TaxTMI 
TaxTMI 
2006 (8) TMI 333
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....ration on 21-3-1999 and the year under consideration, was the 3rd year of the business. For the year under consideration, the assessee declared total income at Rs. 11,75,450 after claiming deduction under section 80-IB amounting to Rs. 1,47,95,357. Besides manufacturing activities at Shoghi, in respect of which deduction under section 80-IB had been claimed, the assessee had also carried on the trading activities. The Assessing Officer observed that the profit percentage in respect of manufacturing activities, was 63 per cent as compared to in other activities which was at 12 per cent. He further observed that the average profit worked out to 48.26 per cent. It was also pointed out that in the succeeding assessment year, the profit rate had been shown at 9.40 per cent only. 3.1 In this case, survey under section 133A was conducted on 19-2-2002 at the business premises of the assessee. During the course of survey, it was noticed that major RCC work for erection of building had been completed and only first floor had been finished and that there were about 8 computers in half portion of first floor, another half portion was used as Office. During the course of survey, only a few i....
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....e Provident Fund Contribution Scheme. The Assessing Officer observed that the consumption of electricity shown by the assessee was on very low side and that huge RCC Building was under construction during the year. According to him the assessee was also carrying on the computer training course in the same premises. He, therefore, opined that the assessee was not entitled for deduction under section 80-IB of IT Act because it did not fulfil the conditions laid down in section 80-IB(2)(iv) and also did not manufacture or produce any article or thing as required under section 80-IB(2)(iii) of IT Act. The Assessing Officer asked the assessee as to why claim of deduction under section 80-IB should not be rejected. In response to that the assessee submitted that it was manufacturing/producing hardware and software products using computers, specialized man power and other equipments. It was further stated that the end products were not the same as rawdata, end result was a sophisticated programme to secure or interrupt the data or voice transmitted by various equipments. It was emphasized that for an industrial undertaking to be eligible for deduction under section 80-IB it was required t....
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....tware. (e)In section 80-IB there is no specific provision for allowing deduction on profits and gains of computer software. Had the Legislature an intention to give benefit of deduction under section 80-IB on profits and gains of computer software then Legislature would have amended the provisions of section 80-IB or inserted Explanation to this section so as to give benefit of deduction on business income of computer software. In other words, the deduction under section 80-IB is not allowable on profits and gains of computer software business. The Assessing Officer rejected the claim of the deduction under section 80-IB on the following grounds : (i)the assessee concern has been formed by splitting up from M/s. Secure Telecom Ltd. Delhi. Thus failed to fulfil condition in 80-IB(2)(i). (ii)The assessee does not manufacture or produce any article or thing in the Backward State i.e., Shoghi Himachal Pradesh. It is not entitled for deduction as per section 80-IB(2)(iii). (iii)The assessee failed to furnish evidence that it employed ten or more workers in the manufacturing process with the aid of power regularly w.r.t. section 80-IB(2)(iv). (iv)The assessee has wrongl....
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....procedure followed by the Industrial Department and thereafter the assessee started making Encryption products and Algorithms etc. and the final products was verified by the department of industries on 15-1-2000. It was further stated that the assessee carried on the software and hardware activities related to the following services : (i)Encryption Products and Algorithms, (ii)Telecom and Telecommunication Products (iii)E-Commerce Products Accordingly it was pleaded that the activities relating to manufacturing of products were undertaken by the assessee from time to time and the inspection and verification were conducted by Industries Department from time to time and relevant endorsements were made on PRC of the company which proved that the manufacturing activities were undertaken at the premises of the industrial unit at Shoghi. It was stated that the assessee was primarily engaged in the production of software and hardware for encryption for which computers and software professionals were primary assets. It was pointed out that in the case of the assessee most of the ultimate customers happened to be Government Departments who used assessee's equipments and software....
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....ee had imported other equipments and sold the same by way of trading. 4.2 As regards to observation of the Assessing Officer that the main activities of the assessee were being carried out in Delhi, it was submitted that proof of transportation of manufactured goods from Shoghi to Gurgaon/Delhi were furnished to the Assessing Officer during assessment proceedings. Reference was made to the following items by stating that these were furnished to the department under the cover of a letter dated 20-1-2004 : (i)Copy of Bills (ii)Form No. 26 of Sales Tax barrier at Parwanoo (iii)G.R. Forms of transporters It was emphasized that assessment order acknowledged that Shri Pradeep Kumar, Manager had stated during the survey that Encryption Adaptors were manufactured at Shoghi. Thus, one of the major products manufactured by the company was mentioned by Shri Pradeep Kumar to the DCIT at the time of survey and it would be wrong to say that no manufacturing activities were carried out at Shoghi. It was further stated that when-so-ever it was required, machinery was taken to Delhi/customer location for installation, testing and maintenance purposes and after completing the job, the....
