2007 (8) TMI 347 - SC - Customs

When a laptop is imported with in-built preloaded operating system recorded on HDD the said item forms an integral part of the laptop (computer system). The Department has rightly classified the laptop as a unit under CTH 84.71, quoted above.

Issues Involved:
1. Classification of Software-loaded Hard Discs under Customs Tariff Act.
2. Eligibility for duty exemption under Notification No. 21/2002-Cus.
3. Separate assessment of Computers and Software-loaded Hard Discs.
4. Interpretation of relevant headings (CTH 85.24 and CTH 84.71) in the Customs Tariff Act.
5. Determination of transaction value for duty assessment purposes.

Detailed Analysis:

1. Classification of Software-loaded Hard Discs under Customs Tariff Act:
The primary issue was whether Software-loaded Hard Discs should be classified under Heading 85.24 or Heading 84.71 of the Customs Tariff Act. The Tribunal had classified these under Heading 85.24, which pertains to "Media recorded with sound or similar recording," while the Department argued for classification under Heading 84.71, which covers "Automatic data processing machines and units thereof."

2. Eligibility for Duty Exemption under Notification No. 21/2002-Cus:
The respondent claimed duty exemption under Notification No. 21/2002-Cus for the Software-loaded Hard Discs. The Tribunal had allowed this exemption based on its classification under Heading 85.24. However, the Department contested this, arguing that the Hard Discs should be classified under Heading 84.71, which would not qualify for the same exemption.

3. Separate Assessment of Computers and Software-loaded Hard Discs:
The respondent had filed Bills of Entry declaring the value of Laptops and Software separately, classifying Software-loaded Hard Discs under Heading 85.24. The Department, however, included the value of the Hard Discs in the overall value of the Laptops for assessment under Heading 84.71. The Tribunal had previously allowed separate assessment based on earlier decisions, but the Department maintained that the Hard Discs were integral to the Laptops.

4. Interpretation of Relevant Headings (CTH 85.24 and CTH 84.71) in the Customs Tariff Act:
The court examined the definitions and scope of CTH 85.24 and CTH 84.71. CTH 85.24 includes "Media recorded with sound or similar recording," while CTH 84.71 covers "Automatic data processing machines and units thereof." The court noted that a preloaded operating system on a Hard Disc is integral to the functioning of a Laptop, making the Laptop a single unit classifiable under CTH 84.71.

5. Determination of Transaction Value for Duty Assessment Purposes:
The court addressed whether the value of the Software-loaded Hard Discs should be included in the overall transaction value of the Laptops. The Department had deducted the software value from the total value of the Laptop, while the respondent argued for separate valuation. The court concluded that the preloaded operating system on the Hard Disc is an integral part of the Laptop, thus supporting the Department's approach of treating the Laptop as a single unit for duty assessment.

Conclusion:
The Supreme Court set aside the Tribunal's judgment, ruling that:
- The imported Laptops with preloaded operating systems are classifiable under CTH 84.71 as "Automatic data processing machines."
- The preloaded operating system on the Hard Disc forms an integral part of the Laptop, and thus, the Laptop should be treated as a single unit for duty assessment.
- The Department's classification and duty assessment approach were upheld, and the respondent's claim for separate assessment and duty exemption under Notification No. 21/2002-Cus was denied.

The court emphasized that the value of the Laptop as a unit includes the value of the preloaded operating system, and there was no error in the Department's computation of duty. The appeal filed by the Department was allowed, and the Tribunal's judgment was overturned. There was no order as to costs.

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