Holding

No central excise duty is payable on operational software loaded in a computer because the software remains a separate, exempt commodity under heading 85.24 and its value cannot be included in the assessable value of the computer.

Summary

The Commissioner of Central Excise (Pondicherry) challenged Acer India Ltd.'s practice of deducting the value of operational software from the assessable value of computers for central excise purposes. The Revenue argued that the software, being loaded in the hardware, formed part of the computer and its value should be included in the transaction value, attracting excise duty. Acer contended that software and hardware are distinct commodities, classified under different tariff headings (84.71 for computers, 85.24 for software), and that software enjoys a statutory exemption from excise. The Court examined the charging provision (Sec. 3) and the definition of "transaction value" (Sec. 4(3)(d)) of the Central Excise Act, 1944, and the relevant Chapter Notes of the Central Excise Tariff Act, 1985. It held that excise duty is levied only on excisable goods and that a software, even when pre‑loaded, retains its character as a separate good and is exempt under heading 85.24; therefore its value cannot be added to the computer's assessable value. The appeal of the Revenue was dismissed.

Issues considered

The applicability of central excise duty on operational software loaded in computers
Whether the value of pre‑loaded software can be included in the transaction value of a computer under Sec. 4(3)(d) of the Central Excise Act
The correct classification of computers and software under the Central Excise Tariff Act, 1985
The interpretation of the charging provision (Sec. 3) versus the valuation provision (Sec. 4) in a taxing statute

Legislation cited

Central Excise Act, 1944s. 2(d), s. 3, s. 4(1), s. 4(3)(d)
Central Excise Tariff Act, 1985s. Chapter Note 5(a), s. Chapter Note 6, s. Heading 84.71, s. Heading 85.24
Constitution of Indias. Article 265, s. Entry 84, List I, Seventh Schedule

Subjects

central excise dutysoftware exemptionhardware‑software classificationtransaction valuetax statute interpretationCentral Excise Tariff ActChapter Noteoperational softwarevaluation of goodscharging provision

Judgment

A COMMISSIONER OF CENTRAL EXCISE, PONDICHERRY
v.
MIS. ACER INDIA LTD.

SEPTEMBER 24, 2004

B [N. SANTOSH HEGDE, S.B. SINHA AND
TARUN CHATTERJEE, JJ.]

Central Excise Act, 1944-Sections 3 and 4:

C Central Excise Tariff Act, 1985-Heading 84. 71 and 85.24:

Excise duty-Levy of-On operational Software loaded in hardware-
Software exempted from duty-Held: Duty is not leviable on such software
while it is not provided under Tariff Act-Computer and Software both are
distinct and separate both·as a matter of comm~rcial parlance as also under
D the statute-Despite being loaded in the hardwarP. the software does not lose
its character as is still marketable as a separate commodity.

Interpretation of Taxing Statute:

E Rule ~f Construction of Charging Section-Held: While interpreting
taxing statute natural meaning of the language of the provision is to be seen
and not the implication~uch statute demands strict construction-It should
never be stretched against a tax payer-Principle ofpurposive construction
to be adhered to when literal meaning result in absurdity-The interpretation
should be user friendly.
F
Interpretation of valuation or classification ·contained in Tariff Act-
Held: Meaning of an enlly should be explained in view of legal text in the
Chapter Note-In the absence ofits applicability general rules ofinterpretation
should be adhered to.
G Maxim:

"quando aliquid prohibetur fieri, prohibitur ex directo et per obliquim "-
Meaning of

H Words and Phrases:
676
C.C.E. v. ACER INDIA LTD. 677

"Firmware" and "Operating System"-Meaning of A
Respondent is a Company manufacturing computers, and
accessories falling under different headings of Chapter 84 of Schedule
appended to Central Excise Tariff Act, 1985. Upon a licence, it also used
to load operational softwares. It used to deduct the value of the B
operational software from the total value of the Computer, while
calculating the amount of central excise payable thereupon. Appellant-
Revenue issued show cause notices to it demanding a differential duty
on the premise that duty is payable on the entire value of the computer
including the value of operational softwares. Revenue thereafter directed
payment of differential duty. Customs, Excise and Service Tax Appellate C
Tribunal allowed the appeal of the respondent relying on decision in PSI
Data System Ltd. v. Collector of Central Excise, (1997] 2 SCC 78 holding
that no duty is payable on a software loaded in a hardware. In appeal,
Division Bench of this Court doubted the correctness of the judgment
opining that as a computer would not function without an operational D
software, the latter would form part of the former and thus excise duty
would be payable on the total value thereof. Hence the matter was
referred to the larger Bench.

Appellant-Revenue contended that excise duty is leviable on the
total value of the computer as operational software implanted in a E
hardware becomes a part thereof; that the definition of "Transaction
Value" as contained in Section 4(3)(d) of Central Excise Act, 1944 wvuld
include the value of all manufactured goods charged as price including
any amount that the buyer is liable to pay by reason of or in connection
with the sale together therewith any other amount which adds to the
value thereof.
F

Respondent-assessee contended that operational softwares which
are implanted on specific orders would retain the characteristics of
software and would not lose its identity only because information
contained therein together with the right to use the same is implanted G
in the computer itself; that· hardwares and softwares are classified
separately under different h~adings viz. 84. 71 and 85.24 of the Customs
Tariff Act; that in respect of computers rate of duty is 16% and for
softwares it is nil and thus assessee was entitled to claim deduction of
the value thereof from the total value of the computer; that as both the
H
678 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A hardware and software are assessed separately, in view of Chapter Note
6 of Chapter 85, which contains a legal text, the valuation of a computer
and software cannot be clubbed together for the purpose of assessment.

