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CASE NO.: Appeal (civil)  10185-10186 of 2003

PETITIONER: Commnr. Of Central Excise, Pondicherry                   

RESPONDENT: M/s. ACER India Ltd.                                             

DATE OF JUDGMENT: 24/09/2004

BENCH: N. Santosh Hegde,S.B. Sinha & Tarun Chatterje

JUDGMENT: J U D G M E N T

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.

FACTS:         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 softwares.    

       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. 48,65,003/-.

       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

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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\005.."

       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  decision of this Court in PSI Data Systems Ltd. Vs. Collector of Central  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.

SUBMISSIONS:

       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

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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  separately.

       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 thereof.

       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

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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  transaction value;  \005            \005            \005            \005            \005                 (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 COMPUTER:

       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."

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       "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 the computers.

       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.         In Cape Brandy Syndicate Vs. Inland Revenue Commissioners,

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[(1921) 1 KB 64 at p. 71], it is stated: "\005In 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."

[See also State of West Bengal Vs. Kesoram Industries Ltd. and Ors, 2004  (1) SCALE 425].         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  fairly and squarely hits. [See St. Aubyn (LM) and Others Vs. Attorney  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  thereto should not be given. [See W.M. Cory & Sons Ltd. Vs. Inland  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 analogy".           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  India and Others Vs. Play World Electronics Pvt. Ltd and Another., (1989) 3  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  computer. In Mathuram Agrawal Vs. State of Madhya Pradesh [(1999) 8 SCC  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

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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)  [See also Indian Banks’ Association, Bombay and Ors. Vs. M/s. Devkala  Consultancy Services and Ors., JT 2004 (4) SC 587]         In Hansraj and Sons Vs. State of Jammu and Kashmir and Others  [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  property’. [See  Oxford University Press Vs. Commissioner of Income-tax,  (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  of its different clauses should be applied.  [See K.P. Verghese Vs. Income  Tax Officer, Ernakulam and Another, (1981) 4 SCC 173].          A consideration of public policy may also be relevant in interpreting  and applying a taxing Act. [See Maddi Venkatraman & Co. (P) Ltd. Vs.  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  Minerals Ltd., M.G. Road, Bangalore Vs. The Commissioner of Income  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 is stated: "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

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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 Tariff Act.

       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 therein.   

       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  Others Vs. Bombay Tyre International Ltd. and Others [(1984) 1 SCC 467].   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

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goods which is not excisable.

CLASSIFICATION :         

       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  interpretation.

       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.

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       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 excise duty.

ANALYSIS :         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 hardware.

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-

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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 opined: "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  followed by this Court in O.R.G. Systems Vs. Commissioner of Central  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 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."

       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

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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."

[See also HCL Hewlett Packard Ltd. Vs. CCE, Meerut, 2000 (116) ELT  667]

       We may notice that the Tribunal in Sprint R.P.G. India Ltd. Vs.  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  this Court in Sprint R.P.G. India Ltd. Vs. Commissioner of Customs-I, Delhi  [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 goods, held: "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

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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."  

       We may also notice that in Shriram Bearings Ltd. Vs. Collector of  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

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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  effect is the judgment in Photopone Industries Pvt. Ltd. Vs. CCE, Goa,  [1999 (108) ELT 523].

       In Philips India Ltd. Vs. Collector of Central Excise, Pune [(1997) 6  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 considerations."

CONCLUSION:         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

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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.