Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2009-10/031

16 February 2010

Case Study

Prepared by: -

CA. Pradeep Jain

Sukhvinder Kaur

Anjali Bihani

Introduction: -

Whether the process of transforming a blank compact disc into software loaded disc amounts to manufacture or processing of goods? The issue has been raised in the case studied herein:

Commr. of Income Tax-V, New Delhi v/s Oracle Software India Ltd.

[2010(250) E.L.T. 161 (S.C.)]

Brief Facts of the Case: -

- The respondent-assessee is a 100% subsidiary of Oracle Corporation, USA. Respondent was engaged in replicating or duplicating the software made by the USA Company during the Assessment years 1995-96 to 1996-97. They used to import Master media of the software from Oracle Corporation, USA. They were converting blank CDs into recorded CDs which along with other processes becomes a software kit and then sold in the market. The assessee had right to duplicate the software.

- The respondent had contended that the said process undertaken by them was manufacture and accordingly were claiming deduction under Sec. 80IA of the Income Tax Act, 1961.

- But Revenue raised an objection that such activity does not fall under the category of manufacture, hence no deduction should be allowed for the same.

Appellant Contentions: -

v Department contended that in the process of copying, there was no element of manufacture or processing of goods.

v Department contended that since the software on the Master Media & software on the pre recorded media was the same, hence no manufacturing activity undertaken could be stated as the end product was not different from the original product. The activity of copying or duplicating does not fall under the terms of Sec. 80IA of the Income Tax Act, 1961 so no deduction was permissible.

v It was contended that there was no change in the use, character or name of the CDs even after the impugned process is undertaken by the assessee.

Respondent Contentions: -

v Respondent-assessee contended that machinery was used to convert blank compact disc into software loaded disc to make it a software kit. The blank CD constituted the raw material.

v They contended that Master Media (software) could not be conveyed as it is, so a copy is to be made and the making of that copy is manufacturing or processing of goods. They contended that activity undertaken amounted to manufacture or processing in terms of Sec. 80IA of the Income Tax Act, 1961 so deduction was claimed under the same.

Question for Consideration: -

The question for consideration before the Apex Court was:

“Whether the process by which a blank Compact Disc (CD) is transformed into software loaded disc constitutes ‘manufacture or processing of goods’ in terms of Section 80-IA (1) read with Section 80-IA (12) (b), as it stood then, of the Income Tax Act, 1961?”

Judgment of the Apex Court: -

The Apex Court held as under:

¨ The Apex Court referred to the relevant provisions of Sections 80-IA (1), 80-IA (12) (b) and also the Explanation to Section 33B of the Income Tax Act. It was stated that Section 80-IA which comes under Chapter VIA provides for special deductions. These special deductions are incentives provided for setting up industrial undertaking in back ward areas, for earning profits in foreign exchange, for setting up hotels etc. In this background, the meaning of the expression “manufacturing or processing of goods” is to be interpreted. It is also noted that technological advancement in computer science makes knowledge as of today obsolete tomorrow. Therefore, in each case, where an issue of this nature arises for determination, the Department should study the actual process undertaken by the assessee claiming deduction under Section 80-IA.

¨ The Apex Court studies the process of making Master Media, which is application software. It was held that commercial duplication was not comparable to home duplication. By applying the test of manufacture to the instant case, it was held that the respondent-assessee undertook an operation to make a blank CD fit for use for which it was otherwise not fit. The blank CD is an input for the recorded CD. The recordable media which is unfit for any specific use gets converted into the programme which is rooted in the master media so blank CD gets converted into recorded CD by the complicated copying process. The duplicating process changed the basic character of a blank CD making it fit for a specific use. Without such processing, blank CDs would be unfit for their intended purpose. Therefore, processing of blank CDs, making it fit to a specific use, represents a manufacture in terms of section 80-IA of the Income Tax Act, 1961.

¨ The Apex Court further held that the Department’s contention about end product and original product being same are not relevant in the context of computer technology. The decisions of Tata Consultancy Services V/s. State of Andhra Pradesh [2004 (178) ELT 22 (SC)] was relied upon. Reliance was also placed on Gramophone Co. of India Ltd. v. Collector of Customs, Calcutta [1999 (114) ELT 770 (SC)] wherein it was held that a blank audio cassette is distinct and different from a pre-recorded audio cassette and two have different use and name.

¨ The Apex Court applied the same test to the facts of the instant case and held that a blank CD is different and distinct from a pre-recorded CD. It was held that marketed copies are goods and if they are goods then the process by which they become goods would certainly fall within the ambit of Section 80-IA (12)(b) read with Section 33B because an industrial undertaking has been defined in Section 33B to cover manufacturing or processing of goods.

Decision of the Apex Court: -

Appeal dismissed as being devoid of any merits..

Comments & Conclusion: -

The department should consider the actual activity undertaken by the assessee, so as to consider whether the activity is manufacturing or not? The contention of the department that the content are same in the original & copy, is not correct as every day new technology emerges. The actual process undertaken by the assessee should be considered in the depth.

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PJ/CASE STUDY/2009-10/031
16 February 2010

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