http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 14  

CASE NO.: Appeal (civil)  2487 of 2000

PETITIONER: Anjaleem Enterprises Pvt. Ltd.

RESPONDENT: Commissioner of Central Excise, Ahmedabad.

DATE OF JUDGMENT: 16/01/2006

BENCH: ASHOK BHAN & S.H. KAPADIA

JUDGMENT: J U D G M E N T

KAPADIA, J.         The following two questions arise for  determination in this civil appeal filed by the  assessee under Section 35-L(b) of the Central  Excise Act, 1944 (for short ’the Act’): (1)     Whether a programmed or designed  EPROM is an integral part of STD- PCO Unit; and  

(2)     Whether the appellant herein was  entitled to exemption under  notification No.84/89 CE dated  1.3.1989 which required the  appellant to show that the  programmed EPROM was a "recorded  medium" under chapter heading  85.24 read with note 6 to Chapter 85  of the 1985 Tariff Act.

       During the period October 1992 to March 1993  appellant was the manufacturer of STD-PCO unit.   The said unit was a computer based equipment.   The said unit was used to identify the time of the  day and day of the week, the time when the  telephone calls were made; to recognize whether the  phone was on-hook or off-hook and to record the  duration of a call.

       The appellant filed classification list dated  29.5.1992 under which the appellant classified the  above unit as an equipment under CH 85.17.  In  the said classification list, the appellant classified  programmed memory chips, EPROM, under CH  85.24 and claimed exemption as a recorded  medium under notification No.84/89 CE dated  1.3.1989.

       Vide show-cause notice (for short ’SCN’) dated  2.4.1993 the Assistant Collector (AC) stated that the  programmed memory chip was an integral part of  STD-PCO unit, without which the unit was non- functional.  According to the SCN, the programme  recorded in the memory chip, EPROM, could be  used with STD-PCO unit only in a particular  telecom region and, therefore, the said chip was an  essential component of the STD-PCO unit.   According to the SCN, the appellant was not

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 14  

entitled to the benefit of exemption as the said chip  was not covered under CH 85.24 as claimed by the  appellant.  According to the department, the said  chip was classifiable as an integral part of STD-PCO  unit under CH 85.17.  Accordingly, the department  called upon the appellant to show cause as to why  duty amounting to Rs.21.50 lacs for the above  period should not be recovered under section 11A of  the Act.   

       At this stage, we may clarify that on the  question of extended limitation the appellant has  succeeded and since the department has not come  in appeal, we are not required to examine that  aspect of the matter.

       By reply dated 24.5.1993, the appellant  submitted that it had imported EPROMs from  abroad or it had obtained EPROMs from the open  market.  According to the appellant, empty EPROMs  were subjected to programming by the appellant  who had designed a programme which was loaded  into the blank EPROMs.  The appellant submitted  that a computer software is a designed programme  recorded on a media commonly called as a  "recorded medium".  Such recorded medium can be  played in a computer or in any other system based  on microprocessors.  The appellant conceded that  STD-PCO unit was classifiable as an equipment  under CH 85.17, however, it contended that the  programmed EPROM was a "recorded medium"  classifiable under sub-heading 8524.90.  According  to the appellant, a programmed EPROM was  classifiable only under sub-heading 8524.90 in view  of note 6 to chapter 85, notwithstanding the fact  that such recorded media was equipped with or  without an apparatus.  It claimed exemption under  notification No.84/89-CE dated 1.3.1989 on the  ground that the said exemption notification gave  exemption to softwares falling under heading 85.24  from whole of duty of excise.  In the circumstances,  the appellant contended that the department was  not entitled to include the value of the programmed  EPROM in the assessable value of STD-PCO unit  and that the unit was classifiable under heading  85.17 whereas the programmed EPROM was  classifiable under heading 85.24.  The appellant  contended, inter alia, that sub-heading 8524.30  covered recorded magnetic disks, such as, a floppy  containing a computer programme whereas all  other types of recorded media stood covered under  sub-heading 8524.90 and, therefore, even if a  recorded EPROM was considered to be an integral  part of STD-PCO unit the recorded EPROM was  required to be separately classified under sub- heading 8524.90 in view of note 6 to chapter 85.   According to the appellant, even if a particular  component or a part was most essential for a  machine, it was not always classifiable with the  machine,  if otherwise, the said component came  under a specific head for its classification.   In this  connection, reliance was placed on note 2 to section  XVI of the schedule to the 1985 Tariff under which  chapter 85 falls.  Therefore, according to the  appellant, in the present case, the programmed

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 14  

EPROM was a recorded media which fell under a  specific entry, viz., 8524.90 and, therefore, was not  classifiable under heading 85.17.  The appellant  also contended that the programmed EPROM was a  computer software under heading 85.24 and,  therefore, the appellant was entitled to exemption  under notification No.84/89 dated 1.3.1989.   

