Capital goods exemption for air-conditioners used to maintain controlled conditions in software development units

Air-conditioners used by a 100% EOU/STP unit for maintaining controlled conditions essential to software development were treated as capital goods for the benefit of Notification No. 1/95-C.E. The stated basis was that the equipment was necessary for the manufacturing or production process, and Board Circular No. 289/5/97-CX clarified that such air-conditioners qualify for the exemption where they are required for the unit's operations. The text further notes that the clarification operates mutatis mutandis and that similar relief in the unit's earlier case had attained finality, leaving the departmental objection unsustainable.

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Issues: Whether air-conditioners used by a 100% EOU/STP unit for maintaining controlled conditions essential for software development were eligible as capital goods for the benefit of Notification No. 1/95-C.E.

Analysis: The unit was engaged in software development, and the use of air-conditioners was found necessary to create the controlled environment required for that activity. The Board's Circular No. 289/5/97-CX clarified that where air-conditioners are required and necessary for manufacture or production by 100% EOU/EHTP/STP units, they are to be treated as capital goods and the benefit of Notification No. 1/95-C.E. would apply. That clarification was stated to follow the Customs circular on the same subject and to operate mutatis mutandis. The Tribunal also noted that the respondent's earlier case had resulted in similar relief, which had attained finality.

Conclusion: Air-conditioners in the facts of the case were eligible for the benefit under Notification No. 1/95-C.E., and the departmental objection failed.

Final Conclusion: The demand was not sustainable, and the appeal filed by the Revenue was rejected.

Ratio Decidendi: Where air-conditioners are indispensable for creating the controlled conditions necessary for the manufacture or development of goods by a 100% EOU/STP unit, they may be treated as capital goods for the purposes of the relevant exemption notification.

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