The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has upheld the inclusion of the value of software licences downloaded from the internet in the assessable value of imported hardware security locks (dongles), ruling that where the hardware and software are inseparable and sourced from the same supplier, the software licence fee forms part of the transaction value for customs purposes. 

The bench of Dr. Rachna Gupta (Officiating President) and Hemambika R. Priya (Technical Member) has observed that  although the importer claimed to have informed the department regarding software downloads, the information had not been furnished to the competent assessing authority. This omission justified invocation of the extended limitation period, particularly since exclusion of the software value resulted in evasion of customs duty. 

The dispute arose from imports made by the appellant/assessee, which imported Hardware Against Software Piracy (HASP) locks from an Israeli supplier, M/s Aladdin Knowledge Systems Ltd. The importer declared only the value of the physical hardware locks in the bills of entry, valuing each lock at US$3.

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During customs scrutiny, the importer admitted that after importing the hardware locks, it regularly downloaded corresponding DCM software licences from the same supplier over the internet. The company further acknowledged that customs duty had not been paid on the value of those software licences and undertook to discharge the differential duty liability.

Based on this admission, customs authorities reassessed one of the consignments by enhancing the value of each hardware lock from US$3 to US$8 after including the software licence cost. The importer paid over ₹7.67 lakh in customs duty along with applicable interest under protest. 

Subsequent investigations revealed that similar imports had been made between April 2007 and June 2009 without including the value of downloaded software licences in the assessable value.

The department issued a show cause notice demanding differential customs duty of approximately ₹23.73 lakh on software licence payments aggregating around ₹1.88 crore. Interest and penalty under the Customs Act were also proposed, contending that the importer had consistently undervalued the imported goods by excluding an essential component of the product. 

Before the Tribunal, the importer argued that the DCM software licence fee could not be added to the assessable value under Rule 10(1)(c) of the Customs Valuation Rules.

According to the appellant, the software licence was neither a condition for the sale of the hardware lock nor an amount payable directly or indirectly for purchasing the imported goods. It maintained that the downloaded software merely provided security functionality and therefore should remain outside customs valuation. The importer also argued that the extended limitation period was wrongly invoked because it had already intimated the department regarding software downloads. 

Rejecting these submissions, the CESTAT observed that the facts clearly established that each imported hardware lock was specifically linked to a corresponding DCM software licence supplied by the same foreign vendor.

The Bench noted that the Director of the importing company had admitted that every imported dongle required downloading of a vendor code or DCM software licence to become operational. The software licences were billed separately by the same overseas supplier, and payments were remitted through banking channels.

The Tribunal held that although the hardware and software were supplied at different points in time, they were customized and specifically designed for each other, making them commercially and functionally inseparable. 

Interpreting Section 14 of the Customs Act, 1962, the Tribunal reiterated that customs valuation is based on the “transaction value”—the price actually paid or payable for imported goods together with amounts that are required to be included under the statutory framework.

The Bench concluded that since the hardware lock could not function without the corresponding software licence, the software constituted an integral component of the imported product. Accordingly, the value of both the hardware and the downloaded software collectively represented the true transaction value liable to customs duty. 

The Tribunal placed significant reliance on the Supreme Court’s judgment in Commissioner of Customs, Chennai v. Hewlett Packard India Sales (P) Ltd., where it was held that a laptop imported with its operating system constitutes a single integrated product because the hardware cannot effectively function without the software.

Drawing a parallel, the CESTAT observed that a hardware security lock without its corresponding software licence is merely an incomplete device incapable of performing its intended function. It also referred to its earlier decision in Atul Kaushik v. Commissioner of Customs, which recognised that software downloaded from abroad constitutes import of goods for customs purposes. 

The Tribunal also upheld the invocation of the extended period of limitation.

The CESTAT upheld the differential customs duty, interest, and penalty imposed on the importer. The Tribunal dismissed the appeal, reaffirming that where downloaded software is indispensable to the functioning of imported hardware and both originate from the same supplier, the software licence value must be included in the assessable value for customs purposes. 

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