V.K. Agrawal, Member (T)

1. The issue involved in this Appeal filed by M/s. Hewlett Packard India Pvt. Ltd. relates to classification of Note book Computer loaded with software.

2. Shri V Lakshmikumaran, learned Advocate, mentioned that the Appellants, engaged in trading of computers, imported computer Notebook loaded with the operating software; that a "Computer loaded with the operating software invariable accompanies the Notebook; that the CD is used to reload the software in case of a crash of the computer or in case the software gets corrupted; that in Bill of Entry dated 1.9.2003, they indicated the configuration of the Notebook and declared the assessable value as US $ 775.02 under sub-Heading 84713010 of the first Schedule to the Customs Tariff Act; that since Microsoft disc, they separately indicated the software and declared its assessable value as US $ 146. He, further, mentioned that the Assistant Commissioner, under Order-in-Original No. 7/2003 dated 23.10.2003, classified the Notebook alongwith the Hard Disc Drive with software under sub-Heading 8471.3010 and assessed to duty accordingly, confiscated the impugned with an option to redeem the same on payment of fine and imposed penalty which has also been upheld by the commissioner (Appeals) under the impugned order on the ground that Note 6 to Chapter 85 of the Customs Tariff, has been amended in 2002 and therefore, any Order or Decision based on the pre-amended Note 6 would not apply and that the whole assembly of the Hard Disc Drive containing a number of hardware and software components is an integrated storage unit and similarly the entire Notebook computer with all its Hardware and software components, specifically including the operating system software, merit classification as an integrated whole and since the Notebook Computer can not be used without an operating System Software, by virtue of Boards Circular 51/2002 dated 12.8.2002, the whole Notebook Computer is classifiable in accordance with general Interpretative rule 3 (b) under one single Heading No.84.71.

3. The learned Counsel submitted that the issue has been settled by the Supreme Court in the case of CCE v. PSI Data System, (1997 (39) ELT 3 (S.C) wherein the Supreme Court has held that the value of the Software in the form of floppies, CSs, etc. is not to be included in the value of the Computer since the software is distinct and is to be assessed separately; that the Supreme Court has held that "a computer and its software are distinct and separate is clear, both as a matter of commercial parlance as also upon the material on record. A computer may not be capable of effective functioning unless loaded with software such as discs floppies and CD roms. But that is not to say that these are a part of the computer or to hold that, if these are sold along with the computer, their value must form part of the assessable value of the computer for the purpose of excise duty." He contended that this decision was rendered by the Apex Court dehors the existence of Note 6 to Chapter 85 even though the said Note was referred to in the decision; that Note 6 to Chapter 85 clearly mandates that records, tapes and other media of Heading 85.23 or 85.24 remain classified in these Headings when presented with the apparatus for which they are intended; that in the case of Barber Ship Management (I) Pvt. Ltd. v. CC ACC, Mumbai (: 2000 (117) ELT 456 (T), the Tribunal after examining the HSN Notes, Chapter Notes, etc. came to the conclusion that hard disc would be classified under Heading 84.71 till such time no software is loaded and that once software is loaded on it the same would be classified under Heading 8524 even if it is a part of the system; that this decision has been affirmed by the Supreme Court as reported in (2002 (144) ELT A 293) relying upon the decision in the case of Sprint R.P. G India Ltd. v. CC (116) ELT 6 (SC). He, further mentioned that before its amendment, Note 6 to Chapter 85 referred to the "apparatus" for which the media was intended; that even after amendment, Note 6 refers to the "apparatus" and "media", that the object of amendment in Note 6 has been explained in Boards Circular No.51/2002-Cus, dated 12.8.2002; that "the objective of amendment was to restrict the coverage of software contained in media under CTH 85.23 or 85.24 only to such of these software which is presented alongwith the apparatus for which it is intended"; that accordingly the amendment in Note 6 does not make the decided case laws non-applicable; that this has been explained in the Explanatory Note of HSN which mentions that "Records, tapes and other media of Heading 85.23 or 85.24 remain classified in those Headings when presented together with the apparatus for which they are intended (e.g., a video cassette presented with a video player). The learned Advocate also relied upon the judgment in CCE, Pondicherry v. Acer India Ltd. (2004 TIOL 81-S C CX LB). Finally, he contended that since the Chapter Note read with the HSN Explanatory Notes make it clear that software whether recorded on CDs or the media on which the software is recorded would be classified under sub-Heading 8524.91, the appropriate values have to be mentioned separately; that confiscation under Section 111 (m) of the Customs Act is tenable only when the value declared does not correspond with the entry made under the; that as in the present matter, the Revenue has not disputed the correctness of the value and has disputed only separate classification of software, provisions of Section 111(m) are not applicable; that the penalty imposed under Section 112 of the Customs Act is also not sustainable.

