A recent judgement of the Supreme Court has come as a rude shock for IT giants like Wipro, Hewlett-Packard, HCL and other PC manufacturers who were not including the value of operational software in the value of the computer at the time of their clearance from factories and were paying central excise duty on the value exclusive of such software cost.

The central excise law warrants that the duty must be paid on transaction value of goods sold in the market.

To avoid duty liability on the full value at which PCs were being sold, computer manufacturers claimed that the value of software is not includible in the value for payment of central excise duty under section 4 of Central Excise Act.

The Central Excise and Service Tax Appellate Tribunal had decided the issue in favour of PC manufacturers in the case reported in 2003-Taxindiaonline-150-CESTAT-Bang. However, on an appeal filed by the Commissioner of Central Excise, Pondicherry, the Supreme Court has ruled that the price of operational software is includible in assessable value of computers.

Further, in view of the contrary opinion of the Supreme Court in the case of PSI Data Systems Limited vs Collector of Central Excise, the matter has been referred to Chief Justice of India for constituting a larger bench for determination of issue by a majority of three judges.

In the case of PSI Data Systems Limited it was held that a computer and its software are distinct and separate items; a computer may not be capable of effective functioning unless loaded with software, but still these are not parts of computer and even if they are sold along with the computer their value does not form part of assessable value.

But the Supreme Court bench did not agree with the view that even though a computer may not function without a software, that would not be part of a computer.

It has been learnt that the central excise authorities are already contemplating provisional assessment of duty for clearances of computers by manufacturers from the factories. However, the manufacturers are still resisting full duty payment.

Those paying duty on full value will be benefited as they can pass on the duty to consumers. Those not paying duty on full value will not be able to recover the same and will be saddled with huge duty liability if the larger bench ruling confirms the recent SC judgment.

Most of the manufacturers had acted on the advice of their consultants who advised them to avoid duty liability by discharging duty at lower value.

The Apex Court held that any amount which a buyer has to pay "by reason of or in connection with the sale" is part of the transaction value. There are software without which computers cannot work at all. There may be software which contain additional or ancillary applications which a customer may want to buy separately. An additional or ancillary application would, of course, be classifiable separately and cannot be included in the value of a computer. But a buyer has to buy software without which the computer cannot work."

"The computer would otherwise be a dead box, if software is not purchased. When one talks of a computer, as understood in the trade, it is not just the box or the hardware. A computer contains of both hardware and the operating software. The price of such software is thus the amount which a buyer is bound to pay by reason of or in connection with the sale of computers. It appears to us that the price of such software is thus includible in the value for purposes of excise duty."

See full text of judgement in 2004-Taxindiaonline-31-SC-CX in Legal Corner.

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