       By order dated 24.3.1994 the Assistant  Collector held that EPROMs were integrated circuits  (chips); that, the recorded EPROMs were meant for  certain functions to be performed by STD-PCO unit;  that, the recorded EPROMs were integral parts of  STD-PCO unit and, therefore, such recorded  EPROMs came under heading 85.17.  In this  connection, reliance was placed on note 2(a) to  section XVI, under which chapter 85 fell.  The AC   further held that the appellant was not entitled to  claim the benefit of exemption under notification  dated 1.3.1989 because that notification warranted  two conditions to be satisfied by the appellant,  namely, that the product should be a computer  software and it should fall under heading 85.24.   The AC further held that recorded EPROMs were  integrated circuits (ICs) under heading 85.42; that,  even as a final product, and not as a component of  STD-PCO unit, the said EPROM would fall under  heading 85.42, therefore, in any view of the matter,  the appellant was not entitled to exemption  under  notification dated 1.3.1989 read with tariff item  85.24.  In the circumstances, it was held that the  value of recorded EPROMs was includible in the  assessable value of STD-PCO unit under heading  85.17.

       The order passed by the AC was confirmed in  appeal by the Collector (Appeals) and also by the  tribunal.  Hence this civil appeal.

       Shri Ramesh Singh, learned counsel appearing  on behalf of the appellant submitted that the STD- PCO unit was classifiable under CH 85.17 as  electrical apparatus for line telephony;  that, the  said equipment has an inbuilt microprocessor  classifiable under CH 84.71; that, in order to  perform various tasks, the microprocessor requires  a software/programme; that, programme in  question was developed by the appellant; that, the  said programme was recorded on EPROM (a  medium) classifiable under CH 85.42 as an  integrated circuit; that, the appellant bought blank  EPROMs from the market @ Rs.149/- each; that,  the appellant encoded the programme developed by  it on the blank EPROM, which programme was  erasable by ultra violet radiation.  According to the  appellant, the said software was area specific.   According to the appellant, the recorded EPROM  was sold @ Rs.6450/-; that, the STD-PCO  equipment was sold @ Rs.8453/-.  Learned counsel  submitted that the programmed EPROM was  classifiable under CH 85.24; that, the said EPROM  was not classifiable under CH 85.17 and  accordingly, its value was not includible in the total  assessable value of STD-PCO unit, because once a  software stood recorded on the blank EPROM, the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 14  

blank EPROM no longer continued to remain as  electronic integrated circuit; that, the essential  character of the recorded EPROM was that of  computer software classifiable under CH 85.24 as a  recorded media; and that, the only function of  EPROM was that of a recorded media.  In this  connection, learned counsel placed reliance on the  judgment of this court in the case of Sprint RPG  India Ltd. v. Commissioner of Customs-I, Delhi  reported in (2000) 2 SCC 486.  Learned counsel  further submitted that once the programmed  EPROM stood classified under CH 85.24, then, even  if it was cleared along with STD-PCO unit,  classifiable under CH 85.17, the said EPROM  remained classifiable under CH 85.24.  In this  connection, learned counsel placed reliance on note  6 to chapter 85.  Reliance was also placed on the  judgments of this court in the case of  Commissioner of Central Excise v. Acer India  Ltd. reported in (2004) 8 SCC 173 and in the case  of PSI Data Systems Ltd. v. Collector of Central  Excise reported in (1997) 2 SCC 78.         Shri T.M. Mohd. Yusuf, learned senior counsel  appearing on behalf of the department, on the other  hand, submitted that note 6 to chapter 85 was not  applicable for the computer-based product, namely  STD-PCO unit, as the programmed EPROM  constituted an inbuilt component of the final STD- PCO unit.  Learned counsel submitted that as a  programmed EPROM constituted an integral part of  the STD-PCO unit, such EPROMs did not fall under  CH 85.24 as they  were neither recorded media  falling under CH 85.24 nor could they be cleared  along with an apparatus as they constituted an  integral part of the STD-PCO unit.  Learned counsel  submitted that what was cleared from the factory  gate of the assessee was STD-PCO unit which  contained a component called "the recorded  EPROM".  In this connection, reliance was placed on  note 2(b) to section XVI in which chapter 85 falls.   Learned counsel submitted that the programmed  ICs were integral parts of the STD-PCO units  without which the units were non-functionable.   Hence, the appellant was not entitled to claim  exemption under notification no.84/89 and the  value of the programmed EPROM was includible in  the value of the STD-PCO unit.

