In a setback to Hewlett Packard India Sales (P) Ltd, the Supreme Court has held that the company cannot claim customs duty exemption on software-loaded hard disc drives fitted in laptops imported into the country.
The judgement was delivered by a bench headed by Justice Arijit Pasayat on an appeal by Commissioner of Customs, Chennai, against a decision of the Customs, Excise and Service Tax Tribunal (CESTAT). The tribunal had allowed the Indian unit of the world’s largest maker of personal computers to categorise hard disc drives pre-loaded with operating system (software) as separate from the laptops.

No categorisation
While the company was paying customs duty on laptops, it had listed such hard discs in a separate category that attracts nil rate of duty. Tax authorities had challenged the company’s contention that it can categorise such hard discs as separate from the imported laptops in which they were fitted. According to the government’s customs tax rules, imported laptops are taxable but software-loaded hard discs not part of a computer or laptop can be imported at nil rate of duty.

Upholding the tax authorities’ view, the apex court said operating system such as Windows XP, which is loaded on a hard disc, forms an integral part of a laptop and the company is liable to pay duty at an appropriate rate. “The department has rightly taken the value of the laptop as a unit and has given the deduction for the value of the software. There is no error in the computation, particularly when Hewlett Packard has refused to give the value of the software to the adjudicating authority,” the bench said.

The SC, however, said operating system recorded on hard disc drives and imported as packaged software without any other apparatus will be allowed at zero rate of duty.

“We are of the view that the imported laptops were classifiable under (customs tariff heading) CTH 84.71, whereas operating software recorded on hard disk drives imported as packaged software were classifiable under CTH 85.24,” Justice Pasayat said in the judgement.

Customs rule
As per customs rule, items falling under heading 84.71 are to be taxed at an appropriate rate of duty, while those falling under heading 85.24 attract nil duty. On this basis, the customs authorities had demanded a tax of Rs 5.9 crore from HP, which was set aside by the tribunal. “...it may be clarified that the operating system can also be imported as packaged software which is like an accessory and which in present case is classified by the department under CTH 85.24.” The court said a person who buys a laptop pays for the entire machine as a unit and without an operating system like Windows, the laptop cannot work.