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PETITIONER: M/S SPRINT RPG INDIA LTD.

       Vs.

RESPONDENT: COMMISSIONER OF CUSTOMS-I, DELHI.

DATE OF JUDGMENT:       20/01/2000

BENCH: M.B.Shah, B.N.Kirpal

JUDGMENT:

     Shah,J.

     Leave granted.  Appeal admitted.

     The  short question involved in this appeal is whether custom  duty on imported computer software loaded on a hard disk  drive  is  to be levied on the basis of  hard  disk simplicitor  or computer software.  Goods imported by  the appellant  were examined on 9th August, 1995 and were  found to  be seven pieces of hard disk drive loaded with software. As  per  the department, custom duty on hard disk  drive  is leviable  under Chapter Heading 84.71 at the rate of 25% and on  a computer software it is at the rate of 10% as per  the tariff  Heading 85.24 read with notification No.59/95  dated 16.3.1995.   It  is  admitted fact that total value  of  the consignment  was  Rs.67,75,119/- for seven hard disk  drives having  software  loaded  thereon.  Value of the  hard  disk simplicitor  would  be roughly at the most Rs.60000/-.   The relevant headings of the Chapter are as under:-

     84.71  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.

     8471.70  Storage  units.   5% 8471.80 Other  units  of automatic date processing machines.  20%

     8471.90 Other 20%

     85.23 Prepared unrecorded media for sound recording or similar recording of other phenomena, other than products of Chapter 37.

     - Magnetic tapes.

     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.  40% - Discs  for  laser

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reading systems;

     8524.31  For reproducing phenomena other than sound or image.  25%

     8524.40 Magnetic tapes for reproducing phenomena other than 25% sound or image.

     - Other magnetic tapes.

     8524.99 Others 40%

     The  Tribunal  arrived at the conclusion that  as  the software  was loaded on a hard disk, it would remain to be a hard disk drive on which software was loaded and, therefore, alongwith  Chapter Note 5(A) and (B) of Chapter 84, it would be hard disk drive loaded with software and would be taxable under  the  Heading  84.71  and  not  85.24.   The  Tribunal considered  the  decision of this Court in PSI Data  Systems Ltd.   vs.   Collector of Central Excise, {1997 (89)  ELT  3 (SC)}  and  observed that it would not be applicable to  the facts of the present case.

     For  understanding  of computer software and the  hard disk, learned counsel for the Customs has produced on record some extracts from Modern All About Hard Disk Drive of BPB Publications, which reads as under:-

     Today  Hard  Disk Drives are the most common  storage device  used with the computer system.  The hard disk  drive is  also known as Hard Disk, Hard Drive, Fixed Disk Drive or Winchester Disk Drive.  The hard disk drive is used to store data  and  programs  permanently inside the  computer.   The information  stored  in  the hard disk drive  does  not  get erased  when  the power supply to the computer  is  switched off.

     This  device  is  known as Hard Disk  Drive  because compared to the other common magnetic storage device, floppy disk,  which  uses  flexible plastic like  carrier  for  the magnetic  recording medium;  the hard disk drive uses rigid, hard, aluminium or glass as the base for recording medium.

     xxxx xxxx xxxx

     Information is stored in the hard drive using the same magnetic recording method, which is used to store songs on a audio  tape  or movies on a video tape.  The audio or  video tape  does not lose its content when the power supply  given to the audio or video recorded is switched off, same way the hard  drive also retains the information stored in it,  even when the power supply to the hard drive is switched off.

     He  has  also pointed out the extract from  PC  Power Boosting  Your  PCs  Performance  written  by  Stephen  J. Dougherty  wherein  hard disk is given meaning as  under:- Hard  disk.  A data storage device that stores the data  on metal  disks that have a magnetic coating.  Hard disk drives provide  faster  access and larger storage  capacities  than diskettes.  Sometimes referred to as a fixed disk.

