2014 (5) TMI 548 - AT - Income Tax

Disallowance of deduction u/s 10B of the Act Held that - The assessee after collecting raw data and pictures has utilized its expert designing skills in producing a ready to print e-book - The final product is intended for use of a particular customer and it does not fit in the category of production of any customized electronic data as per the definition of computer software defined in Explanation 2 to section 10B of the Act - even if it is said that the assessee has merely customized the data, which was already available and has not created altogether new software then too the appellant cannot be deprived of the benefit of deduction the definition of produce is wider than the term manufacture Relying upon CIT vs. Lovesh Jain 2011 (12) TMI 93 - DELHI HIGH COURT it does not require to produce or manufacture altogether a new product - but if the outcome of the process is a different product than the input, it would fall under the definition of produce - whatever form the input data is, so long as the end product is in the form of electronic data which is customised by the appellant for the end use of a particular customer, then benefit of deduction u/s 10B of the Act cannot be denied - the final product of the assessee was in electronic form. The Assessee s business involved export of ready to print books which in the instant case is the customized electronic data - The nature of activity done by the assessee in the EOU was that of producing designs, drawings, layouts and scanning for the projects of foreign clients on the basis of their parameters and specifications - This activity is done by taking into consideration the data collected by the assessee itself or from clients the assessee is entitled to claim deduction u/s 10B of the Act - the ready to print books exported by the appellant in the form of a CD or e-mail are customised electronic data eligible for claiming benefit of deduction Decided in favour of Assessee.

Issues Involved:
1. Disallowance of deduction under Section 10B of the Income Tax Act.
2. Satisfaction of conditions stipulated by Section 10B(2)(i).
3. Levy of interest under Sections 234B and 234D of the Act.
4. Validity of orders passed by CIT(A) and the Assessing Officer.

Detailed Analysis:

1. Disallowance of Deduction under Section 10B of the Income Tax Act:
The assessee claimed a deduction under Section 10B for exporting software, which the Assessing Officer disallowed, arguing that the activities of the assessee did not meet the definition of "software" as per the Act. The assessee's business involved exporting ready-to-print files for illustrated books. The process included collecting raw material, designing and laying out the book, scanning and color correction, and embedding high-resolution images into the final files. The assessee contended that these activities constituted "customized electronic data," qualifying for the deduction under Section 10B.

2. Satisfaction of Conditions Stipulated by Section 10B(2)(i):
The CIT(A) upheld the Assessing Officer's decision, stating that the assessee did not satisfy the conditions of Section 10B(2)(i). The assessee argued that the term "computer software" includes "customized electronic data" as per the statutory provisions and CBDT notifications. The assessee relied on various judicial precedents, including the Chennai Bench of ITAT in the case of ITO, Chennai Vs. Accurum India (P) Ltd, which supported the view that customized electronic data qualifies for the deduction under Section 10B.

3. Levy of Interest under Sections 234B and 234D of the Act:
The CIT(A) also upheld the levy of interest under Sections 234B and 234D. However, the primary focus of the appeal was on the disallowance of the deduction under Section 10B, and the interest levied was a consequential issue dependent on the primary issue's outcome.

4. Validity of Orders Passed by CIT(A) and the Assessing Officer:
The assessee challenged the validity of the orders passed by the CIT(A) and the Assessing Officer, arguing that they were void ab initio and bad in law. The primary contention was that the authorities did not correctly interpret the statutory provisions and judicial precedents relevant to Section 10B.

Judgment:
The Tribunal analyzed the statutory provisions, judicial precedents, and the facts of the case. It concluded that the activities of the assessee constituted "customized electronic data" as per the definition of "computer software" under Section 10B. The Tribunal emphasized that the term "produce" is broader than "manufacture" and includes the creation of customized electronic data. The Tribunal also noted that the authorities below did not appreciate the nature of the assessee's activities correctly.

The Tribunal relied on the Third Member decision in Accurum India Pvt Limited and other coordinate bench decisions, which supported the assessee's claim. It held that the ready-to-print books exported by the assessee in electronic form qualified for the deduction under Section 10B.

Conclusion:
The Tribunal allowed the appeal, directing the Assessing Officer to allow the deduction under Section 10B. Consequently, the interest levied under Sections 234B and 234D was also to be recomputed based on the allowed deduction. The orders passed by the CIT(A) and the Assessing Officer were found to be incorrect in law regarding the interpretation of Section 10B.

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