1. The appellants have filed an application praying for change of cause title from M/s Pentafour Software & Exports Ltd to M/s Pentamedia Graphics Limited. The prayer is accepted and the cause title is changed accordingly.
2. This appeal filed by M/s. Penta Media Graphics Ltd (formerly known as M/s Pentafour Software & Exports Ltd) is directed against the order-in-original No. 9/98 dated 29.6.98 passed by the Commissioner of Central Excise, Chennai, by which the Commissioner has demanded a duty of Rs. 20,18,901 under Rule 9(2) of the CE Rules, 1944 read with proviso to Sub-section (1) of Section 11A of the CE Act, besides imposing a mandatory penalty of Rs 14,38,561 under Section 11AC of the Act, and a further penalty of Rs 2,00,000 on the appellants under Rule 173Q of the Rules ibid. He has also appropriated a sum of Rs 4.5 lakhs out of the security amount furnished for the B11 bond as the appellants have not produced the provisionally released goods for confiscation. He has also confiscated the plant and machinery with an option to redeem the same on payment of fine of Rs 10,000. The sum of Rs 20,00,000 paid vide TR 6 Challan dated 6.1.97 and 22.2.97 was ordered to be adjusted against the above levies.
3. The brief facts of the case are that the appellants herein have set up a 100 EOU for the manufacture of CD ROMs on their own and also on a job work basis. They were issued with a licence stipulating that 100% of their production shall be exported for a period of five years. They were also permitted to import various capital goods, raw materials/components etc for the purpose oi manufacture and export of the goods. Appellants have manufactured and cleared Compact Disc CD Audio, CD video and CD ROMs classifiable under heading 85.24 and valued at Rs 97,10,315 without payment of duty leviable under Section 3 of the CE Act, 1944, during the period from 30.7.1996 to 28.10.96. They have also cleared CD and Audio CD ROMs valued at Rs 25,05,138 without applying the appropriate rate of duty during the period from 29.10.96 to 24.12.96 by wilfully suppressing the production and clearance of CDs and wilful misdeclaration of the said CDs in violation of Rules 100B, 10C, 100D, 100E, 100F and 100G of the CE Rules, 1944. They have also manufactured 22,936 CDs valued at Rs 44,47,047 without accounting in the statutory records with intention to remove the same without payment of duty in violation of Rule 100-B and 173-G of CE Rules, 1944.
Appellants were, therefore, issued with show cause notice bearing C.No. VIII/10/97 HPU CUS dated 23.6.1997 and on consideration of the reply furnished by the appellants vide their letter No. SRM/155/97 dated 30.8.97 and after personal hearing on 15.5.98, in impugned order was passed as noted above. Aggrieved by the said order, the appellants have come in appeal on the following grounds: (a) The order has been passed in violation of the principles of natural justice inasmuch as the Commissioner has failed to furnish copy of the opinion furnished by Prof. V.V. Shastry on whose opinion the findings have been arrived at.
(b) The Commissioner has not appreciated the manufacturing process and the technology involved therein inasmuch as whether a product was called CD-ROM or CD-Video or CD-Audio, the fact remains that they were manufactured by the same process and the goods were identical. They cannot be recognised except through the labels affixed.
(d) Classification of the goods merely based on user understanding is against the established cannons of classification.
(e) The representative of the Department of Electronics had clarified that the goods manufactured by the appellants were Computer Software but this clarification has not been appreciated by the Commissioner.
(f) Merely because the CD-Audio and CD-Video can also be played by any other instrument/equipment, that by itself cannot take away the main classification of the items.
(g) The opinion given by Prof. Sethuraman was not considered by the department, though it was an unbiased opinion.
(h) The denial of the benefit of Notification No. 2/95 on an allegation that no export has taken place is without any basis and in disregard of the orders of the Department of Electronics.
(i) All the records required by law were maintained and the same were furnished to the department which shows the bona fide of the appellants and there was no clandestine removal of the goods.
(j) Penalty both under the provisions of Section 11AC and Rule 173Q cannot be imposed.
(k) Appropriation of an amount of Rs 4.5 lakhs has been done in disregard of the bona fide belief of the appellants.
