1999(12)LCX0148
IN THE CEGAT, WEST ZONAL BENCH, MUMBAI
S/Shri J.H. Joglekar, Member (T) and J.N. Srinivasa Murthy, Member (J)
BARBER SHIP MANAGEMENT (I) PVT. LTD.
Versus
COMMR. OF CUS., ACC, MUMBAI
Order No. 3500/99-WZB/C-II, dated 23-12-1999 in Appeal No. C/460-R/99 Mum
Cases Quoted
Manisha Pharma Plasto Pvt. Ltd. v. U.O.I. — 1999(05)LCX0161 Eq 1999 (112) ELT 0022 (Del.) — Referred [Para 8]
O.R.G. Systems v. Collector — 1998(07)LCX0050 Eq 1998 (102) ELT 0003 (S.C.) — Referred [Para 5]
P.S.I. Data Systems Ltd. v. Collector —1996(12)LCX0035 Eq 1997 (089) ELT 0003 (S.C.) — Referred [Para 5]
Advocated By : Shri Anil Balani, Advocate, for the Appellant.
Shri Deepak Kumar, for the Respondents.
[Order per : J.H. Joglekar, Member (T)]. - This case was initially posted for hearing of the stay application, but on hearing both sides the matter was listed for final disposal. We have heard today Shri Anil Balani, Advocate for the appellants and Shri Deepak Kumar for the Revenue.
2. For the purpose of hearing the main appeal, we waive the condition of pre-deposit of penalty of Rs. 4.00 lakhs levied on the appellants in the impugned order.
3. The appellants imported six sets of data processing machine consisting of Computer, Monitors, Key Boards, Printers. They separately also imported one Colour Printer and one Server. These goods were classified under Heading 84.71 by the importers. One of the computer systems contained Software recorded on a Hard-disk assembled as a part inside the system. The classification for this was separately claimed under Heading 85.24 and clearance under exemption Notification No. 23/98-Cus. (Sr. No. 206) was claimed. The proposed classification was challenged by the Customs. After issue of show cause notice and after hearing the importers, the Commissioner of Customs passed the impugned order whereunder the software was ordered to be classified under Heading 8471.41 of CTA. He also confiscated the entire consignment under Section 111(m) of the Customs Act, 1962, but permitted its redemption on payment of fine of Rs. 13.00 lakhs (Rupees Thirteen lakhs only). In addition, he imposed penalty of Rs. 4.00 lakhs (Rupees Four lakhs only) on the importers. Hence the present appeal.
4. The single issue for determination before us is whether the hard disk on which software is recorded which disc forms part of one computer system, would merit classification under Heading 84.71 as part of the machine or whether it deserves to be classified as software under Heading 85.24.
5. During the proceedings before the Commissioner and before us also reliance was placed on a number of judgments of the Supreme Court as well as of the Tribunal. We have seen the Supreme Court order in the case of P.S.I. Data Systems Ltd. v. Collector of Central Excise [1996(12)LCX0035 Eq 1997 (089) ELT 0003 (S.C.)] as also the other judgment of the Supreme Court in the case of O.R.G. Systems v. Collector of Central Excise [1998(07)LCX0050 Eq 1998 (102) ELT 0003 (S.C.) which followed the ratio of that P.S.I. Data Systems Ltd. We have seen the cited judgments of the Tribunal also which follow the first named judgment. In this judgment the issue that came up for consideration was the valuation of the software if sold along with the computer. The Supreme Court observed that the computer hardware and software were distinct and separate entities. The court accepted their interdependence, but ruled that the two being distinct articles, the value of software could not be added to the value of the hardware. In holding thus a specific reference was made by the Supreme Court to the fact that what was in dispute was not software “etched-in” or “burnt-in”. When these citations were made before the ld. Commissioner, he remarked that the decision did not deal with the classification of the software and that the ratio thereof was not applicable. We shall first examine the discussion on classification made by the ld. Commissioner. When the assessees argued that in terms of the explanatory note to Heading 85.24 of the HSN, such software even assembled into the computer would remain classified under Heading 85; he made the following observation :-
“This contention of importer is not correct. The Explanatory Note referred to above only provides that Media recorded with sound or other similar recording whether or not presented with apparatus for which they are intended or Media with sound or other similar recording assembled with constituent part of machines of Heading 84.69 to 84.72 (e.g. disc packs) is to be classified in Heading 85.24. This provision therefore, deals with cases where recorded media or recorded media assembled with other parts of machine of Heading 84.69 to 84.72 has been presented for assessment. It does not deal with the cases where a complete machine of Heading 84.72 has been imported and recorded media is only one of the internal components of the machine. If the importer argument is to be accepted, then whole computer is to be classified under Heading 85.24.
