Holding

The imported goods are to be classified under heading 85.24 and are assessable at the rate of 10% duty.

Summary

The appellant imported seven hard disk drives pre‑loaded with computer software. Customs classified the consignment under heading 84.71 of the Customs Tariff Act, 1975, attracting a 25% duty, whereas the appellant contended that the goods should fall under heading 85.24, attracting only 10% duty as computer software. The Central Excise, Customs and Gold (Control) Appellate Tribunal upheld the 84.71 classification. On appeal, the Supreme Court examined the nature of the goods, applied the General Rules of Interpretation, and considered the essential character and value of the software versus the hardware. It held that the consignment’s essential character was software, covered by the specific heading 85.24, and that Chapter Note 5(B) of Chapter 84 does not apply when a specific heading exists. Consequently, the Court allowed the appeal, directing that duty be levied at 10% under heading 85.24.

Issues considered

Whether customs duty on imported computer software loaded on a hard disk drive should be levied under heading 84.71 (hard disk) or heading 85.24 (computer software).

Legislation cited

Customs Act, 1962s. section 25
Customs Tariff Act, 1975

Subjects

customs dutyclassificationcomputer softwarehard disk drivetariff headingessential characterGeneral Rules of InterpretationNotification 59/95Chapter 85Chapter 84

Judgment

A SPRINT R.P.G. INDIA LTD.
v.
COMMISSIONER OF CUSTOMS-I, DELHI

JANUARY 20, 2000

B (B.N. KIRPAL A."ID M.B. SHAH, JJ.J

Customs Tariff Act, 1975: Headings 85.24 and 84.71.

Customs Tari~omputer software loaded on a hard disk drive-Clas-
e sification of-Heading 85.24 or 84.71-Held : Classifiable under Heading
85.24 and not under Heading 84.71-Hence, assessable @ 10% and not @
25o/u--General Rules for Interpretation of Sch. [, Rr. 2(b ), 3 and 4--Chapter
85 Chapter Note 6- Notification No. 59(95-Cus dated 16.3.1995.

Chapter 84--Chapter Note 5(B)(b) and (c)-Applicability of-Held:
D Not applicable if a specific Heading covered the goods in question.

The appellant-assessee imported seven pieces of hard disk drive
loaded with software. The customs duty on hard disk drive is leviable
under Chapter Heading 84.71 of the Customs Tariff Act, 1975 at the rate
of 25% and on a computer software It is at the rate of 10% as per the tariff
E Heading 85.24 read with notification No. 59/95-Cus dated 16.3.1995. The
respondent- Revenue sought to classify the said goods under tariff Head-
ing 84.71 by relying on Rules 2(b), 3 and 4 of the Generat Rctes for
Interpretation mentioned in the First Schedule to the Act. The Central
Excise, Customs and Gold (Control) Appellate Tribunal held that the
p goods would be taxable under the Heading 114.71 and not under the
Heading 85.24. Hence this appeal.

The following question arose before this Court :

"Whether custom duty on imported computer software loaded on a
G 'hnrd dis!t drive' is to be levied on the basis of 'hard dis!t' simplicitor or
'computer software'?

Allolling the appeal, this Court

HELD : 1. Hard disk is a refined form of Ooppy and serves the same
H purpose of recording material in a more efficient way. The moot difference
332
SPRINT R.P.G. INDIA LTD. v. COMMR. OF CUSTOM-I 333

betv;een the hard disk and the software is that a hard disk is a hardware A
whereas software is a representation of any type of data and which can be
stored in the hard disk. Admittedly, a floppy on which software is stored
would be taxable under Tariff Heading 85.24 of the Customs Tariff Act, ·
1975. Instead of storing the software on the floppy if it is stored on a hard
disk drive, it would not cease to be a software. [337·G]
B
"Modem All About Hard Disk Drive" (BPB Publications) and Stephen
!. Dougherty; "PC Power Boosting Your PC's Performance·; referred to.

