Holding

Peripheral devices, systems software and service charges are not part of the assessable value of a computer, and therefore the computers are not liable to excise duty in the hands of the appellant.

Summary

O.R.G. Systems (appellant) supplied raw materials, specifications and designs to other firms which manufactured complete computers with etched‑in software and sold them to O.R.G. Systems. The computers, along with imported peripheral devices and systems software, were cleared by the manufacturers after payment of excise duty and later marketed by a dummy unit of O.R.G. Systems. The Revenue argued that the value of the peripherals, software and service charges should be included in the assessable value of the computers under Sections 3 and 4 of the Central Excises and Salt Act, 1944 and Tariff Item 33‑DD, and levied duty, demand and penalty. The Tribunal upheld the Revenue, but the Supreme Court, relying on PSI Data Systems Ltd. v. Collector of Central Excise, held that peripherals, systems software and service charges are not part of the assessable value of a computer; consequently the computers are not liable for excise duty in the hands of the appellant. The appeal was allowed and the demand and penalty were set aside.

Issues considered

Whether computers manufactured by third parties on the appellant's specifications are deemed to be manufactured by the appellant and liable to excise duty.
Whether the value of peripheral devices and systems software supplied with the computers is includible in the assessable value of the computers.
Whether service charges recovered under service contracts can be included in the assessable value of the computers.
Whether the penalty imposed by the Revenue is sustainable.

Legislation cited

Central Excises and Salt Act, 1944s. 3, s. 4

Subjects

excise dutyassessable valuecomputersperipheral devicessystems softwareservice chargesdummy unitmanufacturingCentral Excise ActPSI Data Systems

Judgment

A O.R.G. SYSTEMS BARODA
v.
COLLECTOR OF CENTRAL EXCISE, VADODRA

JULY 21, 1998

B [SUJATA V. MANOHARAND K. VENKATASWAMI, JJ.]

Excise Law: ..
~

Central Excises and Salt Act, 1944 : Tariff Item 33-DD.
c Excise duty-Companies- Peripheral and Systems software-Value
of-lncludibility-Assessee got computers manufactured by other firms by
supplying raw materials as well as specifications and designs-These firms
manufactured and supplied to the assessee complete computers which had
Central Processing unit with "etched-in" or "burnt-in" software, keyboard
D (input device), monitor (output device) and disc drives-The said firms
cleared the computers in accordance with Excise law after paying proper
excise duty-Such computers along with peripheral devices and systems, r
which were imported by assessee after paying countervailing duty, were
marketed by a dummy unit of the assessee- Held: Under these circumstances,
E such computers not liable for duty in the hands of the assessee-Further, the
value of the peripherals and value of the service charges recovered by the
assessee under service contracts, also not includible in the assessable value
of computers.

·The appellant-assessee got computers manufactured by other firms by
F supplying raw materials as well as specification and designs. Those firms
manufactured and supplied to the assessee complete computers which had a
Central Processing Unit with "etched-in" or "burnt-in" software, a keyboard
(input device), monitor (output device) and disc drives. The said firms
cleared the computers in accordance with the Excise law after paying proper
G duty. These computers alengwith peripheral devices and systems software,
which were imported by the appellant after paying countervailing duty, were
marketed by a dummy unit of the appellant.

The excise authorities held that the value of the peripheral devices,
systems software and the service charges recovered by the appellant under
H service contracts was includible in the assessable value of the computers
820
0.R.G. SYSTEMS v. C.C.E. [K. VENKATASWAMI, J.] 821
under Sections 3 and 4 of the Central Excises and Salt Act, 1944 and Tariff A
Item 33-DD. The Customs, Excise and Gold (Control) Appellate Tribunal
upheld the view of the excise authorities. Hence this appeal.

Allowing the appeal, the Court
HELD : 1. In the light of the ratio laid down by this Court in PSI Data B
Systems' case the' value of the peripheral devices and systems software
cannot be included in the assessable value of the computers. Hence, the
computers are not liable for excise duty in the hands of the assessee.
Likewise the value of the service charges also cannot be included.
(825-G]
PSI Data Systems Ltd, v. CCE, (1997) ELT 3 SC, relied on.
c
State of UP v. Kores (India) Ltd., (19771 1 SCR 837 ~nd State of
Mysore v. Kores, (India) Ltd, cited.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6060-6061 D
of 1994.

From the Judgment and Order dated 5.7.94 & 24.1.89 of the Central
Excise & Gold (Control) Appellate Tribunal, New Delhi in F.O. No. 168/
94-A in A. NO. E/2188-85-A in Order No. 8 of 1989-A.