Dismissing the appeals, the Court

B HELD: I.I. A duty of excise primarily is levied upon a manufacturer
or producer in respect of the commodity manufactured or produced. It is
a tax upon goods and not upon sales or the proceeds of sale of goods. In
terms of Entry 84, List I of the Seventh Schedule of Constitution of India,
the taxable event in respect of the duty of excise is the manufa~ture or
C production. No tax in terms of Article 265 of the Constitution oflndia can
be imposed, levied or collected except by the authority of law.(689-G-HJ

Cape Brandy Syndicate v. Inland Revenue Commissioners, [1921) 1
KB 64, referred to

D 1.2. Central excise duty cannot be equated with sales tax. They have
different connotatio~s and apply in different situations. Excise duty would
be leviable only on the goods which answer the definition of "excisable
goods" and satisfy the requirement of Section 3 of Excise Act, 1944. A
machinery provision contained in Section 4 and that too the explanation·
contained therein by way of definition of 'transaction value' can neither
E 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. (694-B-D]

1.3. The legal text contained in Chapter 85, as explained in Chapter
F 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.
(704-C, DJ
G
1.4. 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
H Act. Chapter Note 6 of Chapter 85 being the legal text must be taken
C.C.E. v. ACER INDIA LTD. 679

aid of for the purpose of interpretation of the different headings in A '·
preference to the interpretation rules. 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 information contained therein are loaded in the
hardware. (696-E-G) B
1.5. Even without operational softwares a computer can be put to
use although by loading the same its utility is enhanced. Computers
loaded with different operational softwares cater to the specific needs of
the buyer wherefor he is required to place definite orders on. the
manufacturer. An operating software loaded on the hard disc is erasable. C
It, despite being loaded on to the hard disc is usually supplied separately
to the customers. It can be updated keeping in view the development in
the technology and availability thereof in the market without affecting
the data contained. in the hard disc. Even in the case of hard disc crash
the software contained in the CDs is capable of being reloaded on to the D
hard disc and its utility by the users remain the same. An operational
software, therefore, does not form an essential part of the hardware.
(697-F-H; 698-A]

1.6. Computer and operative softwares are different marketable
commodities. They are available in the market separately. They are E
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. Both
must be subject to corresponding rates of duties separately. The
F
information 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 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 G
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
differ~nce as regard nature and character of the 'computer'. Even if the
appellants in terms of the provisions of a licence were obliged to preload H
680 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A 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 ~xcise duty along with
computer while it is not under the Tariff Act. (703-B-G)

1. 7. So far as the valuation of goods in terms of 'transaction value'
B thereof, as defined in Section 4(3)(d) if 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
C 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. [704-A-C]

PSI Data Systems Ltd v. Collector of Central Excise, (1997) 89 ELT
D 3 SC (1997) 2 SCC 78; 0.R.G. Systems v. Commissioner of Central Excise,
Vadodara, (1998) 102 ELT 3 SC; HCI, Hewlett Packard Ltd. v. CCF,
Meerut, (2000) 116 ELT 667; Sprint R.P.G. India Ltd. v. Commissioner of
Customs, Delhi, (2000) 116 E.L.T. 268; Sprint R.P.G. India Ltd. v.
Commissioner of Customs-I, Delhi, (2000) 116 ELT 6 SC (2000) 2 SCC
E 486; Shriram Bearings Ltd. v. Collector of Central Excise, Patna, (1997) 91
ELT 255 SC; Photopone Industries Pvt. Ltd. v. CCF, Goa, (1999) 108 ELT
523 and Philips India Ltd. v. Colleqtor of Central Excise, Pune, (1997) 6
sec 31, relied on.
2.1. The one and the only proper test in interpreting a Section in a
F 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 natural meaning fairly and squarely hits. 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. A transaction in a fiscal
G 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". The taxing authorities cannot ignore the legal character of the
transaction and tax it on the basis of what may be called "substance of the
matter". One must find the true nature of the transaction. (690-C-G]
H
C.C.E. v. ACER INDIA LTD. 681

Union of India and Ors. v. Play World Electronics Pvt. Ltd and Anr. A
[1989) 3 sec 181, referred to.

2.2. Imposition of tax is a constitutional function. A taxing or a
fiscal statute demands strict construction. It must never be stretched
against a tax payer. So long as natural meaning for the charging Section B
is adhered to and when the law is certain, then a strange meaning thereto
should not be given. When the statutory provision is reasonably akin to
only one meaning, the principle of strict construction may not be adhered
to. A provision enacted for the benefit of an assessee should be so
construed which enables the assessee to get its benefit. However, principle
of purposive construction will be adhered to when a literal meaning may C
result in absurdity. [690-D, E; 692-C; 692-F, G) .

Mathuram Agrawal v. State of Madhya Pradesh, [1999) 8 SCC 667;
Indian Banks' Association, Bombay and Ors. v. Mis. Devkala Consultancy
Services and Ors., JT (2004) 4 SC 587; Hansraj and Sons v. State of D
Jammu and Kashmir and Ors., [2002) 6 SCC 227 and Mysore Minerals
Ltd MG. Road, Bangalore v. The Commissioner of Income Tax, Karnataka
Bangalore, [1999) 7 SCC 106, referred to.

