Commnr. of Central Excise,
Pondicherry Vs. M/S. Acer India Ltd  Insc 574 (24
N. Santosh Hegde,S.B.
Sinha & Tarun Chatterje With C.A. Nos. 1148-1149 Of 2004 & I.A. Nos. 3-4/2004
S.B. Sinha, J:
The Revenue is in appeal before us being aggrieved by and dissatisfied with
the judgment and order dated 29.08.2003 passed by the Customs, Excise and
Service Tax Appellate Tribunal, South Zonal Bench, Bangalore whereby and
whereunder the appeal filed by the Respondent herein from an order passed by
the Commissioner of Central Excise, Pondicherry dated 27.1.2003 was allowed
holding that no central excise duty is payable on a software loaded in a
hardware, i.e., computer.
The Respondent is a company manufacturing computers, peripherals, servers,
note books and accessories falling under different headings of Chapter 84 of
the Schedule appended to the Central Excise
Tariff Act, 1985.
Upon a licence obtained by WIPRO, the Respondent, on orders received from
the customers load operational softwares. While calculating the amount of
central excise payable thereupon, it would deduct the value of the operational
softwares from the total value of the computer supplied to the customers. The
revenue objected to the said procedure on the premise that excise duty is
payable on the entire value of the computer including the value of operational
A show cause notice dated 8.8.2002 was issued by the Superintendent of
Central Excise for the period July 2001 to May, 2002 asking it to show cause as
to why it would not be called upon to pay the differential duty of Rs.
Yet again a show cause notice was issued on 19.8.2002 demanding a
differential duty of Rs. 54,90,700/- for the period 1.7.2000 to 30.6.2001 by
the Commissioner of Central Excise, Trichy purported to be in terms of the
proviso appended to Section 11A (1) of the Central Excise Act, 1944. The
respondent pursuant to the said notices filed their show causes.
The Commissioner of Central Excise by an order dated 27.1.2003 directed
payment of the differential duty specified in the two show cause notices and
further levied interest thereupon as also penalty holding:
"i) That the value/cost of the operational software installed by the
assessee on the computers before clearance from the factory is includible in
the assessable value/ transaction value of the computer system and therefore
the differential duty demanded in the two show cause notices need to be confirmed.
ii) That there were justifying grounds and evidences for the invocation of
the proviso to Section 11A (1) in the present case besides imposition of
penalty.." It was further held that the loading of operational software in
the factory would come within the mischief of 'transaction value' of the
computer in terms of Section 4 of the Central Excise Act, 1944 with effect from
1.4.2000 having regard to the expressions "by reason of sale" or
"in connection with the sale" as contained in the definition thereof.
The Respondent preferred an appeal thereagainst before the Tribunal which by
reason of the impugned judgment dated 29.8.2003 was allowed.
The Tribunal passed the said judgment relying on or on the basis of a Excise
[1997 (89) ELT 3 (SC) : (1997) 2 SCC 78].
A Division Bench of this Court in its order dated 27.02.2004 doubted the
correctness of the said decision opining that as a computer would not function
without an operational software, the latter would form a part of the former
and, thus, excise duty would be payable on the total value thereof.
Distinguishing between softwares without which a computer cannot work and
those containing additional or ancillary applications and which a customer may
want to buy separately, the Bench observed:
"But a buyer has to buy software without which the computer cannot
work. The computer would otherwise be a dead box, if software, without which
the computer cannot work, is not purchased.
When one talks of a computer, as understood in the trade, it is not just the
box or the hardware. A computer contains of both hardware and the operating
software. The price of such softwares is thus the amount which a buyer is bound
to pay by reason of or in connection with the sale of computers. It appears to
us that the price of such software is thus includable in the value for purposes
of excise duty." The matter was, thus, referred to a larger Bench.
Mr. A. Subba Rao, learned counsel appearing on behalf of the Appellant would
contend that an operational software implanted in a hardware becomes a part
thereof and as such central excise duty is leviable on the total value of the
computer. Drawing our attention to the provisions of Section 4 of the Central
Excise Act, 1944 (The Act) and in particular the definition of
"Transaction Value" as contained in Clause (d) of Sub-Section (3) of
Section 4 thereof, the learned counsel would submit that the same would include
the value of all manufactured goods charged as price including any amount that
the buyer is liable to pay by reason of or in connection with the sale together
therewith any other amount which adds to the value thereof. As a software
implanted is a part of the computer, it was urged, excise duty would be payable
on the total value thereof.
