ALO Law Office- IDT Tax I Arbitration I Litigation
Date: 27.02.2026
CESTAT Mumbai- Software Value Not Includable in Assessable Value of Diamond Scanning Machines
This Article has been written by Advocate Ravi Shekhar Jha-BALLB & LLM (Constitutional Law) based in New Delhi. The views expressed are based on his interpretation of the law. He can be reached at his email id intelconsul@gmail.com or on his Mobile +91-9999005379.
The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) Mumbai recently delivered a significant judgment on February 25, 2026, addressing the contentious issue of whether the value of software and hardware can be combined to determine the transaction value of imported diamond cutting and scanning machines under Section 14 of the Customs Act. This decision, which involved 17 appeals, has set a precedent for the treatment of software and hardware in customs duty assessments.
Background of the Case โ
Between 2009 and 2012, several appellants, including M/s. โ Shairu Gems Diamonds Pvt. โ Ltd., imported diamond processing and scanning machines from M/s. โ Sarin Technologies Ltd. and M/s. โ Galatea Ltd., both based in Israel. โ These machines were equipped with functional software, either preloaded or downloaded in India after installation. โ The imports were made under the Export Promotion Capital Goods (EPCG) scheme, and customs assessments were conducted by proper officers based on import invoices, bills of lading, and other relevant documents. โ
In 2013, the Directorate of Revenue Intelligence (DRI) initiated an investigation, alleging that the appellants had undervalued the imported goods by artificially splitting the composite invoices into separate invoices for hardware and software. โ The DRI claimed that this practice led to the suppression of the software’s value, resulting in lower customs duty payments. โ Show-cause notices were issued, and the Commissioner of Customs confirmed the allegations, imposing differential duty, interest, penalties, and redemption fines. โ
Key Issues Addressed โ
The appeals raised several critical legal questions:
- Can the value of software and hardware be combined to determine the transaction value of diamond cutting and scanning machines? โ
- Is the reassessment of goods after clearance permissible under the Customs Act? โ
- Was the invocation of the extended limitation period for reassessment justified? โ
- Are penalties and redemption fines legally sustainable in this case? โ
Arguments Presented
Appellants’ Arguments:
- Exclusion of Software Value: The appellants argued that the value of software should not be included in the assessable value of the hardware. โ They cited landmark Supreme Court judgments, including PSI Data Systems Ltd. v. Collector of Central Excise and Commissioner of Central Excise, Pondicherry v. ACER India Ltd., which established that software and hardware are distinct entities and should be assessed independently. โ
- Reopening of Assessment: The appellants contended that reopening assessments after final clearance under Section 47 of the Customs Act was impermissible without evidence of fraud, collusion, or misrepresentation. โ They argued that the Department had all the necessary information at the time of the original assessment and failed to prove any fraudulent intent. โ
- Penalty and Redemption Fine: The appellants challenged the imposition of penalties and redemption fines, asserting that their imports did not violate any provisions of the Customs Act, EPCG scheme, or Foreign Trade Development Act. โ
Respondent’s Arguments:
- Inclusion of Software Value: The Department argued that the software was an integral part of the diamond scanning machines and essential for their functionality. โ They cited the Larger Bench decision in Bhagyanagar Metals Ltd. v. Commissioner of Central Excise Hyderabad, which held that software and hardware should be assessed as a single unit when the software is embedded in the hardware. โ
- Undervaluation Allegations: The Department presented evidence suggesting that the appellants had artificially bifurcated the value of hardware and software to evade customs duty. โ They argued that the software’s value was inbuilt into the machines and should have been included in the assessable value. โ
CESTAT’s Observations and Final Decision
After thoroughly examining the arguments, evidence, and judicial precedents, the CESTAT Mumbai ruled in favor of the appellants. The key observations and conclusions were as follows:
- Software and Hardware Are Distinct: The Tribunal reaffirmed the Supreme Court’s rulings in PSI Data Systems Ltd. and ACER India Ltd., which established that software and hardware are distinct entities and should be assessed independently. โ The Tribunal emphasized that the value of software sold along with hardware cannot be included in the assessable value of the hardware for customs duty purposes. โ
- Reopening of Assessment Is Impermissible: The Tribunal held that reopening assessments after final clearance under Section 47 of the Customs Act was not legally sustainable without evidence of fraud, collusion, or misrepresentation. โ The Department’s failure to appeal the original assessment order further invalidated the reassessment. โ
- Extended Limitation Period Not Applicable: The Tribunal ruled that the extended limitation period could not be invoked in this case, as the Department had access to all relevant information at the time of the original assessments. โ The absence of evidence of fraudulent intent or misrepresentation by the appellants further supported this conclusion.
- Penalties and Redemption Fines Set Aside: The Tribunal found no legal basis for the imposition of penalties and redemption fines, as the imports did not violate any applicable laws or regulations. โ
Implications of the Judgment โ
This landmark decision has significant implications for the customs valuation of imported goods, particularly those involving software and hardware. โ It reinforces the principle that software and hardware are distinct entities and should be assessed independently, even if the software is essential for the hardware’s functionality. โ The judgment also underscores the importance of adhering to established legal precedents and highlights the limitations on the Department’s power to reopen assessments. โ
Conclusion
The CESTAT Mumbai’s decision in these appeals is a victory for the appellants and a reaffirmation of the legal principles established by the Supreme Court. It provides clarity on the treatment of software and hardware in customs duty assessments and sets a precedent for similar cases in the future. โ This judgment is a reminder of the importance of adhering to legal precedents and ensuring that reassessments are conducted within the bounds of the law.
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Source: CESTAT Mumbai
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