2. As per Item 2 of Notification No. 59/95-Cus dated 16.3.1995 the
rate of duty is 25% for hard disk drive or floppy disk drive covered by
Heading 84.71. As against this, for computer software, if it falls under
c
Chapter 49 or under Heading No. 85.24, the rate would be 10%. If
simplicitor hard disk drive is imported, it may be taxable under the
Heading 84.71. However, in a case where essentially a software is imported
which is loaded on a hard disk drive, it would be computer software
material and in that set of circumstances, it would be taxable under D
Heading 85.24. This is also made clear in Chapter Note 6 of Chapter 85.
[338-G·H]
3. Testing the case from Rules 2, 3 and 4 of the General Rules for
Interpretation of Schedule I to the Customs Tariff Act, 1975 it would be
clear that the disk or floppy on which computer data is recorded, would be E
covered by Heading 85.24. i''urther, con~idering imported goods to be a

1
'
I
mixtcre of two substances namely 'bard disk drive' and 'software' as per
Rule 3(b) they can In classified under the Heading which gives them their
essential character. In the present case, considering its price factor it would
be computer software. The price of the imported consignment was ap·
proximately Rs. 68 Iakhs. As against this, value of the seven bard disk F
drives would be roughly Rs. 60,030; that is to say, value of the computer
sofrnare is hundred times more than its containers hard disk. Hence, the
essential character of the imported goods is computer software. [340-C·E]

4. The consignment in question is essentially a computer software G
covered by a specific Heading No. 85.24 and, therefore, clauses (b) and (c)
of Chapter Note 5(B) of Chapter 84 of the Act are not applicable. (347-B]

5. The computer software imported by the appellant on a bard disk
drive is assessable at the rate of 10% as per Heading 85.24 read with the
Exemption Notification No. 59/95-Cus dated 16.3.1995 because what was H
334 SUPREME COURT REPORTS [2000] 1 S.C.R.
A Imported by the appellant was scftware on a hard disk and it was not hard
disk in the garb of solhrnre. [341 ·E]

PSI Data Systems Ltd. v. CCE, (1997) 89 ELT 3 (SC), referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5582 of
B 1999.

From the Judgment and Order dated 14.5.99 of the Central Excise
Customs & Gold (Control) Appellate Tribunal, New Delhi in C/A. No.
161/96-B2 in F.O. No. 103 of 1999-B2.
c Joseph Vellapally, V.P. Goyal, Sunil Goyal and Sanjeev Malhotra for
the Appellant.

Altaf Ahmed, Additional Solicitor General, K. Swami, Ms. Smita
Inna and P. Parmeswaran for the Respondent.
D
The Judgment of the Court was delivered by

SHAH, J. Appeal admitted.

The short question involved in this appeal is whether custom duty on
E imported computer software loaded on a 'hard disk drive' is to be levied
on the basis of 'hard disk' simplicitor or 'computer software'. Goods
imported by the appellant were examined on 9th Augu:;t, 1995 and were
follll.d to be seven pieces of hard disk drive loaded with software. As per
the department, custom duty on hard disk drive is leviable under Chapter
Heading 84.71 at the rate of 25% and on a computer software it is at the
F rate of 10% as per the tariff Heading 85.24 read with notification No. 59/95
dated 16.3.1995. It is admitted fact that total value of the consignment was
Rs. 67,75,119 for seven hard disk drives having software loaded thereon.
Value of the hard disk simplicitor would be roughly at the most Rs. 6()CC().
The relevant headings of the Chapter are as under :

G "84.71 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.
H 8471.70 Storage units. 5%
v