Mr. Subba Rao would submit that a bare perusal of the judgment of this Court
in PSI Data Systems Ltd. (supra) would indicate that therein this Court was not
concerned with any software, which was implanted into a computer and was only
concerned with a software which is a tangible one being of the nature of discs,
floppies and CD-ROMs. It was also not concerned with intellectual property also
called software, that is recorded or stored thereon.
A software which is implanted with a licence to right to use the
informations contained therein, Mr. Subba Rao would argue, should not be
compared with a disc, floppy or CD-ROM which is available in the market
Drawing our attention to the findings of fact arrived at by the Commissioner
of Central Excise, the learned Counsel would submit that not only the
operational softwares like Windows 98 OS or W2K are implanted in the computers
by the Respondent but as would appear from the price list furnished by it the
configurations of different models of computers including operational software
are also quoted therein. Furthermore, the Respondent was also being under an
obligation to preload a software on the computer before clearing the same from
the factory, the central excise duty would be payable on the entire value
Mr. V. Lakshmikumaran, learned counsel appearing on behalf of the
Respondent, on the other hand, would submit that a computer which is a hardware
is marketable as such containing a firm or etched software being implanted
therein, the valuation thereof also is taken into consideration for the purpose
of excise duty but the operational softwares which are implanted on specific
orders placed by the customers would retain the characteristics of software and
would not lose its identity only because the informations contained therein
together with the right to use the same is implanted in the computer itself. A
computer may have different systems, Mr.
Lakshmikumaran would contend, containing parallel or sequential process
which would make a computer system complete and the same should not be confused
with a mere hardware.
The learned counsel would argue that the hardwares and softwares are
classified differently under different Headings, viz., 84.71 and 85.24 of the
Customs Tariff Act. Whereas in respect of the computers the rate of duty is
16%, for softwares the same is nil and, thus, the assessee was entitled to
claim deduction of the value thereof from the total value of the computer. It
was argued that as both the hardware and the software are assessed separately,
keeping in view Chapter Note 6 of Chapter 85, which contains a legal text, the
valuation of a computer and software cannot be clubbed together for the purpose
of assessment of excise duty.
Mr. Dushyant Dave, learned senior counsel appearing on behalf of the
intervenor, supplemented the submissions of Mr. Lakshmikumaran contending that
the value of the goods which would be subject matter of central excise cannot
be enhanced by implanting a software as it retains its own character
irrespective of the fact that the informations contained therein are loaded in
the computer itself.
The learned counsel would argue that the value of the goods may be enhanced
in terms of the definition of the "Transaction Value" but the
explanation contained therein must be read in the context of the main
provision, viz., Section 4(1) and not de'hors the same.
RELEVANT STATUTORY PROVISIONS:
Central Excise Act, 1994:
"2(d) "excisable goods" means goods specified in the First
Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of
1986) as being subject to a duty of excise and includes salt;
3. Duties specified in the Schedule to the Central Excise Tariff
Act, 1985 to be levied. (1) There shall be levied and collected in such
manner as may be prescribed,- (a) a duty of excise, to be called the Central
Value Added Tax (CENVAT) on all excisable goods which are produced or
manufactured in India as, and at the rates, set forth in the First Schedule to
the Central Excise Tariff Act, 1985 (5 of 1986) :
4 Valuation of excisable goods for purposes of charging of duty of excise.
(1) Where under this Act, the duty of excise is chargeable on any excisable
goods with reference to their value, then, on each removal of the goods, such
value shall- (a) in a case where the goods are sold by the assessee, for
delivery at the time and place of the removal, the assessee and the buyer of goods
are not related and the price is the sole consideration for the sale, be the
(3) for the purposes of this section, - (d) "transaction
value" means the price actually paid or payable for the goods, when sold,
and includes in addition to the amount charged as price, any amount that the
buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in
connection with the sale, whether payable at the time of the sale or at any
other time, including, but not limited to, any amount charged for, or to make
provision for, advertising or publicity, marketing and selling organization
expenses, storage, outward handling, servicing, warranty, commission or any
other matter; but does not include the amount of duty of excise, sales tax and
other taxes, if any, actually paid or actually payable on such goods." A
Before adverting to consider the rival submissions at the bar, we may notice
the meaning of certain terms as also the functioning of a computer.
In Newton's Telecom Dictionary, "Application Program" has been
defined at page 54 as under:
"A computer software program designed for a specific job, such as word
processing, accounting, spreadsheet, etc." In the said dictionary,
"Firmware" has been defined at pages 281-282 as under:
"Software kept in semipermanent memory.
