Customs, Excise and Gold Tribunal - Delhi
O.R.G. Systems vs Collector Of Central Excise on 5 July, 1994
Equivalent citations: 1994(73)ELT450(TRI-DEL)
ORDER G.R. Sharma, Member (T)
1. M/s. O.R.G. Systems have filed this appeal being aggrieved by the order of the Collector, Central Excise. The Collector, Central Excise in his order had held :
"I order that M/s. ORG Systems (a division of Ambalal Sarabhai Enterprise Ltd., Baroda) shall pay the duty of Excise at the appropriate leviable rate amounting to Rs. 3,32,96,010.58 on the goods, i.e., Computers falling under Tariff Item 33-DD manufactured and removed by them during the period from 1979 to May, 1984, under the Proviso to Sub-section (1) of Section 11-A of the CESA, 1944 (Corresponding to provisos (a) & (b) of Sub-rule (1) of Rule 10 of the Central Excise Rules, 1944 as it stood before being omitted by Notification No. 177/80 dated 12-11-1980) read with Rule 9(2) of the Central Excise Rules, 1944."
"I also impose a penalty of Rs. 25 lakhs on M/s. ORG Systems (a division of Ambalal Sarabhai Enterprise Ltd., Baroda), under Sub-rule (1) of Rule 173-Q of Central Excise Rules, 1944."
2. Briefly stated the facts of the case are that during an investigation, it was found by the Central Excise officers that M/s. O.R.G. Systems (a division of Ambalal Sarabhai Enterprise Ltd., Baroda), holder of a Central Excise L-IV licence from 14-5-1982 were from May, 1979 getting the computers manufactured by supplying raw materials from independent manufacturers namely M/s. Digital International, Baroda (hereinafter referred to as DSI) and M/s. Orbit Electronics, Baroda (hereinafter referred to as Orbit) and that the computers so manufactured by the above two units and also manufactured by the appellant after 14-5-1982 were sold through M/s. Adprint Services Ltd. (hereinafter referred to as Adprint) and that the assessable value on which the duty was paid by these manufacturers of computers was considerably low in comparison to the value ultimately collected from the companies to whom the computers were sold by ORG through Adprint. On further enquiry, it was revealed that Orbit was manufacturing computers exclusively for and on behalf of Adprint on job work basis. The officers also found that DSI was also manufacturing the computers for and on behalf of Adprint on job work basis. It was also observed that Adprint was not carrying out any manufacturing activities and but was only located in one of the rooms of the building belonging to ORG wherein one unit in the name and style of Research and Development Centre of ORG was situated which was engaged in the preparation of software as well as specifications and designs of computers. It was also learnt that the computers manufactured by DSI and Orbit for and on behalf of Adprint were manufactured as per the designs and specifications developed by the Research and Development Centre of ORG and that ORG was also manufacturing the computers as per designs and specifications developed in their Research Centre from May, 1982. Scrutiny of records revealed that Adprint was purchasing raw materials for computers to be manufactured by DSI and Orbit from the open market and some of the raw materials and components were being got manufactured from different elctronics and engineering units by supplying the raw materials to them on job work basis. It was also noticed by the investigating officers that while supplying components and materials to DSI and Orbit, Adprint placed purchase orders for computers, data entry systems and data processing systems under certain terms and conditions. The officers also found that after having received the computers, Data Entry Systems (DES) and Data Processing Systems(DPS) for DSI and Orbit, Adprint was affixing the name plate 'ORG' by removing the trade mark DSI, 'DES' and 'DPS'. This name plate (ORG) was got manufactured by Adprint. It was also noticed that after adding certain peripherals to the computers and after converting the trade mark as above, Adprint used to sell computers to different independent customers. The records revealed that ORG had collected service charges from the customers in respect of the computers supplied by Adprint as per agreed terms and conditions between the producer and the supplier and that ORG as an approved party of Adprint had to undertake the work of installation, setting in operation, providing technical assistance, furnishing one copy of systems software, training customers' personnel, providing technical guidance and maintenance of the computers. Statements of a number of persons were recorded during the course of enquiries which revealed that Adprint and ORG were inter-connected units having interest directly or indirectly in the business of each other. It also appeared that DSI had manufactured computers as per designs and specifications supplied by ORG through Adprint on job work basis for and on behalf of ORG through Adprint who supplied the required raw materials. It also appeared that DSI had not prepared the systems software required for the operation of these computers which in fact appeared to be prepared by ORG. Scrutiny of records of Orbit revealed that they had manufactured computers as per designs and specifications supplied by ORG through Adprint on job work basis for and on behalf of ORG. It, therefore, appeared that Adprint was only a dummy unit created by ORG who were having their own separate wing in operation since 1978 where the computers were being developed and the software for the operation of the computers was prepared. It also appeared that ORG had actually got the computers manufactured as per the designs and specifications of their own from DSI and Orbit through Adprint during the year 1979 upto May, 1984. It appeared that M/s. ORG Systems were engaged in the manufacture of computers falling under Tariff Item 33DD; that they were getting computers manufactured by supplying raw materials from two independent manufacturers namely (1) M/s. DSI and (2) M/s. Orbit and that the computers manufactured by ORG as well as those manufactured from outside were sold through Adprint and the assessable value declared by them was considerably low in comparison to the value ultimately collected from the customers to whom these computers were sold by ORG through Adprint. The year-wise break up of value of components and materials supplied to DSI and Orbit and year-wise break up of value of computers removed to Adprint by DSI and Orbit is given below :-
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(a)
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Year Value of components/
Materials supplied to
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DSI (in Rs. ) Orbit 1979 20,01,660.00 - 1980 23,19,371.00 - 1981 58,74,564.00 - 1982 21,83,416.00 14,77,270.00 1983 8,24,859.00 3,87,921.00 1984 (Figures not furnished) 9,98,828.00
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Total: 1,32,03,870.00 28,64,019.00
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(b)
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Year Value of computers
removed to "Adprint".
by DSI (in Rs. ) by Orbit
1979 26,16,200.00 -
1980 42,49,000.00 -
1981 77,21,500.00 -
1982 43,68,530.00 20,51,165.00
1983 21,20,950.00 11,50,503.00
1984 11,10,019.00 6,27,340.00
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Total 2,21,86,199.00 38,29,008.00
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It also appeared that ORG was collecting service charges from the customers in respect of computers supplied through Adprint as per terms and conditions between the purchaser and supplier and ORG as an approved party of Adprint has to undertake the work subject to the terms and conditions of an agreement. It also appeared that Adprint was a shadow unit created by ORG; that 14 persons were given power of attorney who were working for ORG; that out of these 14 persons 10 were on the pay-roll of Ambalal Sarabhai, that the remaining four were on the pay-roll of ORG; that these persons did not get any remuneration from Adprint and that ORG was getting only service charges from Adprint by issuing debit notes; that ORG was purchasing raw material supplied to DSI and Orbit for the manufacture of computers on job work basis by showing the same in the books of accounts of Adprint; that DSI did not prepare the systems software required for the operation of these computers which in fact was prepared by ORG; that duty was not correctly paid during the relevant period by DSI and Orbit as duty was required to be paid on the value collected by ORG from their customers including the service charges collected by ORG; that ORG were the real manufacturer in relation to computers falling under 33DD; that ORG with a deliberate intent to evade payment of duty suppressed the fact that they have got the computers manufactured from DSI and Orbit on job work basis by supplying raw materials and other items; that they deliberately undervalued the computers by not taking into account the service charges etc. Accordingly, a Show Cause notice was issued to M/s. ORG Systems asking them to explain as to why duty of Excise at the appropriate rate should not be recovered from them on the value of goods namely computers falling under Tariff Item 33DD amounting to Rs. 19,50,07,989.00 manufactured and removed by them during the period from 1979 to May, 1984 less duty already paid on the said goods by one M/s. Digital Systems International, Baroda and M/s. Orbit Electronics, Baroda and by themselves under the proviso to Sub-section (1) of Section 11A of the CESA, 1944 read with Rule 9(2) of Central Excise Rules, 1944 and why a penalty should not be imposed on them under Sub-rule (1) of Rule 173Q of the Central Excise Rules, 1944.
3. Shri K.S. Nanavati, Senior Advocate alongwith Shri K.M. Mehta and Ms. Tasneem Ahmadi, Advocates appeared for the appellants whereas Shri Prabhat Kumar, SDR represented the Department. As the oral submissions made by both sides took a lot of time, both the parties agreed to make written submissions. Some of the points raised by the ld. SDR in reply have been dealt with therefore, for proper appreciation of the points, the submissions made by the ld. SDR are being reproduced first.
4. On behalf of the department, the ld. SDR referred to some important aspects in the Show Cause notice and the Order-in-Original and submitted that M/s. ORG Systems were engaged in the manufacture of computers falling under Tariff Item 33-DD from May, 1982; that prior to May, 1982, for the appellants the computers were being got manufactured by supplying raw materials to two independent manufacturers namely (i) M/s. Digital Systems International and (ii) M/s. Orbit Electronics and that the computers manufactured by M/s. ORG Systems as well as those manufactured by DSI and Orbit were sold to M/s. Adprint Services Ltd., Baroda; that the assessable value declared by them was considerably low in comparison to the value ultimately collected from the customers to whom these computers were sold by ORG through Adprint; that Orbit was manufacturing computers exclusively for and on behalf of Adprint on job work basis; that DSI was also manufacturing computers for Adprint as well as for themselves; that the manufacturing of computers by DSI and Orbit was done as per the designs and specifications developed by the Research and Development Centre of ORG; that ORG was manufacturing the computers as per designs and specifications developed in their aforesaid centre from May, 1982; that Adprint had purchased raw materials for computers to be manufactured by DS1 and Orbit from the open market and some of the raw materials were got manufactured/fabricated from different engineering and electronic units by supplying raw materials on job work basis; that these were supplied to DSI and Orbit for manufacture of computers; that these goods were manufactured exclusively for Adprint as per their purchase orders as confirmed by both the units; that ORG was having complete control over Adprint; that it was clearly established that computer division of Adprint was only a dummy unit created by ORG who were having their own separate wing in operation since 1978 where the computers were being developed and software for operation of the computers were prepared and thus ORG actually got the computers manufactured as per the designs and specifications of their own. On the question of assessable value, the ld. SDR, referring to the Order-in-Original submitted that the Collector had held that service charges which included charges on account of installation, maintenance and software for the computers recovered by ORG through Adprint and by themselves and value of peripherals added making fulfledged and complete computers; that systems software is an essential part of the computer without which the same cannot function; that invoices issued by Adprint also show value of peripherals which when supplied with the computer system should be taken into consideration for computing Central Excise duty; that systems software is an integral part for the operation of computer without which the computer cannot operate.