SPRINT R.P.G. INDIA LTD. v. COMMR. OF CUSTOM-I (SHAH, J.] 335

8471.80 Other units of automatic data processing A
machines. 20%
8471.90 Other 20%
85.23 Prepared unrecorded media for sound recording or similar
recording of other phenomena, other than products of
Chapter 37. B
- Magnetic tapes.
---- 85.24 Records, tapes and otlier recorded media for sound or
other similarly recorded phenomena, including matrices
/
_)
and masters for the production of records, but excluding
products of Chapter 37.
c
8524.10 Gramophone records. 40%
- Discs for laser reading systems;
852431 For reproducing phenomena other than sound
or image. 25% D
8524.40 Magnetic tapes for reproducing phenomena
other than sound or image. 25%
- Other magnetic tapes.
8524.99 Others 40%" E
The Tribunal arrived at the conclusion that as the software was
loaded on a hard disk, it would remain to be a hard disk drive on which
softwm-e was loaded and, therefore, alongwith Chapter Note 5(A) and (B)
of Chaplt:r 84, it would be hard disk drive loaded with software and would
be taxable under the Heading 84. 71 and not 85.24. The Tribunal considered F
the decision of this Court in PSI Data Systems Ltd. v. Collector of Central
)
Excise, (1997) 89 ELT 3 SC and observed that it would not be applicable
/
to the facts of the present case.
'.
_j
For understanding of computer software and the hard dis!t, learned G
counsel for the Customs has produced on record some extracts from
'Modem All About Hard Disk Drive' of BPB Publitlltions, which reads as
under:

'Today Hard Disk Drives are the most common storage device
used with the computer system. The hard disk drive is also known H
336 SUPREME COURT REPORTS [2000) 1 S.C.R.
A as Hard Disk, Hard Drive, Fixed Disk Drive or Winchester Disk
Drive. The hand disk drive is used to store data and programs
permanently inside the computer. The information stored in the
hard disk drive does not get erased when the power supply to the
computer is switched off.

B This device is known as "Hard Disk Drive" because compared
to the other common magnetic storage device, floppy disk, which
uses flexible plastic like carrier for the magnetic recording
medium; the hard disk drive uses rigid, hard, aluminium or glass
as the base for recording medium.
c xxxx xxxx xxxx

Information is stored in the hard drive using the same magnetic
recording method, which is used to store songs on an audio tape
or movies on a video tape. The audio or video tape does not lose
D its content when the power supply given to the audio or video
recorded is switched off, same way the hard drive also retains the
information stored in it, even when the power supply to the hard
drive is switched off."

E He has also pointed out the extract from 'PC Power Boosting Your
PC's Performance' written by Stephen J. Dougherty wherein 'hard disk' is
given meaning as under :

"Hard disk. A data storage device that stores the data on metal
disks that have a magnetic coating. Hard disk drives provide faster
F access and larger storage capacities than diskettes. Sometimes
referred to as a fixed disk. '
\
He further submitted that he has received information from the \
Deputy Commissioner (Customs), Air Cargo, New Delhi, as per the letter I
G which is produced on record which points out that in nutshell, a hard disk \__

is one of the devices used in the Computer Systems. Its function is to store
the data, instructions, sound images etc. including source code and object
code. The moot difference between the hard disk and the software is that
a hard disk is hardware whereas software is a representation of any type
of data and which is stored in the hard disk. Similarly, as per the Internet
H information received by Customs, 'a hard disk" is really at set of stacked
SPRINT R.P.G. INDIA LTD. v. CUMMR. OF CUSTOM-I [SHAH, J.J 337

"disks", each of wh.ich like phonograph n.:cords, has data recorded A
electromagm:ticaHy in concentric circles or ''trades" on the disk. A "head"
(something like a phonograph arm but in a relatively fixed position) records
(writes) or reads the information on the tracks.

