17 December 1996
Supreme Court
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M/S PSI DATA SYSTEMS LTD. Vs COLLECTOR OF CENTRAL EXCISE

Bench: S.P. BHARUCHA,S.B. SEN
Case number: Appeal Civil 491 of 1989


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PETITIONER: M/S PSI DATA SYSTEMS LTD.

       Vs.

RESPONDENT: COLLECTOR OF CENTRAL EXCISE

DATE OF JUDGMENT:       17/12/1996

BENCH: S.P. BHARUCHA, S.B. SEN

ACT:

HEADNOTE:

JUDGMENT:                             WITH             (C.A. No.79/89 and C.A. No.6042/94)                       J U D G M E N T      BHARUCHA. J.:      These appeals  against the  judgments and orders of the Customs, Excise and Gold (Control) Appellate Tribunal relate to the  assessable value  of computers  for the  purposes of excise  duty.   The  appeals   of  M/s.   Wipro  information Technology Limited  (Civil Appeal  No.491 of 1989) relate to the tariff  as it  was prior  to 28th.  February, 1986.  The appeal or M/s. Tata Unisys Limited (Civil Appeal No. 6042 of 1994) relates to the present tariff under the Central Excise Tariff Act, 1985.      The  question,  principally,  is  in  relation  to  the inclusion of the value of software sold with the computer in the assessable  value thereof.  It is  not the contention of the appellants  that the  firm or  etched software  that  is implanted into a computer is not to be taken into account in the valuation thereof for the purposes of excise duty. It is their case  that the  value of  the software, such as discs, floppies, C.D.  rhoms and the like, that they may sell along with the  computer is  not to  be taken into account for the aforesaid purpose.      We make it clear at the outset that when we shall speak of software,  we shall  be referring to tangible software of the nature  of discs, floppies and C.D. rhoms and not to the intellectual  property,   also  called   software,  that  is recorded or stored thereon.      It is  necessary, to  start with, to make a distinction between hardware, which is the computer, and the programming necessary to  run it,  which is  the software. (See Computer Contracts  Negotiating  and  Drafting  Guide  by  Robert  P. Bigelow). "Software" has been stated in the same publication to  describe   "programmes  which  consist  of  instructions recorded on  punched cards,  magnetic tapes and discs. These devices instruct  the computer  as to what functions it will perform" to  produce  the  desired  output.  In  a  judgment delivered by  the Supreme  Court of  Illinois in the case of First National  Bank of  Springfield vs.  The Department  of Revenue, it was observed:-

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    "In the computer industry, computer      hardware is  the tangible  part  of      the  machinery   itself.   Software      denotes the information loaded into      the  machine   and  the  directions      given  to   the  machine   (usually      through the  media of  punch cards,      discs or  magnetic tapes as to what      it is  to do and upon what command.      Software    also     may    include      counselling and  expert engineering      assistance furnished  by the seller      of software, as well as flow charts      and instruction manual’s.      There  are   two  basic   types  of      software programs.  An  operational      program controls  the hardware  and      actually makes the machine operate.      It is  fundamental and necessary to      the functioning of the hardware. An      applicational program  is  designed      to perform  specific functions once      the programming  information is fed      into the computer."      Tariff Item  33DD of  the  earlier  Tariff  dealt  with "computers   (including   central   processing   units   and peripheral devices), all sorts".      The present  tariff deals  with computes in Chapter 84. Heading 84.71 reads thus:-      "Automatic data processing machines      and  units   thereof;  magnetic  or      optical   readers,   machines   for      transcribing data  on to data media      in  coded  form  and  machines  for      processing such data, not elsewhere      specified or included."      Chapter Note 5(a) states:      "5.(a)  For  the  purposes  of  heading  No.84.71,  the expression ‘automatic data processing machines’ means:-      (1) Digital  machines,  capable  of      (1)    storing    the    processing      programme  of   programmes  and  at      least    the    date    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;"      Heading 85.24  deals with  "records,  tapes  and  other recorded  media   for  sound  or  other  similarly  recorded phenomena, including matrices and masters for the production of records  and includes  gramophone records,  audio  tapes, audio cassettes,  video  tapes,  video  cassettes,  magnetic discs and other cassettes and discs". Chapter Note 6 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

