Custom, Excise & Service Tax Tribunal
Jabil Circuit India Pvt. Ltd vs Commissioner Of Central Excise on 21 February, 2014
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL,WEST ZONAL BENCH AT MUMBAI COURT No. II APPEAL No.E/48/09 (Arising out of Order-in-Original No.25 & 26/CEX/2008 dated 30/09/2008 passed by Commissioner of Central Excise, Pune) For approval and signature: Honble Mr. P.R. Chandrasekharan, Member (Technical) Honble Mr. Anil Choudhary, Member (Judicial) 1. Whether Press Reporters may be allowed to see :No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it should be released under Rule 27 of the :Yes CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether Their Lordships wish to see the fair copy :Seen of the Order? 4. Whether Order is to be circulated to the Departmental :Yes authorities? ========================================
Jabil Circuit India Pvt. Ltd., Appellant Vs. Commissioner of Central Excise, Respondent Pune Appearance:
Shri. V.Sridharan, Sr. Advocate for the appellant Shri. Shobha Ram, Comm. (AR), for the respondent CORAM:
Honble Mr. P.R.Chandrasekharan, Member (Technical) Honble Mr.Anil Choudhary, Member (Judicial) Date of Hearing : 21/02/2014 Date of Decision : /2014 ORDER NO Per: P.R.Chandrasekharan The appeal arises from Order-in-Original Nos. 25 & 26/CEX/2008 dated 30th September, 2008 passed by the Commissioner of Central Excise, Pune III Commissionerate. Vide the impugned order, a duty demand of Rs.10,78,71,082/- has been confirmed against the appellant M/s Jabil Circuit India Pvt. Ltd., Pune, along with interest thereon in respect of the Set Top Boxes (STB in short) manufactured and supplied by the appellant to M/s Thompson Holdings India Pvt. Ltd., New Delhi, (Thompson in short) who in turn supplied the same to M/s Tata Sky Limited, Mumbai (Tatasky in short). The period of demand is from June 2006 to May 2007. An equivalent amount of penalty has also been imposed on the appellant under Rule 25 of the Central Excise Rules, 2002. Aggrieved of the same, the appellant is before us. The appeal was heard on 20th and 21st of February, 2014. The appellant and the Revenue filed their final submissions on 6-3-2014 and 10-3-2014 respectively.
2. Brief facts of the case are as follows. The appellant is a manufacturer of set-top boxes and manufactured and sold the said goods to M/s Thompson. M/s Thompson had in turn an agreement to sell the STBs to Tatasky. M/s Tatasky supplied remote controls and viewing cards to the appellant through M/s Thompson. M/s NDS is a foreign collaborator of Tatasky and NDS had given access to the appellant to download certain types of software from their server. M/s Tatasky had agreement with NDS for the use of the software. The software was downloaded into a flash memory by the appellant which was then soldered to the populated printed circuit board of the set top boxes which were cleared to M/s Thompson. Tatasky had paid royalty/licence fee to NDS for supply of the aforesaid software. The case of the department is that the value of remote control and viewing card supplied by Tatasky should be included in the assessable value of STBs as they form an essential part of the STB. Further the amount of royalty/licence fee paid by Tatasky to NDS for the download of the software by the appellant should also form part of the assessable value of the STBs. These two cost elements are addable to the assessable value in terms of Rule 6 of the Central Excise Valuation Rules, 2000 read with section 4(1) (b) of the Central Excise Act, 1944. Accordingly two show cause notices dated 28/6/2007 and 4/4/2008 were issued to the appellant. The said notices were adjudicated and vide the impugned order the demands were confirmed along with interest and penalties imposed.
3. The arguments advanced by the ld. Counsel for the appellant can be summarized as follows:-
(1) The remote control provided by Tatasky are universal remote controls which are not specific to any particular piece of STB. STB is complete and functional without remote control. Tatasky as service provider supplies the STB with remote control to the ultimate customer. For the purposes of excise duty, what is relevant is the transaction between the appellant and its customer, Thompson. Excise is not concerned with the transaction between Tatasky and its customers.
(2) The appellant is manufacturing and exporting STBs to USA and remote controls are not supplied with STBs in the case of exports. This shows that STB is complete in itself without remote control.
(3) Remote control has been packed along with the STB only for convenience. No new commodity comes into existence by putting remote control along with STB and hence no duty can be demanded on the value of remote control.
