The Hindu Business Line : Picking on the kernel...

The Digital Globalsoft Ltd versus Commissioner of Customs case that came up before the Bangalore tribunal was over a `kernel' the taxman picked out of the goods imported.

THERE can be no kernel in this light nut, writes the Bard in All's Well That Ends Well. Elsewhere in the same play, you'd hear of somebody getting "beaten in Italy for picking a kernel out of a pomegranate."

Here is a case that may seem a not so hard nut to crack: Digital Globalsoft Ltd vs Commissioner of Customs, that came up before the Bangalore tribunal. Only, it had a `kernel' that the taxman was picking, out of the goods imported.

Digital said that the kernel came under sub-heading 8473.30 of the Customs Tariff, as `Parts and accessories of the machines of heading 8471'.

This heading 8471, as you can see on www.cbec.gov.in, is titled "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."

The Customs officials were of the view that the goods imported by Digital should be classified under 8471.91 as `Digital Processing Unit'. On appeal, the Commissioner too concurred with the officials' view, though the other items imported with kernel were classifiable under Chapter Heading 84.71. Aggrieved, therefore, Digital approached the tribunal, challenging the Commissioner's order.

Heart of the kernel

"The kernel consists of a power supply unit, motherboard and other connectors housed inside a metal box," notes the text of tribunal's order. To make the kernel a full-fledged computer, other items such as RAM (Random Access Memory), floppy disk drive (FDD) or other storage units (hard disk drive) are required, it adds. "There is value addition to the extent of 42 per cent to 92 per cent between the kernel and the automatic data processing machine."

Tribunal members S.L. Peeran and T.K. Jayaraman noted that the department has not been consistent with regard to the classification of kernel. "In the past, the department classified the item under 84.73 only. However, when there was a change in rate of duty in March 1994, the department sought to re-classify the kernel under 84.71."

Digital's advocate G. Shivadass explained that the Department had incorrectly applied a logic that would apply "only if a machine consisting of individual components whether interconnected or not is presented as a unit for assessment". In this case, the kernel merely consisted of a power-supply unit, motherboard and other connectors, he pointed out.

"All these do not contribute to the well-defined function of the automatic data processing machine. Only when RAM, FDD and HDD are added, the well-defined functions can be performed," argued Shivadass. Among the other points highlighted by the company were the following:

Kernel in the absence of memory modules and storage units cannot be called `unit', in view of Chapter notes in the Tariff.

Clarification from the Department of Electronics (DoE) in 1994 that the kernel assembly is classifiable under 84.73 and not 84.71.

Departmental letter of 1998 that computer kernels are classifiable under 8473.30.

Opinion of MAIT on the issue supporting the stand of the company.

Classification of similar product in the UK, as contended by the company.

"I live a day at a time," says Barbara Jordan. "Each day I look for a kernel of excitement. In the morning I say: `What is my exciting thing for today?' Then, I do the day. Don't ask me about tomorrow," she elaborates. Be warned, however, that tax cases may not be that exciting, even when talking about kernel. Let us, therefore, patiently study two of the documents referred to by Digital.

Documents relied upon by Digital

The 1994 communiqué from the DoE explained, "Kernel assembly consists of the following parts: CPU board without memory, power supply, pedestal assembly, packing box, clamp screws, and so on." The pedestal assembly basically is an electronic assembly, which is used for connecting the input output devices and peripherals, explained the DoE.

"The sub-assembly is to be used for assembling computer system VAX 5500. Therefore, basically it consists of three electronic assemblies, namely, motherboard, power supply and pedestal assembly. There is no input and output device assembly built in or attached to the above-mentioned three assemblies and the CPU motherboard does not have memory board. It is a socket for adding memory modules." That is something to stir up the nostalgia of the old-timers.

The 1998 missive from the Tariff Unit (of the Department of Revenue, Ministry of Finance) noted that computer inner and outer cabinets consisting of motherboard, base memory, power supply unit, floppy disc drive, all assembled in the housing are classifiable as parts of computer under 8473.30.

No `units'

Without RAM, memory module and storage devices, the goods in question could not be considered `units' under Chapter 8471, observed the tribunal. "The opinion of the Department of Electronics and also the clarification given by the Ministry cannot be easily brushed aside," stated the tribunal, before ruling that the items be classified under 8473.30, as contended by the company.

Digital may be happy that all's well that ends well. The moral of the story is that the taxman does often see something different from what the assessee sees.

The variance may occasionally be so outlandish that you may seek comfort from the following dialogue snatch off Act II, scene I, The Tempest, between Sebastian and Antonio: "I think he will carry this island home in his pocket and give it his son for an apple." "And, sowing the kernels of it in the sea, bring forth more islands."

Plant a kernel of wheat and you reap a pint; plant a pint and you reap a bushel, says Anthony Norvell, to explain that the law always works to give you back more than you give. Perhaps, tax laws are an exception to Norvell's norms.

Picture by M. Balaji

Cases@TheHindu.co.in

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