4. During the arguments on 25.9.2002 Shri A.S. Sundararajan, learned Counsel referred to the judgment of the Hon'ble Supreme Court in the case of PSI Data Systems Ltd. v. CCE, 1997 (57) ECC 232 (SC) : 1997 (89) ELT 3 (SO wherein it was held that value of software sold along with the computer, not includible in the assessable value of computers since there is a distinction between computer and its software. He has invited our attention to page 75 of the paper book wherein they have explained the manufacturing process of CD plant and CD ROM. He has also invited our attention to page 2 of the order-in-original para 2 dealing with the facts of the case. He has also referred to page 42 of the paper book wherein copy of the letter dated 26.7.96 has been filed which states among other things that the department of Electronics has no objection to the sale of CD products in the DTA. He has also referred to page 43 of the paper book wherein they have requested the Assistant Commissioner of Central Excise, seeking permission to effect DTA sales of the goods. He has further referred to the letter dated 4.10.98 (filed in page 44 of the paper book) of the Supdt of Central, Excise under which he has granted permission for the DTA sale of their product making it clear that they should pay duty under proviso to Section 3 of the CE Act, 1944 without the benefit of Notification No.2/95 dated 4.1.95 equal to the aggregate value of the duties of Customs which would be leviable under Section 12 of the Customs Act, 1962. He has also submitted that in the invoices they have clearly indicated that duty will be paid. The matter was part heard on 25.9.2002 and was adjourned to 10.10.2002 as prayed for the learned Counsel for the appellants.
4.1 Resuming his arguments on 10.10.2002, Shri A.S. Sundararajan, learned Counsel submitted that as regards imposition of penalty under Rule 173Q, the provisions of this rule are subject to the provisions of Section 11AC and argued that penalties under both provisions cannot be imposed simultaneously. He has also referred to para 3 of the judgment of the Hon'ble Supreme Court in the case of PSI Data Systems Ltd. v.CCE, 2997 (57) ECC 232 (SC) : 1997 (89) ELT 3 (SC) wherein the Hon'ble Apex Court held that value of software sold along with the computer, not includible in the assessable value of the computer since there is a distinction between computer and software. He has also referred to the technical opinion given by Dr R. Sethuraman, Professor and Head, Department of Electronics and Instrumentation Engg. He submitted that copy of the expert opinion given by Head, Computer Centre, IIT was not provided to the appellants and only it was shown to him. He submitted that not providing copy of the said technical opinion which is relied upon by the Department against the appellants violates the principles of natural justice. He has also cited the order of the West Regional Bench of CEGAT, in the matter of BPL Mobile Communications Ltd. v. CC, 2002 (126) ELT 986, CEGAT, New Delhi decision in the case of Ginni International ltd. v. CCE, 2002 (79) ECC 85 (T) : 2002 (139) ELT 172.
He has also referred to the Circular No. 330/46/97-CX dated 20.8.97 issued by the CBEC wherein it is stated that transaction value under Rule 3(1) of the Customs Valuation Rules, 1988 should be accepted by the assessing officer with respect of DTA clearances. According to the learned Counsel appellants have only undertaken replication of the mind product into CD Roms "and not converting the mind into music and hence royalty paid to the mind cannot be added to the assessable value" and as the appellants are only replicators, they do not have any copyright.
He has also invited our attention to Notification No. 3/98 which amended Notification No. 11/97 and also to the Notification No. 2/95-CE dated 4.1.95 dated 4.1.95 dealing with exemption to all excisable goods produced in 100% EOU, FTZ, EHPT or STP units sold in India. He has also submitted written submissions before the Court on 10.10.2002 wherein inter alia it is stated that during the personal hearing before the Commissioner on 19.2.98, attention was invited to the letter of the IIT wherein they have expressed their inability to give any opinion as the same had already been furnished to the Department. It is also stated that attention was also invited to the opinion of the Prof. and Head of Department of Electronics and Instrumentation Engg., Hindustan College of Engineering wherein he has stated that both CD audio and video are classifiable as CD ROMs and each was a species of the latter and it was also confirmed that CD can be played both on music system as well as on computer. Further, merely based on the fact that it was playable on the music system was not appropriate to hold that all the three items are different items. It is stated that the Commissioner without furnishing copy of the report of the IIT, passed the impugned order though he read out the report at the time of personal hearing held on 15.5.98. The appellants have also relied upon the decision of the Tribunal in the case of Indo Cosmesi (P) Ltd. v. CC, 2001 (133) ELT 613. The appellants in the written submission have also answered to the questions that were framed by the lower authority from para 9.1 to para 9.9 which are extracted herein below: "Para 9.1: Whether the benefit of Notification No. 36/96-Cus dated 23.7.96 (Vide Sl. No. 162) can be extended CD Audio and CD video for the purpose of charging Basic Customs duty? This has been answered in favour of the appellant herein (para 14), wherein he has recorded that "I see no bar in holding that all the three products are CD ROMs only and thus eligible for concessional rate of duty as provided under Notification No. 36/96-Cus dated 23.7.1996 (para 14, page 32). Kind attention is also invited to the decision of the Hon'ble Supreme Court in the matter of PSI Data Systems Ltd. v. CCE, 1997 (57) ECC 232 (SC) : 1997 (89) ELT 3 (SC).