(4) Reliance is placed on the decision of the apex court in the case of Shriram Bearings [1997 (91) ELT 255 (SC)] wherein it was held that value of accessories cleared along with the main article is not includible in the assessable value of the main article even in a case where the accessories were manufactured in the same factory and fitted with the main article. In Essel Propack [2011-TIOL-112-SC-CX], the honble apex court held that the value of cap supplied free of cost by the buyer is not includible in the assessable value of tubes manufactured and cleared by the assessee along with the caps. This Tribunals decisions in the case of Electronics Corporation [2004 (167) ELT 420 (T)], Col-Tubes (P) Ltd. [1994 (72) ELT 342 (T)], Kamal Engg. Works [1997 (94) ELT 518 (T)], TI Diamond Chains [2000 (126) ELT 790 (T)] also support the appellants contention that value of accessories is not includible in the assessable value of main product., especially when the same are not manufactured by the appellant and supplied free of charge by the buyer.
(5) Even as per Rule 6 of the Valuation Rules, value of remote control is includible in the STB only if the remote control supplied is used in the production and sale of STB. Since production of STB is complete without remote control, remote control value cannot be added to the value of STB for levy of excise duty.
(6) As regards inclusion of value of the viewing card provided by Tatasky, the viewing card carries a number printed on it. The said number is scanned into a computer which is paired with the STB to enable Tatasky to maintain the services provided to its customers. Thus at the appellants end, data entries are made/created linking/pairing the viewing card number with the corresponding STB number. Apart from this nothing is done to the viewing card or STB. The viewing card is merely inserted into the slot provided for it in the STB. Thus the STB is complete even without the viewing card and hence inclusion of value of viewing card in the value of STB does not arise. In the case of STBs exported, viewing card is not supplied which also proves that STB is complete in itself without the viewing cards. The ratio of the decisions relied upon in the case of remote control would apply equally in the case of viewing cards also.
(7) As regards the includibility of royalty paid on software in the assessable value of STB, it is contended that Rule 6 of the valuation rules does not provide for inclusion of any royalties paid unlike Rule 9(1) (c ) of the Customs Valuation Rules. There is also no other rule by which royalty or licence fee paid can be added to the assessable value of the goods manufactured.
(8) The law is settled that software, contained in a medium, which is residing inside a hardware should still be classified separately under heading 8524 and should not be classified along with the hardware in terms of Note 6 to Chapter 85. The decisions of the larger Bench of the Tribunal in the case of Digital Equipment (I) Ltd. [1997 (70) ECR 326 (Tri.-LB)] and of the honble apex court in the case of PSI Data Systems Ltd. [1997 (89) ELT 3 (SC)] and Acer India Ltd. [2004 (172) ELT 289 (SC)] supports the appellants case in this regard. In these decisions, it has been conclusively held that the value of the software, even if sold along with the computer and even if pre-loaded on the computer cannot form part of the assessable value of the computer. The same view was held in Sprint RPG [2000 (116) ELT 6 (SC)]. The reliance placed by the Revenue on the decision of the Apex Court in the case of Hewlett Packard India [2007 (215) ELT 484 (SC)] and Anjaleem Enterprises [2006 (194) ELT 129 (SC)] would not help as in those cases the software was loaded on devices which performed other functions and were an integral part of the machinery supplied whereas in the present case the software is loaded on the flash memory which does not perform any other function and acts as a pure storage device.
(9) Penalty imposed on the appellant under Rule 25 of the Central Excise Rules is not sustainable as the present case involves interpretational issues. Further penalty is imposable under the said Rule only when the goods are not accounted for properly or goods are manufactured without obtaining excise registration or goods are removed in contravention of the provisions of the Rules. In the present case no such contravention is present and hence no penalty is imposable.
(10) The entire demand in the present case is within the normal period of limitation and the appellants had paid the duty demand with interest when the objection was raised by the department. Therefore, there is no suppression of facts or intention to evade payment of duty. Hence imposition of equal amount of penalty is very harsh and inequitable.
Accordingly it is prayed that the appeal be allowed.
4. The ld. Commissioner (AR) appearing for the Revenue made the following submissions:-
(1) M/s Tatasky, a joint venture of Tata Group with M/s Newscorp had set up a DTH platform for providing DTH broadcasting services in India under a licence issued by the Govt. of India. Signals in DTH broadcasting are received through STB in subscriber premises and Tatasky had entered into following agreements with NDS Ltd., U.K. and M/s Thompson Broadband (I) Pvt. Ltd.