Firmware is used in conjunction with hardware and software. It also shares
the characteristics of both. Firmware is usually stored on PROMS (Programmable
Read only Memory) or EPROMs (Electrical PROMS). Firmware contains software
which is so constantly called upon by a computer or phone system that it is
"burned" into a chip, thereby becoming firmware. The computer program
is written into the PROM electrically at higher than usual voltage, causing the
bits to "retain" the pattern as it is "burned in". Firmware
is nonvolatile. It will not be "forgotten" when the power is shut
off. Handheld calculators contain firmware with the instructions for doing
their various mathematical operations. Firmware programs can be altered. An
EPROM is typically erased using intense ultraviolet light."
"Operating system" has been defined at page 500 of the said
dictionary as under:
"A software program which manages the basic operations of a computer
system. It figures how the computer main memory will be apportioned, how and in
what order it will handle tasks assigned to it, how it will manage the flow of
information into and out of the main processor, how it will get material to the
printer for printing, to the screen for viewing, how it will receive
information from the keyboard, etc. In short, the operating system handles the
computer's basic housekeeping MS- DOS, UNIX, PICK, etc, are operating
systems." Thus, there are different operating systems.
Computers of various models and types with different configurations
including Servers and Personal Computers are manufactured by the Respondent.
They are classifiable under Chapter Sub-heading 8471.00 of the Central Excise
Tariff Act, 1985 (Tariff Act) as automatic data processing machines.
In the computers there exists a flash memory chip in the motherboard. The
software that is essential to the starting of the computer which is the Basic
Input Output Software is etched on to this memory chip.
This Basic Input Output Software which is etched or burnt into the
Electrically Erasable Programmable Read Only Memory (EEPROM) is called
firmware. The firmware provides for interactions with the microprocessor to
enable it to access the operating software contained in the hard disc.
As is the general practice in the computer industry, the value of the
firmware etched on to the EEPROM is always included in the assessable value of
A customer may place a specific order upon the manufacturers of computers
for supply of CDs which contain operating softwares like Windows 2000, Windows
XP etc. as also the right to use the same under licence. The said softwares
indisputably can be purchased separately and loaded in the computer by the
purchasers themselves. They can be loaded even at the premises of the
purchasers and by persons other than the manufacturers. The computers, however,
are also loaded with different types of softwares on to the hard disc along
with licence to use, if and when specifically ordered by the customers. Computers
and operational softwares admittedly are available in the market separately.
For the purpose of this case, however, we would proceed on the premise that all
the computers are cleared with the softwares loaded onto the hard disks and
with the CDs containing the softwares along with the licence to use.
The invoice-cum-challan issued by the assessee contains the total value of
the computer but therefrom value of the operating softwares is deducted for the
purpose of computing the central excise duty payable thereupon.
PRINCIPLES OF INTERPRETATION OF A TAXING/FISCAL STATUTE:
A duty of excise primarily is levied upon a manufacturer or producer in
respect of the commodity manufactured or produced. It is a tax upon goods and
not upon sales or the proceeds of sale of goods. In terms of Entry 84, List I
of the Seventh Schedule of Constitution of India, the taxable event in respect
of the duty of excise is the manufacture or production. No tax in terms of
Article 265 of the Constitution of India can be imposed, levied or collected
except by the authority of law.
[(1921) 1 KB 64 at p. 71], it is stated:
"In a taxing Act one has to look merely at what is clearly said. There
is no room for any intendment. There is no equity about a tax.
There is no presumption as to tax. Nothing is to be read in, nothing is to
be implied. One can only look fairly at the language used." (1) SCALE
It is also well-known that the one and the only proper test in interpreting
a section in a taxing statute would be that the question is not at what
transaction the section is according to some alleged general purpose aimed, but
what transaction its language according to its natural meaning General (No. 2),
(1951) 2 All ER 473, p. 485] Imposition of tax is a constitutional function.
A taxing or a fiscal statute demands strict construction. It must never be
stretched against a tax payer. So long natural meaning for the charging section
is adhered to and when the law is certain, then a strange meaning Revenue
Commissioners, (1965) 1 All ER 917] It is also well-settled rule of
construction of a charging section that before taxing a person it must be shown
that he falls within the ambit thereof by clear words used as no one can be
taxed by implication.
