2007 (5) TMI 204 - HC - Income Tax

Royalty Payments Deductions and Software Duplication as Manufacturing Upheld; Appeals Dismissed.

Commissioner of Income-Tax Versus Oracle Software India Limited.

The Tribunal upheld the assessee's entitlement to deductions for royalty payments to Oracle Corporation, USA, ruling that tax deduction within the ... Disallowance royalty payment to non-resident company u/s 40(a)(ia) - On the ground that TDS was not paid by the assessee - HELD THAT:- On a plain reading of section 40(a)(i) of the Act, as long as the tax was deducted within the year, as was done in the present case, the provisions of the section come into play and the assessee must, therefore, be entitled to its benefit. There is no dispute about the fact that tax for the assessment year 1994-95 was deducted during the relevant previous year (but paid on September 6, 1994). For the assessment year 1995-96 the tax was deducted during the relevant previous year and while most of the amount (Rs. 1,97,23,418) was paid during the relevant previous year, a small amount of Rs. 11,011 was deposited on July 6, 1995. On a reading of section 40(a)(i) of the Act, we are of the view that the Assessing Officer erred while the appellate authorities rightly held in favour of the assessee. No substantial question of law arises for consideration. Deduction u/s 80-IA - whether the assessee manufactures any goods - HELD THAT:- It is true that the meaning of the word 'manufacture' as used in the Central Excise Act, 1944 cannot be automatically applied to the provisions of the Income-tax Act, 1961, but in the absence of any definition of the word 'manufacture' as used in section 80-IA of the Act, one has to appreciate its meaning as commonly understood by any reasonable person. Looked at from this point of view, the conversion of a blank disc, which has its own utility, to a software loaded disc clearly amounts to a manufacturing activity because a new commercial product enters the market which is a distinct and different product from the blank disc. On this issue, we see no reason to differ with the view taken by the Tribunal which merely follows the decision of the Supreme Court in Gramaphone Co. of India Ltd. v. Collector of Customs [1999 (11) TMI 62 - SUPREME COURT]. Thus, we are clearly of the view that the assessee would be entitled to the benefit of section 80-IA of the Act since it carries out a manufacturing activity. To substantial question of law arises for consideration. The appeals are dismissed. Issues:1. Disallowance of royalty paid by the assessee to Oracle Corporation, USA due to non-payment of TDS in the relevant previous year.2. Allowability of a deduction under section 80-IA of the Income-tax Act, 1961.Issue 1: Disallowance of Royalty:The case involved the disallowance of royalty paid by the assessee to Oracle Corporation, USA due to non-payment of TDS in the relevant previous year. The Assessing Officer contended that as per section 40(a)(i) of the Income-tax Act, the assessee was not entitled to a deduction for royalty payment to Oracle Corporation, USA since tax was not only required to be deducted but also paid within the relevant previous year. The Commissioner of Income-tax (Appeals) relied on a Rajasthan High Court decision, but the Tribunal noted that tax was indeed deducted during the relevant year. The Tribunal held that as long as tax was deducted within the year, the assessee should be entitled to the benefit, even if the payment was made in the subsequent financial year. The Tribunal's decision was upheld, stating no substantial question of law arose for consideration.Issue 2: Allowability of Deduction under Section 80-IA:The second issue revolved around whether the assessee's activities amounted to manufacturing under section 80-IA of the Act. The Assessing Officer and the Commissioner of Income-tax (Appeals) argued that duplicating software onto blank discs did not constitute manufacturing. However, the Tribunal found that the conversion of blank discs into software-loaded discs by the assessee was a manufacturing activity. The Tribunal referred to a Supreme Court decision regarding the meaning of 'manufacture' in a different context, emphasizing that the conversion of raw material into a distinct commercial product qualified as manufacturing. The Tribunal's interpretation was upheld, stating that the assessee was entitled to the benefit of section 80-IA as it engaged in a manufacturing activity.In conclusion, both issues were analyzed in detail, with the Tribunal's decisions being upheld, and no substantial questions of law were found to warrant further consideration. The appeals were dismissed based on the comprehensive analysis of the legal provisions and precedents cited in the judgment.