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PETITIONER: M/S O.R.G. SYSTEMS, BARODA

       Vs.

RESPONDENT: COLLECTOR OF CENTRAL EXCISE, VADODARA

DATE OF JUDGMENT:       21/07/1998

BENCH: SUJATA V. MANOHAR, K. VENKATASWAMI

ACT:

HEADNOTE:

JUDGMENT:                      J U D G E M E N T K. VENKATASWAMI, J.      These two  appeals arise  out of  a common  order dated 5.7.94 of  the Customs  Excise &  Gold  (Control)  Appellate Tribunal, New Delhi (hereinafter called "the Tribunal"). The issues that  arise out  of the  order of  the Tribunal under appeal are no longer res integra. The decision of this Court in PSI  Data Systems  Ltd. Vs.  Collector of  Central Excise [1997 (89) E.L.T. 3 (S.C.)] settles the controversial issues raised in these appeals.      Briefly stated the facts are the following :-      The  appellant   is  engaged   in  the  manufacture  of Computers falling  under Tariff  Item 33-DD  from May,  1982 when they  got the necessary licence. Prior to May, 1982 the appellant got  the Computers  manufactured by  (a) M/s Orbit Electronics (for  short ’Orbit’)  by supplying raw materials and  also  by  supplying  specifications  and  designs.  The computers so manufactured by the appellant, as stated above, as well  as those  manufactured by  the appellant after May, 1982 were  marketed by  M/s Adprint Services Limited, baroda (for short  ’Adprint’). At  this stage,  it is  necessary to make it clear that the Revenue seriously claimed all through that DSI  and Orbit  were the  dummy units of the appellant. The Tribunal, as final fact finding authority, has held that they ere  not dummy  units. However,  the contention  of the appellant that  Adprint is  an independent  concern, was not accepted by  the Tribunal and the Tribunal has given a clear finding that  Adprint is  a dummy  unit of the appellant. We proceed on  the   basis  of  these  findings  given  by  the Tribunal as they are binding on the parties.      The principal  issues in  controversy are:  (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 and 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

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Computer. The  other subsidiary issues are: (1) in the event of this  Court coming  to the conclusion that the peripheral devices and  the amount of service charges are includible in the assessable  value of  the Computer,  then  what  is  the correct amount  that would  be liable  to be so included and (2) whether  the penalty initially levied in a sum of Rs. 25 lacs and  ultimately reduced by the Tribunal to Rs. 10 lacs, is sustainable in the facts and circumstances of the case.      The authorities,  overruling the  objections raised  by the appellant,  held that  the Computers manufactured by DSI and Orbit  must be  deemed to  have been manufactured by the appellant and  as such  liable for  excise duty. It was also held that  the value  of peripherals  and  systems  software supplied is  includible  in  the  value  of  the  Computers. Likewise, the Revenue held that non-disclosure of the values of  service   charges,  peripherals   and  systems  software attracts levy  of penalty. Accordingly the demand was raised against the appellant in a sum of Rs. 3, 32, 96,010.58 and a penalty of Rs. 25 lacs was also levied. Before the Tribunal, the appellant  got some  relief on duty part and penalty was reduced from Rs. 25 lacs to Rs. 10 lacs.      The Tribunal,  after analysing the facts, held that the supply of raw materials alone does not make the appellant as manufacturer of  the Computers factually manufactured by DSI and Orbit.  However, the  Tribunal was  of the view that the supply of  specifications and  designs was  actually at  par with the  supply of  specific designs  of a tailor made item and hence  will constitute  manufacture. On  that basis, the Tribunal held  that the case of supply of specifications and designs for  Computers will  amount to manufacture and price charged therefore  shall be  includible  in  the  assessable value.  Similarly,  the  Tribunal  held  that  the  vale  of peripherals at  the time  of supply  of computers would make the appellant  as computer manufacturer as, according to the Tribunal, the  supply  of  those  peripherals  and  computer systems bring  into existence  a   new product. The value of those supplies  should also  be included  in  the  value  of computer supplied.  The  Tribunal  declined  to  accept  the arguments of  the appellant  that the  software was  already burnt in  the chips  of the  computer to  make the  computer complete and that the systems software and other peripherals are only  additions to  a computer  that was  complete  even without those peripherals and systems software. The Tribunal relied on  its own decision in PSI Data System for rejecting the case of the appellants, which has since been reversed by this Court in PSI’s case (supra).      In these appeals, we heard arguments of counsel on both sides. Naturally, the learned counsel, Mr. Ganesh, appearing for the  appellant, placed  reliance on the judgment of this Court in  PSI case  (supra). This Court in PSI Data system’s case considered  identical issues and Bharucha, J., speaking for the Bench, held as follows :-      " 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 judgements  was erroneous.

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    Our  attention  was  drawn  to  the      judgement of this Court in State of      Uttar Pradesh  V. 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      V. 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."      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   and,  in   that      sense,   the   software   was   not      understood to  be  a  part  of  the      Computer.  Reference  was  made  to      Section 80  HHL 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.

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         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 appellant’s 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 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.           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."

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    The above judgment of this Court completely answers the principal issues  in controversy in favour of the appellant. In the  case  on  hand,  it  cannot  be  disputed  that  the computers manufactured  and supplied  y 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 counter-vailing duty  on such  imported peripherals.  In the light of  these facts,  we have  no difficulty  to apply the ratio in  the judgment  of this  court in  PSI Data  systems (supra) and  grant relief  to the  appellant.  The  Tribunal itself has  placed reliance  on its  earlier decision in PSI Data Systems,  which has  been reversed  by this  Court,  as noticed above.  Likewise, the  value of service charges also cannot be  included in  the light  of the ratio laid down by this Court  in PSI  Data Systems. The Tribunal went wrong in assuming that  the appellant must have given warranty to its customers at  the time  of purchase of computers when it was the case  of the  appellant that  no such warranty was given and no  such case  was specifically put forward in the show- cause notice.      For all  these reasons,  we do  not think  that we  can accept the  contentions  to  the  contrary  by  the  learned counsel appearing for the Revenue.      In the  result, the  appeals succeed  and the  impugned demand including  the levy  of penalty  is  set  aside.  The appeals are accordingly allowed with no order as to costs.