It is further well-settled that a transaction in a fiscal legislation cannot
be taxed only on any doctrine of "the substance of the matter" as
distinguished from its legal signification, for a subject is not liable to tax
on supposed "spirit of the law" or "by inference or by
The taxing authorities cannot ignore the legal character of the transaction
and tax it on the basis of what may be called 'substance of the matter'. One
must find the true nature of the transaction. [See Union of SCC 181] While
interpreting valuation or classification contained in the Tariff Act, one
cannot lose sight of the legal text contained in the Chapter Note explaining
the meaning of the entry and in absence of its applicability thereto the
general rules of interpretation.
The entries in the instant case are covered by the Chapter Note 6 vis- `-vis
Rule 1 of the general rules of interpretation and Rule 3 thereof.
While construing a taxing statute, the existing market practice may also be
taken into consideration.
The statute, however, should not be interpreted in such a manner which may
lead to wide scale evasion of duty. The Court should adopt an interpretation
which would be user friendly. If any other interpretation is made, the same
would encourage the manufacturers to sell the operational computer separately
as a result of which the buyers may have to incur extra charges. The customers,
thus, may not be able to get the benefit of the information contained in the
operational computer loaded in the factory.
Furthermore, it may encourage in loading of pirated softwares in the
667], the law is stated in the following terms:
"...The intention of the legislature in a taxation statute is to be
gathered from the language of the provisions particularly where the language is
plain and unambiguous. In a taxing Act it is not possible to assume any
intention or governing purpose of the statute more than what is stated in the
plain language. It is not the economic results sought to be obtained by making
the provision which is relevant in interpreting a fiscal statute.
Equally impermissible is an interpretation which does not follow from the
plain, unambiguous language of the statute. Words cannot be added to or
substituted so as to give a meaning to the statute which will serve the spirit
and intention of the legislature. The statute should clearly and unambiguously
convey the three components of the tax law i.e. the subject of the tax, the
person who is liable to pay the tax and the rate at which the tax is to be
paid. If there is any ambiguity regarding any of these ingredients in a
taxation statute then there is no tax in law. Then it is for the legislature to
do the needful in the matter." (Emphasis Supplied) Consultancy Services
and Ors., JT 2004 (4) SC 587] [AIR 2002 SC 2692 : (2002) 6 SCC 227] rule of
strict construction of a taxing statute was recommended.
We are also not oblivious of the fact that when the statutory provision is
reasonably akin to only one meaning, the principle of strict constructions may
not be adhered to.
Artificial rules to give the tax payer the 'breaks' are not out of place for
taxation is now not an 'impertinent intrusion into sacred rights of private
(2001) 3 SCC 359] Furthermore, for the purpose of interpretation of a taxing
statute, the fiscal philosophy, a feel of which is necessary to gather the
intent and effect Tax Officer, Ernakulam and Another, (1981) 4 SCC 173].
A consideration of public policy may also be relevant in interpreting
Commissioner of Income Tax, (1998) 2 SCC 95].
A provision enacted for the benefit of an assessee should be so construed
which enables the assessee to get its benefit. [See Mysore Tax, Karnataka,
Bangalore (1999) 7 SCC 106] However, principle of purposive construction will
be adhered to when a literal meaning may result in absurdity.
In Francis Bennion's Statutory Interpretation, Fourth Edition, page 828, it
"Section 310. Purposive construction not excluded for taxing etc. Acts:
Particular types of Acts (for example taxing Acts) are not excluded from
strained and purposive construction. The presumption as to purposive
construction applies to them as to other Acts." We may also notice that in
Francis Bennion's Statutory Interpretation, Fourth edition at pages 879-880,
the maxim 'quando aliquid prohibetur fieri, prohibitur ex directo et per
obliquum' has been quoted which means "Whenever a thing is prohibited, it
is prohibited whether done directly or indirectly." With the
aforementioned principles in mind, answers to the questions involved in these
matters are required to be found out.
INTERPRETATION OF THE RELEVANT PROVISIONS:
Section 2(d) of Central Excise Act, 1944 defines the "excisable
goods" to mean the goods specified in the First Schedule and the Second
Schedule to the Central
Excise Tariff Act, 1985 as being subject to a duty of excise. It must,
therefore, be 'goods' which would be subject to a duty of excise and not the
'goods' which would not be.
