Full Judgment Text
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CASE NO.:
Appeal (civil) 5854 of 2006
PETITIONER:
Commissioner of Customs, Chennai
RESPONDENT:
M/s Hewlett Packard India Sales (P) Ltd
DATE OF JUDGMENT: 30/08/2007
BENCH:
Dr. ARIJIT PASAYAT & LOKESHWAR SINGH PANTA
JUDGMENT:
J U D G M E N T
CIVIL APPEAL NO. 5854 OF 2006
Dr. ARIJIT PASAYAT, J.
1. Challenge in this appeal is to the order passed by the
Customs Excise and Service Tax Appellate Tribunal, South
Zonal Bench, Chennai (in short ’CESTAT’) allowing the appeal
filed by the respondent. By the impugned judgment CESTAT
held that the Software-loaded Hard Discs are classifiable
under Heading 85.24 of the First Schedule to Customs Tariff
Act, 1985 (in short ’Tariff Act’). It was further held that
respondent will be eligible for duty exemption under
Notification No.21/2002-Cus as amended. It was held that
rest of the machine would be classified under Heading 84.71.
2. Background facts in a nutshell are as follows:
The Department had demanded customs duty of about
Rs.5.9 crores from the respondent by classifying goods
imported by them under Heading 84.71 of the First Schedule
of the Act and denying them benefit of exemption Notification
No.21/2000-Cus. dated 1.3.2002 (as amended). Demand was
questioned before CESTAT. An application seeking waiver of
pre-deposit and stay of recovery in respect of this amount of
duty was filed. After examining the records and hearing both
sides, CESTAT found prima facie case for the assessee in view
of the Tribunal’s decision in the case of Barber Ship
Management (I) Pvt. Ltd. Vs. Commissioner, 2000 (117) ELT
456 (Tri.) as well as the decision in the assessee’s own case
reported in 2005 (126) ECR 124 (Tri-Del) and, accordingly,
CESTAT have dispensed with pre-deposit of the duty amount.
Further, having heard both sides at length and having regard
to the high stake involved in the case, the appeal was taken up
for final disposal.
The respondents are engaged in the manufacture of, and
trading in, computers including Laptops (otherwise called
’Notebooks’) falling under Heading 84.71 of the CTA Schedule.
They imported Notebooks (Laptops) with Hard Disc Drivers
(Hard Discs, for short) preloaded with Operating Software like
Windows XP, XP Home etc. These computers were also
accompanied by separate Compact Discs (CDs) containing the
same software, which were intended to be used in the event of
Hard Disc failure. The Bills of Entry filed by the importer
declared the value of Laptop and the value of Software
separately, the software value including the Hard Disc value
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also. The Bills of Entry classified the Software-loaded Hard
Discs under Heading 85.24 of the CTA Schedule and claimed
exemption in terms of Sl. No.157 of Notification No.21/2002-
Cus ibid. These Bills of Entry were filed with the Chennai Air
Customs Authorities in July 2005. Long before this, by a letter
dated 7.10.2003 the respondents had informed the Addl.
Commissioner of Customs, Chennai that they would be filing
Bills of Entry for separate assessment of Computers and
Software-loaded Hard Discs in view of the Tribunal’s decision
in Barber Ship Management’s case (supra). It was also
informed that they would claim duty exemption under Sl.
No.157 of Notification No.21/2002-Cus. ibid. Subsequently,
under cover of letter dated 11.10.2003, the respondents had
also supplied to the Addl. Commissioner the OEM pricelist for
the various models of ’Notebooks’ imported by them. They had
also provided a worksheet indicating separately the value of
Hard Disc, value of Operating Software and the CD &
replicating charges.
In the meantime, at Delhi, they had imported Laptop
computers with Hard Discs preloaded with Software and
claimed classification of the Software-loaded Hard Disc Drives
under Heading 85.24. The department issued a show-cause
notice for demanding duty on these goods in terms of Heading
84.71. This demand was confirmed by the original authority,
against which appeal before the Commissioner (Appeals) was
preferred, who sustained the decision of the lower authority.
But the appeal preferred to the Tribunal was allowed and it
was held that the Hard Disc Drives preloaded with software
required to be assessed separately in terms of 85.248 of the
CTA Schedule by virtue of Note 6 to Chapter 85 of the said
Schedule vide Final order No.380/2005-NB-A dated 18.3.05
reported in 2005 (126) ECR 124 (Tri-Del).