Para 9.2. Whether the contents of CD Audio, CD Video and CD ROMs are in the nature of "computer software" within the meaning of Explanation provided to Notification No. 11/97-Cus Dated 1.3.97 so as to determine the liability of CVD on the goods in question? He has dealt with this question in paras 14, 15 & 20. He has held that there is a distinction between CD ROMs on the one hand and CD Audio and Video, on the other. He has proceeded to record his findings with reference to Notification No. 3/98 and held that the appellants are not entitled to the NIL rate of duty under Chapter Heading 8524.20 of the Tariff.
In this connection it is submitted that the period of dispute in this case is 30.7.96 to 28.10.96 & 29.10.96 to 24.12.96. Therefore the question of applicability of Notification No. 11/97 dt. 1.3.97 would not fall for consideration. It is submitted that this is an obiter findings on which this Hon'ble Tribunal may not record any findings. However, reliance is placed on the decision of the Hon'ble Tribunal in the matter of BPL Mobile Communication Ltd v. CC, 2000 (126) ELT 986 (T).
Para. 9.3: Whether CVD can be charged on the 'hardware' if CD's contents are in the nature of Computer Software? The adjudicating authority had dealt with the question whether CVD can be charged on the Hardware or CD's contents are in the nature of Computer software. Even though he has posed this question to himself he does not appear to have answered the same. However, the fact remains that this question does not arise for consideration in the Show Cause Notice and therefore this Hon'ble Tribunal may not answer the same.
Para. 9.4: Whether concessional rate of 50% as provided under Notification No. 2/95 Central Excise dated 1.4.95 can be extended to the goods? The Commissioner has answered the same in the negative in para 22 of the order. In this connection, it is submitted that the appellant have specific approval of the ELCOT, who is the Nodal Agency for EHTP Units under Tamilnadu. They had accorded approval for clearance to DTA of goods worth Rs. 6.2 crores on a trial basis to feel the market. This was essential, according to the representation made by the appellant to the authorities concerned as the goods are of sensitive nature for the customers and any initial rejection would jeopardise their interests. Even though the authorities had permitted clearances to the extent of Rs. 6.2 crores, in view of the objections raised by the department the appellants have not availed of the benefit to the full extent. On commencement of these proceedings further clearances were stopped. The total clearances were less than Rs. one crore and the balance quantity was surrendered to the ELCOT as unutilised. Copy of the appellant's letter in this regard is enclosed. It is further submitted that on physical exports in subsequent years the appellants have during 1997-98 obtained permission for DTA clearances to the extent of Rs. 1.28 crores. This is not the subject matter of the present Show Cause Notice. In this connection, the appellant places reliance on the decision of the Hon'ble Tribunal, wherein it has been held that once permission has been given by the designated authority the Customs cannot go back on the decision and deny the benefit of Notification No. 2/95. Reliance is placed on the decision of the Hon'ble Tribunal in the following case; Ginni International Ltd v. CCE, 2002 (79) ECC 85 (T): 2002 (139) ELT 172 Para 9.5: Whether the value adopted for the purpose of charging duty in the Show cause notice when the goods have been manufactured on job work basis, is in terms of Provisions of Section 14 of the Customs Act, 1962? It is the contention of the appellant that the goods cleared to DTA from 100% EOU is to be charged ad valoram duty at the transaction value at which the goods have been cleared. It is submitted that the appellants are only replicators and are not Proprietors of the Intellectual Property Rights of the mind product. In this connection, reliance is placed on the Circular No. 330/46/97 CX dt.
20.8.97, wherein the Central Board of Excise and Customs has clarified that Invoice value can be accepted for the purpose of assessment in conformity with the provisions of Customs Valuation Rules, 1988. Copy of the Circular enclosed, in this connection. It is submitted that the provisions of Section 4 of the Central Excise Act has also been amended to provide for assessment based on transaction value, which appears to be in consonance with the aforementioned Circular of the Board. There could be no other basis for the valuation as the value of the proprietary item would not be known to the replicator whose job is only to carry out a mechanical replication of the CD Audio/Video/ROMs irrespective of the contents thereof. The valuation has to be oh a firm basis and cannot be left to an imaginary formula.
