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TMI Blog2004 (9) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003 was allowed holding that no central excise duty is payable on a software loaded in a hardware, i.e., computer. Facts : 2.The Respondent is a company manufacturing computers, peripherals, servers, note books and accessories falling under different headings of Chapter 84 of the Schedule appended to the Central Excise Tariff Act, 1985. Upon a licence obtained by WIPRO, the Respondent, on orders received from the customers load operational softwares. While calculating the amount of central excise payable thereupon, it would deduct the value of the operational softwares from the total value of the computer supplied to the customers. The revenue objected to the said procedure on the premise that excise duty is payable on the entire value of the computer including the value of operational softwares. 3.A show cause notice dated 8-8-2002 was issued by the Superintendent of Central Excise for the period July 2001 to May, 2002 asking it to show cause as to why it would not be called upon to pay the differential duty of Rs. 48,65,003/-. 4.Yet again a show cause notice was issued on 19-8-2002 demanding a differential duty of Rs. 54,90,700/- for the period 1-7-2000 to 30-6-2001 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of both hardware and the operating software. The price of such softwares is thus the amount which a buyer is bound to pay by reason of or in connection with the sale of computers. It appears to us that the price of such software is thus includable in the value for purposes of excise duty." 9.The matter was, thus, referred to a larger Bench. Submissions : 10.Mr. A. Subba Rao, learned counsel appearing on behalf of the Appellant would contend that an operational software implanted in a hardware becomes a part thereof and as such central excise duty is leviable on the total value of the computer. Drawing our attention to the provisions of Section 4 of the Central Excise Act, 1944 (The Act) and in particular the definition of "Transaction Value" as contained in Clause (d) of Sub-Section (3) of Section 4 thereof, the learned counsel would submit that the same would include the value of all manufactured goods charged as price including any amount that the buyer is liable to pay by reason of or in connection with the sale together therewith any other amount which adds to the value thereof. As a software implanted is a part of the computer, it was urged, excise duty would be pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 16%, for softwares the same is nil and, thus, the assessee was entitled to claim deduction of the value thereof from the total value of the computer. It was argued that as both the hardware and the software are assessed separately, keeping in view Chapter Note 6 of Chapter 85, which contains a legal text, the valuation of a computer and software cannot be clubbed together for the purpose of assessment of excise duty. 16.Mr. Dushyant Dave, learned senior Counsel appearing on behalf of the intervenor, supplemented the submissions of Mr. Lakshmikumaran contending that the value of the goods which would be subject matter of central excise cannot be enhanced by implanting a software as it retains its own character irrespective of the fact that the informations contained therein are loaded in the computer itself. 17.The learned Counsel would argue that the value of the goods may be enhanced in terms of the definition of the "Transaction Value" but the explanation contained therein must be read in the context of the main provision, viz., Section 4(1) and not de'hors the same. Relevant statutory provisions : Central Excise Act, 1944 : "2(d) "excisable goods" means goods s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the characteristics of both. Firmware is usually stored on PROMS (Programmable Read only Memory) or EPROMs (Electrical PROMS). Firmware contains software which is so constantly called upon by a computer or phone system that it is "burned" into a chip, thereby becoming firmware. The computer program is written into the PROM electrically at higher than usual voltage, causing the bits to "retain" the pattern as it is "burned in". Firmware is nonvolatile. It will not be "forgotten" when the power is shut off. Handheld calculators contain firmware with the instructions for doing their various mathematical operations. Firmware programs can be altered. An EPROM is typically erased using intense ultraviolet light." 21"Operating system" has been defined at page 500 of. the said dictionary as under : "A software program which manages the basic operations of a computer system. It figures how the computer main memory will be apportioned, how and in what order it will handle tasks assigned to it, how it will manage the flow of information into and out of the main processor, how it will get material to the printer for printing, to the screen for viewing, how it will receive information f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s levied upon a manufacturer or producer in respect of the commodity manufactured or produced. It is a tax upon goods and not upon sales or the proceeds of sale of goods. In terms of Entry 84, List I of the Seventh Schedule of Constitution of India, the taxable event in respect of the duty of excise is the manufacture or production. No tax in terms of Article 265 of the Constitution of India can be imposed, levied or collected except by the authority of law. 29.In Cape Brandy Syndicate v. Inland Revenue Commissioners, [(1921) 1 KB 64 at p. 71], it is stated : " In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." [See also State of West Bengal v. Kesoram Industries Ltd. and Ors., 2004 (1) SCALE 425]. 