(a) Agreement between Tatasky and NDS Ltd. for supply of viewing cards and conditional access module;
(b) Memorandum of understanding between Tatasky and Thompson for supply of DTH STB as per mutually agreed specifications;
(c ) Statement of work between Tatasky, NDS and Thompson.
(2) As per these agreements, the STB hardware shall comply with the specifications contained in Generic Digital Project and STB interface specifications for use with the smart cards. Statement of work referred in clause (c) above, envisaged integration of NDS verifier software, smart card, EPG and Media Highway Core middleware into the STB to be manufactured and supplied. The software components were to be provided by NDS and Thompson was required to design and manufacture the STB in accordance with the specifications stipulated by NDS. As per these specifications the components containing NDS technology (ICAM IC and integration implementation thereof) shall be soldered on the main Digital Receiver Board of the STB, all NDS technology should be an integral part of the main board, the IRD-Smart Card electronic interface shall conform to the requirements of NDS, the manufacturer shall implement a serial numbering procedure as part of the manufacturing process and provide the list of serial numbers to NDS and the serial numbering procedure shall be according to the agreement between NDS and Thompson. The STB interface specification for use with the NDS smart cards was applicable to all STB manufacturers involved in the manufacture of Tatasky STBs . Thus as per these agreements, the STB design and manufacture provided for integration of NDS verifier software, smart card, the EPG and Media Highway core 3.1 middleware and thus all the above elements were an integral part of the STBs.
(3) As per the statement dated 22/05/2007 of Mr. A.K. Mehrotra, Group Financial Controller of the appellant firm, the STBs were manufactured as per the product design, software for the PCB of set top box and quality plan provided by M/s Thompson. The STBs contain PCB boards and various electronic components which included ICs. The NDS software was copied on to the ICs and then the ICs were fixed on the PCB through surface mounting technology. The software was not supplied separately but it was an integral part of the NDS technology without which it could not function. Thus the ICs became an integral part of the STB.
(4) As per the statement dated 29/12/2006 of Mr. Shrikant V Gramopadhye, Asst. Operations Manager, the smart cards are inserted into the set top boxes during the course of manufacture and the user manual and remote control are packed with the set top boxes. The smart card is scanned for its serial number along with the NDS serial number given to the PCB of the set top box and after scanning the above numbers, the Thompson serial number for the set top box is generated and the smart card is inserted inside the set top box. This particular activity is carried out as per the approved customer plan of Thompson.
(5) In view of the above factual position, the cost of smart card (viewing card), remote control and software , supplied free of cost by the buyer or on behalf of the buyer, is addable to the assessable value of the goods supplied in terms of Rule 6 of the valuation rules.
(6) Reliance is placed on the decision of the Tribunal in the case of Avaya Global Connect Ltd. [2007 (213) ELT 383] wherein it was held that software supplied along with the system, viz., EPROM as embedded in the system, becomes its integral part and therefore the value of such basic software is includible in the assessable value of the system. Similar view has been expressed by the honble Apex Court in the case of Anjaleem Enterprises Pvt. Ltd. [2006 (94) ELT 129] wherein it was held that EPROM is a re-writable integrated chip/memory chip and the programme embedded in it is not easily removable. It cannot be compared to a floppy which is only a dumb box. Therefore, it is classifiable as an integrated circuit and not as software and thus distinguished the decisions in the case of PSI Data system and Acer India Ltd. Again in the case of Hewlett Packard Sales (P) Ltd. [2007 (215) ELT 484 (SC)] it was held that pre-loaded operating systems software in the Hard Disk Drive of the laptop becomes an integral part of the laptop and hence the software vale is includible in the value of laptop and assessed to duty accordingly. In a recent decision in the case of ACCEL Ltd. [2013 (295) ELT 412], this Tribunal held that embedded software etched on the non-volatile memory on the imported device has no independent existence and becomes part and parcel of the system. The ratio of these decisions are more relevant to the facts of the present appeal and hence the value of the software is rightly includible in the assessable value of the STB.
