2013 (4) TMI 220 - AT - Central Excise

Valuation - inclusion of cost of software in the value hardware - Customized software - manufacture and supply of Digital Loop Carriers (DLC) - supply of Hardware and also the operating software and spare parts - Appellant are of the opinion that the value of the software supplied by them cannot be charged to Central Excise as held by the Hon ble Supreme Court in the case of PSI Data Systems Ltd. Vs. Collector of Central Excise 1996 (12) TMI 47 - SUPREME COURT OF INDIA , wherein, it was held that the value of computers will not include the value of the software supplied in the form of floppies, discs, tapes, along with the computer. Held that - the dispute arose consequent to an objection raised after audit of the appellants unit. DLC equipments manufactured by the appellants were supplied to BEL who in turn supplied to MTNL. When the equipments were received by MTNL, the software was loaded into the equipments and testing completed. It is the consistent stand of the appellant that the equipments have been cleared from the factory without the software being loaded in the equipments. No evidence is relied upon by the department to disprove this claim. The impugned software is no doubt customized software usable only with the DLCs. However, the DLCs do not become dysfunctional without the impugned software as they can be used as 2W type of DLC. In view of the above, the appellants claiming separate classification of the impugned software under Chapter subheading 8524 and clearing the said software without payment of duty is in order. There is no justification for including value of such software in the value of DLC equipments. - Decided in favor of assessee.

Issues Involved:
1. Classification and valuation of software supplied with hardware.
2. Whether the software was preloaded in the hardware at the time of clearance.
3. Invocation of extended period of limitation.
4. Imposition of penalties under Section 11AC and Rule 25 of the Central Excise Rules.

Issue-wise Detailed Analysis:

1. Classification and Valuation of Software Supplied with Hardware:
The primary issue was whether the software supplied along with Digital Loop Carriers (DLCs) should be treated as a distinct product or as an integral part of the hardware. The Tribunal referred to various guidelines and principles established in previous cases, emphasizing that the commercial understanding of the product is more relevant than technical specifications. It was concluded that software which is embedded or essential for the hardware's functionality should be included in the hardware's value. However, the Tribunal found that the software in question, though customized, could be upgraded and was not essential for the basic functionality of the DLCs, which could still function as 2W type DLCs without the software. Therefore, the software was classified separately under Chapter subheading 8524 and cleared without payment of duty.

2. Whether the Software was Preloaded in the Hardware at the Time of Clearance:
The appellant argued that the software was not preloaded in the DLCs at the time of clearance from the factory but was loaded at BEL's premises. The department failed to provide evidence to counter this claim. The Tribunal noted that the valuation of excisable products should be based on their condition when they leave the factory. Since no evidence was presented to prove that the software was preloaded, the Tribunal ruled that the value of the software should not be included in the hardware's value.

3. Invocation of Extended Period of Limitation:
The Tribunal found that the department's reliance on documents like purchase orders, sale invoices, and monthly returns without further investigation was insufficient to justify the invocation of the extended period of limitation. The appellant had disclosed the manufacturing process and delivery of software in their correspondence with the department. The show-cause notice was issued based on audit objections raised in December 2003, communicated to the appellant in January 2005, and replied to by the appellant in April 2005. The Tribunal concluded that there was no justification for invoking the extended period of limitation.

4. Imposition of Penalties under Section 11AC and Rule 25 of the Central Excise Rules:
Given the Tribunal's findings that the software was not preloaded and that the extended period of limitation was not justified, the imposition of penalties under Section 11AC and Rule 25 was also deemed invalid. The Tribunal noted that the appellant had no intention to evade duty and that the applicable central excise duty was to be borne by BEL as per the contract. Consequently, the penalties imposed were set aside.

Conclusion:
The Tribunal set aside the impugned order, allowing the appeal with consequential relief as per law. The DLC equipment was supplied without preloaded software, and the software was classified separately, excluding its value from the hardware. The extended period of limitation was not justified, and the penalties imposed were invalid.

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