       Before dealing with the arguments, it is  necessary for us to set out the relevant entries from  the Tariff Act, 1985 as under: - SECTION XVI:

MACHINERY AND MECHANICAL APPLIANCES;  ELECTRICAL EQUIPMENT; PARTS THEREOF;  SOUND RECORDERS AND REPRODUCERS,  TELEVISION IMAGE AND SOUND RECORDERS  AND REPRODUCERS, AND PARTS AND  ACCESSORIES OF SUCH ARTICLES.

Notes:

2.      Subject to Note 1 to this Section, Note 1  to Chapter 84 and to Note 1 to Chapter 85,  parts of machines (not being parts of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 14  

articles of heading No.84.84, 85.44, 85.45,  85.46 or 85.47) are to be classified according  to the following rules:-

(b)     Other parts, if suitable for use solely or  principally with a particular kind of machine,  or with a number of machines of the same  heading (including a machine of heading  No.84.79 or heading No.85.43) are to be  classified with the machines of that kind.   However, parts which are equally suitable for  use principally with the goods of heading  Nos.85.17 and 85.25 to 85.28 are to be  classified in heading No.85.17.

CHAPTER 85: ELECTRICAL MACHINERY AND  EQUIPMENT AND PARTS THEREOF; SOUND  RECORDERS AND REPRODUCERS,  TELEVISION IMAGE AND SOUND RECORDERS  AND REPRODUCERS, AND PARTS AND  ACCESSORIES OF SUCH ARTICLES.

Notes:

5.      For the purposes of heading Nos.85.41  and 85.42:

(a)     "Diodes, transistors and similar semi- conductor devices" are semi-conductor  devices  the operation of which depends on  variations in resistivity on the application of  an electric field;

(b)     "Electronic integrated circuits and  microassemblies" are:

(i)     Monolithic integrated circuits in  which the circuit elements  (diodes, transistors, resistors,  capacitors, interconnections, etc.)  are created in the mass  (essentially) and on the surface of  a semi-conductor material (doped  silicon, for example) and are  inseparably associated;

(ii)    Hybrid integrated circuits in  which passive elements (resistors,  capacitors, interconnections, etc.),  obtained by thin-or thick-film  technology, and active elements  (diodes, transistors, monolithic  integrated circuits, etc.), obtained  by semi-conductor technology, are  combined to all intents and  purposes indivisibly, on a single  insulating substrate (glass,  ceramic, etc.).  These circuits may  also include discrete components;

(iii)   Microassemblies of the moulded  module, micromodule or similar  types, consisting of discrete,  active or both active and passive,  components which are combined

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 14  

and interconnected.

       For the classification of the articles  defined in this Note, heading Nos.85.41 and  85.42 shall take precedence over any other  heading in the Schedule which might cover  them by reference to, in particular, their  function.

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.

Heading No. Sub- heading No. Description of goods Rate of  duty (1) (2) (3) (4) 85.17 8517.00 Electrical apparatus for line  telephony or line telegraphy,  including such apparatus for  carrier-current line systems.  20% 85.24

Records, tapes and other  recorded media for sound or  other similarly recorded  phenomena, including matrices  and masters for the production of  records, but excluding products  of Chapter 37.

8524.10 Gramophone records. 30%                                                                                                              Magnetic tapes:         

8524.21 Audio tapes in any form. 30% plus  Rs.8 per  square  metre.

8524.22 Audio cassettes. 30% plus  Rs.2 per  cassette.

8524.23 Video tapes in any form.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 14  

30% plus  Rs.18 per  square  metre.

