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CASE NO.: Appeal (civil)  5854 of 2006

PETITIONER: Commissioner of Customs, Chennai

RESPONDENT: M/s Hewlett Packard India Sales (P) Ltd

DATE OF JUDGMENT: 30/08/2007

BENCH: Dr. ARIJIT PASAYAT & LOKESHWAR SINGH PANTA

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO. 5854 OF 2006

Dr. ARIJIT PASAYAT, J.

1.      Challenge in this appeal is to the order passed by the  Customs Excise and Service Tax Appellate Tribunal, South  Zonal Bench, Chennai (in short ’CESTAT’) allowing the appeal  filed by the respondent. By the impugned judgment CESTAT  held that the Software-loaded Hard Discs are classifiable  under Heading 85.24 of the First Schedule to Customs Tariff  Act, 1985 (in short ’Tariff Act’). It was further held that  respondent will be eligible for duty exemption under  Notification No.21/2002-Cus as amended.  It was held that  rest of the machine would be classified under Heading 84.71.   

2.      Background facts in a nutshell are as follows:

       The Department had demanded customs duty of about  Rs.5.9 crores from the respondent by classifying goods  imported by them under Heading 84.71 of the First Schedule  of the Act and denying them benefit of exemption Notification  No.21/2000-Cus. dated 1.3.2002 (as amended). Demand was  questioned before CESTAT.  An application seeking waiver of  pre-deposit and stay of recovery in respect of this amount of  duty was filed. After examining the records and hearing both  sides, CESTAT found prima facie case for the assessee in view  of the Tribunal’s decision in the case of Barber Ship  Management (I) Pvt. Ltd. Vs. Commissioner, 2000 (117) ELT  456 (Tri.) as well as the decision in the assessee’s own case  reported in 2005 (126) ECR 124 (Tri-Del) and, accordingly,  CESTAT have dispensed with pre-deposit of the duty amount.   Further, having heard both sides at length and having regard  to the high stake involved in the case, the appeal was taken up  for final disposal.

       The respondents are engaged in the manufacture of, and  trading in, computers including Laptops (otherwise called  ’Notebooks’) falling under Heading 84.71 of the CTA Schedule.   They imported Notebooks (Laptops) with Hard Disc Drivers  (Hard Discs, for short) preloaded with Operating Software like  Windows XP, XP Home etc. These computers were also  accompanied by separate Compact Discs (CDs) containing the  same software, which were intended to be used in the event of  Hard Disc failure. The Bills of Entry filed by the importer  declared the value of Laptop and the value of Software  separately, the software value including the Hard Disc value

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also. The Bills of Entry classified the Software-loaded Hard  Discs under Heading 85.24 of the CTA Schedule and claimed  exemption in terms of Sl. No.157 of Notification No.21/2002- Cus ibid.  These Bills of Entry were filed with the Chennai Air  Customs Authorities in July 2005. Long before this, by a letter  dated 7.10.2003 the respondents had informed the Addl.  Commissioner of Customs, Chennai that they would be filing  Bills of Entry for separate assessment of Computers and  Software-loaded Hard Discs in view of the Tribunal’s decision  in Barber Ship Management’s case (supra). It was also  informed that they would claim duty exemption under Sl.  No.157 of Notification No.21/2002-Cus. ibid. Subsequently,  under cover of letter dated 11.10.2003, the respondents had  also supplied to the Addl. Commissioner the OEM pricelist for  the various models of ’Notebooks’ imported by them. They had  also provided a worksheet indicating separately the value of  Hard Disc, value of Operating Software and the CD &  replicating charges.

       In the meantime, at Delhi, they had imported Laptop  computers with Hard Discs preloaded with Software and  claimed classification of the Software-loaded Hard Disc Drives  under Heading 85.24. The department issued a show-cause  notice for demanding duty on these goods in terms of Heading  84.71. This demand was confirmed by the original authority,  against which appeal before the Commissioner (Appeals) was  preferred, who sustained the decision of the lower authority.   But the appeal preferred to the Tribunal was allowed and it  was held that the Hard Disc Drives preloaded with software  required to be assessed separately in terms of 85.24 of the  CTA Schedule by virtue of Note 6 to Chapter 85 of the said  Schedule vide Final order No.380/2005-NB-A dated  11.10.2004 reported in 2005 (126) ECR 124 (Tri-Del).

