The Hindu Business Line : A clear divide

Does software loaded on to a computer become part of the hardware? No, says this ruling, calling software a `distinct commercial commodity.' Read on for the rationale.

IT was about a year ago that the Supreme Court decided the Acer India case, where the question was whether software loaded onto a computer became part of the hardware. Computer and software are distinct and separate, the court had then said. Although a computer may not be capable of effective functioning unless loaded with software, the same would not tantamount to bringing software `within the purview of the part of the computer', read that decision.

Quoting the Acer ruling, Yokogawa India recently argued at the Bangalore Tribunal that its DCS (Distributed Control System) and software required for controlling the same are separate. "No," said the Excise officials, who had raised a duty demand for Rs 4.8 crore by lumping together software with DCS. An equivalent penalty too had been imposed on the company.

The company's advocate, K. Parameshwaran, submitted that software was supplied separately as a distinct commercial commodity and that the duty on software was nil. "Though the software is loaded in some cases at the time of conducting `factory acceptance test', still it is uninstalled and its supply does not become embedded or etched as part of the hardware," he explained. The Department's representative, L. Narasimha Murthy, "reiterated the findings in the orders of the original authority".

After hearing both sides, the Tribunal observed that the company supplied both hardware and software. The Acer decision `is squarely applicable to the present case' said T.K. Jayaraman, Tribunal Member, and ruled that software was `a distinct commercial commodity'. Accordingly, the value of software - both application and systems - is not includible in the value of DCS, ruled the Tribunal.

Power unit and mere chassis

A DIFFERENT dispute was engaging the attention of the Tariff Unit in the Department of Revenue of the Ministry of Finance till a few weeks ago. It was about separately importing computer casing and power supply unit, as one learns from Circular No. 39/2005 dated October 3.

Years ago, there was a Notification that spoke of a concessional duty of 5 per cent on "all parts of the machines of heading 8471, other than PPCBs, motherboards and power supply units". Where the computer casing/chassis was `pre-fitted with the power supply unit', it was not eligible for the benefit of the Notification and accordingly the rate of basic Customs Duty on the same used to be 15 per cent.

"However, some importers had imported the chassis and the power supply as separate units in the same consignment. These units were meant to be fitted together after the clearance thereof, but in the form as presented, these were not assembled," says the recent Circular, outlining the background to the clamour of these `separate' importers for the Notification's largesse.

Customs officials applied `Rule 2(a) of the General Rules for the Interpretation of the First Schedule' (a.k.a. GIR for General Interpretative Rules) to say that such imports were not eligible for concessional duty. Heading 8471, if you looked up in www.cbec.gov.in, reads: "automatic data processing machines and units thereof; magnetic or optical readers, machines for transcribing data on to data media in coded form and machines for processing such data, not elsewhere specified or included."

Okay, what's the decision of the Central Board of Excise and Customs a.k.a. the Board? "For the sake of denial of the benefit of a Notification, Rule 2 (a) cannot be invoked," it said. "It is clarified that the goods have to be classified in the form as presented and Rule 2 (a) of the GIR cannot be applied for the sake of allowing/disallowing the benefit of a Notification, unless the exemption Notification is based on classification of the item under a particular heading of the Customs Tariff."

Do I hear you mumbling `grrr... '?

Connect to BTS, BSC and MSC

SPICE Telecom imported radio terminals and cleared them, on payment of duty. Later, it came back to the Department asking for benefit under an old Notification, where there was exemption for BTS (base trans-receiver station) and its ancillary equipment.

The Customs officials, however, didn't see eye-to-eye with the company, because there was no one-to-one correspondence between the Notification and the item that was imported by Spice.

So, Spice argued, "the radio terminal links the BTS with the main switching centre, which in turn transfers the signals to other mobiles," as one reads in the Bangalore Tribunal's decision of May 20, reported in a recent issue of Excise Law Times.

"Without these radio terminals, the networking is not completed and switching from one mobile to another mobile is not possible," emphasised Spice. But that was in vain because `the original authority was not inclined to give the benefit of exemption Notification'.

When Spice appealed against the decision, the Commissioner (Appeals) studied the problem and held that the imported radio terminals could not be treated as BTS or its ancillary. The dispute then moved to the Tribunal.

For Spice, it was Rukmani Menon who argued, on the strength of technical literature, that radio terminals are part of BTS. "Even if they are not considered as parts, at least they should be treated as ancillary equipments," she submitted. For the Department, R.N. Vishwanath reiterated the points from the original order.

S.L. Peeran and T.K. Jayaraman, Tribunal Members, heard the case and explained how cellular network services work using microwave frequencies, under spectrum licence issued by the Wireless Processing Cell, a division of the Ministry of Communications. Frequency levels are distinguished and divided into specific spot frequencies for usage among cellular service providers, said the Tribunal.

In what may read as a primer, the text of the order educates how, in cellular telephony, the entire area is divided into cells, and how each area has a BTS.

"Several BTSs are controlled by one BSC (base station control). In turn, several BSCs are controlled by MSC (main switching centre). This is roughly the configuration of the cellular telephone system."

When a cell-phone is used, its first contact is with the nearest cell, and the BTS therein, explained the Tribunal. "The person using the cell is put in touch with the person receiving the call through the network, which connects the BTS in the cell of the caller to the BTS in the cell of the receiver."

To have interconnectivity, radio terminals are must, observed the Tribunal. It studied the technical literature and said that radio terminals and antennas are ancillary equipment of BTS.

"It is very clear that without the radio terminals there cannot be any interconnectivity between BTS and BTS or BSC or MSC," declared the Tribunal, and ruled that radio terminals "definitely qualify to be ancillary equipment for BTS."

Picture by K. Murali Kumar

Cases@TheHindu.co.in

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
More stork than fish?

Rebound in sight

Win some, lose some — but learn every time

A clear divide

`There's nothing called a free lunch!'

Some `open' muscle-building

Quiz

Make spreadsheets yield their secrets

Cartoon