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....qualified. Therefore, it would not be correct to say that they were looking after the marketing only rather they were engaged in the development/manufacturing/ installation and also marketing development activities because of nature of the products. It was further stated that the assessee was working on the specialised technology (I.E. communication security/Encryption) i.e., to secure the communication for critical applications and the end-users were Defence and other Government Organisations. It was emphasized that the technology in manufacture of various equipments was not told/made public to all the employees of the organisation and the modules/sub-modules were given to different people for the development purpose keeping in view the security issues. That was the reason why total projects and details being worked on, were not known to the number of employees of the organization of the assessee-company. 4.4 Regarding low consumption of electricity, it was submitted that a detailed report was submitted to the DCIT vide letter dated 30-1-2004. Regarding computer training course being carried out by the assessee, it was stated that during the period in question, no such activity....
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.... not violate the conditions laid down under section 80-IB(2)(i) of the IT Act. Reliance was placed on the judgment of Hon'ble Karnataka High Court in the case of T. Satish U. Pai v. CIT [1979] 119 ITR 877. 5.1 Regarding manufacturing activities claimed to be undertaken by the assessee, Ld. CIT(A) pointed out that the main products as mentioned in the Certificate of Registration issued by the Manager, District Industries Centre, Shimla, were following : Telephone Information Recorder (TIR) Telephone Security Unit (TSU) Information Gathering System (IGS) And as per item No. 14, its main raw materials were following : Telephone Security Unit (TSU) Telephone Information Recorder (TIR) Information Gathering System (IGS) Electronic/Electrical Component On the basis of above, he stated that the raw material and the final products were same which implied that the assessee was engaged in the sale/purchase of those goods and was not manufacturing them. He further observed that out of total turn over of Rs. 3.30 crores as much as Rs. 1.91 crores was on account of sale of software and Rs. 97 lakhs was on account of trading in goods. Therefore, trading and other no....
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....ssary to look into the other evidences available and most important evidence was in the form of information gathered by the Assessing Officer during the course of survey conducted under section 133A of IT Act at the business premises of the assessee at Shoghi. According to him, during the course of survey, survey team did not come across any manufacturing activities being carried out at Shoghi and all the employees, whose statements were recorded during the course of survey, categorically stated that no manufacturing activities were being carried out at Shoghi. Ld. CIT(A) mentioned the names of 10 persons at page 14 of the impugned order, statements of whom were recorded on the date of survey. He, therefore, opined that the assessee did not have any evidence to support that any manufacturing activities were being carried out at Shoghi and all the employees present during survey operation, confirmed that no manufacturing activities were carried out there and that only activity of the assessee as per its employees related to the sale of laptops and web designing/software development. He pointed out that there were absolutely no record to suggest that any manufacturing process was bei....
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....im. He further stated that the assessee was selling most of the goods to the sister concerns namely M/s. Secure Telecom Ltd. and M/s. Shyam Telecom Ltd. who were the dealers and not the ultimate users of this kind of equipment and had also their own equipments, tools, plants & machinery etc., so would not require assessee's equipments, tools etc. According to him, the Shoghi was only a camou- flage and was being maintained to claim deduction under section 80-IB although everything concerning assessee's business was being done in its office at Delhi. He, therefore, opined that the assessee was not actually engaged in the software and hardware during the relevant period and this fact was supported by the fact that no plant & machinery was found at assessee's premises at the time of survey on 19-2-2002. Ld. CIT(A) further observed that purchase bills revealed that along with hardware items of Elite 2000 XL and M Fax Cards purchased from M/s. Sevenhill Trading Inc., USA, the assessee had also purchased corresponding softwares in equal number as the hardware items through the bills. He further observed that hardware items were sold by the assessee from certain bills to M/s. Secure Telec....
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....s per needs and requirement of each user and customer i.e., customers. These all activities are done by our Delhi corporate office except for R&D customization." On the basis of above, Ld. CIT(A) observed that the Vice President of assessee-company, himself had admitted that except for R&D, customization of other activities were being done at Delhi and no manufacturing was done at Shoghi. Ld. CIT(A) further stated that during the course of survey, Shri Anand stated that development/manufacturing of software commenced in December 2000 at Shoghi, if that be so, it was not clear, how the assessee could sell software worth over Rs. 60 lakhs in financial year 1999-2000 and software worth Rs. 1.53 crores till 5-5-2000 in financial year 2000-01. According to the Ld. CIT(A), all those sales took place before December, 2000 when the assessee had not started manufacturing software. According to him during the relevant period, all the persons responsible for development of software were based at Delhi office. He further observed that items sold to M/s. Secure Telecom Ltd. were to be shipped to Shri Vibhu Anand on behalf of that company. He referred to few bills which had been reproduced....
