Custom, Excise & Service Tax Tribunal
M/S Steag Encotec India Pvt. Ltd vs Commissioner Of Customs (Airport), ... on 8 October, 2009
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. I Appeal No. C/811/08-Mum (Arising out of Order-in-Appeal No. 89/2008-Misc. ACC dated 30.4.2008 passed by the Commissioner of Customs (Appeals), Airport, Mumbai). For approval and signature: Honble Shri P.G. Chacko, Member (Judicial) Honble Shri A.K. Srivastava, Member (Technical) ======================================================
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? ====================================================== M/s Steag Encotec India Pvt. Ltd. Appellant Vs. Commissioner of Customs (Airport), Mumbai Respondent Appearance: Shri A. Hidayatullah with Shri S. Vijay Kumar Sr. Advocate Advocate for Appellant Dr. T. Tiju JDR for Respondent CORAM: SHRI P.G. CHACKO, MEMBER (JUDICIAL) SHRI A.K. SRIVASTAVA, MEMBER (TECHNICAL) Date of Hearing: 11.09.2009 Date of Decision: .2009 ORDER NO. WZB/MUM/2009 Per: A.K. Srivastava
This is an appeal filed by M/s Steag Encotec (India) Pvt. Ltd (the appellant herein) against the Order in Appeal passed by the Commissioner of Appeals (ACC).
2. The brief facts of the case are as follows:
The appellant has imported Performance Analysis and Diagnostic Optimization System (PADO) software package and Boiler Performance Optimization System software package (BPOS) vide four Bills of Entry for use in coal based power plants run by BHEL. The appellant claimed exemption from Additional Customs Duty and Educational Cess (totalling Rs.1,04,58,534/-) in lieu of Central Excise duty, based on Notification No.6/2006 CE dt. 01.03.2006 classifying the same as customized software. The Department's view that the same is not custom designed software and hence ineligible for the exemption under the said notification was confirmed by the adjudicating authority and upheld by the Commissioner (Appeals). Hence this appeal.
3. The main contention of the Ld. Counsel of the appellant is that the Commissioner (Appeals) grossly misinterpreted the Excise Notification No. 6 /2006, which grants exemption from the Central Excise duty to customized software and denied the benefit of the same to the customized software made specifically for each power plant of BHEL 3.1 The Ld. Counsel has submitted that the software has been customized specifically for each plant of BHEL and hence the issues such as ownership of the software, the necessity to develop the software entirely from scratch etc. , which are not parts of the notification cannot be the grounds for denying the exemption.
3.2 The Ld. Counsel has relied on the decision of the Tribunal in the case of Yokogawa India Ltd Vs.. Commissioner of Customs Bangalore as reported in 2008 (226) ELT 474 (Tri. Bang.). He contended that the judgment means that it does not matter whether the software is just modified from standard software or is virgin developed software, what really matters is whether the software was packaged software or customized software at the time of import. He maintained that in the present case, the software was customized in Germany as per the needs of BHEL, after due consultation with BHEL and NTPC and hence at the time of import, the software was customized and hence as per the decision cited above, the benefit of the notification should be extended to them.
3.3 The Ld. Counsel also stated that since the word 'customized' is not defined, the dictionary meaning will have to be resorted to. He has tried to rely on the meaning of the word customized and customized software as given in the Oxford dictionary as well as on the web from wikianswers.com 3.4 The Ld. Counsel also submitted that there is a strict condition that the software should be used only in the specified plant and that they were given licenses for each software. He submitted that there could not have been any post sale condition to utilize "off the shelf software". Hence, he contented that the software imported was indeed customized software. It is also the Ld. Counsel's submission that the benefit of the notification is unavailable only for packaged software i.e software developed to meet the need of variety of users, which is capable of being sold "off the shelf".
3.5 He further contended that once there was a technical opinion given, the adjudicating authority was bound to take equal expert opinion, if the same had to be refuted or discarded. He relied on the decisions in the case of BPL Pharmaceuticals Ltd Vs. Collector of Central Excise reported in 1995 (77) ELT 485 SC and in the case of Mahindra Sintered Products Ltd Vs. Collector of Central Excise reported in 1994(71)ELT 563- Tri.
3.6 The Ld. Counsel stated that their assertion regarding the fact that the software was prepared for each unit based on design and operating conditions, which may vary from one power plant to another, has been totally ignored and the Revenue has arrived at its own conclusion contrary to the meaning and connotation of packaged software as explained in the notification and hence the order merits to be set aside.
4. The Ld. SDR appearing for the Revenue countered the arguments of the Ld. Counsel and contended that the software imported was indeed not custom designed software. He put forth an example of chapattis in an attempt to classify the software. The chapattis, which are normally made, are standard chapattis. If in case someone demands chapattis in diamond shape, the standard chapattis are cut into diamond shape and served, which would be customized chapattis (still maintaining the qualities of standard chapattis). In case, chapattis are made for a heart patient keeping in mind his specific requirements, right from the start of making of the dough, care would be taken to add a bit of Soya bean powder, add less salt and less oil. The chapattis thus made would be custom made chapattis. He stated that, in a similar manner, software can be standard or canned software; standard software, which can be customized by modifying the existing software; and custom made or custom designed software, where the software is designed right from the beginning keeping in mind the exact requirements of the client.
