1. In appeal No. E/410/2003 the appellants i.e. M/s ACER India Ltd. are manufacturing computers, peripherals, servers, notebooks and accessories falling under Chapter Heading 8471, 8473.20 and 8473.90 of the Schedule to the Central Excise Tariff Act, 1985. Consequent to an investigation initiated, it appeared that they were not including the value of operational software in the assessable value/ transactional value of computers manufacturing and cleared by them on demand of duty w.e.f. 1.7.2000, which was required. It was the view of the department that the value of such operational software loaded on the computers and cleared when it was being done for the customers before removal, in connection with the sale of computers, by the appellants, it would form part of Transaction Value of the computers, as per the provisions substituted Sec. 4 of the Central Excise Act, 1994 [effective from 1.7.2000]. Certain other charges of violation of Central Excise Rules were also found and invoked in the two show cause notices issued. The same had been decided by the Commissioner, who after considering the material on record determined the following points as raised in the show cause notices issued:- "i) That the value/cost of the operational software installed by the assessee on the computers before clearance from the factory is includible in the assessable value/transaction value of the computer system and therefore the differential duty demanded in the two show cause notices could be confirmed.
ii) That the longer period of limitation under proviso to Sect.
11A(1) is various decisions of the Hon'ble Supreme Court as detailed in Para 11." 2. The Commissioner, after examining the purchase orders and the invoice-cum-delivery challans, came to a conclusion that "pre-loading of the operational software was invariably done on the computers before being cleared from the factory". Therefore, he held that the requirement of operational software being optional was inconsistent with the practice as adopted. It was also found by him that for different models of computers, different operational softwares were loaded. He found that operational softwares being installed in the factory and there was no evidence produced that operational software alone was sold to a particular customer, as also manufacturers of software invariably were insisting that before shipment of the computers, the software should be loaded on to the computers to ensure that the computers contain the original and genuine software and that it was obligatory on the assessee to pre-load the software on the computers before they were removed from his factory.
3. The Commissioner, thereafter, distinguished the case of Hon'ble Supreme Court in the case of PSI Data Systems Ltd. (2002-Taxindiaonline-46-SC-CX), in as much as, in the facts of the present case, since operational software in question was pre-loaded or installed before being removed from the factory the question was not in relation to the inclusion of the value of software sold, with the computer, in the form of disks, floppies, CD Roms and the like. He concluded the valuation of the computers by coming to the following findings:- "As far as the question of inclusion or otherwise of the cost/value of the operational software (installed by the assessee on the computers before clearance from the factory) in the assessable value/transaction value of the computer systems, I wish to observe the following: a) In this case, it has been seen from the records and also confirmed by the assessee that the cost of operational software, deducted from the assessable value, was relatable to the operational software installed on the computers before being cleared from the factory and therefore in connection with the sale of the computers, which are subjected to excise duty. In other words, the proposals in the two show cause notices herein were only for proper assessment of duty on the computes by including the said operational software and not on the operational software as such.
b) The practice of pre-loading of the operational software on the computers by the assessee during the period covered by the show cause notices was confirmed by the assessee. As observed above, the assessee could neither furnish of cases of sales of computers to any customer without the operational software being installed on them nor sale of operational software alone to any customer.
c) The customers of the assessee have specifically placed purchase orders for the computers with the operational software in question and accordingly the assessee had also supplied the computers with pre-loaded operational software, thus confirming the fact that a composite price was negotiated and agreed for the computers with pre-loaded operational software." and thereafter noting the definitions of Transaction Value, under new Sec. 4, effective from 1.7.2000, and then noting that it was well-settled law that all those expenses incurred by the assessee, which enrich the value of the goods before their marketing are includible in the assessable value/transaction value of such goods for the purpose of levy of excise duty, he was of the view that the expression "by reason of sale" or "in connection with the sale" cannot be ignored in the scheme for values of goods under substituted Sec. 4 effected from 1.7.2000 and in this case, he held that undoubtedly, the pre-loaded operational software enriches the value of computers and therefore was required to be added. The Commissioner also came to the conclusion that classification of operational software under Heading 84.24 was not in dispute in the present proceedings and the two show cause notices made no proposals to demand duty on such software. The Commissioner, relying on the decision of Nizam Sugar Factory [1999 (34) RLT 864 (CEGAT-LB)=RLT (LB-CEGAT)-1310=1999 (114) ELT 429 (Tri)] and the facts of this case, did not find the present demands made by the notices to be barred by the limitation and thereafter concluded as follows:- "i) That the value/cost of the operational software installed by the assessee on the computers before clearance from the factory is includible in the assessable value/transaction value of the computer system and therefore the differential duty demanded in the two show cause notices need to be confirmed.
ii) That there were justifying grounds and evidences for the invocation of the proviso to Sec. 11A(1) in the present case, besides imposition of penalty, for the reasons aforementioned." and confirmed the demand of Rs. 48,65,003/- being the duty payable on operational software installed on the computers before clearance and differential demand of Rs. 54,90,700/- on same account in the show cause notice dtd. 19.8.2002. He also ordered recovery of the said amounts of duty alongwith interest thereon under Sec. 11AB and imposed a penalty of Rs. 54,90,700/- under the provisions of Sec. 11AC and a penalty of Rs. 48,65,003/- under Rule 25 of Central Excise (No.2) Rules, 2001/Central Excise Rules, 2002 in respect of the offence relatable to the period 07/2001 to 05/2002 covered by show cause notice dtd. 08.08.2002.