5. Arguing the case, the ld. SDR submitted that we have to look at the Tariff Entry No. 33DD existing at the relevant time for the purpose of assessment of computers; that the Tariff Entry read as under :
"33DD - Computers (including central processing units and peripheral device), all sorts".
Pointing out that the definition of computers is very wide and all peripheral devices are treated as parts of computers as per the mandate given by the legislature under the said entry; that the use of the word 'including' expands the ambit and scope of the entry to include within its meaning peripheral devices etc. for the purpose of assessment. He cited and relied on the Hon'ble Supreme Court's judgment in the case of Doypack Systems Pvt. Ltd. reported in 1988 (36) E.L.T. 201, Corporation of City of Nagpur reported in l960 (2) SCR 942, V.R. Shelat v. Pranlal Jagmohan Thakur reported in 1975 (1) SCR 534 and State of Bombay v. Hospital Mazdoor Sabha reported in AIR 1960 (SC) 610 defined the scope and ambit of the word 'including'; that the normal meaning of computer as understood in common parlance for excluding the peripheral device cannot be relied upon as the definition is otherwise available for computers under the said entry itself; that no reliance can be placed on technical literature also for the purpose of understanding the meaning of computers in view of the specific definition provided under the Tariff Entry itself; that this is supported by the decision of Hon'ble Supreme Court in the case of Oswal Agro Mills reported in 1993 (66) E.L.T. 37 (SC) Indo International Industry reported in 1981 (8) E.L.T. 325 (SC) and Collector v. Eskaye Ltd. reported in 1990 (45) E.L.T. 490; that in view of the case law relied upon and cited and various decisions of the Tribunal, it is clear that value of all peripherals is to be included in the value of computers for the purpose of assessment; that Notification No. 148/76 shows that the legislature had already provided relief to the extent of Excise Duty paid on peripheral devices in the matter of assessment of computers supplied alongwith such peripheral devices; that this notification supports the contention that the peripheral devices are necessarily to be treated as part of computer at the time of assessment; that the fact that some of the peripheral devices are purchased from the market after payment of duty would not make any difference in so far as assessment of computer systems under Tariff Entry No. 33DD is concerned; that the value of the said bought out items which form part of the computer systems has to be included is supported by the decisions in the following cases :-
1. Name Tulaman -1988 (38) E.L.T. 566 (SC)
2. Rallis India -1993 (67) E.L.T. 144
3. Daya Ram Metal Works -1985 (20) E.L.T. 392
4. Koran Business Systems Ltd. - 1992 (58) E.L.T. 48 (Bom.)
5. Pressure Cooker -1987 (28) E.L.T. 566
6. Referring to the allegations in the Show Cause notice and the findings of the Collector, the ld. SDR submitted that M/s. ORG Systems are the manufacturer of computers in question; that they received different models of computers from DSI and Orbit; that these computers were supplied without any systems software; that mere assembly of some parts cannot be called as a full-fledged computer without including the software; that M/s. ORG Systems were exclusively preparing software for the operation of the computer itself; that systems software is different from operating software; that systems software is the basis and essential part of the computer.
7. Referring to the technical literature, the ld. SDR argued that memory consists of two parts namely Random Access Memory (RAM) which is temporary memory and any information stored in the same is lost on switching off the computer; that the other type of memory namely Read Only Memory (ROM) consists of permanent memory where information is burnt into the ROM chip at the manufacturing time; that ROMs are used for applications in which it is known that the information never needs to be altered; that ORG themselves were manufacturing systems software which was to be permanently stored in the memory of ROM of the computer system; that without this systems software the assembly of parts supplied by DSI and Orbit cannot be called a computer system, because it will not be able to process any data fed from outside; that it was only upon fixing of the basic systems software (which in instant case is manufactured by ORG Systems) with which the computer can run and do the function of data operation; that the appellants have nowhere stated that DSI and Orbit ever supplied the basic systems software and therefore this position regarding supply of systems software remains uncontested till date and therefore, has to be accepted as correct.
8. Submitting further, the ld. SDR pleaded that the Tribunal held in a number of cases that software is basic and most essential component of a computer without which the computer is only a dumb box and will not be able to process the data fed in it. In support of his contention he cited and retted upon the decisions contained in :-
1. CCE Bangalore v. Wipro -1989 (39) E.L.T. 113.
2. Sunray Computer -1988 (33) E.L.T. 787.
3. IACE Dockers (P) Ltd. -1990 (48) E.L.T. 388.
4. PSI Data Systems -1989 (39) E.L.T. 692.
5. Tata Sons Ltd. v. U.O.I. -1982 (10) E.L.T. 53 (Bom.).
9. On the question of purchase of peripherals from outside and their supply of complete systems consisting of parts of computer bought from DSI and Orbit, software and peripheral devices to their customers as a complete system which is classifiable under Tariff Item 33DD, the ld. SDR submitted that the question of assessment under Tariff Item 33DD within the scope of the said Tariff Entry cannot be challenged before the Tribunal. In support of this contention, he cited and relied upon the case law reported in :-
1. U.O.I. v. Ram Lal Mansukhrai - AIR 1971(SC) 2335.
2. Hyderabad Asbestos Cement Products -1980 (6) E.L.T. 735.
3. New Shakti Dye Works -1983 (14) E.L.T. 1736 (Bom.)
4. Khandelwal Metal and Engineering -1983 (12) E.L.T. 292.
10. That M/s. ORG was supplying a different product to their customers from the one procured from DSI and Orbit as an incomplete computer system, which is merely an assembly of parts; that the fact that an excisable commodity in two cases fall under the same tariff item or same sub-heading would not make any difference as to liability of duty with respect to new excisable commodity. In support of his contention, he cited and relied upon the case law contained in the following :-
1. Empire Dye Co. -1985 (20) E.L.T. 179 (SC)
2. 1986 (24) E.L.T. 542 (Larger Bench)
3. Anil Ice Factory - 1984 (15) E.L.T. 333
4. 1991 (53) E.L.T. 461.
11. On the question of manufacture, the ld. SDR referred to the case law reported in :-
1. 1987 (27) E.L.T. 269.
2. 1986 (25) E.L.T. 609 (SC)
3. 1977 (1) E.L.T.(J 168) (SC)
4. 1988 (36) E.L.T. 593
5. 1987 (28) E.L.T. 566
6. 1986 (25) E.L.T. 609 (Guj.)
12. On the manner of assessment, the Departmental Representative argued that we have to assess the goods in the form in which they were cleared from the factory. In support of this contention, he relied on the decisions of various judicial forums reported in :-
1. E. Merck India (P) Ltd. -1983 (13) E.L.T. 966
2. 1986 (26) E.L.T. 936
3. 1993 (64) E.L.T. 171 (Bom.)
4. Moped India Ltd. -1991 (56) E.L.T. 246
5. 1990 (29) E.C.R. 30.
13. In regard to the interconnection of Adprint and ORG, the ld. SDR reiterated the findings of tire lower authorities.
14. On the question of limitation, he submitted that no classification list or any other statutory documents were filed for proper assessment of the goods before the lower authorities and therefore there is a dear suppression on this count. In support of his contention, he cited and relied upon the decisions in the following cases :-
1. 1987(31) E.L.T. 95.
2. Collector v. Fert. & Chem. -1987 (31) E.L.T. 292
3. British India Corpn. -1986 (25) E.L.T. 725.
4. 1989 (40) E.L.T. 214 (SC).
that the evidence on record will clearly show that the evasion of duty was intentional; that the extended period Will also apply for the reason that there was mis-declaration and suppression of facts in the matter of assessment of computers; that there has been clear contravention of the rules and provisions of the Act; that the feet that Departmental officers visited the factory during the relevant period will be of no consequence as far as application of extended period is concerned. In support of these contentions, the ld. SDR cited and relied upon the case law cited in:
1. 1983 (12) E.L.T. 17
2. 1991 (53) E.L.T. 70
3. 1986 (26) E.L.T. 169
4. 1984 (18) E.L.T. 76.
5. 1989 (39) E.L.T. 303
6. 1990 (30) E C.R. 99
7. 1989 (39) E.L.T. 449
8. 1986 (25) E.L.T. 726
15. On the question of jurisdiction, the ld. SDR submitted that the matter has been concluded by die Tribunal and that the report on 1989 (40) E.L.T. 401 is relevant; that the Collector has powers to decide the case himself as was held in the case of DCW reported in 1988 (35) E.L.T. 167; that the Collector is authorised to exercise powers of a junior officer.
16. On valuation, the ld. SDR cited and relied upon the decisions in the cases of M/s. Sunray Computers and M/s. Wipro and argued that the cost of peripheral and devices is to be included in the assessable value of the goods at the time of assessment.
17. In the written submissions made by the appellant, it has been submitted that Adprint Services Ltd. is a separate company registered in 1973 under the Indian Companies Act and is dealing in the business of computers from October, 1979 in addition to some other products; that it does not have any manufacturing facility; that during the relevant period, Adprint entered into an agreement with ORG to take on rent various services in their field where ORG had necessary expertise; that DSI and Orbit are independent manufacturing units manufacturing computers; that during the relevant period Adprint was procuring orders from customers and was placing orders with DSI and Orbit for supply of computers of certain specifications and designs; that Adprint was procuring certain raw materials and selling it to DSI and Orbit to ensure quality; that the sale of raw materials to DSI and Orbit was on principal to principal basis; that DSI and Orbit were filing classification list and price list which were being approved by the concerned authorities; that the computers so manufactured were sold by DSI and Orbit to Adprint for a price on principal to principal basis; that Adprint used to remove the brand name of DSI and Orbit and to affix the name of ORG; that Adprint also supplied peripheral equipments like Tape Drives, Printers, Cartridge Disk Drives etc., if required by the customers; that Adprint or ORG were not manufacturing these devices but were purchasing them from the market or importing them; that ORG was looking after the activities of Adprint on payment of service charges; that ORG provided technical services like installation and maintenance services to the customers; that ORG supplied software to customers under separate agreement.
18. Referring to the order-in-original, the appellant submitted that the Collector in his finding has wrongly held that ORG and Adprint are related concerns, that Adprint was dummy unit created by ORG; that ORG was the real manufacturer of the computers within the meaning of Section 2(f) on the ground that ORG had supplied raw materials to DSI/Orbit and that they manufactured the computers as per the designs and specifications on job work basis under the Memorandum of Understanding signed by the parties; that the Collector in his order took into consideration the ground that payments of raw materials sold were adjusted in the accounts and no cash payments were made; that since DSI and Orbit were held to be manufacturing computers for and on behalf of ORG and ORG was held to be manufacturer, value of the peripheral devices, technical service charges and software were held to be includible in the assessable value of the computers.