4.1 The Ld. SDR submitted that the wording of the notification is unambiguous and customized software at Sl No. 27 of Notification No.6/2006-CE dt. 01.03.2006 has been clarified to mean custom designed software. He also submitted that the intention of the Government is very clear from the description of customized software as given in the Service Tax Circular 81 / 2 / 2005 - ST dated 07 October, 2005 which reads in the case of unbranded / customized software, the supplier develops the software and thereafter transfers.."
4.2 The Ld. SDR further contended that the imported software was not custom developed for BHEL. As per the System Design Document submitted by BHEL, the PADO software consists of SRv, SR 1, SR 4, SRnt, SR opt components. PADO and BPOS are to be installed in multiple plants like Ramagundam plant, Rihand plant, Kahalgoan plant and Sipat plant. He has also referred to the System Design Document, Factory Acceptance test, various print outs of the Steag Encotec website and a news item and a power point presentation of Steag Encotec to show that the basic models and components of PADO software and BPOS already exist and they have been successfully installed and employed in different power plants across the world. He further referred to the Standard Technical Specifications prescribed for Main Plant Package of Sub Critical Thermal Power projects brought out by the Central Electricity Authority, Ministry of Power, Govt. of India, which specifies PADO software and BPOS as the standard packages to be employed in such coal based thermal power plants.
4.3 The Ld. SDR submitted that the facts like software to be handed over to BHEL within a short span of 6 weeks as per the agreement, the ownership rights still remaining with Steag Ketek IT GmbH, the software to get regular updates and upgrades just like a standard software - all point to the fact that the same is a standard /packaged software.
4.4 The Ld. SDR submitted that based on the above evidences, it can be seen that it is the same product Steag Ketek has developed, which is supplied to the clients with some modifications so that it can work better in their environment. He thus contended that the impugned software is not at all custom designed to merit exemption as per the relevant notification.
5. Heard both sides and perused the records.
6. The main issue before us is whether the software imported vide impugned four Bills of Entry would merit exemption under Central Excise Notification No. 6 / 2006 dt. 01.03.2006 which, vide entry at Sl.No.27, grants exemption from the whole of Central Excise duty to customized software.
6.1. The Ld. Counsel has submitted that the software for each plant is specifically designed taking into consideration the parameters and specifications of each power plant. For this purpose, the data from each plant is made available to Steag Ketek IT GmbH and the customized software is developed accordingly. He referred to the Factory Acceptance Test (FAT), which referred to the testing of PADO software based on the simulated input data derived from BHEL plants. He also referred to the System Design Document and pointed out that there was a separate System Design Document for each power plant based on the specific parameters. He also referred to the minutes of the meeting held in Germany on 29/ 07/2005 and 30/ 07/ 2005 between M/s Steag Germany / India and BHEL EDN for procurement of PADO packages for NTPC projects. He submitted that all these indicate that the pre-customization discussions had taken place and based on the same, customization of the software has taken place in Germany and the software imported was customized software.
6.1.1 He relied on the decision of the Tribunal in the case of Yokogawa India Ltd. Vs. Commissioner of Customs Bangalore as reported in 2008 (226) ELT 474 (Tri. Bang.), wherein the benefit of the notification was denied to the import of a software package by the party. In the said case, it was held that the customization was done at the site and that at the time of import, the software remained packaged software. He referred specifically to the relevant part of Para 9 of the said judgment, which reads as under:
"9. ..In other words, when the software package is imported, it remains a packed software or canned software. Only after further modification, it acquires the characteristic of custom designed software. Alternatively, what is supplied to the customer is customized software, but what is imported is packaged software. "
The Ld. Counsel submitted that the judgment means that it does not matter whether the software is just modified from standard software or is virgin developed software, what really matters is whether at the time of import, the software was packaged software or customized software. He contended that in the present case, the software was customized in Germany as per the needs of BHEL, after due consultation with BHEL and NTPC, and hence at the time of import, the software was customized and hence as per the decision cited above, the benefit of the notification should be extended to them.
6.1.2. The Ld. SDR, on the other hand, submitted that in the case of Yokogawa, the issue of what amounts to customization of software was neither agitated nor contested. This is not the case here, where the main issue being contested is whether the software needs to be developed from scratch or whether it just needs to be modified to qualify for the said exemption notification. He submitted that the issue in the case of Yokogawa was decided mainly on the fact that the Customs duty should be chargeable on the goods, as they were at the time of import. He also submitted that this being a Central Excise notification, the CVD on import is only secondary and the major aspect to be kept in mind on interpreting the notification is regarding the levy of Central Excise duty on the software.
6.1.3. We note that the subject notification is a Central Excise notification exempting customized software from the whole of the Central Excise duty. We find that the exact meaning of customized software was not agitated or discussed in the decision cited by the appellant. We also find considerable force in the Ld SDRs submission that when eligibility of the software to the benefit of the notification is to be decided, it is prudent to look at the issues on a wider compass. We are of the view that when the basic issues are being agitated in this appeal, a decision, which has not dealt with the same, cannot be held to squarely cover the case in hand.
6.2 Having said so, the first issue now before us in this case is the determination of the exact nature of the software, which is imported by the appellant. Once the exact nature of the software is determined, the applicability of the notification can be taken up for decision.