30.It is also well-known that the one and the only proper test in interpreting a section in a taxing statute would be that the question is not at what transaction the section is according to some alleged general purpose aimed, but what transaction its language ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermore, it may encourage in loading of pirated softwares in the computer. 40.In Mathuram Agrawal v. State of Madhya Pradesh [(1999) 8 SCC 667], the law is stated in the following terms : "...The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved in these matters are required to be found out. Interpretation of the Relevant Provisions : 51.Section 2(d) of Central Excise Act, 1944 defines the "excisable goods" to mean the goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise. It must, therefore, be 'goods' which would be subject to a duty of excise and not the 'goods' which would not be. 52.Section 3 thereof is the charging provision. It not only lays down the mode and manner for levy and collection of central excise duty but in no uncertain terms states that a duty of excise shall be levied on all excisable goods which are produced or manufactured in India, as, and at the rates, set forth in the Tariff Act. 53.Section 4 provides for the manner in which an enquiry is required to be made for valuation of goods for the purpose of levy of excise duty on "goods". In terms of Clause (a) of Sub-section (1) of Section 4 when the duty of excise is chargeable on the concerned excisable goods with reference to their value, the same shall be calculated in the manner laid down therein. 54.It may be true that the definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n terms of the decision of this Court in Union of India and Others v. Bombay Tyre International Ltd. and Others Thus, the requirements contained in the second[(1984) 1 SCC 467]. part of the definition of 'transaction tax' are met. Furthermore, invoice value is not always excisable value in respect of the goods. 57.In the instant case, having regard to the decision of this Court in Bombay Tyre International Ltd. (supra) the excisable value of the computer has been disclosed. The cost of loading the softwares which would enhance the value of the goods had also been added. There cannot, thus, be any doubt whatsoever that while computing such costs of manufacturing expenses which would add to the value of the excisable goods (in this case the computer) must be taken into consideration but not the value of any other goods which is not excisable. Classification : 58.Automatic data processing machines are classifiable under the sub-heading 84.71. Softwares, however, are classifiable under the sub-heading 85.24; the duties payable for are 16% and 'Nil' respectively. Chapter Note 5(a) of Chapter 84 of the Tariff Act states : For the purposes of heading No. 84.71, the expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62.Rule 3 pre-supposes three conditions under which goods classifiable under two or more headings may be classified under one heading or the other. Such conditions are not applicable in the instant case. Rules 3 of the Rules for interpretation shall not be applicable whereas Rule 1 does. 63.In the instant case having regard to the Chapter Note, the legal text contained in Rule 1 will apply and not Rule 3. 64.The softwares, thus, whether they are cleared with the apparatus for which they are intended, viz., with the computer or not they remain classified under the same heading. By reason of the provisions of the Tariff Act, the rate of duties specified becomes part of a Parliamentary Act. Chapter Note 6 of Chapter 85 being the legal text must be taken aid of for the purpose of interpretation of the different headings in preference to the interpretation rules. Suffice it to point out that once 'no duty' is payable on softwares being classified under 8524.20 being a magnetic tape, the recorders whereof is classified under 8520.00, a duty would not be payable only because the informations contained therein are loaded in the hardware. 65.It is not in dispute that operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to place definite orders on the manufacturer. It is also not in dispute that an operating software loaded on the hard disc is erasable. It is also accepted that the operating software despite being loaded on to the hard disc is usually supplied separately to the customers. It is also beyond any controversy that operating software can be updated keeping in view the development in the technology and availability thereof in the market without effecting the data contained in the hard disc. Concededly, even in the case of hard disc crash the software contained in the CDs is capable of being reloaded on to the hard disc and its utility by the users remain the same. An operational software, therefore, does not form an essential part of the hardware. Case laws : 68.In PSI Data Systems Ltd. (supra) this Court in paragraph 2 of the judgment excluded a firm or etched software and not the operational software. It has been clarified that the softwares with which the Bench was concerned were tangible softwares of the nature of discs, floppies and CD-ROMs. It is not in dispute that the operational softwares despite being implanted in the computer retain its characteristic of a tangi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the Appellant under service contracts can be included in the assessable value of the computer." 