IMPORTANT POINT
A programmed or designed EPROM is an integral part of STD-PCO unit, therefore, a manufacturer of STD-PCO unit is not entitled to the benefit of exemption notification under notification No. 84/89 CE dated 1.3.1989.

Headnote:(i) Central Excise Tariff Act, 1985—CH. 85.17, CH. 85.24, CH 85.42—Manufacture of STD-PCO unit, a computer based equipment—Classification—Unit was used to identify the time of the day and day of the week, the time when telephone calls were made; to recognize whether the phone was on-hook or off-hook and to record the duration of a call—Appellant classified programmed memory chips, EPROM, under CH 85.24 and claimed exemption as a recorded medium under notification No. 84/89 CE dated 1-3-1989—Appellant classified STD-PCO unit as an equipment under CH 85.17—Show cause notice stated that programmed memory chip was an integral part of STD-PCO unit, without which the unit was non-functional—Whether appellant was rightly held not entitled to claim benefit of exemption notification—(Yes)—Levy is on the unit, not on the programmed EPROM which is an integral part of the system—Programme embedded is not an easily removable—It will not fall in the category of recorded media under tariff item 85.24 and remains an IC under tariff item 84.42.
       Held : In the entire controversy before us, the appellant has tried to compare a floppy containing a programme with an IC in which the programme is electronically embodied. The functions which an IC performs, as enumerated above, are intelligent functions which are not performed by a floppy. A floppy cannot be used as a timer or amplifier. An IC is more than a storage device. (Para 18)
       “EPROM” stands for Erasable Programmable ROM. The word `ROM’ is an acronym for `Read Only Memory’, a type of unchangeable memory residing in chips or the ICs on the mother board. ROM contains bare minimum of instructions needed to start a computer. It is used for critical functions. It is similar to municipal utilities such as gas and electricity. If a different configuration is required, one has to move to a different computer. ROM is sometimes wrongly compared to a storage media such as CD-ROMs. (Para 19)
       EPROM cannot be compared to a floppy. As stated above, floppy is a dumb box. That is not the case with EPROM. EPROM is basically an integrated circuit or a chip. We agree with the department. EPROM is, therefore, classifiable as an integrated circuit under tariff item 85.42. (Para 21)
       An embedded system is a programmed hardware device. Software written for embedded systems, especially those without a disk drive is called Firmware, the name for software embedded in hardware devices e.g. in ROM IC chips. Many embedded systems avoid mechanical moving parts, such as, disk drives, switches or buttons because they are unreliable as compared to ROM or Fast Memory IC chips. It is kept outside the reach of humans. In embedded systems, the software resides in ROM IC chips. Embedded systems are combination of hardware and software like ATMs, Cellular telephones etc. In embedded systems, the software resides in ROM IC Chip (See: www.answers.com). These chips are more than mere carriers. Example of embedded system: microwave ovens, cell phones, calculators etc. (Para 24)
       Even under HSN, entry 84.71 covers Data Processors, however, under the explanatory note it is clarified, at page 1403, that devices working in conjunction with such processors have to be classified not under 84.71 but with reference to their specific function. Therefore, devices like ICs, as in the present case, which help the processor to function can only fall under 85.42 (in cases where such ICs are the final products) and where they form an integral part of a machine like STD-PCO unit, they have to be classified under heading 85.17, hence, it will not fall under heading 85.24 as claimed by the appellant (See: page 1408 of HSN—2nd Edition, 1996). As stated above, a disk with a programme is a software. However, a ROM with a particular circuit in which a programme is structured remains an IC. (Para 26)
       Before concluding, we reiterate that in the present case, the levy is on a computer based embedded system. The software embedded in the programmed EPROM, which is an IC chip, constitutes the “brain” of the system. The programmed EPROM is an integral part of the system. The levy is on the unit. The levy is not on the programmed EPROM. The programme embedded is not an easily removable. Hence, it will not fall in the category of recorded media under tariff item 85.24 and remains an IC under tariff item 85.42. (Para 30)
       (ii) WORDS AND PHRASES—Words ‘EPROM’ and ‘ROM’—Meanings—‘EPROM’ stands for Erasable Programmable ROM—Word ‘ROM’ is an acronym for ‘Read Only Memory’, a type of unchangeable memory residing in chips or the ICs on the mother board. (Para 19)
       (iii) WORDS AND PHRASES—Word ‘Programmable’ in Computer technology—Means that EPROM can be programmed with data, program or both. (Para 19)