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.... with the manufacture or processing of goods, was an 'industrial undertaking'. According to the Ld. CIT(A) software programme was a outcome of processing of any raw material which was designed and developed using the intangible resources of the human mind and hence did not fit into the context in which the words had been used in the section 80-IB and that the words 'computer software' had not been included in the term 'manufacture of an article or thing' but had been specifically added where the Legislature intended to refer to it. The reference was made to the definitions given in sections 10A, 10B and 10(15) of IT Act. Ld. CIT(A) held that activity of computer software was not covered under the clause (A) of section 10(15) of IT Act which concerns manufacturing or processing of goods. Ld. CIT(A) relied on the following judgment: CIT v. N.C. Budhiraja & Co. [1993] 204 ITR 412 (SC) CIT v. Madgul Udyog [1994] 208 ITR 541 (Cal.) Ld. CIT(A) distinguished the judgment of Hon'ble Calcutta High Court relied on by the assessee in CIT v. Shaw Wallace and Co. by stating that the issue in that case was related to investment allowance on new plant & machinery installed in the compute....
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....e worth Rs. 1.53 crores had been sold up to that date. Ld. CIT(A) referred to section 101 of the Evidence Act which provides that "whoever desires any court of give judgment as to any legal right or liability dependent on the existence of facts which he asserts, must prove that those facts exists." He also referred to section 102 of the Evidence Act which provides that the burden to prove in a suit or proceeding lies on that party who would fail if no evidence at all were given or no more evidence as the case may be, were added by either side. Ld. CIT(A) stated that in the present case it was claimed by the assessee that it was entitled to deduction under section 80-IB of IT Act and therefore, he must have proved it and if no evidence was adduced by it, it should fail. According to him the assessee had failed to produce any record relating to manufacturing activities. The evidence gathered at the time of survey also were against the assessee and not even a single document relating to manufacture or production was found at the time of survey. He, therefore, was of the view that the assessee had failed to prove that it carried out any manufacturing activity at the premises at Shoghi.....
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....cer was sustained. Now the assessee is in appeal. 6. Ld. Counsel for the assessee reiterated the submissions made before the authorities below and submitted that deduction under section 80-IB had been denied by the revenue authorities entirely on erroneous grounds, legal as well as factual. It was submitted that most of the evidences filed by the assessee as well as string of judicial authorities cited in support of the claim that production of software and hardware had been carried out by the assessee at its industrial undertaking at Shoghi (Shimla) which is a notified backward region, had been unfairly brushed aside by the revenue authorities. He further submitted that standard of proof in civil cases is based on the test of preponderance of probabilities and not proof beyond reasonable doubt as held by the Hon'ble Apex Court in the case of Dastane v. Dastane AIR 1975 SC 1534. It was further stated that sections 80-IB and 80HHC were incentive provisions for promoting industrial growth in backward regions and pushing up exports respectively and the very approach/attitude of the revenue adopted against the assessee in the instant case would thus frustrate the legislative intenti....
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....igital Multimeters, Soldering Stations and Resoldering Stations etc. Reference was made to page 93 of assessee's compilation. It was further stated that the detail of raw material to be used for manufacturing had been given at Sr. No. 14 of the Registration application which included following : (1)Module for Code 8031/51 (2)ICE Box (3)TSU cabins (4)TIR cabins (5)IGS cabins (6)Electronic & Electrical components It was argued that subsequently on 15-1-2000 additional items of manufacture namely Encryption board had been started and duly entered on the registration certificate. Again on 20-1-2000 manufacture of following additional items had been started and recorded on the registration certificate. Software & Hardware Development (i) Encryption products & algorithms Activities and related services (ii) Telecom & Communication products (iii) E-commerce products It was emphasized that additional products had again been added with effect from 6-3-2000 and the additional items were Computer Network Security Products & Solutions with effect from 6-3-2000. The PRC had been issued by the General Manger, District Industries Centre, S....
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.... goods which were sold had been manufactured at the industrial unit at Shoghi. It was submitted that this fact was evidenced by the prescribed declarations in Form No. 26A under HP General Sales Tax Rules and was duly verified by the concerned Sales Tax authorities at Parwanoo barrier, further transportation of goods from Shoghi to the destination was also evidenced by the respective GRs issued by the transporters. It was clarified that certain sales which were transit sales whereby imported products were cleared and delivered to the vendees at New Delhi, the proper narration to this effect had been made on the Sale Bills itself. Reference was made to the bills placed at page Nos. 51, 53 and 68 etc. of paper book. It was further stated that bill-wise details of the sales indicating the break up under the head 'Exports Software 80-IB and Hardware 80-IB as well as trading' had been tabulated at page 33 of paper book. Ld. Counsel for the assessee narrated the manufacturing process of the products manufactured by the assessee. It was stated that Elite 2000 XL Voice & Fax Encryption System was designed and developed for securing point to point communication on radio links by the end use....
