The Hindu Business Line : Going round in a `circular'

THE 1996 decision in the PSI Data Systems Ltd case raised too many doubts in the minds of computer companies on the valuation of computer systems sold along with software. So, the Central Board of Excise & Customs thought it fit to issue a Circular to clear the cloud.

Circular No.644/35/2002-CX dated July 12, 2002 classified software into two types: "One is the `systems software' or `operating software' which is designed to control the operation of the computer system. The other software is the application software which is developed for specified applications only." There is also a third category of software, the Circular added. It is "the `firm software' or `basic software' which is generally burnt into the hardware itself."

What does this do? "The `basic software' enables a computer to read into itself from peripheral devices and includes vocabulary of basic instructions such as add, subtract, increment, document, etc."

For Excise valuation, the Lakshman Rekha is July 1, 2000, because the concept of transaction value takes over since then. Thus, the circular clarified that for period prior to July 1, 2000, as held in the PSI Data System Ltd case, the value of computers under heading of the Central Excise Tariff, would not include the value of the software supplied, in the form of floppies, discs, tapes, along with the computer.

What about `firm software' etched on the hard disc of the computer? Would it form part of the assessable value of the computer? This was not decided by the apex court in the PSI case where the issue was more about software in the form of discs, floppies and so forth. CBEC's Circular inferred therefore: "By implication it can be said that the Supreme Court approved the inclusion of the etched software in the value of the computer system."

As per Central Excise Law, valuation of goods is to be done in the form in which it is cleared, observed the Circular. "For the period prior to July 1, 2000 computer systems will be valued by including the value of the software already etched or burnt or loaded on the hard disc of the system. No distinction should be made between an `operating software' or an `application software' in this regard. If the computer is sold loaded with a software, the value of the software will be included in the value of the computer. Any floppy, disc or tape containing any software supplied along with the computer system will, however, be assessed separately."

On whether the introduction of transaction value concept changes the position, the Circular clarified that it did not. "In other words, for the period July 1, 2000 onwards also the same system of valuation of computer system is to be adopted so far as inclusion (or exclusion) of software is concerned."

That perhaps vindicated the stand of computer manufactures to thus far exclude the value of software supplied in floppies and other media from the valuation of hardware. And the Acer decision now sets a cat among the pigeons by including the price of all software in the value of computer.

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