6.3.1 It is pertinent here to consider the submissions of the Ld. Counsel that there is an expert opinion tendered by BHEL about the nature of the impugned software. He submitted that BHEL, vide their letter dated 29.11.2006, have said that the said software is customized software and hence that expert opinion should be the basis for deciding the same. It is also his contention that once a technical opinion is given, the adjudicating authority was bound to take equal expert opinion, if the same had to be refuted or discarded. He relied on the decisions in the case of BPL Pharmaceuticals Ltd Vs. Collector of Central Excise reported in 1995 (77) ELT 485 SC and in the case of Mahindra Sintered Products Ltd Vs. Collector of Central Excise reported in 1994(71)ELT 563- Tri. The relevant portion of the latter reads thus :
The opinion of Dr BK Aggarwal who is an expert and a Professor of metallurgical is also very categorical, specific and unambiguous. Such an opinion of an expert cannot be faulted, with the Asst Commissioners own understanding. If at all, the department has to counter these opinions, they should have better and more solid evidence from other experts. Such an exercise has not been done nor have they cross examined the experts to prove the point that the expert had given the opinion in favour of the assessee is a self interested testimony and a false one. The department, not having done such an exercise, cannot reject the evidence and hold their own opinion for the classification of the goods 6.3.2 The Ld. SDR, on the other hand, relied on the Judgment in the case of Novopan India Ltd Vs. Collector of Central Excise and Customs, Hyderabad as reported in 1994 (73) ELT 769 (SC) , the relevant paragraph 12 of which reads as under:
"Learned Counsel for the appellant sought to rely upon the affidavits of experts filed by him before the Tribunal which according to him prove that, commercially speaking, particle boards and MFPBs are one and the same product. The Tribunal has declined to place any reliance on these affidavits for more than one reason. So far as Dr. Joseph, one of the experts is concerned, the Tribunal has pointed out, and rightly in our opinion, that he has been associated with the appellant company from the beginning, as admitted by the said person himself. The other person Shri. A. C. Shekhar was also found to be associated with the appellant company. Both of them deposed before the Tribunal that they did not witness the process of manufacture nor were they able to comment upon the process of manufacture contained in the brochure referred to hereinabove. From a reading of their affidavits, the Tribunal concluded that they are not independent experts and that their affidavits were prepared with a view to bolster the appellants case in these proceedings. The said experts, the Tribunal observed, did not also try to support their opinions with reference to any technical literature or authority on the subject. For all the above reasons, the Tribunal declined to accept their bare assertion that MFPBs can be described as unveneered particle boards. We cannot say that the reasons given by the Tribunal for rejecting the said affidavits are either irrelevant or unsustainable. The said affidavits, therefore, do not advance the appellants case in any manner. The Ld. SDR, therefore submitted that the Supreme Court has thus decided that the opinion of the interested parties cannot be considered as relevant and sustainable.
6.3.3. The Ld. SDR, in this regard, referred to the Commercial Terms and Conditions annexed to each purchase order of the software, the relevant para 3 of which reads as under:
"Customs Duty: Presently Nil. In case if the customs duty is applicable during the tenure of the contract, the same shall be reimbursed by BHEL against documentary evidences."
6.3.4. He contended that since the duty incidence, thus, being directly on BHEL, the opinion of BHEL cannot be considered as an expert opinion in the light of the Honble Supreme Court Judgment cited above. He submitted that in the given scenario, it can only be considered as a letter to thwart the duty liability and hence the adjudicating authority was not bound by the opinion.
6.3.5. We find that since the duty liability falls squarely on BHEL in this case, BHEL very much become an interested party and we find considerable force in the submission of the Ld. SDR that the document can at best be seen as a defence of an interested party. This position, as it is pointed out, is well supported by the relevant decision of the Honble Apex Court in the case of Novopan India Ltd Vs. Collector of Central Excise and Customs, Hyderabad cited supra. Therefore, we hold that in the case before us, there was no infirmity in the Order passed by the Adjudicating authority and confirmed by the Commissioner (Appeals) for not considering the BHELs letter titled " To Whomsoever it may concern" as a reliable binding expert opinion.
6.4. The Ld. Counsel for the Appellant has also contended that the officer concerned has used his personal knowledge and if he does so, he becomes a witness in the proceedings and cannot adjudicate the subject case. He has relied on the decisions in the case of Advani Oerlikon Ltd. & Anr Vs UOI reported in 1981-8-ELT-432 (Bom) and Pudumji Paper Mills Vs UOI reported in 1991-51-ELT-273 (Bom). We have perused the said decision. We find that such intent is neither forthcoming from any of these decisions cited by the Ld. Counsel nor can it be construed from these decisions that on using personal knowledge, one becomes a witness in the proceedings and hence cannot adjudicate. It is true that quasi-judicial authorities should not decide issues purely based on their personal knowledge. However, personal knowledge of the adjudicating authority is undoubtedly valuable in appreciating evidence available before him as rightly held by the Tribunal in the case of National Leather Cloth Mfg. Co. Vs. Commissioner of Central Excise Mumbai reported in 2003 (160) ELT 672 (Tri. -Mumbai). In the present case, we find that the Adjudicating authority has used his personal knowledge to appreciate the evidence before him in a better manner and that cannot be faulted with.
6.5. Hence, we have to proceed with determination of the nature of the impugned software based on the other submissions and relevant documents submitted by both sides.
6.6.1. It is at this stage of appreciating the documentary evidence that the Ld. Counsels averments that the website advertisements should not be the basis for adjudication need to be considered. He relied on the decision in the case of Blue Star Ltd. Vs. UOI reported in 1980-6-ELT 280 (Bom) and Leukoplast India Pvt Ltd. Vs. UOI reported in 1985-20-ELT-70 (Bom) to substantiate this aspect and pointed out that at the time of adjudication, the Ld. Adjudicating authority has relied on the website print outs of Steag Encotec.
