O.R.G. Systems, Baroda Vs. Collector of Central Excise, Vadodara
 INSC 341 (21
V. Manohar, K. Venkataswami K. Venkataswami, J.
J U D
G E M E N T
two appeals arise out of a common order dated 5.7.94 of the Customs Excise
& Gold (Control) Appellate Tribunal, New Delhi (hereinafter called
"the Tribunal"). The issues that arise out of the order of the
Tribunal under appeal are no longer res integra. The decision of this Court
[1997 (89) E.L.T. 3 (S.C.)] settles the controversial issues raised in these
stated the facts are the following :- The appellant is engaged in the
manufacture of Computers falling under Tariff Item 33-DD from May, 1982 when
they got the necessary licence. Prior to May, 1982 the appellant got the
Computers manufactured by (a) M/s Orbit Electronics (for short 'Orbit') by
supplying raw materials and also by supplying specifications and designs. The
computers so manufactured by the appellant, as stated above, as well as those manufactured
by the appellant after May, 1982 were marketed by M/s Adprint Services Limited,
baroda (for short 'Adprint'). At this
stage, it is necessary to make it clear that the Revenue seriously claimed all
through that DSI and Orbit were the dummy units of the appellant.
Tribunal, as final fact finding authority, has held that they ere not dummy
units. However, the contention of the appellant that Adprint is an independent concern,
was not accepted by the Tribunal and the Tribunal has given a clear finding
that Adprint is a dummy unit of the appellant. We proceed on the basis of these
findings given by the Tribunal as they are binding on the parties.
principal issues in controversy are: (a) whether the Computers manufactured and
cleared by the DSI and Orbit are liable to be treated as the Computers
manufactured and cleared by the appellant and, therefore, liable for excise
duty at the hands of the Appellant; (b) whether the value of peripheral devices
and/or Computer systems sold by Adprint along with Computers and includible in
the assessable value of the Computer; and (c) whether the amount or value of
the service charges recovered by the appellant under service contracts can be
included in the assessable value of the Computer. The other subsidiary issues
are: (1) in the event of this Court coming to the conclusion that the
peripheral devices and the amount of service charges are includible in the
assessable value of the Computer, then what is the correct amount that would be
liable to be so included and (2) whether the penalty initially levied in a sum
of Rs. 25 lacs and ultimately reduced by the Tribunal to Rs. 10 lacs, is
sustainable in the facts and circumstances of the case.
authorities, overruling the objections raised by the appellant, held that the
Computers manufactured by DSI and Orbit must be deemed to have been
manufactured by the appellant and as such liable for excise duty. It was also
held that the value of peripherals and systems software supplied is includible
in the value of the Computers.
the Revenue held that non-disclosure of the values of service charges,
peripherals and systems software attracts levy of penalty. Accordingly the
demand was raised against the appellant in a sum of Rs. 3, 32, 96,010.58 and a
penalty of Rs. 25 lacs was also levied. Before the Tribunal, the appellant got
some relief on duty part and penalty was reduced from Rs. 25 lacs to Rs. 10 lacs.
Tribunal, after analysing the facts, held that the supply of raw materials
alone does not make the appellant as manufacturer of the Computers factually
manufactured by DSI and Orbit. However, the Tribunal was of the view that the
supply of specifications and designs was actually at par with the supply of
specific designs of a tailor made item and hence will constitute manufacture.
On that basis, the Tribunal held that the case of supply of specifications and
designs for Computers will amount to manufacture and price charged therefore
shall be includible in the assessable value. Similarly, the Tribunal held that
the vale of peripherals at the time of supply of computers would make the
appellant as computer manufacturer as, according to the Tribunal, the supply of
those peripherals and computer systems bring into existence a new product. The
value of those supplies should also be included in the value of computer
supplied. The Tribunal declined to accept the arguments of the appellant that
the software was already burnt in the chips of the computer to make the
computer complete and that the systems software and other peripherals are only
additions to a computer that was complete even without those peripherals and
systems software. The Tribunal relied on its own decision in PSI Data System
for rejecting the case of the appellants, which has since been reversed by this
Court in PSI's case (supra).
these appeals, we heard arguments of counsel on both sides. Naturally, the
learned counsel, Mr. Ganesh, appearing for the appellant, placed reliance on
the judgment of this Court in PSI case (supra). This Court in PSI Data system's
case considered identical issues and Bharucha, J., speaking for the Bench, held
as follows :- " The 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
counsel for the appellants submitted that the test that had been applied by the
Tribunal in the impugned judgements was erroneous.
attention was drawn to the judgement of this Court in State of Uttar Pradesh V.
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.
Court quoted with approval the following observation of the High Court of Mysore
in State of Mysore V. Kores (India) ltd.
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.
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 80 HHL 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.
was also made to the aforementioned contracts which indicate the distinction
that buyers made between the computer and the software.
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 or to hold that, if they are sold along with the computer, their
value must form part 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
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." The above judgment
of this Court completely answers the principal issues in controversy in favour
of the appellant.
case on hand, it cannot be disputed that the computers manufactured and
supplied y Orbit, DSI or the appellant (from May, 1982 onwards) were complete
computers, which had a Central processing Unit, with "etched-in" or
"burnt-in" software, a key Board (input device) the monitor (output
device) and Disc drives. The computers, as above, were cleared after complying
with all requirements under the Excise Law and proper duty as computed was
paid. The peripheral devices and other systems software were merely additional
devices meant to increase the memory or storage capacity of the computers and
other facilities. It is also not disputed by the Revenue that the peripheral
devices were imported by the appellant and the appellant had paid counter-vailing
duty on such imported peripherals. In the light of these facts, we have no
difficulty to apply the ratio in the judgment of this court in PSI Data systems
(supra) and grant relief to the appellant. The Tribunal itself has placed
reliance on its earlier decision in PSI Data Systems, which has been reversed
by this Court, as noticed above. Likewise, the value of service charges also
cannot be included in the light of the ratio laid down by this Court in PSI
Data Systems. The Tribunal went wrong in assuming that the appellant must have
given warranty to its customers at the time of purchase of computers when it
was the case of the appellant that no such warranty was given and no such case
was specifically put forward in the show- cause notice.
all these reasons, we do not think that we can accept the contentions to the
contrary by the learned counsel appearing for the Revenue.
result, the appeals succeed and the impugned demand including the levy of
penalty is set aside. The appeals are accordingly allowed with no order as to