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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’: NEW DELHI
Before: SHRI J.S. REDDY, & SHRI CHANDRA MOHAN GARG
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER This appeal filed by the assessee is directed against the order of the CIT(A)-XXIII, dated 28/03/2013 passed in first appeal No. 353/10-11 for A.Y 2008-09.
At the very outset of the opening of the arguments, the ld. AR appearing on behalf of the assessee furnished a copy of the Tribunal order of the Delhi ‘D’ Bench in the case of the very assessee for A.Y 2006-07 and submitted that the grounds raised in the year under consideration, being A.Y 2008-09, on the issue of disallowance of deduction u/s 10B of the Income-tax Act, 1961 [the Act, for short] are squarely covered in favour of the assessee by the Tribunal order rendered in vide order dated 07.05.2014
The ld. DR, although supported the orders of the authorities below, could not controvert the submission of the assessee by bringing on record any material on record to controvert the submissions of the ld. AR. He fairly conceded that the grounds stand covered in favour of the assessee.
We have heard the rival submissions and have perused the relevant material on record. We have also gone through the Tribunal order [supra]. We find that similar issue came up before the Tribunal in assessee’s own case for A.Y 2006- 07. The Tribunal, vide paras 17 to 21 of its order dated 07.05.2014 held as under:
3 “In the instant case we find that the appellant after collecting raw data and pictures has utilized its expert designing skills in producing a ready to print e-book. Shri Syali in his submissions has neatly narrated the entire sequence of activities carried on by the appellant. The samples produced before us were also shown to the AO, however he has conveniently chosen to remain quite on this aspect. The final product is intended for use of a particular customer and therefore the case under consideration does fit in the category ofproduction of"any customized electronic data" as per the definition of computer software defined in Explanation 2 to section 10B of the Act. The above Third Member decision is germane to the issue before us and therefore it clearly supports the case of appellant. In our considered opinion even if it is said that the appellant has merely customized the data, which was already available and has not created altogether new software then too the appellant cannot be deprived of the benefit of deduction. It is pertinent to note that the definition of "produce" is wider than the term manufacture as held by the Hon'ble Supreme Court in a number of decisions (referred to in Lovesh Jain‟s case above) and does not require to produce or manufacture altogether a new product; but if the outcome of the process is a different product than the input, it would fall under the definition of 'produce'.In our considered view, whatever form the input data is, so long as the end product is in the form of electronic data which is customised by the appellant for the end use of a 4 particular customer, then benefit of deduction u/s 10B of the Act cannot be denied. And there is no dispute that the final product of the assessee was in electronic form. We may also refer here another co-ordinate bench decision in case of Cybertech Systems & Software (supra) wherein it has been held by a co-ordinate bench as under: "14.1 Thus it is clear that when the process of customisation involve addition, modification and creation of new programmes as per the requirement of the individual clients by utilising the foundation of standard programme and such exercise involves human expertise and intellectual process to bring the end result a different product or thing and fit into the definition of term produce. Further, in the case of Amadeus India (P.) Ltd. (supra) the coordinate Bench of the Tribunal has considered and decided a similar question in para 35 as under: "35. The assessee which occupies a position mid-way between the two fulfils, it will be clear from the facts stated above, the functions of a programme exporter, it does not add mere entries to the database as done by the travel agent. In fact it has no direct interest in adding to, or drawing extracts from the database built into the computer like the several operators all the world over. What it does actually is to supplement the functions of the Amadeus Group by preparing and transmitting programmes to the latter for incorporation into portions or "partitions" in its mega- computer at Erding in Germany, so as to enable the travel agents in its marketing region draw on the available
5 information for their benefit. Its activities are to issue instructions to the master-computer to recognise the operators, identify them and provide them access to specific portions of the database. There can be no doubt whatever, for the reasons discussed above, that the assessee manufactures, produces and exports software within the meaning of the three specified sections of the Act. It is open to it to claim exemption under anyone of these sections and as is well established by pertaining to interpretation of taxing statutes is entitled to choose that one which is most favourable to it in any particular assessment year."
