Sukumar Mukhopadhyay: Software exempt from excise

EXPERT EYE

Computer software is exempt from the central excise duty but hardware is not. So the question came up for decision if software would have to pay excise if it was loaded in computer hardware and sold as such.

When a computer is sold, a separate identity of the software does not exist. The in-voice may show the price of the software separately but the issue still remains if the excise duty that is charged on the computer will be only for the hardware or the total.

If the total value is taken then the software is also to pay duty, though independently it is exempt.

The controversy is not such an easy one as it looks on the face of it. It has a very chequered history. There being too many judgments on computer software and hardware, the pitch has got queered. The issue reached the Supreme Court, which examined the whole gamut of the controversy in the Commissioner of Central Excise vs ACER case, 2004, (172) ELT 289 SC.

The revenue department's view is that computer hardware without software does not function: it is a dead box. Operational software implanted in a hardware system becomes a part and parcel of the hardware and, therefore, excise duty is chargeable on the total value of the hardware and the software combined.

The manufacturers' view is that computer with only the hardware is also marketable as such containing the firmware or etched software.

The value of that etched software is included in the value of the computer and there is no controversy about that. It is the operational software, which is implanted on the specific order of the customer. It will retain its individuality even after it is implanted in the system.

Moreover, the excise tariff makes it clear in the Chapter note 6 of Chapter 85 where computer falls that records, tapes and other media of heading 85.23 or 85.24, where software falls, remain classified in those headings, whether or not they are cleared with the apparatus for which they are intended.

The Supreme Court after examining the various definitions of software and methods of using them in the computer has come to the conclusion that it cannot be held that a computer without an operational software becomes a dead box.

Even without operational software a computer can be put to use although by loading the same its operational utility can be enhanced. Operational software loaded on the hard disc is erasable and is usually supplied separately.

The Supreme Court concluded that operational software did not form an essential part of the computer hardware.

This case is now resolved but the general issue is still not so simple. Several exempted items are used in making a car. But when the whole value of car is shown for assessment, the value of the exempted product is not deducted.

That is because these components become part and parcel of car.So while deciding an issue whether the value of an exempted item is to be included or excluded, several things are to be judged. They are:

• if it is a part of the composite item in a way that the end product cannot run without the part;
• if the value is shown separately; and
• if the items are separately sold in the market so that they can be fitted to the end product independently.

smukher2000@yahoo.com