Data Systems Ltd. Vs. Collector of Central Excise  INSC 1631 (17 December 1996)
Bharucha, S.B. Sen Bharucha. J.:
WITH (C.A. No.79/89 and C.A.
appeals against the judgments and orders of the Customs, Excise and Gold
(Control) Appellate Tribunal relate to the assessable value of computers for
the purposes of excise duty. The appeals of M/s. Wipro information Technology
Limited (Civil Appeal No.491 of 1989) relate to the tariff as it was prior to
28th. February, 1986. The appeal or M/s. Tata Unisys Limited (Civil Appeal No.
6042 of 1994) relates to the present tariff under the Central Excise Tariff
question, principally, is in relation to the inclusion of the value of software
sold with the computer in the assessable value thereof. It is not the
contention of the appellants that the firm or etched software that is implanted
into a computer is not to be taken into account in the valuation thereof for
the purposes of excise duty. It is their case that the value of the software,
such as discs, floppies, C.D. rhoms and the like, that they may sell along with
the computer is not to be taken into account for the aforesaid purpose.
make it clear at the outset that when we shall speak of software, we shall be
referring to tangible software of the nature of discs, floppies and C.D. rhoms
and not to the intellectual property, also called software, that is recorded or
necessary, to start with, to make a distinction between hardware, which is the
computer, and the programming necessary to run it, which is the software. (See
Computer Contracts Negotiating and Drafting Guide by Robert P.
"Software" has been stated in the same publication to describe "programmes
which consist of instructions recorded on punched cards, magnetic tapes and
discs. These devices instruct the computer as to what functions it will
perform" to produce the desired output. In a judgment delivered by the
Supreme Court of Illinois in the case of First National Bank of Springfield vs.
The Department of Revenue, it was observed:- "In the computer industry,
computer hardware is the tangible part of the machinery itself. Software
denotes the information loaded into the machine and the directions given to the
machine (usually through the media of punch cards, discs or magnetic tapes as
to what it is to do and upon what command.
also may include counselling and expert engineering assistance furnished by the
seller of software, as well as flow charts and instruction manual's.
are two basic types of software programs. An operational program controls the
hardware and actually makes the machine operate.
fundamental and necessary to the functioning of the hardware. An applicational
program is designed to perform specific functions once the programming
information is fed into the computer." Tariff Item 33DD of the earlier
Tariff dealt with "computers (including central processing units and
peripheral devices), all sorts".
present tariff deals with computes in Chapter 84.
84.71 reads thus:- "Automatic data processing machines and units thereof;
magnetic or optical readers, machines for transcribing data on to data media in
coded form and machines for processing such data, not elsewhere specified or
included." Chapter Note 5(a) states:
For the purposes of heading No.84.71, the expression `automatic data processing
machines' means:- (1) Digital machines, capable of
the processing programme of programmes and at least the date immediately
necessary for the execution of the programme;
freely programmed in accordance with the requirements of the user;
arithmetical computations specified by the user;
(4) executing, without human intervention, a processing programme which
requires them to modify their execution by logical decision during the
processing run;" Heading 85.24 deals with "records, tapes and other
recorded media for sound or other similarly recorded phenomena, including
matrices and masters for the production of records and includes gramophone
records, audio tapes, audio cassettes, video tapes, video cassettes, magnetic
discs and other cassettes and discs". Chapter Note 6 states" "6.
Records, tapes and other media of heading No. 85.23 or 85.24 remain classified
in those headings, whether or not they are cleared with the apparatus for which
they are intended." For the sake of completeness, it must be noted that a
Notification dated 1st March, 1989, issued in exercise of the powers conferred
by Section 5A(1) of the Central Excises and Salt Act, 1944, gives to
"computer software falling under Heading 85.24 of the Schedule to the
Central Excise Tariff Act, 1985," exemption from the whole as the excise
duty leviable thereon.