(7) As regards the inclusion of value of smart cards and remote control in the assessable value of STB, reliance is placed on the decision of the Apex Court in the case of Siddhartha Tubes Ltd. [2006 (193) ELT 3 (SC)] wherein a question arose regarding the inclusion of value of bought out sockets which was fitted to the pipes manufactured by the appellant and it was held that since sockets contributed to the functioning of the pipes and hence its value is includible in the assessable value of the pipes. Reliance is placed on the decision of this Tribunal in the case of Electronics & Controls Power Systems Pvt. Ltd. [2010 (257) ELT 578] wherein it was held that the cost of battery is includible in the value of UPS system as the same has to be regarded as an integral part of the UPS. Similarly in the case of Frick India Ltd. [2007 (216) ELT 497 (SC)], the value of remote control used to operate a fan was held to be includible in the value of the fan though the remote might be an accessory. In the light of these decisions, it is contended that the value of smart cards and remote control are includible in the assessable value of STBs.
(8) As regards the imposition of penalty, it is contended that mandatory penalty is imposable when the fact of additional consideration flowing directly or indirectly from the buyer are not disclosed to the department. In the present case evasion of duty could not have come to light in the absence of investigation by the department. Reliance is placed on the decision of the Tribunal in the case of Jaycee Autofab (P) Ltd. [2010 (260) ELT 263] and of the honble Apex Court in the case of Indian Aluminium Co. Ltd. [1991 (55) ELT 454 (SC)] in support of this contention.
Accordingly it is pleaded that the impugned order is sustainable in law and the appeal deserves to be dismissed.
5. We have carefully considered the rival submissions. Our findings and conclusions are discussed in the ensuing paragraphs.
5.1 In the present case the value of the STB manufactured and supplied by the appellant is sought to be enhanced in terms of the provisions of Rule 6 of the Central Excise Valuation Rules, 2000. It would be, therefore, useful to examine the said Rule which reads as follows:-
RULE 6. Where the excisable goods are sold in the circumstances specified in clause (a) of sub section (1) of section 4 of the Act except the circumstance where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.
Explanation 1 - For removal of doubts, it is hereby clarified that the value, apportioned as appropriate, of the following goods and services, whether supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to the extent that such value has not been included in the price actually paid or payable, shall be treated to be the amount of money value of additional consideration flowing directly or indirectly from the buyer to the assessee in relation to sale of the goods being valued and aggregated accordingly, namely : -
(i) value of materials, components, parts and similar items relatable to such goods;
(ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used in the production of such goods;
(iii) value of material consumed, including packaging materials, in the production of such goods;
(iv) value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods.
Explanation 2. - Where an assessee receives any advance payment from the buyer against delivery of any excisable goods, no notional interest on such advance shall be added to the value unless the Central Excise Officer has evidence to the effect that the advance received has influenced the fixation of the price of the goods by way of charging a lesser price from or by offering a special discount to the buyer who has made the advance deposit. ..
5.2 A plain reading of the said Rule makes it obvious that the expression and used between production and sale is used not in a conjunctive sense but in a disjunctive sense. This is obvious from clauses (ii) to (iv) to the Explanation where the items specified therein are used in or for production of goods. They are not required for the sale of such goods. Thus the expression and has to be read as or in a disjunctive sense. The word or is normally disjunctive and and is normally conjunctive but at times they are read as vice versa to give effect to the manifest intention of the Legislature as disclosed from the context. In the present case, from the context, it is obvious that the word and has been used in a disjunctive sense. Secondly a legal fiction has been created to include the money value of goods supplied free of charge or at reduced cost by the buyer which shall be treated as an additional consideration flowing directly or indirectly from the buyer to the assessee. It is in this light, the said Rule has to be applied to the facts of the case in hand.
5.3 As per the MOU between Tatasky and Thompson dated 17-1-2006, Clause 9.1 of the MOU stipulated that the STB supplied to Tatasky shall conform to the mutually agreed specification as attached in Schedule 2 to the MOU. The said specification is the Surya Product Development Specification, Space TV. Clause 6 of the said specification deals with Conditional Access and Security. The relevant extracts therefrom are reproduced below:-
The STB shall feature a conditional access system developed by NDS. This system uses a detachable smart card and several hardware and software components within the STB. The subscriber access card complies fully with ISO-7816 standards, including authentication procedure, which prevent the use of unauthorized cards.
6.1 Subscriber Access Card The subscriber access card is the key component of the conditional access system, containing secret user information, entitlements and authorizations, and other pieces of information which are used by the application to identify the user.
The subscriber access card is the systems active security device, it receives and records entitlements from the Authorisation control centre. It then checks the conditional access entitlement information for the current program against the recorded entitlements, when a subscriber is authorized to use the current service, the card provides control word to the STB.
