2017 (8) TMI 533 - HC - Income Tax

Claim u/s 80-IB denied - proof of business activity as manufacture or production of articles or things - scope of activity undertaken by assessee - activity of supplying the audio of the back ground sound to the film already shot by the customers - Held that - The activity of Video Software Generation has been recognized as Small Scale Industries by Government of India, Ministry of Industry vide order dated 04.03.1993, as well as 03.11.1993. It is also pertinent to mention the fact that by providing the Audio Software to the Video already shot makes an article fit for use which in turn amounts to manufacture, in view of the Law laid down by the Supreme Court in the case of Commissioner of Income Tax Vs. Oracle Software India Ltd (2010 (1) TMI 9 - SUPREME COURT OF INDIA ). The activity of the petitioner in supplying the audio of the back ground sound to the film already shot by the customers, amounts to manufacture within the meaning of Section 80-IB of the Income Tax Act and, therefore, the Tribunal erred in upholding the disallowance - Decided in favor of assessee.

Summary

Issues:
1. Interpretation of Section 80-IB of the Income Tax Act, 1961 regarding the manufacturing or processing of goods.
2. Whether the activity of editing and supplying audio to a film constitutes manufacture or processing of goods under Section 80-IB.

Detailed Analysis:
1. The primary issue in this case revolves around the interpretation of Section 80-IB of the Income Tax Act, 1961, specifically concerning the manufacturing or processing of goods. The appellant, engaged in Video Software Generation, was involved in editing and supplying audio of the background sound to films already shot by customers. The Assessing Officer disallowed the appellant's claim under Section 80-IB, stating that no article or thing had been manufactured by the appellant as required by the provision. This decision was upheld by the Commissioner of Income Tax appeals and subsequently appealed before the Income Tax Appellate Tribunal.

2. The core issue for consideration was whether the appellant's activity of editing and supplying audio to films amounted to manufacturing or processing of goods under Section 80-IB. The Tribunal, based on an earlier decision regarding the appellant's case for the assessment year 2001-2002, dismissed the appeal. The appellant argued that the Tribunal erred in relying solely on the previous assessment order without considering the scope of the activity undertaken. Citing relevant Supreme Court decisions, the appellant contended that the activity transformed the blank CD into a recorded CD, making it fit for a specific use, thus constituting manufacture under the Income Tax Act.

3. The High Court analyzed the legal principles laid down by the Supreme Court in previous cases to determine the applicability of Section 80-IB in the present scenario. The Court emphasized that if an operation renders a commodity fit for use for which it was previously unfit, it falls within the definition of manufacture. In this case, providing audio software to the video already shot made the article fit for use, thereby amounting to manufacture. The Court also noted that the activity of Video Software Generation had been recognized as a Small Scale Industry by the Government of India, further supporting the classification of the appellant's activity as manufacture.

4. Consequently, the High Court answered the substantial question of law in the affirmative, holding that the appellant's activity of supplying audio to films constituted manufacture within the meaning of Section 80-IB of the Income Tax Act. The Court quashed the orders of the Assessing Officer, Commissioner of Income Tax appeals, and the Tribunal, allowing the appellant's claim for disallowance. The appeal was allowed in favor of the appellant, emphasizing the transformative nature of the activity in question and its alignment with the legal definition of manufacture under the Income Tax Act.