Tribunal in the judgments that are impugned proceeded upon the basis that the
appellants sold computer systems and that a computer systems was incomplete
without systems software inasmuch as mere hardware without systems software did
not make the system workable. It relied upon its earlier judgment in the case
of collector of Central Excise, Bangalore, vs. Sunray computers Private
Limited, (1988) 33 ELT 787, in this behalf. That judgment observed that
"without software the hardware was incomplete, a mere dumb box and of no
use at all to the customer. If there was a single contract for the supply of a
computer including software the total value of the computer including that of
the software would have to be assessed to duty irrespective of the fact whether
the software part is supplied along with the hardware or in a separate lot and
irrespective of the fact whether a single invoice is made for both hardware and
software or a separate invoice is made for the software." The Tribunal
held that the excise liability of the computer system had to be determined with
reference to the computer system itself and for assessment of the computer
system it was immaterial whether the software was a bought out item.
assessment of the computer system an individual part lost its independent
identity and became a part of the computer system.
appellants before us have sold only a computer, or a computer along with
software, and the software might have been imported or bought out. Some
contracts in this behalf are lump-sum contracts and some are for the computer
and the software separately. Sample contracts are on the record.
counsel for the appellants submitted that the test that had been applied by the
Tribunal in the impugned judgments was erroneous. Our attention was drawn to
the judgment of this Court in State of Uttar Pradesh vs. M/s. Kores (India) Limited, (1977) 1 SCR 837, where it
was held that a typewriter ribbon was an accessory to a typewriter and not a
part of the typewriter, though it might not be possible to type out any matter
on the typewriter without the ribbon. This Court quoted with approval the
following observation of the High Court of Mysore in State of Mysore vs. Kores
a typewriter ribbon is a part of a typewriter is to be considered in the light
of what is meant by a typewriter in the commercial sense. Typewriters are being
sold in the market without the typewriter ribbons and therefore typewriter
ribbon is not an essential part of a typewriter so as to attract tax as per
entry 18 of the Second Schedule to the Mysore Sales Tax Act, 1957." On the
same reasoning, it was submitted, the software that was sold by the appellants
along with their computers was not an essential part of the computers. What a
computer was had to be judged in the light of its commercial sense and, in that
sense, the software was not understood to be a part of the computer. Reference
was made to Section 8OHHL of the Income tax Act which provides for deduction of
profits from export of "computer software" Reference was also made to
the provisions of the Copyright Act, 1967, where a computer is defined as
including any electronic or similar device having information processing
capabilities and a computer programme is defined to mean a set of instructions
expressed in words, codes, schemes or in any other form, including a machine
readable medium, capable of causing a computer to perform a particular task or
achieve a particular result. Interestingly, the Copyright Act defines `literary
work' to include computer programmes, tables and compilations including
computer data bases. Reference was also made to the aforementioned contracts
which indicate the distinction that buyers made between the computer and the
appeals of Wipro Information Technology Limited and PSI Data Systems Limited,
the charges for installation of the computer and the training of the
purchaser's personnel to operate and maintain it were also included in the
assessable value of the computer, and the argument that was advanced in respect
of the value of the software was also advanced in respect of these charges.
counsel for the respondent, fairly, did not dispute that the value of the
software that the appellants might sell with their computers, if so ordered by
the purchasers thereof, could not be included in the assessable value of the
computers. He was, however, at pains to urge that this did not apply to the
firm software that was etched into the computer; this is not even the
first place, the Tribunal confused a computer system with a computer; what was
being charged to excise duty was the computer.
that a computer and its software are distinct and separate is clear, both as a
matter of commercial parlance as also upon the material on record. A computer
may not be capable of effective functioning unless loaded with software such as
discs, floppies and C.D. rhoms, but that is not to say that these are part of
the computer, their value must form par of the assessable value of the computer
for the purposes of excise duty. To give an example, a cassette recorder will
not function unless a cassette is inserted in it; but the two are well known
and recognised to be different and distinct articles. The value of the
cassette, if sold along with the cassette recorder, cannot be included in the
assessable value of the cassette recorder. Just so, the value of software, if
sold along with the computer, cannot be included in the assessable value of the
computer for the purposes of excise duty.
regard to the view that we take, it becomes unnecessary to deal with the
subsidiary arguments on behalf of the appellants and the intervenor, M/s
Digital Equipment (India) Limited.
appeals are allowed and the judgments and orders under appeal are set aside.
There shall be no order as to costs.