6.2 STB Hardware 6.2.1 ICAM The CA functionality is implemented within the STB hardware by means of a stand-alone custom hardware device circuit called the Integrated Conditional Access Module (ICAM) which interfaces directly with a Transport demux chip, microprocessor, and smart card interface chip. ..
6.2.2 The Smart card electrical interface The STB manufacturer is responsible for implementing the smart card electrical interface. NDS shall certify this interface for each STB Model. 5.4 Thus from the MOU and the Product specifications, it clearly emerges that conditional access system (CAS) is a key feature of the STB and the subscriber access card (smart card) is the key component of the CAS. The smart card is the systems active security device. In other words, the smart card is an integral part of the STB and it is not an accessory.
5.5 From the statement of work between Tatasky, NDS and Thompson, as per clause 1.1, the statement of work applies to integration of the NDS verifier software, smart card, the EPG and Media Highway Core 3.1 middleware in to the manufacture of STB. As per clause 3.2, software components specified under the said clause are to be provided by NDS. Clause 4 deals with Manufacturers obligations and clause 4.1 deals with STB software. The manufacturer is required to design and manufacture the STB in accordance with the document LC-T056, IRD Electrical interface Specification and the hardware must comply with LQ-T400, Generic Digital Project and SB-T004, Set-top box security. Generic Digital Project document specifies NDSs mandatory hardware requirements and specifications which shall be approved by NDS for each specific model of STB prior to full scale manufacture. Clause 4.1 deals with Hardware Design requirements. Clause 4.1.1 prescribes that the components containing NDS technology (ICAM IC and integrated implementation thereof) shall be soldered on the main Digital Receiver Board. The use of sockets and removable component mountings is not acceptable. All NDS technology shall be an integral part of the main board. A separate printed circuit assembly containing NDS technology is not acceptable. As per the agreement for the supply of viewing cards and conditional access modules entered into between Tatasky and NDS, Conditional Access Module (CAM) is a hardware device that contains NDS software and which hardware device plugs into a common interface slot in a receiver decoder service, which is compliant with BIS standards for a digital STB for DTH IS 15377:2003. Further NDS CAM means the NDS software, third party equipment and NDS hardware to be supplied by NDS to be used for encryption and decryption of programming within the DTH service in support of Tataskys pay-TV business. STB means a digital set-top box decoder, supplied by the manufacturer for the purpose of availing DTH service which receives, decodes and accesses programming and data signals transmitted by Tatasky for use with the NDS Conditional Access system.
5.6 From these documents available on record, which are self explanatory, it clearly emerges that both the smart card (viewing card) and the software are an integral part of the STB manufactured and supplied by the appellant. From the statement of Sri. A.K. Mehrotra, Group Financial Controller, it is evident that the STB contains PCB boards and various electronic components which include integrated chips (IC). These ICs are first put on to the AP 600 programming machine from where the software is copied on to the IC and the ICs are then fixed on the PCB board through surface mounting technology process. As per system integration agreement, the STB integration costs refer to the cost of development of the software, which is required to be supplied by the manufacturer. NDS assists the manufacturer to develop this software to be loaded on to the STB. It is in the above factual matrix, we have to see whether the cost of remote control, smart card and software supplied free by or behalf of the buyer should be included in the assessable value of the STB manufactured and supplied by the appellant.
5.7 It would also be useful to know what a flash memory is . As per Princeton Universitys website, www.Princeton.edu.
Flash memory is a non-volatile computer storage chip that can be electrically erased and reprogrammed. It is primarily used in memory cards, USB flash drives, MP3 players and solid-state drives for general storage and transfer of data between computers and other digital products. It is a specific type of EEPROM (electrically erasable programmable read-only memory) that is erased and programmed in large blocks; in early flash the entire chip had to be erased at once. Flash memory costs far less than byte-programmable EEPROM and therefore has become the dominant technology wherever a significant amount of non-volatile, solid state storage is needed. ..
Flash memory is non-volatile, meaning no power is needed to maintain the information stored in the chip. In addition, flash memory offers fast read access times (although not as fast as volatile DRAM memory used for main memory in PCs) and better kinetic shock resistance than hard disks. These characteristics explain the popularity of flash memory in portable devices. Another feature of flash memory is that when packaged in a "memory card," it is extremely durable, being able to withstand intense pressure, extremes of temperature, and even immersion in water. 5.8 From the technical literature submitted by the appellant during the proceedings, it is seen that the flash memory used in the present case is an integrated chip consisting of Voltage generators, voltage detectors, timers, decoders, gates and so on. Thus it is an integrated circuit and not merely a media for storage of software.
