Is an imported computer hard disc with software subject to customs duty ashardware or software. This issue arose before the Supreme Court in the caseof Sprint RPG India Ltd. Vs Commissioner of Customs-I, Delhi. Justice MBShah sitting with Justice BN Kirpal has declared that hard disc withsoftware is subject to the import duty of software. This is a bonanza forsuch importers since the import duty on hardware is 25 per cent and onsoftware it comes to 10 per cent only. The company imported on August 9, 1995 seven pieces of hard disk driveloaded with software. The choice before the customs authorities was two-fold. One, to subject the imports under tariff head 84.71 of the CustomsTariff Act 1975 as "automatic data processing machines and units thereof andlevy an import duty of 25%''. Two, to treat the imports as. "recorded media"under tariff head 85.24 and then in terms of the exemption notificationdated March 16, 1995 levy a customs duty of ten per cent only. The customs authorities treated the imports as hardware under tariff head84.71 and levied duty of 25 per cent. CEGAT confirmed the order of thecustoms. Accordingly, the company appealed to the Supreme Court. Since the March 16, 1995 exemption notification levied 25 per cent advalorem duty on "Hard disk or floppy disk drive" and only 10 per cent advalorem on "computer software" the apex court took the route of finding outthe position of a floppy with software. It held on the basis of BPB publication, "Modern All about Hard Disk Drive"and Stephen J Dougherty's "PC Power Boosting Your PC's Performance" that ahard disk is only a "refined form of a floppy". Both the floppy and the harddisk record data. But the floppy does it on flexible plastic whereas thehard disk does it on hard aluminium or glass. The hard disk has greaterrecording and storage capacity than a floppy. It also stores the datapermanently and this data does not get erased when the power supply to thecomputer is switched off. Since the customs authorities had agreed that afloppy imported with software on it would be subject to only 10 per cent advalorem import duty, and since conceptually there was little differencebetween a floppy and a hard disk, the judges concluded that a hard disk withsoftware would also be liable to only 10 per cent ad valorem import duty. However, the customs contended that the rules of interpretation in thefirst schedule to the Act required the levy of 25 per cent ad valorem duty.The classification of goods consisting of more than one material orsubstance could be done under rule 3 on two basis. One, by classifying themixed goods, like hard disk and software, under the tariff heading thatprovides ``the most specific description''. Two, on the basis of thematerial or component which gives the mixed goods ``their essentialcharacter''. The first basis of classification of mixed goods could not apply since therule stated that where goods in the mixture fell only partly under two ormore headings then each heading is ``equally specific'' even if ``one of theheadings gives a more complete or precious description of the goods''. In applying the second basis of classification the question arose as towhat is the test of determining ``essential character'' of the composite ormixed goods like hard disk and software. The apex court answered this by holding that ``essential character'' wouldbe determined by the price of the materials that make up the composite ormixed goods. The material having the highest price in the mixed goods woulddetermine the classification and accordingly the import duty to be lived. Applying this test the judges found that the hard disk drive-cum-softwareimport was worth Rs 68 lakh. The value of the seven hard disk drives wouldbe about Rs 60,000 only in the import value of Rs 68 lakh. Since the valueof the software is hundred times more than its container _ the hard disk _the import has to be classified as software and hence be subjected to only10 per cent ad valorem import duty. It is surprising that the customs agreed that mixed goods like floppy withsoftware would be software and yet chose to fight the case against hard diskwith software being software. Equally surprising is the legislative omissionto deal specifically in the tariff with such mixed goods. But will theimporters of the goods pass on some of the bonanza to their customers?>