-
W.M Cory and Sons Ltd. v. Inland Revenue Commissioners, [1965) 1
All ER 917, referred to. E
Francis Bennion 's Statutory Interpretation, Fourth Edition, p. 828,
referred to.

2.3. The statute, however, should not be interpreted in such a
manner which may lead to wide scale evasion of duty. The Court should F
adopt an interpretation which would be user friendly. If any other
interpretation is made, the same would encourage the manufacturers to
sell the operational computer separately as a result of which the buyers
may have to incur extra charges. The customers, thus, may not be able
to get the benefit of the information contained in the operational computer
loaded in the factory. Furthermore, it may encourage in loading of G
pirated softwares in the computer. [691-C, DJ

2.4. Artificial rules to give the tax payer the 'breaks' are not out
of place for taxation is now not an "impertinent intrusion into sacred
rights of private property" (692-D) H
682 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.l,{.

A Oxford University Press v. Commissioner of Income-tax, (2001) 3 SCC
359, referred to.

2.5. For the purpose of interpretation of a taxing statute, the fiscal
philosophy, a feel of which is necessary to gather the intent and effect
of its different clauses should be applied. A consideration of public policy
B may also be relevant in interpreting and applying a taxing Act.
[692-E, FJ

Maddi Venkataraman and Co. (P) Ltd. v. Commissioner of Income
Tax, [1998) 2 SCC 95, referred to.
c 2.6. 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. While construing
a taxing statute, the existing market practice may also be taken into
D consideration. [691-A, BJ

CIVIL APPELLATE JURISDICTION Civil Appeal Nos. 10185-
10186 of 2003.

From the Judgment and Order dated 29.8.2003 of the Customs, Excise
E and Service Tax Appellate Tribunal South Zonal Bench, Bangalore in A.No.
E/Misc/131/2003 and E/St/272/2003 in E/410/2003, E/St/810-8 I 1/2002 in E/
1307, 1308/2002.

WITH

F C.A. Nos. 1148-1149 of 2004 & I.A. Nos. 3-4/2004.

A. Subba Rao and B.K. Krishna Prasad for the Appellant.

V. Lakshmikumaran, Alok Yadav and Rajesh Kumar for the Respondents.

G Dushyants, Dave, K.T.A., Harris Beeran, Tarak Damani and Vasudevan
Raghavan for Intervenor.

The Judgment of the Court was delivered by.

S.B. SINHA, J. : The Revenue is in appeal before us being aggrieved
H
C.C.E. v. ACER INDIA LTD. [SINHA, J.] 683

' ' by and dissatisfied with the judgment and order dated 29.08.2003 passed by A .
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. B
FACTS:

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. c
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 D
softwares.

·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.
E

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 tenns of the
proviso appended to Section l lA (1) of the Central Excise Act, 1944. The F
respondent pursuant to the said notices filed their show causes.

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:
G
"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 confinned.
H
684 SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.

A ii) That there were justifying grounds and evidences for the invocation
of the proviso to Section I IA (I) ·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
B
terms of Section 4 ofthe 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.

The Respondent preferred an appeal thereagainst before· the Tribunal
C 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. v. Collector a/Central Excise, (1997)
89 ELT 3 (SC) : (1997] 2 sec 78.

A Division Bench of this Court in its order dated 27 .02.2004 doubted
D 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
E 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
F box or the hardware. A computer contains of both hardware and the
operating software. The price of such softwares is thus the amount
which 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."
G
The matter was, thus, referred to a larger Bench.

SUBMISSIONS:

Mr. A. Subba Rao, learned counsel appearing on behalf of the Appellant
H would contend that an operational software implanted in a hardware becomes
C.C.E. v. ACER INDIA LTD. [SINHA, J.] 685

a part thereof and as such central excise duty is Ieviable on the total value A
of the computer. Drawing our attention to the provisions of Section 4 of the
Central Excise Act, 1944 (The Act) and in particular the definition of
"Transaction Value" as contained in Clause (d) of Sub-Section (3) of Section
4 thereof, the learned counsel would submit that the same would include the
value of all manufactured goods charged as price including any amount that B
the buyer is liable to pay by reason of or in connection with the sale together
therewith any other amount which adds to the value thereof. As a software
implanted is a part of the computer, it was urged, excise duty would be
payable on the total value thereof.

Mr. Subba Rao would submit that a bare perusal of the judgment of this C
Court in PSI Data Systems Ltd. (supra) would indicate that therein this Court
was not concerned with any software, which was implanted into a computer
and was only concerned with a software which is a tangible one being of the
nature of discs, floppies and CD-ROMs. It was also not concerned with
intellectual property also called software, that is recorded or stored thereon.
D
A software which is implanted with a licence to right to use the
informations contained therein, Mr. Subba Rao would argue, should not be
compared with a disc, floppy or CD-ROM which is available in the market

- separately.

Drawing our attention to the findings of fact arrived at by the
Commissioner of Central Excise, the learned Counsel would submit that not
only the operational softwares like Windows 98 OS or W2K are implanted
E

in the computers by the Respondent but as would appear from the price list
furnished by it the configurations of different models of computers including
operational software are also quoted therein. Furthermore, the Respondent F
was also being under an obligation to preload a software on the computer
before clearing the same from the factory, the central excise duty would be
payable on the entire value thereof.