19. As against the above findings of the Collector, the appellant contested that the definition of inter-connected undertakings within the meaning of the MRTP Act is irrelevant for the purpose of deciding who are related persons within the meaning of CESA, 1944; that it has been so held by the Hon'ble Gujarat High Court in a case reported in 1979 (4) E.L.T. 500 and that this decision of the Hon'ble Gujarat High Court has been confirmed by the Hon'ble Supreme Court in the matter of Union of India v. Atic Industries Ltd. reported in 1984 (17) E.L.T. 323; that for being related persons mutuality of interest in respect of each other is to be proved first; that no evidence has been brought on record to show that Adprint and ORG had mutual interest in the business of each other and therefore the finding of the Collector is not justified either on facts or on the point of law.
20. On the question of Adprint being a dummy unit of ORG, it was argued that Adprint Services Ltd. is a Public Ltd. Company incorporated in 1973. The emphasis in the arguments was that a separate legal entity registered under the Companies Act cannot be a dummy unit; that the Collector based his decision on the ground that Adprint and ORG have common premises, telephone, telegraphic address, common use of some machines and common partners. As against this, the appellant argued that commonness of partners, common use of certain facilities are not conclusive circumstances to show that they were related persons; that independence of three parties can be judged from the facts that they have separate income tax registrations, separate registration as Small Scale units and separate electricity meters. Referring to the judgment of the Tribunal in the case of Jagjivan Das & Co. v. CCE reported in 1985 (19) E.L.T. 441, the ld. Counsel argued that the Tribunal had held that "occasional use of buffing machine by the remaining two firms by itself would not make the three concerns working for and on behalf of another on these circumstances alone"; that the Supreme Court dismissed the appeal by the department in this case. It was, therefore, argued that the finding of the Collector that Adprint is a dummy unit of ORG is erroneous and illegal.
21. It was further argued that a person cannot be treated as a manufacturer simply because he has supplied the raw materials or the goods are manufactured according to his specifications. The case law cited and relied upon by the appellant for this purpose is as under :-
1. 1979 (4) E.L.T. 600 (A.P.)
2. 1985 (21) E.L.T. 187 (paras 9-12)
3. 1986 (23) E.L.T. 187 (paras 8-13 and 15)
4. 1986 (24) E.L.T. 460
5. 1984 (16) E.L.T. 415 (paras 11-14)
6. 1987 (30) E.L.T. 980
7. 1987 (30) E.L.T. 745
8. 1990 (47) E.L.T. 62
9. 1987 (31) E.L.T. 247 (para 4)
10. 1991 (56) E.L.T. 665
11. 1986 (24) E.L.T. 185
12. 1990 (46) E.L.T. 562
13. 1993 (68) E.L.T. 65
14. 1981 (8) E.L.T. 319 It was argued that the case law contained in 1977 (1) E.L.T. (J 168), AIR 1965 (Guj.) 215 and 1986 (25) E.L.T. 609 relied upon by the Adjudicating Authority for coming to the conclusion that the supplier of raw materials is the real manufacturer were considered in the cases reported in 1988 (37) E.L.T. 528, 1992 (61) E.L.T. 413, (42) E.C.R. 128 whereunder it was held that the aforesaid cases do not lay down any such principles and that the decisions in those cases were based on the peculiar facts obtaining therein. The ld. Advocates, therefore, pleaded that the order of the Collector holding Adprint/ORG as real manufacturer is wrong and contrary to the settled legal position.
22. Referring to the conditions of the purchase order, it was argued on behalf of the appellant that the conditions clearly showed that the transactions between the two were on principal to principal basis. Arguing for the appellant, it was pleaded that the activities carried on by Adprint/ORG cannot be said to be the manufacturing activity within the meaning of Section 2(f). Referring to the points raised by the ld. SDR during the course of his oral submissions which comprised that software and peripherals alongwith the computers were supplied by ORG and therefore ORG was the manufacturer; that the computers manufactured and cleared by DSI/Orbit were incomplete computers; that they were only parts or equipments and not computers falling under Tariff Item 33DD; that they became computers only when software and peripherals were supplied by ORG. On behalf of the appellants, it was argued that it was never the case of the department in the Show Cause notice that what was manufactured by DSI/Orbit was not a computer; that the department all through was relying that what was manufactured and cleared by DSI/Orbit was computers; that the Collector in his order has not held that ORG/Adprint is the manufacturer of computers on the ground that they have supplied peripherals and software. The conclusion of the Collector that ORG/Adprint is the real manufacturer was on the ground that ORG through Adprint purchased raw materials for computers from the open market and supplied the same to DSI/Orbit; that DSI/Orbit manufactured the computers as per the specifications and designs and out of raw materials supplied by ORG through Adprint; that the prices of raw materials were adjusted in the accounts and not paid in cash; that the Collector never went into the question whether only by reason of supplying software and peripherals, ORG/Adprint can be said to be manufacturing computers when such computers had been manufactured on payment of duty under the Tariff Item 33DD by DSI/Orbit; that the case law reported in 1989 (41) E.L.T. 450 and 1987 (27) E.L.T. 300 clearly brings out that the adjudication cannot go beyond the show cause notice or in other words the adjudicating authority cannot travel beyond the show cause notice; that the SDR's contention that the goods cleared by DSI/Orbit were computers without systems software is contrary to evidence on record; that from the statement of Shri M.N. Dave and Sh. B.S. Patel that the price was worked out on the basis of the cost of raw material, overheads, software, etc; that the contention of the SDR that systems software is essential to operate the computer which was supplied by ORG is not correct in as much as the statements referred to in the preceding paragraphs clearly show that the systems software essential for operating computer was built in the computer itself before it was cleared by DSI/Orbit. In support of his contention that the systems software is loaded on the computer before it is cleared from the premises of DSI/Orbit, the Counsel for the appellant quoted from the book "Computers and Commonsense" 3rd Edition wherein it was stated "Another type of microcomputer memory is READ ONLY MEMORY. Information is burnt into the ROM chip at the manufacturing time. It cannot be altered and fresh information cannot be written into a ROM." Arguing further the ld. Counsel for the appellant submitted that the systems software would not have been separately supplied after the computer was manufactured, tested and cleared from the premises of DSI/Orbit; that the activity of manufacturing cannotes an activity which brings about transformation and brings into existence a new commodity having distinct name, characteristics, form and use. In support of this contention, the ld. Counsel for the appellant cited and relied on the judgments reported in AIR 1963 SC 791,1977 (1) E.L.T. Q199), 1986 (26) E.L.T. 3 and 1990 (48) E.L.T. 591. Pointing out further that in the premises of Adprint/ORG no activity other than removing the name DSI/Orbit and putting the name of ORG was undertaken; that ORG/Adprint merely supplied peripherals, systems software or application software if so required by the customer; that since supply of these items did not bring into existence any new commodity known to the market as having a distinct name, characteristic, use and form and therefore no manufacturing activity can be said to have taken place which may make Adprint/ORG the manufacturer. Arguing further it was pleaded that no commodity can be subjected to duty twice under the same Tariff Item, that the configuration of CPU, VDU and Key board as supplied by DSI/Orbit were assessed to duty under Tariff Item 33DD they cannot be subjected to further duty if fitted with peripherals and software; that the department had not brought any evidence on record to prove that ORG/Adprint had brought in any new goods into existence; that the Hon'ble Supreme Court in the cases reported in 1990 (49) E.L.T. 326 and 1991 (51) E.L.T. 182 (SC) had held that to attract the levy again, the article must be transformed into another distinct commodity so known in the market; that the contention of the ld. SDR that the word 'including' occurring in Tariff Item 33DD has the effect of expanding the scope of the entry and to include within Tariff Item 33DD software as well as peripheral devices would only mean that peripherals independently would be taxed under Tariff Item 33DD. The ld. Counsel submitted that it only shows that peripherals independently would be taxed under Tariff Item 33DD and not that if peripherals are supplied alongwith the computer it will again be charged to duty under Tariff Item 33DD. Illustrating his contention by the example that certain peripherals are required by the customers and the add-on peripherals are supplied much after the original equipment was sold and installed at the customers' premises, does the department hold the view that the value of these add-ons shall be added to the value of the computer supplied earlier and then the Central Excise duty should be calculated and paid again on the entire value of the computer systems; that on this corollary the computers which do not need any peripheral equipment if resold should also be excluded from the assessable value determined by the ld. Collector.
23. On the question of valuation, the ld. Counsel submitted that ORG provides technical services to the customers; that these services are provided by professionals and no material is consumed; that these services are not related to the manufacture of computers; that technical service charges comprise of installation charges, maintenance charges after the expiry of warranty, development of software, selection and training of personnel, assistance in systems designing and programming, problem solving etc.; that these services are provided at the customers' site having no nexus to the manufacturing of computers; that the charges had no connection with the design of the equipment supplied; that the value of service or advice would not be includible in the value of the computer; that these technical services are rendered under a separate contract with the customers; that they are optional; that these services are being rendered in respect of computers which are imported and which are not purchased from ORG; that the Tribunal in their judgment in the case of Collector, Central Excise v. Sunray Computers reported in 1988 (33) E.L.T. 787 had held that training of customers' staff may be prior to delivery of computer or after it but in either case it can be said to have no nexus with the manufacture or marketability and therefore the same should be excluded while arriving at the asessable value. The ld. Counsel pleaded that the Tribunal had further held that expenses regarding installation and commissioning of computers at customer premises are post-removal expenses and this activity has no nexus with manufacturing and marketability of the company; their cost is, therefore, not includible in the assessable value of the computer. Arguing further, the ld. Counsel submitted that the contract is an optional service and that these activities were clearly post-removal expenses and not connected with manufacture or marketability of the machines.