Section 3 thereof is the charging provision. It not only lays down the mode
and manner for levy and collection of central excise duty but in no uncertain
terms states that a duty of excise shall be levied on all excisable goods which
are produced or manufactured in India, as, and at the rates, set forth in the
Section 4 provides for the manner in which an enquiry is required to be made
for valuation of goods for the purpose of levy of excise duty on
"goods". In terms of Clause (a) of Sub-section (1) of Section 4 when
the duty of excise is chargeable on the concerned excisable goods with
reference to their value, the same shall be calculated in the manner laid down
It may be true that the definition of "Transaction Value" which is
incorporated in Clause (d) of Sub-section (3) of Section 4 for the purpose of
said Section states that the price actually paid or payable for the goods, when
sold, would include in addition to the amount charged as price, any amount that
the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or
in connection with the sale. Only because the expressions "by reason of,
or in connection with the sale" have been used in the definition of
"Transaction Value", the same by itself would not take away the
rigours of Sub-section (1) of Section 4 as also the requirement of charging
section as contained in Section 3.
It must be borne in mind that central excise duty cannot be equated with
sales tax. They have different connotations and apply in different situations.
Central excise duty is chargeable on the excisable goods and not on the goods
which are not excisable. Thus, a 'goods' which is not excisable if transplanted
into a goods which is excisable would not together make the same excisable
goods so as to make the assessee liable to pay excise duty on the combined
value of both. Excise duty, in other words, would be leviable only on the goods
which answer the definition of "excisable goods" and satisfy the
requirement of Section 3. A machinery provision contained in Section 4 and that
too the explanation contained therein by way of definition of 'transaction
value' can neither override the charging provision nor by reason thereof a
'goods' which is not excisable would become an excisable one only because one
is fitted into the other, unless the context otherwise requires.
It is not a case where the software is being supplied to the customer along
with the computer by way of incentive or gift. The Respondent is charging the
price therefor. Software therefor along with a computer is being sold both in
the form of the information loaded in the computer as also in the form of a
CD-ROM. In the invoice, the composite price of the computer and software is
being shown, as noticed hereinbefore and therefrom, the price of the software
is only being deducted. The invoice price, thus, also shows the actual price of
the computer as also the price of the software together with the licence to use
the same. The Appellant while calculating the price of the computer had shown
all expenses which are borne by it in terms of the decision of this Court in
Union of India and Thus, the requirements contained in the second part of the
definition of 'transaction tax' are met. Furthermore, invoice value is not
always excisable value in respect of the goods.
In the instant case, having regard to the decision of this Court in Bombay
Tyre International Ltd. (supra) the excisable value of the computer has been
disclosed. The cost of loading the softwares which would enhance the value of
the goods had also been added. There cannot, thus, be any doubt whatsoever that
while computing such costs of manufacturing expenses which would add to the
value of the excisable goods (in this case the computer) must be taken into
consideration but not the value of any other goods which is not excisable.
Automatic data processing machines are classifiable under the sub- heading
84.71. Softwares, however, are classifiable under the sub-heading 85.24; the
duties payable for are 16% and 'Nil' respectively.
Chapter Note 5(a) of Chapter 84 of the Tariff Act states:
"5. (a) For the purposes of heading No. 84.71, the expression
'automatic data processing machines' means :
(i) Digital machines, capable of (1) storing the processing programme or
programmes and at least the data immediately necessary for the execution of the
programme; (2) being freely programmed in accordance with the requirements of
the user; (3) performing arithmetical computations specified by the user; and
(4) executing, without human intervention, a processing programme which
requires them to modify their execution by logical decision during the
processing run;" Chapter Note 6 of Chapter 85 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." It is profitable
to notice at this juncture the general principles of interpretation and in
particular Rules 1 and 3 thereof. The interpretative rules, in our opinion,
should be considered keeping in view of the Chapter (s) of the Tariff Act.
Rule 1 of the Rules for the Interpretation of the First Schedule states that
the titles of Sections and Chapters are provided for ease of reference only
which having regard to Chapter 84 providing for nuclear reactors, boilers,
machinery and mechanical appliances; parts thereof are required to be referred
to for reference only. However, for legal purposes, the classification is to be
determined according to the terms of the headings.
The subject matter of the heading is important. Once a particular subject
matter falls within the specified classification, the determination of
valuation for the purpose imposition of duty must be done according to the
terms of the heading and any relative Section or Chapter Notes unless such
headings or Notes otherwise do not require. For our purpose, therefore, the
rule of interpretation as contained in Chapter Notes would be given effect to
for the purpose of classification in preference to the general rules of
Rule 3, on the other hand, refers to a situation where any reference in a
heading to a material or substance includes a reference to mixtures or
combinations of that material or substance with other materials or substances,
as a result whereof the goods are prima facie classifiable under two or more
headings. Only in that event, the different rules of interpretation specified
in Rule 3 may be taken recourse to.
