By TIOL News Service

NEW DELHI, AUG 10, 2016: APPLICANT proposes to import a hardware called the Nucleus Device manufactured by a Chinese entity and undertake the activity of loading of business software on said Nucleus Device.

Nucleus Device is classifiable under Tariff Entry 85176290 of CETA, 1985 for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus.

Prior to import of the Nucleus Devices, the Chinese entity would embed the basic input output system onto the Nucleus Devices enabling it to perform primary functions such as processing of input commands and display of data.

Upon import into India, the Nucleus Devices would be loaded with the business software developed by the applicant before they are sold in the domestic market.

Applicant has sought ruling on the following question:

Whether the activity of loading of business software in the Nucleus Device by the applicant constitutes manufacture under the Central Excise Law?

Revenue, relying on the order of Tribunal in the case of NCR Corporation India Pvt. Ltd. vs. Commissioner of Central Excise, Pondicherry - 2009-TIOL-1703-CESTAT-MUM submits that loading of software on the Nucleus Device would amount to manufacture since the device could not function without it and cost of software would be part of the final cost of the Nucleus Device.

The Authority noted -

+ Applicant has clearly mentioned in the application that the Nucleus Device, prior to import would be embedded with basic input output system, enabling it to perform primary functions, such as processing of input commands and display of data. Further, it is Bluetooth enabled whereby it can connect with other authorized devices and the NFC (Near Field Communication) - for providing security and proximity functionality, can store information and transfer the information to another device. Thus, we agree with the applicant that the Nucleus Devices, as imported, are not incomplete or unfinished articles.

After examining the definition of ‘Manufacture' as laid down in section 2(f) of the CEA, 1944, the Authority for Advance Rulings further observed -

++ Loading of software only enhances the utility of Nucleus Device, hence, loading of software cannot be said to be incidental or ancillary to completion of manufactured product as envisaged under Section 2 (f) (i) of the Central Excise Act, 1944.

++ No section or chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 treat process of recording of sound or data or other phenomena of product of heading 8517 as amounting to manufacture. (section 2(f)(ii) refers)

++ Furthermore, Section 2 (f)(iii) ibid is applicable only in respect of goods which fall under Third Schedule to the Central Excise Tariff Act, 1985. Nucleus Device classifiable under heading 8517 does not fall under said Schedule.

++ It is observed from the submissions made by the Revenue that they have claimed that subject activity of loading of software into the Nucleus Device is manufacture but for this assertion they have not invoked sub-clause (i), (ii) and (iii) of Section 2 (f) of Central Excise Act, 1944.

++ The character, usage and identity of the Nucleus Device on loading of software remain the same. Further, the original commodity i.e. Nucleus Devise proposed to be imported, will not cease to exist on up-loading of software into the Nucleus Device and would also continue to serve its functions. Therefore, loading of business software would not ipso facto amount to manufacture in the scope of its natural meaning as interpreted by the Courts. [ Union of India vs. Delhi Cloth and General Mills Co. Ltd. - 2002-TIOL-12-SC-CX-CB; Union of India vs. J.G. Glass Industries = 2002-TIOL-112-SC-CX refers.]

++ We are in agreement with the applicant that Chapter Note 10 or any other Note to Chapter 85 is not applicable in the present case to consider the activity of up-loading of business software in the Nucleus Device as deemed manufacture. If the intention of the legislature was to treat uploading of software into devices like Nucleus Device as manufacture, Note(s) to Chapter 85 would have included goods of heading 8517, deeming such activity to be manufacture.

Ruling:

The activity of loading of business software in the Nucleus Device by the applicant will not constitute manufacture under the Central Excise Law.

(See 2016-TIOL-15-ARA-CX )