In the present case, what is imported by the appellant is hard disk B
drive loaded with software material. Heading 84. 71 apparently covers
automatic data processing machines and units thereof and magnetic or
optical readers not elsewhere specified or included. It is to be stated that
heading 85.23 deals with prepared unrecorded media for sound recording
( or similar recording of other phenomena, which includes magnetic tapes.
~ As against this, heading 85.24 covers records, tapes and other recorded C
media for sound or other similarly recorded phenomena which covers
gramophone records or magnetic tapes for reproducing phenomena. That
software material is admittedly classifiable under Tariff Heading No. 85.24
which provides for trucing records, tapes and other recorded media for
sound or other similarly recorded phenc'mena. The difference between the D
hard disk drives and magnetic storage devices or floppy disks is only with
regard to the use of rigid, hard, aluminium or glass as the base for
recording medium. What is covered by the said heading is recorded tapes,
magnetic tapes or other similar recordt:d phenomena. As per the literature
supplied by the department, hard disk drive is used to store data and
programs permanently insidt: the computer. The difference between hard E
disk drive and common magnetic storage device er floppy disk is the base
for recording medium. It also provides faster access and larger storage
capacity; its function is to store the data instructions, sound images etc.
and it is like phonograph records. Floppy disk uses flexible plastic like
carrier for magnetic recording medium. Information is stored in the hard p
disk drivt: using the same magnetic recording method which is used to store
songs on an audio tape or movies on a video tape. Therefore, hard disk is
a refined form of floppy and serves the same purpose of recording material
in more efficient way. The moot difference between the hard disk and the
software is that a hard disk is a hardware whereas software is a repre-
sentation of any type of data and which can be stored in the hard disk. G
There is no dispute that floppy on which software is stored would be
taxable under Tariff Heading 85.24. Instead of storing the software on the
floppy if it is stored on a hard disk, it would not cease to be a software.
As stated above, it is an information stored in the hard disk drive using
magnetic recording method. H
338 SUPREME COURT REPORTS [2000) 1 S.C.R.
A Further, the Central Government by its Notification No. 59195-CUs.
dated 16th March, 1995 provided exemption to the computer equipments
which reads as under :

"In exercise of the powers conferred by sub-section ( 1) of
section 25 of the Customs Act, 1962 (52 of 1962), the Central
B Government, being satisfied that it is necessary in the public
interest so to do, hereby exempts the goods specified in column
(3) of the Table hereto annexed and falling within Chapter or
under heading No. or sub-heading No. of the First Schedule to the
Customs Tariff Act, 1975 (51 of 1975), specified in the correspond-
\
c ing entry in column 92} of the said Table, when imported into 4
India, from so much of that portion of the duty of customs leviable
thereon which is specified in the said First Schedule, as is in excess"
of the amount calculated at the rates specified in the corresponding
entry in column (4) of the said Table.
---- ---· ·---
D SI. Chapter Description Rate of Duty
No or heading of goods
No. or sub-
heading No.
-- - - .
(1) (2) (3) (4)
E -------·
l. 84.71
·------·
All goods other than 40% ad valorem
Hard disk drive and
Floppy disk drive.
2. 84.71 Hard disk drive or 25% ad valorem
Floppy disk drive
F
3. 8473.30 All goods. 35% ad valorem
4. 49 or Computer software 10% ad valorem
85.24

As per Item 2 of the above notification rate of duty is 25% for hard
G disk drive or floppy disk drive covered by heading or sub-heading 84.71.
As against this, for computer software if it falls under Chapter 49 or under
Heading No. 85.24, the rate of duty would be 10%. If simplicitor hard disk
drive is imported, it may be taxable under the Heading 84.71. HowevP-r, in
a case where essentially a software is imported which is loaded on a hard
H disk drive, it would be computer software material and in that set of
SPRINT R.P.G. INDIA LTD. v. COMMR. OF CUSTOM-I [SHAH, J.J 339

circumstances, it would be taxable under Heading 85.24. This is also made A
clear in Chapter Note 6 Chapter 85 by providing as under :

"Records, tapes and other media of heading No. 85.23 or 85.24
remain classified in those headings, whether or not they are
presented with the apparatus for which they are intended."
B
Mr. Swami, learned counsel for the respondent relied upon the Rules
of Interpretation mentioned in the First Schedule appended to the Customs
Tllriff Act which lay down general Rules for the interpretation and clas-
sification of goods for import tariff. Rules 2(b), 3 and 4 read as under :

, "2(b) Any reference in a heading to a material or substance
c
shall be tal:ten to include a reference to mixtures or
combinations of that material or substance with other
lllilterials or substances. Any reference to goods of a
given material or substance shall be taken to include a
reference to goods consisting wholly or partly of such D
material or substance. The classification of goods con-
sisting of more than one mati:;rial or substance shall be
according to the principles of rule 3.