Para 9.6 & 9.7: Whether duty on the goods can be demanded under proviso to Section 11A(1) of CE Act, 1944 and whether the unaccounted CD Audios, CD Videos and CD ROMs (valued at Rs 44,47,047) which have been released provisionally are liable for confiscation under Rule 173Q(1) of CE Rules, 1944? His findings are to be found in para 27, wherein he has rejected the contention of the appellant that the errors of omission or commission was due to communication gap between various departments of the appellant, He has held that the proviso to Section 11A of the Act can be invoked. He has therefore appropriated a sum of Rs. 4.5 lakhs in terms of the bond executed. In this connection, it is submitted that indisputedly the appellants have sought clarification and permission for clearing the goods much ahead of the actual clearances. It is the department who has taken time to react. In the meantime the appellants have in the bona fide belief that necessary permission has been granted have cleared certain goods. Further being a Computer Company they have maintained all records of orders received, goods manufactured and cleared to DTA. Therefore there is no question of any suppression with an intent to evade payment of duty. The mens rea is lacking. In fact the SCN relies upon the date furnished by the appellant. In the circumstances the provisions of Section 11A(1) of the Central Excise Act are not applicable. The goods are not rendered liable for confiscation. Indisputedly the assessments were provisional and the appellants are bound to pay the assessed duty without prejudice to the their rights in this regard.
Moreover, the Commissioner's order appropriating a sum of Rs. 4.5 lakhs from the bond without specifying the grounds on which the same is invoked are not sustainable. It is submitted that the proper course was not to order confiscation of the goods and impose redemption fine and appropriating the bond amount. On this ground alone this portion of the order (at para 27) is liable to be quashed.
Para 9.8: Whether the noticee is liable for penalty under Section 11AC of CE Act, 1944 and Rule 173Q of the CE Rules, 1944? The answer is recorded in para 28. The Commissioner has recorded that since Section 11 AC was introduced from 28.9.96 he has limited the mandatory penalty for the period after 28.9.96. However, the fact remains that the mandatory penalty referred to in Section 11 AC of the Central Excise Act is the maximum prescribed under the Central Excise Act and not the minimum. Reliance in this connection is placed on the following decisions:CCE v. L.G. Electronics, In this connection it may be seen that Section 11AC provides for a mandatory penalty only in cases were there has been a short levy by a reason of fraud, collusion or any wilful misstatement or suppression of facts or contravention of any provisions of the Act or the Rules made thereunder with intent to evade payment of duty.
In this case the ingredients for invoking Section 11 AC are not specified in the Show Cause Notice nor the same has been recorded by the adjudicating authority. Therefore the provisions of Section 11 AC per se are not applicable. The mandatory penalty imposed is therefore not sustainable. Without prejudice to the same there is no justification for 100% penalty.
In addition to mandatory penalty under Section 11AC the adjudicating authority has also imposed a penalty of Rs. 2 lakhs under Rule 173Q of the Central Excise Rules. In this connector, it may be seen that Rule 173Q specifically states that the same is "subject to the provisions of Section 11AC of the Act." Since Section 11AC has been invoked and, as submitted, there is no case establishing that there was wilful misstatement or there was intention to evade payment of duty, the said provision is not invocable. Therefore the penalty imposed both under Section 11AC of the Act as well as under Rule 173Q of the Rules are not sustainable.
He has in para 30 ordered confiscation of Plant and Machinery and allowed redemption of the same on payment of Rs. 10,000. In this connection, it is submitted that there was no wilful misstatement or attempt to clear the goods without payment of duty. The Rules itself provides that confiscation of Plant and Machinery is permissible only in the case of a contravention of the nature referred to in Sub-rule (1) of Rule 173Q of the Central Excise Rules. The Clauses (a) & (b) of the Rule 173Q (2) appears to be connective and so read the same does not appear to be applicable for the reason that Clause (b) refers to a habitual offender and in this case indisputedly the appellant was not a habitual offender. On the other hand this was the first clearance to DTA and therefore the errors of omission or commission if any have to be given the benefit of doubt. In the circumstances the fine of Rs. 10,000 is not sustaiaable. Reliance is placed on the decision of YA. Hazare Bros v. CCE, 1990 (47)ELT 286.