Mr. V. Lakshmikumaran, learned counsel appearing on behalf of the
Respondent, on the other hand, would submit that a computer which is a G
hardware is marketable as such containing a firn1 or etched software being
implanted therein, the valuation thereof also is taken into consideration for
the purpose of excise duty but the operational softwares which are implanted
on specific orders placed by the customers would retain the characteristics
of software and would not lose its identity only because the informations H
686 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A contained therein together with the right to use the same is implanted in the
computer itself. A computer may have different systems, Mr. Lakshmjkumaran
would contend, containing parallel or sequential process which would make
a computer system complete and the same should not be confused with a mere
hardware.

B
The learned counsel would argue that the hardwares and softwares are
classified differently under different Headings, viz., 84.71 and 85.24 of the
Customs Tariff Act. Whereas in respect of the computers the rate of duty is
16%, for softwares the same is nil and, thus, the assessee was entitled to claim
deduction of the value thereof from the total value of the computer. It was
c argued that as both the hardware and the software are assessed separately,
keeping in view Chapter Note 6 of Chapter 85, which contains a legal text,
the valuation of a computer and software cannot be clubbed together for the .
I

purpose of assessment of excise duty. --
Mr. Dushyant Dave, learned senior counsel appearing on behalf of the
D
intervenor, supplemented the submissions ofMr. Lakshmikumaran conte9ding
that the value of the goods which would be subject matter of central excise
cannot be enhanced by implanting a software as it retains its own character
irrespective of the fact that the informations contained therein are loaded in
the computer itself.
E
The learned counsel would argue that the value of the goods may be
enhanced in terms of the definition of the "Transaction Value" but the
explanation contained therein must be read in the context of the main
provision, viz., Section 4(1) and not de'hors the same.
F
RELEVANT STATUTORY PROVISIONS:

Central Excise Act, 1994:

"2(d) "excisable goods" means goods specified in the First Schedule
G and the Second Schedule to the Central Excise Tariff Act, 1985 (5
of 1986) as being subject to a duty of excise and includes salt;

3. Duties specified in the Schedule to the 'central Excise Tariff Act,
1985 to be levied (I) There shall be levied and collected in such
manner as may be prescribed,-
H
C.C.E. v. ACER INDIA LTD. [SfNHA, J.] 687

(a) a duty of excise, to be called the Central Value Added Tax A
(CENV AT) on all excisable goods which are produced or
manufactured in India as, and at the rates, set forth in the First
Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) :

4 Valuation of excisable goods for purposes of charging of duty of
excise. (1) Where under this Act, the duty of excise is chargeable
B
on any excisable goods with reference to their value, then, on each
removal of the goods, such value shall-

(a) in a case where the goods are sold by the assessee, for delivery
at the time and place of the removal, the assessee and the buyer of C
goods are not related and the price is the sole consideration for the
sale, be the transaction value;

D
(3) for the purposes of this section, -

(d) "transaction value" means the price actually paid or payable for
the goods, when sold, and includes in addition to the amount
charged as price, any amount that the buyer is liable to pay to, or E
on behalf of, the assessee, by reason of, or in connection with the
sale, whether payable at the time of the sale or at any other time,
including, but not limited to, any amount charged for, or to make
provision for, advertising or publicity, marketing and selling
organization expenses, storage, outward handling, servicing, warranty, F
commission or any other matter; but does not include the amount
of duty of excise, sales tax and other taxes, if any, actually paid or
actually payable on such goods."

A COMPUTER:
G
Before adverting to consider the rival submissions at the bar, we may
notice the meaning of certain tenns as also the functioning of a computer.

In Newton's Telecom Dictionary, "Application Program" has been .
defined at page 54 as under:
H
688 SUPREME COURT REPORTS [2004) SUPP. 4 S.C.R.

A "A computer software program designed for a specific job, such as
word processing, accounting, spreadsheet, etc."

In the said dictionary, "Firmware" has been defined at pages 281-282
as under:

B "Software kept in semipermanent memory. Firmware is used in
conjunction with hardware and software. It also shares the
characteristics of both. Firmware is usually stored on PROMS
(Programmable Read only Memory) or EPROMs (Electrical
PROMS). Firmware contains software which is so constantly called
c upon by a computer or phone system that it is "burned" into a chip,
thereby becoming firmware. The computer program is written into
the PROM electrically at higher than usual voltage, causing the bits
to "retain" the pattern as it is "burned in". Firmware is nonvolatile.
It will not be "forgotten" when the power is shut off. Handheld
calculators contain firmware with the instructions for doing their
D various mathematical operations. Firmware programs can be altered.
An EPROM is typically erased using intense ultraviolet light."

"Operating system" has been defined at page 500 of the said dictionary
as under:
E "A software program which manages the basic operations of a
computer system. It figures how the computer main memory will
be apportioned, how and in what order it will handle .tasks assigned
to it, how it will manage the flow of information into and out of the
main processor, how it will get material to the printer for printing,
F to the screen for viewing, how it will receive information from the
keyboard, etc. In short, the operating system handles the computer's
basic housekeeping MS-DOS, UNIX, PICK, etc, are operating
systems."

Thus, there are different operating systems.
G
Computers of various models and types with. different configurations
including Servers and Personal Computers are manufactured by the
Respondent. They are classifiable under Chapter Sub-heading 8471.00 of the
.Central Excise Tariff Act, 1985 (Tariff Act) as automatic data processing
H machines.
C.C.E. v. ACER INDIA LTD. [SINHA, J.] 689

In the computers there exists a flash memory chip in the motherboard. A
The software that is essential to the starting of the computer which is the Basic
Input Output Software is etched on to this memory chip. This Basic Input
Output Software which is etched or burnt into the Electrically Erasable
Programmable Read Only Memory (EEPROM) is called firmware. The
firmware provides for interactions with the microprocessor to enable it to B
access the operating software contained in the hard disc.

