Preloaded operating system software is an integral part of a laptop and cannot be classified separately – Revenue wins big case in Supreme Court
SEP 5, 2007
The appeal is against the CESTAT order holding that the Software-loaded Hard Discs are classifiable under Heading 85.24 of the First Schedule to Customs Tariff Act. It was further held that respondent will be eligible for duty exemption under Notification No.21/2002-Cus as amended. It was held that rest of the machine would be classified under Heading 84.71.
The Department had demanded customs duty of about Rs.5.9crores from the respondent by classifying goods imported by them under Heading 84.71 of the First Schedule of the Act and denying them benefit of exemption Notification No.21/2000-Cus. dated 1.3.2002.
The respondents are engaged in the manufacture of, and trading in, computers including Laptops (otherwise called ‘Notebooks’) falling under Heading 84.71 of the CTA Schedule. They imported Notebooks (Laptops) with Hard Disc Drivers preloaded with Operating Software like Windows XP, XP Home etc. These computers were also accompanied by separate Compact Discs (CDs) containing the same software, which were intended to be used in the event of Hard Disc failure. The Bills of Entry filed by the importer declared the value of Laptop and the value of Software separately, the software value including the Hard Disc value also. The Bills of Entry classified the Software-loaded Hard Discs under Heading 85.24 of the CTA Schedule and claimed exemption in terms of Sl. No.157 of Notification No.21/2002- Cus. These Bills of Entry were filed with the Chennai Air Customs Authorities in July 2005. Long before this, by a letter dated 7.10.2003 the respondents had informed the Addl. Commissioner of Customs, Chennai that they would be filing Bills of Entry for separate assessment of Computers and Software-loaded Hard Discs in view of the Tribunal’s decision in Barber Ship Management’s case. It was also informed that they would claim duty exemption under Sl. No.157 of Notification No.21/2002-Cus. Subsequently, under cover of letter dated 11.10.2003, the respondents had also supplied to the Addl. Commissioner the OEM pricelist for the various models of ‘Notebooks’ imported by them. They had also provided a worksheet indicating separately the value of Hard Disc, value of Operating Software and the CD & replicating charges.
In the meantime, at Delhi, they had imported Laptop computers with Hard Discs preloaded with Software and claimed classification of the Software-loaded Hard Disc Drives under Heading 85.24. The department issued a show-cause notice for demanding duty on these goods in terms of Heading 84.71. This demand was confirmed by the original authority, against which appeal before the Commissioner (Appeals) was preferred, who sustained the decision of the lower authority. But the appeal preferred to the Tribunal was allowed and it was held that the Hard Disc Drives preloaded with software required to be assessed separately in terms of 85.248 of the CTA Schedule by virtue of Note 6 to Chapter 85 of the said Schedule.
However, the Appraising Officer at Chennai Air Customs, dealing with the goods in question, queried the respondents as to why the value of the Hard Discs should not be included in the value of the ‘Notebooks’ for the purpose of assessment under Heading 84.71. The respondents replied by pointing out that, in terms of the Tribunal’s decision in Barber Ship Management’s case which had been upheld by the Apex Court, the Software- loaded Hard Discs could only be classified under Heading 85.24. They also cited, in support of their stand, the order passed by the Tribunal in their own case. Their arguments, however, did not weigh with the assessing authority, which proceeded to assess the Bills of Entry on a provisional basis. The jurisdictional Asst. Commissioner of Customs, after hearing the party and considering their submissions, found Hard Disc as integral part of Notebook-computer and accordingly passed Order-in- Original dated 31.10.2005 classifying the Notebooks together with the Hard Discs assembled therein, under Heading 84.71 as ‘automatic data processing machines’. This order was upheld by the Commissioner (Appeals).
The party won in the Tribunal and that is why Revenue is in appeal before the Supreme Court. The Supreme Court noted that the short question for determination is, Whether operating systems (software) which controls the working of the computer and which is preloaded in the laptop (notebook) is classifiable as a separate entity under CTH 85.24 at ‘nil’ rate of duty or as an integral part of the laptop under CTH 84.71 at the appropriate rate of duty.
The Court observed that:-
1. a software is a computer programme.
2. It consists of instructions that make hardware work.
3. There are two types of software’s, namely, system software which controls the working of the computer and application software such as word processing programmes, databases etc., which perform the tasks for which we use computers.
4. In addition, we now have network software which enables groups of computers to communicate, and language software which provides programmers with the tools with which they write programmes.
5. We also have what is called as packaged software’s which are sold through retail outlets.
6. In the present case, the respondent imported laptops containing preloaded HDD. The said drives were preloaded with operating systems (software) which, as stated above, controls the working of the computer.
7. The value of the laptop depends on the operating system, which is preloaded.
8. The computer cannot open without the operating system.
9. The laptop without an operating system is like an empty building.