1996 (12) TMI 47 - SC - Central Excise

Whether the value of the software, such as discs, floppies, C.D. rhoms and the like, that may sell along with the computer is not to be taken into account in the valuation thereof for the purposes of excise duty? Held that - 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. In favour of assessee.

Summary

Issues:
Assessable value of computers for excise duty including software value, distinction between hardware and software, interpretation of Tariff items, applicability of excise duty on software sold with computers.

Analysis:
The judgment pertains to appeals against the Customs, Excise and Gold (Control) Appellate Tribunal's orders regarding the assessable value of computers for excise duty. The central issue revolves around whether the value of software sold with computers should be included in the assessable value for excise duty purposes. The appellants argue that while firm or etched software embedded in a computer should be considered, the value of software like discs, floppies, and C.D. rhoms sold alongside should not be included.

The distinction between hardware (computer) and software is crucial. Hardware refers to the tangible part of the machinery, while software consists of instructions necessary for the computer's functioning. The judgment cites definitions and observations to differentiate between hardware and software in the context of the computer industry.

The judgment delves into the relevant Tariff items governing computers and software. It discusses the earlier Tariff Item 33DD and the present Chapter 84 of the Central Excise Tariff Act, 1985, which classifies automatic data processing machines and related devices.

The Tribunal's impugned judgments considered a computer system incomplete without systems software, leading to the inclusion of software value in the assessable value for excise duty. However, the appellants contend that software is not an essential part of a computer in the commercial sense. They draw parallels with precedents and statutory provisions to support their argument that software sold with computers should not be subject to excise duty.

Ultimately, the Supreme Court rules in favor of the appellants, stating that the value of software sold alongside computers should not be included in the assessable value for excise duty. The judgment emphasizes the distinction between a computer and its software, likening it to a cassette recorder and cassette relationship. Consequently, the appeals are allowed, and the earlier orders are set aside, with no costs imposed.

This comprehensive analysis addresses the key legal issues surrounding the judgment, including the interpretation of relevant laws, the distinction between hardware and software, and the applicability of excise duty on software sold with computers.