72.Referring to P.S.I. Data Systems Ltd. (supra) in extenso, this Court held : The above judgment of this Court"7. completely answers the principal issues in controversy in favour of the appellant. In the case on hand, it cannot be disputed that the computers manufactured and supplied by Orbit, DSI or the appellant (from May, 1982 onwards) were complete computers, which had a Central Processing Unit, with "etched-in" or "burnt-in" software, a Key Board (input device) the monitor (output device) and Disc drives. The computers, as above, were cleared after complying with all requirements under the Excise Law and proper duty as computed was paid. The peripheral devices and other systems software were merely additional devices meant to increase the memory or storage capacity of the computers and other facilities. It is also not disputed by the Revenue that the peripheral devices were imported by the appellant and the appellant had paid countervailing duty on such imported peripherals." [See also HCL Hewlett Packard Ltd. v. CCE, Meerut, 2000 (116) E.L.T. 667]. 73.We may not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computer software. The price of the imported consignment was approximately Rs. 68 lakhs. As against this, the value of the seven hard disk drives would be roughly Rs. 60,000 that is to say, value of the computer software is hundred times more than its containers hard disk. Hence, the essential character of the imported goods is computer software." 75.While reversing the decision of the Tribunal this Court rejected the contention of the Revenue that in view of Chapter Note 5 of Chapter 84 for the purposes of Heading No. 84.71, the expression "automatic data processing machine" means automatic data processing machines or a unit as being a part of a complete system if it meets the conditions specified therefor stating : He referred to clauses (b) and (c) and contended that this"13. hard disk drive can be used either directly or through one or more other units for processing the data and, therefore, it would be automatic data-processing, machine falling under Heading No. 84.71. This submission cannot be accepted for the consignment in question is essentially a computer software covered by specific Heading No. 85.24 which is for levying duty on records, tapes and other recorded medi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rings. It is the Revenue's case that these are accessories but they were fitted to the ball bearings when the ball bearings were removed from the appellant's factory. The Tariff Entry at the relevant time (No. 49) read, "Rolling bearings, that is to say, ball or roller bearings, all sorts". Clearly, what fell under this entry were the ball bearings and not what, admittedly, are the accessories thereof. Accordingly, the conclusion of the Tribunal on this issue must be set aside." 77.Once it is held that the computer is complete without the operating softwares, the question of adding the cost of software therewith would not arise since what is under assessment is only the computer. To the same effect is the judgment in Photopone Industries Pvt. Ltd. v. CCE, Goa, [1999 (108) E.L.T. 523]. 78.In Philips India Ltd. v. Collector of Central Excise, Pune [(1997) 6 SCC 31], this Court upon noticing the terms and conditions between the manufacturer and their dealers stating the same to be one as between principal and principal observed that making a deduction on this account was uncalled for as the advertisement which the dealer was required to make at its own cost benefited in equal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under the said 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. So far as, the valuation of goods in terms of 'transaction value' thereof, as defined in Section 4(3)(d) of the Act is concerned, suffice it to say that the said provision would be subject to the charging provisions contained in Section 3 of the Act as also Sub-Section (1) of Section 4. The expressions "by reason of sale" or "in connection with the sale" contained in the definition of 'transaction value' refer to such goods which is excisable to excise duty and not the one which is not so excisable. Section 3 of the Act being the charging section, the definition of 'transaction value' must be read in the text and context thereof and not de'hors the same. The legal text contained in Chapter 84, as explained in Chapter Note 6, clearly states that a software, even if contained in a hardware, does not lose its character as such. When an exemption has been granted from levy of any excise duty on software whether it is operating software or application software ..... X X X X Extracts X X X X X X X X Extracts X X X X
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