As is the general practice in the computer industry, the value of the
firmware etched on to the EEPROM is always included in the assessable
value of the computers.
c
A customer may place a specific order upon the manufacturers of
computers for supply of CDs which contain operating softwares like Windows
2000, Windows XP etc. as also the right to use the same under licence. The
said softwares indisputably can be purchased separately and loaded in the
computer by the purchasers themselves. They can be loaded even at the D
premises of the purchasers and by persons other than the manufacturers. The
computers, however, are also loaded with different types of softwares on to
the hard disc along with licence to use, if and when specifically ordered by
the customers. Computers and operational softwares admittedly are available
in the market separately. For the purpose of this case, however, we would
proceed on the premise that all the computers are cleared with the softwares E
loaded onto the hard disks and with the CDs containing the softwares along
with the licence to use.

The invoice-cum-challan issued by the assessee contains the total value
of the computer but therefrom value of the operating softwares is deducted F
for the purpose of computing the central excise duty payable thereupon.

PRINCIPLES OF INTERPRETATION OF ATAXING/FISCAL STATUTE:

A duty of excise primarily is levied upon a manufacti.Jrer or producer
in respect of the commodity manufactured or produced. It is a tax upon goods G
and not upon sales or the proceeds of sale of goods. In terms of Entry 84,
List I of the Seventh Schedule of Constitution of India, the taxable event in
respect of the duty of excise is the manufacture oI"production. No tax in terms
of Article 265 of the Constitution oflndia can be imposed, levied or collected
except by the authority of law. H
690 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A In Cape Brandy Syndicate v. Inland Revenue Commissioners, (1921)
1 KB 64 at p. 71, it is stated:

~' .. .In a taxing Act one has to look merely at what is clearly said.
There is no room for any intendment. There is no equity about a
tax. There is no presumption as to tax. Nothing is to be read in,
B nothing is to be implied. One can only look fairly at the language
used."

[See also State of West Bengal v. Kesoram Industries Ltd and Ors,
(2004) 1 SCALE 425].
c
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. [See St. Aubyn (LM) and Others v. Attorney General (No. 2),
D (1951) 2 All ER 473, p. 485].

Imposition of tax is a constitutional function.

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
E section is adhered to and when the Jaw is certain, then a strange meaning
thereto should not be given. [See WM Cory & Sons Ltd. v. Inland Revenue
Commissioners, (1965) 1 All ER 917].

It is also well-settled rule of construction of a charging section that
F 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
G of the Jaw" or "by inference or by analogy".

The taxing authorities cannot ignore the legal character of the transaction
and tax it on the basis of what may be called 'substance of the matter'. One
must find the true nature of the transaction. [See Union of India and Others
v. Play World Electronics Pvt. Ltd and Another., [1989] 3 SCC 181].
H
C.C.E. v. ACER INDIA LTD. [SINHA, J.] 691

While interpreting valuation or classification contained in the Tariff A
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- B
a-vis Rule I 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.

The statute, however, should not be interpreted in such a manner which C
may lead to wide scale evasion of duty. The Court should adopt an
interpretation which would be user friendly. If any other interpretation is
made, the same would encourage the manufacturers to sell the operational
computer separately as a result of which the buyers may have to incur extra
charges. The customers, thus, may not be able to get the benefit of the D
information contained in the operational computer loaded in the factory.
Furthermore, it may encourage in loading of pirated softwares in the
computer.

In Mathuram Agrawal v. State vf Madhya Pradesh, [1999) 8 SCC 667,
the law is stated in the following terms: E

" ... The intention of the legislature in a taxation statute is :o be
gathered from the language of the provisions particularly where the
language is plain and unambiguous. In a taxing Act it is not possible
to assume any intention or governing purpose of the statute more
F
than what is stated in the plain language. It is not the economic
results sought to be obtained by making the provision which is
relevant in interpreting a fiscal statute. Equally impermissible is an
interpretation which does not follow from the plain, unambiguous
language of the statute. Words cannot be added to or substituted so
as to give a me·aning to the statute which will serve the spirit and G
intention of the legislature. The statute should clearly and
unambiguously convey the three components of the tax law i.e. the
subject of the tax, the person who is liable to pay the tax and the
rate at which the tax is to be paid. Ifthere is any ambiguity regarding
any of these ingredients in a taxation statute then there is no tax in H
692 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A law. Then it is for the legislature to do the needful in the matter. "
(Emphasis Supplied)

[See also Indian Banks' Association, Bombay and Ors. v. Mis. Devkala
Consultancy Services and Ors., JT (2004) 4 SC 587]
B
In Hansraj and Sons v. State of Jammu and Kashmir and Others, AIR
(2002) SC 2692 : [2002] 6 SCC 227 rule of strict construction of a taxing
statute was recommended.

We are also not oblivious of the fact that when the statutory provision
C is reasonably akin to only one meaning, the principle of strict constructions
may not be adhered to.

Artificial rules to give the tax payer the 'breaks' are not out of place
for taxation is now not an 'impertinent intrusion into sacred rights of private
property'. [See Oxford University Press v. Commissioner of Income-tax,
D
[20011 3 sec 359].