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    cleared  with   the  apparatus  for      which they are intended."      For the  sake of  completeness, it must be noted that a Notification dated  1st March,  1989, issued  in exercise of the powers conferred by Section 5A(1) of the Central Excises and Salt  Act, 1944,  gives to  "computer  software  falling under Heading  85.24 of  the Schedule  to the Central Excise Tariff Act,  1985," exemption  from the  whole as the excise duty leviable thereon.      The  Tribunal   in  the  judgments  that  are  impugned proceeded upon  the basis  that the appellants sold computer systems and  that a  computer systems was incomplete without systems software  inasmuch as  mere hardware without systems software did  not make  the system  workable. It relied upon its earlier  judgment in  the case  of collector  of Central Excise, Bangalore,  vs. Sunray  computers  Private  Limited, (1988) 33  ELT 787,  in this  behalf. That judgment observed that "without  software the  hardware was incomplete, a mere dumb box  and of no use at all to the customer. If there was a single  contract for  the supply  of a  computer including software the  total value  of the computer including that of the software  would have to be assessed to duty irrespective of the fact whether the software part is supplied along with the hardware  or in  a separate  lot and irrespective of the fact whether  a single invoice is made for both hardware and software or  a separate  invoice is  made for the software." The Tribunal  held that the excise liability of the computer system had  to be  determined with reference to the computer system itself  and for  assessment of the computer system it was immaterial  whether the  software was a bought out item. In the  assessment of the computer system an individual part lost its  independent identity  and became  a  part  of  the computer system.      The appellants  before us have sold only a computer, or a computer  along with software, and the software might have been imported  or bought  out. Some contracts in this behalf are lump-sum contracts and some are for the computer and the software separately. Sample contracts are on the record.      Learned counsel  for the  appellants submitted that the test that  had been  applied by the Tribunal in the impugned judgments was  erroneous. Our  attention was  drawn  to  the judgment of  this Court  in State  of Uttar Pradesh vs. M/s. Kores (India)  Limited, (1977)  1 SCR 837, where it was held that a  typewriter ribbon  was an  accessory to a typewriter and not  a part  of the  typewriter, though  it might not be possible to  type out  any matter  on the typewriter without the ribbon.  This Court  quoted with  approval the following observation of  the High  Court of Mysore in State of Mysore vs. Kores (India) Ltd.,:      "Whether a  typewriter ribbon  is a      part  of  a  typewriter  is  to  be      considered in  the light of what is      meant  by   a  typewriter   in  the      commercial sense.  Typewriters  are      being sold  in the  market  without      the    typewriter    ribbons    and      therefore typewriter  ribbon is not      an essential  part of  a typewriter      so as  to attract  tax as per entry      18 of  the Second  Schedule to  the      Mysore Sales Tax Act, 1957." <sle>      On the  same reasoning,  it was submitted, the software that was  sold by  the appellants along with their computers was not  an essential part of the computers. What a computer was had  to be  judged in  the light of its commercial sense

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and, in  that sense, the software was not understood to be a part of the computer. Reference was made to Section 8OHHL of the Income  tax Act  which provides for deduction of profits from export  of "computer  software" Reference was also made to the  provisions of  the  Copyright  Act,  1967,  where  a computer is  defined as  including any electronic or similar device having  information  processing  capabilities  and  a computer programme  is defined to mean a set of instructions expressed in  words, codes,  schemes or  in any  other form, including a  machine readable  medium, capable  of causing a computer  to   perform  a   particular  task  or  achieve  a particular result.  Interestingly, the Copyright Act defines ‘literary work’  to include  computer programmes, tables and compilations including  computer data  bases. Reference  was also made to the aforementioned contracts which indicate the distinction that  buyers made  between the  computer and the software.      In the  appeals of Wipro Information Technology Limited and PSI  Data Systems  Limited, the charges for installation of  the   computer  and  the  training  of  the  purchaser’s personnel to  operate and  maintain it were also included in the assessable  value of the computer, and the argument that was advanced  in respect  of the  value of  the software was also advanced in respect of these charges.      Learned counsel  for the  respondent, fairly,  did  not dispute that  the value  of the software that the appellants might sell  with their  computers,  if  so  ordered  by  the purchasers thereof,  could not be included in the assessable value of  the computers.  He was,  however, at pains to urge that this did not apply to the firm software that was etched into the computer; this is not even the appellants’ case.      In the  first place,  the Tribunal  confused a computer system with  a computer;  what was  being charged  to excise duty was the computer.      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 C.D. rhoms, but that is not to  say that these are part of the computer, their value must form  par 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.      Having regard  to the  view that  we take,  it  becomes unnecessary to  deal with the subsidiary arguments on behalf of the  appellants and the intervenor, M/s Digital Equipment (India) Limited.      The appeals  are allowed  and the  judgments and orders under appeal  are set  aside. There  shall be no order as to costs.