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....denied the claim of deduction under section 80-IB of IT Act and the same had been sustained by the Ld. CIT(A) in spite of the fact that the written submissions had been made on various dates to the Ld. CIT(A) refuting the points raised by the Assessing Officer. Our attention was drawn towards page Nos. 1 to 88 of assessee's compilation. As regards to the observation of the Ld. CIT(A) that no production and manufacturing had been carried out at Shoghi unit and that the number of workers were below 10, as such conditions laid down under section 80-IB(2)(iv) were not fulfilled, ld. Counsel for the assessee submitted that plethora of evidence had been placed on record in support of the activity of production of software and hardware products at the Shoghi unit namely security products and communication and encryption devices. The certificate of registration issued by the General Manager, Industries Centre, Shimla was one of the documents supporting the factum that the assessee was a bona fide and genuine unit engaged in the manufacture of software and hardware. As regards to the observation of the Ld. CIT(A) that item No. 11 mentioned in the certificate was exactly identical with....
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....r of Rs. 3.30 crores, Rs. 97 lakhs was on account of trading in goods and that the separate books of account were not maintained in respect of trading goods. It was submitted that the trading activity was only for an amount of Rs. 97.30 lakhs and the balance turn over including software of Rs. 1.90 crores and hardware amounting to Rs. 18.69 lakhs represented sales of self-manufactured products of the assessee. Thus substantial part of the turn over of the Shoghi unit of the assessee represented manufacturing activities. It was further stated that non-maintenance of separate account for trading as well as manufacturing, would not justify the rejection of claim under section 80-IB. Reliance was placed on the following case laws: CIT v. Mazagaon Docks Ltd. [1991] 191 ITR 460 (Bom.). CIT v. Hind Lamps Ltd. [1991] 190 ITR 553 (All.) Mahindra Sintered Products Ltd. v. CIT [1989] 177 ITR 111 (Bom.) CIT v. JK Synthetics Ltd. [1990] 182 ITR 125 (Delhi) CIT v. Dunlop Rubber Co. India Ltd. [1977] 107 ITR 182 (Cal.) CIT v. Harinkhola Ice & Cold Storage Ltd. [1982] 134 ITR 540 (Cal.) Ld. Counsel for the assessee further submitted that the conclusion drawn by the Ld. CIT(A) ....
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....ubmissions that the statements were inadmissible evidence and had no evidentiary value, the inference drawn by the Ld. CIT(A) on the basis of these statements was factually incorrect. It was pointed out that Shri Vibhu Anand who had been working with the company as Vice President looking after Shoghi Unit, Shimla, in response to Q. No. 11, had given his residential address at Summer Hills residing in the house of Shri Dharan Das Sharma. Regarding the manufacturing activity, Shri Vibhu Anand stated that software development of encryption instrument had been carried out at the Shoghi Unit since December 2000 whereas sales activity were carried out at the corporate office at Delhi. With regard to plant & machinery, he had given the details of some instruments in response to Q. No. 3 Ld. Counsel for the assessee emphasized that in the Information Technology Industry particularly the software sector is primarily a knowledge based industry and that unlike heavy engineering sector in capital intensive heavy equipment, plant & machinery were normally not required in software sector. This vital aspect had apparently being ignored by the revenue authorities while insinuating against the asse....
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.... was stated that new industrial undertaking should have employed 10 or more workers during the entire period in which the deduction under section 80-IB was claimed. It was emphasized that deduction would be allowable if the undertaking had employed 10 or more workers substantially during the period. Reliance was placed on the following case laws: CIT v. Harit Synthetic Fabrics (P.) Ltd. [1986] 162 ITR 640 (Bom.) CIT v. Ormerods Industries (P.) Ltd. [1989] 176 ITR 470 (Bom.) CIT v. KG Yediyurappa & Co. [1985] 152 ITR 152 (Kar.) CIT v. Sultan & Sons Rice Mill [2005] 272 ITR 181 (All.) Asstt. CIT v. Ms. Richa Chadha [2005] 96 ITD 325 (Mum.) Panorma Industries v. Dy. CIT [ITA No. 3104 (Mum.) of 1997] Ld. Counsel for the assessee furnished a written submission which was reiterated during the course of hearing in the following words: "In the instant case apart from what has been mentioned above regarding the working strength it can be pointed out that over and above the workers included in the establishment strength as per pages 95 & 96 of the paper book No. 1 there are temporary and part time workers also employed as would be seen from the software expenses of Rs....
