Case Note & Summary
These appeals, filed before the Supreme Court of India, arose from orders of the Customs, Excise and Gold (Control) Appellate Tribunal relating to the assessable value of computers for the purposes of central excise duty. The appellants, computer manufacturers and sellers, challenged the inclusion of the value of tangible software sold along with computers, and in two appeals also challenged inclusion of installation and training charges. The core dispute was whether such software formed part of the computer for excise valuation. The Tribunal had held that a computer system was incomplete without systems software and that the total value of the computer including software was assessable, relying on Collector of Central Excise, Bangalore v. Sunray Computers Private Limited. The Supreme Court began by distinguishing between hardware, the computer, and software, the programming necessary to run it. It noted that software meant programmes recorded on punched cards, magnetic tapes and discs, citing a definition and a Supreme Court of Illinois judgment. The Court examined the tariff entries under the Central Excise Tariff Act, 1985: Heading 84.71 covered automatic data processing machines, Heading 85.24 covered records, tapes and other recorded media, and Chapter Note 6 stated that such media remained classified in those headings whether or not cleared with the apparatus for which intended. A notification dated 1st March 1989 exempted computer software falling under Heading 85.24. The appellants argued that software was analogous to a typewriter ribbon, an accessory and not part of the typewriter per State of Uttar Pradesh v. Kores (India) Limited; that buyers' contracts distinguished between computer and software; and that the Income Tax Act Section 80HHL and Copyright Act treated computer programmes separately. Respondent counsel conceded that optional software sold with a computer was not includible but urged that firm or etched software was includible. The Supreme Court held that the Tribunal erred in confusing a computer system with a computer. It ruled that a computer and its software are distinct and separate, both as a matter of commercial parlance and upon the material on record. A computer may not function effectively without software, but software is not part of the computer; its value cannot be added to the assessable value. The Court gave the example of a cassette recorder and a cassette, which are different and distinct articles. Consequently, charges for installation and training were also excluded. The appeals were allowed, the judgments and orders under appeal were set aside, and no order as to costs was made.
Headnote
A) Excise Duty - Assessable Value - Inclusion of Software - Central Excise Tariff Act, 1985, Heading 84.71, Heading 85.24, Chapter Note 6 - The Tribunal confused a computer system with a computer; tangible software sold with a computer is distinct and separate and its value cannot be included in the assessable value of the computer - Held that the value of software such as discs, floppies and CD ROMs sold along with the computer cannot be included in the assessable value of the computer for excise duty (Paras 9-16) B) Interpretation - Commercial Parlance - Software as Part of Computer - Central Excise Tariff Act, 1985, Heading 84.71, Heading 85.24 - A computer and its software are distinct and separate in commercial parlance; software is analogous to a cassette sold with a cassette recorder, not a part of the recorder - Held that the typewriter ribbon analogy from State of Uttar Pradesh v. Kores (India) Limited applies; software is not an essential part of the computer, so its value is excluded (Paras 12-16) C) Excise Duty - Assessable Value - Installation and Training Charges - Central Excise Tariff Act, 1985 - Charges for installation of the computer and training of purchaser's personnel were included by the Tribunal; these are in the same category as software and cannot form part of the assessable value of the computer - Held that such charges are not includible in the assessable value of the computer (Paras 14-16)
Issue of Consideration
Whether the value of tangible software sold along with a computer is includible in the assessable value of the computer for purposes of central excise duty; whether installation and training charges form part of the assessable value of the computer
Final Decision
Appeals allowed; judgments and orders under appeal set aside; no order as to costs. The value of tangible software sold along with a computer cannot be included in the assessable value of the computer for excise duty; installation and training charges also cannot be included.
Law Points
- Assessable value of computer excludes value of tangible software sold separately
- Computer and software are distinct and separate articles in commercial parlance
- Chapter Note 6 to Heading 85.24 keeps recorded media separate
- Installation and training charges not part of assessable value of computer
- Tribunal erred in equating computer system with computer