8524.24 Video cassettes. 30% plus  Rs.40 per  cassette.

8524.29 Other 30%

8524.30 Magnetic discs. 30%

8524.90 Other. 30% 85.42 8542.00 Electronic integrated circuits and  microassemblies.  15%

       We also set out exemption notification  no.84/89-CE dated 1.3.1989 hereinbelow:-  "Exemption to computer software. \026 In  exercise of the powers conferred by sub- section (1) of section 5A of the Central  Excises and Salt Act, 1944 (1 of 1944), the  Central Government, being satisfied that it is  necessary in the public interest so to do,  hereby exempts computer software, falling  under Heading No.85.24 of the Schedule to  the Central Excise Tariff Act, 1985 (5 of  1986), from the whole of the duty of excise  leviable thereon which is specified in the said  schedule."

       At the outset, we may point out that the  dispute involved in the present case concerns  valuation.  In the matter of valuation, one of the  important aspects to be taken into account is the  condition of the goods/product at the time the  goods leave the factory.  In the present case one has  to see at the "condition" of STD-PCO unit at the  time of clearance and, therefore, the issue which  arises for consideration, in the first instance, is  whether the recorded EPROM was an essential  component of the said STD-PCO unit for making it  operational.  The authorities below have  concurrently found that the programmed EPROM  was an integral part of the unit;  that, it served the  purpose of transmitting electronic instructions for  the performance of the unit; that, the recorded  EPROM was a part of the unit and that the said  EPROM was an essential component of the unit for  making it operational after plugging in with  telephone line and, therefore, the said EPROM

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 14  

constituted an integral part of the STD-PCO unit.   Conceptually, one has to keep in mind the subject- matter of the levy.  In the present case, the subject- matter of the levy is STD-PCO unit, as a final  product.  The subject-matter of the levy in the  present case is not the recorded EPROM.  The  question before us is whether the appellant was  entitled to claim deduction of the value of the  programmed EPROM from the assessable value of  STD-PCO unit.  It was the case of the appellant  before the department that the value of the recorded  EPROM was not includible in the assessable value  of STD-PCO unit on the ground that blank EPROM  was a medium in which the programme was  encoded; that, it was similar to a programme being  put in a floppy; that, the recorded media came  under tariff item 85.24 and, therefore, the appellant  was entitled to the benefit of exemption under  notification dated 1.3.1989.  Admittedly, in the  present case, the appellant had classified the said  unit under CH 85.17.  There can hardly be any  doubt that the price of a component will form part  of the final cost of the unit and hence includible in  its assessable value.  The manufacturer takes into  account, in deciding the cost of the said unit, the  cost incurred for its manufacture and, therefore,  unless the sale price of the said unit is arrived at on  a basis independent of the cost of manufacture (if  law so permits) the cost of the recorded EPROM has  got to be included in the assessable value of the  unit.  Under note 2 to section XVI, parts or  components of a machine are required to be  classified with the machine which, in the present  case, was STD-PCO unit classifiable under heading  85.17.  Accordingly, each of the units cleared from  the factory by the appellant in its completed form  which included the programmed EPROM was  classifiable under tariff item 85.17.  The line  telephone device (unit) was not complete without  the programmed EPROM for its functioning.   Therefore, the department was right in classifying  the unit under tariff item 85.17 and further it was  right in including the value of the  programmed/recorded EPROM in the assessable  value of the unit.                   In the present case, the appellant submitted  that it was entitled to claim the benefit of exemption  under the above notification dated 1.3.1989; that, it  had bought blank EPROM from the market which  was programmed/designed by the appellant; that,  the recorded EPROM constituted a "recorded  medium" under tariff item 85.24; that, under note 6  to chapter 85, recorded media would remain  classifiable under tariff item 85.24, whether or not  such recorded media was cleared with or without  the apparatus and, therefore, its value was not  includible in the assessable value of the unit  (apparatus).  It was vehemently urged on behalf of  the appellant that the general principle of valuation  supported by note 2(b) to section XVI was not  applicable particularly in view of note 6 to chapter  85 and, therefore, the value of the "recorded  medium" was not includible in the assessable value  of the unit.  

