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Friday, April 1, 2016

In Commissioner of Central Excise Vs. Acer Ltd.[2], the scope and purport of Section 3 of the Act, Section 4 (1) (a) as substituted with effect from 1.7.2000 and Section 4 (3) (d) defining “transaction value” came up for consideration before another Three Judges Bench of this Court. In the said case, the question that arose is whether value of software attached to a computer, which is otherwise exempt from duty, is liable to be included in the assessable value of the computer for the purposes of levy of duty. Paragraphs 67, 69 and 84 of the judgment in Commissioner of Central Excise Vs. Acer Ltd. (supra) would be relevant and is, therefore, noticed below:-It is not in dispute that operational softwares are available in the market separately. They are separately marketable commodities. The essentiality test or the functional test cannot be applied for the purpose of levy of Central excise inasmuch as the tax is on manufacture of “goods”. The Act being a fiscal legislation an attempt must be made to read the provisions thereof reasonably. Computer comes within the definition of excisable goods. So is a software. They find place in different classifications. The rate of duty payable in relation to these two different goods is also different.While calculating the value of the computer the value of the hard disc, value of the firmware, the cost of the motherboard as also the costs for loading operating softwares is included. What is excluded from the total value of the computer is the value of the operating softwares like Windows 2000, Windows XP which are secondary softwares. Indisputably, when an operating software is loaded in the computer, its utility increases. But does it mean that it is so essential for running the computer that exclusion thereof would make a computer a dead box? The answer to the said question as would appear from the discussions made hereinafter must be rendered in the negative. It is not disputed before us that even without operational softwares a computer can be put to use although by loading the same its utility is enhanced. Computers loaded with different operational softwares cater to the specific needs of the buyer wherefor he is required to place definite orders on the manufacturer. It is also not in dispute that an operating software loaded on the hard disc is erasable. It is also accepted that the operating software despite being loaded on to the hard disc is usually supplied separately to the customers. It is also beyond any controversy that operating software can be updated keeping in view the development in the technology and availability thereof in the market without affecting the data contained in the hard disc. Concededly, even in the case of hard disc crash the software contained in the CDs is capable of being reloaded on to the hard disc and its utility by the users remains the same. An operational software, therefore, does not form an essential part of the hardware. In other words, computers and softwares are different and distinct goods under the said Act having been classified differently and in that view of the matter, no Central excise duty would be leviable upon determination of the value thereof by taking the total value of the computer and software. So far as the valuation of goods in terms of “transaction value” thereof, as defined in Section 4(3)(d) of the Act is concerned, suffice it to say that the said provision would be subject to the charging provisions contained in Section 3 of the Act as also sub- section (1) of Section 4. The expressions “by reason of sale” or “in connection with the sale” contained in the definition of “transaction value” refer to such goods which is excisable to excise duty and not the one which is not so excisable. Section 3 of the Act being the charging section, the definition of “transaction value” must be read in the text and context thereof and not dehors the same. The legal text contained in Chapter 85, as explained in Chapter Note 6, clearly states that a software, even if contained in a hardware, does not lose its character as such. When an exemption has been granted from levy of any excise duty on software whether it is operating software or application software in terms of Heading 85.24, no excise duty can be levied thereupon indirectly as it was impermissible to levy a tax indirectly. In that view of the matter the decision in PSI Data Systems must be held to have correctly been rendered.”- two Coordinate Benches (Three Judges) have taken what would appear to be contrary views with regard to purport and effect and the interconnection between Section 3 and 4 of the Central Excise Act, 1944.=the questions referred should receive consideration of a Larger Bench for which purpose the connected papers may now be placed before the Hon’ble the Chief Justice of India for appropriate directions.

            IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 3159 OF 2004

Commissioner of Central Excise, Indore                   ...Appellant (s)

                                   Versus
M/s Grasim Industries Ltd                              ...Respondent (s)

                                    WITH
C.A.  Nos.2982-2985/2005,   C.A.  No.2986/2005,  C.A.   No.7143/2005,   C.A.
No.2261/2006,  C.A. Nos.2246-2247/2008, C.A.  Nos.2934-2935/2008,  C.A.  No.
3528/2008, C.A. No.4820/2008, C.A. No. 6695/2008,  C.A.  No.2534/2009,  C.A.
No.8541/2009 , C.A. No. 253/2010,   C.A.  No.445/2010,   C.A.  No.1382/2010,
C.A.  Nos.2003-2004/2010,   C.A.  No.2363/2010,  C.A.   No.2430/2010,   C.A.
Nos.7174-7175/2010,   C.A.   No.   4696/2011,   C.A.   No.2705/2012,    C.A.
No.3455/2004,  C.A. No.6984/2011 and  C.A. No.7272/2005.

                       O R D E R

1.    By order dated 30.7.2009 the following questions  have  been  referred
for consideration by a larger Bench in terms of which the matters have  been
posted before us.
“1. Whether Section 4 of the Central Excise Act, 1944 (as  substituted  with
effect from 01.07.2000) and the definition of "Transaction Value" in  Clause
(d) of sub-Section (3) of Section 4 are subject to Section 3 of the Act?

2.  Whether Sections 3 and 4  of  the  Central  Excise  Act,  despite  being
interlinked, operate in different fields and what is their  real  scope  and
ambit?

3. Whether the concept of "Transaction Value" makes any  material  departure
from the deemed normal price concept of the  erstwhile  Section  4(1)(a)  of
the Act?”

2.    The facts in brief are as follows:
       The  respondents-assessees  are  manufacturers   of   dissolved   and
compressed  industrial  gases  and  allied   products.   These   gases   are
transported and supplied to the customers in  tonners,  cylinders,  carboys,
paper cones and HDPE bags, BIBs, pipeline and canisters, which may  be  more
conveniently referred to as Containers.  Some container items  are  provided
by the assessees and  in  some  instances  the  customers  bring  their  own
cylinders/containers. For providing the  containers,  the  assessees  charge
the customers certain amounts under different heads.  These amounts are  not
reflected in the sale invoices for the purpose of computation of  assessable
value.  The assessees treat the said amounts as their income from  ancillary
or allied ventures.

3.    The issue arising in  all  these  appeals  is  whether  the  aforesaid
charges are liable to be taken into account for determination of  value  for
the purpose of levy of duty in terms of Section  4  of  the  Central  Excise
Act, 1944 (hereinafter referred to as “the  Act”)  as  amended  with  effect
from 1.7.2000.

4.    Section 3 of the Act is the charging section and reads as follows:

“3. (1) There shall be levied  and  collected  in  such  manner  as  may  be
prescribed,


(a) a duty of excise to be called the Central Value Added Tax  (CENVAT)]  on
all excisable goods (excluding goods produced  or  manufactured  in  special
economic zones) which are produced or  manufactured in India as, and at  the
rates, set forth in the First Schedule to the  Central  Excise  Tariff  Act,
1985 (5 of 1986);
                          …………………

5.    Section 4 (1)  (a)  of  the  Act,  as  substituted  with  effect  from
01.07.2000, reads as under:

“4. Valuation of excisable  goods  for  purposes  of  charging  of  duty  of
excise.--(1) Where under this Act, the duty of excise is chargeable  on  any
excisable goods with reference to their value, then, on each removal of  the
goods, such value shall--


(a) in a case where the goods are sold by the assessee, for delivery at  the
time and place of the removal, the assessee and the buyer of goods  are  not
related and the price is  the  sole  consideration  for  the  sale,  be  the
transaction value;”


6.    “Transaction Value” as defined by Section 4 (3) (d) reads as follows:

“(d) "transaction value" means the prices actually paid or payable  for  the
goods, when sold, and includes in addition to the amount charged  as  price,
any amount that the buyer is  liable  to  pay  to,  or  on  behalf  of,  the
assessee, by reason of, or in connection with the sale, whether  payable  at
the time of the sale or at any other time, including, but  not  limited  to,
any amount charged for, or to make provision for, advertising or  publicity,
marketing and selling  organization  expenses,  storage,  outward  handling,
servicing, warranty, commission or any other matter; but  does  not  include
the amount of duty of excise, sales tax and other taxes, if any, actually
paid or actually payable on such goods.”