6.6.2. The Ld. SDR, on the other hand, submitted that the relevant company website extracts cannot be considered as advertisements. A website is an identity of the company on the web, detailing the various aspects of a company in addition to many optional features, which is open to the people all over the world, who can access the internet. It has to be presumed that such a big company like Steag GMBH or Steag Encotec will not give wrong facts on their own website.
6.6.3. We have seen the documents as were available before the adjudicating authority as well as the ones presented before us. Even at this stage, the Ld. Counsel and the Ld. SDR have produced website extracts from wikianswers.com. In todays world, the role of internet in gathering information cannot be underestimated. We do not find any impropriety in referring to relevant website print outs to ascertain facts and to bring in any corroborative evidence. We have taken similar view in the case of Nestle India Ltd. Vs. Commissioner of Central Excise Goa as reported in 2008 (227) E.L.T. 631 (Tri. - Mumbai). The relevant paragraphs 26 and 27 of the Tribunals Order read thus:
26. We may now consider the claim of the appellant that in trade parlance, Milkybar Choo is not known as White Chocolate. We find that this claim of the appellant is belied by its various own web materials. Some of these web materials are discussed herein below to bring home the fact that the impugned goods are in trade parlance as white chocolate.
(i) At page 57 of the Paper Book, the web page material reads as follows :
Nestle (UK) - Milkybar choo - soft chewy fudge covered with white chocolate. Who says kids should have all the fun?
(ii) At page 70-74 of the Paper Book, there is a 4-page web material under the title Chocolate Review. In this web material, various names of Chocolate Bars are shown. Nestle Milkybar Choo is also shown as chocolate at page 72.
(iii) At page 84 of the Paper Book, the web material says, inter alia as follows: The milkybar choo, the greatest Chocolate bar of all times.
(iv) At page 85 of the Paper Book, there is a web material under the title Nestle Milkybar Choo - Read Reviews. It says, inter alia, as follows :
Its CHOO good to be true. Review of Nestle Mikybar choo by James Brock.
Advantages : Delicious blend of white chocolate and fudge. Disadvantages: They do not last very long. ?27. From the above web materials, it is clearly established that the appellant not only recognizes Milkybar Choo as white chocolate but also sells it in the market as white chocolate. 6.6.4. Hence, we hold that even the website extracts can be taken as corroborative evidence, though caution should be exercised to examine the relevance and authenticity of the same. In this case, we do not find any reason to disregard the print outs of the suppliers and importers websites as corroborative evidence brought before us.
6.7. The Ld. Counsel for the appellant has tried to make the distinction between Packaged or canned software, whereas the Ld. SDR has tried to bring in a third category, though as a subset of the packaged or standard software viz. customized or modified software. He has referred to website print outs of two websites, one which describes 101 ways to customize Microsoft Office TM and the other which describes ways and means to customize Microsoft Windows TM. He submitted that customizations made like this on canned / packaged software like Microsoft Office TM and Microsoft Windows TM to suit the specific requirements of the client or customer cannot render it custom designed software and they would be aptly called modified or customized standard (packaged) software.
6.7.1 The Ld. Counsel has submitted that the imported software is customized software whereas the Ld. SDR maintained that the software was not a custom designed software, but was a standard or packaged software, which has been modified / adapted for BHEL so that it can work better in their environment.
6.7.2. The Ld. Counsel argued that the imported software is customized software, which is specifically made for each plant based on the specific parameters and design of each plant. The Ld. SDR countered this by pointing out that the standard software / its standard components or modules are installed in different power plants across the world. He relied on the following documents in support:
a) PADO and BPOS are to be installed in multiple plants like Ramagundam plant, Rihand plant, Kahalgoan plant and Sipat plant in India itself as evidenced by the Purchase orders and the agreements on the same.
b) The minutes of the meeting on the Factory Acceptance Test (FAT) of PADO system for Ramagundam and Rihand at Steag Ketek IT office at Oberhausen, Germany from 13th March to 17th March 2006 attended by the representatives of Steag Ketek, Steag India, NTPC and BHEL, the first paragraph of the General Comments( A1) reads as under:
BHEL / STEAG confirmed that the PADO systems for Ramagundam and Rihand have been developed in the same lines as the system ultimately commissioned at Simhadri. It was further clarified that the issues identified and resolved at Simhadri have been similarly implemented with the necessary corrections for Ramagundam and Rihand. These shall be further refined wherever required based on the observations during this FAT This means that the same systems have been used and only corrections and refinement done to get the software going in Simhadri, Ramagundam and Rihand.
c) As per the System Design Document (SDD) submitted by BHEL, the PADO software consists of SRv, SR 1, SR 4, SR nt, SR opt components. The SDD mentions interalia that, SR1 is employed successfully in many different power plant units either as standalone application or in combination with other SR modules like SRv for data reconciliation or SR4 for optimization of power plant operation. As a standard, SR1 has been designed to run on Windows NT as a client/server system. It includes a specific data management system as well as a powerful visualization module. The required data are exchanged with the process control system or with external data management systems via standard interfaces. For system handling and visualization of calculation results on the customer owned LAN/WAN license free clients in any number are available.