     He  further  submits that he has received  information

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from  the  Deputy  Commissioner (Customs),  Air  Cargo,  New Delhi,  as per the letter which is produced on record  which points  out  that  in nutshell, a hard disk is  one  of  the devices  used  in the Computer Systems.  Its function is  to store  the data, instructions, sound images etc.   including source  code  and object code.  The moot difference  between the  hard  disk  and  the software is that a  hard  disk  is hardware whereas software is a representation of any type of data  and  which is stored in the hard disk.  Similarly,  as per  the  Internet information received by Customs, a  hard disk  is  really a set of stacked disks, each  of  which, like    phonograph    records,       has    data    recorded electromagnetically in concentric circles or tracks on the disk.   A  head (something like a phonograph arm but in  a relatively  fixed  position) records (writes) or  reads  the information on the tracks.

     appellant  is  hard disk In the present case, what  is imported  by  the  drive   loaded  with  software  material. Heading  84.71  apparently covers automatic data  processing machines  and units thereof and magnetic or optical  readers not  elsewhere  specified or included.  It is to  be  stated that  heading 85.23 deals with prepared unrecorded media for sound  recording  or similar recording of  other  phenomena, which  includes  magnetic tapes.  As against  this,  heading 85.24  covers  records, tapes and other recorded  media  for sound  or  other similarly recorded phenomena  which  covers gramophone  records  or  magnetic   tapes  for   reproducing phenomena.    That   software     material   is   admittedly classifiable  under  Tariff Heading No.85.24 which  provides for taxing records, tapes and other recorded media for sound or  other  similarly  recorded  phenomena.   The  difference between the hard disk drives and magnetic storage devices or floppy  disks is only with regard to the use of rigid, hard, aluminium  or glass as the base for recording medium.   What is  covered by the said heading is recorded tapes,  magnetic tapes  or  other  similar recorded phenomena.   As  per  the literature  supplied  by the department, hard disk drive  is used  to  store  data and programs  permanently  inside  the computer.  The difference between hard disk drive and common magnetic  storage  device  or floppy disk is  the  base  for recording medium.  It also provides faster access and larger storage  capacity;   its  function  is  to  store  the  data instructions,  sound images etc.  and it is like  phonograph records.  Floppy disk uses flexible plastic like carrier for magnetic  recording  medium.  Information is stored  in  the hard  disk  drive using the same magnetic  recording  method which is used to store songs on an audio tape or movies on a video  tape.   Therefore,  hard disk is a  refined  form  of floppy  and serves the same purpose of recording material in more  efficient  way.  The moot difference between the  hard disk  and  the  software is that a hard disk is  a  hardware whereas software is a representation of any type of data and which  can be stored in the hard disk.  There is no  dispute that  floppy  on which software is stored would  be  taxable under Tariff Heading 85.24.  Instead of storing the software on the floppy if it is stored on a hard disk drive, it would not  ceased  to  be a software.  As stated above, it  is  an information  stored  in the hard disk drive  using  magnetic recording method.

     Further,  the  Central Government by its  Notification No.59/95-Cus.   dated 16th March, 1995 provided exemption to the computer equipments which reads as under:-

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     In  exercise  of the powers conferred by  sub-section (1) of section 25 of the Customs Act, 1962 (52 of 1962), the Central  Government, being satisfied that it is necessary in the  public  interest  so to do, hereby  exempts  the  goods specified  in  column  (3) of the Table hereto  annexed  and falling  within Chapter or under heading No.  or sub-heading No.   of the First Schedule to the Customs Tariff Act,  1975 (51 of 1975), specified in the corresponding entry in column 92)  of  the said Table, when imported into India,  from  so much of that portion of the duty of customs leviable thereon which  is  specified  in the said First Schedule, as  is  in excess  of  the amount calculated at the rates specified  in the corresponding entry in column (4) of the said Table.

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     Sl.   Chapter  Description  of Rate of  duty  No.   or heading        goods           No.            or        sub- No.______________________________________  heading  (1)  (2) (3)(4)____

     40%  ad  valorem 1.  84.71 All goods other  than  Hard disk drive and Floppy disk drive.

     25%  ad  valorem 2.  84.71 Hard disk drive  or  Floppy disk drive.