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 14  

       In the light of these arguments, the question  which arises for determination is the meaning of the  word "recorded medium" in tariff item 85.24.  At  this stage, we may reiterate that the appellant has  claimed exemption, therefore, the burden was on  the appellant to show that the programmed EPROM  constituted a "recorded media" under tariff item  85.24.  It is in this context that the matter was  examined by the department which came to the  conclusion that EPROM was basically a chip or an  IC classifiable under tariff item 85.42 and,  therefore, on facts the authorities found that tariff  item 85.24 had no application to the facts of this  case.   

       The controversy on classification, therefore, is :  whether the essential character of the programmed  EPROM, in the present case, as an IC changed to  become a "recorded media" or a software under CH  85.24.

       The main components of a computer system  are central processing unit, memory and disk store  [See: Oxford Illustrated Encyclopedia of Invention  and Technology \026 1992 Edition, page 183].  A floppy  is a dumb storage box.  It is different from a chip or  an integrated circuit which performs intelligent  functions.  An integrated circuit (IC) is often  referred to as a micro-chip or a chip.  It is a  miniaturized electronic circuit consisting of semi- conductor devices.  A ’memory’ is the most regular  type of integrated circuit [See:  www.en.wikipedia.org]. According to  www.whatis.com, an ’IC’, sometimes called a chip  or micro-chip, is a semi-conductor wafer on which  thousands of capacitors and transistors are  fabricated.  Unlike a floppy or a disk (which is  removable from the system) an ’IC’ can function as  an amplifier, timer, counter, computer memory and  as a microprocessor.  It is not easily removable.  Therefore,  an ’IC’ or a chip cannot be compared to  a floppy which is merely a storage device similar to  an empty box or a suitcase.   

       In the entire controversy before us, the  appellant has tried to compare a floppy containing a  programme with an IC in which the programme is  electronically embodied.  The functions which an IC  performs, as enumerated above, are intelligent  functions which are not performed by a floppy.  A  floppy cannot be used as a timer or amplifier.  An  IC is more than a storage device.

       "EPROM" stands for Erasable Programmable  ROM.  The word ’ROM’ is an acronym for ’Read  Only Memory’, a type of unchangeable memory  residing in chips or the ICs on the mother board.   ROM contains bare minimum of instructions  needed to start a computer.  It is used for critical  functions.  It is similar to municipal utilities such  as gas and electricity.  If a different configuration is  required, one has to move to a different computer.   ROM is sometimes wrongly compared to a storage

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 14  

media such as CD-ROMs [See:  utut.essortment.com].  ROM chips have  programmes built into them at the factory.  ROM  chips are not volatile.  The expression, "Read Only"  means that CPU can read or retrieve the  programmes written on the ROM chips.  ROM chips  contain special instructions for detailed computer  operations. For example, ROM instructions may  start the computer, give keyboard keys their special  control capabilities, and put characters on the  screen.  ROMs are generally called as Firmware  [See: "Computing Essentials" by Timothy J.  O’Leary & Linda I. O’Leary \026 2002 Edition].   According to the Illustrated Dictionary of  Computing by Jonar C. Nader \026 3rd Edition, "ROM"  is a hardware which is used to store permanent  instructions for the computer’s general  housekeeping operations.  A user can read and use  the data stored in ROM, but cannot change them.   When a computer is turned on, ROM supplies a  series of instructions to CPU which in turn  performs a series of tests. EPROM, on the other  hand, according to the same dictionary, is an  erasable programmable ROM.  Initially, users had  to supply ROM vendor with an inter-connected  program  so that the vendor could build the ROM.   To avoid this high set-up charge, manufacturers  developed a user-programmable ROM (PROM).  A  ’PROM’ is just like a ROM.  Similarly, as an  alternative, with the development of technology, in  the year 1973 Intel Corporation came out with  EPROM.  When the chip was exposed to ultra-violet  radiation the memory could be erased and replaced  by a new memory.  Therefore, EPROM is a re- writable memory chip.  The only difference between  ROM and EPROM is that EPROM holds its content  without power.  EPROM chips are written on an  external programming device before being placed on  the circuit board [See: www.answers.com].  The  word "programmable" means that EPROM can be  programmed with data, program or both whereas  ’ROM" means that the computer which is connected  to the EPROM can only get information from the  chip or IC.  It cannot put information into the chip.   In short, EPROM is a memory part which will not  forget its program or data when power is removed.   EPROM has to be programmed by a special  programming product called an EPROM or a device  programmer.  The computer cannot store data in an  EPROM because the EPROM is a READ ONLY  memory part [See: www.arlabs.com].