       However, the Appraising Officer at Chennai Air Customs,  dealing with the goods in question, queried the respondents as  to why the value of the Hard Discs should not be included in  the value of the ’Notebooks’ for the purpose of assessment  under Heading 84.71.  The respondents replied by pointing  out that, in terms of the Tribunal’s decision in Barber Ship  Management’s case (supra) which had been upheld by this  Court as reported in 2002 (144) ELT A293, the Software- loaded Hard Discs could only be classified under Heading  85.24.  They also cited, in support of their stand, Final Order  No.380/2005-NB-A dated 11.10.2004 (supra) passed by the  Tribunal in their own case. Their arguments, however, did not  weigh with the assessing authority, which proceeded to assess  the Bills of Entry on a provisional basis. The jurisdictional  Asst. Commissioner of Customs, after hearing the party and  considering their submissions, found Hard Disc as integral  part of Notebook-computer and accordingly passed Order-in- Original dated 31.10.2005 classifying the Notebooks together  with the Hard Discs assembled therein, under Heading 84.71  as ’automatic data processing machines’. This order was  upheld by the Commissioner (Appeals) as per Order-in-Appeal  dated 25.11.2005. It is on the basis of the appellate  Commissioner’s order that the assessments were finalized.  Hence the demand of duty which is on the assessable value  comprising the value of the Notebook computers with Hard  Discs excluding the value of Software.  Appeals were preferred  against the appellate Commissioner’s order.

3.      Stand of respondent before the  Tribunal revolved round   decision in Barber Ship Management’s case (supra) which was  affirmed by this Court in [202 (144) ELT A 293]. It was pointed

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out that, in their own case involving import of similar goods at  Delhi, the Tribunal had classified Software-loaded Hard Disc  Drives under Heading 85.24. It was argued that the issue  arising in this case had already been conclusively decided by  this Court in the case of Barber Ship Management’s case  (supra) and, therefore, there was nothing further to be  examined in this case.  It was submitted that Software-loaded  Hard Disc, being "recorded media for sound or other similarly  recorded phenomena\005excluding products of Chapter 37" was  to be classified under Heading 85.24. The department had no  objection to classifying Software-recorded Hard Disc Drive, if  imported without any other apparatus, under Heading 85.24.   Hence the lower authorities should have been taken the aid of  Note 6 to Chapter 85 for classifying the Software-loaded Hard  Disc Drives under heading 85.24. Reference was also made to  the HSN Notes under Heading 85.24. It was submitted that  the authorities below had failed to note the clear distinction  between Computer and Software despite decisions of this  Court on the point. In this connection, reference was made to  this Court’s judgment in CCE Vs. PSI Data Systems [1989 (39)  ELT 692] and Commissioner Vs. Acer India Ltd. [2004 (172)  ELT 289]. The ratio of the Supreme Court’s decision in the  case of Sprint RPG India Ltd. Vs. Commissioner, [2000 (116)  ELT 6 (SC)] was wrongly applied to the facts of the case by the  lower appellate authority.                                             4.      While issuing notice this Court noted that the matter  appeared to be covered by 3-Judge Bench’s decision of this  Court in Commissioner of Central Excise, Pondicherry v.  ACER India Ltd. (2004 (8) SCC 173). But it was contended by  learned Additional Solicitor General that the question whether  Hard Discs fitted to the Computer would be treated as a  Software was not specifically dealt with in the said case. Notice  was issued and the matter was listed for final hearing.   

5.      A short question which arises for determination in this  civil appeal is : Whether operating systems (software) which  controls the working of the computer and which is preloaded  in the laptop (notebook) is classifiable as a separate entity  under CTH 85.24 at ’nil’ rate of duty or as an integral part of  the laptop under CTH 84.71 at the appropriate rate of duty.

6.      To answer the above question CTH 85.24 and CTH 84.71  need to be quoted:

CTH 85.24:  "Media recorded with sound or similar  recording, whether or not presented together  with the apparatus for which they are intended  or assembled with constituent parts of  machines of heading 84.69 to 84.72 (e.g. disc  packs) are in all cases to be classified in this  heading."  

CTH 84.71 "Automatic data processing machines and  units thereof; magnetic or optical reader,  machines for transcribing data on to data  media in coded form and machines for  processing such data, not elsewhere specified  or included."  

7.      The Department has classified the laptop as a machine in  CTH 84.71 and has demanded duty on the assessable value  determined by deducting the software value from the total

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value of the laptop whereas the assessee has classified the  software loaded Hard Disk Drive (for short, ’HDD’) under CTH  85.24 separately from the laptop and has claimed the benefit  of Notification No.21/2002-Cus dated 1.3.2002.