4. After hearing both sides and considering the material on record, it is found:- a) The software, value of which and inclusion thereof is in dispute is imported. It is not the software etched or burnt or what in the computer world is called as EEPROM (Electrically Erasable Programmable Read Only Memory)/BIOS software on the mother board of the computer. The software, in dispute, is admittedly operational software, loosely these could be referred to as operational/application software packages, commercially termed e.g.
Windows-2000, Office-XP etc. They are not for running the computer per se, but are useful to run the programmers as desired by the user of the computer. Computers could be cleared by various manufacturers in the following manner:- (i) Hardware assembled as per configuration with EEPROM and or BIOS etched/burnt only.
(ii) Hardware assembled to the desired configuration with EEPROM and or BIOS etched/burnt and Operational/Application Software supplied separately on a tangible like disc, floppies, CD etc, to be loaded at the customer's premises.
(iii) Hardware assembled to the desired configuration with EEPROM and or BIOS etched and Operational/Application Software supplied separately on a tangible like disc, floppies, CD Roms, etc., and also loaded in the factory premises before clearance.
(iv) Hardware assembled to the desired configuration with EEPROM and or BIOS etched/burnt and operational software, as desired, loaded, without the supply of tangible like floppy etc.
b) While there is no doubt that value or and costs of loading of operational/application system cannot be included to determine the assessable value of 'computer' being cleared in the situations as at Sl No. (i) & (ii) when the law as laid down by the Apex Court in the case of PSI Data System Ltd., (2002-Taxindiaonline-46-SC-CX) is applied wherein the apex court had held:- "13........., the value of software, if sold alongwith the computer, cannot be included in the assessable value of the computer for the purposes of excise duty." The 'software' being considered by the Apex Court in that case was tangible Software for Operational/Application.
c) Similarly, wherein cases at Sl. No. (iii), where Operational/Application Software is loaded and is supplied separately on a tangible like disc, floppy and CD rom. The value of such tangibles cannot be reckoned for the purposes of duty under the Central Excise law.
d) As regards the clearances effected as at Sl. No. (iv) i.e. where the Operational/Application Software is loaded and not separately supplied on a tangible like disc, floppy and CD, the full value of such tangibles cannot be loaded by application of definition of "Transaction Value' of the substituted Sec. 4 of the Central Excise Act, 1944. A reading of the definition of Transaction Value does not entitle the addition of the value of an accessory. The law on the aspect is well settled (see Digital Equipment India Ltd. - 1997 (19) RLT 361 (CEGAT)=1997 (70) ECR 326 (Tri), Shriram Bearings Ltd. Vs.
CCE (2002-Taxindiaonline-47-SC-CX) and tangible Operational/Application Software would be an accessory. It has been clarified by Board, vide its Circular dtd. 12.5.2000, that Transaction Value does not seem to be divergently wider in content and scope of the concept of value under erstwhile Sec. 4 and Circular No. 644/35/2002 - Cx. dtd. 12.7.2002 [reported in 2002 (51) RLT M84] issued by CBEC clarified that as regards inclusion or exclusion of value of software is concerned, the erstwhile principles applicable remain even after 1.7.2000.
e) As regards the question from the Bench, on the law as laid down by the Apex Court in the case of Siddharth Tubes - 2000 (36) RLT 365 (SC)=2000 (115) ELT 32 (SC), especially the law laid down therein to the effect that assessable value of galvanized pipe to include cost of galvanisation, the Ld. Advocate for the appellants drew our attention to the following finding as regard galvanization, therein:- "2..... while that process did not amount to manufacture, it added to the intrinsic value of the product to make up the full commercial value which was realized by the appellants by charging a higher price for such pipes covering the cost of galvanization".
and submitted that Para 3 thereof requires, addition of costs of galvanizing as would be cleared from the following:- "..... when the assessable value is to be calculated of the galvanized black pipe made by the appellants, the elements of the cost of galvanization must form a part thereof." It was further contended that the total consideration being received for tangible Operational/Application software was a fee for the 'right to use' and not a sale price. The costs of loading were already included in the assessable value on which duties were determined. Both sides agree that more than one computer could be loaded by the said programmes as a technological possibility but it was not permissible in law. The supply of the tangible was being effected only to re-load the programme, in case of crash of computer during usage. On considering this aspect and the case law and the facts, we would hold that it was only the cost for loading the Operational/Application software that may be added and not the full value or the licence fee for right to use being recovered, especially when there is no charge and or allegation that costs of hardware have been transferred on to such recoveries now being proposed to be added to the value.
(f) Since the loading of the entire value of the tangible Operational/Application Software cannot be loaded onto the value of the computers in any of the situations, in which the clearances could be made, the demands as made, cannot be upheld, therefore the penalties as arrived at cannot be sustained.
5. In this view of the findings, the Appeal No. E/410/03 is required to be allowed after setting aside the order.
6. Appeal No. E/1307-1308/02 filed by M/s Compaq has to be allowed, since in that case the operational/application softwares have been supplied on tangibles separately. The value thereof, cannot be added for the purposes of duty, in view of the findings arrived at herein above. This appeal is also allowed after setting aside the order.