       Lastly, even under the scheme of the 1985  Tariff and the HSN, ICs (85.42), data processors  (84.71) and recorded media (85.24) are all  separately classifiable.  Under the explanatory note  to HSN (2nd Edition, 1996), at page 1234, separate  electrical parts have been classified under one or  other of the headings of chapter 85, for example,  transistors, diodes and similar semiconductor  devices, stand classified under heading 85.41 while  electronic integrated circuits are classified under  heading 85.42.

       The above discussion, therefore, shows that

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 14  

EPROM cannot be compared to a floppy.  As stated  above, floppy is a dumb box.  That is not the case  with EPROM.  EPROM is basically an integrated  circuit or a chip.  We agree with the department.   EPROM is, therefore, classifiable as an integrated  circuit under tariff item 85.42.

       The question which remains to be answered is  whether a programmed EPROM is a recorded media  under CH 85.24.  It was argued before us that like  CD-ROM or a floppy which has a programme in it,  EPROM is also a programmed device.  It was argued  that blank EPROMs were purchased in which the  appellant embodied its programme and, therefore,  the recorded EPROM constituted a recorded media  under tariff item 85.24.   

       We do not find any merit in this argument.  In  a disk operating system, the basic input is stored in  a ROM which is transferred to RAM when the  system gets started.  The input/output routines are  written into the IC at the factory.  The point to be  noted is that the ICs which contain semiconductor  components like diodes etc. have got to be  embedded in the mother board.  The ROM chip is  fixed at the factory.  The chip is fixed in the  computer and only then the programme works.   Hence, this is basic difference between a mere  floppy which is a recorded media under CH 85.24  and the IC under CH 85.42.  In the former case, the  program is a software because a floppy is a storage  in which software plays the dominant role whereas  in the case of IC the programme is embodied in the  IC which can perform various functions only when  fixed to the mother board and is not removable like  a floppy from VCR.  According to Encyclopedia of  Technology Terms by Whatis.com, an IC can  function as an amplifier, oscillator, timer,  microprocessor etc.  On the other hand, a floppy  disk is only a storage. Moreover the essential  character of IC does not change with the  programme being embedded in the IC and hence  the IC remains classifiable under CH 85.42.  This  distinction is also brought out by tariff items  referred to above (See: Dictionary of Computing  by Prentice Hall).

       An embedded system is a programmed  hardware device. Software written for embedded  systems, especially those without a disk drive is  called Firmware, the name for software embedded  in hardware devices e.g. in ROM IC chips.  Many  embedded systems avoid mechanical moving parts,  such as, disk drives, switches or buttons because  they are unreliable as compared to ROM or Fast  Memory IC chips.  It is kept outside the reach of  humans.  In embedded systems, the software  resides in ROM IC chips.  Embedded systems are  combination of hardware and software like ATMs,  Cellular telephones etc.  In embedded systems, the  software resides in ROM IC Chip (See:  www.answers.com).  These chips are more than  mere carriers.  Example of embedded system:  microwave ovens, cell phones, calculators etc.         In the case of Office of Patent v. Gale

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 14  

reported in 1991 RPC 305 the Court of Appeal held  that if a programme is embodied in a floppy disk it  becomes a software but where the chip with its  electronic circuit embodies a programme it becomes  a hardware.  It has been further held that electronic  circuitry in the form known as ROM is an integrated  circuit or a chip.  In the said case it has been  observed by the Court of Appeal that ROM is an  article which can be manufactured.  It is an article  because its structure can be altered during the  manufacture so as to perform mathematical  functions.  It has been further observed that there  is a difference between a disk containing a  programme and a ROM with a particular circuitry  embodying a programme.  In the former case, the  disk carries the programme whereas  in the latter  case, a programme is used as the basis for altering  the structure of ROM.  ROM is more than a carrier  and, therefore, it cannot be compared to a floppy or  a disk.  We may clarify that Gale’s case was on two  aspects, viz., patent and difference between ROM  and the floppy disk.  What is stated herein is on the  second aspect which the Court of Appeal decided.    To the same effect is the ratio of the judgment of the  US Supreme Court in the case of Robert  Gottschalk, Acting Commissioner of Patents v.  Gary R. Benson 409 US 63.   

