12th July, 2002.
Government of India
Ministry of Finance
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Central Board of Excise & Customs
Subject: Valuation of Computer Systems sold along with software – clarifications – regarding.
I am directed to say that doubts have been raised regarding the valuation of computer systems sold along with software. The software can be of two types. One is the “systems software” or “operating software” which is designed to control the operation of the computer system. The other software is the application software which is developed for specified applications only. There is also a third category of software, called the “firm software” or “basic software” which is generally burnt into the hardware itself. The “basic software” enables a computer to read into itself from peripheral devices and includes vocabulary of basic instructions such as add, subtract, increment, document, etc.
2. The matter has been examined. So far as the period prior to 1.7.2000 is concerned, the Supreme Court has clearly held, in the case of PSI Data System Ltd. Vs. CCE [1997(89)ELT3(SC)] that the value of computers under heading 84.71 of the Central Excise Tariff, will not include the value of the software supplied, in the form of floppies, discs, tapes, along with the computer. The question whether the software etched on the hard disc of the computer would form a part of the assessable value of the Computer or not, was not decided by the Apex Court in this case since this aspect had already been accepted by the appellants i.e. PSI Data Systems Ltd. (reference paras 2 & 11 of the judgment). However, by implication it can be said that the Supreme Court approved the inclusion of the etched software in the value of the computer system (the Head Notes of this judgement brought out in the above citation does not bring out the gist of the judgement correctly as the Head Notes make an assertion which is not found anywhere in the judgement, that the cost of firm software etched into the computer is also not includible in the value of the computer). It may be noted that in para 3 of the judgment, the Apex Court has clarified that the term “software” used in the judgement refers to tangible software only in the nature of discs, floppies and CD Roms. The Apex Court did not discuss cases where computers were cleared loaded with any software, other than “firm software.”
3. As per Central Excise Law, valuation of goods is to be done in the form in which it is cleared. It, therefore, emerges that for the period prior to 1.7.2000 computer systems will be valued by including the value of the software already etched or burnt or loaded on the hard disc of the system. No distinction should be made between an “operating software” or an “application software” in this regard. If the computer is sold loaded with a software, the value of the software will be included in the value of the computer. Any floppy, disc or tape containing any software supplied along with the computer system will, however, be assessed separately.
4. The introduction of the “transaction value” concept w.e.f. 1.7.2000 does not effect this basic principle. In other words, for the period 1.7.2000 onwards also the same system of valuation of computer system is to be adopted so far as inclusion (or exclusion) of software is concerned.
5. Suitable Trade Notices may be issued for information of the Trade.
6. The field formations may be suitably informed.
7. Receipt of this Circular may please be acknowledged.
8. Hindi version will follow.