5.9 As regards the question whether the cost of remote control supplied free of charge by the buyer can be added in the value of STBs supplied by the appellant to the buyer, the appellant has relied on the decisions in the case of Shriram Bearings, Essel Propack, Electronics Corporation, Kamal Engineering Works and TI Diamond Chains, etc. (supra). On a perusal of these decisions, it is seen that all these decisions dealt with situations pertaining to the period prior to 2000. Prior to 1-7-2000, the valuation rules did not provide for addition of costs in respect of goods supplied free of charge by the buyer to the assessee. With effect from 01/07/2000, the new Central Excise Valuation Rules came into force. As per Rule 6 of the said Rules, the value of materials, components, parts and similar items relatable to the goods under clearance, when supplied free by the buyer to the assessee, if not included in the price actually paid or payable, the same shall be treated to be the amount of money value for additional consideration supplying directly or indirectly from the buyer to the assessee in relation to sale of goods being valued. In view of this change in law, the value of remote control which has been supplied along with the STB has to be added in the assessable value of STB supplied by the appellant. Therefore, the ratio of the decisions relied upon by the appellant does not help their case at all. On the other hand, in the Frick India Ltd. case relied upon by the Revenue, the Honble Apex Court held, interalia, as follows:
The concept classification is different from the concept of valuation..Therefore, on the question of valuation, the Commissioner should have examined the pricing aspect of the entire package supplied by the assessee to its buyers. For example, when a ceiling fan is sold to the buyer, apart from the parts of the ceiling fan, there may be a remote which is a part of the package supplied to the buyer. That remote is fan-specific in matter of valuation since the remote is an additional feature provided with the ceiling fan its value has also to be taken into account. This is because the remote which operates the fan may be an accessory but still it makes value addition and, therefore, its value is liable to be included in the assessable value of the ceiling fan. 5.10 The same view was reiterated in the case of Siddhartha Tubes Ltd. wherein a question arose regarding inclusion of value of bought out sockets which was fitted to the pipes manufactured by the assessee. The Honble Apex Court held that since the sockets were essential for functioning of the pipes, its value is includible in the assessable value of the pipes. In our view, the ratio of these decisions are relevant and shall apply to the facts of the case before us. The remote control supplied along with STB may be an accessory supplied free of charge to the buyer by the assessee. But nevertheless it is an additional feature providing value addition. Therefore, in respect of an STB supplied with remote control, the cost of remote control has to be added to the assessable value of the STB supplied and we hold accordingly.
5.11 As regards the subscriber access card (viewing card), we have already held in paragraph 5.4 that the subscriber access card is the key component of the conditional access system and it is an active security device of the STB and hence an integral part of the STB. Therefore, the cost of the same has to be included in the assessable value of the STB in terms of Rule 6 of the Central Excise Valuation Rules.
5.12 The next question for consideration is with regard to the inclusion of cost of software which were downloaded and incorporated in the flash memory chip which was soldered onto the PCB of the STB. As per the literature available, flash memory is EPROM (Erasable Programmable Read Only Memory) and is an integrated chip. Thus, it is a rewriteable memory chip on which programmes are written with an external programming device before being placed on the PCBs. Thus, the flash memory is an integral part of the STB and therefore, its cost would include the cost of software loaded on to it. It is in this factual context, the decisions relied upon by the appellant have to be examined. The appellant has relied on the decisions of the Apex Court in the case of PSI Data Systems and Acer India Ltd. wherein it was held that software has independent existence and has to be classified separately as a recorded media falling under CETH 85.24. It is also contended that Note 6 to Chapter 85 also provides that records, tapes and other media of heading 8523 or 8524 remain classified in those headings, when they are presented with the apparatus for which they are intended. The said note was deleted with effect from 01/01/2007 and no longer applies. The PSI Data System and Acer India Ltd. cases dealt with a situation where computer software was stored in a Hard Disk of the computer and the question arose whether the value of software could be included in the value of the hardware. In that context, the Honble Apex Court held that the value of software sold along with the computer is not includible in the assessable value of the computer since there is a distinction between a computer and its software. However, these decisions of the Honble Apex Court later on came to be examined in the case of Anjaleem Enterprises Pvt. Ltd. by