24. Department's contention is that charges for supply of systems software have to be included in the assessable value as systems software were basic to the functioning of the computer and that without such software the computer is a dumb box. In reply to this, the ld. Counsel submitted that Orbit and DSI while manufacturing the computer had included in the price of the computer the value of the systems software; that this can be confirmed from the evidence of Shri M.N. Dave, partner of Orbit and Mr. Dholakia that minimum software necessary to operate the computer were already there in the computer before the computer was cleared from the premises of Adprint/ORG and Orbit; that Adprint/ORG at times supplied additional set of systems software in machine readable form and also, wherever the clients so desired, application software; that the department has not brought on record any evidence to show that this additional software was essential for the working of the computer. In this view, the Counsel pleaded that the value of additional set of systems software in machine readable form and/or value of software cannot be added to the assessabale value of goods. Illustrating his contention, the ld. Counsel submitted that a typewriter without a ribbon cannot be put to use or a tape-recorder without a tape cannot be used. But only from this, no inference can be drawn that value of a ribbon or value of a tape has to be added to the assessable value of the typewriter or tape-recorder respectively. It was further contended that if a dealer purchases a typewriter from the market and also purchases a ribbon from the market and puts in the typewriter as required by the customers such dealer becomes manufacturer of the typewriter because without the ribbion the typewriter would be a useless tool. On this analogy, the appellant submitted that they had purchased the computer from DSI/Orbit and had supplied software, the appellant had not become manufacturer and value of the software, therefore, cannot be added in the assessable value of the computer.
25. In regard to peripherals, the appellant relied on the Circular No. V-33 DD(8)/82 MP/dated 12-6-1985 issued by the Central Board of Excise & Customs providing that "as regards inclusion of value of peripheral devices in the assessable value of computers, it is ascertained that such peripheral devices are sometimes purchased from the market on payment of duty." "...but when no manufacturing process is carried out, the peripheral devices purchased from the market where the price of the same is shown separately in the invoice, the question of including the price of peripheral devices once again may not arise as in that case it becomes a trading operation where certain goods are bought and resold without undergoing any manufacturing process." It was pleaded on behalf of the appellant that the above circular was binding on the department in regard to bought out items and exclusion of the value of these items from the assessable value.
26. Relying on the judgement of the Hon'ble Supreme Court in the case of Union of India v. Godphrey Phillip reported in 1985 (22) E.L.T. 306 (SC), it was pleaded on behalf of the appellant that the Hon'ble Supreme Court had held that the CBEC was clearly bound by promissory estoppel in view of issuance of circular. It was, therefore, pleaded that this decision is binding on the department in this case also; that in spite of the above circular even if the value of the peripheral were decided to be includible credit should have been given for the duty paid thereon. In support of their contention they relied on the ratio of decisions reported in 1984 (16) E.L.T. 294, 1984 (16) E.L.T. 360 and 1989 (42) E.L.T. 154 wherein it has been held that set off benefit of credit for procedural lapses not deniable if conditions of notification have been substantially complied with; that in their Orders-in-appeal Nos. 404-431/91, dated 30-5-1991 and KW-12/92 dated 28-1-1992, the Collector (Appeals) held that value of peripherals should not be included in the assessable value; that the value of additional peripherals supplied much after supply of the computers should not be included in the assessable value of computers.
27. On the question of supply of accessories and the inclusion of the price thereof in the assessable value of computers, the appellants contended that assessories do not form an integral part of the product which is complete and marketable by itself. Relying on the decision reported in AIR 1977 SC 134 and the following judgments :-
1. 1984 (18) E.L.T. 14 (Para 4)
2. 1985 (22) E.L.T. 780 (Bom.)
3. 1986 (25) E.L.T. 856
4. 1991 (51) E.L.T. 212
5. 1992 (62) E.L.T. 772
6. 1989 (42) E.L.T. 210
7. 1991 (51) E.L.T. 173
8. 1989 (44) E.L.T. 763
9. 1990 (45) E.L.T. 508
10. 1989 (43) E.L.T. 201 the appellant submitted that the peripherals supplied alongwith the computers formed accessories which are supplied purely based on the customers' requirements; that a computer is complete even without these multiple number of peripherals or accessories. It was argued that the Collector had erred in including the value of peripherals in the assessable value of the computers; that the amount included for the purpose of computing the assessable value and duty thereon the Collector had erroneously included :-
(i) Rs. 23,000/- which was collected as rentals on computers
(ii) Rs. 7,68^51 /- which was collected as instalment of computers sold on hire purchase basis,
(iii) Installation charges for installation of computers,
(iv) Rs. 23,197.50 the amount received as advance,
(v) Maintenance charges,
(vi) Rs. 85,95,126.00 received as service charges rendered on imported computers,
(vii) Lodging and boarding expenses,
(viii) Rs. 1,35,278 collected as interest of instalments,
(ix) Rs. 14,08,376 collected as duplication of invoices,
(x) Rs. 81,629/- given as discount to customers,
(xi) Rs. 1,57,786 admissible to Research Institutes as Excise exemption,
(xii) Rs. 36,498/- being the discrepancies as the figure given in the show cause notice are wrong,
(xiii) Rs. 30,030 recovered as sales tax,
(xiv) Rs. 90,30,000/- paid as excise duty and included in the price.
In respect of the above amounts, the appellants contended that in view of the judgment in Sunray Computer case, these expenses have no nexus with the manufacture or marketability of computers and therefore, should not be included in the assessable value.
28. On the point of limitation, the ld. Counsel submitted that the Show Cause notice covers the period 1979 to May, 1984; that the entire period could be divided into two sub-divisions, i.e., 1979 to May, 1982 and May, 1982 to May, 1984; that from 1979 to May, 1982, both DSI and Orbit had manufacturing licence and computers on payment of requisite duty were removed from their premises; that the department was aware of the contracts between DSI and Adprint on the one hand and Orbit and Adprint on the other. Therefore, there was no suppression of facts or mis-statement on the part of Adprint/ORG to disclose any material facts on behalf of Orbit/DSI; that Adprint was involved in trading of computers and ORG was merely offering its services that the equipments manufactured by DSI/Orbit were properly removed on payment of duty under Part I/H; that between the period May, 1982 to 1984, ORG manufactured and cleared the computers under Tariff Item 33DD after payment of duty on goods similar to those manufactured by DSI and Orbit. Therefore, all operations of ORG were carried out openly within the knowledge of the department. There was no clandestine removal. Therefore a longer period of limitation under the proviso to Sub-section (1) of Section 11A was not applicable in their case. In support of this contention, they relied on the following case law :-
1. 1988 (35) E.L.T. 605 (SC)
2. 1989 (40) E.L.T. 276 (SC)
3. 1989 (43) E.L.T. 195 (SC)
4. 1992 (57) E.L.T. 432 (Tribunal)
5. 1992 (62) E.L.T. 241 (M.P.)
6. 1993 (65) E.L.T. 166 (All.)
29. On the question of penalty, the ld. Counsel submitted that no penalty could be imposed on the appellant for technical breach or venial breach of legal provisions specially when the breach flows from bonafide belief that the appellant is not liable to act in the manner prescribed by the statute; that penalty will not be imposed merely because it is lawful to do so. In support of his contention, he cited and relied on the decisions in the following cases :-
1. 1978 (2) E.L.T. 159 (SC)
2. 1980 (6) E.L.T. 295
3. 1984 (16) E.L.T. 534
4. 1985 (20) E.L.T. 80
5. 1989 (43) E.L.T. 80
6. 1990 (45) E.L.T. 285
7. 1990 (47) E.L.T. 161
8. 1988 (34) E.L.T. 65 The ld. Advocate, therefore, prayed that the impugned order may be set aside and consequential relief may be allowed.
30. Heard the submissions of both sides and considered them. Also perused the case law cited and relied upon by both sides. Major issues for determination before us are:
(a) Whether Adprint, Orbit and DSI are the dummy units of ORG;
(b) Whether ORG/Adprint are manufacturers of computer systems;
(For deciding this larger issue of manufacturer it can be further sub-divided into the following;
(i) Whether supply of raw materials is the sole factor for determination of the manufacturing activity;
(ii) Whether supply of specifications and designs would make Adprint/ORG the manufacturer of computers/computer systems;
(iii) Whether adding of peripherals at the time of supply of computers would make ORG/Adprint as computer manufacturers;
(iv) Whether supply of systems software would make ORG/Adprint a manufacturer;
(v) Whether the tariff entry against Tariff Item 33DD indicates that adding of peripherals to computers would create new goods, if so, whether the new goods would still be called computers or would be designated as computer systems indicating a different commodity;
(iv) Whether notification allowing set off of duty on peripherals was indicative that adding of peripherals created a new product;
(vii) Whether the conditions of purchase order in anyway were indicative that ORG/Adprint was the manufacturer.
(c) Whether the service charges collected by ORG would in toto should be added to value or only certain expenditure should be added;
(d) Whether the Collector had travelled beyond the Show Cause notice;
(e) Whether the demand was time barred.
30(a) On the question whether Adprint on the one hand and DSI and Orbit on the other were dummy units of ORG. We may examine the issue in two parts as under : (i) Whether Adprint was a dummy unit of ORG and (ii) Whether DSI and Orbit are dummy units of M/s. ORG.
(i) On the question whether Adprint was a dummy unit of ORG the department has relied on the fact that ORG was having complete control over Adprint in as much as Adprint was located in one of the rooms of the building of ORG; that Adprint was not carrying out any manufacturing activity; that preparation of systems software as well as specifications and designs of computers was being done by the Research and Development Centre of ORG; that computers manufactured by DSI and Orbit were as per design and specifications developed by Research and Development Centre of ORG; that ORG while placing purchase order for material for their own requirement included the requirement of materials for Adprint in their own purchase order; that suppliers raised invoices in the name of ORG but ORG manipulated the same in the name of Adprint and vice versa; that suppliers raised invoices in the name of Adprint but goods were received by ORG; that suppliers raised invoices to Adprint but payment was made by ORG; that in one case invoice was in the name of Adprint but payment of Rs. 1,10,864 was made by M/s. ORG (A division of Ambalal Sarabhai Enterprises); that Adprint directed the supplier to collect has payment of Rs. 1,08,905 from the Bombay office of ORG; that Adprint in one case made a special transaction for which neither the purchase order nor the delivery challan was prepared and ORG directed Adprint for payment; that ORG on their letter-heads had directed customers to pay computer price to Adprint and service charges to ORG; that on the directions of ORG, customers were sending two cheques: one as cost of computers to Adprint and the other as service charges to ORG; that ORG was reminding customers to clear their dues, both due to ORG as well as Adprint; that persons dealing with receipt of goods, issue of the invoices to Adprint were the same persons who were working for ORG; that on scrutiny of power of attorney issued in favour of Adprint, it was found that out of 14 persons holding power of attorney of Adprint, 10 were on the pay-roll of Ambalal Sarabhai Enterprises and the remaining four were drawing their pay from ORG, that no remuneration was paid to them by Adprint; that ORG was getting service charges from Adprint by issuing debit notes, that the Manager of Adprint stated that ORG were purchasing raw materials to be supplied to DSI and Orbit for the manufacture of computers on job work basis by showing the same in the books of accounts of Adprint; that there was no staff on the pay-roll of Adprint upto 1984; that marketing of computers was being done by ORG on behalf of Adprint. In support of their contention, the Revenue cited and relied upon the ratio of the judgment in the case of Shree Agency reported in 1977 (1) E.L.T. (J 168) and Bajrang Gopilal Gajabi reported in 1986 (25) E.L.T. 609.