Furthennore, for the purpose of interpretation of a taxing statute, the
fiscal philosophy, a feel of which is necessary to gather the intent and effect
of its different clauses should be applied. [See K.P. Verghese v. Income Tax
E Officer, Ernakulam and Another, [1981] 4 SCC 173].

A consideration of public policy may also be relevant in interpreting
and applying a taxing Act. [See Maddi Venkatraman & Co. (P) Ltd v.
Commissioner of Income Tax, [1998] 2 SCC 95].

F A provision enacted for the benefit of !in assessee should be so
construed which enables the assessee to get its benefit. [See Mysore Minerals
Ltd., MG. Road, Bangalore v. The Commissioner ofIncome Tax, Karnataka,
Bangalore, [1999] 7 SCC 106].

However, principle of purposive construction will be adhered to when
G
a literal meaning may result in absurdity.

In Francis Bennion's Statutory Interpretation, Fourth Edition, page 828,
it is stated:

H "Section 310. Purposive construction not excluded for taxing etc.
C.C.E. v. ACER INDIA LTD. [SINHA, J.] 693

Acts: Particular types of Acts (for example taxing Acts) are not A
excluded from strained and purposive construction. The presumption
· as to purposive construction applies to them as to other Acts."

We may also notice that in Francis Bennion's Statutory Interpretation,
Fourth edition at pages 879-880, the maxim 'quando aliquid prohibetur fieri,
prohibitur ex directo et per obliquum' has been quoted which means
B
"Whenever a thing is prohibited, it is prohibited whether done directly or
indirectly."

With the aforementioned principles in mind, answers to the questions
involved in these matters are required to be found out. C
INTERPRETATION OF THE RELEVANT PROVISIONS:

Section 2( d) of Central Excise Act, 1944 defines the "excisable goods"
to mean the goods specified in the First Schedule and the Second Schedule
to the Central Excise Tariff Act, 1985 as being subject to a duty of excise. D
It must, therefore, be 'goods' which would be subject to a duty of excise and
not the 'goods' which would not be.

Section 3 thereof is the charging provision. It not only lays down the
mode and manner for levy and collection of central excise duty but in no
uncertain terms states that a duty of excise shall be levied on all excisable
E
goods which are produced or manufactured in India, as, and at the rate<:, set
forth in the Tariff Act.

Section 4 provides for the manner in which an enquiry is required to
be made for valuation of goods for the purpose of levy of excise duty on F
"goods". In terms of Clause (a) of Sub-section (1) of Section 4 when the duty
of excise is chargeable on the concerned excisable goods with reference to
their value, the same shall be calculated in the manner laid down therein.

It may be true that the definition of "Transaction Value" which is
incorporated in Clause (d) of Sub-section (3) of Section 4 for the purpose G
of said Section states that the price actually paid or payable for the goods,
when sold, would include in addition to the amount charged as price, any
amount that the buyer is liable to pay to, or on behalf of, the assessee, by
reason of, or in connection with the sale. Only because the expressions "by
reason of, or in connection with the sale" have been used in the definition H
694 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A of "Transaction Value", the same by itself would not take away the rigours
of Sub-section (1) of Section 4 as also the requirement of charging section
as contained in Section 3.

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.
B 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
c 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.
D
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 therefor along with a computer is being
sold both in the form of the information loaded in the computer as also in
E 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
F
decision of this Court in Union of India and Others v. Bombay Tyre
International Ltd and Others, [1984] I 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.
G
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
H whatsoever that while computing such costs of manufacturing expenses
C.C.E. v.. ACER INDIA LTD. [SINHA, J.] 695

which would add to the value of the excisable goods (in this case the A
computer) must be taken into consideration but not the value of any other
goods which is not excisable.

CLASSIFICATION :

Automatic data processing machines are classifiable under the sub- B
heading 84.71. Softwares, however, are classifiable under the sub-heading
85.24; the duties payable for are 16% and 'Nil' respectively.

Chapter Note 5(a) of Chapter 84 of the Tariff Act states:

"5. (a) For the purposes of heading No. 84.71, the expression
c
'automatic data processing machines' means :

(i) Digital machines, capable of(l) storing the processing programme
or programmes and at least the data immediately necessary for the
execution of the programme; (2) being freely programmed in D
accordance with the requirements of the user; (3) performing
arithmetical computations specified by the user; and (4) executing,
without human intervention, a processing programme which requires
them to modify their execution by logical decision during the
processing run;"
E
Chapter Note 6 of Chapter 85 states:

"6. Records, tapes and other media of heading No. 85.23 or 85.24
remain classified in those headings, whether or not they are cleared
with the apparatus for which they are intended." F
It is profitable to notice at this juncture the general principles of
interpretation and in particular Rules I and 3 thereof. The interpretative rules,
in our opinion, should be considered keeping in view of the Chapter (s) of
the Tariff Act.
G
Rule I of the Rules for the Interpretation of the First Schedule states
that the titles of Sections and Chapters are provided for ease 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 reference only. However, for legal purposes, the classification H
696 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A is to be determined ac·cording 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
B
as contained in Chapter Notes would be given effect to for the purpose of
classification in preference to the general rules of interpretation.

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
c 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.

Rule 3 pre-supposes three conditions under which goods classifiable
D 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 I does.

In the instant case having regard to the Chapter Note, the legal text
E contained in Rule l will apply and not Rule 3.

