2003 (8) TMI 128 - AT - Central Excise

Valuation of operational software in the assessable value/transaction value of computers - period of limitation - HELD THAT - It is not the software etched or burnt or what in the computer world is called as EEPROM (Electrically Erasable Programmable Read Only Memory)/BIOS software on the mother board of the computer. The software, in dispute, is admittedly operational software, loosely these could be referred to as operational/application software packages, commercially termed e.g. Windows-2000, Office-XP etc. They are not for running the computer per se, but are useful to run the programmes as desired by the user of the computer. The 'software' being considered by the Apex Court in the case of PSI Data System Ltd. 1996 (12) TMI 47 - SUPREME COURT that case was tangible Software for Operational/Application. Similarly, wherein cases at Sl. No. (iii), where Operational/Application Software is loaded and is supplied separately on a tangible like disc, floppy and CD Rom. The value of such tangibles cannot be reckoned for the purposes of duty under the Central Excise law. Since the loading of the entire value of the tangible Operational/Application Software cannot be loaded on to the value of the computers in any of the situations, in which the clearances could be made, the demands as made, cannot be upheld, therefore the penalties as arrived at cannot be sustained. Thus, the appeal No. E/410/2003 is required to be allowed after setting aside the order. Appeal Nos. E/1307-1308/2002 filed by M/s. Compaq has to be allowed, since in that case the operational/application softwares have been supplied on tangibles separately. The value thereof, cannot be added for the purposes of duty, in view of the findings arrived at hereinabove. This appeal is also allowed after setting aside the order. Ordered accordingly.

Issues:
1. Inclusion of the value of operational software in the assessable value/transactional value of computers.
2. Application of the proviso to Section 11A(1) in the case.
3. Classification of operational software under Heading 84.24.
4. Determination of assessable value of computers with pre-loaded operational software.
5. Interpretation of Transaction Value under Section 4 of the Central Excise Act.
6. Consideration of costs of loading operational/application software in the assessable value.

Analysis:

1. The case involved the inclusion of the value of operational software in the assessable value of computers manufactured by the appellants. The Commissioner found that the operational software was pre-loaded on the computers before clearance from the factory, and it enriched the value of the computers. The Commissioner concluded that the value of the operational software should be added to the assessable value of the computers for the purpose of levy of excise duty.

2. The Commissioner invoked the proviso to Section 11A(1) based on justifying grounds and evidence, besides imposing penalties for the alleged violations. The Commissioner determined that the differential duty demanded in the show cause notices needed to be confirmed, and penalties were imposed accordingly.

3. The classification of operational software under Heading 84.24 was not in dispute in the proceedings. The Commissioner did not make any proposals to demand duty on the software itself but focused on including its value in the assessable value of the computer systems.

4. The Tribunal analyzed different scenarios of how computers were cleared by various manufacturers, including cases where operational software was loaded separately on tangibles or pre-loaded in the factory premises. The Tribunal differentiated between situations where the software was supplied separately and where it was pre-loaded, determining the assessable value accordingly.

5. The Tribunal interpreted the concept of Transaction Value under the substituted Section 4 of the Central Excise Act, emphasizing that expenses enriching the value of goods before marketing should be included in the assessable value. The Tribunal considered the expressions "by reason of sale" or "in connection with the sale" in determining the inclusion of the operational software value.

6. The Tribunal considered the costs of loading operational/application software in the assessable value of the computers. It was held that only the cost for loading the software could be added, not the full value or license fee for the right to use. The Tribunal concluded that demands for loading the entire value of the software onto the computers could not be upheld, leading to the setting aside of the orders and penalties.

In conclusion, the Tribunal allowed the appeals after setting aside the orders, determining that the value of operational software should be included in the assessable value of computers only to the extent of the cost of loading the software, not the full value or license fee.

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