M/S Sprint Rpg India Ltd vs Commissioner Of Customs-I, Delhi

Supreme Court20 January 2000M.B.Shah · B.N.Kirpal

SCC(2000) 2 SCC 486
Neutral2000 INSC 26
AIRAIR 2000 SC 749
SCR[2000] 1 SCR 332

Ratio decidendi

The rule this decision rests on

When computer software is imported loaded on a hard disk drive, the classification and rate of customs duty is determined by the essential character of the goods, which is the software rather than the hard disk. The hard disk functions as a container or storage medium for the software, and where the value of the software substantially exceeds the value of the hard disk (as in the ratio of approximately 100:1), the goods are classifiable under Tariff Heading 85.24 as recorded media for computer software, attracting a duty rate of 10%, rather than under Heading 84.71 as automatic data processing machines, which would attract a higher rate of 25%.

Written by Miss Lucy from the judgment below, not taken from a headnote.

Judgment

As delivered

PETITIONER:M/S SPRINT RPG INDIA LTD.

Vs.

RESPONDENT:COMMISSIONER OF CUSTOMS-I, DELHI.

DATE OF JUDGMENT: 20/01/2000

BENCH:M.B.Shah, B.N.Kirpal

JUDGMENT:

Shah,J.

Leave granted. Appeal admitted.

The short question involved in this appeal is whethercustom duty on imported computer software loaded on a harddisk drive is to be levied on the basis of hard disksimplicitor or computer software. Goods imported by theappellant were examined on 9th August, 1995 and were foundto be seven pieces of hard disk drive loaded with software.As per the department, custom duty on hard disk drive isleviable under Chapter Heading 84.71 at the rate of 25% andon a computer software it is at the rate of 10% as per thetariff Heading 85.24 read with notification No.59/95 dated16.3.1995. It is admitted fact that total value of theconsignment was Rs.67,75,119/- for seven hard disk driveshaving software loaded thereon. Value of the hard disksimplicitor would be roughly at the most Rs.60000/-. Therelevant headings of the Chapter are as under:-

84.71 Automatic data processing machines and unitsthereof; magnetic or optical readers, machines fortranscribing data on to data media in coded form andmachines for processing such data, not elsewhere specifiedor included.

8471.70 Storage units. 5% 8471.80 Other units ofautomatic date processing machines. 20%

8471.90 Other 20%

85.23 Prepared unrecorded media for sound recording orsimilar recording of other phenomena, other than products ofChapter 37.

- Magnetic tapes.

85.24 Records, tapes and other recorded media forsound or other similarly recorded phenomena, includingmatrices and masters for the production of records, butexcluding products of Chapter 37.

8524.10 Gramophone records. 40% - Discs for laserreading systems;

8524.31 For reproducing phenomena other than sound orimage. 25%

8524.40 Magnetic tapes for reproducing phenomena otherthan 25% sound or image.

- Other magnetic tapes.

8524.99 Others 40%

The Tribunal arrived at the conclusion that as thesoftware was loaded on a hard disk, it would remain to be ahard disk drive on which software was loaded and, therefore,alongwith Chapter Note 5(A) and (B) of Chapter 84, it wouldbe hard disk drive loaded with software and would be taxableunder the Heading 84.71 and not 85.24. The Tribunalconsidered the decision of this Court in PSI Data SystemsLtd. vs. Collector of Central Excise, {1997 (89) ELT 3(SC)} and observed that it would not be applicable to thefacts of the present case.

For understanding of computer software and the harddisk, learned counsel for the Customs has produced on recordsome extracts from Modern All About Hard Disk Drive of BPBPublications, which reads as under:-

Today Hard Disk Drives are the most common storagedevice used with the computer system. The hard disk driveis also known as Hard Disk, Hard Drive, Fixed Disk Drive orWinchester Disk Drive. The hard disk drive is used to storedata and programs permanently inside the computer. Theinformation stored in the hard disk drive does not geterased when the power supply to the computer is switchedoff.

This device is known as Hard Disk Drive becausecompared to the other common magnetic storage device, floppydisk, which uses flexible plastic like carrier for themagnetic recording medium; the hard disk drive uses rigid,hard, aluminium or glass as the base for recording medium.

xxxx xxxx xxxx

Information is stored in the hard drive using the samemagnetic recording method, which is used to store songs on aaudio tape or movies on a video tape. The audio or videotape does not lose its content when the power supply givento the audio or video recorded is switched off, same way thehard drive also retains the information stored in it, evenwhen the power supply to the hard drive is switched off.