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
F 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 ate loaded in the hardware.
G
It is not in dispute that operational softwares are available in the market
separately. They.are separately marketable commodities. The essentiality test
or the functional test cannot be applied for the purpose of levy of central

H
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 -
C.C.E. v. ACER INDIA LTD. [SINHA, J.] 697

reasonably. Computer comes within the definition of excisable goods. So is A
a software. They find place in different classifications. The rate of duty
payable in relation to these two different goods is also different.

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 B
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-headings 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 C
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.
D
ANALYSIS:

While calculating the value of the computer the value of the hard disc,
value of the firmware, the cost of the motherboard as also the costs for
loading operating softwares is included. What is excluded from the total value
of the computer is the value of the operating softwares like Windows 2000, E
Windows XP which are secondary softwares. Indisputably, when an operating
software is loaded in the computer, its utility increases. But does it mean that
it is so essential for running the computer that exclusion thereof would make
a computer dead box? The answer to the said question as would appear from
the discussions made hereinafter must be rendered in the negative. It is not F
disputed before us that even without operational softwares a computer can
be put to use although by loading the same its utility is enhanced. Computers
loaded with different operational softwares cater to the specific needs of the
buyer wherefor he is required to place definite orders on the manufacturer.
It is also not in dispute that an operating software loaded on the hard disc
is erasable. It is also accepted that the operating software despite being loaded G
on to the hard disc is usually supplied separately to the customers. It is also
beyond any controversy that operating software can be updated keeping in
view the development in the technology and availability thereof in the market
without effecting the data contained in the hard disc. Concededly, even in
the case of hard disc crash the software contained in the CDs is capable of H
698 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A being reloaded on to the hard disc and its utility by the users remain the same.
An operational software, therefore, does not form an essential part of the
hardware.

CASE LAWS:

B In PSI Data Systems Ltd. (supra) this Court in paragraph 2 of the
judgment excluded a firm or etched software and not the operational
software. It has been clarified that the softwares with which the Bench was
concerned were tangible softwares of the nature of discs, floppies and CD-
ROMs. It is not in dispute that the operational softwares despite being
c implanted in the computer retain its characteristic of a tangible software of
a CD-ROM and can be marketted separately. This Court also noticed that the
· computers and softwares are classified differently in different chapters being
Chapter Nos. 84 and 85 under the heading 84.71 and heading 85.24
respectively.

D Drawing a distinction between a computer system and a computer, it
was held:

"12. In the first place, the Tribunal confused a computer system with
a computer; what was being charged to excise duty was the
computer."
E
It was furthermore opined:

"13. Secondly, that a computer and its software are distinct and
separate is clear, both as a matter of commercial parlance as also
F upon the material on record. A computer may not be capable of
effective functioning unless loaded with software such as discs,
floppies and CD ROMs, but that is not to say that these are part of
the computer or to hold that, if they are sold along with the
computer, their value must form part of the assessable value of the
computer for the purposes of excise duty. To give an example, a
G cassette recorder will not function unless a cassette is inserted in it;
but the two are well known and recognised to be different and
distinct articles. The value of the cassette, if sold along with the
cassette-recorder, cannot be included in the assessable value of the
cassette recorder. Just so, the value of software, if sold along with
the computer, cannot be included in the assessable value of the
H
C.C.E. v. ACER INDIA LTD. (SINHA, J.] 699

computer for the purposes of excise duty." A
The functional test or the essentiality test, thus, had been given a
complete go by therein and, thus, it is not possible to agree that without an
operating software, the computers would become disfunctional.

The decision in the case of PSI Data Systems Ltd. (supra) has been B
followed by this Court in O.R.G. Systems v. Commissioner a/Central Excise,
Vadodara, (l998) (I02) ELT 3 SC.

In O.R.G. Systems (supra), the principal. issues in controversy were:

"(a) whether the computers manufactured and cleared by the DSI c
and Orbit are liable to be treated as the computers manufactured and
cleared by the appellant and, therefore, liable for excise duty at the
hands of the Appellant; (b) Whether the value of peripheral devices
and/ or computer systems sold by Adprint along with computers are
includible in the assessable value of the Computer; and (c) Whether
D
the amount or value of the service charges recovered by the
Appellant under service contracts can be included in the assessable
value of the computer."

Referring to P.S.I. Data Systems Ltd. (supra) in extenso, this Court held:
.~

E
"7. The above judgment of this Court completely answers the
principal issues in controversy in favour of the appellant. In the case
on hand, it cannot be disputed that the computers manufactured and
supplied by Orbit, DSI or the appellant (from May, 1982 onwards)
were complete computers, which had a Central Processing Unit,
with "etched-in" or "burnt-in" software, a Key Board (input device) F
the monitor (output device) and Disc drives. The computers, as
above, were cleared after complying with all requirements under the
Excise Law and proper duty as computed was paid. The peripheral
devices and other systems software were merely additional devices
meant to increase the memory or storage capacity of the computers
and other facilities. It is also not disputed by the Revenue that the
G
peripheral devices were imported by the appellant and the appellant
had paid countervailing duty on such imported peripherals."