It also mentions that SR4 has been successfully installed on several power plants and can be operated in combination with other modules of the SR family such as SRv for data reconciliation or the SRp for the statistic prediction of individual and more qualitative fenomena. In its standard structure SR4 comes as a Windows NT client server system with interfaces to the plant DCS for data exchange and to the customers LAN/WAN for the visualization of results on any client terminal.
This means that the components are installed in many power plants worldwide.
d) A news item German Software optimizes Indian power plants which mentions about Steag Ketek winning contract to monitor and optimize 14 more power plants of NTPC in India.
e) A Power Point Presentation of Steag Encotec, which mentions that
i) it owns and operates around 11000 MW of installed capacity of coal, gas and refinery residue based power plants (90% of which is coal based)
ii) it has developed projects in Germany, USA, Columbia, Turkey, Philippines etc.
iii) Steag Ketek has been developing and supplying Energy management systems viz. SR1 (Lifetime monitoring), SR2 ( Energy Management), SR3(Energy controlling), SR4 (Power plant Optimisation), SR5 (Power trade system), SRv (Data validation), SRp (Strategic forecast), SRk (Power cycle evaluation) etc.
f) Standard Technical Specifications prescribed for Main Plant Package of Sub Critical Thermal Power projects brought out by the Central Electricity Authority (CEA), Ministry of Power, Govt. of India. The CEA with the help of major utilities and equipment manufacturers like NTPC, BHEL, MAHAGENCO, APGENCO, WBPDCL, REL, Tata Power and Alstorm has finalized the standard technical specifications for Coal based Main Plant Packages. The document at Para 6.3.11 under the main head Control and Instrumentation Works stipulates the use of PADO software as the standard software to be used. The relevant portion of Para 6.3.11 reads as under:
The contractor shall provide PC based on line plant performance analysis, diagnosis & optimization (PADO) system for the station. The PADO system shall incorporate the complete thermal design model of each unit. The model of each unit shall work together from the same PC for the complete plant. The system shall use the measured data from the C & I system through appropriate interface to be provided by the bidder. Instruments, which are specifically required for implementation of PADO, shall also be in the scope of contractor.
The PADO system shall provide the following functions in a modular and seamlessly integrated environment using a common plant model and a dynamically shared database. The Ld. SDR submitted that the Specifications document brought out by CEA clearly specifies PADO software and BPOS as the standard packages to be employed in such coal based thermal power plants.
6.7.3. The Ld. SDR contended that this goes to mean that the various modules of PADO and BPOS are standard software products of the developer M/s Steag Ketek IT GmbH. They have been just suitably adapted or modified to suit the specific parameters of each power plant so that it can work better in their environment.
6.8.1 The Ld. Counsel of the appellant also submitted that there is a strict condition that the software should be used only in the specified plant and that they were given license for each software. He referred to the letter dated 03.03.2006 from M/s Steag KETEK IT GmbH to M/s Steag Encotec India Pvt. Ltd intimating the licenses for the software to be used in Ramagundam plant Unit 7. He pointed out that the letter mentions that the licensed software is configured and restricted for use in Ramagundam Unit 7 and is not permitted to be used at any other unit or site. He submitted that there could not have been any post sale condition to utilize "off the shelf software"
6.8.2. The Ld. SDR, on the other hand, argued that the restriction on the use of the software indicates two aspects, which prove that the software is not custom designed software.
a) He submitted that these conditions indicate only a licensing angle and the very fact that they are specifically prohibited for further use in any plant or site implies that they are capable of being used in other sites as well. If the same cannot be absolutely used in any other plants or sites, there is no point in such a restriction / warning. Further, it is standard or canned software, which will need licenses to prevent unauthorized duplication / copying / use of the same. Classical examples are MS Office, MS Windows etc., which are undisputedly standard or canned software, which are protected by a license and the license agreement stipulates that the same are also specific to the system / network / site / domain as per the situation. A plain reading of the End User License Agreement (EULA) of these canned software will make it amply clear that they are licensed for a specific site / domain / plant / machine.
b) He contended that this restriction also means that the ownership of the software is still with Steag KETEK IT GmbH, which also is a strong indication that the software is not custom designed for BHEL. To support his arguments, he has referred to the letter of Steag Encotec submitted to the adjudicating authority, wherein it is mentioned as under:
The purpose of the BPOS is to optimize this while at the same time ensuring maximum heat transfer. Proprietary knowledge of KETEK is used in preparing the algorithms of this system and this has not been disclosed even to BHEL or NTPC.. They accept this is proprietary Further, the minutes of the meeting between M/s Steag Germany / India and BHEL EDN at Bangalore on 29 / 07 / 2005 and 30 / 07 / 2005 for procurement of PADO packages for NTPC projects at Para 6 read as under:
BHEL recognizes the proprietary right of M/s Steag KETEK Germany over the products being licensed and the parties will enter into an appropriate agreement to protect M/s Steag KETEK Germanys rights to patent and copyright. 6.8.3. The Ld. SDR thus contended that this is again highly indicative of the software being packaged, where the developer retains all proprietary knowledge of the software. In the case of custom designed software, the ownership of the software is given to the client with full rights to use them as he needs. Thus the restrictions and license effectively point towards the packaged nature of the software.
