TMI Blog2008 (10) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... ed certain equipments viz. Mobile Switching Centre (MSC), Base Station Controller (BSC) and Base Transceiver Station (BTS) from M/s. Nokia Corporation, Finland for providing telephone services. While MSCs were classifiable under Chapter Heading 8517, the other two i.e. BSC and BTS were classifiable under Chapter Heading 8525. All these equipments i.e. MSC, BSC and BTS were pre-loaded with software required for operating. The appellants also imported media [in the form of CDs/Tapes] containing the same software that is pre-loaded in the equipments and which came in another consignment. In respect of the software imported in the form of CDs /tapes, the appellants claimed classification under Chapter Heading 85.24 and also claimed benefit of exemption under S. No. 157 of Notification No. 21/02-Cus. The goods were finally assessed and cleared for home consumption after payment of appropriate duty. 2. Certain investigations were carried out by the DRI which revealed that the contracts and MOUs between M/s. Fascel, the importer and M/s. Nokia Corporation indicated that the negotiated price was on the basis of (a) per subscriber base in respect of MSC equipment and (b) per TRS (Transc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above allegations and accordingly ordered for clubbing the value of the software with that of the hardware and demanded Customs duty amounting to Rs. 9,73,46,240/- by invoking extended period, confiscated the goods with an option to redeem the same on payment of fine of Rs. One lakh and imposed penalty of Rs. 9,73,46,240/- under Sec. 114A of the Customs Act, 1962. 3. Ld. advocate for the appellants submitted that the software in question has been preloaded in the hard disk contained in the hardware. Thus MSC software is contained in the MSC unit hardware. Similarly, BSC and BTS software are contained in the hard disc contained in the BSC and BST unit respectively. This hardware unit is also referred to as Winchester disk unit. The software in question is not etched software or embedded software and is not contained in ROM or EEPROM of the hardware or the microprocessor chips. This is evident from the statements of all the persons recorded by the DRI and referred to in the show cause notice. Though the show cause notice alleges these software to be firmware, the Commissioner has not dealt with this plea which indirectly means that the software in question was not a firmware ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on the computer. Reference was invited to several Supreme Court decisions on the subject. The first among them is in the case of PSI Data Systems Ltd. 1997 (89) E.L.T. 3 (S.C.) wherein it was held that software sold along with computers, even though preloaded, cannot be considered as essential part of the computer and therefore its value cannot be added to the value of the computer overlooking the Tribunal's finding that a computer system was incomplete without system software in as much as mere hardware without system software did not make a system workable and that without software, the hardware was incomplete, a mere dumb box which is of no use at all to the customer. A similar view was taken by the Tribunal in the case of Acer India Ltd., 2003 (161) E.L.T. 926 (T) = 2003 (59) RLT 285 (CESTAT). It was submitted that while considering the plea as to whether the value of software can be included in the value of the hardware, Tribunal observed that the software in question is not the software etched or brunt or in what computer world is known as EEPROM/BIOS software on the mother board of the computer. The software in dispute is admittedly operational software, which is l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the matter was decided by the Larger Bench of the Supreme Court. While delivering the decision, the Supreme Court observed that they are proceeding on the premises, that all the computers were cleared with the software loaded on to the hard disc and that CDs containing the software along with the licence to use and that the invoice-cum-challan issued by the assessee contain the total value of the computer but from that the value of the operating software was deducted for the purpose of computing Central Excise duty payable there on. The Apex Court after referring to Chapter Note 6 to Chapter 85 observed that a software retain its character irrespective of the fact that as to whether it is sold with the apparatus viz, the computer or not. 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 headings contained in different chapters of Tariff Act, the intent and purport of the legislature, in its 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 central excise duty is not leviable o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E.L.T. 484 (S.C.) wherein a laptop was imported which was classified by the revenue under Chapter Heading 84.71 and duty was demanded on the assessable value after deducting the software value from the total value of the laptop, whereas the assessee has claimed exclusion of the value of the hard disk drive on which software was loaded also from the value of the laptop for the purpose of duty. The Supreme Court held that the laptop is classifiable under Chapter Heading 84.71 and that a laptop is imported with in built preloaded operating software recorded on hard disc drive. The said items forms an integral part of the laptop and the laptop itself is rightly classifiable under Chapter Heading 84.71. It was submitted by the ld. advocate that though the laptop was held to be classifiable under Chapter Heading 84.71, but for the purpose of payment of duty, the value of the software loaded on the hard disc was deducted and it was separately classified under Chapter Heading 85.24. In view of this the Supreme Court order is in favour of the appellants rather than revenue. 7. On limitation, it was submitted that the appellants have filed bills of entry wherein they have declared the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks and function units designed to perform specific service feature or function. Most of the sub-systems are implemented both in hardware and software. In these equipments, the operating and application software are interleaved and very large in size. Each operating section hardware is self sufficient and is loaded with its own system and application software enabled by an 'etched' software in that section able to identify and link the software and the hardware. 