4.1 Countering the arguments, Shri R.C. Sankhla, learned Senior Departmental Representative, submitted that after the amendment of Note 6 to Chapter 85, software is to be classified alongwith the hardware only; that the plain meaning of the language used in Note 6 has to be adopted for the purpose of interpretation; that Note 6 before and after amendment reads as under:

(i) Before Amendment

"Records, tapes and other media of Heading 85.23 or 85.24 remain classified in those Heading," whether or not they are presented with the apparatus for which they are intended."

(ii) After Amendment

"Records, tapes and other media of heading 85.23 or 85.24 remain classified in those Headings when presented with the apparatus for which they are intended. This Note does not apply to such media when they are presented with articles other than the apparatus for which they are intended."

4.2 The learned Senior Departmental Representative contended that in amended Note coma (,) is missing after the words "in those Heading"; that his makes it clear that the Record, tapes and other media are to be classified in those Heading in which the apparatus for which they are intended fall; thus the impugned Order is justified and merits no interference.

5.1 We have considered the submissions of both the sides. We agree with the learned Advocate that the amendment in Note 6 to Chapter 85 of the Customs Tariff has not affected the classification of "Records, tapes and other media of Heading 85.23 or 85.24". They remain to be classified in those Headings i.e. 85.23 or 85.24 when presented with the apparatus for which they are intended. The change brought out by the amendment is that after amendment they should be presented with the apparatus for which they are intended. In case the media is presented with articles other than the apparatus for which they are intended, Note 6 will have no application. General Explanatory Notes of HSN for Chapter 85 gives the following example for the said situation - "materials for use in instructing children in mathematics consisting of an instruction video cassette, an instructional workbook and small calculating machine". The Explanatory Notes also provides the guideline for classification "When the media are presented with articles other than the apparatus for which they are intended." The Explanatory Notes also provides the guideline for classification "When the media are presented with articles other than the apparatus for which they are intended." The classification principles, mentioned in General Explanatory Notes, are as under:

"(i) If the media and other articles make up a set put up for retail sale under General Interpretative Rule 3 (b), the set should be classified by application of that Rule; or

(iii) If the media and the other articles do not make up a set put up for retail sale under General Interpretative Rule 3(b), then they should be classified separately in their own appropriate Headings."

5.2 It is thus apparent from these Explanatory Notes of HSN that if the media is presented with the apparatus for which they are intended, they remain classified in Heading 85.23 or 85.24 Boards Circular No.51/2002-Cus, dated 12.8.2002 also makes it very clear. The question addressed in the said Circular was whether "software imported alongwith the equipment or apparatus would need to be classified alongwith the equipment/apparatus and duty charged at the rate applicable to the equipment/apparatus." The Circular explained as under:

"It appears that the doubt has been raised on account of the words, "those Headings" mentioned in Chapter Note 6 to Chapter 85 of the Customs Tariff. A plain reading of Note 6 as it stands, makes it amply clear that the reference to "those Heading" in this Chapter Note refers to Headings "85.23 or 85.24" and not to the Headings of the equipment/apparatus. Therefore, the question of software being classified under Headings/ sub Headings applicable to equipment/apparatus for which it is intended does not arise. A comparison of the revised Chapter Note 6 with the Chapter Note 6 as it stood prior to the amendment would reveal that the objective of the amendment was to restrict the coverage of software contained in media under CTH 85.23 or 85.24 only to such of those software which is presented along with the apparatus for which it is intended. Prior to the amendment, regardless of whether or not such software was intended for the apparatus along with which it was presented, the classification remained under CTH 85.23 or 85.24.

4. This aspect is clear from the remarks column of the Correlation Table which compares the changes between the HS 1996 and HS-2002 version. It states that

"Records, tapes, etc. presented with articles other than the apparatus for which they are intended can be classified with these articles if they constitute a set".

Hence it is evidently clear that the revision in the above Chapter Note was effected keeping in view the situations where recorded media (audio cassette, video cassette, software on floppy/CD, etc.) was imported along with merchandise for which it is not intended, eg. a book, which as a set would form educational material for retail sale. The earlier Chapter Note posed difficulty in classifying such goods. The amendment has been effected to solve this difficulty."

6. Recently, the Supreme Court in Acer Ltd., supra, has held that in terms of Chapter Note 6 of Chapter 85, "a software retains its character irrespective of the fact as to whether it is sold with the apparatus, viz. the computer. Once it is held that the essential characteristic of a software is not lost by reason of its being loaded in the hardware; having regard to the different sub-Heading contained in different Chapter of the Tariff Act, the intent and purport of the legislature, in our opinion, can not be permitted to be withered away only because the information contained in a software are loaded in a hardware." Accordingly, we hold that the software imported in the present case along with Computer Notebook has to be assessed separately in terms of Note 6 to Chapter 85 since it is not in dispute that the software has been presented with the apparatus for which they are intended. In view of this, we set aside the confiscation of the impugned goods and penalty imposed on the Appellants.