Customs, Excise and Gold Tribunal - Delhi
Collector Of Central Excise vs P.S.I. Data Systems on 2 November, 1988
Equivalent citations: 1989(39)ELT692(TRI-DEL)
ORDER K.L. Rekhi, Member (T)
1. The principal dispute in this appeal is whether certain amounts recovered by the respondents from their customers in the name of technical service charges should form a part of the assessable value of computers manufactured and sold by them.
2. Relying on paragraph 49 of the Hon'ble Supreme Court's judgment in the case of Mis. Bombay Tyres International Limited, 1983 ELT 18% (SC), in which it had been held that after-sale service charges were includible in the assessable value under Section 4 of the Central Excises & Salt Act, 1944, the Assistant Collector held that the technical service charges collected by the respondents enriched the marketability of the computers and they were, therefore, to be included in the assessable value of the computers. The Assistant Collector further held that the respondents had not disclosed to the department the amounts collected in the name of technical service charges and further that the charges on account of technical services were inflated so as to divert a part of the price of the computers to the technical service charges. Holding it a case of suppression of facts by the respondents, in which the extended time limit of 5 years applied for demand of duty short levied, the Assistant Collector confirmed the demand for duty of Rs. 34,42,668.65. In appeal, the Collector (Appeals) held that technical service charges were optional and were for rendering professional services by the respondents and hence they were not includible in the assessable value of the computers. The Collector (Appeals) further held that there was no suppression of facts by the respondents. Accordingly, he allowed the appeal of the respondents and set aside the entire demand. The department is now in appeal before us against the order passed by the Collector (Appeals).
3. We have heard both sides and have given the matter our earnest consideration. Technical service charges are of various types. But we find that the lower authorities have dealt with the matter as if all of them were either deductible or not deductible from the assessable value. The lower authorities have fallen into a similar error on the question of limitation also. The respondents entered into individual contracts with each of their customers and for each contract they filed a separate price list in Part II for approval of the authorities. The Asstt. Collector held that there was non-disclosure of technical service charges in respect of all the price lists. The Collector (Appeals) held that there was no suppression in respect of any of them. It appears to us that the truth lies somewhere in between.
4. During the hearing, both parties referred to the Tribunal's earlier judgment at 1988 (33) ELT 787 (Tribunal) - Collector of Central Excise, Bangalore v. Sunray Computers (P) Ltd. in which the question of technical service charges had been dealt with in detail. In this judgment, the Tribunal held that cost of services having nexus with manufacturing or marketability of the goods, such as pre-manufacturing research, planning and design, advertisements, warranty service and supply of software was includible in the assessable value while the cost of services having no such nexus, such as selection of skilled personnel for the customer, training of the customer's staff, installation and commissioning of the computer at customer's premises, was not includible. It was also stated in the same judgment that while determining the assessable value, care would have to be taken to see that a part of the real value of the computer system was not recovered by the assessee by inflating the excludable service charges. The Tribunal later dealt with a similar matter again in their order No. 465/88-A dated 25-8-88 in Appeal No. E-2231/86-A (Collector of Central Excise, Bangalore v. Wipro Information Technology Ltd.). The learned representative of the department referred to this later judgment also. He stated that in the impugned order-in-appeal the Collector (Appeals) had, in fact, relied on his earlier order-in-appeal passed in the case of Sunray Computers (P) Ltd. which had already been set aside by this Tribunal and the matter remanded to the Asstt. Collector for re-determination of the assessable values in the light of the Tribunal's judgment ii the Sunray case aforesaid. The learned representative of the department further stated that the department accepted the principles decided by the Tribunal in the Sun-ray and Wipro cases and he wanted those principles to be followed for the present case also. The respondents, in addition to making oral arguments, submitted a written summary of such of their submissions as they pressed for during the hearing. On going through their arguments and their written summary, we find that their only dispute in respect of the Tribunal's earlier judgments in Sunray and Wipro cases is in respect of software. The respondents maintained that "technical services are pure intellectual property" which cannot be considered as an excisable commodity. We find that we have already dealt with this argument at length in the Sunray case. We have held therein that if only a service as such is performed, there would be no question of charging Central Excise duty but where tangible goods come into existence as a result of intellectual-cum-industrial activity and such goods are bought and sold in the market, they have to be treated as excisable. We reiterate the same view here. The other plea of the respondents in respect of software is that in the Sunray case the Tribunal relied on the book "Computers for Everybody", 3rd Edition by Jerry Willis and Merle Miller and held that without software (i.e., Computer Language, Programme and Operating System etc.), the hardware (i.e., the actual computer and its accessories) was incomplete, a mere dumb box, and of no use at all to the customer and that hardware, software and peripherals together made a workable computer. All three of them were, therefore, a part and parcel of the computer. The respondents pleaded that this book relied on by the Tribunal was for layman's understanding and it over-simplified the matter to the point of being incorrect. The respondents, however, cited no technical authority or literature in support of their contention. But, on their own, they tried to draw a distinction between different types of software as follows :
"Software ranges from basic software to operating systems software and application software. Basic software enables a computer to read into itself from peripheral devices and includes vacabulary of basic instructions such as add, sub-stract, increment, document etc. This software is burnt into the hardware and is called 'firmware'. The cost of firmware is included in the cost of a computer hardware. In the light of this, the finding that hardware (which includes firmware) without software is a dumb box and of no use to the customer is incorrect. Software (excluding firmware) only increases the utility and hence not excisable."
