2012 (3) TMI 206 - HC - Income Tax

Development of software - manufacture and export - deduction under section 80HHC of the Income-tax Act - Revenue contented order of the AO that computer software recorded on magnetic tapes cannot be considered as goods for the purposes of section 80HHC of the Act in view of the introduction of section 80HHE in the Act - Held that - As per Section 80HHC an assessee, being an Indian company or a person (other than a company) resident in India,is engaged in the business of export out of India of any goods or merchandise to which this section applies whereas 80HHE defines that an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of computer software or its transmission from India to a place outside India by any means and providing technical services outside India in connection with the development or production of computer software - there is no substantial or material difference in provisions of section 80HHC(1) and section 80HHE(1)-because section 80HHE specifically deals with the export of computer software with effect from April 1, 1991,it does not mean that the operation of section 80HHC of the Act is excluded prior to April 1, 1991 - assessee was entitled to the benefit of section 80HHC

Summary

Issues:
1. Whether development of software amounts to manufacture of goods for deduction under section 80HHC of the Income-tax Act?
2. Whether the introduction of section 80HHE militates against granting deduction under section 80HHC for the anterior period?

Analysis:

Issue 1:
The first issue revolves around whether computer software recorded on magnetic tapes qualifies as goods under section 80HHC of the Income-tax Act. The Commissioner initially rejected the deduction claim, arguing that computer software on tapes does not constitute goods. However, the Income-tax Appellate Tribunal (ITAT) allowed the appeal, leading to the current case. The Revenue acknowledged that marketable computer software, including that on magnetic tapes, is considered goods based on Supreme Court precedents. The Madras High Court also supported this view. Consequently, the High Court affirmed that software recorded on various media forms, including tapes, qualifies as goods under section 80HHC, ruling in favor of the assessee.

Issue 2:
The second issue pertains to the impact of the introduction of section 80HHE on claiming deductions under section 80HHC for the period before its enactment. Section 80HHE specifically addresses the export of computer software, similar to section 80HHC. Drawing on a previous case regarding film software, the High Court reasoned that the introduction of a specific provision like section 80HHE does not nullify the applicability of section 80HHC before its implementation. Given that the assessment year in question predates the introduction of section 80HHE, the High Court concluded that the assessee rightfully claimed the benefit under section 80HHC. Consequently, the second substantial question of law was answered in favor of the assessee, leading to the disposal of the appeal in their favor.

In conclusion, the High Court upheld the assessee's entitlement to deductions under section 80HHC for software development, considering it as the manufacture of goods. Additionally, the Court affirmed the validity of claiming such deductions for the period preceding the introduction of section 80HHE.