He has also pointed out the extract from PC PowerBoosting Your PCs Performance written by Stephen J.Dougherty wherein hard disk is given meaning as under:-

Hard disk. A data storage device that stores the data onmetal disks that have a magnetic coating. Hard disk drivesprovide faster access and larger storage capacities thandiskettes. Sometimes referred to as a fixed disk.

He further submits that he has received informationfrom the Deputy Commissioner (Customs), Air Cargo, NewDelhi, as per the letter which is produced on record whichpoints out that in nutshell, a hard disk is one of thedevices used in the Computer Systems. Its function is tostore the data, instructions, sound images etc. includingsource code and object code. The moot difference betweenthe hard disk and the software is that a hard disk ishardware whereas software is a representation of any type ofdata and which is stored in the hard disk. Similarly, asper the Internet information received by Customs, a harddisk is really a set of stacked disks, each of which,like phonograph records, has data recordedelectromagnetically in concentric circles or tracks on thedisk. A head (something like a phonograph arm but in arelatively fixed position) records (writes) or reads theinformation on the tracks.

appellant is hard disk In the present case, what isimported by the drive loaded with software material.Heading 84.71 apparently covers automatic data processingmachines and units thereof and magnetic or optical readersnot elsewhere specified or included. It is to be statedthat heading 85.23 deals with prepared unrecorded media forsound recording or similar recording of other phenomena,which includes magnetic tapes. As against this, heading85.24 covers records, tapes and other recorded media forsound or other similarly recorded phenomena which coversgramophone records or magnetic tapes for reproducingphenomena. That software material is admittedlyclassifiable under Tariff Heading No.85.24 which providesfor taxing records, tapes and other recorded media for soundor other similarly recorded phenomena. The differencebetween the hard disk drives and magnetic storage devices orfloppy disks is only with regard to the use of rigid, hard,aluminium or glass as the base for recording medium. Whatis covered by the said heading is recorded tapes, magnetictapes or other similar recorded phenomena. As per theliterature supplied by the department, hard disk drive isused to store data and programs permanently inside thecomputer. The difference between hard disk drive and commonmagnetic storage device or floppy disk is the base forrecording medium. It also provides faster access and largerstorage capacity; its function is to store the datainstructions, sound images etc. and it is like phonographrecords. Floppy disk uses flexible plastic like carrier formagnetic recording medium. Information is stored in thehard disk drive using the same magnetic recording methodwhich is used to store songs on an audio tape or movies on avideo tape. Therefore, hard disk is a refined form offloppy and serves the same purpose of recording material inmore efficient way. The moot difference between the harddisk and the software is that a hard disk is a hardwarewhereas software is a representation of any type of data andwhich can be stored in the hard disk. There is no disputethat floppy on which software is stored would be taxableunder Tariff Heading 85.24. Instead of storing the softwareon the floppy if it is stored on a hard disk drive, it wouldnot ceased to be a software. As stated above, it is aninformation stored in the hard disk drive using magneticrecording method.

Further, the Central Government by its NotificationNo.59/95-Cus. dated 16th March, 1995 provided exemption tothe computer equipments which reads as under:-

In exercise of the powers conferred by sub-section(1) of section 25 of the Customs Act, 1962 (52 of 1962), theCentral Government, being satisfied that it is necessary inthe public interest so to do, hereby exempts the goodsspecified in column (3) of the Table hereto annexed andfalling within Chapter or under heading No. or sub-headingNo. of the First Schedule to the Customs Tariff Act, 1975(51 of 1975), specified in the corresponding entry in column

92) of the said Table, when imported into India, from somuch of that portion of the duty of customs leviable thereonwhich is specified in the said First Schedule, as is inexcess of the amount calculated at the rates specified inthe corresponding entry in column (4) of the said Table.

------------------------------------------------------------------------------

Sl. Chapter Description of Rate of duty No. or heading goods No. or sub-

No.______________________________________ heading (1) (2) (3)(4)____

40% ad valorem 1. 84.71 All goods other than Hard disk drive and Floppy disk drive.

25% ad valorem 2. 84.71 Hard disk drive or Floppy disk drive.