7.    Prior to amendment of Section 4 (1) (a) with effect from 1.7.2000  the
unamended Section 4 (1) (a) read as follows:

“4. Valuation of excisable  goods  for  purposes  of  charging  of  duty  of
excise.--(1) Where under this Act, the duty of excise is chargeable  on  any
excisable goods with reference to value, such value, shall, subject  to  the
other provisions of this Section, be deemed to be--


(a) the normal price thereof, that is to say, the price at which such  goods
are ordinarily sold by the assessee to a buyer in the  course  of  wholesale
trade for delivery at the time and place of removal, where the buyer is  not
a related person and the price is the sole consideration for the sale.”

8.    Section 4 (1) (a) [prior to the  substitution]  was  considered  by  a
Three Judges Bench of this Court in Union of India & Ors.  Vs.  Bombay  Tyre
International Ltd.  &  Ors.[1].  While  considering  the  interplay  between
Section 3 and 4, it was held as follows:

"...Section 3 of the Central Excises and Salt Act provides for the  levy  of
the duty of excise. It creates the charge, and defines  the  nature  of  the
charge. That it is a levy on excisable goods, produced  or  manufactured  in
India, is mentioned in terms in the Section itself. Section  4  of  the  Act
provides the measure by reference to which the charge is to be  levied.  The
duty of excise is chargeable with reference to the value  of  the  excisable
goods, and the value is defined in express terms by  that  Section.  It  has
long been recognized that the measure employed for assessing a tax must  not
be confused with the nature of the tax.
                                ...       ...      ...

It is apparent, therefore, that when  enacting  a  measure  to  serve  as  a
standard for assessing the levy the Legislature need not  contour  it  along
lines which spell out the character of the levy  itself.  Viewed  from  this
standpoint, it is not possible to accept the  contention  that  because  the
levy of excise is a levy on goods manufactured or produced the value  of  an
excisable article must  be  limited  to  the  manufacturing  cost  plus  the
manufacturing profit. We are of opinion that a  broader  based  standard  of
reference may be adopted for the purpose of determining the measure  of  the
levy. Any standard which maintains a nexus with the essential  character  of
the levy can be regarded as a valid basis for assessing the measure of   the
levy. In our opinion, the original Section 4 and the new Section  4  of  the
Central
Excises and Salt Act satisfy this test.

                            ...      ...      ...


A contention was raised for some of the assessees, that the measure  was  to
be found by reading Section 3 with Section 4, thus drawing  the  ingredients
of Section 3 into the exercise. We are unable to  agree.  We  are  concerned
with Section 3(1), and we find nothing there  which  clothes  the  provision
with a dual character, a charging provision as well as a provision  defining
the measure of the charge."


9.    In Commissioner of Central Excise Vs.  Acer  Ltd.[2],  the  scope  and
purport of Section 3 of the Act, Section  4  (1)  (a)  as  substituted  with
effect from 1.7.2000 and Section 4 (3)  (d)  defining   “transaction  value”
came up for consideration before another Three Judges Bench of  this  Court.
In the said case, the question that  arose  is  whether  value  of  software
attached to a computer, which is otherwise exempt from duty,  is  liable  to
be included in the assessable value of the  computer  for  the  purposes  of
levy of duty.  Paragraphs 67, 69 and 84 of the judgment in  Commissioner  of
Central Excise Vs. Acer Ltd. (supra) would be relevant  and  is,  therefore,
noticed below:

“67. It is not in dispute that operational softwares are  available  in  the
market  separately.  They  are  separately   marketable   commodities.   The
essentiality test or the functional test cannot be applied for  the  purpose
of levy of Central excise inasmuch as the tax is on manufacture of  “goods”.
The Act being a fiscal legislation an attempt  must  be  made  to  read  the
provisions thereof reasonably.  Computer  comes  within  the  definition  of
excisable  goods.  So  is  a  software.  They  find   place   in   different
classifications.  The  rate  of  duty  payable  in  relation  to  these  two
different goods is also different.