6. It would be useful hereto reproduce the relevant portions of the said note.
“This heading covers..... Media on which phenomena other than sound or image have been recorded (e.g. magnetic tapes, discs packs, diskettes and cassettes for machines of Headings 84.69 to 84.72). Media recorded with sound or similar recording, whether or not presented together with the apparatus for which they are intended or assembled with constituent parts of machines of Headings 84.69 to 84.72/(e.g., disc packs) are in all cases to be classified in this heading”.
7. This sub-note is reflected in the Chapter Note 6 under Chapter 85 which is worded as below :-
Records, tapes and other media of Heading No. 85.23 or 85.24 remain classified in those headings, whether or not they are cleared with the apparatus for which they are intended.
The same wording occurs in Chapter 85 in the HSN also. It is truth under Chapter 85 covered the situation, the recorded media is assembled into apparatus, but then this additional key to the classification is available in the sub-notes under the HSN.
8. The value of the HSN as guide to classification under the CTA has been discussed in a number of judgments. The Delhi High Court in their judgment in the case of Manisha Pharma Plasto Pvt. Ltd. v. Union of India [1999(05)LCX0161 Eq 1999 (112) ELT 0022 (Del.)] while giving their opinion on the classification of a medicinal talcum powder, referred to an opinion given by the Harmonized System Committee and observed that it was the high powered body to ascertain International practice of classification and that their opinion and recommendations would not be brushed aside on account of the existence of other instructions under other laws. There should therefore be little difficulty in accepting the sub-notes reproduced above, in holding that a storage device with software recorded thereupon would continue to attract classification under Heading 85.24, even if, it is presented along with the computer system or is assembled therein.
9. Shri Deepak Kumar argued at considerable length on the coverage of sub-heading 84.71. It was his case that sub-heading 8471.70 describes storage units which are parts of machines falling under Heading 84.71. He relies upon Chapter Note 5 to Chapter 84. It is his case that the subject hard-disk satisfied the conditions listed in sub-para (b) thereof, since it is solely or principally used in data processing system, and is connectable thereto. It is capable of delivering data. In terms of sub-note (d), it is his case that this storage units would merit classification under Heading 84.71.
10. We have carefully considered his submission and have seen the coverage of Heading 84.71. After reading the notes pertaining to Chapter 85 what is clear is that the device i.e. hard disk is at all times a part of system falling under Heading 84.71. It is only when something is recorded thereupon that the classification would charge. We see no conflict in the same physical goods being Classified differently, in the same tariff after the operation of recording of software thereupon has been undertaken.
11. Shri Deepak Kumar here submits that there is possibility of conflict inasmuch as sub-heading 85.23 covers prepared unrecorded media for sound recording or similar recording, and therefore it could be held that the unrecorded hard disk may also merit classification thereunder, thereby nullifying the effect of Chapter Note 5 to Chapter 84 whereby the entire heading may become redundant as far as storage units are concerned. We do not see any reason for this apprehension. The coverage of Heading 85.23 is much less compared to the coverage of Heading 85.24. Sub-heading 85.23 speaks of “sound recording or similar recording of other phenomena”. The Explanatory Notes make it clear that what is covered under this are the blanks for recording, as also strips or cards or films of metal or composit material for recording of sound or visual or Electro-magnetic impulses. The coverage of 85.24 is much larger taking into account carriers for reproducing phenomena other than sound recording. The matrices and master unrecorded of Heading 85.23 find their place after being recorded in 85.24 also. But looking at the coverage of the two items it becomes clear that Heading 85.24 is intended to cover more material than the material transferred thereto, from Heading 85.23 after being recorded.
12. It is therefore clear that the hard disks on which no recording is done cannot be brought under the coverage of Heading 85.23 but that they would remain covered under Heading 84.71.
13. We thus find on the examination of the relevant Tariff entries, that the hard disk on which software was recorded merited classification under Heading 85.24, even when it was a part of the computer system and that it merited the benefit of Notification No. 23/98. We, therefore, allow the appeal, set aside the impugned order and direct consequential relief.
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Equivalent 2000 (117) ELT 456 (Tribunal)