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

COMMR. OF INCOME TAX-V, NEW DELHI Versus M/s ORACLE SOFTWARE INDIA LTD.

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 in terms of Section 80IA - activity of copying or duplicating - Whether the process by which a blank Compact Disc (CD) is transformed into software loaded disc constitutes 'manufacture or processing of goods' in terms of Section 80IA(1) read with Section 80IA(12) (b), as it stood then, of the Income Tax Act, 1961? - HELD THAT:- We are of the view that, in the present case, the assessee has undertaken an operation which renders a blank CD fit for use for which it was otherwise not fit. The blank CD is an input. By the duplicating process undertaken by the assessee, the recordable media which is unfit for any specific use gets converted into the programme which is embedded in the Master Media and, thus, blank CD gets converted into recorded CD by the afore-stated intricate process. The duplicating process changes the basic character of a blank CD, dedicating it to a specific use. Without such processing, blank CDs would be unfit for their intended purpose. Therefore, processing of blank CDs, dedicating them to a specific use, constitutes a manufacture in terms of Section 80IA(12)(b) read with Section 33B of the Income Tax Act. We hold that a blank CD is different and distinct from a pre-recorded CD. In Gramophone Co. of India Ltd.[1999 (11) TMI 62 - SUPREME COURT], it was held that an input/ raw-material in the above process is a blank audio cassette. It was further held that recording of an audio cassette on duplicating music system amounts to manufacture because blank audio cassette is distinct and different from pre-recorded audio cassette and the two have different uses and names. In our view, the High Court was right in coming to the conclusion that the judgment of this Court in Gramophone Co. of India Ltd. (supra) is squarely applicable to the facts of the present case. We may add that in the case of Tata Consultancy Services [2004 (11) TMI 11 - SUPREME COURT (LB)], as stated above, it has been held that a software programme may consist of commands which enable the computer to perform designated task, but, the moment copies are made and marketed, they become goods. Therefore, applying the above judgment to the facts of the present case, we are of the view that marketed copies are goods and if they are goods then the process by which they become goods would certainly fall within the ambit of Section 80IA(12)(b) read with Section 33B because an industrial undertaking has been defined in Section 33B to cover manufacture or processing of goods. Thus, we find no merit in the Civil Appeals filed by the Department, which are accordingly dismissed with no order as to costs. 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.