     3.  8473.30 All goods.  35% ad valorem

     4.  49 or Computer software 10% ad valorem 85.24

     -----------------------------------------------------------------------------

     As  per Item 2 of the above notification rate of  duty is  25% for hard disk drive or floppy disk drive covered  by heading or sub-heading 84.71.  As against this, for computer software,  if  it  falls under Chapter 49 or  under  Heading No.85.24,  the  rate of duty would be 10%.   If  simplicitor hard  disk  drive is imported, it may be taxable  under  the Heading  84.71.   However,  in a case  where  essentially  a software  is imported which is loaded on a hard disk  drive, it  would  be computer software material and in that set  of circumstances,  it  would  be taxable under  Heading  85.24. This  is also made clear in Chapter Note 6 of Chapter 85  by providing as under:-

     Records, tapes and other media of heading No.85.23 or 85.24  remain  classified in those headings, whether or  not they  are  presented with the apparatus for which  they  are intended.

     Mr.   Swami, learned counsel for the respondent relied upon  the  Rules  of Interpretation mentioned in  the  First Schedule  appended to the Customs Tariff Act which lay  down general  Rules for the interpretation and classification  of goods  for  import  tariff.   Rules 2(b), 3 and  4  read  as under:-

     2(b)  Any  reference  in a heading to a  material  or substance  shall be taken to include a reference to mixtures or  combinations  of that material or substance  with  other materials  or substances.  Any reference to goods of a given material  or substance shall be taken to include a reference

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to  goods  consisting wholly or partly of such  material  or substance.   The classification of goods consisting of  more than  one  material or substance shall be according  to  the principles of rule 3.

     3.   When by application of rule 2(b) or for any other reason,  goods  are, prima facie, classifiable under two  or more headings, classification shall be effected as follows:

     (a)  The  heading  which provides  the  most  specific description  shall be preferred to headings providing a more general  description.   However, when two or  more  headings each  refer  to  part only of the  materials  or  substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be  regarded as equally specific in relation to those goods, even  if  one  of  them gives a  more  complete  or  precise description of the goods.

     (b)  Mixtures, composite goods consisting of different materials  or made up of different components, and goods put up  in  sets for retail sale, which cannot be classified  by reference  to (a), shall be classified as if they  consisted of  the  material  or  component   which  gives  them  their essential   character,   insofar  as   this   criterion   is applicable.

     (c  ) When goods cannot be classified by reference  to (a) or (b), they shall be classified under the heading which occurs  last  in numerical order among those  which  equally merit consideration.

     4.   Goods  which cannot be classified  in  accordance with  the above rules shall be classified under the  heading appropriate to the goods to which they are most akin.

     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  gives  a more complete or precise description  of  the goods.   Further, considering imported goods to be a mixture of two substances namely hard disk drive and software as per Rule 3(b) they can be classified under the heading which gives  them their essential character.  In the present case, considering  its price factor it would be computer software. The  price  of  the imported consignment  was  approximately Rs.68  lakhs.  As against this, value of the seven hard disk drives  would be roughly Rs.60000/-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.

     Mr.  Swami, learned counsel for the respondent further referred  to Chapter Note 5 of Chapter 84 and submitted that 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 following conditions:

     (a)  It is of a kind solely or principally used in  an automatic data processing system;

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     (b)  It is connectable to the central processing  unit either directly or through one or more other units;  and

     (c)  It  is able to accept or deliver data in  a  form (codes or signals) which can be used by the system.

     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 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.60000/- or Rs.65000/-.  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.

     In  this  view  of the matter, the  order  dated  25th March,  1996  of the Commissioner of Customs and  the  order dated  14th  May, 1999 of the Tribunal confirming  the  said order  in Appeal No.161/96-B2 are quashed and set aside.  It is  held that computer software imported by the appellant on a  hard  disk drive is assessable at the rate of 10% as  per Heading  85.24 with the Exemption Notification stated  above because what was imported by the appellant was software on a hard disk and it was not hard disk in the garb of software.

     In  the result, the appeal is allowed accordingly with no order as to costs.