Acer case order redefines valuation system

EXIM MATTERS

In a landmark judgment in the Acer India Ltd case on September 24, the Supreme Court has held that excise duty cannot be charged on the value of operating software (operating system) loaded on the hard disk of computer, even under the "transaction value" concept, introduced in 2000.

The revenue department contended that computers were supplied with pre-loaded operational software at a composite price that the buyer paid and relied on the Section 4(3)(d) of the Central Excise Act.

The Act says "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 on behalf of, the assessee, by reason of, or in connection with the sale.

The revenue department also said the pre-loaded operational software was part of computers cleared from the factory and so, computers with pre-loaded operational software had to be classified as computers and excise duty was payable at 16 per cent on the composite price charged.

A Division Bench of the Supreme Court had in February 2004 considered the revenue department's appeal against the tribunal decision (2003 (161) ELT 926 (Tribunal-Bangalore)) and concurred with it (2004 (166) ELT 21 (SC)), but referred the case to the larger Bench because the settled law (the PSI Data Systems Ltd case, 1997 (89) ELT 3 (SC)) was that even if computer might not be capable of effective functioning unless loaded with software, but still these (software) were not parts of computer and even if they were sold along with the computer their value did not form part of the assessable value.

The larger Bench reasoned that operating software loaded on the hard disc was erasable and despite being loaded on to the hard disc was usually supplied separately to the customers; it could be updated keeping in view the development in the technology; even in the case of hard disc crash the software contained in the CDs was capable of being reloaded on to the hard disc; operational software, therefore, did not form an essential part of the hardware.

The Supreme Court reiterated the PSI Data Systems case judgment and held that software retained its character irrespective of whether it was sold with the computer and that only because it was implanted in hardware, the same would not attract central excise duty.

At present, excise duty on computers is "nil" but the importance of judgment stems from the many observations of the court in regard to classification and valuation. For example, a machinery provision contained in Section 4 can neither override the charging provision nor by reason thereof a "goods", which is not excisable will become an excisable one only because one is fitted into the other.

The Acer India case judgment, however, differs from the Associated Cement Company case judgment (2001 (128) ELT 21 (SC)), where the Supreme Court held that intellectual property when put on a media was to be regarded as an article on the total transaction value of which Customs duty was payable and that there was no scope for splitting the engineering drawing or the encyclopaedia into intellectual input on the one hand and the media, whether paper, diskette or cassette or any other thing on which it was scribed on the other.

tncr@sify.com