As against this, the appellant submitted that Adprint was registered as a separate entity in 1973 and was dealing in computers since 1979; that there was an agreement between ORG and Adprint to take on rent the expertise of ORG; that Adprint was processing orders for computers and supplying the raw materials to DSI and Orbit; that Aprint does not have manufacturing facility.
Examining all these contentions of both sides and also the case law cited and relied upon by both sides, we find that Adprint was not a separate entity but was a dummy unit of M/s. ORG Systems. As it did not have any staff of its own and all the work was being managed and done by the people of ORG/ASE. The purchase and sale of raw materials to DSI and Orbit was also actually being controlled by ORG and only entered in the books of Adprint by the Accountants employed either by Sarabhai Enterprises or by ORG. We also see that there is clear indication that all the financial dealings were linked up between the two, right from purchase of raw materials to receipt of computers. It is, thus, very clear that Adprint is a facade, a dummy unit of ORG and ORG is the organiser of all these activities attributed to Adprint. We shall now refer to the appellant as ORG only and not ORG/Adprint.
30(a)(ii) Now coming to the relationship between ORG on the one side and Orbit and DSI on the other, we find that raw materials were being supplied by ORG as sales and these sale prices were being adjusted in the books of accounts of ORG. DSI and Orbit cannot be considered as hired labour of ORG as DSI and Orbit were having their own investment in plant and machinery and cannot be treated as dummy units of ORG but were job workers only. We, therefore, hold that DSI and Orbit were not the dummy units of ORG. Following the ratio of the Hon'ble Supreme Court's decision we hold that DSI and Orbit were independent manufacturers.
30(b) Whether ORG/Adprint are manufacturers of computer systems:
On the question whether ORG was manufacturer of computers the entire period can be divided into two spells namely (i) the period from 1979 to prior 14th May, 1982 and (ii) from 14th May, 1982 to May, 1984. During the period 1979 to 14th May, 1982, M/s. ORG were getting computers manufactured from DSI and Orbit. However, ORG got a Central Excise licence for manufacture of computers with effect from 14-5-1982 and started manufacturing computers themselves and also continued purchasing computers from DSI and Orbit. These computers also were being sold through Adprint as was being done in the case of computers manufactured by DSI and Orbit. In support of the contentions that in respect of computers got manufactured from DSI and Orbit, ORG was the manufacturer, the department contended that designs and specifications were developed by ORG; that the raw material was purchased by ORG; that one copy of systems software in the Machine Readable Form was supplied by ORG; that systems software is an essential part of a computer without which the computer cannot work. As against this, the appellants contended that DSI and Orbit were independent units, were holding Central Excise licence for manufacture of computers and were filing classification list and price list and complying with all Central Excise formalities; that DSI and Orbit were selling computers to Adprint at a price on principal to principal basis.
Before examining the various aspects and rendering a finding on it, let us examine and decide on the issues raised by both sides on the counts referred to in the preceding paragraphs.
30(b)(i) Whether supply of raw materials is a factor for determination of manufacturing activity:
The department by citing and relying on the judgments of the Tribunal in the cases reported in 1977 (1) E.L.T. 168, AIR 1965 (Guj) 215,1986 (25) E.L.T. 609 and H. Guru Instrument v. CCE reported in 1987 (27) E.L.T. 269 submitted that supplier of raw materials is the manufacturer. The Hon'ble Tribunal in the H. Guru Instruments' case had held :-
"We find from the order-in-appeal that the appellants had taken the first plea before the CBEC also. On this point, paragraph 6 of the Board's order-in-appeal reads as under:-
"When it was pointed out that the law in this regard has been settled by the judgment of the Supreme Court in Shree Agencies case (AIR 1972 SC 78) the argument was not pursued."
The plea has, however, been raised again before us. We observe that it is the admitted position by the appellants that they supplied case Aluminium cases, Aluminium Rods, Mild Steel Rods, Stainless Steel rods, Stainless Steel Brass and German Silver components etc. to M/s. IEC and M/s. IEC manufactured therefrom scientific and industrial instruments, namely non-ferrous pressure gauges, Stainless Steel Pressure Guages, Mercury-in-Steel Thermometers, Vapour Pressure Thermometers etc. as per specifications of the appellants. The instruments so manufactured bore the brand name and ISI mark of the appellants and they were marketed by the appellants just like similar other instruments manufactured in their own large scale factory. In the facts and circumstances of the case, the status of M/s. I.E.C. was no better than that of hired labour and in fact also they received only the job charges. Section 2(f) of the Central Excises and Salt Act, 1944 defines 'Manufacture' and 'Manufacturer' in the following terms:
"Manufacture" includes any process incidental or ancillary to the completion of a manufactured product; and and the word 'manufacturer' shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account."
According to the aforesaid definition, the lower authorities, have held the appellants as manufacturers of the instruments which they got fabricated from M/s. I.E.C. We agree with the lower authorities. The case of appellants is distinguishable from the usual brand name cases, such as those reported at:
(1) 1985 (22) E.L.T. 302 (SC) - Citabul Ltd.
(2) 1985 (22) E.L.T. 324 (SC) - Food Specialities Ltd.
In the aforesaid Supreme Court cases, the brand name owners did not supply the raw materials or components. The manufacturing units used their own materials and they charged full commercial price for the articles manufactured by them. The brand name owners had the right of inspection and they could reject any part of the goods manufactured with their brand name which did not come up to their quality standard. These were the cases of manufacture and sale of on principal to principal basis However, in the case before us, it is the appellants who were owners of the raw materials and components throughout and at the end they took away all the goods fabricated on their behalf by paying only the job charges to M/s. I.E.C. This was not the case of manufacture and sale on principal to principal basis but of one unit employing another unit on hired labour basis. To the facts of appellants' case, ratio of the Supreme Court judgments at (1) 1977 (1) E.L.T. 0168) - Shree Agency v. S.K. Bhattacharjee (2) 1986 (25) E.L.T. 609 - Bajrang Gopi Lai Gajabi v. M.N. Balkundri are applicable and they have to be held manufacturers of the instruments which they got fabricated from M/s. I.E.C."
The department also relied on the ratio of the judgment in the case of Pressure Cookers in which the Tribunal held that:
It is a matter of what one makes rather than how one makes it. A goods that requires little or no skill to produce it, is not less a product than one that took much skill and labour. It is a mistake to see manufacture only as conventionally understood and as meaning manipulations, treatment, shaping and forming of some materials into different products. The process can be simple one of bringing different parts together to create a product that had not existed before. On the other hand, it can be a product that had not existed before. On the other hand, it can be a complicated process that depends not so much on bringing together different parts, as taking a material and shaping it into a new product to be used in totally different ways. The man who assembles a motor cycle from the parts he buys in different shops has made that motor cycle, which did not exist before he created a new motor cycle without forming or treating any material. His manipulations or process consisted of simply fitting together parts available in the market and which he simply bought; even when he has to buy nuts and bolts, they are ready in the market and are simply used to fasten the different parts together to assemble the motor cycle. It is not the act of manipulating or changing materials, but the act of creating or bringing forth a product, a property or commodity that had not been in existence till the action to unite different parts together was taken. It is for this reason that the law did not explain manufacture, because by explaining manufacture or describing it, it is possible to fetter the tax collecting agencies in ways that may help many products and merchandise to escape taxation, when such is not the will of the law making power. What might at first sight appear to be not a manufacture, will undergo a revision when viewed against the questions: What was done? Does the object assume an identity which attracts to it the laws of taxation? If anything has been done that produces a unit, a collection, a utility, a body that has never been there before, then however that unit or collection came into being, the law will be attracted and we will therefore have to say that there have been a manufacture.
40. There seems to have been some confusion in the minds of the deptt. about the stove and griller but these need not deflect us unduly from our present direction. Whatever may have been done in the classification of the components, we are satisfied that the two cuisinettes are cookers and would therefore be assessable to duty under Tariff Item 33C of Central Excise Tariff. There may have been a certain awkwardness in the department's approach to the matter but we would not say that the flaws were such that they have destroyed the present case. The case is true and right."
The ld. SDR argued that examining the case before us in the light of the Tribunal's decision, it would be seen that the computers manufactured by M/s. DSI and Orbit were superimposed with the logo 'ORG' and they were marketed by M/s. ORG even after 14-5-1982 just like similar other computers manufactured in their own factory by M/s. ORG. Thus the status of M/s. Orbit and DSI was not better than that of a hired labourer and in fact also they received only the job charges. Referring to the judgment of the Hon'ble Supreme Court in the case of Shree Agencies v. S.K. Bhattacharya, reported in 1977 (1) E.L.T. 168, the department had contended that on the ratio of that judgement when applied to the present case, it was crystal clear that ORG used to supply raw material to M/s. Orbit and DSI; that an attempt was made by M/s. ORG to give to this simple business deal a complicated shape so as to make it look like two independent and inter-connected transactions of sale of raw material to M/s. Orbit and DSI and purchase of computers from them. Their lordships in this case had held that "The conclusions of the Asstt. Collector and of the Collector which are identical are amply supported by evidence on record and have not been shown to be vitiated by any legal error nor has any grave injustice been shown to have resulted thereby to the appellant. Supporting their contention further, the department referred to the case of McDowell & Co. reported in 1985 ECR 259 wherein their lordship of the Hon'ble Supreme Court observed :
"Tax planning may be legitimate provided it is within the frame-work of law. Colorable devices cannot be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges."
The department also relied on the ratio of the decision in the case of Paramount Cable Corporation v. CCE reported in 1988 (36) E.L.T. 593. The facts of the case were that M/s. Krishna Electricals Industries supplied raw materials to M/s. Paramount Cable Corpn. and the issue before the Tribunal for decision was whether Krishna Electrical Industries were the manufacturers or M/s. Paramount Cable Corpn. were the manufacturers. In that case entire raw material were supplied by M/s. Krishna Electrical Industries to M/s. Paramount Cables and M/s. Paramount Cables after processing the goods had sent them to M/s. Krishna Electrical Industries. The Tribunal held that "The decision in the case of H. Guru Instruments applied to the present facts. Examining the facts of the case before us in the light of the above findings of the Tribunal we are inclined to agree with them."