However, the Appraising Officer at Chennai Air Customs,
dealing with the goods in question, queried the respondents as
to why the value of the Hard Discs should not be included in
the value of the ’Notebooks’ for the purpose of assessment
under Heading 84.71. The respondents replied by pointing
out that, in terms of the Tribunal’s decision in Barber Ship
Management’s case (supra) which had been upheld by this
Court as reported in 2002 (144) ELT A293, the Software-
loaded Hard Discs could only be classified under Heading
85.24. They also cited, in support of their stand, Final Order
No.380/2005-NB-A dated 18.3.05 (supra) passed by the
Tribunal in their own case. Their arguments, however, did not
weigh with the assessing authority, which proceeded to assess
the Bills of Entry on a provisional basis. The jurisdictional
Asst. Commissioner of Customs, after hearing the party and
considering their submissions, found Hard Disc as integral
part of Notebook-computer and accordingly passed Order-in-
Original dated 31.10.2005 classifying the Notebooks together
with the Hard Discs assembled therein, under Heading 84.71
as ’automatic data processing machines’. This order was
upheld by the Commissioner (Appeals) as per Order-in-Appeal
dated 25.11.2005. It is on the basis of the appellate
Commissioner’s order that the assessments were finalized.
Hence the demand of duty which is on the assessable value
comprising the value of the Notebook computers with Hard
Discs excluding the value of Software. Appeals were preferred
against the appellate Commissioner’s order.
3. Stand of respondent before the Tribunal revolved round
decision in Barber Ship Management’s case (supra) which was
affirmed by this Court in [202 (144) ELT A 293]. It was pointed
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out that, in their own case involving import of similar goods at
Delhi, the Tribunal had classified Software-loaded Hard Disc
Drives under Heading 85.24. It was argued that the issue
arising in this case had already been conclusively decided by
this Court in the case of Barber Ship Management’s case
(supra) and, therefore, there was nothing further to be
examined in this case. It was submitted that Software-loaded
Hard Disc, being "recorded media for sound or other similarly
recorded phenomena\005excluding products of Chapter 37" was
to be classified under Heading 85.24. The department had no
objection to classifying Software-recorded Hard Disc Drive, if
imported without any other apparatus, under Heading 85.24.
Hence the lower authorities should have been taken the aid of
Note 6 to Chapter 85 for classifying the Software-loaded Hard
Disc Drives under heading 85.24. Reference was also made to
the HSN Notes under Heading 85.24. It was submitted that
the authorities below had failed to note the clear distinction
between Computer and Software despite decisions of this
Court on the point. In this connection, reference was made to
this Court’s judgment in CCE Vs. PSI Data Systems [1989 (39)
ELT 692] and Commissioner Vs. Acer India Ltd. [2004 (172)
ELT 289]. The ratio of the Supreme Court’s decision in the
case of Sprint RPG India Ltd. Vs. Commissioner, [2000 (116)
ELT 6 (SC)] was wrongly applied to the facts of the case by the
lower appellate authority.
4. While issuing notice this Court noted that the matter
appeared to be covered by 3-Judge Bench’s decision of this
Court in Commissioner of Central Excise, Pondicherry v.
ACER India Ltd. (2004 (8) SCC 173). But it was contended by
learned Additional Solicitor General that the question whether
Hard Discs fitted to the Computer would be treated as a
Software was not specifically dealt with in the said case. Notice
was issued and the matter was listed for final hearing.
5. A short question which arises for determination in this
civil appeal is : Whether operating systems (software) which
controls the working of the computer and which is preloaded
in the laptop (notebook) is classifiable as a separate entity
under CTH 85.24 at ’nil’ rate of duty or as an integral part of
the laptop under CTH 84.71 at the appropriate rate of duty.
6. To answer the above question CTH 85.24 and CTH 84.71
need to be quoted:
CTH 85.24:
"Media recorded with sound or similar
recording, whether or not presented together
with the apparatus for which they are intended
or assembled with constituent parts of
machines of heading 84.69 to 84.72 (e.g. disc
packs) are in all cases to be classified in this
heading."
CTH 84.71
"Automatic data processing machines and
units thereof; magnetic or optical reader,
machines for transcribing data on to data
media in coded form and machines for
processing such data, not elsewhere specified
or included."
7. The Department has classified the laptop as a machine in
CTH 84.71 and has demanded duty on the assessable value
determined by deducting the software value from the total
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value of the laptop whereas the assessee has classified the
software loaded Hard Disk Drive (for short, ’HDD’) under CTH
85.24 separately from the laptop and has claimed the benefit
of Notification No.21/2002-Cus dated 1.3.2002.
