Case: Commissioner of Central Excise, Pondicherry Vs. M/s. Acer India Ltd

The Respondent is a company manufacturing computers, peripherals, servers, note books and accessories falling under different headings of Chapter 84 of the Schedule appended to the Central Excise Tariff Act, 1985. Upon a licence obtained by WIPRO, the Respondent, on orders received from the customers load operational softwares. While calculating the amount of central excise payable thereupon, it would deduct the value of the operational softwares from the total value of the computer supplied to the customers. The revenue objected to the said procedure on the premise that excise duty is payable on the entire value of the computer including the value of operational softwares.3. A show cause notice dated 8.8.2002 was issued by the Superintendent of Central Excise for the period July 2001 to May, 2002 asking it to show cause as to why it would not be called upon to pay the differential duty of Rs.48,65,003/-.4. Yet again a show cause notice was issued on 19.8.2002 demanding a differential duty of Rs.54,90,700/- for the period 1.7.2000 to 30.6.2001 by the Commissioner of Central Excise, Trichy purported to be in terms of the proviso appended to Section 11A(1) of the Central Excise Act, 1944. The respondent pursuant to the said notices filed their show causes.5. The Commissioner of Central Excise by an order dated 27.1.2003 directed payment of the differential duty specified in the two show cause notices and further levied interest thereupon as also penaltyThat the value / cost of the operational software installed by the assessee on the computers before clearance from the factory is includible in the assessable value/ transaction value of the computer system and therefore the differential duty demanded in the two show cause notices need to be confirmed.ii) That there were justifying grounds and evidences for the invocation of the proviso to Section 11A (1) in the present case besides imposition of penalty..It was further held that the loading of operational software in the factory would come within the mischief of transaction value of the computer in terms of Section 4 of the Central Excise Act, 1944 with effect from 1.4.2000 having regard to the expressions by reason of sale or in connection with the sale as contained in the definition in the definition thereof.7. The Respondent preferred an appeal there against before the Tribunal which by reason of the impugned judgment dated 29.8.2003 was allowed. The Tribunal passed the said judgment relying on or on the basis of a decision of this Court in PSI Data Systems Ltd. vs. Collector of Central Excise (1997 (89) ELT 3 (SC): (1997) 2 SCC 78 ).A Division Bench of this Court in its order dated 27.2.2004 doubted the correctness of the said decision opining that as a computer would not function without an operational software, the latter would form a part of the former, and thus, excise duty would be payable on the total value thereof. Distinguishing between softwares without which a computer cannot work and those containing additional or ancillary applications and which a customer may want to buy separately, the Bencha buyer has to buy software without which the computer cannot work. The computer would otherwise be a dead box, it 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 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.The matter was, thus, referred to a larger Bench.

Court's reasoning:
55. It must be borne in mind that central excise duty cannot be equated with sales tax. They have different connotations and apply in different situations. Central excise duty is chargeable on the excisable goods and not on the goods which are not excisable. Thus, a goods which is not excisable if transplanted into a goods which is excisable would not together make the same excisable goods so as to make the assessee liable to pay excise duty on the combined value of both. Excise duty, in other words, would be leviable only on the goods which answer the definition of excisable goods and satisfy the requirement of Section 3. A machinery provision contained in Section 4 and that too the explanation contained therein by way of definition of transaction value can neither override the charging provision nor by reason thereof a goods which is not excisable would become an excisable one only because one is fitted into the other, unless the context otherwise requires.56. It is not a case where the software is being supplied to the customer along with the computer by way of incentive or gift. The Respondent is charging the price therefor. Software therefore along with a computer is being sold both in the form of the information loaded in the computer as also in the form of a CD-ROM. In the invoice, the composite price of the computer and software is being shown, as noticed hereinbefore and therefrom, the price of the software is only being deducted. The invoice price, thus, also shows the actual price of the computer as also the price of the software together with the licence to use the same. The Appellant while calculating the price of the computer had shown all expenses which are borne by it in terms of the decision of this Court in Union of India and others vs. Bombay Tyre International Ltd. and others (1984) 1 SCC 467 ). Thus, the requirements contained in the second part of the definition of transaction tax are met. Furthermore, invoice value is not always excisable value in respect of the goods.57. In the instant case, having regard to the decision of this Court in Bombay Tyre International Ltd. (supra) the excisable value of the computer has been