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....er consideration, it was stated that the Ld. CIT(A) had unfortunately failed to appreciate that Shoghi unit started production of software in November - December, 1998 and the registration certificate of the Industries department certified the date of commencement of production as 21-3-1999, the development of software programme was ongoing process for any software unit and the assessee developed software which was duly included in the opening stock of Rs. 32,18,589 and that looking to the substantial profit margin in the software being developed by the assessee being indigenous development of security devices and products hitherto being imported and also looking to the facts of the case, there was nothing unusual and unrealistic if the assessee had shown the sale aggregating to Rs. 1.53 crores till 15-5-2000 which were in respect of software namely Elite 2000 XL Encryption System as well as software for M-Fax system. As regards to the observation of Ld. CIT(A) that certain sale bills issued by the assessee to M/s. Secure Telecom Ltd. had been signed by Ms. Garima Paul and Shri Vibhu Anand during the period when they were not the employees of the assessee, it was stated that the....
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....each component instead of giving lump sum price of the system at Rs. 80,000 per unit. It was explained that the first component described as hardware Elite 2000 XL hardware was imported, this hardware when imported included the driver software which was used to connect the device to the PC/External Devices for programming this software, since this hardware had been imported this portion of the sale consideration had been taken as trading item sale. The second component of the system which was actually the heart and soul of the system, i.e., Encryption Algorithm was the computer software developed by the Shoghi unit and was actually the application software without which the system would not perform the point to point communication on the radio links. This encryption algorithm developed by the assessee at Shoghi unit was programmed/down loaded on the above mentioned imported hardware device and the sale consideration of this unit had separately been indicated on which deduction under section 80-IB had been claimed being self-developed software. Regarding third component shown in the bill, it was stated that the same was self-manufactured hardware device used as an inter face between....
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....mance in the field of indigenous development of surveillance system and the award was conferred by the Dy. Prime Minister of India on 9th June, 2001 at the valedictory function held at Shimla when the top dignitaries of the State and the Senior officers of State Government were also present. It was further stated that several officers of the State Government visited the unit of the assessee several times and profusely commended the good work done by the assessee. It was submitted that the development of the software had been construed as production of an article or thing by the various Benches of ITAT and thus entitling the assessee for claim of deduction under section 80-IB. Reliance was placed on the following case laws : Infotech Enterprises Ltd. v. Jt. CIT [2003] 85 ITD 325 (Hyd.). R.S. Bhagwat v. Asstt. CIT [IT Appeal No. 8620 (Bom.) of 1995]. ISBC Consultancy Services Ltd.'s case (supra). On the basis of above, it was submitted that in view of the consistent stand taken by the Tribunal and the doctrine of binding precedent, judicial discipline and propriety, makes it imperative that co-ordinate Benches to take a view in conformity with judicial precedent available....
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.... of Hon'ble Supreme Court in the case of CCE v. Dhiren Chemical Industries [2002] 254 ITR 554. On the basis of aforesaid arguments, Ld. Counsel for the assessee emphasized that the assessee fulfilled all the conditions to make it eligible for deduction under section 80-IB, therefore, the order of Ld. CIT(A) should be set aside and the directions may be given to allow the claim of the assessee. 7. On behalf of the department, Ld. CIT (Admn.), Shimla sought the permission to argue the case in place of regular Departmental Representative i.e., CIT (D.R. for the revenue), Addl. CIT, JCIT etc. In the beginning, Ld. Counsel for the assessee showed reluctance but later on did not object for the arguments to be made by the CIT (Admn.), Shimla. 8. In his rival submissions, ld. CIT strongly supported the orders of authorities below and submitted that at the time of survey on 19-2-2002, no machinery was available, no attendance register was produced, therefore, it could easily be said that the assessee was not engaged in the manufacturing activity and no article or thing was manufactured. He submitted that the assessee was buying the software and trading those. It was stated that certai....
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....purchase of those goods. He further stated that the trading and other non-manufacturing activities of the assessee constituted a very sizeable part of its operation (87.3 per cent at Shoghi). It was argued that an industrial undertaking could not be engaged in non-manufacturing activities unless of course, such activities were incidental and ancillary to its main operations. According to him, Income-tax Act did not envisage deduction under section 80-IA/80-IB for units engaged in non-manufacturing activities in substantial way and since in assessee's case a substantial part of its turn over was on account of trading, so deduction was not allowable. The ld. CIT further stated that the statement of 10 senior employees were recorded on the date of survey. In their statements, those employees stated that no manufacturing activities were being carried out at Shoghi and the only activity which was carried out by the assessee related to sale of laptops and Web Designing/Software development and there were absolutely no records that suggest any manufacturing processes being carried out by the assessee-company. Regarding submissions of the assessee that no record was kept and the product re....
