2023 (6) TMI 1499 - HC - Income Tax

Conversion of legal database into customized electronic software qualifies as 'computer software' under Explanation 2(i)(b) to s.10B, enabling 100% deduction

Pr. Commissioner of Income Tax – 16 Versus Majumdar And Co.

HC held that conversion of a long-standing legal database into customized electronic data transmission falls within 'computer software' under Explanation ... Exemption u/s 10B - conversion of exiting physical database into an electronic database would amount to manufacture or production of computer software? - HELD THAT:- CBDT Notification No. S.O. 890 (E) dated 26th September 2000 has permitted both products and services of legal database as eligible information technology enabled products or services for grant of deduction u/s 10B of the Act. The services provided by appellant firm are “customized electronic data transmission” and are user/client specific. Legal service provided by the assessee firm were rendered by use of legal database created by appellant firm over a period of more than 60 years of its professional experience. The legal services were rendered by the assessee to its foreign clients by use of electronic mode of communications, i.e., by exchange of legal information and documents via emails and internet services. Assessee has complied with the other conditions in form 56G, realization of service charges within the permitted time, exporting legal services to its clients outside India and receiving the services charges for the same in the foreign currency in India. Therefore, the claim of the assessee is fully justified. Any transmission of “customized electronic data” falls within the expression of “computer software” as per explanation 2(i)(b) to the Section 10B of the Act. Therefore, the assessee is entitled to claim deduction u/s 10B of the Act in respect of its 100% EOU unit. Therefore, the entire issue in this case is fact based. A similar issue had been raised for the AY 2004-05 to 2008-09. AO has rejected the claim of the assessee for exemption u/s 10B of the Act and the CIT(A) had set aside the order of the AO. Department had impugned the order of the CIT(A) and those appeals were also dismissed by the Tribunal. Mr. Suresh Kumar states that the appeal filed by the Revenue have also been dismissed by the High Court, Bombay though not on merits but under Rule 986 of the High Court, Bombay (Original Side) Rules. While dismissing the appeal of the Department, the ITAT has relied upon the decision of the ITAT in the assessee’s own case for the AY 2004-05 to 2008-09. ITAT has also observed that there are no distinguishable facts or contrary facts placed on record. We also find in the grounds of appeal this finding of the ITAT has also not been challenged. ISSUES PRESENTED AND CONSIDERED 1. Whether conversion of an existing physical database into an electronic database amounts to 'manufacture or production of computer software' within the meaning of Section 10B of the Income Tax Act. 2. Whether segregation of computer/software-related activity from an established firm of advocates and solicitors into a 100% EOU constitutes an impermissible 'splitting up' of an existing business so as to render the unit ineligible for deduction under Section 10B. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of converted electronic database as 'computer software' under Section 10B Legal framework: Section 10B provides deduction for profits and gains of export of articles or things or computer software by units established in specified undertakings (EOUs). Explanation 2(i)(b) to Section 10B and relevant CBDT notifications identify 'products and services of legal database' and 'customized electronic data transmission' as eligible IT-enabled products/services. Precedent treatment: The Tribunal relied on its earlier decisions in the assessee's own case for previous assessment years (2004-05 to 2008-09), and on the CBDT notification classifying legal database/services as eligible under Section 10B. Interpretation and reasoning: The CIT(A) found that the Development Commissioner had registered the unit as a 100% EOU for 'Legal Services' and that the CBDT notification explicitly permitted legal database products/services as eligible IT-enabled services. The assessee's services were characterised as 'customized electronic data transmission,' user/client specific, and delivered electronically to foreign clients using a legal database compiled over many years. The assessee met procedural and transactional conditions (Form 56G, realization of service charges in permitted time, export of services and receipt in foreign currency). The Tribunal, following earlier factual findings, found no new or distinguishable facts to contradict those conclusions. Ratio vs. Obiter: The Court treated the Tribunal's factual conclusion that the converted electronic database and the resulting customized electronic legal services fall within the expression of 'computer software' (per explanation 2(i)(b)) as the operative ratio for the assessment year in question. There is no dictum purporting to alter or extend statutory interpretation beyond the facts; thus, the holding is fact-specific ratio rather than broader obiter. Conclusion: On the facts and material on record, conversion of the physical database into an electronic database and provision of customized electronic legal services qualified as computer software/eligible IT-enabled services for deduction under Section 10B. The factual findings of the tribunal and CIT(A) were upheld, and no question of law arose from this factual conclusion. Issue 2 - Splitting up of business by diverting software activity to an EOU and eligibility under Section 10B Legal framework: Section 10B eligibility is fact- and condition-driven; relevant considerations include nature of activities, registration as EOU, compliance with procedural formalities (Form 56G), and realization/receipt of foreign exchange. The concept of 'splitting up' of business impacts eligibility when reorganisations are contrived to obtain tax benefits. Precedent treatment: The Tribunal and CIT(A) had previously considered similar facts for earlier assessment years and reached the same conclusion in favour of the assessee; those findings were relied upon by the Tribunal in the present appeal. No binding authority was cited by the Revenue in the impugned order to treat the corporate/firm restructuring as disqualifying. Interpretation and reasoning: The CIT(A) and Tribunal examined whether the assessee satisfied statutory and administrative prerequisites for Section 10B: registration by the Development Commissioner as a 100% EOU for 'Legal Services,' classification under the CBDT notification, delivery of services by electronic means, customized electronic data transmission characterization, and compliance with Form 56G and foreign exchange realization requirements. The Tribunal found no evidence of contrivance amounting to an impermissible split that would disqualify the incentive; the issue was treated as fact-specific and resolved against Revenue based on material on record. Ratio vs. Obiter: The Tribunal's affirmation that segregation into an EOU did not amount to disqualifying 'splitting up' in the present facts is a factual ratio; it does not establish a general legal rule that all segregations are permissible. The Court treated this as a factual finding, not a principle of general application. Conclusion: The diversion of computer/software-related activity into a 100% EOU was not found to be an impermissible splitting-up in these facts; the unit satisfied statutory and administrative conditions for Section 10B relief, and the factual conclusion was upheld. Ancillary finding - Nature of the controversy and standard of review Legal framework: Appellate review of Tribunal factual findings is limited; questions of law arise only where a finding is unsupported by material or involves misapplication of legal principles. Interpretation and reasoning: The Court emphasised that the dispute was essentially fact-based. The Tribunal relied on its earlier findings in the assessee's own case for earlier years and observed absence of distinguishable facts in the present year; that finding was not challenged in the grounds of appeal. Given that the Tribunal made factual findings based on material on record and upheld the CIT(A)'s reasoning, the Court concluded no substantial question of law was raised. Ratio vs. Obiter: The Court's conclusion that no question of law arises is a legal determination limited to the posture of the appeal (i.e., reviewability of Tribunal's factual conclusions) rather than an adjudication on broader statutory interpretation beyond the record. Conclusion: The appeal was dismissed because the issue was fact-based, the Tribunal's factual conclusions were supported by material and prior findings, and no substantial question of law arose for the High Court's determination.