretation of the provisions relating to valuation, in our considered view, imposition of penalty equal to the duty is not warranted. A penalty of (say) 5% of the differential duty demanded would suffice for contravention of the statutory provisions. Accordingly, we reduce the penalty imposed on the appellant from Rs.10,78,71,082/- to Rs.50 lakhs (Rs. Fifty Lakhs)."

In fine, the differential duty demand of Rs.10.78 cores was upheld along with interest and a penalty was imposed of Rs.50 lakhs.

In passing: We will be seeing more of this case in the days to come. Also see 2011-TIOL-745-CESTAT-MUM & 2012-TIOL-267-HC-MUM-CX.

(See 2014-TIOL-991-CESTAT-MUM)