8.      To answer the above controversy meaning of the words  software, hard disk and platter need to be noted (See:  Computer Dictionary by Microsoft - Fifth Edition at pp.489,  246 and 408 respectively):

"Hard disk. A device containing one or more  inflexible platters coated with material in  which data can be recorded magnetically,  together with their read/write heads, the head- positioning mechanism, and the spindly motor  in a sealed case that protects against outside  contaminants. The protected environment  allows the head to fly 10 to 25 millionths of an  inch above the surface of a platter rotating  typically at 3600 to 7200 rpm; therefore, much  more data can be stored and accessed much  more quickly than on a floppy disk. Most hard  disks contain from two to eight platters. See  the illustration. Also called: hard disk drive. Hard disk drive n. See hard disk Platter. One of the individual metal data  storage disks within a hard disk drive. Most  hard disks have from two to eight platters. See  the illustration. See also hard disk.

Software. Computer programs; instructions  that make hardware work. Two main types of  software are system software (operating  systems), which controls the workings of the  computer, and applications, such as word  processing programs, spreadsheets, and  databases, which perform the tasks for which  people use computers. Two additional  categories, which are neither system nor  application software but contain elements of  both, are network software, which enables  groups of computers to communicate, and  language software, which provides  programmers with the tools they need to write  programs. In addition to these task-based  categories, several types of software are  described based on their method of  distribution. These include packaged software  (canned programs), sold primarily through  retail outlets; freeware and public domain  software, which are distributed free of charge;  shareware, which is also distributed free of  charge; although users are requested to pay a  small registration fee for continued use of the  program; and vaporware, software that is  announced by a company or individuals but  either never makes it to market or is very late.  See also application, canned software,  freeware, network software, operating system,  shareware, system software, vaporware,  Compare firmware, hardware, liveware."

9.      On the basis of the above dictionary meanings it becomes  clear that a software is a computer programme. It consists of  instructions that make hardware work. There are two types of

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softwares, namely, system software which controls the  working of the computer and application software such as  word processing programmes, databases etc., which perform  the tasks for which we use computers. In addition, we now  have network software which enables groups of computers to  communicate, and language software which provides  programmers with the tools with which they write  programmes. We also have what is called as packaged  softwares which are sold through retail outlets. In the present  case, the respondent imported laptops containing preloaded  HDD. The said drives were preloaded with operating systems  (software) which, as stated above, controls the working of the  computer. The value of the laptop depends on the operating  system, which is preloaded. The computer cannot open  without the operating system. The laptop without an operating  system is like an empty building. At this stage, it may be  clarified that the operating system can also be imported as a  packaged software which is like an accessory and which in the  present case is classified by the department under CTH 85.24.  However, a preloaded operating system recorded on HDD is an  integral part of the laptop (unit). Such preloaded operating  system on the HDD forms an integral part of the laptop. It is  important to note that laptop as a stand alone unit is  classifiable under CTH 84.71. A laptop is a small portable  Personal Computer (in short ’PC’). It runs either on battery or  electricity. Laptop has a screen and a small key board. Most of  the laptops run on the same software as their desk top  counterparts. Most of the laptops accept floppy disks, CD  ROM Drives, External or Internal Modem etc. A notebook  computer is a laptop. It is a machine. A CD or a floppy disk is  a peripheral.

10.     Applying the above tests to the facts of the present case,  we are of the view that preloaded operating system recorded in  HDD in the laptop (which is the item of import) forms an  integral part of the laptop. What was imported in the present  case was a laptop as a stand alone item (unit). Present dispute  relates to the transaction value of the unit. An importer who  buys a laptop containing an operating system pays for the  laptop as a unit. As stated above, without the operating  system, like Windows, the laptop cannot work. The computer  cannot open without operating system. In the present case,  the respondent has not only imported laptops, it has also  imported HDDs on which the operating system was recorded  (packaged software) which has been classified by the  Department under CTH 85.24. However, when a laptop is  imported with in-built preloaded operating system recorded on  HDD the said item forms an integral part of the laptop  (computer system) and in which case the Department is right  in treating the laptop as one single unit imported by the  respondent. The Department has rightly classified the laptop  as a unit under CTH 84.71, quoted above.

11.     Before concluding it may be pointed out that in none of  the decisions cited on behalf of the respondent, the question  raised in the present dispute was ever raised. Although laptop  is similar PC, the former is more compact. It cannot be  assembled as easily as PC. In the present case, the  Department has rightly taken the value of the laptop as a unit  and it has given the deduction for the value of the software.  There is no error in the computation, particularly, when the  respondent has refused to give the value of the software to the  adjudicating authority despite being called upon to do so.

12.     For the afore-stated reasons, we are of the view that the

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imported laptops were classifiable under CTH 84.71 whereas  operating software recorded on HDD imported as packaged  software were classifiable under CTH 85.24 and accordingly  Civil Appeal filed by the Department deserves to be allowed,  and the impugned judgment of the Tribunal is set aside. There  will be no order as to costs.