As against the above contention of the department, the appellant submitted that the Tribunal in the case of Lucas India Services v. CCE held that manufacture of goods with customer's raw materials and according to the customer's specifications and designs does not render the actual manufacturer a dummy nor such customer be treated as manufacturer of such goods; that in the case of Super Printers v. CCE, the Tribunal held that the goods cannot be said to have been manufactured on behalf of a customer if the raw material is supplied by the customer and goods are manufactured according to the specifications and designs supplied by the customer; that in the case of Multi Trade Overseas v. CCE , Cochin, the Tribunal held more or less on the same lines as in the above two cases; that so also can be said of the ratio of the decision in the case of Kerala State Electricity Board v. CCE. The ratio of the above decisions was followed in the case of Prasad Engineering Works v. CCE; that in the case of Fusion Polymers Ltd. v. CCE the term 'hired labour' was discussed as 'a hired labourer' is one who hires himself out to work for and under the control of another for wages; that the Hon'ble Bombay High Court in the case of Chetan B. Thadani v. UOI reported in 1987 (30) E.L.T. 287 had held that the mere fact that the goods manufactured bear the trade mark of the customer and the entire production is supplied to such customers and the manufacturer has no interest in the commercial scale of product.
The appellant relied on the ratio of the decision in the case of CCE Madras reported in 1985 (21) E.L.T. 187 wherein it was held that:
"Following the decisions of Allahabad High Court in Ganga Dhar Ram Chandra (supra), Phillips India Ltd. and Ors. (supra) and that of Special Bench-B of this Tribunal in Lucas India Services Ltd. Madras (supra), we hold that the respondent i.e., Modoplast (P) Ltd. are the manufacturers of these goods i.e. Urea Formaldehyde Moulding Powder within the meaning of Section 2(f) of the Central Excises & Salt Act, 1944 but we would like to observe that they are liable to pay duty on the manufactured goods, i.e. Urea Formaldehyde Moulding Powder if the benefit of Notification No. 80/80 is extended to them. Charging only job work charges from them cannot be said to be legal. In this particular case, the product i.e. Urea Formaldehyde Moulding Powder falls under Tariff Item 15A(1) CET and job work notification is applicable only to these goods which fall under Item 68 C.E.T."
The appellant also relied on the case law cited in Metal Box of India's case reported in 1986 (23) E.L.T. 187, in which the Tribunal held that goods manufactured out of customers' raw materials cannot be said to have been manufactured on behalf of the customer when the manufacturer has a licence, and other statutory requirements for manufacture were complied with by the actual manufacturer. The appellant further buttressed their arguments deriving support from the ratio of decisions reported in 1984 (16) E.L.T. 415,1987 (30) E.L.T. 980,1987 (30) E.L.T. 745,1990 (47) E.L.T. 62,1987 (31) E.L.T. 247,1991 (56) E.L.T. 665 and 1993 (68) E.L.T. 65.
These cases cited and relied upon by both the sides have brought out a salient feature that computer business is a highly sophisticated business which needs very careful and cautious planning right from the selection of raw materials and control over the entire process of manufacture. It is unlike most of the other consumer items. Therefore getting it manufactured by supply of raw material is not a simple operation but a very complex one and therefore has to be distinguished from the facts of the cases cited by both sides. The computer as a hardware is invariably manufactured in such a manner that software is compatible to the hardware and later on is fitted to it. Having regard to the preponderance of the decisions in favour of the appellant, we hold that supply of raw materials alone does not make ORG a manufacturer.
30.b.(ii) Whether supply of specifications and designs would make ORG a manufacturer of computer:
The department has argued that manufacture of a computer is a very complex method. The entire manufacture consists of a hardware and software. The hardware and software must be compatible to each other and hence supply of designs and specifications assumes importance; that ORG themselves were manufacturing systems software; that without systems software the assembly supplied by DSI and Orbit cannot be called a computer, it is a dumb box. It was further contended on behalf of the department that processing of data which is the main function of a computer cannot be done without the systems software.
The appellant as against this, contested that a person cannot be treated as a manufacturer simply because the goods are manufactured according to his specifications and designs. In support of his argument, the appellant submitted that in the case of CCE v. Modoplast, the Tribunal held that mere supplying the raw materials to another for manufacture of goods will not make the supplier of the raw material as a manufacturer; that in the case of Metal Box v. CCE, the Tribunal had held that goods manufactured out of customer's raw material cannot be said to have been manufactured on behalf of customer when the licence for manufacture of computers was taken by the actual manufacturer. In the case of Lucas Indian Services v. CCE reported in 1984 (16) E.L.T. 415 the Tribunal held that customer supplying raw materials to another for manufacture of goods in accordance with his drawings and specifications is not a manufacturer. Further in the Kerala State Electricity Board v. CCE reported in 1990 (47) E.L.T. 62, the Tribunal held that the mere fact that raw materials were being supplied by the customer and that the same were to be utilised in the manufacture of articles to the specifications of the customers and that the manufactured articles were to be returned to the customer would not those reasons only make the customer rather than the actual manufacturer of the product.
On examination of the contentions of both sides, one point that clearly comes out is that supply of designs and specifications in the case of computers is very different from the other types of manufacture and hence has to be viewed on a different footing. Supply of specifications and designs is actually at par with supply of specific designs for a tailor-made item and hence will constitute manufacture. So, in the case of supply of specifications and designs for computers will amount to manufacture and price charged therefor shall be inclusive in the assessable value.
30(b)(iii) Whether adding of peripherals at the time of supply of computers would make ORG as computer manufacturers :
The department contended that supplying the computers with peripherals constitutes manufacture of computer systems. In support of this contention, they cited and relied upon the decision of the Tribunal in the case of Pressure Cookers cited supra; that their Lordships of the Hon'ble Supreme Court in the case reported in 1988 (36) E.L.T. 201 held :
"It is well settled that the word "includes" is an inclusive definition and expands the meaning."
that the normal meaning for excluding the peripheral devices cannot be relied upon; that the peripheral devices supplied with the computers makes it computer systems and hence a new product comes into existence. It was also argued by the Revenue that in the case of Name Tulaman, the Apex Court held that activity of assembling the three components (i) Platforms, (ii) Load Cell and (iii) Indicating system amounts to manufacture as it brings into existence a weigh-bridge, a new product known in the market and known as an excise item. The mere fact that appellant bought out the two parts and manufactured only the indicating system and paid duty thereon will not change the position because parts and end-products are separately dutiable.
As against this, the appellant submitted that in the case of Tata Robins Fraser v. CCE, the Tribunal observed that it is well settled by Supreme Court that excise duty is a tax on the event of production/manufacture of goods; that merely collecting the various component parts at site partly by manufacture from one's own factory and partly buying some components from the market will not mean manufacture; that in the case of Ashok Leyland v. CCE, the Hon'ble Madras High Court held that "On an application of the decisions of the various High Courts and also the law laid by their Lordships of the Supreme Court in the case of Ujagar Prints and having regard to the facts, I have no hesitation in coming to the conclusion that on the facts and circumstances of this case the petitioners cannot be considered as manufacturer as the respondent concern is an independent concern and there is nothing to suggest that the arrangement entered into between the petitioner and 2nd respondent was not a genuine one or a camouflage"; that the activity of manufacturing connotes an activity which brings about transformation and brings into existence a new commodity having distinct name, characteristic, form and use. Arguing further, the appellant also submitted that manufacture implies a change, but every change is not a manufacture, yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation, a new and different article must emerge having a distinctive name, character and use and further that to become goods an article must be something which can ordinarily come to market to be bought and sold; that in the case of Sterling Foods v. State of Karnataka the Hon'ble Supreme Court held that "the test is whether in the eyes of those dealing in the commodity or in the commercial parlance the processed commodity is received as distinct in character and identity from the original commodity". Further held that "There can, therefore, be no doubt that processed or frozen shrimps, prawns and lobsters are not a new commodity, but they retain the same character, and identity as the original shrimps, prawns and lobsters."; that if peripherals are supplied later on as add-ons does it mean that the value of peripherals should be added to the computers supplied early and then duty charged on the entire value comprising the value of the computer supplied earlier and the value of peripheral devices supplied later.
On going through the arguments adduced by both the sides and the case law cited and relied upon, we find that a computer has three basic components namely the input devices, the Central Processing device and the output device. All the three put together make a computer system. A computer supplied with these peripherals makes the functioning of the computer not only easy and convenient but enhances the entire working of the computer and therefore peripherals cannot be termed as accessories., Moveover, adding of peripherals gives rise to a new product known in the market and to the users as computer systems. It would thus be seen that an entirely new product comes into existence, when peripherals are supplied with the main frame. We also find that this product is distinctly bought and sold in the market and is a distinct item in Entry 33DD of the Central Excise Tariff. We, therefore, hold that ORG is a manufacturer of computer systems.
30(b)(iv) Whether supply of systems software would make ORG/Adprint a manufacturer:
Computer is a marvel of technology. It is one of the most interesting and important machines ever invented. It is even capable to create new knowledge for the use of mankind and has great potentiality for the future. A computer is in two parts: Hardware and Software. The term 'software' in computer technology is used in contraposition to hardware Hardware in itself cannot think about problems and figure out how to solve them. The hardware has to be told as what to do with the data and other input it receives. The material, in the form of instructions, for a computer to follow is called a programme. This instructional material necessary to run the computer is the software. With the help of this material called software, the computer is able to perform the desired tasks. Without programme, a computer could not solve any problem or deliver any desired result. The software is also of two types: systems software and application software. In addition there is also a type of software known as 'firmware' for basic instructions which is generally burnt into the chips of the hardware itself.
Systems software is designed to use a computer for its basic functions. This 'systems software' is further comprised of operating systems and utilities. Operating system is a type of software that controls the operation of a computer system. It controls the input and output devices and it reads and responds to user's commands. It also places programmes and data into the memory and makes sure that the processor executes the right programmes. It is clear that without the systems software, the computer will not work and that the computer was useless without the systems software. It is common knowledge that the computer system will not be operational without the system software. It is an admitted position that systems software is prepared and supplied by M/s. ORG. It was argued before us that software is already burnt in the chips of the computer and this burning of the software is done by DSI and Orbit.
In support of this contention, the appellant had referred to the statements of S/Shri M.N. Dave and B.S. Patel. The department had contested that what was burnt into the chips by DSI and Orbit was firmware and what was supplied by M/s. ORG was systems software without which the computer frame was a dumb box. After careful consideration of the arguments adduced, case law cited and relied upon by both sides, we find that what was burnt into the chips of the computer frame was firmware and not systems software and what was essential for a computer to function and operate was systems software which was supplied admittedly by M/s. ORG. Preparation and design of systems software shall amount to manufacture and we hold accordingly.