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....f goods and thus exempt. The CIT submitted that the software too was not manufactured by the assessee which was borne from the purchase bills issued by M/s. Seven Hills Trading Inc. though those bills were dated 27-3-2000 and 29-3-2000 but the goods covered by those bills were received sometime in April, 2000 i.e., may be a day or two before the date of sale on 7-4-2000 and 25-4-2000 as per sale bills of the assessee. He further submitted that the hardware and software items were sold separately and there was no question of integrating the same which clearly proved that false description of manufacturing process was given by the assessee before the Assessing Officer and the Ld. CIT(A). He also stated that the goods and software appeared to have been received in New Delhi on 8-5-2000 and it was not understood how the assessee could have sold those items of the software vide sale bill dated 5-5-2000. He reiterated that out of total sales of Rs. 1.90 crores of software as much as sales worth Rs. 1.53 crores had been effected during the first 35 days i.e., till 5-5-2000 of the financial year, which was not possible to be accepted in the absence of any supporting evidence that all this ....
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....en manufacture or production of an article or thing, this would have automatically been covered by the natural definition of article or thing and the Legislature would not have added computer software at various places in the section 10 of IT Act. He further stated that the words 'computer software' had been added in section 10B by the Finance Act, 2001 with effect from 1-4-2001, prior to the amendment, there was a special definition of "manufacture" and "produce" given in the said section which had shown that the term was not included in the ordinary meaning of "manufacture" or "produce", therefore, the development of computer software/programme could not be deemed to have been contemplated under the provisions of section 10B. He further stated that the software development or making computer programme was different from processing or management of electronic data, as per the provisions of section 10BB. He further stated that section 10BB is a deeming provision and processing of electronic data had been considered as production of computer programme under section 10BB with effect from 1-4-2001. He accordingly submitted that the development of computer software could not be covered....
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.... be termed as goods. The meaning of canned software as given in para 61 on page 162 in the said decision by the Hon'ble Supreme Court reads as under : (7)'Canned Software' means that is a not specifically for a particular consumer. The sale or lease of or granting a license to use, canned software is not automatic data processing and computer services. But is the sale of tangible personal property. When a vendor, in a single transaction sells canned software that has been modified or customized for that particular consumer, the transaction will be considered the sale of tangible personal property, if the charge for the modification constitutes not more than half of the price of the sale. vii.The software allegedly produced by the assessee does not fall within the scope of the definition of 'canned software' for the following reasons : (a)The software claimed to be manufactured by the assessee is for specific clients and users. (b)It is user software of which hundreds of copies are prepared and distributed for use of the purchaser. (c )The assessee is not actually manufacturing software but it is buying software from abroad and selling the same at very high premier....
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....ar, electricity expenses had gone up against all expectations of as much as three times. He, therefore, stated that there was no relation with the manufacturing turn over and the consumption of electricity and the assessee could not prove anything on this point that the manufacturing process was carrying on with the aid of power. He further submitted that although the assessee had claimed to have employed 20 or more people but most of them were posted in its Delhi office and those who were posted at Shoghi, many of them admittedly were engaged in the marketing and other non-manufacturing jobs and thus did not qualify to be termed as 'workers employed in the manufacturing process'. He further stated that the assessee and the official inflated the profit to claim higher deduction under section 80-IB since the other sister concerns of the assessee were showing net profit on lower side in comparison to profit shown by the assessee, in spite of the fact that the activities of the sister concerns and the assessee were same, moreover, the value of plant & machinery of the sister concerns, were much higher than that of assessee's. Therefore, it was clear that the assessee had declared abno....
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....ficer who had rightly disallowed the claim of the assessee. 9. In his rejoinder, Ld. Counsel for the assessee submitted that it was not legally required that separate books should be maintained in respect of manufacturing and trading. He further stated that the sales tax assessment of the assessee had been framed and it was not necessary that the sales tax should be levied because the manufacturing of software was in the nil sales tax category. He further stated that in the form submitted for registration to the G.M., D.I.C. in the items to be manufactured, software and hardware were mentioned and that had been endorsed by the G.M., D.I.C. Our attention was drawn towards back of page No. 34 of assessee's compilation. He further stated that the assessee started manufacturing activity from 20-1-2000 and on that date workers were more than 10, so the conditions laid down were fulfilled by the assessee to be eligible for deduction under section 80-IB. He further submitted that in the details of plant & machinery computer was mentioned and it was physically verified by the officials of the Industries Department. He drew our attention towards page No. 36 of assessee's compilation whic....
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....n ITA No. 8620/Mum./95 in the case of R.S. Bhagwat ( supra) (A copy of the same was furnished which is on the record). Ld. Counsel for the assessee concluded that all the conditions necessary for the claim of deduction under section 80-IB were satisfied by the assessee, therefore, Ld. CIT(A) was not justified in confirming the action of the Assessing Officer in not allowing deduction legally available to the assessee under section 80-IB of IT Act. He, therefore, prayed to allow the deduction. When the Ld. Counsel for the assessee concluded his arguments in the shape of rejoinder, the ld. CIT asked for an opportunity to be given to him to rebut the contention of the Ld. Counsel for the assessee. The ld. Counsel for the assessee objected and stated that the opportunity was not to be given to the ld. CIT because he had already argued the matter at length and rebutted all the contentions raised on behalf of the assessee and also supported the observations of the Assessing Officer as well as of the Ld. CIT(A) during his detailed and lengthy arguments. It was further stated that in the rejoinder he only rebutted the contentions raised by the ld. CIT and nothing new had been argued, so....