We find that the ld CIT(A) has erred in considering the definition of "Computer Software" as per clause (i) of Explanation 2 to section 10B in a conjunctive manner and not disjunctive manner without considering that word used in between sub-clauses (a) and (b) is "or". The ld CIT(A) has erred in comparing the work done by the assessee with "Computer Programme". Here it is to noted that it is not assessee’s case that its case falls under sub-clause (a) of clause (i) to Explanation 2 to section 10B. It is the consistent stand assessee that its case falls under sub clause (b) of clause (i) to Explanation 2 to section 10B. Here it is to be seen that whether the assessee is engaged in any customization of electronic data. We find that ld CIT(A) has not recorded any finding in this respect in his order. We find also that ld CIT(A) has tested assessee’s case u/s 10BB. However we find that counsel for the assessee had submitted that scope of section 6 10BB is limited in scope as compared to the new definition in new section 10B. In this regard it is to be taken note that post amendment old section 10B requires "processing or management of electronic data" whereas new section 10B is larger in scope and only requires "any customized electronic data". The difference is that old section 10B requires that input data must necessarily be in electronic form where as in new section 10B this requirement is done away with. This interpretation has found favour by ITAT in Accurum‟s case (Supra) were in at para 9 (of Third Member order) it has been held that "The data which a customer may require, may be gathered either by manual effort or by electronic means, as for example, through internet. By whatever means the data is collected, once it is stored in an electronic form, it becomes a customized electronic data which can be exported to qualify for deduction u/s 10A".
The requirement of the provision (Section 10B) is that there should be a customized electronic data and such data should be exported outside India. The data which a customer may require may be gathered either by manual effort or by electronic means, as for example, through internet. By whatever means the data is collected, once it is stored in an electronic form, it becomes a customized electronic data which can be exported to qualify for deduction u/s 10A. The process of actually collecting the data need not be IT enabled. What all is required is that the data collected should be in an electronic form.
7 The exact language of sub-clause(b) of clause (1) of Explanation 2 is "any customized electronic data.
Thus we find that Assessee’s business involved export of ready to print books which in the instant case is the "customized electronic data". The nature of activity done by the assessee in the EOU was that of producing designs, drawings, layouts and scanning for the projects of foreign clients on the basis of their parameters and specifications. This activity is done by taking into consideration the data collected by the assessee itself or from clients. Though the steps/stages involved in completion of a particular assignment for the foreign client has been reproduced by the AO at page 2 of the assessment order, still neither the Assessing Officer nor ld CIT(A) have appreciated these aspects in the right perspective.
In the light of the decisions of Ld Third Member in the case of Accurum India Limited and co-ordinate bench decision in case of Cybertech Systems (supra), we find that the appellant merits to succeed in its claim for deduction u/s 10B of the Act. We hold that the ready to print books exported by the appellant in the form of a CD or e-mail are customised electronic data eligible for claiming benefit of deduction as per law. Therefore the appeal filed by the assessee is allowed and the AO is directed to allow deduction u/s 10B of the Act in accordance to law.”
Aggrieved by the order of the Tribunal, the Revenue went in appeal before the Hon'ble Jurisdictional High Court at Delhi. In turn, the Hon'ble High Court in C.M. Appeal No. 157 of 2015 vide order dated 19th January, 2015, after considering the orders of the AO, the ld. CIT(A) as well as the order of the Tribunal [supra] dismissed the appeal of the Revenue by holding as under:
The ITAT also relied upon a Gujarat High Court decision, in CIT v. Ajay Printers Pvt. Ltd: (1965) 58 ITR 811 (Guj) where it was held that manufacture" has a wider and a narrower connotation:
"In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power. The word "manufacture" in ordinary parlance would mean a person who makes, fabricates or brings into existence a product or an article by physical labour or power. The other shade of meaning which is the narrower meaning implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus both the words "manufacture" and "produce" apply as well to the bringing into existence of something which is different from its components. One manufactures or produces an article which is necessarily different from its components."