Para 9.9: Whether the Plant and Machinery used in the manufacture of said excisable goods, are liable for confiscation under Rule 173Q(2) of CE Rules, 1944? He has in para 30 ordered confiscation of Plant and Machinery and allowed redemption of the same on payment of Rs. 10,000. In this connection, it is submitted that there was no wilful misstatement or attempt to clear the goods without payment of duty. The Rules itself provides that confiscation of Plant and Machinery is permissible only in the case of a contravention of the nature referred to in Sub-rule (1) of Rule 173Q of the Central Excise Rules. The Clauses (a) & (b) of the Rule 173Q(2) appears to be conjective and so read the same does not appear to be applicable for the reason that Clause (b) refers to a habitual offender and in this case in-disputedly the appellant was not a habitual offender. On the other hand this was the first clearance to DTA and therefore the errors of omission or commission if any have to be given the benefit of doubt. In the circumstances the fine of Rs. 10,000 is not sustainable. Reliance is placed on the decision of YA. Hazare Bros v. CCE, 1990 (47) ELT 5. They have also stated in the written submission that the main question that falls for consideration in this case is whether the CD Audio/Video/ROMs are software per se and qualify for the benefit of Notification No. 36/96-Cus dated 23.7.96. They submitted that the findings in this regard are in their favour. It is stated that the other question is whether certain clearances effected to the DTA without debiting the PLA, would call for penal proceedings. It is further stated that the appellants at the material time was the only manufacturer of such goods and they had bona fide sought clarification/permission from the ELCOT and the jurisdictional Central Excise Officer. It is further stated that the depositions of the departmental officers clearly established that the appellants maintained all the records and hence there was no meas rea on the part of the appellants. It is also stated that the department had issued instructions for levy of duty on the transaction value and there was no relationship between the buyer and the seller and it is not the case of the department that there was any mutuality of interest. It is further stated that in the circumstances there was no case for invocation of the provisions of Section 11AC and Rule 173Q(1).
6. Shri A Jayachandran, learned DR for the department defended the impugned order. He has also invited our attention to para 24 of the order-in-original wherein the Commissioner has dealt with aspects regarding value addition, DTA clearances, applicability of Customs Valuation Rules. He has also invited our attention to para 9, 10.3 to 10.5 of the Annexure A to the show cause notice dealing with the aspects pertaining to classification of the goods, rate of duty applicable and applicability of Notification No. 36/96-Cus dated 23.7.1996. He has also invited our attention to page 29 of the paper book wherein the Expert opinion given by Shri V.V. Sastry, Head, Computer Centre, IIT has been adverted to by the Commissioner. The learned DR particularly referred to the opinion given Shri V.V. Sastry, wherein he has stated that "Mere selecting the particular sequence/song either from CD Audio/Video cannot be called as 'interactivity'. To have interactivity with the user, the software should be designed to accommodate the user's query and answer the same" According to the learned DR, the CD cannot be called as Computer Software and at best be called a 'Software". He submitted that clearances made to the DTA prior to receiving permission and without paying duty is an admitted fact. He has also invited our attention to the judgment of the Hon'ble Apex Court in the case of Tata Consultancy Services v. State of Andhra Pradesh, 2001 (74) ECC 521 (SC) : 2001 (129) ELT 3 (SC) wherein the question whether specialised and exclusively custom made software and standardized software marketed for use of certain classes of clients like Oracle, Lotus, Master Key, etc. are goods or not came up for consideration and the Division Bench ordered for placing the papers before the Hon'ble Chief Justice of India for Constituting a large; Bench in view of the matter being highly controversial and the issue is yet to be decided.
6.1 In counter the learned Counsel for the appellants referred to the judgment of the Hon'ble Supreme Court in the case of PSI Data Systems Ltd. v. CCE, 1997 (57)ECC232 (SC) : 1997(89) ELT 3 (SC) (supra). He submitted that the appellants are replicators and do not have the copyright and hence they are "mind product and they are exempted" according to the learned Counsel. He submitted that all these CDs/Discs are playable on computers and hence they are computer software and not hardware. While winding up his arguments he submitted that explanation to Notification No. 3/98 dated 11.2.98 was not the point for consideration.
6.2 Shri A Jayachandran, learned DR in counter submitted that "nobody asks for CD and they ask for CD of a particular singer". He submitted that the main issue is naming the goods cleared. He has also made written submission before the Court on 10.10.2002, which are reproduced hereinbelow: "1. Pentafour software has cleared CD ROMs, Audio CD & Video CD. Whether these items can be called as software is the issue. Before understanding software, it is necessary to see the definition of hardware. Hardware is equal to physical parts of our body. Software is like mind of our body. CPU, monitor, keyboard, mouse etc., are called hardware. Mind used to operate these hardware are called system software. (Say type A) DOS, window, linex fall under this category. By utilizing hardware and system hardware one can run certain software which are meant for collection, storing and manipulating of dates. These types of software are called utility software. (Say type B) MD Word, Excel, oracle ADOBE etc., falls under this category. Besides these two types of software, there is in existence of one more type of software which carries Audio albums full time motion pictures and certain books on CDs.