S. Ganesh, Mrs. Nisha Bagachi, Rajan Narian and Kamal Mehta for
E
M(s. J.B. Datachanji and Co., for the Appellant.

N.K. Rajpai and VJ. Francis for V.K. Verma for the Respondent.

The Judgment of the Court was delivered by F
K. VENKAT ASWAMI, J. These two appeals arise out of a common
order dated 5.7.94 of the Customs Excise & Gold (Control) Appellate Tribunal,
New Delhi (hereinafter called "the Tribunal"). The issues that arise out of the
order of the Tribunal under appeal are no longer .res integra. The decision
of this Court in PSI Data Systems Ltd. v. Collector of Central Excise, (1997) G
89 E.L. T. 3 S.C. settles the controversial issues raised in these appeals.

"'-. Briefly stated the facts are the following :-

The appellant is engaged in the manufacture of Computers falling under
Tariff Item 33-DD from May, 1982 when they got the necessary licence. Prior H
822 SUPREME COURT REPORTS [1998] 3 S.C.R.

.A to May, 1982 the appellant got the Computers m~ufactured by {a) Mis Digital
·c;
Systems International (for short 'OSI') and (b) Mis Orbit Electronics (for short
'Orbit') by supplying raw materials and also by supplying specifications and
designs. The Computers so manufactured by the appellant, as stated above,
as well as those manufactured by the appellant after May, 1982 were marketed
by Mis Adprint Services Limited, Baroda (for short 'Adprint'). At this stage,
B it is necessary to make it clear that the Revenue seriously claimed all through
that OSI and Orbit were the dummy units of the appellant. The Tribunal, as
final fact finding authority, has held that they were not dummy units. However,
the contention of the appellant that Adprint is an independent concern, was
not accepted by the Tribunal and the Tribunal has given a clear finding that
C Adprint is a dummy unit of the appellant. We proceed on the basis of these
findings given by the Tribunal as they are binding on the parties.

The principal issues in controversy are: (a) Whether the Computers
manufactured and cleared by the OSI and Orbit are liable to be treated as the
Computers manufactured and cleared by the appellant and, therefore, liable
D 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 and includible in the assessable value of the Computer; and (c)
Whether the amount or value of the service charges recovered by the appellant
under service contracts can be included in the assessable value of the
E Computer. The other subsidiary issues are: {I) in the event of this Court
coming to the conclusion that the peripheral devices and the amount of
s.:rvice charges are includible in the assessable value of the Computer, then
what is the correct amount that would be liable to be so included and (2)
whether the penalty initially levied in a sum of Rs. 25 lacs and ultimately
reduced by the Tribunal to Rs. l 0 lacs, is sustainable in the facts and
F circumstances of the case.

The authorities, overruling the objections raised by the appellant, held
that the Computers manufactured by OSI and Orbit must be deemed to have
been manufactured by the appellant and as such liable for excise duty. It was
also held that the value of peripherals and systems software supplied is
G includible in the value of the Computers. Likewise, the Revenue held that non-
disclosure of the values of service charges, peripherals and systems software
attracts levy of penalty. Accordingly the demand was raised against the
appellant in a sum of Rs. 3, 32, 96,010.58 and a penalty of Rs. 25 lacs was also
levied. Before the Tribunal, the appellant got some relief on duty part and
H penalty was reduced from Rs. 25 lacs to Rs. I 0 lacs.
O.R.G. SYSTEMS v. C.C.E. [K. VENKATASWAMI, J.] 823
The Tribunal, after analysing tile facts, held that the supply of raw A
materials alone does not make the appellant as manufacturer of the Computers
factually manufactured by DSI and Orbit. However, the Tribunal was of the
view that the supply of specifications and designs was actually at par with
the supply of specific designs of a tailormade item and hence will constitute
manufacture. On that basis, the Tribunal held that the case of supply of
specifications and designs for Computers will amount to manufacture and B
price charged therefor shall be includible in the assessable value. Similarly, the
Tribunal held that the vale of peripherals at the time of supply of computers
would make the appellant as computer manufacturer as, according to the
Tribunal, the supply of those peripherals and computer systems bring into
existence a new product. The value of those supplies should also be included C
in the value of computer supplied. The Tribunal declined to accept the
arguments of the appellant that the software was already burnt in the chips
of the computer to make the computer complete and that the systems software
and other peripherals are only additions to a computer that was complete
even without those peripherals and systems software. The Tribunal relied on
its own decision in PSI Data System for rejecting the case of the appellants, D
which has since been reversed by this Court in PSI's case (supra).
·:..
In these appeals, we heard arguments of counsel on both sides. Naturally,
the learned counsel, Mr. Ganesh, appearing for the appellant, placed reliance
on the judgment of this Court in PSI case (supra). This Court in PSI Data
System 's case considered identical issues and Bharucha, J., speaking for the E
Bench, held as follows :-"

"The appellants before us have sold only a computer, or a computer
along with software, and the software might have been imported or
bought out. Some contracts in this behalf are lump-sum contracts and F
some are for the computer and the software separately. Sample
contracts are on the record.