JUDGMENT

Kapadia, J.—The following two questions arise for determination in this civil appeal filed by the assessee under Section 35-L(b) of the Central Excise Act, 1944 (for short ‘the Act’):

(1) Whether a programmed or designed EPROM is an integral part of STD-PCO Unit; and

(2) Whether the appellant herein was entitled to exemption under notification No.84/89 CE dated 1.3.1989 which required the appellant to show that the programmed EPROM was a “recorded medium” under chapter heading 85.24 read with note 6 to Chapter 85 of the 1985 Tariff Act.

2. During the period October 1992 to March 1993 appellant was the manufacturer of STD-PCO unit. The said unit was a computer based equipment. The said unit was used to identify the time of the day and day of the week, the time when the telephone calls were made; to recognize whether the phone was on-hook or off-hook and to record the duration of a call.

3. The appellant filed classification list dated 29-5-1992 under which the appellant classified the above unit as an equipment under CH 85.17. In the said classification list, the appellant classified programmed memory chips, EPROM, under CH 85.24 and claimed exemption as a recorded medium under notification No.84/89 CE dated 1-3-1989.

4. Vide show-cause notice (for short ‘SCN’) dated 2-4-1993 the Assistant Collector (AC) stated that the programmed memory chip was an integral part of STD-PCO unit, without which the unit was non-functional. According to the SCN, the programme recorded in the memory chip, EPROM, could be used with STD-PCO unit only in a particular telecom region and, therefore, the said chip was an essential component of the STD-PCO unit. According to the SCN, the appellant was not entitled to the benefit of exemption as the said chip was not covered under CH 85.24 as claimed by the appellant. According to the department, the said chip was classifiable as an integral part of STD-PCO unit under CH 85.17. Accordingly, the department called upon the appellant to show cause as to why duty amounting to Rs. 21.50 lacs for the above period should not be recovered under section 11A of the Act.

5. At this stage, we may clarify that on the question of extended limitation the appellant has succeeded and since the department has not come in appeal, we are not required to examine that aspect of the matter.

6. By reply dated 24-5-1993, the appellant submitted that it had imported EPROMs from abroad or it had obtained EPROMs from the open market. According to the appellant, empty EPROMs were subjected to programming by the appellant who had designed a programme which was loaded into the blank EPROMs. The appellant submitted that a computer software is a designed programme recorded on a media commonly called as a “recorded medium”. Such recorded medium can be played in a computer or in any other system based on microprocessors. The appellant conceded that STD-PCO unit was classifiable as an equipment under CH 85.17, however, it contended that the programmed EPROM was a “recorded medium” classifiable under sub-heading 8524.90. According to the appellant, a programmed EPROM was classifiable only under sub-heading 8524.90 in view of note 6 to chapter 85, notwithstanding the fact that such recorded media was equipped with or without an apparatus. It claimed exemption under notification No.84/89-CE dated 1-3-1989, on the ground that the said exemption notification gave exemption to softwares falling under heading 85.24 from whole of duty of excise. In the circumstances, the appellant contended that the department was not entitled to include the value of the programmed EPROM in the assessable value of STD-PCO unit and that the unit was classifiable under heading 85.17 whereas the programmed EPROM was classifiable under heading 85.24. The appellant contended, inter alia, that sub-heading 85.24.30 covered recorded magnetic disks, such as, a floppy containing a computer programme whereas all other types of recorded media stood covered under sub-heading 8

Click Here to Read the rest of this document

2006 Supreme(SC) 38

IMPORTANT POINTA programmed or designed EPROM is an integral part of STD-PCO unit, therefore, a manufacturer of STD-PCO unit is not entitled to the benefit of exemption notification under notification No. 84/89 CE dated 1.3.1989.

Cases Referred (3)

IMPORTANT POINT
A programmed or designed EPROM is an integral part of STD-PCO unit, therefore, a manufacturer of STD-PCO unit is not entitled to the benefit of exemption notification under notification No. 84/89 CE dated 1.3.1989.