2. All these software are stored in magnetic tapes like floppy discs or in CD ROM. The floppy and CD ROM are carriers of software.
3. CD ROM is read only memory. It cannot be re-written like magnetic tapes. The CD ROM can be used to store all the types of software mentioned in the para 1 above.
4. Whether the 3rd category of software like motion pictures, audio album and teaching demo pictures can be equated with system software and utility software and what type of software can be allowed under Sl. No. 173 of Customs Notification 11/96 is the question to be decided.
5. The Sl. No. 173 of Customs Notification 11/96 reads as computer software. In circular No. 7/98 dated 10.2.98 department had clarified that the exemption under Sl. No. 173 of the said notifications is to 'computer software' and not to software in general. By applying this classification the system software and which software are computer software and others are game type software.
The classification further states software means any representative of instructions, data, sound, or image including ones and object recorded in a readable form and capable of being manipulated or profit interactivity to a user by means of an automatic data processing machine.
The word "capable of being manipulated or of providing interactivity to an user" carries much weight. Practically there is no manipulation of data in audio CD or in video CD. There is no interactivity also. If at all there is an interactivity it is only to select the needed song or scenes.
Mere selection is not interactivity as per the opinion given by Shri. V.V. Shastry, Head computer center. I.I.T. vide his letter dated 5.3.98".
7. We have carefully considered the rival submissions and gone through the case records. The issues arising for determination in this appeal are as under: (a) Whether the CD ROMs. Audio CD & Video CD are capable of being manipulate or providing interactivity to a user by means of a computer and whether the appellants are eligible for the benefit of Notification 36/96 (S) No. 162). The Commissioner vide para 14 of the impugned order has held that all the three products of the appellants are CD ROMs only and are eligible for the concessional rate under Notification No. 36/96 dated 23.7.96. The Commissioner has further held in para 20 of his order that in the light of the explanation given for "Computer Software" under Notification No. 3/98, the appellants are not entitled to clear the goods carrying NIL rate of duty. The appellants have taken the plea that since the period of dispute is 30.7.96 to 28.10.96 and 29.10.96 to 24.12.96, the Notification No. 11/97 dated 1st March 97 which has been amended by Notification No. 3/98 dated 11.2.98 would not fall for consideration. We observe that according to Sl. 161 of the Table to the Notification 36/96 dated 23.7.96. Computer Software carries a rate of duty of 10% and vide Sl. 162 thereto, Compact Disc -- Read Only Memory (CD ROM) also carries a rate of duty of 10%. We also observe that vide Sl. No. 173 to the table Annexed to Notification 11/97 dated 1st March 1997, Computer Software carries 'Nil' rate of duty and vide Sl No. 174 thereto, Compact Disc -- Read Only Memory (CD ROM) the rate of duty is 10% as was provided in the Notification No. 36/96. The question to be decided is whether the goods involved in the present case viz. CD Audio, CD Video and CD ROMs are Computer Software or not. We observe that the issue to be decided in the case is highly technical in nature and, therefore, the adjudicating authority had to be guided by expert opinion. The expert opinion was therefore sought by the department from Shri V.V. Shastry, Head of the Computer Centre, IIT, Chennai which has been relied upon in the impugned order. Though he has adverted to the said report and quoted certain portions of the same in the impugned order, a copy of the report was not made available to the appellants and the report was only read over to the opposite side during personal hearing and this amounts to violation of principles of natural justice. We observe that there is force in the plea taken by the appellants in this regard more particularly when the findings arrived at by them is against them. As already noted, this is a highly technical matter and just reading over the expert opinion at the time of personal hearing cannot be taken to be giving the opposite side adequate and effective opportunity to explain their stand in the facts and circumstances of this case. Therefore, on this score, the matter has to go back for re-consideration after giving copy of the expert opinion given by the IIT to the appellants. The appellants have also relied upon similar expert opinion given by Dr. R. Sethuraman, Prof.
& Head of the Department of Hindustan College of Engineering. This expert opinion shall also be taken into consideration by the lower authority in the de novo proceedings.
(b) Para 9.2. Whether the contents of CD Audio. CD Video and CD ROMs are in the nature of "computer software" within the meaning of Explanation provided to Notification No. 11/97 dated 1.3.97 as amended by Notification No. 3/98 Cus Dated 11.2.98, so as to determine the liability of CVD on the goods in question? The plea of the appellants is thatsince period of dispute is from 30.7.96 to 28.10.96 and 29.10.96 to 24.12.96. Notification No. 11/97 dated 1.3.97, as amended by Notification No. 3/98 cannot be invoked in the present case. We observe that Notification No. 3/98 which amended Notification 11/97 is only a clarification on an existing term "Computer Software" which reads as under.