30(b)(v) Whether the tariff entry against Tariff Item 33DD indicates that adding on peripherals to computers would create new goods, if so, whether the new goods would still be called computers or would be designated as computer systems indicating a different commodity:
The department contended that tariff entry is wide enough and peripheral devices have been included in the entry 33-DD; that the Hon'ble Supreme Court in the case reported in 1988 (36) E.L.T. 201 held that "It is well settled that the word 'includes' is an inclusive definition and expands the meaning; that the normal meaning for excluding the peripheral device cannot be relied upon; that the technical definition cannot be relied upon in view of the specific entry in the tariff; that expanding the ambit and scope of the term 'includes', the Hon'ble Supreme Court in the case of Indo International Industries v. CST, UP reported in 1981 (8) E.L.T. 325 had held : "It is well settled that in interpreting the Tariff entries in statutes like the Excise Tax Acts and Sales Tax Acts whose primary objective is to raise revenue for which purpose they classify diverse products, articles and substances resort should be had not to the scientific and technical meaning of the terms or expressions used but to their popular meaning, that is to say, the meaning attached to them by those dealing in them. If any terms or expression has been defined in the enactment then it must be understood in the sense in which it is defined but in the absence of any definition being given in the enactment the meaning of the term in common parlance or commercial parlance has to be adopted"; that the Tribunal in the case reported in 1990 (45) E.L.T. 490 held that Tariff definition is to be preferred over the trade parlance; that in the case of Name Tulaman v. CCE reported in 1988 (38) E.L.T. 566 (SC), the Apex Court held :' "3. The appellant's contention before the Tribunal was that it was only preparing a part and that part is dutiable as a separate part. The appellant, however, did the work of assembling. As a result of the work of the appellant a new product known in the market and known under the excise item 'weighbridge' comes into being. The appellant will become a manufacturer of that product and as such liable to duty. That is precisely what the Tribunal found on the facts of the case. The appellant seems to have been obsessed by the idea that as part of machine is liable to duty then the whole end-product should not be dutiable as separate excise goods. That is mistake, a part may be goods as known in the excise laws and may be dutiable. The appellant in this case claims to have manufactured only the indicator system. If the indicator system is a separate part and a duty had been paid on it and if the rules so provide then the appellant may be entitled to abatement under the rules. But if the end-product is a separate product which comes into being as a result of the endeavour and activity of the appellant then the appellant must be held to have manufactured the said item. When parts and the end-product are separately dutiable - both are taxable.
4. In that view of the matter, the appellant's case that it is liable only for the component part and not the end-product cannot be entertained. The Tribunal was, therefore, right in the view it took. These appeals have no merit and are accordingly dismissed. This order will not prejudice the rights of the appellant to claim, if any, abatement as indicated before according to the rules if the appellant is so entitled."
that the Tribunal in the case of Pressure Cookers and Appliances reported in 1987 (28) E.L.T. 566 (Tribunal) held that mere bringing together of different parts to create a new product tantamounts to manufacture. It was argued by the department that adding up peripherals no doubt creates a new product known in the market as computer system. As the computer systems were supplied by the ORG therefore they were manufacturers. The appellant contested that Adprint supplied peripheral devices if required by the customers; that Adprint or ORG was not manufacturing these devices but were purchasing these devices from the market. It was contested by the appellant that the word 'including' occurring in Tarrif Item 33DD only shows that peripherals independently would be taxed under Tariff Item 33DD and not that if the peripheral devices are supplied alongwith the computers it will again be charged to duty under TI 33DD. For making his intention clear, the appellant submitted that if peripherals are supplied later on as add-ons does it mean that the value of peripherals should be added to the computers supplied earlier and then duty charged on the entire items. After considering all the arguments and the case law relied upon and cited by both sides, we find that Tariff Entry 33DD shows that addition of peripherals and add-ons no doubt created a new item which will be liable to duty. One point that was vigorously agitated by the appellant was that how on the same item duty can be charged twice. It was contended on behalf of Adprint/ORG that whatever they purchased from DSI/Orbit or ORG was a computer. What they were selling was also a computer; that the supply of add-ons was optional. This contention of the appellant does not appear to be correct that whatever was being purchased by them from DSI/Orbit or ORG was a computer and what they were supplying was also a computer. However, we find that on addition of some add-ons it does not remain a simple computer but it takes the form of a computer system which is known to the users and the market as such and therefore even for the purpose of Tariff Entry 33DD whatever is sold by ORG is a computer system which is different from the computer purchased by them from DSI/Orbit or ORG. In this view of the matter, we hold that addition of peripherals no doubt brings into existence a new product known as such in the market and identified as such in the Tariff Item 33DD and will be liable to excise duty.
30(b)(vi) Whether Notification No. 148/76 allowing set off of duty on peripherals would change the nature of the goods for the purpose of classification:
Notification No. 148/76 shows that legislature had already provided relief to the extent of Excise duty paid on peripheral devices in the matter of assessment of computers. This notification was issued by the Govt. of India to cover situations in which peripherals were added to the computers and the computer systems was sold, i.e., for relief of duty paid to bought out items (add-ons and peripherals) was provided. This notification makes Tariff Entry 33DD amply clear showing that with the addition of peripherals to the main computer frame, the computer becomes new product known in the market as well as the user as computer systems and duty is leviable on the total cost of the computer and the peripheral devices.
30(b)(vii) Whether the conditions of the purchase order in any way were indicative that ORG/Adprint was the manufacturer :
The appellants argued that the conditions clearly showed that the transactions between the two were on principal to principal basis and that the Department has not brought any evidence on record to show that Orbit and DSI were dummy units of ORG; that the ld. Collector only went by the assertion of Revenue that the prices of raw materials were adjusted in the accounts and not paid in cash, and therefore, ORG on this account cannot be termed as manufacturer.
Having regard to the findings on the issues relating to manufacture, we hold that on the basis of discussions in the paras b(i) to b(vii), M/s. ORG was the manufacturer of computers as well as computer systems.
30(c) Whether the service charges collected by ORG should in toto be added to value or only certain expenditure should be added:
A lot of case law was cited on the question of valuation. Valuation aspect can be approached from the following two angles :
(i) Whether the value of the bought out items (Add-ons and peripherals) should be added to the value of the computers for purpose of levy of duty; and
(ii) Whether service charges including the cost of systems software collected by ORG should form a part of the assessable value and if yes, to what extent;
30(c)(i) The Revenue argued that in the case of Rallies India v. CCE reported in 1993 (67) E.L.T. 144 it was held that value of essential parts should be added, as peripheral devices are essential part of computer and therefore value thereof shall be added; that in the case of Dayaram Metal Works v. CCE it was held that value of bought out items should be included in the value of the main frame computers; that in the case of Sunray Computers reported in 1988 (33) E.L.T. 787, the Tribunal held:
"In the light of these general principles, we shall now deal with the individual items of dispute in this case:
(1) Technical Consultancy Fee:
The nature of the technical consultancy given by the respondents to their customer is not clear from the record. We have already stated in para 3 above that pre-manufacturing research, planning and designing are a part of the manufacturing activity itself and their cost would form a cost of the machine produced. Therefore, if the service rendered by the respondents was for assessing the specific needs of a particular customer so that a computer could be tailor-made for him the cost of service would form a part of the assessable value of that computer. The respondents stated before us during the hearing that they were manufacturing and marketing only standards units and not custom made units and that their technical consultancy fee was for assessing 'how the system is to be used in the particular customer's environment'. The precise meaning of this statement was not clear to us nor could the ld. Chartered Accountant representing the respondents explain it further in more specific terms. We direct the Asstt. Collector to verify the nature of the technical consultancy provided by the respondents in each case. If it was in the nature of advice as to how the customer could utilise the computer so as to take maximum benefit out of it and it had no connection with the designing of the equipment supplied, the service or the advice as such would not be taxable nor its value includible in the value of the computer. But any goods supplied as a part of the consultancy service would be taxable on their own merits.
(2) Training of the Customer's staff:
The training may be prior to the delivery of the computer or after it but in either case it can be said to have no nexus with the manufacture or marketability of the computer. However, as already stated in connection with the consultancy service, if any goods are supplied as a part of the training, the goods would be taxable on their own merits.
(3) Installation and Commissioning of the Computer at the customer's premises:
These are clearly post-removal expenses and this activity has no nexus with manufacturing and marketability of the computer. Their cost is, therefore, not includible in the assessable value of the computer.
(4) Warranty Charges:
It is not possible to market any costly machinery article without the manufacturer extending free warranty service for a reasonable period of time. The customer needs a minimum assurance that the machine he is buying would give reliable operation for some reasonable period and, in case of need, the manufacturer would attend to the defect free of cost. The cost of such after-sale-service during the warranty period is generally included in the sale price of the machine. If it is not so included already and is recovered by the manufacturer separately, it would yet be includible in the assessable value of the machine.
(5) Other service Charges:
The machines may require servicing and maintenance even after the expiry of the warranty period. Even during the warranty period, the need for certain repairs or replacements may arise which may not be covered by the terms of the warranty, such as damage or defect occurring to the machine because of some accident. The manufacturer and his buyers may find worthwhile to enter into service arrangements in such situations also. These would be clearly post-removal expenses not connected with the manufacture or marketability of the machines. In the case of computers, certain buyers may require some special types of services, such as assistance of the manufacturer's experts for recruiting skilled labour to operate the computer and its peripheral devices. Some customer may require specific on-site programming to be done in their premises. These activities also are not connected with manufacture and marketability of the computers and are provided by the manufacturers or specialised consultancy companies on optional basis. The charges for such services are not includible in the assessable value. However, here too, if any goods are cleared from the manufacturer's factory in pursuance of the services required, the goods would naturally be assessable on their own merits.
(6) Software/ROMs supply charges :
(i) Before starting discussion on this point, it would be worthwhile noticing the wording of Central Excise Tarriff Item 33DD. It reads as under :
"Computers (including central processing units and peripheral devices), all sorts"
(ii) The respondents' point is that only hardware part of the computer is goods and hence that part alone is chargeable to excise duty, that software is nothing but computer language, programme, and knowledge or instruction on how to use the hardware and that language or knowledge are not goods and hence not taxable; they are only a service activity and charges therefor are not includible in the assessable value.
(iii) We find that the aforesaid contention of the respondents is an over-simplification to the point of being incorrect. The ld. representative of the deptt. produced before us a book titled "Computers for Everybody", 3rd Edition, by Jerry Willis and Merl Miller. This book has been written for a layman's understanding. We reproduce a couple of extracts from it to facilitate understanding of what is hardware and software:
"Hardware, the actual computer and its accessories is only half a computer system. To get it to do anything useful the computer must be given a set of instructions that will it exactly what to do. These instructions are called programmes or software and they are at least as important as the nuts and bolts of a system."