This contention of the respondents is not, in fact, a new one. We have already dealt with a similar point in our Wipro judgment aforesaid. We quote from the said judgment:
"We do not agree with the respondents. No part of the software could be treated as an accessory. A customer who invests lakhs of rupees on a computer system wants to get maximum benefit out of it. The type and number of software required by a customer is determined by his needs. A customer who goes in for a bigger computer system, does so because all parts of that system are essential for him. Inasmuch as the software actually makes the computer work, the software cannot be treated as an accessory. It is-an essential part and parcel of the computer system. A customer wants more than one language, programme and operating system because he wants his computer to do many things, each one of them being an essential function for the customer. We do not, therefore, think that any departure is called for from the principles laid down by us in the Sunray case."
We reiterate the same view here. It is obvious that no customer would like to invest lakhs of rupees on a computer just for the luxury of doing simple jobs of addition, substraction, multiplication etc.
5. The respondents then relied on the Bombay High Court judgment in the case of Tata Sons Limited v. U.O.I. and Ors. -1982 ELT 53 (Bom.). We find that their relianceis mis-placed. To keep the record straight, we re-produce below the passage in the said-judgment which the respondents relied on :
"The principal question which requires determination is whether the computer would fall under definition of 'machine' or could be properly described as an electrical instrument, apparatus or appliance. To appreciate the problem, it would be convenient to find out what the expression 'computer' connotes. The 'computer' is a comprehensive expression which includes the Central Processing Unit, Disk File Storage Units, Disk Pack Drives, Disk Cartridge Drives, Magnetic Tape Drive Units, Line Printers, Card Readers, Paper Tape Punch Unit, Console Printers and Display Terminals. The whole combination of these devices constitute an integrated computer system (Data Processing Machine). Individual Units of the system cannot be considered as a computer by itself and none of the units are capable of working except in conjunction with the others and a particular system can be configured after giving due regards to the particular requirements e.g. raw data can be accepted by the system either/through punched cards, paper tape, console terminals or can be directly encoded on the magnetic tapes; processed data can either be stored on any of the disk devices, magnetic tapes and/or be outputted on the line printer, paper tape, or can be displayed on the visual display unit. The mode of input or output a user will vary from application to application and, therefore, the computer manufacturers market their systems in this modular fashion. The individual components of the computer system i.e. tape drives, line printers, disk drive, etc. consist of electromechanical and electronic devices, while the Central Processor, though it consists of complex electronic circuits also has its own power supply system, relays, switches, cooling fan motors, etc. It is obvious that the computer consisting of several machines by the compound unit and interdependent operation of their respective parts produced definite and specific results."
It is quite evident that the question under consideration before the Hon'ble High Court was a different one. Neither the question of deducibility or otherwise of the software value came up before the High Court nor did the High Court deal with it even as an obiter. On the other hand, we find that the High Court judgment squarely negatives the respondents' contention regarding software when it holds that the computer is a comprehensive expression (emphasis added by us).
6. The respondents have argued that for the purposes of tariffs, no distinction is made between blank floppies and recorded floppies and that once duty is paid on blank floppies, subsequent recording of the same with intellectual property would not render them liable for further levy of excise duty, whatever be there intrinsic value. We do not agree with the.m. A blank floppy and recorded floppy are two different commercial products just as a blank cassette tape or video tape and a recorded cassette tape or video tape are two different sets of commodities. To take another example, if the respondents' arguments were to be accepted there would be no excise duty on cinema films once duty on blank/un-exposed film had been paid. But it is not so because the two are different commodities and the tariff had a specific scheme to tax both separately. The respondents complained of discrimination and violation of Article 16 of the Constitution of India inasmuch as, they alleged, that while they were being called upon to pay duty in respect of the software purchased and supplied, certain other manufacturers were not so taxed. We find that this is a new argument put forth by the respondents. No such allegation of discrimination was made before the lower authorities and, consequently, the facts whether any discrimination existed or not are not before us. Secondly, this Tribunal is not the right forum where the constitutionality of a taxing provision could be challenged. Thirdly, we find that our judgments in Sunray and Wipro cases laid down cer-ain principles which apply equally to all manufacturers of software in India. We do not, therefore, know how the question of discriminating against the respondents alone arises.
