The appellant, O R G Systems, was giving raw materials, specifications and designs to two independent units -- M/S Digital Systems International and M/S Orbit Electronics. The manufactured computers were being supplied to O R G which then got it marketed through a dummy concern called Adprint. Adprint was selling peripherals and computer systems alongwith the computers. The manufacturer, M/S O R G, was also collecting service charges from its customers on the basis of servicecontracts.

The departmental authorities held that the computers manufactured by Data Systems and Orbit must be deemed to have been manufactured by O R G and as such were liable for excise duty in the hands of O R G. Further it was held that the value of the peripherals and systems software supplied is includible in the value of the computers so manufactured.

Further, the non-disclosure of the value of the service charges, peripherals and systems software would attract the levy of penalty. Accordingly, the department of excise raised a demand against O R G for Rs 3,32,96,010.58 and imposed a penalty of Rs 25 lakh.

The tribunal held that Data System and Orbit were not dummy concerns but independent firms. However, it held that Adprint doing the marketing of computers was a dummy firm. The Supreme Court accepted these findings of the tribunal and proceeded to decide the appeal against the verdict of the tribunal which had given some relief on the excise duty and had reduced the penalty from Rs 25 lakh toRs 10 lakh.

Justices Sujata Manohar and K Venkataswami of the Supreme Court, relying on several previous judgments of the apex court, reversed the tribunal. They pointed out that in the 1977 Kores case and the 1997 PSI Data Systems case, the Supreme Court had held that a typewriter ribbon was an accessory of a typewriter whose value could not be added to the value of the typewriter for calculating the excise duty payable. A cassette recorder/player and a cassette were two different things and so the value of the cassette could not be added to the value of the recorder/player to calculate the excise duty payable on its manufacture. Similarly, there should be no confusion between a computer and a computer system since what was being subjected to excise duty was a computer and not the system.

In PSI Data Systems, it had been held that a computer and its software are distinct and separate and so the value of the software could not be added to that of the computer manufactured by a firm. A computer may not becapable of effective functioning unless loaded with software such as discs, floppies and C D roms. But that is not to say that these are part of the computer or to hold that if they are sold alongwith the computer their value must form part of the assessable value of the computer for purposes of excise.

Regarding service charges charged by O R G, the apex court held that the tribunal went wrong in assuming that the manufacturer must have given a warranty to its customers. The appellant firm had denied this. Further, there was no basis for the assumption made by the tribunal as such a fact had not been stated anywhere in the show-cause notice.

It seems that as usual the excise authorities had not done their homework properly in collecting evidence either as regards the dummy firms or as regards the service contracts.