2013 (8) TMI 823 - AT - Income Tax

Deduction u/s. 80IB - CIT declined deduction - Held that - assessee is engaged in the business of development of customized software on job work basis - software produced by the assessee is not a map simpliciter but an interactive digital product which produces lots of reports and relevant information, on the basis of various inputs including maps of the area. The fact that it is produced on a platform not owned by the assessee is irrelevant inasmuch as what is being transferred by the assessee is not the platform but the end product. The mere fact that one of the input is owned by the client itself, does not mean that the property in the product never belonged to the assessee. In any case, all this is really irrelevant inasmuch as there is a specific direction from a coordinate bench to the effect that all that is to be seen is the point of time when property in end product is transferred. It is clear that the product, i.e. software, comes into existence after carrying on several processes, and its only on completion of these processes, the property in the product can be transferred to the customer. The transfer of property is therefore not an ongoing process at the each stage of work as will be the case of a provision for services - Following decision of of CIT vs. Oracle Software India Ltd. 2010 (1) TMI 9 - SUPREME COURT OF INDIA - Decided in favour of assessee.

Issues Involved:
1. Rejection of the claim under Section 80IB of the Income Tax Act.
2. Determination of whether the appellant is engaged in the manufacture or production of any article or thing.
3. Scope of the Assessing Officer's (AO) authority in remand proceedings.
4. Consistency in the application of tax deductions under Section 80IB in subsequent assessment years.

Issue-wise Detailed Analysis:

1. Rejection of the Claim under Section 80IB:
The primary issue in this appeal is whether the learned Commissioner (Appeals) was justified in declining the deduction of Rs. 26,40,619 under Section 80IB. The appellant argued that the software developed and maps produced by them should be considered as distinct products, thereby qualifying for the deduction under Section 80IB. The Tribunal noted that this was the second round of proceedings, and in the first round, the matter was remitted back to the AO to determine the point at which the customer acquired the property in the software.

2. Determination of Manufacturing or Production:
The core contention was whether the development of customized software by the appellant constituted "manufacture" or "production" of an article or thing. The Tribunal referred to several judicial precedents, including the Hon'ble Supreme Court's decision in CIT vs. Oracle Software India Ltd., which held that a process rendering a commodity fit for use qualifies as "manufacture." The Tribunal observed that the appellant's activity involved converting raw data into interactive digital maps, which were significantly different from the raw data supplied by the clients. Therefore, the Tribunal concluded that the appellant was indeed engaged in manufacturing a new product.

3. Scope of AO's Authority in Remand Proceedings:
The Tribunal highlighted that the AO was only required to determine the point at which the customer acquired the property in the software. The AO concluded that since the basic area maps always belonged to the customer, the appellant was merely providing a service. However, the Tribunal found that the AO and the CIT(A) had overstepped their mandate by addressing issues beyond the scope of the Tribunal's remand directions. The Tribunal emphasized that the AO should have confined himself to the specific directions given by the coordinate bench.

4. Consistency in Tax Deductions:
The appellant argued that the deduction under Section 80IB had been allowed in earlier and subsequent assessment years, and thus, following the rule of consistency, the deduction should be allowed for the entire term. The Tribunal did not delve deeply into this argument, as it had already decided the appeal in favor of the appellant based on the primary issue of whether the property in the software was transferred only upon its completion and transmission to the customer.

Conclusion:
The Tribunal concluded that the software developed by the appellant was a new product and not merely a service. It was noted that the property in the software was transferred to the customer only upon its completion, thereby entitling the appellant to the deduction under Section 80IB. The Tribunal allowed the appeal, setting aside the orders of the lower authorities and directing them to grant the deduction as claimed by the appellant. The detailed order was pronounced on June 28, 2013.

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