Rule 3 pre-supposes three conditions under which goods classifiable under
two or more headings may be classified under one heading or the other. Such
conditions are not applicable in the instant case. Rules 3 of the Rules for
interpretation shall not be applicable whereas Rule 1 does.
In the instant case having regard to the Chapter Note, the legal text
contained in Rule 1 will apply and not Rule 3.
The softwares, thus, whether they are cleared with the apparatus for which
they are intended, viz., with the computer or not they remain classified under
the same heading. By reason of the provisions of the Tariff Act, the rate of
duties specified becomes part of a Parliamentary Act.
Chapter Note 6 of Chapter 85 being the legal text must be taken aid of for
the purpose of interpretation of the different headings in preference to the
interpretation rules. Suffice it to point out that once 'no duty' is payable on
softwares being classified under 8524.20 being a magnetic tape, the recorders
whereof is classified under 8520.00, a duty would not be payable only because
the informations contained therein are loaded in the hardware.
It is not in dispute that operational softwares are available in the market
separately. They are separately marketable commodities. The essentiality test
or the functional test cannot be applied for the purpose of levy of central
excise inasmuch as the tax is on manufacture of "goods".
The Act being a fiscal legislation an attempt must be made to read the
provisions thereof reasonably. Computer comes within the definition of
excisable goods. So is a software. They find place in different
classifications. The rate of duty payable in relation to these two different
goods is also different.
In terms of Chapter Note 6 of Chapter 85, as noticed hereinbefore, a
software retains its character irrespective of the fact as to whether it is
sold with the apparatus, viz., the computer. Once it is held that the essential
characteristic of a software is not lost by reason of its being loaded in the
hardware; having regard to the different sub-headings contained in different
chapters of the Tariff Act, the intent and purport of the legislature, in our
opinion, cannot be permitted to be withered away only because the informations
contained in a software are loaded in a hardware. In other words, as the
central excise duty is not leviable on a software in terms of the Act, only
because it is implanted in a hardware which can be subjected to the assessment
of central excise under different head, the same would not attract central
While calculating the value of the computer the value of the hard disc,
value of the firmware, the cost of the motherboard as also the costs for
loading operating softwares is included. What is excluded from the total value
of the computer is the value of the operating softwares like Windows 2000, Windows
XP which are secondary softwares. Indisputably, when an operating software is
loaded in the computer, its utility increases. But does it mean that it is so
essential for running the computer that exclusion thereof would make a computer
dead box? The answer to the said question as would appear from the discussions
made hereinafter must be rendered in the negative. It is not disputed before us
that even without operational softwares a computer can be put to use although
by loading the same its utility is enhanced. Computers loaded with different
operational softwares cater to the specific needs of the buyer wherefor he is
required to place definite orders on the manufacturer. It is also not in
dispute that an operating software loaded on the hard disc is erasable. It is
also accepted that the operating software despite being loaded on to the hard
disc is usually supplied separately to the customers. It is also beyond any
controversy that operating software can be updated keeping in view the
development in the technology and availability thereof in the market without
effecting the data contained in the hard disc. Concededly, even in the case of
hard disc crash the software contained in the CDs is capable of being reloaded
on to the hard disc and its utility by the users remain the same. An
operational software, therefore, does not form an essential part of the
CASE LAWS :
In PSI Data Systems Ltd. (supra) this Court in paragraph 2 of the judgment
excluded a firm or etched software and not the operational software. It has
been clarified that the softwares with which the Bench was concerned were
tangible softwares of the nature of discs, floppies and CD- ROMs. It is not in
dispute that the operational softwares despite being implanted in the computer
retain its characteristic of a tangible software of a CD-ROM and can be
marketted separately. This Court also noticed that the computers and softwares
are classified differently in different chapters being Chapter Nos. 84 and 85
under the heading 84.71 and heading 85.24 respectively.
Drawing a distinction between a computer system and a computer, it was held:
"12. In the first place, the Tribunal confused a computer system with a
computer; what was being charged to excise duty was the computer." It was furthermore
"13. Secondly, 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 CD ROMs, 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 excise duty." The
functional test or the essentiality test, thus, had been given a complete go by
therein and, thus, it is not possible to agree that without an operating
software, the computers would become disfunctional.
The decision in the case of PSI Data Systems Ltd. (supra) has been Excise,
Vadodara [1998 (102) ELT 3 (SC)].