10. It was submitted that in the normal PC, software like Windows XP for operating systems and applications like MS Word operate on top of the Windows OS with a single computer board. Mobile technology is built with a large number of distributed boards held together by software working at various levels. This entails a full integration of the software with the hardware. Further, the interface protocols between key sections of hardware are exclusive to telecommunications. These equipments are therefore not in the nature of general purpose computers or computers with special applications or automatic data processing machines, as understood under Indian Customs Tariff. Their architecture and software are significantly diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioning. Original packages were not even opened for more than six years, which goes to indicate that the software was never required and was not of any use. The purported import of said software was a subterfuge to shown that these were software meant for installation and commissioning of the equipment. Given the highly specialized and complex nature of the software, loading the same into equipments calls for special skills and training. Such skills are not easily found in India. Therefore, to say that the software imported separately is to be used as backup in case of crash is indeed of doubtful validity. The appellants failed to indicate in the bills of entry that the software required to operationalise the equipment were preloaded and integrated with the equipment to make it functionally ready. These facts were suppressed to gain duty exemption without being entitled to it and therefore the extended period has been correctly invoked. 12. Ld. consultant referred to the submissions of the appellants wherein attention was invited to Note 6 to Chapter 85 which states that "records, tapes and other media of heading 85.23 or 85.24 remain classified in those headings when present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, the equipments do not fall under any of these headings, but fall under 85.17 or 85.25. This anomaly cannot be extended to software loaded in/integrated with/incorporated in the HDDs or flash memory of the equipments. 14. In view of the above, it was submitted that each of the equipments, including the software incorporated in it should be taken to form a whole and be regarded as a composite machine. The whole equipment is accordingly classifiable either under Heading 85.17 or 85.25, as the case may be. The classification of the software incorporated in the aforesaid equipments under heading 85.24 is not at all justified, legal and proper. 15. Referring to the decisions in the case of Sprint RPG, Barber Ship Management, PSI Data Systems, Acer India (cited supra), it was submitted that these decisions concern only with classification and the issue was regarding exciseability of software loaded in hard disc drive, which according to Note 6 to Chapter 85 were held to be classifiable under heading 8524 and not under 8471. This reasoning do not apply to the present case as they concern with mobile telephone equipments i.e. machines with specific functions falling under Headi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an integral part of laptop, which is a stand-alone item and the laptop as a whole was classifiable under heading 84.71. As regards valuation, the Supreme Court allowed the addition of value of the hard disc in the value of the laptop and only gave deduction in respect of software. However, in the Vodafone case the equipment as a whole including the software preloaded/integrated are classifiable under Chapter Heading 85.17 or 85.25 as the case may be and since in this case the software was an integral part, its value had to be included in that of hardware. 18. In the rejoinder, the ld. advocate for the appellants submitted that the imported software was not in the nature of firmware and though it was so alleged in the show cause notice, the Commissioner discarded this plea and various statements recorded clearly indicate that it was not etched or embedded on a memory chip or microprocessor which alone is called a firmware and therefore assertion that it was a firmware is contrary to facts. It was submitted that the equipments falling under Chapter Heading 85.17 and 85.25 are in the nature of special purpose computer and not general purpose computer. The processor used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll through consistent irrespective of the fact whether software is chargeable to duty or not. 20. We have considered the submissions. We find that it is an admitted fact that telephone equipments falling under Chapter Heading 8517 and 8525 have been imported along with operational software preloaded in the factory of the supplier and also along with CDs/Tapes loaded with such software. The issue to be decided is whether the value of such software can be added to the value of the hardware. While the revenue's contention has been that this software was not required to be imported separately as it was already preloaded in the supplier's factory which loading was a technical necessity, requiring special skills not available in India and was never used and lying in original packed condition, the appellants contention is that being operational software, it falls under Chapter Heading 8524 and its value cannot be included in the value of the hardware as held by the Supreme Court in its various decisions starting from PSI Data Systems Ltd., Acer India Ltd., Hewlett Packard (supra) and other decisions referred to in the submissions from both sides. We find that the issue whether the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s character as a software, whether it is meant for automatic data processing machines falling under Chapter Heading 8471 or for telephone equipments falling under Chapter Heading 8517/8525, which are nothing but, special purpose computers which is build to handle specific task. Such computers can perform a specific task and no other task. The appellants in their reply to the show cause notice has referred to the extracts from the book 'Mini Microcomputer Systems' by M.G. Hartley, wherein at page 7 it has been stated that "computers are classified loosely as microcomputers, minicomputers and mainframe computer Minicomputers are general-purpose machines. Sometime they may be used as part of a large piece of equipment -- for example, as the switching controller in an automatic telephone exchange...". Further at page 23 in the same book, it has been stated as under: ".... Quite often a general purpose mini or microcomputer is tailored to a communications application by using special interface hardware and appropriate real-time software." This all show that even the telecommunication equipment imported by the appellants are nothing but computers and therefore the software meant fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. The value of such software cannot be added in the value of the hardware as has been conclusively held by the Apex Court in the case of Hewlett Packard (supra) where the value of the laptop was arrived at by excluding the value of the software. The question of invoking Rule 9(1)(c) of the Customs Valuation Rules, 1988 does not arise firstly for the reason that this is a new ground, which cannot be taken in the assessee's appeal. Besides, we are in agreement with the appellant's view that licence relates to software to which alone the value of the licence, if at all, can be added. 21. In view of the above, we upheld that the value of the software cannot be added to the value of the hardware and accordingly there has been no mis-declaration and no duty is therefore demandable. No confiscation can therefore be done. Even otherwise, the goods which had already been cleared could not have been confiscated and redemption fine imposed, as has been held by the Punjab Haryana High Court in the case of Raja Impex reported at 2008 (229) E.L.T. 185 (P H). The appeal is accordingly allowed and Commissioner's order is set aside. (Pronounced on 8-10-2008) - - TaxTMI - TMITax - ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