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....is stage we may mention that in appellate proceedings, the parties are free to argue at length and may ask for the time which is needed to make the relevant submissions. However, when the arguments of both the parties are concluded the Bench should not consider anything new furnished by either of the party because in that event opportunity should also be given to another party and it will be a never ending process because after receiving the written submissions of one party, the opposite party will ask for time to argue the matter or will furnish written submissions then the another party will repeat the same course and it will be a never ending process. We, therefore, are of the opinion that in the appellate proceedings, equal, due & reasonable opportunity should be given to both the parties to argue the matter and also the opportunity should be given to the appellant for rejoinder and if after concluding the arguments/hearing of the case, anything new is furnished by either of the party that should not be entertained unless and until that goes to the root of the matter under consideration but in that eventuality opportunity should be given to the opposite party. As we have alread....
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....n in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted. Explanation 1-For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:- (a)such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b)such machinery or plant is imported into India from any country outside India; and (c)no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2-Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new bu....
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....ule. In the present case the claim of the assessee is that it produced software, so it was eligible for deduction under section 80-IB. The Central Excise Tariff Act, defines the "software" and states that any representation of instructions, data, sound or image including source code and object code recorded in a machine readable form and capable of being manipulated or providing interactivity to a user by means of an automatic data processing machine. 10.1 In the instant case the assessee claimed that it manufactured software which was an Encryption Algorithm and also manufactured Serial Encryption Hardware. The Encryption Algorithm was programmed & down loaded on the hardware device. Now the question arises - whether the software developed by the assessee comes under the category of manufacture or thing. In this regard Hon'ble Supreme Court in the case of Tata Consultancy Service Ltd. (supra) has held as under : "The term "goods", for the purposes of sales tax, cannot be given a narrow meaning. Properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc., are "goods" for the purpose of sales tax. Th....
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....ce to the observation that the assessee was engaged in manufacture of articles or things, the activities embarked upon by the assessee would also amount to 'process'. It is well-settled that an inclusive definition enlarges the ordinary meaning of the word and when it is so used, it must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which, the interpretation clause declares that they shall include. Hence those processes which ordinarily may not constitute manufacture will have to be construed as such in view of the artificial and widened definition in clause (iii) of Explanation to section 10A." 10.3 On a similar issue, ITAT Hyderabad Bench 'B' in the case of Infotech Enterprises Ltd. (supra) has held as under : "The word 'produce' given in sections 10A and 10B is limited to those sections only. However, the CBDT Circular No. 694, dated 29-11-1994 clearly mentions that the definition of 'produce' given in sections 10A and 10B is only clarificatory and that EOUs and software units are eligible for availing exemption under sections 10A and 10B even for the period prior to the insertion of that expr....
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....anded software. In view of the judicial pronouncements as discussed herein above, and as per the instructions given by the CBDT in the aforesaid referred to circular, development of software can be considered as manufacturing. Deduction under section 80-IB is available to an industrial undertaking which manufactures goods. In the instant case software developed i.e., manufactured by the assessee comes under the category of goods and so, the assessee fulfilled the conditions laid down under section 80-IB(2)(iii) since the software is not an article or thing specified in the list of 11th Schedule. 10.5 In the instant case, the G.M., D.I.C after on the spot verification and personal inspection which is very much evident from page No. 93 of the assessee's compilation where the G.M., D.I.C as appended his signature with Office seal and mentioning "verified plant & machinery". Therefore, it can be said that the plant & machinery were installed and those were verified by the G.M., D.I.C. It is also not in dispute that the assessee was having General Sales Tax and Central Sales Tax exemption and also Central Excise Duty was not leviable in accordance with Central Excise Tariff Act, 2005....
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....tc. which established that the goods were manufactured at Shoghi unit. 10.8 As regards to the objection of the department that for few items sales were transit sales, the assessee had already given the explanation to the department that those sales were trading sales and no deduction under section 80-IB had been claimed on those sales, therefore, the objection of the department is without any merit. 10.9 Considering the totality of the facts and the evidences produced by the assessee in the form of registration certificate, wherein the manufacturing process has been described, sales bills, goods receipt note, Form No. 26 maintained under; the H.P General Sales Tax Act, certificate of registration issued by the G.M., D.I.C etc. it cannot be denied that the assessee was manufacturing software at the Shoghi unit. 10.10 The another objection raised by the department while rejecting the claim under section 80-IB, was that separate books of account, had not been maintained in respect of goods manufactured and trading activities. In the instant case the assessee had maintained books of account in regular course of business which had been accepted by the department and no defect h....