6.9. The Ld. SDR also submitted that there are a few more aspects, which prove that the impugned imported software is not custom designed software.
a) He pointed out that as per the minutes of the meeting referred to above, the licensed software was to be handed over to the client within a period of 12 weeks. He pointed out that the entire processes of the software development life cycle including any modifications, bug testing, bug fixing and final release all have to be completed within such a short period and hence the modification can only be epidermal and not at the fundamental level. This again shows that the software is packaged software, which is just modified according to the needs.
b) He also referred to the Commercial Terms and Conditions as annexed to each purchase order, wherein after sales support is detailed. The paragraph reads as under:
After Sales Support: Software support in the form of upgrades / new releases / improvements made by the vendor / sub vendors etc shall be provided free of cost to BHEL / NTPC up to 5 years from the completion of PG Test He pointed out that this support in the form of regular upgrades, new releases and improvements strongly indicates that the software is packaged software. He referred to an Income Tax case regarding the allowability of expenditure on custom built and canned software as business expenditure viz. Commissioner of Income Tax Vs.. GE Capital Services Ltd, reported in (2007) 164 TAXMAN 46 (DELHI). The Honble High Court of Delhi in this case has observed as under:
3. The only question that has arisen in this case pertaining to the assessment year 1997-98 is that expenditure incurred by the assessee on software was treated by the assessing officer as capital expenditure. The Tribunal was of the view that due to technological changes and the need to upgrade the software on a regular basis, it cannot be said that the software was of an enduring nature.
4. We are informed that the software for which the expenditure was incurred was MS office; which is not a custom built software for the assessee and it is common knowledge that this software requires regular upgradation.
5. We can understand that where customized software is prepared then, it could be of an enduring nature, but in this case, MS Office is not customized software and it cannot be said that the software does not require frequent upgradation The Ld. SDR submitted that the above observations read with the Terms and Conditions of the after sales contract in this case about regular upgrades, new releases and improvements only go to prove that the impugned software is standard / packaged software, for which regular upgrades are being sent. Had it been a custom designed software, it would not necessitate a regular upgrade.
c) He also submitted that as per the minutes of the meeting referred to above, Para 3.c reads as Terms of delivery of licenses for Vindhyachal I &II , Kahalgaon I , II & III , Sipat I & II and Talcher III and IV shall be FOR BHEL EDN basis. The customization of the software shall be in BHEL scope.
The Ld. SDR submitted that if the software is custom designed for the specific plant as per its specific parameters after getting all necessary data, the question of customizing by BHEL does not arise at all. In reply to a specific query from the Bench, the Ld. Counsel of the appellant has in his written synopsis submitted that this was applicable only to Vindhyachal, Kahalgaon, Sipat and Talcher and not to other locations. The entire customization of the software to the design conditions including the dimension and material specifications of the boiler in particular will be done by Steag in Germany. Thereafter, the software is installed at site. BHEL will be responsible for further fine tuning to suit the local ambient conditions of temperature, pressure, humidity etc. 6.10. Taking into consideration all aspects as discussed above, we find that the impugned software / its constituent modules did exist prior to importation and have been installed and employed in many coal based power plants in many parts of the world including India. We also find that the licensing angle and the withholding of the proprietary rights by the software developer also point strongly towards a packaged software. This is further strengthened by the small latent period from the order to the delivery of the software and the fact of regular upgrades / releases / improvements promised to the client. On the clause, which mentions that customization shall be in BHEL scope also, we find adequate force in the Ld. SDRs submission. Further, the decision of the CEA, which specifies PADO and BPOS software as standard specifications to optimize operations in the coal based power plants comes as a clincher in this case.
6.11. Thus, based on the facts mentioned above, we are in full agreement with the Ld. SDR that the impugned software is in the nature of packaged software. However, we also note that the same have been modified to suit the various parameters as required by the power plants. Hence, we hold that the impugned imported PADO software and BPOS software packages are modified packaged software.
7. Having come to a conclusion that the software packages viz PADO and BPOS imported by Steag Encotec are pre existing software, which were modified to suit the relevant parameters of the power generation plants, we, now have to examine whether the software is eligible to the exemption under the Central Excise Notification No. 6/2006 dated 01. 03.2006.
7.1. The description of the entry at Sl. No 27 of the said Notification reads thus:
Any Customized software (that is to say, any custom designed software, developed for a specific user or client), other than packaged software or canned software.
Explanation.- For the purposes of this entry, packaged software or canned software means a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf Thus, it is clear that only customized software merits exemption under the notification. The issue to be decided here is whether software needs to be developed from scratch or whether modification of pre existing software is sufficient enough to merit it being called customized software.
7.2.1. The Ld Counsel for the appellant stated that since the word 'customized' is not defined, the dictionary meaning will have to be resorted to. The Oxford dictionary gives the meaning of customized as 'Modify (something) to suit a particular individual or task'. Hence, it is the Ld Counsel's contention that 'modification' of 'something' amounts to 'customization'. He also has submitted a copy of the web extract from wikianswers.com, which gives the meaning of customized software as "an application that has been modified to work for a specific company to keep track of and cross reference information or users in a definite way. It can be any software made to do a specific function not available otherwise."
7.2.2. It is also the Ld. Counsel's submission that the benefit of the notification is unavailable only for packaged software i.e software developed to meet the need of variety of users, which is capable of being sold "off the shelf" and any software other than packaged software will be eligible to the exemption. He pointed out that packaged software is synonymous to a CD, a cassette, a tape or such other specified product, which has specific pre-designed known purpose and usage. In this case, he submitted that the impugned goods were not developed to meet the need of variety of users like various power plants. The software is specific as modifications, adaptations and changes in configurations have been carried out taking into consideration the needs of each of the plants. He further submitted that "off the shelf software" in this case would be a standard product of known advertised Technical specification of qualities and technical capabilities, which will not fit into any power plant of BHEL with 500 MW capacity.