Section 10B of the Act provides as follows: "10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. ... ..... (2) This section applies to any undertaking which fulfills all the following conditions, namely :-- (i) it manufactures or produces any articles or things or computer software; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence : ... ..... Explanation 2.--For the purposes of this section,-- (i) "computer software" means-- (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or service of similar nature as may be notified by the Board, which is 10 transmitted or exported from India to any place outside India by any means" 12. In the two decisions of the Supreme Court, the construction placed on the term "manufacture" was a liberal one. The extracts of those decisions are Deputy Commissioner of Sales Tax v. M/s. Pio Food Packers, 1980 Supp.
SCC 174:
...commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place.
Again, in Aspinwall & Co. Ltd v Commissioner of Income Tax (2001) 251 ITR 323 it was held as follows:
"the word manufacture has not been defined in the Act. In the absence of a definition of the word manufacture it has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials
11 new forms, ITA 13/2015 TO 15/2015 Page 11 qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity."
The term "manufacture" is of wide import and in numerous occasions was held by the Supreme Court to include a variety of activities. Thus, refining crude oil (M/s. B.P. Oil Mills Ltd. vs. Sales Tax Tribunal and others - AIR 1998 SC 3055); extracting oil from oil-seeds (the Constitution Bench in Devi Das Gopal Krishnan etc. vs. State of Punjab & others, AIR 1967 SC 1895,); cutting and shearing of metal scrap for use by rolling mills (Ashirwad Ispat Udyog & Ors vs State Level Committee & Ors (1998 (8) SCC 85,); conversion of coconut husk into fibres (in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam vs. M/s. Coco Fibres, AIR 1991 SC 378); lamination of paper ( Laminated Packings (P) Ltd. vs. Collector of Central Excise (1990) 4 SCC 51), were all held to be activities that qualify as "manufacture". In M/S. Sonebhadra Fuels vs Commissioner,Trade Tax (2006) 7 SCC 322 the Supreme Court clarified that the term manufacture is of wide import and that:
"the expression 'manufacture' covers within its sweep not only such activities which bring into existence a new commercial commodity different from the articles on which that activity was carried on, but also such activities which do
12 not necessarily result in bringing into existence an article different from the articles on which such activity was carried on. For example, the activity of ornamenting of goods does not result in manufacturing any goods which are commercially different from the goods which had been subjected to ornamentation, but yet it will amount to manufacture.."
In the present case Section 10B uses the expression "manufactures or produces... things or computer software". The four stage process of ITA 13/2015 TO 15/2015 Page 12 compiling material, collating the text, designing the layout, scanning, digital image editing (to remove distortion) and final arrangement of the data, ultimately transmitted according to the customer's specification - and ready to be used for printing, (or even e-Book publication) is undoubtedly manufacture or production.
The second question is whether assessee's manufacturing activity described earlier results in "computer software". The main thrust of the revenue's contention here was that final product or "thing" does not answer that description because it is not software per se, but mere compilation of data. This court is of opinion that this contention is unpersuasive. The expression "computer software" is wide enough to embrace diverse activities. To eliminate any doubt, the reference to "customized electronic data" in the second Explanation to Section 10B (2), Parliament enabled the Board (CBDT) to 13 include (by notification) diverse activities - which involve export of software, etc. The Notification relied on in the present case uses the expressions "(iii) Content Development or animation (iv) Data Processing... (vii) Human Resources Services" and "(ix) Legal Databases". Here, the very first head "content development or animation" describes the process and is wide enough to cover compilation of material or data and its transformation into a ready to print/ ready to publish book. It is also a "legal database". The expression "legal" here cannot be confined to databases that cater to law students or legal practitioners or academics; it is again of wide import to include databases that are legal - as databases. This court also notices that the term "computer software" is defined by the Copyright Act, 1957 by Section 2 (ffc) as follows:
ITA 13/2015 TO 15/2015 Page 13 "(ffc)"computer programme" means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result.."
In the present case, the work which ultimately results as the culmination of the assessee's efforts of compiling, editing, digital designing, etc. "is transmitted or exported from India to any place outside India by any means". It is, therefore, computer software that are produced or manufactured, to qualify for benefit under Section 10B.
For the above reasons, the questions of law framed in this case are answered against the revenue and in favour of the assessee. The appeals are consequently dismissed.”