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....aintained." It is noticed that in the aforesaid referred to cases, the issue under consideration of the various High Courts related to deduction under section 80J which had since been omitted by the Finance (No. 2) Act, 1996 with retrospective effect from 1-4-1989 however, the fact remains that the deduction under section 80J was available in respect of the profits and gains from a newly established industrial undertaking and the deduction under section 80-IB also relates to profits and gains from certain industrial undertakings. Therefore, the ratio laid down by the various Hon'ble High Courts in the aforesaid referred to cases rendered in respect of section 80J, is applicable to the facts of the present case. In that view of the matter, we are of the view that non-maintenance of separate books of account for trading as well as manufacturing, would not justify the rejection of claim under section 80-IB particularly when other books of account maintained by the assessee in the regular course of business, had been accepted and no defect had been pointed out either in sale or in purchase and even the profit declared by the assessee, had not been altered except the disallowance on ....
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....the requisite number of workers in the industrial undertaking or not. The assessee had submitted the list of employees to the Assessing Officer vide letter dated 30-1-2004. The Assessing Officer did not disbelieve the list furnished by the assessee. The only objection was that out of 29 employees shown as working in the month of March 2001 only four persons were there in the list furnished by Shri Tapan, the employee of the assessee in his statement dated 19-4-2002. The contention of the assessee was that during the course of survey, the statements of as many as 16 persons, present at the premises were recorded. Some of the employees in their statements, have indicted the particulars of the workers who were employed with the assessee and those statements had not been rebutted. The assessee had furnished the list of employees during financial year 2000-01 which is placed at page Nos. 95 and 96 of assessee's compilation. On perusing the list, it is noticed that some of the employees had left the organization during financial year itself and the number of persons who left the service on or before 31-3-2001, was seven out of total 34 employees and two of the employees left on 31-3-2001....
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....t the relief would be allowable if the undertaking has employed 10 or more workers substantially, during the period for which the relief was claimed. As per list furnished by the assessee which had been reproduced by the Assessing Officer at page 4 of the assessment order dated 1-3-2004, it would be clear that the workers employed for the months of April and May, 2000 were 17 and in the months of July, September, November and December, 2000 the employees were 21. For the month of June, 2000, the number of employees were 19 while for August & October, 2000 and February, 2001 the number of employees were 20, for the month of January 2001, there were 22 employees and for the month of March, 2001, 29 employees were employed by the assessee which clearly establishes that the worker employed substantially during the period relevant to assessment year under consideration were 20 or more than 20. The Assessing Officer as well as the Ld. CIT(A), although doubted the number of persons employed by the assessee, however, the expenses claimed by the assessee for temporary and part time workers amounting to Rs. 10,25,180 had been allowed and the expenses on account of establishment debited to....
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.... not justified in rejecting the claim of the assessee on the basis that only four employees out of list furnished by the assessee for year under consideration, were working as on 19-2-2002 and only for seven employees, provident fund Contribution scheme was applicable. In our opinion, the condition to be fulfilled by the assessee was that there must have been at least 10 employees involved in the manufacturing process during the year under consideration since the process was undertaken with the aid of power, from the details available in the assessment order as well as the list furnished by the assessee before the Assessing Officer which is available at pages 95 and 96 of assessee's compilation, it would be clear that the assessee had employed more than the requisite number of employees. Therefore, the condition mentioned in clause (iv) of sub-section (2) of section 80-IB had also been fulfilled by the assessee. 10.22 The another reason for refusing the deduction to the assessee under section 80-IB was based on the statements of certain persons. The Assessing Officer pointed out that during the course of survey, the statements of 16 persons claimed to be the employees of the ass....
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.... the assessee on the basis of books of account maintained during the regular course of business. In the present case, the Assessing Officer did not doubt the payment of salary and wages to 29 workers and had also allowed expenses paid to the temporary and casual workers. So, there was no occasion to hold that the assessee had not fulfilled the conditions laid down under section 80-IB (2)(iv) of IT Act. 10.26 In view of the above discussion, we are of the opinion that the assessee had fulfilled all the four conditions laid down in section 80-IB(2), therefore, it was eligible for deduction under section 80-IB of IT Act. In that view of the matter, we set aside the order of Ld. CIT(A) on this issue and direct the Assessing Officer to accept the claim of the assessee. 11. The next ground in this appeal raised by the assessee relates to the deduction under section 80HHC. 12. The assessee claimed deduction under section 80HHC at Rs. 11,42,990. The Assessing Officer disallowed the claim by stating that the assessee had given note in the return of income for deduction under section 80HHC and filed the audit report under section 80HHC in Form No. 10CCA but no amount of deduction wa....