Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6
PETITIONER:
M/S SPRINT RPG INDIA LTD.
Vs.
RESPONDENT:
COMMISSIONER OF CUSTOMS-I, DELHI.
DATE OF JUDGMENT: 20/01/2000
BENCH:
M.B.Shah, B.N.Kirpal
JUDGMENT:
Shah,J.
Leave granted. Appeal admitted.
The short question involved in this appeal is whether
custom duty on imported computer software loaded on a hard
disk drive is to be levied on the basis of hard disk
simplicitor or computer software. Goods imported by the
appellant were examined on 9th August, 1995 and were found
to be seven pieces of hard disk drive loaded with software.
As per the department, custom duty on hard disk drive is
leviable under Chapter Heading 84.71 at the rate of 25% and
on a computer software it is at the rate of 10% as per the
tariff Heading 85.24 read with notification No.59/95 dated
16.3.1995. It is admitted fact that total value of the
consignment was Rs.67,75,119/- for seven hard disk drives
having software loaded thereon. Value of the hard disk
simplicitor would be roughly at the most Rs.60000/-. The
relevant headings of the Chapter are as under:-
84.71 Automatic data processing machines and units
thereof; magnetic or optical readers, machines for
transcribing data on to data media in coded form and
machines for processing such data, not elsewhere specified
or included.
8471.70 Storage units. 5% 8471.80 Other units of
automatic date processing machines. 20%
8471.90 Other 20%
85.23 Prepared unrecorded media for sound recording or
similar recording of other phenomena, other than products of
Chapter 37.
- Magnetic tapes.
85.24 Records, tapes and other recorded media for
sound or other similarly recorded phenomena, including
matrices and masters for the production of records, but
excluding products of Chapter 37.
8524.10 Gramophone records. 40% - Discs for laser
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6
reading systems;
8524.31 For reproducing phenomena other than sound or
image. 25%
8524.40 Magnetic tapes for reproducing phenomena other
than 25% sound or image.
- Other magnetic tapes.
8524.99 Others 40%
The Tribunal arrived at the conclusion that as the
software was loaded on a hard disk, it would remain to be a
hard disk drive on which software was loaded and, therefore,
alongwith Chapter Note 5(A) and (B) of Chapter 84, it would
be hard disk drive loaded with software and would be taxable
under the Heading 84.71 and not 85.24. The Tribunal
considered the decision of this Court in PSI Data Systems
Ltd. vs. Collector of Central Excise, {1997 (89) ELT 3
(SC)} and observed that it would not be applicable to the
facts of the present case.
For understanding of computer software and the hard
disk, learned counsel for the Customs has produced on record
some extracts from Modern All About Hard Disk Drive of BPB
Publications, which reads as under:-
Today Hard Disk Drives are the most common storage
device used with the computer system. The hard disk drive
is also known as Hard Disk, Hard Drive, Fixed Disk Drive or
Winchester Disk Drive. The hard disk drive is used to store
data and programs permanently inside the computer. The
information stored in the hard disk drive does not get
erased when the power supply to the computer is switched
off.
This device is known as Hard Disk Drive because
compared to the other common magnetic storage device, floppy
disk, which uses flexible plastic like carrier for the
magnetic recording medium; the hard disk drive uses rigid,
hard, aluminium or glass as the base for recording medium.
xxxx xxxx xxxx
Information is stored in the hard drive using the same
magnetic recording method, which is used to store songs on a
audio tape or movies on a video tape. The audio or video
tape does not lose its content when the power supply given
to the audio or video recorded is switched off, same way the
hard drive also retains the information stored in it, even
when the power supply to the hard drive is switched off.
He has also pointed out the extract from PC Power
Boosting Your PCs Performance written by Stephen J.
Dougherty wherein hard disk is given meaning as under:-
Hard disk. A data storage device that stores the data on
metal disks that have a magnetic coating. Hard disk drives
provide faster access and larger storage capacities than
diskettes. Sometimes referred to as a fixed disk.
He further submits that he has received information
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6
from the Deputy Commissioner (Customs), Air Cargo, New
Delhi, as per the letter which is produced on record which
points out that in nutshell, a hard disk is one of the
devices used in the Computer Systems. Its function is to
store the data, instructions, sound images etc. including
source code and object code. The moot difference between
the hard disk and the software is that a hard disk is
hardware whereas software is a representation of any type of
data and which is stored in the hard disk. Similarly, as
per the Internet information received by Customs, a hard
disk is really a set of stacked disks, each of which,
like phonograph records, has data recorded
electromagnetically in concentric circles or tracks on the
disk. A head (something like a phonograph arm but in a
relatively fixed position) records (writes) or reads the
information on the tracks.
appellant is hard disk In the present case, what is
imported by the drive loaded with software material.
