LOADING OF SOFTWARE IN ATM AMOUNTS TO MANUFACTURE

[Mr. M. GOVINDARAJAN]

The term 'manufacture' has been defined differently in different acts. In all such legislations various litigations are arising interpreting the definition of the term 'interpretation'. The Central Excise Act, 1944 is no exception to this. Number of cases has arised on interpretation on the term 'manufacture'. One such is software. Whether loading of software in computer or other equipments amounts to manufacture. Answer to this is arrived at by referring to decided case laws in this article.

The Supreme Court in the case 'Commissioner V. Acer India Ltd.,' - 2004 -TMI - 47049 - (SUPREME COURT OF INDIA) held that the software, whether they were cleared with the apparatus for which they were intended viz., with the computer or not, they remained classified under the same heading and concluded that 'computer and software are different and distinct goods under the Act having been classified differently, and in that view of the matter no central excise duty would be leviable upon determination of the value thereof by taking the total value of the computer and software. The computer and operation software were different marketable commodities and in the legal context contained in the Chapter 85 and explained in Note 6 of that Chapter, the software did not lose its characteristics and were eligible for exemption applicable to software.

In 'Commissioner V. Hewlett Packard India Sales Pvt., Ltd.,'- 2007 2007 -TMI - 48041 - (SUPREME COURT OF INDIA) the Apex Court held that even if software became an integral part of the machine, the value of the same was to be excluded while arriving at the value of the machine on which was loaded. In this case the Apex Court dealt with valuation of imported laptops containing pre loaded HDD. The Court found that pre loaded operating system on the HDD of the laptop was formed integral part of the laptop. When a laptop was imported with inbuilt pre loaded operating system recorded on HDD, the said item formed integral part of the laptop and the Department was right in treating laptop as a unit and it had given deduction for the value of the software. There was no error in computation.

In 'Anjaleem Enterprises Private Ltd., V. Commissioner of Central Excise, Ahamedabad' - 2006 (1) TMI 271 - SUPREME COURT OF INDIA, the Apex court held includibility of the value of EPROM for assessment of STD PCO unit, of which EPROM formed an integral part. The Apex Court held that EPROM (IC chip containing software) constituted the 'brain' of the STDPCO system. The levy was on the STDPCO unit of CH 85.17 and not on the programmed EPROM. The Apex Court sustained the order of the authorities to include the value of EPROM in the assessable value of the STDPCO under Chapter heading 85.15.

In 'NCR Corporation India Private Ltd., V. Commissioner of Central Excise, Pondicherry' - 2010 (251) ELT 380 (Tri. Chennai) the appellants are engaged in the manufacture of 'Automated Teller Machines' (ATM) falling under CSH 8472 90 90 of the First Schedule to the Central Excise Tariff Act, 1985. They import 'Aptra XFS' software and 'Aptra NDC' software in CDs and licence cards, falling under Chapter Heading 8523 8020 of the tariff for the manufacture of ATMs. The imported software along with 'Windows' software are pre loaded on to the Hard Disk Drives (HDD) of the machines manufactured and cleared by the appellants. The appellants paid duty at the rate of 16% ad valorem on the ATMs on a value including the value of the Windows. But they did not include the value of Aptra Software on the plea that they were customized software and exempt from payment of duty.

The Commissioner found that the ATM could not function if the same was not pre loaded with Aptra Software which provides the most essential and basic characteristics of ATMs. Pre loading of Aptra software on the HDD involved process of manufacture. The appellants paid duty on ATM including the value of Windows showed that according to the appellants itself pre loading Windows on HDD of the ATMs amounted to manufacture. She further held that software, whether packaged or customized, that is pre loaded to a machine could not be classified as independent commodity and its value excluded from the value of the machine with which it is supplied when the software formed an integral part of the machine. The Commissioner relied on the Apex Court's decision in 'Commissioner of Central Excise, Delhi V. Frick India Ltd.,' - 2007 -TMI - 1744 - SUPREME COURT OF INDIA in which the Apex Court held that in assessing ceiling fan sold along with remote, the value of remote was liable to be included in the assessable value of fan; the remote made value addition though it was an accessory. The appellant relied on the judgments in 'Acer India' (supra) 'Hewlett Packard India Sales' (supra) The Commissioner held that the findings of the Apex court are with reference to Note 6 of Chapter 85. Once the said notice was omitted, the ratio of the above laws could not be applied in deciding the case of the appellant. The Commissioner demanded differential duty with applicable interest. She also imposed penalty under Rule 25 of the Central Excise Rules, 2002.

The appellant seeks waiver of pre deposit of the duty, interest and penalties. The appellant submitted the following before the Tribunal:

* Aptra XFS and Aptra NDC software were custom-built for use and were exempted as customized software in terms of Notification No.6/06, dated 01.03.2006;

* The Commissioner had wrongly found that the Apex Court's finding was with reference to Note 6 of Chapter 85;

* Notification No.6/2006-CE, dated 01.03.2006 exempted, inter alia, any customized software, that is to say, any custom designed software, developed for a specific user or client, other than packaged software or canned software;

* The value of the impugned software could have been validly included in the value of ATMs, had the appellants themselves manufactured them in their factory and loaded it on ATMs;

The Tribunal after hearing both sides held as follows:

* The Commissioner had considered the question of assessment of ATM and whether the value of software pre-loaded in the HDD of the ATM had to be included in the value for the purpose of payment of duty. She held that the impugned software formed part of ATMs. Therefore, she rightly did not find it necessary to examine whether the subject software were eligible for exemption under any notification;

* The appellants have not raised any valid challenge to the finding of the Commissioner that the subject software formed integral part of the ATM;

* The appellants relied on various laws to argue that software was classifiable a separate commodity and were exempt from payment of duty. By virtue of Note software had to be classified as software even if it is formed part of an article as long as the Chapter Note was on the statue book i.e., up to 01.01.2007. Various case laws relied upon by the appellants have been so decided owing to this Note;

* The finding of the Commissioner that the impugned software formed essential part of the ATM without which the machine could not function as ATM is correct. The loading of software converts the hardware manufactured in the assessee's factory into functioning of ATMs. This process amounts to manufacture;

* After 01.01.2007 the software has lost the special status in its treatment of classification;

* Impugned demand is legal and proper.