In O.R.G. Systems (supra), the principal issues in controversy were:
"(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 are includible in the assessable value of the
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." Referring to P.S.I. Data Systems Ltd. (supra) in extenso,
this Court held:
"7.The above judgment of this Court completely answers the principal
issues in controversy in favour of the appellant. In the case on hand, it
cannot be disputed that the computers manufactured and supplied by 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 countervailing duty
on such imported peripherals." 667] Commissioner of Customs, Delhi [2000
(116) E.L.T. 268 (Tribunal)] in a similar situation observed:
"9. The contention of the appellants is that when the software is
loaded on the hard disk drive, it becomes software and, therefore, is
classifiable under Tariff Heading 85.24 which covers records, tapes and other
recorded media, sound or other similarly recorded phenomena, including matrices
and masters for the production of records. Further contention of the appellants
is that Note 6 to Chapter 85 provides that the records tapes and other media of
Heading 85.24 remains classifiable under this heading whether or not which
presented with the apparatus. We find that the appellants imported hard disk
drive loaded with the software.
It is not the case of the appellants that the software was assembled with
the disk drive. In fact, the software was installed on the hard disk drive from
the recorded software media for the purpose of executing commands to the
system. In these circumstances, the software becomes an integral part of the
hard disk drive. Therefore, we do not find any force in the arguments of the
appellants that the goods, in question, are, in fact, software." On an
appeal preferred therefrom by the assessee, a Division Bench of [2000 (116)
E.L.T. 6 (SC) : (2000) 2 SCC 486], upon taking into consideration the rules of
interpretation mentioned in the First Schedule appended to the Customs Tariff
Act which lay down the general rules for interpretation and classification of
"11. Testing it from the aforesaid rules of interpretation, it would be
clear that the disk or a floppy on which computer data is recorded, would be
covered by Heading 85.24. Rule 3(a), inter alia, provides that when two or more
headings each refer to part only of the materials or composite goods, those
headings are to be regarded as equally specific in relation to those goods,
even if one of item (sic them) gives a more complete or precise description of
the goods. Further, considering imported goods to be a mixture of two
substances namely "hard disk drive" and "software" as per
Rule 3(b) they can be classified under the heading which gives them their essential
character. In the present case, considering its price factor it would be
computer software. The price of the imported consignment was approximately Rs.
68 lakhs. As against this, the value of the seven hard disk drives would be
roughly Rs. 60,000 that is to say, value of the computer software is hundred
times more than its containers hard disk. Hence, the essential character of the
imported goods is computer software." While reversing the decision of the
Tribunal this Court rejected the contention of the Revenue that in view of
Chapter Note 5 of Chapter 84 for the purposes of Heading No. 84.71, the
expression "automatic data processing machine" means automatic data
processing machines or a unit as being a part of a complete system if it meets
the conditions specified therefor stating:
"13. He referred to clauses (b) and (c) and contended that this hard
disk drive can be used either directly or through one or more other units for
processing the data and, therefore, it would be automatic data-processing,
machine falling under Heading No. 84.71. This submission cannot be accepted for
the consignment in question is essentially a computer software covered by
specific Heading No. 85.24 which is for levying duty on records, tapes and
other recorded media for sound or other similarly recorded phenomena.
As mentioned in the notification dated 16th March, 1995, computer software
is covered by Heading No. 85.24. The said notification also covers computer
software imported in the form of printed books, pictures, manuscripts and typed
scripts covered by Chapter 49. Computer software can be brought either on a
floppy or a magnetic tape or on a hard disk or in a printed form and hence,
what is imported is software on a container which is a hard disk drive. The
value of the containers (hard disks) approximately in the present case is Rs.
60,000 or Rs. 65,000. As against this, the cost of the computer software is
roughly Rs. 67 lakhs.
Therefore, it can be said that what is imported by the appellant is
essentially a computer software." Central Excise, Patna [1997 (91) ELT 255
(SC)] this Court while considering the question as to whether where ball
bearings fitted with accessories like snap rings, sleeve lock devices, oil
seals etc. would still retain the character of ball bearings or can be
subjected to payment of excise duty under a different head, held :
"2. The first issue relates to the value for the purpose of excise duty
of ball bearings manufactured by the assessee. It was the case of the assessee
that the ball bearings were complete when they consisted of the inner ring, the
outer ring, the ball or rollers and the cage. Snap rings, sleeve lock devices,
cup assemblies, oil seals, eccentric collars, dust shields, etc., were
accessories and not necessary for the manufacture of the complete ball
bearings. The Revenue, however, argued that the duty liability had to be
determined at the time of clearance and the ball bearings had been actually
removed from the appellant's factory fitted with accessories.
