Software Import Cannot Be Taxed as Both Goods and Service; No Dual Levy of Customs Duty and Service Tax: Gujarat High Court - 2025-06-25

Software Import Cannot Be Taxed Twice as Both Goods and Service: Gujarat High Court Quashes Customs Notice

Ahmedabad: In a significant ruling on indirect taxation, the Gujarat High Court has held that a single transaction involving the import of software cannot be subjected to both customs duty (as goods) and service tax (as a service). A division bench of Justice Bhargav D. Karia and Justice Pranav Trivedi quashed show-cause notices issued by the Directorate of Revenue Intelligence (DRI) seeking to levy customs duty on software for which service tax had already been assessed and paid.

The court reinforced the principle that the revenue department cannot take contradictory stands and subject an assessee to a dual levy on the same component.

Case Background

The petitioner, J B and Brothers Pvt Ltd, a company in the diamond polishing business, imported diamond scanning machines (hardware) and related software from Israeli companies. The DRI initiated proceedings, alleging that the petitioner had deliberately undervalued the hardware to evade customs duty. The authorities claimed that the value of the software, for which a separate invoice was raised, was an integral part of the machine's value and should have been included for customs valuation. This led to the seizure of machines and the issuance of show-cause notices for the recovery of customs duty.

Concurrently, the service tax authorities initiated separate proceedings, contending that the supply of the same software constituted a "service" under the Finance Act, 1994. The service tax department passed an adjudication order confirming the levy of service tax on a reverse charge basis, which the petitioner accepted and paid.

Conflicting Stands of the Revenue Department

The petitioner argued that the revenue department could not simultaneously treat the same software as "goods" to levy customs duty and as a "service" to levy service tax. Senior Advocate Mr. Tushar Hemani, representing the petitioner, submitted that once the service tax liability was finalized and paid, the proceedings under the Customs Act became untenable.

The revenue, represented by advocate Mr. Ankit Shah, contended that the petitioner had adopted a "modus operandi" to evade customs duty by splitting the invoices for hardware and software. They argued that the software was an embedded part of the imported machine and its value was suppressed to avoid the higher customs duty rate. The department insisted on its right to proceed with the adjudication of the show-cause notice to uncover the alleged undervaluation, irrespective of the service tax payment.

Court's Analysis and Ruling

The High Court observed that the core issue was whether two different units of the revenue department could take "diametrically opposite stands" against an assessee for the same transaction.

The bench took note of the adjudication order passed by the service tax authority, which had definitively classified the software transaction as the provision of "Information Technology Software Services." The order explicitly stated that customs duty had not been paid on the software as it was delivered online and the payment was for the "right to use."

The court drew an analogy from the Supreme Court's decision in Union of India v. Mohit Minerals Pvt. Ltd. , which dealt with the principle of "composite supply" under the GST regime. Applying the same logic conversely, the High Court reasoned that if a transaction is treated as a composite supply, tax can be levied at only one point.

In a pivotal observation, the Court stated:

"The above decision would apply conversely in facts of the case as when there is composite supply of goods and service, the tax is to be levied at one point only similarly when in facts of the case when service tax is already levied on reverse charge mechanism by the Service Tax Authority on the Software purchased by the petitioner, the same cannot be subjected again to custom duty..."

The judgment emphasized that once the service tax liability on the software import was crystallized and paid, the very basis for the customs show-cause notice—which treated the software as part of the goods—was nullified.

Final Decision

Finding the customs department's actions unsustainable, the High Court allowed the petitions and quashed the impugned show-cause notices and any consequent orders-in-original. The court directed the authorities to refund Rs. 50,00,000/- that the petitioner had deposited under protest for the provisional release of goods, bringing the protracted litigation to a close.