disclosed. The cost of loading the softwares which would enhance the value of the goods had also been added. There cannot, thus, be any doubt whatsoever that while computing such costs of manufacturing expenses which would add to the value of the excisable goods (in this case the computer) must be taken into consideration but not the value of any other goods which is not excisable.It is profitable to notice at this juncture the general principles of interpretation and in particular Rules 1 and 3 thereof. The interpretative rules, in our opinion, should be considered keeping in view of the Chapter(s) of the Tariff Act.62. Rule 1 of the Rules for the Interpretation of the First Schedule states, that the titles of Sections and Chapters are provided for case of reference only which having regard to Chapter 84 providing for nuclear reactors, boilers, machinery and mechanical appliances; parts thereof are required to be referred to for referred to for reference only. However, for legal purposes, the classification is to be determined according to the terms of the headings. The subject matter of the heading is important. Once a particular subject matter falls within the specified classification, the determination of valuation for the purpose imposition of duty must be done according to the terms of the heading and any relative Section or Chapter Notes unless such headings or Notes otherwise do not require. For our purpose, therefore, the rule of interpretation as contained in Chapter Notes would be given effect to for the purpose of classification in preference to the general rules of interpretation.63. Rule 3, on the other hand, refers to a situation where any reference in a heading to a material or substance includes a reference to mixtures or combinations of that material or substance with other materials or substances, as a result whereof the goods are prima facie classifiable under two or more headings. Only in that event, the different rules of interpretation specified in Rule 3 may be taken recourse to.64. Rule 3 pre-supposes, three conditions under which goods classifiable under two or more headings may be classified under one heading or the other. Such conditions are not applicable in the instant case. Rules 3 of the Rules for interpretation shall not be applicable whereas Rule 1 does.The softwares, thus, whether they are cleared with the apparatus for which they are intended, viz, with the computer or not they remain classified under the same heading. By reason of the provisions of the Tariff Act, the rate of duties specified becomes part of a Parliamentary Act. Chapter Note 6 of Chapter 85 being the legal text must be taken aid of for the purpose of interpretation of the different headings in preference to the interpretation rules. Suffice it to point out that once no duty is payable on softwares being classified under 8524.20 being a magnetic tape, the recorders whereof is classified under 8520.00, a duty would not be payable only because the informations contained therein are loaded in the hardware.67. It is not in dispute that operational softwares are available in the market separately. They are separately marketable commodities. The essentially test or the functional test cannot be applied for the purpose of levy of central excise inasmuch as the tax is on manufacture of goods. The Act being a fiscal legislation an attempt must be made to read the provisions thereof reasonably. Computer comes within the definition of excisable goods. So is a software. They find place in different classifications. The rate of duty payable in relation to those two different goods is also different.68. In terms of Chapter Note 6 of Chapter 85, as noticed hereinbefore, a software retains its character irrespective of the fact as to whether it is sold with the apparatus, viz. the computer. Once it is held that the essential characteristic of a software is not lost by reason of its being loaded in the hardware; having regard to the different sub-heading contained in different chapters of the Tariff Act, the intent and purport of the legislature, in our opinion, cannot be permitted to be withered away only because the informations contained in a software are loaded in a hardware. In other words, as the central excise duty is not leviable on a software in terms of the Act, only because it is implanted in a hardware which can be subjected to the assessment of central excise under different head, the same would not attract central excise duty.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 contains 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.84. In other words, computers, and softwares are different and distinct goods under the said Act having been classified differently and in that view of the matter, no central excise duty would be leviable upon determination of the value thereof by taking the total value of the computer and software. So far as, the valuation of goods in terms of transaction value thereof, as defined in Section 4(3)(d) of the Act is concerned, suffice it to say that the said provision would be subject to the charging provisions contained in Section 3 of the Act as also Sub-section (1) of Section 4. The expressions "by reason of sale" or "in connection with the sale contained in the definition of transaction value refer to such goods which is excisable to excise duty and not the one which is not so excisable. 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 dehors 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 (supra) must be held to have correctly been rendered.85. 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 statues.