Heading 84.71 apparently covers automatic data processing
machines and units thereof and magnetic or optical readers
not elsewhere specified or included. It is to be stated
that heading 85.23 deals with prepared unrecorded media for
sound recording or similar recording of other phenomena,
which includes magnetic tapes. As against this, heading
85.24 covers records, tapes and other recorded media for
sound or other similarly recorded phenomena which covers
gramophone records or magnetic tapes for reproducing
phenomena. That software material is admittedly
classifiable under Tariff Heading No.85.24 which provides
for taxing records, tapes and other recorded media for sound
or other similarly recorded phenomena. The difference
between the hard disk drives and magnetic storage devices or
floppy disks is only with regard to the use of rigid, hard,
aluminium or glass as the base for recording medium. What
is covered by the said heading is recorded tapes, magnetic
tapes or other similar recorded phenomena. As per the
literature supplied by the department, hard disk drive is
used to store data and programs permanently inside the
computer. The difference between hard disk drive and common
magnetic storage device or floppy disk is the base for
recording medium. It also provides faster access and larger
storage capacity; its function is to store the data
instructions, sound images etc. and it is like phonograph
records. Floppy disk uses flexible plastic like carrier for
magnetic recording medium. Information is stored in the
hard disk drive using the same magnetic recording method
which is used to store songs on an audio tape or movies on a
video tape. Therefore, hard disk is a refined form of
floppy and serves the same purpose of recording material in
more efficient way. The moot difference between the hard
disk and the software is that a hard disk is a hardware
whereas software is a representation of any type of data and
which can be stored in the hard disk. There is no dispute
that floppy on which software is stored would be taxable
under Tariff Heading 85.24. Instead of storing the software
on the floppy if it is stored on a hard disk drive, it would
not ceased to be a software. As stated above, it is an
information stored in the hard disk drive using magnetic
recording method.
Further, the Central Government by its Notification
No.59/95-Cus. dated 16th March, 1995 provided exemption to
the computer equipments which reads as under:-
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6
In exercise of the powers conferred by sub-section
(1) of section 25 of the Customs Act, 1962 (52 of 1962), the
Central Government, being satisfied that it is necessary in
the public interest so to do, hereby exempts the goods
specified in column (3) of the Table hereto annexed and
falling within Chapter or under heading No. or sub-heading
No. of the First Schedule to the Customs Tariff Act, 1975
(51 of 1975), specified in the corresponding entry in column
92) of the said Table, when imported into India, from so
much of that portion of the duty of customs leviable thereon
which is specified in the said First Schedule, as is in
excess of the amount calculated at the rates specified in
the corresponding entry in column (4) of the said Table.
------------------------------------------------------------------------------
Sl. Chapter Description of Rate of duty No. or
heading goods No. or sub-
No.______________________________________ heading (1) (2)
(3)(4)____
40% ad valorem 1. 84.71 All goods other than Hard
disk drive and Floppy disk drive.
25% ad valorem 2. 84.71 Hard disk drive or Floppy
disk drive.
3. 8473.30 All goods. 35% ad valorem
4. 49 or Computer software 10% ad valorem 85.24
-----------------------------------------------------------------------------
As per Item 2 of the above notification rate of duty
is 25% for hard disk drive or floppy disk drive covered by
heading or sub-heading 84.71. As against this, for computer
software, if it falls under Chapter 49 or under Heading
No.85.24, the rate of duty would be 10%. If simplicitor
hard disk drive is imported, it may be taxable under the
Heading 84.71. However, in a case where essentially a
software is imported which is loaded on a hard disk drive,
it would be computer software material and in that set of
circumstances, it would be taxable under Heading 85.24.
This is also made clear in Chapter Note 6 of Chapter 85 by
providing as under:-
Records, tapes and other media of heading No.85.23 or
85.24 remain classified in those headings, whether or not
they are presented with the apparatus for which they are
intended.