the Honble Apex Court where the software was recorded on an EPROM. The Honble Apex Court held that EPROM cannot be compared to a floppy which is only a dump box. EPROM is basically an integrated circuit or chip and classifiable under CETH 8542. Accordingly, it was held that the value of software embedded in the programmed EPROM, which is an integral part of the system is includible in the value of the goods supplied. In the case before us, the flash memory is not the goods under clearance but it is the STB. The memory chip has been soldered onto the PCB of the STB and is not easily removable. The programme embedded in the flash memory is also not removable. Therefore, it will not fall under the category of recorded media under CETH 8424. In view of the above position, the ratio of the decision of the Honble Apex Court in the case of Anjaleem Enterprises Pvt. Ltd. would be more appropriate and correct in the facts of the case before us. This ratio of the Apex Court was followed by this Tribunal in the case of Avaya Global Connect Ltd. (supra) wherein also it was held that software supplied along with system, namely, EPROM, as embedded in the system becomes an integral part and the value of such software is includible in the assessable value of the system supplied. This Tribunal further held that when the software is embedded in the system and becomes an integral part of the equipment, it is not a case of charging duty on software but it is a case of charging duty on the equipment which includes the value of such basic software. In the Hewlett Packard Sales (P) Ltd. case, the Honble Apex Court once again reiterated the above view, wherein it was held that pre-loaded operating systems software in the Hard Disk Drive of the laptop forms an integral part of the laptop and therefore, the cost of such pre-loaded software forms part of the value of the laptop. Accordingly, the Honble Apex Court held that when a laptop is imported with inbuilt pre-loaded operating system recorded on the hard disk, the said item forms an integral part of the laptop and has to be classified as laptop and not as computer software separately. Applying the ratio of these decisions to the facts of the present case, it becomes abundantly clear that the cost of software which has been loaded on to the flash memory which in turn has been soldered onto the PCB of the STB forms an integral part of the STB and therefore, the value of the STB shall include the value of such software also. In these circumstances, we uphold the confirmation of duty demand against the appellant by including the value of remote control, smart card and software in the value of STB. Consequently, the appellant shall also be liable to interest on the said duty demand confirmed.
5.13 The last question for consideration is whether the appellant is liable to penalty under Rule 25 of the Central Excise Rules. Rule 25 provides that if a manufacturer removes any excisable goods in contravention of any of the provisions of these rules or with an intent to evade payment of duty, the manufacturer shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed or Rs.2,000/- whichever is greater. Rule 4 of the Central Excise Rules, 2002 mandates that the goods have to be removed on payment of duty as provided under Rule 8. Rule 6 of the Rules provide that the assessee shall himself assess the duty payable on the excisable goods. Therefore, it is the responsibility of the assessee to correctly determine the duty liability and remove the goods on payment of correct amount of duty. In the present case, the assessee has failed to discharge this statutory obligation and therefore, provisions of Rule 25 are clearly attracted. The non-disclosure of the various elements of cost and the existence of various agreements in respect of the transaction also lends credence to the allegation of mens rea on the part of the appellant.
5.14 The question is whether the penalty should be imposed equal to the duty sought to be evaded or not. The issue involved in this casel is the valuation of goods under clearance. No doubt, the assessee did not declare or reveal to the department the cost of items supplied free by the buyer and the non-inclusion of cost of such free supply in the assessable value of the STB manufactured and cleared by them. The appellant also did not inform or declare to the department the existence of various agreements relating to the design, manufacture and supply of the STB which could have supported its contention that it did not have any intention to evade payment of duty. Since the issue entailed interpretation of the provisions relating to valuation, in our considered view, imposition of penalty equal to the duty is not warranted. A penalty of (say) 5% of the differential duty demanded would suffice for contravention of the statutory provisions. Accordingly, we reduce the penalty imposed on the appellant from Rs.10,78,71,082/- to Rs. 50 lakhs (Rs. Fifty lakhs).
6. To sum up, we uphold the differential duty demand of Rs.10,78,71,082/- along with interest thereon on the appellant. However, we reduce the penalty imposed on the appellant to Rs. Fifty lakhs as discussed above. But for the above modification, the impugned order is upheld and the appeal dismissed.
(Pronounced in Court on ..) (Anil Choudhary) Member (Judicial) (P.R. Chandrasekharan) Member (Technical) pj 1 11