Learned counsel for the appellants submitted that the test that
had been applied by the Tribunal in the impugned judgements was
erroneous. Our attention was drawn to the judgement of this Court in G
State ofUttar Pradesh v. M/s Kores (India) Limited, [1977] 1SCR837,
where it was held that a typewriter ribbon was an accessory to a
typewriter and not a part of the typewriter though it might not be
possible to type out any matter on the typewriter without the ribbon.
This Court quoted with approval the following observation of the
High Court of Mysore in State of Mysore v. Kores (India) Ltd. H
824 SUPREME COURT REPORTS [1998) 3 S.C.R.

A "Whether a typewriter ribbon is a part of a typewriter is to be ...
considered in the light of what is meant by a typewriter in the
•
commercial sense. Typewriters are being sold in the market without
the typewriter ribbons and therefore typewriter ribbon is not an
essential part of a typewriter so as to attract tax as per Entry 18 of
the Second Schedule to the Mysore Sales Tax Act, 1957 ."
B
On the same reasoning, it was submitted, the software that was sold
by the appellants along with their computers was not an essential part
of the computers. What a computer was had to be judged in the light '
-f
of its commercial sense and, in that sense, the software was not
understood to be a part of the computer. Reference was made to
c Section 80 HHL of the Income Tax Act which provides for deduction
of profits from export of "computer software". Reference was also
made to the provisions of the Copyright Act, 1967, where a computer
is defined as including any electronic or similar device having
information processing capabilities and a computer programme is
D defined to mean a set of instructions expressed in words, codes,
schemes or in any other form, including a machine readable medium,
capable of causing a computer to perform a particular task or achieve
a particular result. Interestingly, the Copyright Act defines 'literary
work ' to include computer programmes, tables and compilations
including computer data bases. Reference was also made to the
E aforementioned contracts which indicate the distinction that buyers
made between the computer and the software.

In the appeals of Wipro Information Technology Limited and PSI
Data Systems Limited, the charges for installation of the computer and
the training of the purchaser's personnel to operate and maintain it
F were also included in the assessable value of the computer, and the
s.
'
argument that was advanced in respect of the value of the software
was also advanced in respect of these charges.

Learned counsel for the respondent, fairly, did not dispute that
G. the value of the software that the appellants might sell with their
computers, if so ordered by the purchasers thereof, could not be
included in the assessable value of the computers. He was, however,
at pains to urge that this did not apply to the firm software that was
etched into the computer; this is not even the appellant's case.

H In the first place, the Tribunal confused a computer system with
O.R.G. SYSTEMS v. C.C.E. [K. VENKATASWAMI, J.] 825
a computer; what was being charged to excise duty was the computer. A
Secondly, that a computer and its software are distinct and separate
is clear, both as a matter of commercial parlance as also upon the
material on record. A computer may not be capable of effective
functioning unless loaded with software such as discs, floppies and
C.D. rhoms, but that is not to say that these are part of the computer B
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 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 C
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 computer for the purposes of excise duty.

Having regard to the view that we take, it becomes unnecessary to
deal with the subsidiary arguments on behalf of the appellants and the D
intervenor, Mis Digital Equipment (India) Limited."

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, E
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) 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 F
the memory or storage capacity of the computers and other facilities. It is also
not disputed by the Revenue that the peripheral devices were imported by
the appellant and the appellant had paid counter-vailing duty on such imported
peripherals. In the light of these facts, we have no difficulty to apply the ratio
in the judgment of this court in PSI Data Systems (supra) and grant relief to G
the appellant. The Tribunal itself has placed reliance on its earlier decision in
PSI Data Systems, which has been reversed by this Court, as noticed above.
Likewise, the value of service charges also cannot be included in the light of
the ratio laid down by this Court in PSI Data Systems. The Tribunal went
wrong in assuming that the appellant must have given warranty to its customers
at the time of purchase of computers when it was the case of the appellant H
826 SUPREME COURT REPORTS [1998] 3 S. C.R.

A that no such warranty was given and no such case was specifically put
forward in the show-cause notice.

For all these reasons, we do not th ink that we can accept the contentions
to the contrary by the learned counsel appearing for the Revenue.

B In the result, the appeals succeed and the impugned demand including
the levy of penalty is set aside. The appeals are accordingly allowed with no
order as to costs.

V.S.S.· Appeals allowed.