TRANSFORMATION OF MANUSCRIPTS OF AUTHORS IN COMPUTER DISCS

[Mr. M. GOVINDARAJAN]

The main issue to be discussed in this article is whether receiving the manuscripts from the authors in paper form and after subjecting the same into typesetting, indexing, pagination etc., delivers in electronic and/or hard copy to the authors amount to manufacture and eligible for deduction under Section 80IB of the Income Tax Act, 1961 with reference to decided case law.

In ‘SPI India Technologies India Private Limited V. Asst. Commissioner of Income Tax’ – 2012 (10) TMI 411 - ITAT, CHENNAI the assessee is a company engaged in the business of information technology enabled services. The assessee filed a return for the year under consideration admitting the income at NIL rate claiming deduction under Section 80-IA of the Income Tax Act, 1961. The return of the income filed was processed under Section 143(1) and subsequently scrutiny assessment was made under Section 143(3) of the Act. The Assessing Officer rejected the claim of the assessee on the ground that the assessee does not come under the purview of Section 80-IA. The assessee filed an appeal before the Commissioner of Income Tax (Appeals) aggrieved against this order. The assessee submitted before the Commissioner of Income Tax (Appeals) that inadvertently the claim of deduction was made under Section 80-IA and in fact it was a deduction to be claimed under Section 80-IB of the Act. The Commissioner (Appeals) upheld the order of the Assessing Officer. taxmanagementindia.com

The assessee filed appeal before the Tribunal. The Tribunal remanded the matter to the Assessing Officer to re-examine the issue in detail after visiting the factory of the assessee.

The Assessing Officer visited the premises of the assessee and collected all the details and issued a show cause notice. To the reply to the show cause notice the assessee submitted that the company offered typesetting and composition activities with the help of typeset software for publishers. Depending on the source material, subject matter, media, formatting, language and presence of non standard characters of a handwritten annotations and the customer requirements, a comprehensive solution is appropriately adopted in offering typesetting and composition activities. The expertise is in a broad range of content and layout complexities, formats, fonts and special characters as well as high and pagination software to digitally merge text, illustrations and tabular constructs into complex pages. The company’s hands on experience in Quark Xpress, 3B2, inDEsign, TeX, LaTex, has enable accuracy in structure of the document, speed of turnaround and finally speed to market, for several publishers in US and Europe. The work is received in paper form as manuscript.  This is the data or material given by the author for typesetting. This is a kind of raw data which cannot be used by any reader as in the form of book.  The raw data undergoes the following process:

• Data entry process and tagging;
• Copy editing and editorial proof reading;
• Composition – pagination process;
• Graphic art – either use as it is or redraw;
• Proof reading and quality check;
• Indexing;
• Front and back end matters and cover design;
• Creation of deliverables – electronic and/or hard copy.

It is submitted by the assessee that the nature of the above said activities amounts to manufacture of an article or a thing.

The Assessing Officer examined the activity of the assessee company which formats manuscripts into PDF and computer files which is used for printing. The formatted PDF files/CDs contain the manuscripts in typeset form. The program contained in the CDs could not be said to have been manufactured by the assessee. The Assessing Officer rejected the claim of the assessee and added the amount to the total income of the assessee.

The assessee filed appeal before the Commissioner of Income Tax (Appeals). The Commissioner (Appeals) held that the raw material and the so-called final product is one and the same, i.e., contents of the subject. The assessee receives the manuscripts which are either typed or handwritten ones. On receipt, the assessee converts them into digital form by typing or scanning in to the computer. Also certain drawings are scanned and redrawn using computers. Thus, before and after the assessee’s activity, the contents remain the same. The only change is the medium which holds the data, i.e, paper medium to digital medium. Hence both before and after the assessee’s activity the contents are the same and use is also the same. Hence the same cannot be considered as resulting in a new thing or article. The Commissioner (Appeals) confirmed the order passed by the Assessing Officer.

The assessee carried the matter to the Tribunal. Before the Tribunal the assessee submitted the following:

• A change in composition from manuscript to hard disc amounts to manufacture and therefore the assessee is eligible for deduction under Section 80-IB(3) of the Act;
• Carrying out the above process the assessee is manufacturing hard disc/electronic media;
• The assessee had used the raw material for the purpose of production;

The assessee further relied on Section 2(29BA) of the Act and Circular 5 of 2010, dated 03.06.2010. The assessee also relied the following judgments:

v  In ‘Commissioner of Income Tax V. Oracle Software India Limited’ 2010 (1) TMI 9 - SUPREME COURT OF INDIA the Supreme Court has considered that whether the process by which a blank CD is transformed into software loaded disc constitutes  manufacture or processing of goods;

v  In ‘Commissioner of Income tax V. Apollo Hospital Enterprises’ – 2011 (4) TMI 477 - MADRAS HIGH COURT the High Court considered whether the assessee is entitled to investment allowance in respect of X-ray, ultra sound, angiography, gamma camera, stress analysis equipment etc., and  held that hospital and individual doctors are engaged in commercial activity and therefore the assessee was treated as industrial undertaking and also engaged in manufacture or production of any article or thing;

v  In ‘Commissioner of Income Tax V. HLS India Limited’- 2011 (5) TMI 322 - DELHI HIGH COURT the facts are that production of log by way of wire line logging was the concerned activity.  Wire line logging assists the mineral oil concerns primarily to ascertain as to whether there is any gas or oil in the well, and if there is such presence, then the availability at what depth and the quantity of such reserves, and whether such gas or oil can be extracted. The Court held that if an operation/process renders a commodity or article fit for use, the operation/process falls within the meaning of the word ‘manufacture’ applies.

The Department contended that the activities carried out by the assessee do not amount to manufacturing or producing an article or thing. Therefore the assessee is not eligible for deduction under Section 80-IB of the Act. Manufacturing means the outcome should be something different. The assessee is not bringing anything new. 

The High Court considered the submissions of both the parties. It held that the activities of the assessee neither amounts to manufacturing nor amounts to producing an article or thing. The activity of the assessee is nothing but transferring the data/information from paper medium to electronic medium. The data used by the assessee before and after the conversion is the same. There is no change in the content. The High Court also held that the provisions referred to and the case laws cited by the assessee are not relevant and applicable to the present case. The High Court dismissed the appeal of the assessee.