Classification of “CD ROM” containing images or drawings and designs of engineering goods

This Article summarizes the decision of the Hon’ble Supreme Court dated 21 September 2010 in the case of L.M.L. Ltd. Vs. Commissioner of Customs (2010-TMI-77632-Supreme Court] on the issue of classification of a CD ROM containing images of drawings and designs of engineering goods.

Background

1. The classification of the CD ROM containing drawings, designs of engineering goods have been claimed under the following Chapter headings:

2. First Schedule to the Customs Tariff Act, 1975 (Customs Tariff) Heading – 49.06 –”Plans and drawings for architectural, engineering, industrial, commercial… being originals drawn by hand.”

3. Customs Tariff Heading – 49.11- “Other printed matter, including printed pictures and photographs”

4. Customs Tariff Heading – 85 – “Electrical machinery and equipment and parts thereof, sound recorders and reproducers, television image and sound recorders and reproducers and parts and accessories of such articles”

5. Customs Tariff Heading – 85.24 – “Records, tapes and other recorded media for sound or other similarly recorded phenomena, including matrices and masters for production of records”

6. Customs Tariff Heading – 8524.39 “Other”

Facts

1. The Appellant, filed a Bill of Entry on 29 January 2002, for the clearance of the CD ROM containing drawings, designs of engineering goods (“goods”) under Tariff heading 4906.00 of the Customs Tariff read with Central Excise Tariff heading 4901.90 or Tariff heading 49.11.

2. The appellant alternatively claimed that the goods were classifiable Tariff heading 8524.39 or 8524.90 of the Customs Tariff for availing benefit of `nil’ rate of duty vide Notification 17/2001-Cus dated 1 March 2001.

3. The adjudicating authority did not accept the classification claimed by the appellant and recorded a finding that the goods were classifiable under Central Excise Tariff heading 8524.90.

4. The appellant in his appeal before the Commissioner (Appeals) and the Tribunal was unsuccessful in the claim for the classification of the goods.

Question before the Court:- The question before the Hon’ble Supreme Court was whether the goods were classifiable under Customs Tariff headings 49.06 or 49.11 or in the alternate headings 8524.39 or 8524.90.

Decision of the Supreme Court

• The Hon’ble Supreme Court held that the goods were not classifiable under Customs Tariff heading 49.06 as the drawings and designs of the engineering goods were not originals, drawn by hand but images of drawings loaded on a CD ROM as the requirements of being original and drawn by hand are to be construed strictly and not liberally.
• The Hon’ble Supreme Court held that the goods were not classifiable under Customs Tariff heading 49.11 (other printed matter) as the Tariff heading is in the nature of a residual entry intended to cover articles that are executed on paper including printing under control of a printer and to include the goods within Tariff Heading 49.11 would be inconsistent.
• The alternate classification under main chapter 85 was also not accepted by the Hon’ble Supreme Court on the ground that the Chapter intended to cover a CD ROM as it is and not a CD ROM which contained drawings and designs of engineering goods.
• The Hon’ble Supreme Court held that the goods were not classifiable under Tariff heading 85.24 (information technology software). The Hon’ble Supreme Court observed that “software is a set of instructions that allows physical hardware to function and perform computations in a particular matter, be it a word processor or web browser or the computer’s operating system”. While distinguishing the concept of hardware and data, the Hon’ble Supreme Court observed that “these expressions are in contract with the concept of hardware which are the physical components of a computer system, and data which is information that performs no computation and gives no enabling instructions to computer hardware but is ready for processing by the computer software”.
• The Hon’ble Supreme Court held that the engineering drawings and designs do not provide instructions to computer hardware to perform and at best by-products or outputs or computer software. Hence the goods were not classifiable under Tariff heading 85.24 as `software’.
• The Hon’ble Supreme Court further held that the goods were not classifiable under Tariff heading 8524.99 (Other) as the heading will cover those articles which are relatable to the articles covered under the main heading 85.24.
• The Hon’ble Supreme finally held that the goods are not classifiable under Customs Tariff heading 49.06 or under heading 49.11. It further held that the alternative plea for classification of the goods under Customs Tariff Heading 8524.39 or 8524.90 was not acceptable and hence not eligible for the benefit of `nil’ rate of duty under Notification 17/2001-Cus dated 1 March 2001
• The Hon’ble Supreme Court observed that classification of goods involves technical and scientific evaluation and analysis and unless there is something patently wrong while classifying a product, the Supreme Court should not interfere.

Comments and analysis

• The Hon’ble Supreme Court’s decision has tremendous implications on the Manufacturing sector which import CD ROM/ media containing drawings and designs for the purpose of manufacturing.
• The Supreme Court has held that the CD ROM which contains designs or drawings or any other similar data will not be classifiable as `software’ or ‘CD ROM’ under Chapter 85 of the Customs Tariff which provides for a `nil’ rate of duty.
• It is further important to note the observation of the Hon’ble Supreme Court on the distinction between software, being a set of instructions allowing physical hardware to perform instructions and Data, which is information that does not perform any computations or enable instructions for physical hardware.

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