2015 (6) TMI 658 - AT - Central Excise

Manufacture - replicating certain Microsoft software on CDs/DVDs - Benefit of serial No. 27 of Notification No. 6/2006-CE - Held that - Applicant does not have any case on merits as the work of replicating and that also in large quantity, will not be relating to a customized software. It is not under dispute that such software has been developed by the Microsoft and are used in computer system by various original equipment manufacturers or other customers. In such a situation, the software cannot be called customized software so as to extend the benefit of Notification 6/2006-CE dated 01/03/2006. In view of the said position, prima facie, we are of the view that the applicant will be required to pay duty on the said goods. However, the question comes what would be the value for computation of duty. It appears that the Revenue has added US 7/- per disc for computing the duty. The figure of US 7/- has been taken as that is the royalty that is required to be paid by the Authorised Replicators/OEM to the Microsoft for the main software. Similarly, recovery disc is provided to OEM manufacturer so that in case of any problem in the original software, recovery disc is used. Similar is the position in respect of other type of discs other than works. In case of Works, it appears that the same royalty is indirectly paid to the Mircrosoft. - stay granted partly.

Summary

Issues:
1. Interpretation of Notification No. 6/2006-CE regarding duty exemption for replicated Microsoft software on CDs/DVDs.
2. Determination of the value for computation of duty based on royalty payment.

Analysis:
1. The case involved the interpretation of Notification No. 6/2006-CE concerning the duty exemption for certain types of CDs/DVDs replicating Microsoft software. The applicant claimed duty exemption under serial No. 27 of the notification, while the Revenue contended that the goods did not fall under the said entry as it covered customized software excluding packaged or canned software. The Tribunal observed that replicating Microsoft software in large quantities did not constitute customized software. The software developed by Microsoft and used by various manufacturers could not be considered customized, thus not qualifying for the duty exemption under the notification. Consequently, the Tribunal held that the applicant would be required to pay duty on the replicated goods.

2. Regarding the computation of duty value, the Revenue had added US $7 per disc based on the royalty paid to Microsoft by Authorized Replicators/OEM for the main software. The applicant argued that the US $7 royalty was not specific to the first five types of discs but was a general royalty for various Microsoft operating systems. The discs were provided as free supplies, such as upgraded discs for original software purchasers and recovery discs for OEM manufacturers. The Tribunal acknowledged the contentious nature of the royalty amount and directed the appellant to deposit Rs. 50 lakhs within eight weeks for further consideration during the final hearing. The decision on the royalty amount would be determined after a thorough examination of all relevant facts and circumstances.

In conclusion, the Tribunal ruled against the duty exemption claim for replicated Microsoft software CDs/DVDs under Notification No. 6/2006-CE due to the nature of the software not meeting the criteria for customized software. The determination of the royalty amount for computing duty was deferred for detailed examination during the final hearing, with the appellant instructed to deposit a specified amount pending further proceedings.