2004 (9) TMI 106 - SC - Central Excise

Operative software under heading 85.24 is distinct from computers under heading 84.71; preloaded software excluded from assessable value

COMMISSIONER OF CENTRAL EXCISE, PONDICHERRY Versus ACER INDIA LTD.

The SC held that operative software and computers are distinct marketable commodities with separate classifications and duty rates; software (heading ... Valuation (Central Excise) - excise duty - payable on a software loaded in a hardware, i.e., computer - Principles of Interpretation of a Taxing/Fiscal Statute - whether the value of operational software loaded onto a computer should be included in the assessable value of the computer for the purpose of central excise duty - HELD THAT:- Computer and operative softwares are different marketable commodities. They are available in the market separately. They are classified differently. The rate of excise duty for computer is 16% whereas that of a software is nil. Accessories of a machine promote the convenience and better utilization of the machine but nevertheless they are not machine itself. The computer and software are distinct and separate, both as a matter of commercial parlance as also under the statute. Although a computer may not be capable of effective functioning unless loaded with softwares, the same would not tantamount to bringing them within the purview of the part of the computer so as to hold that if they are sold along with the computer their value must form part of the assessable value thereof for the purpose of excise duty. Both computer and software must be classified having fallen under 84.71 and 85.24 and must be subject to corresponding rates of duties separately. The informations contained in a software although are loaded in the hard disc, the operational software does not lose its value and is still marketable as a separate commodity. It does not lose its character as a tangible goods being of the nature of CD-ROM. A licence to use the information contained in a software can be given irrespective of the fact as to whether they are loaded in the computer or not. The fact that the manufacturers put different prices for the computers loaded with different types of operational softwares whether separately or not would not make any difference as regard nature and character of the 'computer'. Even if the Appellants in terms of the provisions of a licence were obliged to preload a software on the computer before clearing the same from the factory, the characteristic of the software cannot be said to have transformed into a hardware so as to make it subject to levy of excise duty along with computer while it is not under the Tariff Act. 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 in terms of heading 85.24, no excise duty can be levied thereupon indirectly as it was impermissible to levy a tax indirectly. In that view of the matter the decision in PSI Data Systems [1996 (12) TMI 47 - SUPREME COURT] must be held to have correctly been rendered. We, however, place on record that we have not applied our mind as regard the larger question as to whether the informations contained in a software would be tangible personal property or not or whether preparation of such software would amount to manufacture under different statutes. We do not find any merit in the appeals of the Revenue which are dismissed accordingly. Issues Involved:1. Whether central excise duty is payable on the entire value of a computer, including the value of operational software loaded onto it.2. Interpretation of relevant provisions of the Central Excise Act, 1944, and the Central Excise Tariff Act, 1985.3. Classification of computers and software under different headings and their corresponding duty rates.4. Principles of interpretation of a taxing statute.Detailed Analysis:1. Central Excise Duty on Computers and Software:The core issue was whether the value of operational software loaded onto a computer should be included in the assessable value of the computer for the purpose of central excise duty. The Commissioner of Central Excise held that the value of operational software installed before clearance from the factory is includible in the assessable value of the computer, thus confirming the differential duty demanded. This decision was based on the interpretation that the loading of software in the factory falls within the 'transaction value' of the computer as per Section 4 of the Central Excise Act, 1944.2. Interpretation of Relevant Provisions:The definition of 'Transaction Value' under Section 4(3)(d) of the Central Excise Act includes any amount the buyer is liable to pay by reason of or in connection with the sale. However, the court emphasized that central excise duty is chargeable on excisable goods and not on non-excisable goods. The court clarified that even if software is implanted in a computer, it does not transform the software into excisable goods when it is not classified as such under the Tariff Act.3. Classification of Computers and Software:Computers are classified under Chapter 84, heading 84.71, while software is classified under Chapter 85, heading 85.24 of the Central Excise Tariff Act. The court noted that the rate of duty for computers is 16%, whereas for software, it is nil. Chapter Note 6 of Chapter 85 states that records, tapes, and other media of heading 85.23 or 85.24 remain classified under those headings, whether or not they are cleared with the apparatus for which they are intended. This means that software retains its classification even when sold with a computer.4. Principles of Interpretation of a Taxing Statute:The court reiterated that a taxing statute must be construed strictly. The taxable event for excise duty is the manufacture or production of goods. The court emphasized that the legal character of a transaction cannot be ignored, and a subject cannot be taxed by implication. The court also highlighted that the interpretation of a taxing statute should not lead to wide-scale evasion of duty and should be user-friendly.Conclusion:The court concluded that computers and operational software are distinct and separate marketable commodities, classified differently under the Central Excise Tariff Act. The operational software does not lose its character as a separate commodity even when loaded onto a computer. Therefore, no central excise duty is payable on the value of the software when calculating the excisable value of the computer. The decision in PSI Data Systems Ltd. was upheld, confirming that the value of software should not be included in the assessable value of the computer for excise duty purposes. The appeals of the Revenue were dismissed, and the court emphasized that the interpretation of 'transaction value' must align with the charging provisions of the Act.