69. While calculating the value of the computer the value of the hard  disc,
value of the firmware, the cost of the motherboard as  also  the  costs  for
loading operating softwares is included. What is  excluded  from  the  total
value of the computer is the value of the operating softwares  like  Windows
2000, Windows XP  which  are  secondary  softwares.  Indisputably,  when  an
operating software is loaded in the computer,  its  utility  increases.  But
does it mean  that  it  is  so  essential  for  running  the  computer  that
exclusion thereof would make a computer a dead box? The answer to  the  said
question as would appear from  the  discussions  made  hereinafter  must  be
rendered in the negative. It is not disputed before  us  that  even  without
operational softwares a computer can be put to use although by  loading  the
same its utility is enhanced. Computers loaded  with  different  operational
softwares cater to the specific needs of the buyer wherefor he  is  required
to place definite orders on the manufacturer. It  is  also  not  in  dispute
that an operating software loaded on the hard disc is erasable. It  is  also
accepted that the operating software despite being loaded  on  to  the  hard
disc is usually supplied separately to the customers. It is also beyond  any
controversy that operating software can  be  updated  keeping  in  view  the
development in  the  technology  and  availability  thereof  in  the  market
without affecting the data contained in the hard disc. Concededly,  even  in
the case of hard disc crash the software contained in the CDs is capable  of
being reloaded on to the hard disc and its utility by the users remains  the
same. An operational software, therefore, does not form  an  essential  part
of the hardware.


84. In other words, computers  and  softwares  are  different  and  distinct
goods under the said Act having been  classified  differently  and  in  that
view  of  the  matter,  no  Central  excise  duty  would  be  leviable  upon
determination of the  value  thereof  by  taking  the  total  value  of  the
computer and software. So  far  as  the  valuation  of  goods  in  terms  of
“transaction value” thereof, as defined in Section 4(3)(d)  of  the  Act  is
concerned, suffice it to say that the said provision  would  be  subject  to
the charging provisions contained in Section 3  of  the  Act  as  also  sub-
section (1) of Section 4.  The  expressions  “by  reason  of  sale”  or  “in
connection with the  sale”  contained  in  the  definition  of  “transaction
value” refer to such goods which is excisable to excise  duty  and  not  the
one which is not so excisable. Section 3  of  the  Act  being  the  charging
section, the definition of “transaction value” must be read in the text  and
context thereof and not  dehors  the  same.  The  legal  text  contained  in
Chapter 85, as explained in Chapter Note 6, clearly states that a  software,
even if contained in a hardware, does not lose its character as  such.  When
an exemption has been granted from levy  of  any  excise  duty  on  software
whether it is  operating  software  or  application  software  in  terms  of
Heading 85.24, no excise duty can be levied thereupon indirectly as  it  was
impermissible to levy a tax indirectly. In  that  view  of  the  matter  the
decision in PSI Data Systems must be held to have correctly been rendered.”



10.   From the above, it clearly appears that, though  in  the  backdrop  of
different factual scenarios, two  Coordinate  Benches  (Three  Judges)  have
taken what would appear to be contrary views  with  regard  to  purport  and
effect and the interconnection between  Section  3  and  4  of  the  Central
Excise Act, 1944.



11.   In the above situation, we are of the  view  that  another  Coordinate
Bench should not venture into the issues raised and even attempt to  express
any opinion on the merits of either of  the  views  expressed  in  Union  of
India &  Ors.  Vs.  Bombay  Tyre  International  Ltd.  &  Ors.  (supra)  and
Commissioner of Central Excise Vs. Acer Ltd. (supra).  Rather, according  to
us, the questions referred should receive consideration of  a  Larger  Bench
for which purpose the connected papers may now be placed before the  Hon’ble
the Chief Justice of India for appropriate directions.



                                                          …….…………………………...J.
                                                              [RANJAN GOGOI]


                                                            ………………………………….J.

                                                               [ARUN MISHRA]

                                                            …………………………….……J.
                                                          [PRAFULLA C. PANT]

NEW DELHI;
MARCH 30, 2016.
-----------------------
[1]    (1984) 1 SCC 467
[2]    (2004) 8 SCC 173

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