Explanation: "Computer Software" means any representation of instructions, data, sound or image, including source code and object code recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of an automatic data processing machine falling under heading 84.71, but does not include software required for operation of any machine performing a specific function other than data processing and incorporating or working in conjunction with an automatic data processing machine.
From the above explanation it is clear that any software representation which can be manipulated or interfered or providing with interactivity can be called a Computer Software and any software required for operation of a specific function other than data, processing cannot be called a Compute Software, example CD ROM. Therefore, just because a clarification has been issued on a later date, that by itself does not alter the factual position as to what is meant by Computer Software and what is meant by CD ROM. Further according to Notification No. 36/96 dated 23.7.1996 even Computer software was chargeable to duty of 10%. Therefore, Computer Software was also not exempted from CVD. It was only by Notification 11/97 dated 1.3.97 that nil rate of duty was chargeable to Computer Software. Explanation by issue of Notification 3/98 dated 11.2.98 was issued to set at rest any doubt as to what constitutes "Computer Software". The items cleared by the appellants are not Computer Software as the items in question cannot be manipulated or interfered or interacted.
(c) Whether CVD can be charged on the hardware if CD's contends are in the nature of Computer Software. We observe that the appellants have taken the ground that this aspect of the matter is beyond the scope of the Show cause notice and hence the question of CVD liability does not arise. We have gone through the show cause notice and find that the Annexure to the show cause notice dated 23.6.1997 has clearly dealt with demand of CVD. We however, observe that this question has not been specifically answered by the lower authority.
Therefore, it is proper that this aspect of the matter is remanded for de novo consideration in accordance with law.
(d) Whether concessional rate of duty of 50%_as per Notfn. No. 2/95 dated 4.1.95 can be extended to the goods. This concession has been denied to the appellants on the ground that the appellants have not achieved the value addition on the date of DTA which is the relevant date to decide the rate of duty in terms of Rule 9A of the CE Rules, 1944 whereas the appellants contend that this is not the subject matter of the show cause notice. This plea of the appellants cannot be accepted inasmuch as this aspect of the matter has been clearly dealt with in Annexure A to the show cause notice which formed part of the show cause notice. They have also relied upon the decision of the Tribunal in the case of Ginni International Ltd. v. CCE, 2002 (79) ECC 85 (T) : 2002 (139) ELT 172 wherein it was held that once Development Commissioner Export Processing Units have granted permission to sell the goods to DTA up to a specified value of goods, Revenue cannot go beyond the permission and dispute it holding that the physical export and not deemed export should have been taken into account for fixing limit of such sales. We observe that in the present case, the appellants have been granted permission to sell CD ROMs to DTA by the Govt. of India, Department of Electronics, vide letter dated 26.7.96 for the first year of operation for a value of Rs 6.20 crores subject to payment of duty in terms of Notification No. 42 (N-8) 92-97 DATED 14.9.92 and as against this value, they have exported goods for a value of Rs 89,64,494. We further observe that while granting permission to the appellants by the department to remove the goods to the DTA it was made clear in the permission letter dated 4.10.96 of the Supdt of Central Excise that the appellants should clear the goods on payment of duty under Section 3 of the CE Act, 1944 without the benefit of the Notification No. 2/95 dated 4.1.95 equal to the aggregate duties of Customs which would be leviable under Section 12 of the Customs Act, 1962. Further, the contention of the appellants that the goods have been cleared on provisional basis cannot be accepted since it is not the case of the appellants that they have followed the procedure laid down under Rule 9B of the CE Rules, 1944 for provisional payment of duty. It is an admitted fact that the appellants have cleared the goods to DTA without payment of duty for the period from 30.7.96 to 28.10.96 and from 29.10.96 on payment of duty less than the applicable rate though the appellants claim that in the invoice they had mentioned that duty shall be payable as determined by the authorities. However, the concession has been denied to the appellants on the ground of value addition as noted above and the Commissioner has not adverted to the conditional permission granted to them to clear the goods to DTA viz. without the benefit of Notification No. 2/95. However, in view of the ratio of the decision in the case of Ginni International Ltd. v. CCE (supra), this aspect of the matter is remanded for reconsideration taking into consideration the above noted case law.
