2015 (2) TMI 20 - HC - Income Tax

Assessee's Software Activities Deemed Manufacture under Section 10B

The High Court held that the assessee's activities constituted 'manufacture' or 'production' of 'computer software,' meeting the criteria under Section ... Benefit of Section 10B - whether assessee is engaged in activity which can be termed “manufacture”? - Held that:- In the present case Section 10B uses the expression “manufactures or produces… things or computer software”. The four stage process of 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. - Decided in favour of the assessee. Whether assessee’s manufacturing activity described earlier results in “computer software” - Held that:- 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.- Decided in favour of the assessee Issues Involved:1. Whether the assessee's activity qualifies as 'manufacture' under Section 10B of the Income Tax Act, 1961.2. Whether the activity of collection, collation, formatting of data and information, and its export fulfills the conditions stipulated in Section 10B(2)(i) of the Act.Issue-Wise Detailed Analysis:1. Qualification of Assessee's Activity as 'Manufacture' under Section 10B:The core issue was whether the assessee's activities could be termed as 'manufacture' to claim benefits under Section 10B of the Income Tax Act, 1961. The ITAT reviewed the process undertaken by the assessee, which involved four stages: collection of raw material (text and photographs), design and layout, scanning and color correction, and embedding high-resolution images into the layout to create a ready-to-export final product. The ITAT cited Supreme Court rulings, including Graphic Company India Ltd. v. Collector of Customs and CIT v. Tara Agencies, which elucidated that 'manufacture' implies a transformation resulting in a new product. The ITAT concluded that the assessee's activities, which resulted in a ready-to-print e-book, amounted to 'production' of customized electronic data, fitting the definition of 'computer software' under Explanation 2 to Section 10B of the Act. The High Court upheld this view, citing various precedents that broadly interpreted 'manufacture' to include processes that resulted in new and distinct articles.2. Fulfillment of Conditions Stipulated in Section 10B(2)(i):The second issue was whether the assessee's activities met the conditions of Section 10B(2)(i), which defines 'computer software' to include 'any customized electronic data or any product or service of similar nature.' The revenue argued that mere compilation of data did not constitute 'manufacture' or 'production' of software. However, the ITAT observed that the assessee's activities involved significant customization and transformation of data, which were exported in electronic form. The ITAT noted that the work done by the assessee, such as creating user-friendly layouts and digitally correcting images, resulted in a product that was different from the input data. The High Court agreed with this interpretation, emphasizing that the definition of 'computer software' in the Act and the CBDT notification included activities like content development and data processing. The court also referenced the Copyright Act's definition of 'computer programme,' which supported the view that the assessee's final product qualified as 'computer software.'Conclusion:The High Court concluded that the assessee's activities amounted to 'manufacture' or 'production' of 'computer software,' thereby fulfilling the conditions under Section 10B of the Income Tax Act. Consequently, the court dismissed the revenue's appeals and ruled in favor of the assessee, affirming the ITAT's decision to grant the benefit of Section 10B.