8. To answer the above controversy meaning of the words
software, hard disk and platter need to be noted (See:
Computer Dictionary by Microsoft - Fifth Edition at pp.489,
246 and 408 respectively):
"Hard disk. A device containing one or more
inflexible platters coated with material in
which data can be recorded magnetically,
together with their read/write heads, the head-
positioning mechanism, and the spindly motor
in a sealed case that protects against outside
contaminants. The protected environment
allows the head to fly 10 to 25 millionths of an
inch above the surface of a platter rotating
typically at 3600 to 7200 rpm; therefore, much
more data can be stored and accessed much
more quickly than on a floppy disk. Most hard
disks contain from two to eight platters. See
the illustration. Also called: hard disk drive.
Hard disk drive n. See hard disk
Platter. One of the individual metal data
storage disks within a hard disk drive. Most
hard disks have from two to eight platters. See
the illustration. See also hard disk.
Software. Computer programs; instructions
that make hardware work. Two main types of
software are system software (operating
systems), which controls the workings of the
computer, and applications, such as word
processing programs, spreadsheets, and
databases, which perform the tasks for which
people use computers. Two additional
categories, which are neither system nor
application software but contain elements of
both, are network software, which enables
groups of computers to communicate, and
language software, which provides
programmers with the tools they need to write
programs. In addition to these task-based
categories, several types of software are
described based on their method of
distribution. These include packaged software
(canned programs), sold primarily through
retail outlets; freeware and public domain
software, which are distributed free of charge;
shareware, which is also distributed free of
charge; although users are requested to pay a
small registration fee for continued use of the
program; and vaporware, software that is
announced by a company or individuals but
either never makes it to market or is very late.
See also application, canned software,
freeware, network software, operating system,
shareware, system software, vaporware,
Compare firmware, hardware, liveware."
9. On the basis of the above dictionary meanings it becomes
clear that a software is a computer programme. It consists of
instructions that make hardware work. There are two types of
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softwares, namely, system software which controls the
working of the computer and application software such as
word processing programmes, databases etc., which perform
the tasks for which we use computers. In addition, we now
have network software which enables groups of computers to
communicate, and language software which provides
programmers with the tools with which they write
programmes. We also have what is called as packaged
softwares which are sold through retail outlets. In the present
case, the respondent imported laptops containing preloaded
HDD. The said drives were preloaded with operating systems
(software) which, as stated above, controls the working of the
computer. The value of the laptop depends on the operating
system, which is preloaded. The computer cannot open
without the operating system. The laptop without an operating
system is like an empty building. At this stage, it may be
clarified that the operating system can also be imported as a
packaged software which is like an accessory and which in the
present case is classified by the department under CTH 85.24.
However, a preloaded operating system recorded on HDD is an
integral part of the laptop (unit). Such preloaded operating
system on the HDD forms an integral part of the laptop. It is
important to note that laptop as a stand alone unit is
classifiable under CTH 84.71. A laptop is a small portable
Personal Computer (in short ’PC’). It runs either on battery or
electricity. Laptop has a screen and a small key board. Most of
the laptops run on the same software as their desk top
counterparts. Most of the laptops accept floppy disks, CD
ROM Drives, External or Internal Modem etc. A notebook
computer is a laptop. It is a machine. A CD or a floppy disk is
a peripheral.
10. Applying the above tests to the facts of the present case,
we are of the view that preloaded operating system recorded in
HDD in the laptop (which is the item of import) forms an
integral part of the laptop. What was imported in the present
case was a laptop as a stand alone item (unit). Present dispute
relates to the transaction value of the unit. An importer who
buys a laptop containing an operating system pays for the
laptop as a unit. As stated above, without the operating
system, like Windows, the laptop cannot work. The computer
cannot open without operating system. In the present case,
the respondent has not only imported laptops, it has also
imported HDDs on which the operating system was recorded
(packaged software) which has been classified by the
Department under CTH 85.24. However, when a laptop is
imported with in-built preloaded operating system recorded on
HDD the said item forms an integral part of the laptop
(computer system) and in which case the Department is right
in treating the laptop as one single unit imported by the
respondent. The Department has rightly classified the laptop
as a unit under CTH 84.71, quoted above.
11. Before concluding it may be pointed out that in none of
the decisions cited on behalf of the respondent, the question
raised in the present dispute was ever raised. Although laptop
is similar PC, the former is more compact. It cannot be
assembled as easily as PC. In the present case, the
Department has rightly taken the value of the laptop as a unit
and it has given the deduction for the value of the software.
There is no error in the computation, particularly, when the
respondent has refused to give the value of the software to the
adjudicating authority despite being called upon to do so.
12. For the afore-stated reasons, we are of the view that the
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imported laptops were classifiable under CTH 84.71 whereas
operating software recorded on HDD imported as packaged
software were classifiable under CTH 85.24 and accordingly
Civil Appeal filed by the Department deserves to be allowed,
and the impugned judgment of the Tribunal is set aside. There
will be no order as to costs.