The ld. AR furnished a copy of the order of the Hon'ble High Court which is placed on record which has been reported at [2015] 57 Taxmann.com 39 [Delhi]. In the absence of any material contradicting the above order of the Hon'ble High Court and respectfully following the same, we allow the grounds of appeal raised by the assessee on the issue of disallowance of deduction u/s 10B of the Act.
7. Ground No. 2 is against the direction of the ld. CIT(A) to the AO to recompute the disallowance of depreciation at Rs. 7,34,543/-.
During the course of assessment proceedings, the AO noticed that the assessee had claimed depreciation at 5% amounting to Rs, 7,34,543/- on addition to building of Rs. 1,46,90,869/. The assessee filed evidence of addition to building in the form of a sale deed which showed that the assessee had purchased land alongwith building at the stated price. The AO determined the cost of the land at Rs. 51,33,130/- by applying the value of land determined by the sub-registrar of Rs. 5,500/- per sq. mtr. including proportionate stamp duty and transfer charges. The claim of depreciation was disallowed to the extent of the claim relating the land which worked out to Rs. 5,35,371/-. In appeal, the ld. CIT(A) directed the AO to recompute the disallowance of deprecation at Rs. 7,34,543/-. Aggrieved, the assessee is in appeal before us.
We have heard the rival submissions and have perused the relevant material on record. At the outset, we are in agreement with the view taken by the ld. CIT(A) that the depreciation on land is not allowable to the assessee. We further observe that the ld. CIT(A) dismissed entire ground No. 2 of the assessee and noted the submissions of the assessee vide letter dated 16-02-2012 wherein it was informed to the AO that the building was not put to use during F.Y. 2007-08 and hence the ld. CIT(A) concluded that the assessee was not eligible for any claim of depreciation for F.Y. 2007-08 relevant to A.Y 2008-09 and we direct the AO to recompute the depreciation. Operative part of the first appellate order is being reproduced below for the sake of clarity in our findings:
“Ground of appeal
No. 2 pertains to the disallowance of depreciation on the value of land included by the appellant in the addition to building. It is argued on behalf of the appellant that the property was used for business purposes, and hence the entire value of land and building was entitled for depreciation. It is also argued that the appellant was entitled to depreciation @ 10%, which has been allowed at 5%. Firstly, it is seen that the purchase deed of the property at Noida, separately shows the cost of land and of building for determination of stamp duty. The appellant is clearly not allowed to claim depreciation on the value of land. Hence the action of the Assessing Officer in disallowing the depreciation to the extent of the value of land of Rs. 51,33,130/- embedded in the purchase price of Rs. 1,46,90,869/- is in accordance with law. Secondly, from the chart of fixed assets annexed with the audited Balance Sheet, it was seen that the addition to building had been disclosed after September, 2007, and_the appellant had herself claimed depreciation for half of the year. Hence the restriction of depreciation to 5% appeared correct. Vide order sheet entry dated 10.02.2012, the counsels for the appellant were required to file a note on putting to use of the premises at Noida for the purposes of business. The counsels filed a reply on 16.02.2012 wherein it was admitted that the property was purchased on 28.11.2007 with the appellant's expansion plans in mind, however, the appellant did not use the premises during the Financial Year 2007-08. It is held therefore, that the appellant is not entitled to the claim of depreciation on the premises at all, in the year under consideration. Accordingly, the entire claim of depreciation of Rs. 7,34,543/- requires to be disallowed, as against the disallowance made by the Assessing Officer of Rs. 5,35,371/- . The appellant, therefore, fails at ground of appeal No.
2. The Assessing Officer is directed to re- compute the disallowance of depreciation at Rs. 7,34,543/-.”
In view of above conclusion of the ld. CIT(A), we are inclined to hold that the ld. CIT(A) properly adjudicated the issue and this conclusion is not against the Revenue rather it is in favour of the Revenue and against the assessee as the entire claim of depreciation has been dismissed for which no appeal or cross objection has been filed by the assessee. We are unable to see any valid reason to interfere with the impugned order on this count. Accordingly, Ground No. 2 of the assessee is also allowed.
In the result, the appeal of the assessee stands allowed. The order is pronounced in the open court on 01.02.2016.