2019 (3) TMI 1092 - AT - Central Excise

Valuation - inclusion of pre-loaded operational software in assessable value - essential software for computers - composite contract for supply of computers - Held that - The basis for the proceedings initiated by the Department is that Chapter Note 6 of Chapter 85, which provided for separate assessment of preloaded software, was deleted and hence, the classification of software changed to Heading 8523 of the Central Excise Tariff Act, 1985 with effect from 01.01.2007. Thus, after 01.01.2007 software loaded on to the CPU has lost the eligibility for separate duty assessment and became assessable to duty as a part of the CPU and thereby part of the computer system. The judgement of the Hon ble Apex Court in the case of Commissioner of Central Excise, Pondicherry Vs. M/s. Acer India Ltd. 2004 (9) TMI 106 - SUPREME COURT OF INDIA has been greatly relied upon by the appellants. However, it is pertinent to take note that the facts of the said case relates to a period prior to the deletion of Chapter Note 6 of Chapter 85 of the Central Excise Tariff Act, 1985. In the present case, the software is preloaded in the CPU. Appellants do not manufacture software. The purchase order for the computer system is a composite one which is for supply of computer system preloaded with Windows XP (OS) and Antivirus software besides the service and installation at customer s site - From the evidence tendered by the above witness as well as from the invoices, it is seen that the software is preloaded. The Ld. Counsel for the appellants has made a frail effort to argue that these are only testing software. Undisputedly, for activation and use of the computer this software is essential. The software is thus an integral part of the computer systems, though shown separately in the invoices. The value of the software has to be included in the assessable value for payment of Excise Duty. Revenue neutral situation - Held that - The appellant has to pay Central Excise Duty on the assessable value arrived for the computer sets after including the value of software. Any service tax to be paid under ITSS services for Royalty has no connection or bearing with the liability to discharge Excise Duty. Therefore, the prayer of the appellant that they have paid service tax and that therefore the demand of duty under Central Excise law has to be set aside or adjusted, is without any legal basis and not acceptable. Demand with interest upheld - penalty set aside - appeal allowed in part.

Summary

Issues Involved:
1. Whether the value of pre-loaded software should be included in the assessable value of CPUs for the purpose of Central Excise Duty.
2. Whether the situation is revenue neutral due to the payment of service tax on Information Technology Software Services (ITSS).
3. Applicability and interpretation of various Board Circulars and Instructions regarding indirect taxes on packaged software.
4. Legitimacy of penalties imposed on the appellants.

Issue-wise Detailed Analysis:

1. Inclusion of Pre-loaded Software Value in Assessable Value of CPUs:
The appellants argued that the software was not pre-loaded but sold separately, and they had paid service tax under ITSS. However, the Department contended that the software was pre-loaded on CPUs and thus should be included in the assessable value for Central Excise Duty. The Tribunal found that the software was indeed pre-loaded and integral to the computer systems, making it necessary to include its value in the assessable value for excise duty. The Tribunal upheld the Department's view, referencing the deletion of Chapter Note 6 of Chapter 85, which previously allowed separate assessment of pre-loaded software.

2. Revenue Neutrality Due to Service Tax Payment:
The appellants claimed that the situation was revenue neutral as they had paid service tax on ITSS, which should be eligible for CENVAT Credit. They argued that they had discharged service tax liabilities exceeding the confirmed excise duty demands for the relevant periods. The Tribunal, however, held that the payment of service tax on ITSS does not negate the liability to pay Central Excise Duty on the assessable value of the computer systems, including the pre-loaded software. The Tribunal found no legal basis to set aside or adjust the excise duty demand based on the service tax payments.

3. Applicability and Interpretation of Board Circulars:
The appellants referred to several Board Circulars and Instructions to argue against double taxation and support their case. These included Circulars dated 04.11.2009, 18.03.2011, and 29.02.2016, which discussed the applicability of indirect taxes on packaged software. The Tribunal found that these Circulars pertained to packaged software on media and were not applicable to the operating software integral to the computer systems. The Tribunal concluded that these Circulars did not support the appellants' case and were intended to mislead.

4. Legitimacy of Penalties:
The Tribunal reviewed the penalties imposed under Rule 25 of the Central Excise Rules, 2002. Given the peculiar facts of the case, particularly the payment of service tax by the appellants, the Tribunal found the penalties unwarranted. The Tribunal modified the impugned Orders to set aside the penalties while upholding the confirmation of the demand and interest.

Conclusion:
The Tribunal upheld the Department's demand for Central Excise Duty on the value of pre-loaded software in CPUs, rejected the argument of revenue neutrality, and found the referenced Board Circulars inapplicable. However, it set aside the penalties imposed on the appellants. The appeals were partly allowed, providing consequential reliefs as per law.