Software Value Can’t Be Added To Hardware Value For Determining Assessable Value Of Imported Diamond Cutting, Scanning Machines: CESTAT

The Mumbai Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the value of software cannot be added to the value of hardware for determining the assessable value of imported diamond cutting and scanning machines. The Bench of Dr. Suvendu Kumar Pati (Judicial Member) and M.M. Parthiban (Technical Member) has observed that a computer and its software are distinct and separate; even if a machine cannot function effectively without software, the value of the software cannot automatically be included in the assessable value of the hardware. Between 2009 and 2012, several diamond exporters imported diamond processing and scanning machines from Israeli suppliers, including Sarin Technologies Ltd. and Galatea Ltd., under the EPCG Scheme. The machines were used for cutting and polishing rough diamonds before export. The Directorate of Revenue Intelligence (DRI), Ahmedabad, initiated investigations in 2013 alleging undervaluation. According to the Department, the importers had artificially split composite invoices into two parts: Hardware (machine) – approximately 1/3rd of total value and Software – approximately 2/3rd of total value. Only the hardware invoice was presented for customs assessment, while the software component—downloaded and installed separately—was allegedly suppressed to avoid payment of duty. Based on this theory, the Commissioner redetermined the assessable value by clubbing software and hardware costs, invoking extended limitation and confirming substantial duty demands along with penalties under Sections 114AA and 111(m) of the Customs Act. The Tribunal framed two central questions: Whether the value of software and hardware could be combined to determine the transaction value of diamond scanning machines under Section 14 of the Customs Act. Whether reassessment was permissible years after final assessment and clearance under Sections 17 and 47 of the Customs Act. The Bench reproduced the Supreme Court’s analogy that just as a cassette recorder and cassette are separate goods, the value of the cassette cannot be included in the value of the recorder. The Tribunal observed that separate invoices existed for hardware and software in the present case, and software was transmitted electronically (“via email”). Therefore, it could not be treated as inseparable from the machine for valuation purposes. The Department relied on the Larger Bench ruling in Bhagyanagar Metals Ltd., where embedded software in fixed wireless telephones was treated as part of a single assessable unit. However, CESTAT distinguished that ruling on facts, noting that the software was separately invoiced and identifiable. The mode of supply was electronic transmission. Supreme Court precedents, being binding under Article 141 of the Constitution, override conflicting Tribunal rulings. The Bench further cited the Larger Bench decision in Mira Silk Mills to emphasise that Supreme Court judgments prevail over Tribunal decisions in case of conflict. The Tribunal found no material evidence that the declared invoice price was incorrect. Additional consideration was paid to the foreign supplier. Comparable imports existed at higher prices. It also noted that the show cause notices failed to clearly invoke the appropriate rule under Rule 3 of the Customs Valuation Rules, 2007 for redetermination of value. Another crucial aspect was reopening of assessments made between 2009 and 2012. The Tribunal observed that the imports were assessed by proper officers prior to the self-assessment regime. Duties were paid and goods cleared under Section 47. All relevant documents were available with Customs at the time of import. Without establishing fraud, collusion, wilful misstatement or suppression of facts—as required by the Supreme Court in Uniworth Textiles Ltd.—extended limitation could not be invoked. The Bench also took note of parallel proceedings involving service tax demands under reverse charge, indicating departmental knowledge of the software supply, thereby weakening allegations of suppression. The Tribunal held that there was no violation of EPCG licence conditions, DGFT regulations, Exim Policy, or any prohibition under the Customs Act. Software imports per se were not dutiable. Higher quotation vis-à-vis invoice price does not automatically establish misdeclaration. The CESTAT held that penalties under Section 114AA and redemption fines imposed in lieu of confiscation were held unsustainable. Case Details Case Title: M/s. Shairu Gems Diamonds Pvt. Ltd. Versus Commissioner of Customs-IV, (Air Cargo Complex-Export), Mumbai Zone-III Citation: JURISHOUR-194-CESTAT-2026(Mum) Case No.: Customs Appeal No. 86896 of 2016 Date: 25.02.2026 Counsel For Appellant: Jhamman Singh, Advocate Counsel For Respondent: Shambhoo Nath, Special Counsel Click Here To Read Order Read More: Constitution (Amendment) Bill, 2026 Proposes SC Regional Benches, Judicial Diversity, Caste-Based Census By States And Much More

Software Value Can’t Be Added To Hardware Value For Determining Assessable Value Of Imported Diamond Cutting, Scanning Machines: CESTAT

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