2007 (5) TMI 204 - HC - Income Tax

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

The Tribunal upheld the assessee's entitlement to deductions for royalty payments to Oracle Corporation, USA, ruling that tax deduction within the ... Disallowance of expenditure where tax deductible at source not paid in relevant previous year (section 40(a)(i)) - allowability of deduction where tax was deducted in the relevant previous year but paid subsequently - meaning of 'manufacture' for claim under section 80-IA - conversion of blank media into software-loaded product - application of Gramaphone Co. precedent on manufacture of pre-recorded mediaDisallowance of expenditure where tax deductible at source not paid in relevant previous year (section 40(a)(i)) - allowability of deduction where tax was deducted in the relevant previous year but paid subsequently - Deduction of royalty payments where tax was deducted at source during the relevant previous year but partly paid in the subsequent year. - HELD THAT: - The Assessing Officer disallowed the royalty paid to the non-resident on the ground that although tax was deducted, the payment of tax was made in the subsequent financial year. The Tribunal and this Court observed that section 40(a)(i) operates where tax has been deducted under Chapter XVII-B during the relevant previous year; the provision permits the deduction where tax has been deducted in that year, even if payment to the department occurs subsequently. There was no dispute that tax was deducted in the relevant previous years for the assessment years in question; the Assessing Officer's requirement of actual payment within the same previous year was an incorrect interpretation. Accordingly, the appellate authorities were right to allow the deduction.The disallowance under section 40(a)(i) was incorrect; the assessee is entitled to the deduction since tax was deducted in the relevant previous year.Meaning of 'manufacture' for claim under section 80-IA - conversion of blank media into software-loaded product - application of Gramaphone Co. precedent on manufacture of pre-recorded media - Whether the assessee's activity of duplicating imported master copies onto blank discs and selling the software-loaded discs amounts to 'manufacture' for the purpose of claiming deduction under section 80-IA. - HELD THAT: - The Assessing Officer and the CIT(A) held that duplicating software onto discs did not amount to manufacture. The Tribunal, following the Supreme Court's reasoning in Gramaphone Co. (which held that converting blank audio cassettes into pre-recorded cassettes produced goods different and distinct in the market), concluded that the assessee's process converts blank discs (raw material) into software-loaded discs that are commercially different and have distinct use and market identity. In the absence of a statutory definition of 'manufacture' in section 80-IA, the ordinary commercial meaning applies; the conversion here constitutes manufacture and therefore falls within the ambit of activities eligible for the section 80-IA deduction.The duplication and conversion of blank discs into software-loaded discs amounts to manufacturing activity; the assessee is entitled to the benefit of section 80-IA.Final Conclusion: Both appeals are dismissed; the Tribunal's decisions allowing the deductions (royalty where tax was deducted in the relevant previous year, and section 80-IA treatment for conversion of blank discs into software-loaded discs) are upheld and no substantial question of law arises. 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.