Therefore, the composite value thereof was the excisable value of the ball
bearings. The Tribunal upheld the contention of the Revenue on the basis that
(i) the entire article was cleared as ball bearings; (ii) in the price list,
invoices and catalogue, the assessee had quoted the item as ball bearings and
the price for the entire article was stated; and (iii) no separate price was
quoted for accessories and the ball bearings.
3. It is not the case of the Revenue that the snap rings, sleeve lock
devices, etc., are parts of ball bearings. It is the Revenue's case that these
are accessories but they were fitted to the ball bearings when the ball
bearings were removed from the appellant's factory. The Tariff Entry at the
relevant time ( No. 49) read, "Rolling bearings, that is to say, ball or
roller bearings, all sorts".
Clearly, what fell under this entry were the ball bearings and not what,
admittedly, are the accessories thereof. Accordingly, the conclusion of the
Tribunal on this issue must be set aside." Once it is held that the
computer is complete without the operating softwares, the question of adding
the cost of software therewith would not arise since what is under assessment
is only the computer. To the same [1999 (108) ELT 523].
SCC 31], this Court upon noticing the terms and conditions between the
manufacturer and their dealers stating the same to be one as between principal
and principal observed that making a deduction on this account was uncalled for
as the advertisement which the dealer was required to make at its own cost
benefited in equal degree the Appellant and the dealer.
Similarly, with regard to after-sales service, it was held that the same
benefited not only the manufacturer but also the dealer. It was observed:
"7. We think that in adjudicating matters such as this, the Excise
authorities would do well to keep in mind legitimate business
Computer and operative softwares are different marketable commodities. They
are available in the market separately. They are classified differently. The
rate of excise duty for computer is 16% whereas that of a software is nil.
Accessories of a machine promote the convenience and better utilization of the
machine but nevertheless they are not machine itself. The computer and software
are distinct and separate, both as a matter of commercial parlance as also
under the statute. Although a computer may not be capable of effective
functioning unless loaded with softwares, the same would not tantamount to
bringing them within the purview of the part of the computer so as to hold that
if they are sold along with the computer their value must form part of the
assessable value thereof for the purpose of excise duty. Both computer and
software must be classified having fallen under 84.71 and 85.24 and must be
subject to corresponding rates of duties separately. The informations contained
in a software although are loaded in the hard disc, the operational software
does not lose its value and is still marketable as a separate commodity. It
does not lose its character as a tangible goods being of the nature of CD-ROM.
A licence to use the information contained in a software can be given
irrespective of the fact as to whether they are loaded in the computer or not.
The fact that the manufacturers put different prices for the computers loaded
with different types of operational softwares whether separately or not would
not make any difference as regard nature and character of the 'computer'. Even
if the Appellants in terms of the provisions of a licence were obliged to
preload a software on the computer before clearing the same from the factory,
the characteristic of the software cannot be said to have transformed into a
hardware so as to make it subject to levy of excise duty along with computer
while it is not under the Tariff Act.
In other words, computers and softwares are different and distinct goods
under the said Act having been classified differently and in that view of the
matter, no central excise duty would be leviable upon determination of the value
thereof by taking the total value of the computer and software.
So far as, the valuation of goods in terms of 'transaction value' thereof,
as defined in Section 4(3)(d) of the Act is concerned, suffice it to say that
the said provision would be subject to the charging provisions contained in
Section 3 of the Act as also Sub-Section (1) of Section 4. The expressions
"by reason of sale" or "in connection with the sale"
contained in the definition of 'transaction value' refer to such goods which is
excisable to excise duty and not the one which is not so excisable. Section 3
of the Act being the charging section, the definition of 'transaction value'
must be read in the text and context thereof and not de'hors the same. The
legal text contained in Chapter 84, as explained in Chapter Note 6, clearly
states that a software, even if contained in a hardware, does not lose its
character as such.
When an exemption has been granted from levy of any excise duty on software
whether it is operating software or application software in terms of heading
85.24, no excise duty can be levied thereupon indirectly as it was
impermissible to levy a tax indirectly. In that view of the matter the decision
in PSI Data Systems (supra) must be held to have correctly been rendered.
We, however, place on record that we have not applied our mind as regard the
larger question as to whether the informations contained in a software would be
tangible personal property or not or whether preparation of such software would
amount to manufacture under different statutes.
For the reasons aforementioned, we do not find any merit in the appeals of
the Revenue which are dismissed accordingly. However, interlocutory
applications are allowed. No Costs.