7. In the lower orders and during the hearing before us, two specific items of technical services came to be mentioned. They are warranty charges and maintenance charges. The respondents did not dispute that warranty charges should form a part of the assessable value of the machine. In the Affidavit dated 29-1-1988 filed by them before us, they submitted as under:
"2. I submit that PSI Data Systems Limited, (PSI) custom builds computer hardware to suit its customer's specific requirements as also standard systems.
3. I submit that for all standard systems manufactured and sold, PSI offered a 3 to 12 months warranty. In the case of special purpose, systems warranty is given at the discretion of the company.
4. I submit that no separate charge is made for offering the warranties referred to above.
5. I am further advised to submit that where PSI markets systems there is an express representation as to fitness of the system and it is not possible under law to exclude ourselves from liability in the matter of the reasonable fitness of the goods for the purpose for which they were purchased."
During the oral arguments, the respondents first submitted that warranty charges were already billed into their price for the computers and there was no instance in which they had separately charged for warranty. Later during the hearing, however, they admitted that there were some few instances where they supplied custom-made computers to some research institutions and for which they gave no warranty. We do not agree that costly machines like computers could be sold to anybody without reasonable assurance of their fitness and the promise of servicing them in case they proved defective during their working in the first few months. It is possible that the customer would have paid for the warranty in some other form if not as a part of the price of the machine. In either case, we hold that the cost of warranty has to be included in the assessable value; such sophisticated and costly machinery as computer could obviously be not marketed without the manufacturer extending a reasonable warranty for them.
8. So far as maintenance charges are concerned, we find that according to the lower orders they were optional and were for the service rendered after the free warranty period was over. In the circumstances, such maintenance charges would not be in-cludible in the assessable value.
[Reliance on 1988 (36) ELT 517 (SC) - Collector of Central Excise v. Kelvinator of India Ltd.]
9. Since we have held that cost of some of the items of technical services is in-cludible in the assessable value of the computers while the cost of certain other items is not includible, the Assistant Collector would have to go through each contract and segregate the includible and non-includible items. From the sum total of the invoices issued by the respondents for the computer as well as the technical services, the cost of non-includible items could be excluded and the assessable value re-determined. As to whether there had, in fact, been diversion of the cost of the computer to the cost of ex-cludible items of technical services, can be determined with the help of a Chartered Accountant/Cost Accountant. If the Assistant Collector did not agree with the costing done by the respondents' Chartered Accountant/Cost Accountant, the department could appoint its own Chartered Accountant/Cost Accountant. The respondents contended that there was no diversion of cost because in a few cases the contract for technical services and software was cancelled but because of such cancellation the price of the main machine was not increased by the respondents. We do not think that the matter could be disposed of by such a simplistic approach. When doubt persists, a proper costing would be the only reliable method to settle the controversy.
10. We now come to the question of limitation. The period to which the demand for duty relates is from 1-1-1979 to 30-11-1983. The show cause notice was issued by the department on 9-12-1983. Thus, the demand for the period subsequent to 9-6-1983 is after the expiry of the normal time limit of six months. But the original authority invoked the extended time limit of 5 years in Section 11A of the Act making it a case of suppression of facts on the part of the respondents. It is well settled that the question of limitation is a mixed question of facts and law. We find that the relevant facts are disputed before us. The learned representative of the department stated before us first that the respondents realised technical service charges through separate invoices and separate contracts neither of which were disclosed to the department. The respondents denied it. On our direction, the department produced two contracts relating to M/s. Ahmedabad Electricity Company Limited and M/s. ETTDC. On going through these contracts, there appeared to be no case of suppression at least in these two cases. The learned representative of the department then stated that the respondents had not disclosed the collection of technical service charges in most cases and that if they had declared in a few cases, those few cases could be excluded from the duty demand if otherwise barred under the normal time limit of six months. The respondents maintained that in most cases they had declared the technical service charges and that there could be a few cases where they had not declared them. It appears to us that no generalisation is possible either way unless the facts are fully sorted out. Neither of the lower authorities has done it so far. We were told that there were hundreds of contracts involved and the respondents had filed a separate price list in Part II for each contract. The learned representative of the department was fair enough to say that each contract and price-list would have to be gone into to see whether there was or was not a disclosure of the technical service charges and that this work could only be done in the first instance by the Assistant Collector. He, therefore, suggested that the question of time bar may also be remanded to the Assistant Collector alongwith the principal issue of segregating includible and non-in-cludible technical services. We agree that in the circumstances this is the only feasible course.
11. Accordingly, we set aside both the lower orders and direct the Assistant Collector to re-determine the assessable values in the light of our observations above. The appeal is allowed by way of remand in these terms.
12. So far as the cross-objection filed by the respondents is concerned, we found that not only was it time barred, it sought no further relief either. We put this position to the respondents in the course of the hearing. The respondents stated that they did not press for the cross-objection. Accordingly, we dismiss the cross-objection.