3. When by application of rule 2(b) or for any other E
reason, goods arc, prima facie, classifiable under two
or more headings, classification shall be effected as
follows:

(a) The heading which provides the most specific description
shall be preferred to hemdings providing a more general dcscrip- F
tion. However, when two or more headings each refer to part only
of the materials or substances contained in mixed or composite
goods or to part only of the items in a set put up for retail sale,
those headings are to be regarded as equally specific in relation
to those goods, even if one of them gives a more complete or G
precise description of the goods.

(b) Mixtures, composite goods consisting of different materials
or ma.de up of different components, and goods put up in sets for
retail sale, which cannot be classified by reference to (a), shall be
classified as if they consisted of the material or component which H
340 SUPREME COURT REPORTS (200011 S.C.R.
A gives them their essential character, insofar as t~ criterion is
applicable.

(c) When goods cannot be classified by reference to (a) or (b),
they shall be classified under the heading which occurs last in
numerical order among those which equally merit consideration.
B
4. Goods which cannot be classified in accordanct with the
above rules shall be classified under the heading appropriate
to the goods to which they an: most akin."

Testing it from the aforesaid Rules of Interpretation, it would be
C clear that the disk or a floppy on which computer data is recorded, would
be covered by heading 85.24. Rule 3(a), inter- alia, provides that when two
or more headings each refer to part only of the materials or composite
goods, those headings are to be regarded as equally specific in relation to
those goods, even if one of item gives a more complete or precise descrip-
D tion of the goods. Further, considering imported goods to be a mixtun: of
two substances namely 'hard disk drive' and 'software' as per Rule 3(b)
they can be classified under the heading which gives them their essential
character. In the present case, considering its price factor it would be
computer software. The price of the imported consignment was ap-
proximately Rs. 68 Wchs. As against this, value of the computer seven hard
E disk drives would be roughly Rs. 6CCCO that is to say, value of the computer
software is hundred times more than its containers hard disk. Hence, the
essential character of the imported goods is computer software.

Mr. Swami, learned counsel for the respondent further referred to
F Chapter Note 5 of Chapter 84 and submitted that for the purposes of
Heading No. 84.71, the expression "automatic data processing machine"
means automatic data processing machines or a unit as being a part of a
complete system if it meets the following conditions :

(a) It is of a kind solely or principally used in an automatic data
G processing system;

(b) It is connectable to the central processing unit either directly or
through one or more other units; and

(c) It is able to accept or deliver data in a form (codes or signals)
H which can be used by the system.
SPRINT R.P.G. INDIA LTD. v. COMMR. OF CUSTOM-I (SHAH, J.] 341

He referred to clauses (b) and (c) and contended that this hard disk A
drive can be used either directly or through one or more other units for
processing the data and, therefore, it would be automatic data processing
machine falling under Heading No. 84.71. This submission cannot be
accepted for the consignment in question is essentially a computer software
covered by specific Heading No. 85.24 which is for levying duty on records,
tapes and other recorded media for sound or other similarly recorded B
phenomena. As mentioned in the Notification dated 16th March, 1995,
~. computer software is covered by Heading No. 85.24. The said notification
also covers computer software imported in the form of printed books,
I
pictures, manuscripts and typed scripts covered by Chapter 49. Computer
/ software can be brought either on a floppy or magnetic tape or on a hard C
disk or in a printed form and hence, what is imported is software on a
container which is a hard disk drive. The value of the containers (hard
disks) approximately in the present case is Rs. 6GXO or Rs. 65CZ>. As
against this, the cost of the computer software is roughly Rs. 67 lakhs.
Therefore, it can be said that whil;t is imported by the appellant is essen- D
tially a computer software.

In this view of the matter, the order dated 25th March, 1996 of the
Commissioner of Customs and the order dated 14th May, 1999 of the
Tribunal confirming the said order in Appeal No. 161/96-82 are quashed
and set aside. It is held that computer software imported by the appellant E
on a hard disk drive is assessable at the rate of 10% as per Heading 85.24
with the Exemption Notification stated above because what was imported
by the appellant was software on a hard disk and it was not hard disk in
the garb of software.

In the result, the appeal is allowed accordingly with no order as to F
costs.
_/
v.s.s. Appeal allowed.