7.3.1 The Ld. SDR, on the other hand, submitted that the notification is very clear as it lays down specifically what customized software means. It is his submission that by the clarificatory expression that is to say, custom designed software the meaning of the word customized software is restricted to custom designed software only. He submitted that the legislative intent is made clear with that expression.
7.3.2. He also submitted that the intention of the Government can also be inferred from the Service Tax Circular 81/2/2005-ST dated 07 October 2005, the relevant part of the Para 3 reads as under:
"..In the case of unbranded / customized software, the supplier develops the software and thereafter transfers the software so developed in a media and it is taken to the customer's premises for loading in their system"
The Ld. SDR submitted that the description finds mention in the Service Tax as well and there also it is mentioned in no unclear terms that in the case of customized software, the supplier develops the software. The same does not talk about modifying / tuning / adapting / customizing the software. He submitted that this description is pari materia to the description in Central Excise and hence should be considered as a pointer to the Government intent.
7.3.3. It is the Ld. SDR's contention that what 'customized software' means is clearly specified in the statute and hence no other interpretation or meaning will prevail over the same. When the Indian statute is clear, there is no point relying on other statutes.
7.3.4. He submitted that this is an exemption notification and hence it has to be construed very strictly as has been held in a catena of decisions of the Honble Supreme Court, High Courts and the Tribunal and in the case of exemption notifications, even when there is any ambiguity, the benefit should go to the State. The Ld. Counsel of the appellant argued to the contrary and submitted that in case of any doubt, the benefit should go to the assessee. The Ld. SDR at this stage pointed out that this is not the law laid down in the case of any doubt with regard to exemption notifications and relied on Para 18 of the Judgment of the Honble Supreme Court in the case of Novopan India Ltd Vs. Collector of Central Excise and Customs, Hyderabad as reported in 1994 (73) ELT 769 (SC). The same reads as under:
18. We are, however, of the opinion that, on? principle, the decision of this Court in Mangalore Chemicals - and in Union of India v. Wood Papers referred to therein - represents the correct view of law. The principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee - assuming that the said principle is good and sound - does not apply to the construction of an exception or an exempting provision; they have to be construed strictly. A person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. This is for the reason explained in Mangalore Chemicals and other decisions, viz., each such exception/exemption increases the tax burden on other members of the community correspondingly. Once, of course, the provision is found applicable to him, full effect must be given to it. As observed by a Constitution Bench of this Court in Hansraj Gordhandas v. H.H. Dave [1978 (2) E.L.T. (J 350) (SC) = 1969 (2) S.C.R. 253) that such a Notification has to be interpreted in the light of the words employed by it and not on any other basis. This was so held in the context of the principle that in a taxing statute, there is no room for any intendment, that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification, i.e., by the plain terms of the exemption. 7.3.5. The Ld. SDR submitted that as per the decision, the subject notification also, being an exemption notification, should be construed strictly and if at all there is any ambiguity, the benefit should go to the State. He also submitted that this being an exemption notification, which is available specifically for custom designed software only, anything other than custom designed /developed software will go out of the purview of the exemption. He submitted that even well established canned or packaged software can be customized in many ways and if mere modification / tuning / adaptation / customization of a standard or packaged software will render itself to be considered as custom designed software, then that would render the notification to immense misuse, in the realm of both Central excise and Customs.
7.4.1. We note that the Honble Supreme Court in the case of Novopan India Ltd. cited supra, after lengthy deliberations on the issue of interpretation of exemption notifications has held thus:
13. The learned counsel for the appellant then? contended that since there is an ambiguity about the meaning and purport of Item 6 of the table appended to the Exemption Notification, the benefit of such ambiguity should go to the assessee-manufacturer and the entry must be construed as taking in the MFPBs as well. It is not possible to agree with this submission.
14. In? Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner of Commercial Taxes & Ors. [1991 (55) E.L.T. 437 (SC) = 1992 Suppl. (1) S.C.C. 21], a Bench of this Court comprising M.N. Venkatachaliah, J. (as the learned Chief Justice then was) and S.C. Agarwal, J. stated the relevant principle in the following words :
Shri Narasimhamurthy again relied on certain observations in CCE v. Parle Exports (P) Ltd. [1988 (38) E.L.T. 741 (SC) = 1989 (1) SCC 345), in support of strict construction of a provision concerning exemptions. There is support of judicial opinion to the view that exemptions from taxation have a tendency to increase the burden on the other unexempted class of tax payers and should be construed against the subject in case of ambiguity. It is an equally well known principle that a person who claims an exemption has to establish his case. Indeed, in the very case of Parle Exports (P) Ltd. relied upon by Shri Narasimhamurthy, it was observed :
While interpreting an exemption clause, liberal interpretation should be imparted to the language thereof, provided no violence is done to the language employed. It must, however, be borne in mind that absurd results of construction should be avoided. The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the legislature manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only where the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation. It appears to us the true rule of construction of a provision as to exemption is the one stated by this Court in Union of India v. Wood Paper Ltd. [1990 (47) E.L.T. 500 (SC) = 1990 (4) SCC 256] :
...Truly speaking liberal and strict construction of an exemption provision are to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction....