Mr. Swami, learned counsel for the respondent relied
upon the Rules of Interpretation mentioned in the First
Schedule appended to the Customs Tariff Act which lay down
general Rules for the interpretation and classification of
goods for import tariff. Rules 2(b), 3 and 4 read as
under:-
2(b) Any reference in a heading to a material or
substance shall be taken to include a reference to mixtures
or combinations of that material or substance with other
materials or substances. Any reference to goods of a given
material or substance shall be taken to include a reference
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6
to goods consisting wholly or partly of such material or
substance. The classification of goods consisting of more
than one material or substance shall be according to the
principles of rule 3.
3. When by application of rule 2(b) or for any other
reason, goods are, prima facie, classifiable under two or
more headings, classification shall be effected as follows:
(a) The heading which provides the most specific
description shall be preferred to headings providing a more
general description. However, when two or more headings
each refer to part only of the materials or substances
contained in mixed or composite goods or to part only of the
items in a set put up for retail sale, those headings are to
be regarded as equally specific in relation to those goods,
even if one of them gives a more complete or precise
description of the goods.
(b) Mixtures, composite goods consisting of different
materials or made up of different components, and goods put
up in sets for retail sale, which cannot be classified by
reference to (a), shall be classified as if they consisted
of the material or component which gives them their
essential character, insofar as this criterion is
applicable.
(c ) When goods cannot be classified by reference to
(a) or (b), they shall be classified under the heading which
occurs last in numerical order among those which equally
merit consideration.
4. Goods which cannot be classified in accordance
with the above rules shall be classified under the heading
appropriate to the goods to which they are most akin.
Testing it from the aforesaid Rules of Interpretation,
it would be clear that the disk or a floppy on which
computer data is recorded, would be covered by heading
85.24. Rule 3(a), inter-alia, provides that when two or
more headings each refer to part only of the materials or
composite goods, those headings are to be regarded as
equally specific in relation to those goods, even if one of
item gives a more complete or precise description of the
goods. Further, considering imported goods to be a mixture
of two substances namely hard disk drive and software as
per Rule 3(b) they can be classified under the heading which
gives them their essential character. In the present case,
considering its price factor it would be computer software.
The price of the imported consignment was approximately
Rs.68 lakhs. As against this, value of the seven hard disk
drives would be roughly Rs.60000/-that is to say, value of
the computer software is hundred times more than its
containers hard disk. Hence, the essential character of the
imported goods is computer software.
Mr. Swami, learned counsel for the respondent further
referred to Chapter Note 5 of Chapter 84 and submitted that
for the purposes of Heading No.84.71, the expression
automatic data processing machine means automatic data
processing machines or a unit as being a part of a complete
system if it meets the following conditions:
(a) It is of a kind solely or principally used in an
automatic data processing system;
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6
(b) It is connectable to the central processing unit
either directly or through one or more other units; and
(c) It is able to accept or deliver data in a form
(codes or signals) which can be used by the system.
He referred to clauses (b) and (c) and contended that
this hard disk drive can be used either directly or through
one or more other units for processing the data and,
therefore, it would be automatic data processing machine
falling under Heading No.84.71. This submission cannot be
accepted for the consignment in question is essentially a
computer software covered by specific Heading No.85.24 which
is for levying duty on records, tapes and other recorded
media for sound or other similarly recorded phenomena. As
mentioned in the Notification dated 16th March, 1995,
computer software is covered by Heading No.85.24. The said
notification also covers computer software imported in the
form of printed books, pictures, manuscripts and typed
scripts covered by Chapter 49. Computer software can be
brought either on a floppy or magnetic tape or on a hard
disk or in a printed form and hence, what is imported is
software on a container which is a hard disk drive. The
value of the containers (hard disks) approximately in the
present case is Rs.60000/- or Rs.65000/-. As against this,
the cost of the computer software is roughly Rs.67 lakhs.
Therefore, it can be said that what is imported by the
appellant is essentially a computer software.
In this view of the matter, the order dated 25th
March, 1996 of the Commissioner of Customs and the order
dated 14th May, 1999 of the Tribunal confirming the said
order in Appeal No.161/96-B2 are quashed and set aside. It
is held that computer software imported by the appellant on
a hard disk drive is assessable at the rate of 10% as per
Heading 85.24 with the Exemption Notification stated above
because what was imported by the appellant was software on a
hard disk and it was not hard disk in the garb of software.
In the result, the appeal is allowed accordingly with
no order as to costs.