(e) Whether the value adopted for purpose of charging duty is in terms of the provisions of Section 14 of The Customs Act, 1962 when the goods have been manufactured on job work basis. The appellants have relied upon the Circular No. 330/46/97 dated 20.8.97 wherein it is stated that transaction value under Rule 3(1) of the CVR 1988 should be accepted by the assessing officer with respect to DTA clearances. The said circular was not considered by the adjudicating authority when the impugned order came to be passed. This aspect of the matter is therefore remanded for the purpose of deciding the value in the light of the noted circular.
(f) Whether proviso to Section 11A(1) can be invoked for demand of duty. We find that the period involved in this case is 30.7.96 to 24.12.96. The appellants as far back as on 30.4.96 had sought permission from the Department of Electronics, Govt. of India, for permission to effect sale of the goods to DTA and on receipt of their reply dated 26.7.96, the Revenue was also requested to grant permission for effect ing DTA sales and the said permission was granted by the department vide letter bearing No. OC 2085/95 dated 4.10.96. However we find that the appellants have effected sale of the goods without payment of duty from 30.7.96 to 28.10.96 and on payment of duty though at a lesser rate from 29.10.96 to 24.12.96.
The appellants contend that they have effected sales clearly indicating on the invoice that duty shall be payable as determined by the authorities. In the face of the appellant's seeking permission to sell the goods to DTA much in advance and in view of the assertion that they have indicated in the invoice that duty shall be payable as may be determined by the authorities, this aspect of the matter is required to be verified by the authorities as to whether such remarks were clearly mentioned in the invoice along with the documents namely the RT-12. If so, it may not be said that the appellants had any intention to evade payment of duty. This aspect of the matter needs verification with reference to records and hence remanded for de novo adjudication in accordance with law.
If it is found that no such remarks were make in the invoice, then proviso to Section 11A(1) can be invoked.
(g) Whether the unaccounted CD Audios, CD videos and CD ROMs which have been released provisionally are liable for confiscation under Rule 173Q(1) of the CE Rules. We find that finished goods viz. CD ROMs valued at Rs 44,47,047 had not been accounted for in the statutory records. This act on the part of the appellants cannot be said to be without the intention of clearing the same clandestinely, Therefore, confiscation of the goods have been correctly ordered.
(h) Mandatory penalty under Section 11AC and penalty under Rule 173Q. In this case the Commissioner himself in the impugned order has held in para 11 that since Section 11AC was introduced with effect from 28.9.96 only a portion of the period of dispute is covered by this Section and accordingly he has limited the penalty under this Section to Rs 14,38,561. We find that this quantum is more than the maximum permissible limit. We observe that the issue with regard to imposition of penalty under Section 11AC is mandatory or not is no longer res integra and the authorities have discretion to impose a lesser penalty as has been held by the Hon'ble Supreme Court in the case of State of Madhya Pradesh v. Bharat Heavy Electricals Ltd. 1998 (99) ELT 33 (SC). The said decision has been followed by the Hon'ble High Court of Madras in the case of CCE, Trichy v. CEGAT, Chennai, 2001 (133) ELT 536 wherein while dismissing the Reference application filed by the Revenue, the High Court has held that despite prescription of penalty in the statutory provisions the element of discretion still lies and what is provided in the provision is the maximum, discretion which no doubt be exercised judiciously can be exercised, having due regard to the facts and circumstances of each case which is what the Tribunal has done. Therefore, penalty under Section 11AC maybe re-examined in the de novo proceedings. Further, in the present case, the appellants have also been imposed a penalty of Rs. 2 lakhs under Rule 173Q. We note that we have been taking a consistent view that penalty under both the provisions i.e. for under Section 11AC and Rule 173Q has to be apportioned and in the present case the Commissioner has apportioned the penalty under both the provisions. Appellants are at liberty to cite authorities in support of their plea in regard to imposition of penalty under both the provisions, during the de novo proceedings.
(i) Confiscation of Plant & Machinery. The appellants have taken a plea that confiscation of plant and machinery is not legal in term of the provisions of Rule 173(Q)(2) which requires the adjudicating authority to record specific reasons for directing confiscation of plant and machinery. We find that in the impugned order no such reason is spelt out nor is there any finding that the offence has been committed for the second time or subsequent occasion. In view of this, the lower authority is directed to reconsider the aspect with regard to confiscation of plant is also therefore, remanded for re-consideration and decision in the de novo proceedings in the light of the view taken in the case of YA Hazare & Bros v. CCE, 1990 (47) ELT 286.
8. In view of our above observation and findings, the impugned order is set aside and the appeal is allowed by remand for de novo consideration in accordance with law.