"A computer is only a dumb box with a bunch of electronics in it. All the talk about the marvellous things computer can do is really only talk about the marvellous things software can do."
(iv) The software may be language or knowledge, no doubt. But it is not passed by word of mouth. It is recorded on a medium such as floppy, cartridge, chip, diskette or documents. These recorded mediums are goods in their own right, just as an education film, a language teaching casette tape or a music record is. They are bought and sold in the market as a valuable commodity. Their intrinsic value includes the cost of the blank medium as well as of the instruction or knowledge recorded thereon. There cannot, therefore, be any doubt that the recorded mediums are goods in their own right.
(v) Without software, the hardware is incomplete, a mere dumb box and of no use at all to the customer. Hardware, software and peripherals, together make a wordable computer. All three of them are, therefore, a part and parcel of the computer. If there is a single contract for the supply of computer, including software, the total value of the computer, including that of the software, would have to be assessed to duty, irrespective of the fact whether the software part is supplied alongwith the hardware or in a separate lot and irrespective of the fact whether a single invoice is made for both hardware and software or a separate invoice is made for the software.
(vi) Once a complete computer system has been delivered to the customer, the customer can yet need supply of software later on just as a user of a motor car would require spares throughout the life period of a car. If there is a separate contract for supply of the software alone, the goods, through the medium of which the software is delivered, would have to be assessed on their own merit under the appropriate tariff item unless otherwise exempt from duty. If the supply of software involves only a service activity, and no goods are delivered at all, such as in a situation where an expert of the seller goes to the premises of the buyer, does the necessary research and programming and keys the programme directly into the memory of the customer's computer, it being purely a service activity and there being no goods, the question of charge of central excise duty would not arise.
(vii) When we talk of the cost of software, supplied in the shape of goods, it would, just as in the case of hardware, include the cost of warranty on the software as well.
(viii) The respondents made a point that their programme was tailor-made for each customer. We do not think it makes any difference whether the goods are mass produced, or are custom made. In both cases, so long as they are goods, they would have to be charged to duty, unless otherwise exempt."
The appellant as against these arguments had contended that duty on main frame computers was paid by M/s. Orbit/DSI and ORG under Tariff Item No. 33DD; that as the item sold finally by ORG/Adprint was only a computer, therefore the same computer on which duty has already been paid cannot be subjected to duty again under Tariff Item 33DD as it was contended by the appellant that peripherals were not manufactured by them, were bought out items and addition of peripherals did not bring into existence a new product known as such in the market to those dealing in or using it.
We find that all the contentions raised by the appellant have been adequately met and replied to by the respondents. On the basis of the various decisions cited by both sides and relied upon by them, we are of the view that addition of peripherals and add-ons to main frame computer brings into existence a new product commonly known as computer systems and therefore charging of duty on computer systems after adding the value of bought out items to the value of main frame computer when the two are supplied together, is perfectly legal and valid, and we hold accordingly.
30(c)(ii) Before dealing with service charges, we find that a very important link in the process of valuation is missing and that link is the "warranty". Computers are very sophisticated machines and need an initial back up. As the cost of computers is quite high, no consumer would like to throw his money into the gutter without a back up service and operational guarantee known to the trade, as 'warranty'. We have, therefore, to examine the service charges in this background.
(a) On the question of service charges, the appellant contended that technical services are provided by professionals and no goods are supplied; that these services are not related to manufacture; that technical service charges comprise of installation charges, maintenance charges, development of software, selection and training of personnel, assistance in system designing and programming, problem solving etc; that these charges are collected under a separate contract. The department submitted that the decision of the Tribunal in the case of Sunray Computers is very clear on the question which of the charges will be included and which not.
(b) It was argued by the appellant that maintenance operations are necessary for the purpose of keeping the computers in a state of good repair and also for the purpose of repairing it as and when any problems or malfunctions occur.
We find that the computer is highly sophisticated, complex machine. New ideas and concepts are evolved almost every day and unlike other fields where a study of technology remains current for many years, in the field of computer technology, developments which are comparatively new rapidly become obsolete. However, the exact needs of customers for computer and data processing, services vary very widely depending entirely upon the facts and circumstances relating to the activities of each particular customer and his data processing needs. Looking to this angle, nowhere it has been clarified whether the sale and installation of computers was being warranted and a warranty for a particular period was being provided. All the consumer durable industries provide warranty on consumer durables. What was the warranty and who was providing this warranty? Service charges were being collected by ORG. On the question of the inclusion of the cost of systems software, Revenue submitted that without the systems software a computer frame is a dumb box, whereas the appellant submits that it is a software which is not goods and is exempt. Having carefully considered the competing pleas of both sides, we have already held that systems software is an essential requirement without which the computer cannot perform the functions for which it is made and it is an admitted position that systems software is supplied by M/s. ORG. We therefore hold that the cost of systems software shall be added to the value of computer for levy of duty. In the absence of any explanation as to the warranty on computers and as to how this warranty period was being granted to the consumers, we hold that service charges which included the cost of systems software were an additional consideration and were being collected among other services to provide warranty to the consumers. As we have already held that M/s. ORG are manufacturers of the computers and computer systems and therefore invariablly the warranty is required to be provided to the customers by them. As no explanation has come forth as to what extent the price charged from the customers included the warranty amount and in the absence of break-up, we hold that the amount collected in the form of service charges comprise an element of warranty also.
On behalf of the appellant it was argued that the appellants have a very high level of expertise in computer technology not only in the installation and maintenance of computers but also of their design so that they are tailor-made to fit the individual requirements of the customers and hence service charges were being collected to render expert service.
Computers are very delicate machines and most sophisticated items commanding a very high price. No doubt every customer shall request for a warranty for perfect functioning of the computer. Service charges collected by ORG appear to form a part of the warranty cost. As no break-up of these charges as to how much of them were for warranty and cost of systems software and how much were for other operations which may legitimately be treated as post-clearance operations we hold that the entire amount; collected as service charges shall be includible in the value.
There are other points which have been contested by the appellant stating inter alia that the appellant may be given deduction of Central Excise duty. The ld. Collector in his order in regard to deduction of duties paid has rendered a finding that duty paid by DSI and Orbit amounting to Rs. 67,03,183.18 basic duty and Rs. 2,54,298.69 as special duty has already been deducted before quantifying the additional duty liability of ORG. It was also argued by the appellant that countervailing duty on the items imported by them has not been allowed to be deducted from the assessable value calculated by the department. We find that though the ld. Collector has denied them the set-off of countervailing duty on the ground that provisions of Rule 56A were not followed by the appellant, we however, hold that in case accounts were available as to the amount of countervailing duty paid on the items imported and supplied with the computers as add-ons making them as computer system, the amount of countervailing duty paid shall be admissible for deduction.
Installation and maintenance charges collected by ORG in respect of computers imported by customers will not be includible in the assessable value as it appears to be legitimate trading activity. Hiring charges collected as rent in respect of computers shall be deductible from the assessable value. Computers sold on instalment basis, instalments thereof shall be includible in the assessable value. Calculation mistakes and other errors may be sorted out by mutual discussions in the light of the principles laid down in the preceding paragraphs.
30(d) Whether the Collector had travelled beyond the Show Cause notice:
It was argued by the appellant that the Collector had gone beyond the Show Cause Notice inasmuch as from the statement of S/Shri Dave and Patel, it was clear that the price was worked out on the basis of cost of raw material overheads, software etc. Thus, the inference of the Collector that systems software was supplied by ORG was not correct and thus relying on the ratio of the judgment in the cases Rajasthan Spinning and Weaving Mills reported in 1989 (41) E.L.T. 450 and Ashivin Vanaspati Industries, the appellant supported his contentions. Examining this contention of the appellant we find that the software burnt into chips was the firmware and as already held in the preceding paragraphs that this software is different from systems software, we hold that the findings of the Collector were based on facts and hence were appropriate and correct and the Collector had not travelled beyond the Show Cause notice.
30(e) Whether the demand was time-barred :
The ld. Collector has held that the material fact that Adprint was a dummy unit and ORG was actual manufacturer of computers was suppressed. ORG also suppressed the fact that they got computers manufactured by DSI and Orbit on job work basis by supplying raw material from 1979 to May, 1984. ORG also deliberately suppressed the information about service charges collected by them.
The appellant submitted that there were contracts between Adprint and Orbit and Adprint and DSI; that the deptt. was aware of these contracts, therefore, there was no suppression of facts or mis-statement; that Adprint was involved in the trading activity and ORG was merely offering its services for a price.
We have carefully considered the submissions of both sides and find that what was suppressed was first the relationship between M/s. ORG and Adprint and the second was the suppression of service charges being collected by ORG.
As both questions have come to notice only during investigation we hold that there was suppression of facts with an intention to evade payment of duty. In the circumstances, the demand beyond six months under the provision of Section 11A of the Central Excises and Salt Act, 1944 is maintainable. In view of the fact that the information was not supplied therefore the demand was not time-barred and we hold accordingly.
31. On the question of imposition of penalty, we find that the information regarding charging of service charges, supply of peripherals and systems software was held back and was not disclosed to the Central Excise authorities. This holding of the vital information for determination of the actual assessable value is with the intention of evading payment of duty. As the intention of evading payment of duty is very clear inasmuch as though ORG was the actual manufacturer in computers yet to evade payment of duty they created a facade in the name of Adprint and then acted through it. Having regard to these facts and circumstances we hold that imposition of penalty was justified in law. However, the quantum of penalty appears to be very much on the higher side. Having regard to all the facts and circumstances of the case as also to the point pleaded by them that they had the bona fide belief that they were not the manufacturers of computers, we reduce the quantum of penalty to Rs. 10 lakhs.
32. The findings are summarised below :-
(a) Adprint is a dummy unit of ORG.
(b) DSI and Orbit are not dummy units of ORG nor are they related to ORG.
(c) ORG is manufacturer of computers and computer systems.
(d) Demand is not time-barred.
(e) Service charges, which include cost of systems software and warranty charges in the absence of break up shall be added to the assessable value.
(f) Value of peripherals shall be added to the value of computers.
(g) Admissible deduction of duty paid on peripheral devices and computer frame shall be admissible to the extent proved.
(h) Calculation inaccuracies and expenses incurred in maintenance of computers not sold by ORG shall be adjustable by mutual discussion.
(i) The quantum of penalty is reduced from Rs. 25 lakhs to Rs. 10 lakhs.
33. But for the above modifications, the impugned order is upheld and the appeal is disposed of accordingly.