       Even under HSN, entry 84.71 covers Data  Processors, however, under the explanatory note it  is clarified, at page 1403, that devices working in  conjunction with such processors have to be  classified not under 84.71 but with reference to  their specific function.  Therefore, devices like ICs,  as in the present case, which help the processor to  function can only fall under 85.42 (in cases where  such ICs are the final products) and where they  form an integral part of a machine like STD-PCO  unit, they have to be classified under heading  85.17, hence, it will not fall under heading 85.24 as  claimed by the appellant (See: page 1408 of HSN \026  2nd Edition, 1996).  As stated above, a disk with a  programme is a software.  However, a ROM with a  particular circuit in which a programme is  structured remains an IC.             In the case of PSI Data Systems Ltd. (supra)  the department had conceded that the item in  question was a software.  Further, in that matter  the subject-matter of the levy was a software, as a  final product, sold with the computer.  On the other  hand, in the present case, the subject-matter of the  levy is STD-PCO unit.  The question before us in the  present case is whether the programmed EPROM  constituted an integral part of the STD-PCO unit  classifiable under CH 85.17.  As stated  hereinabove, the programmed EPROM was a ROM  with a circuit in which the programme was  embodied.  Therefore, the judgment of this Court in  the case of PSI Data Systems Ltd. (supra) is not  applicable to the facts of the present case.  In fact,  in para 2 of the judgment of this Court in PSI Data  Systems, this Court has made a clear distinction  between softwares, such as, disks, floppies, CD- ROMs etc. on the one hand vis-‘-vis softwares

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 14  

which are etched into the computer.  Therefore, the  judgment in the case of PSI Data Systems has no  application.  On the contrary, it supports our  interpretation in the present case.

       In the case of Sprint RPG India Ltd. (supra)  this Court observed that hard disk is a refined form  of floppy which records material in an efficient  manner.  In that case, the question was  classification, namely, whether duty was leviable on  software loaded on a hard disk drive under heading  84.71 or under 85.24.  This Court held that a hard  disk was a form of floppy on which the programme  was stored and, therefore, the character of such a  programme did not change and, therefore, the  imported item was a software which was stored in  the hard disk and, therefore, it was classifiable  under CH 85.24.  In that matter the question of a  software being an integral part of a machine like  STD-PCO unit was not there.  In that matter there  was no duty imposed on the unit or machine.  The  question in that matter was regarding levy of duty  on a floppy with the software.  In that matter the  question of the integrated circuit did not arise.  In  that matter the interpretation of entry 85.42 was  not at all considered.  Hence, the judgment of this  Court in Sprint RPG India Ltd. (supra) has no  application to the facts of the present case.  

       In the case of ACER India Ltd. (supra) the  demand raised by the department was for the  period July 2001 to May 2002.  In the year 2000  the Excise Act was amended and the concept of  "transaction value" came to be introduced for the  first time.  Further, the argument on behalf of the  department was that the loading of operational  software was includible in the value of the computer  manufacture by the assessee after 1.4.2000 when  the concept of transaction value came to be  introduced.  In the circumstances, the judgment of  this Court in ACER India Ltd. (supra) has no  application to the facts of the present case.   Further, in the case of ACER India Ltd. (supra), the  subject-matter of the levy was a computer whereas  the subject-matter of the levy in the present case is  STD-PCO unit.  The concurrent finding of all the  courts below indicate that, in the present case, the  programme was etched in a particular form of  circuit known as ROM which is required to be fixed  to the mother board and only on such fitment the  STD-PCO unit became operational.  Therefore, the  judgment of this Court in ACER India Ltd. (supra)  has no application to the facts of the present case.   In fact, in the judgment of this Court in ACER  India Ltd. (supra) the Court was not required to  examine the scope of CH  85.42.  

       Before concluding, we reiterate that in the  present case, the levy is on a computer based  embedded system.  The software embedded in the  programmed EPROM, which is an IC chip,  constitutes the "brain" of the system.  The  programmed EPROM is an integral part of the  system.  The levy is on the unit.  The levy is not on  the programmed EPROM.  The programme

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 14  

embedded is not an easily removable.  Hence, it will  not fall in the category of recorded media under  tariff item 85.24 and remains an IC under tariff  item 85.42.

       For the aforestated reasons, we do not find any  merit in this civil appeal which is accordingly  dismissed with no order as to costs.