[See also HCL Hewlett Packard Ltd. v. CCE, Meerut, (2000) ll6 ELT
~. H
700 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A We may notice that the Tribunal in Sprint R.P.G. India ltd v.
Commissioner of Customs, Delhi, (2000) 116 E.L.T. 268 (Tribunal) in a
similar situation observed:

'·9. The contention of the appellants is that when the software is
loaded on the hard disk drive, it becomes software and, therefore,
B
is classifiable under Tariff Heading 85.24 which covers records,
tapes an_d other recorded media, sound or other similarly recorded
phenomena, including matrices and masters for the production of
records. Further contention of the appellants is that Note 6 to ....
Chapter 85 provides that the records tapes and other media of
c Heading 85.24 remains classifiable under this heading whether or
not which presented with the apparatus. We find that the appellants
imported hard disk drive loaded with the software. It is not the case
of the appellants that the software was assembled with the disk drive.
In fact, the software was installed on the hard disk drive from the
recorded software media for the purpose of executing commands to
D
the system. In these circumstances, the software becomes an integral
part of the hard disk drive. Therefore, we do not find any force in
the arguments of the appellants that the goods, in question, are, in
fact, software."

E On an appeal preferred therefrom by the assessee, a Division Bench of
this Court in Sprin:f R.P.G. India ltd. v. Commissioner of Customs-I, Delhi:
(2000) 116 E.L.T. 6 SC : [2000] 2 SCC 486, upon taking into consideration
the rules of interpretation mentioned in the First Schedule appended to the
Customs Tariff Act which lay down the general rules for interpretation and
F classification of goods, held:

"11. 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 a/ia, provides
that when two or more headings each refer to part only of the
G materials or composite goods, those headings are to be regarded as
equally specific in relation to those goods, even if one of item (sic
them) 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
H
C.C.E. v. ACER INDIA LTD. [SINHA, J.] 701

character. In the present case, considering its price factor it would A
be computer software. The price of the imported consignment was
approximately Rs. 68 lakhs. As against this, the value of the seven
hard disk drives would be roughly Rs. 60,000 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."
B

While reversing the decision of the Tribunal this Court rejected the
contention of the Revenue that in view of Chapter Note 5 of Chapter 84 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 c
of a c.omplete system if it meets the conditions specified therefor stating:

"13. 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 D
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
E
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 a 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 F
containers (hard disks) approximately in the present case is Rs.
60,000 or Rs. 65,000. 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."

- We may also notice that in Shriram Bearings Ltd v. Collector of
Central Excise, Patna, (1997) 91 ELT 255 SC, this Court while considering
the question as to whether where ball bearings fitted with accessories like
G

snap rings, sleeve lock devices, oil seals etc. would still retain the character
of ball bearings or can be subjected to payment of excise duty under a
different head, held : . H
702 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A "2. The first issue relates to the value for the purpose of excise duty
of ball bearings manufactured by the assessee. It was the case of the
assessee that the ball bearings were complete when they consisted
of the inner ring, the outer ring, the ball or rollers anci the cage. Snap
rings, sleeve lock devices, cup assemblies, oil seals, eccentric
collars, dust shields, etc., were accessories and not necessary for the
B manufacture of the complete ball bearings. The Revenue, however,
argued that the duty liability had to be determined at the time of
clearance and the ball bearings had been actually removed from the
appellant's factory fitted with accessories. Therefore, the composite
value thereof was the excisable value of the ball bearings. The
c Tribunal upheld the contention of the Revenue on the basis that (i)
the entire article was cleared as ball bearings; (ii) in the price list,
invoices and catalogue, 'the assessee had quoted the item as ball
bearings and the price for the entire article was stated; and (iii) no
separate price was quoted for accessories and the ball bearings.

D 3. It is not the case of the Revenue that the snap rings, sleeve lock
devices, etc., are parts of ball bearings. It is the Revenue's case that
these are accessories but they were fitted to the ball bearings when
the ball bearings were removed from the appellant's factory. The
Tariff Entry at the relevant time ( No. 49) read, "Rolling bearings,
E that is to say, ball or roller bearings, all sorts". Clearly, what fell
under this entry were the ball bearings and not what, admittedly, are
the accessories thereof. Accordingly, the conclusion of the Tribunal
on this issue must be set aside."

Once it is held that the computer is complete without the operating
F softwares, the question of adding the cost of software therewith would not
arise since what is under assessment is only the computer. To the same effect
is the judgment in Photopone Industries Pvt. Ltd v. CCF, Goa, (1999)108
ELT 523.

G In Philips India Ltd v. Collector ofCentral Excise, Pune, [1997] 6 SCC
31, this Court upon noticing the terms and conditions between the manufacturer
and their dealers stating the same to be one as between principal and principal
observed that making a deduction on this account was uncalled for as the
advertisement which the dealer was required to make at its own cost benefited
in equal degree the Appellant and the dealer. Similarly, with regard to after-
H
C.C.E. v. ACER INDIA LTD. (SINHA, J.] 703

sales service, it was held that the same benefited not only the manufacturer A
but also the dealer. It was observed:

"7. We think that in adjudicating matters such as this, the Excise
authorities would do well to keep in mind legitimate business
considerations."
B
CONCLUSION:

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 C
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 D
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, E
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 ofthe fact as to whether they are loaded
in the computer or not. The fact that the manufacturers put different prices F
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 G
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 H
704 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A 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
B 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 exci:::.able 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
c 85, 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 ariy 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
D to levy a tax indirectly. In that view of the matter the decision in PSI Data
Systems (supta) must be held to have corr~ctly been rendered.

·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 tangi_ble personal property or not or whether preparation
E of such software would amount to manufacture under different statutes.

For the reasons aforementioned, we do not find any merit in the appeals
of the Revenue which are dismissed accordingly. However, interlocutory
applications are allowed~ No Costs.
F K.K.T. Appeals dismissed.