2004 (2) TMI 72 - SC - Central Excise

Supreme Court: Software Integral to Computer for Excise Duty Valuation

The Supreme Court held that software should be considered a part of a computer for excise duty valuation under Section 4 of the Central Excise Act. ... Valuation (Central Excise) - Computer software - Held that:- Any amount which a buyer has to pay 'by reason of or in connection with the sale' is part of the transaction value. There are softwares without which computer cannot work at all. There may be softwares which contain additional or ancillary applications which a customer may want to buy separately. An additional or ancillary application would, of course, be classifiable separately and cannot be included in the value of a computer. But a buyer has to buy software without which the computer cannot work. The computer would otherwise be a dead box, if software, without which the computer cannot work, is not purchased. When one talks of a computer, as understood in the trade, it is not just the box or the hardware. A computer contains 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. We, therefore, feel that the matter requires reference to a Larger Bench - decided in favour of Revenue. Issues:1. Whether software is to be considered part of a computer for the purpose of excise duty valuation.Analysis:The Supreme Court addressed the issue of whether software should be considered a part of a computer for the purpose of excise duty valuation. Referring to a previous case, the Court noted that a computer and its software are distinct and separate items. However, the Court disagreed with this view, stating that even though a computer may not function without software, the software should be considered a part of the computer for valuation purposes under Section 4 of the Central Excise Act. The Court emphasized that any amount a buyer has to pay 'by reason of or in connection with the sale' should be included in the transaction value. It was highlighted that without software, a computer would be non-functional, making the software an essential component of the computer system. Therefore, the Court decided that the price of software should be included in the value for excise duty purposes.The Court concluded that the matter required reference to a Larger Bench for further consideration. The papers were directed to be placed before the Hon'ble Chief Justice of India for appropriate orders. This decision signifies the importance of considering software as an integral part of a computer system for the purpose of excise duty valuation, highlighting the essential role software plays in the functioning of modern computer systems.