2010 (1) TMI 9 - SC - Income Tax

Converting blank recordable CDs into software-loaded pre-recorded CDs is 'manufacture/processing' under Section 80IA(1), 80IA(12)(b) and Section 33B

The SC held that converting blank recordable CDs into software-loaded (pre-recorded) CDs by duplicating processes constitutes manufacture/processing under ... Manufacture or processing of goods - industrial undertaking - deduction under Section 80IA - operation rendering a commodity fit for use - goods as media-embedded copiesManufacture or processing of goods - deduction under Section 80IA - operation rendering a commodity fit for use - goods as media-embedded copies - Whether commercial duplication of software from Master Media onto blank Compact Discs (recordable media) constitutes 'manufacture or processing of goods' for the purpose of entitlement to deduction under Section 80IA read with the Explanation to Section 33B - HELD THAT: - The Court examined the commercial process of duplication - validation of Master Media, creation of a virtual image in the CD-blaster, and replication onto blank recordable CDs - and applied the legal test that an operation which renders a commodity fit for a use for which it was otherwise not fit falls within 'manufacture'. The blank CD was treated as the input/raw material which, by the duplicating process, is converted into a recorded CD dedicated to a specific use; thus the basic character of the blank CD is changed. The Court rejected the Department's contention that identity of content between Master Media and recorded media negates manufacture, observing that the relevant test is the change in the nature and use of the input, not sameness of intellectual content. Reliance was placed on precedents holding that intellectual content embodied in a medium becomes 'goods' when put on media and marketed, and on the Gramophone line of authority which held recording blank media into pre-recorded media to be manufacture. The Court confined its conclusion to the particular commercial process examined and noted that the Department must study the actual process in each case; applying the explained test to the facts, the duplicating operation was held to fall within the meaning of 'manufacture or processing of goods' in Section 80IA(12)(b) read with the Explanation to Section 33B. [Paras 10, 11, 12]Commercial duplication of software onto blank CDs amounts to 'manufacture or processing of goods' and the activity falls within the definition of an industrial undertaking for the purposes of Section 80IA; the Department's appeals are without merit.Final Conclusion: The Civil Appeals filed by the Department are dismissed; the Court holds that the commercial process of replicating software onto blank CDs constitutes manufacture/processing of goods and falls within Section 80IA(12)(b) read with the Explanation to Section 33B for the relevant assessment years. Issues Involved:1. Whether the transformation of a blank Compact Disc (CD) into a software-loaded disc constitutes 'manufacture or processing of goods' under Section 80IA(1) read with Section 80IA(12)(b) of the Income Tax Act, 1961.2. The interpretation of relevant provisions of Sections 80IA(1), 80IA(12)(b), and the Explanation to Section 33B of the Income Tax Act.3. The applicability of the judgment in Tata Consultancy Services v. State of Andhra Pradesh and Gramophone Co. of India Ltd. v. Collector of Customs, Calcutta to the present case.Issue-wise Detailed Analysis:1. Transformation of Blank CD into Software-loaded Disc:The primary issue is whether converting a blank CD into a software-loaded disc qualifies as 'manufacture or processing of goods' under the Income Tax Act. The assessee argued that this process involves using machinery to convert blank CDs into recorded CDs, which, along with other processes, become a Software Kit. They contended that the blank CD constitutes raw material and that making a copy of the Master Media constitutes manufacture or processing of goods, entitling them to a deduction under Section 80IA. Conversely, the Department argued that since the software on the Master Media and the recorded media remains unchanged, there is no manufacture or processing of goods involved in the activity of copying or duplicating.2. Interpretation of Relevant Provisions:The court examined Sections 80IA(1), 80IA(12)(b), and the Explanation to Section 33B of the Income Tax Act. Section 80IA provides deductions for profits derived from industrial undertakings engaged in the manufacture or processing of goods. The court noted that the term 'manufacture' implies a change, but not every change constitutes manufacture. The court emphasized that if an operation renders a commodity fit for use for which it was otherwise not fit, the operation falls within the meaning of 'manufacture.' Applying this test, the court concluded that the process undertaken by the assessee rendered blank CDs fit for use as software-loaded discs, thereby constituting manufacture.3. Applicability of Judgments:The court referred to the judgment in Tata Consultancy Services v. State of Andhra Pradesh, which held that a software program, once put on media and marketed, becomes goods. The court also referred to Gramophone Co. of India Ltd. v. Collector of Customs, Calcutta, which held that recording audio cassettes on a duplicating music system amounts to manufacture because a blank audio cassette is distinct and different from a pre-recorded audio cassette. Applying these judgments, the court held that a blank CD is distinct and different from a pre-recorded CD, and the process of converting blank CDs into recorded CDs constitutes manufacture.Conclusion:The court dismissed the Civil Appeals filed by the Department, holding that the process of converting blank CDs into software-loaded discs constitutes 'manufacture or processing of goods' under Section 80IA(1) read with Section 80IA(12)(b) of the Income Tax Act. The court affirmed that the assessee is entitled to the deduction under Section 80IA.