Pre-loaded operating software forms part of computer system value for excise, while penalties were waived on the facts.

Pre-loaded operating software supplied with computer systems was treated as part of a composite clearance and, because it was essential for the computers to function, its value had to be included in the assessable value for central excise duty. The fact that service tax had been paid on the right to use software did not affect excise valuation of the goods, and Board circulars on packaged software on media were held inapplicable to operating software integral to the system. On the peculiar facts, the demand of excise duty and interest was sustained, while the penalties were set aside as unnecessary.

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Issues: Whether the value of pre-loaded operating software supplied along with computer systems was includible in the assessable value for central excise duty, and whether the penalties imposed were sustainable.

Analysis: The software was found to be pre-loaded on the CPU as part of a composite supply of computer systems and was essential for the computers to function. On the evidence and invoices, the software was not treated as a separate, independent sale but as an integral component of the cleared computer systems. The value of such software therefore had to be added to the assessable value of the computers for central excise purposes. The plea that service tax had already been paid on information technology software service did not displace the excise liability, because the service tax was paid in relation to the right to use software and had no legal bearing on valuation of the excisable goods. The Board circulars relied upon dealt with packaged software on media and did not apply to operating software forming part of the computer system. In view of the peculiar facts, especially the tax payments made, the penalties were held to be unnecessary.

Conclusion: The demand of excise duty and interest was sustained, but the penalties were set aside.

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