IMPORTANT POINT
Once it is held that the computer is complete without the operating softwares, the question of adding the cost of software therewith would not arise since what is under assessment is only the computer.

Headnote:(i) Central Excise Tariff Act, 1985-Chapter 84-Central Excise Act, 1944 -Sections 2(d), 3, 11A(1) and 4-Computers-Valuation for purposes of charging of duty of excise-Levy of excise duty on entire value of computer including value of operational softwares -Commissioner of Central Excise held that loading of operational software in the factory would come within the mischief of transaction value of the computer-Respondent company manufactures computers, peripherals, servers, note books and accessories falling under different headings-Upon a licence obtained by WIPRO, respondent, on orders received from customers load operational softwares-While calculating the amount of central excise payable thereupon, it would deduct the value of operational softwares from total value of computer supplied to customers-Revenue s case that excise duty is payable on entire value of computer including value of operational softwares-Show cause notice demanding differential duty-Validity challenged-Tribunal held that no excise duty is payable on a software loaded in a hardware-Whether order of Tribunal is sustainable-(Yes)-Computers and softwares are different and distinct marketable commodities.
       Held : 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. 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 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. (Paras 78 and 79)
       (ii) INTERPRETATION OF STATUTES-Strict Construction-Taxing or fiscal statute-Natural meaning for the charging section is adhered to-Existing market practice may also be taken into consideration.
       Held : It is also well-known that the one and the only proper test in interpreting a section in a taxing statute would be that the question is not at what transaction the section is according to some alleged general purpose aimed, but what transaction its language according to its natural meaning fairly and squarely hits. (Para 28)
       A taxing or a fiscal statute demands strict construction. It must never be stretched against a tax payer. So long natural meaning for the charging section is adhered to and when the law is certain, then a strange meaning thereto should not be given. (Para 30)
       It is also well-settled rule of construction of a charging section that before taxing a person it must be shown that he falls within the ambit thereof by clear words used as no one can be taxed by implication. It is further well-settled that a transaction in a fiscal legislation cannot be taxed only on any doctrine of "the substance of the matter" as distinguished from its legal signification, for a subject is not liable to tax on supposed "spirit of the law" or "by inference or by analogy". (Paras 31 and 32)
       While interpreting valuation or classification contained in the Tariff Act, one cannot lose sight of the legal text contained in the Chapter Note explaining the meaning of the entry and in absence of its applicability thereto the general rules of interpretation. The entries in the instant case are covered by the Chapter Note 6 vis-a-vis Rule 1 of the general rules of interpretation and Rule 3 thereof. While construing a taxing statute, the existing market practice may also be taken into consideration. (Paras 34 to 36)

JUDGMENT

S.B. Sinha, J.-The Revenue is in appeal before us being aggrieved by and dissatisfied with the judgment and order dated 29.08.2003 passed by the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Bangalore whereby and whereunder the appeal filed by the Respondent herein from an order passed by the Commissioner of Central Excise, Pondicherry dated 27.1.2003 was allowed holding that no central excise duty is payable on a software loaded in a hardware, i.e., computer.

FACTS :

2. 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 penalty holding:

"i) That 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..."

6. 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 thereof.

7. The Respondent preferred an appeal thereagainst 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].

8. A Division Bench of this Court in its order dated 27.02.2004 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 Bench observed:

"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

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2004 Supreme(SC) 1165

IMPORTANT POINTOnce it is held that the computer is complete without the operating softwares, the question of adding the cost of software therewith would not arise since what is under assessment is only the computer.

Cases Referred (18)

IMPORTANT POINT
Once it is held that the computer is complete without the operating softwares, the question of adding the cost of software therewith would not arise since what is under assessment is only the computer.