15. This was also the view expressed in? The Commissioners of Inland Revenue v. James Forrest [(1890) 15 A.C. 334] where Lord Halsbury, L.C. observed : all exemptions from taxation to some extent increase the burden on other members of the community .... and in Littman v. Barron (Inspector of Taxes) (1951 (2) A.E.R. 393), a decision of the Court of Appeal where Cohen, L.J. said : the principle that in case of ambiguity a taxing statute should be construed in favour of a taxpayer does not apply to a provision giving a taxpayer relief in certain cases from a section clearly imposing liability".
16. It is true that in some decisions a contrary? view appears to have been expressed. In Caroline M. Armytage & Ors. v. Frederick Wilkinson [(1878) 3 A.C. 355], a decision of the Privy Council, it was observed :
Their Lordships have now to consider whether the decision of Mr. Justice Molesworth upon the merits of the application to him is correct.
They must begin by expressing their dissent from the principle which seems to have influenced Mr. Justice Molesworth in this and some of the earlier cases, viz., that the provisions of the 24th section, because they establish an exception to the general rule, are to be construed strictly against those who invoke their benefit. That principle is opposed to the rule expressed by Lord Ellenborough in Warrington v. Furbor (8, East 242), and followed and confirmed in Hobson v. Neale (17, Beav. 185). Lord Ellenboroughs words are - I think that when the subject is to be charged with a duty, the cases in which it is to attach ought to be fairly marked out, and we should give a liberal construction to words of exception confining the operation of the duty." It is only, however, in the event of there being a real difficulty in ascertaining the meaning of a particular enactment that the question of strictness or of liberality of construction need arise."
17. To the same effect is the view expressed by Sir? Raymond Evershed in Routledge v. McKay & Ors. (1954 (1) A.E.R. 855). The learned Master of Rolls observed : on the authorities, that exemption, as I understand, should be liberally interpreted.
18. We are, however, of the opinion that, on? principle, the decision of this Court in Mangalore Chemicals - and in Union of India v. Wood Papers referred to therein - represents the correct view of law. The principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee - assuming that the said principle is good and sound - does not apply to the construction of an exception or an exempting provision; they have to be construed strictly. A person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. This is for the reason explained in Mangalore Chemicals and other decisions, viz., each such exception/exemption increases the tax burden on other members of the community correspondingly. Once, of course, the provision is found applicable to him, full effect must be given to it. As observed by a Constitution Bench of this Court in Hansraj Gordhandas v. H.H. Dave [1978 (2) E.L.T. (J 350) (SC) = 1969 (2) S.C.R. 253) that such a Notification has to be interpreted in the light of the words employed by it and not on any other basis. This was so held in the context of the principle that in a taxing statute, there is no room for any intendment, that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification, i.e., by the plain terms of the exemption. 7.4.2. Thus the two stages of interpreting the exemption notifications in the case of doubt are very clearly laid down. At the stage when there is a doubt whether a subject falls in the notification or in the exemption clause; then, it being in nature of exception has to be construed strictly and against the subject. It will be the liability of the person who invokes the exemption provision to relieve him of the tax liability to clearly establish that he is covered by the said provision. At this stage, if there is any doubt or ambiguity, the Honble Apex Court rules that exemption, being an exception, the benefit should go to the State. The Honble Court also notes that exemptions from taxation have a tendency to increase the burden on the other unexempted class of tax payers and underlines the further rationale why it should be construed against the subject in case of ambiguity.
7.4.3. The second stage is obviously after the first i.e. when it is proved that the subject falls well within the ambit of the notification, then at that stage, full effect must be given to it.
7.4.4. On going through the Central Excise exemption notification No.6 / 2006, we find that the exemption is given only to customized software, which is further qualified by the clause that is to say custom designed software.
7.4.5. The Ld. SDR has rightly pointed out that though customized software may have a wide meaning in common parlance, even then, by virtue of the restrictive clause in the notification, the eligibility to the exemption is restricted to only custom designed software. This is further reinforced by the intent as decipherable from the comparable Service Tax law in force, which says that in the case of unbranded / customized software, the supplier develops the software. We also agree with the submissions of the Ld. SDR that when there is a clear cut meaning attributed to customized software in the notification itself, then the dictionary meaning or description as given in wikianswers.com cannot override the same.
7.4.6. When we apply the rationale as laid down by the Honble Supreme Court in the case of Novopan cited supra and construe the subject notification strictly, we are of the considered opinion that only custom designed software can pass the acid test of eligibility to the exemption and that the party will have to categorically prove the same to claim the exemption. There is no scope for any ambiguity here. Even if there had been any doubt, still, as per the said Judgment, the same has to be construed in favour of the Revenue only.
7.4.7. There is considerable force in the Ld. SDRs argument that if the argument of the appellant that even modification / tuning / adaptation of standard software will make it a customized software is accepted then that would defeat the very purpose of the notification. This would undoubtedly lead to unintended benefits.
7.5. We, therefore, hold that the software has to be developed from the basic building blocks, whereby a new software product should emerge as per the specific requirement of the client so as to qualify itself as a custom designed software. Software, just modified from already existing established software packages/modules, will not qualify itself as a custom designed software.
8. Based on our discussions and findings in the preceding paragraphs, we hold that the imported PADO and BPOS software packages are only modified packaged software and are not eligible to the exemption under the Central Excise Notification No. 6/2006 dated 01.03.2006 as the benefit of the said Notification is admissible only to the Custom designed Software.
9. We uphold the impugned Order passed by the Commissioner of Customs (Appeals) and reject the appeal.
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