3. 8473.30 All goods. 35% ad valorem

4. 49 or Computer software 10% ad valorem 85.24

-----------------------------------------------------------------------------

As per Item 2 of the above notification rate of duty is 25% for hard disk drive or floppy disk drive covered by heading or sub-heading 84.71. As against this, for computer software, if it falls under Chapter 49 or under Heading No.85.24, the rate of duty would be 10%. If simplicitor hard disk drive is imported, it may be taxable under the Heading 84.71. However, in a case where essentially a software is imported which is loaded on a hard disk drive, it would be computer software material and in that set of circumstances, it would be taxable under Heading 85.24. This is also made clear in Chapter Note 6 of Chapter 85 by providing as under:-

Records, tapes and other media of heading No.85.23 or 85.24 remain classified in those headings, whether or not they are presented with the apparatus for which they are intended.

Mr. Swami, learned counsel for the respondent relied upon the Rules of Interpretation mentioned in the First Schedule appended to the Customs Tariff Act which lay down general Rules for the interpretation and classification of goods for import tariff. Rules 2(b), 3 and 4 read as under:-

2(b) Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of rule 3.

3. When by application of rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows:

(a) The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.

(b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.

(c ) When goods cannot be classified by reference to

(a) or (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration.

4. Goods which cannot be classified in accordance with the above rules shall be classified under the heading appropriate to the goods to which they are most akin.

Testing it from the aforesaid Rules of Interpretation, it would be clear that the disk or a floppy on which computer data is recorded, would be covered by heading 85.24. Rule 3(a), inter-alia, provides that when two or more headings each refer to part only of the materials or composite goods, those headings are to be regarded as equally specific in relation to those goods, even if one of item gives a more complete or precise description of the goods. Further, considering imported goods to be a mixture of two substances namely hard disk drive and software as per Rule 3(b) they can be classified under the heading which gives them their essential character. In the present case, considering its price factor it would be computer software. The price of the imported consignment was approximately Rs.68 lakhs. As against this, value of the seven hard disk drives would be roughly Rs.60000/-that is to say, value of the computer software is hundred times more than its containers hard disk. Hence, the essential character of the imported goods is computer software.

Mr. Swami, learned counsel for the respondent further referred to Chapter Note 5 of Chapter 84 and submitted that for the purposes of Heading No.84.71, the expression automatic data processing machine means automatic data processing machines or a unit as being a part of a complete system if it meets the following conditions:

(a) It is of a kind solely or principally used in an automatic data processing system;

(b) It is connectable to the central processing unit either directly or through one or more other units; and

He referred to clauses (b) and (c) and contended that this hard disk drive can be used either directly or through one or more other units for processing the data and, therefore, it would be automatic data processing machine falling under Heading No.84.71. This submission cannot be accepted for the consignment in question is essentially a computer software covered by specific Heading No.85.24 which is for levying duty on records, tapes and other recorded media for sound or other similarly recorded phenomena. As mentioned in the Notification dated 16th March, 1995, computer software is covered by Heading No.85.24. The said notification also covers computer software imported in the form of printed books, pictures, manuscripts and typed scripts covered by Chapter 49. Computer software can be brought either on a floppy or magnetic tape or on a hard disk or in a printed form and hence, what is imported is software on a container which is a hard disk drive. The value of the containers (hard disks) approximately in the present case is Rs.60000/- or Rs.65000/-. As against this, the cost of the computer software is roughly Rs.67 lakhs. Therefore, it can be said that what is imported by the appellant is essentially a computer software.

In this view of the matter, the order dated 25th March, 1996 of the Commissioner of Customs and the order dated 14th May, 1999 of the Tribunal confirming the said order in Appeal No.161/96-B2 are quashed and set aside. It is held that computer software imported by the appellant on a hard disk drive is assessable at the rate of 10% as per Heading 85.24 with the Exemption Notification stated above because what was imported by the appellant was software on a hard disk and it was not hard disk in the garb of software.

In the result, the appeal is allowed accordingly with no order as to costs.

This page reproduces a public judgment and a summary of it. It is research material, not legal advice, and it is no substitute for advice from an advocate on your own facts.

Research this judgment with Miss Lucy

Ask what it holds, what has followed it, and what it means for your matter — in plain English, with the citations.

Try Miss Lucy free