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TMI Blog2014 (5) TMI 548X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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. - ITA No. 3911/Del/2009 - - - Dated:- 7-5-2014 - Shri S. V. Mehrotra And Shri A. T. Varkey,JJ. For the Appellant : Sr. Adv. M. S. Syali, Tarandeep Singh and Harkund Singh For the Respondent : S. N. Bhatia, Sr. DR ORDER Per A. T. Varkey, Judicial Member. This is an appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Addition on account of section 10B(2)(i) as discussed above Rs. 39,32,654.00 NET TAXABLE INCOME Rs. 45,67,261.13 NET TAXABLE INCOME ROUNDED OFF Rs. 45,67,260.00 7. Aggrieved by the said order of the Assessing Officer the assessee preferred an appeal before the ld CIT(A), who was pleased to dismiss the same. Aggrieved by the said order of the ld CIT(A) the assessee is before us. 8. Ld Sr. Advocate Shri M. S. Syali appearing for the assessee stated that the assessee s business involved the export of software of ready to print books. The term software means ready to print files for illustrated books which their client have to forward to their respective printers to get the finished physical products. According to the ld Sr. counsel there are four stages for the completion of their products and pointed our attention to Page 58 of the Paper Book. The first stage is the collection of material, where the assessee has to collect the raw material that goes into making of the final files. This raw material comprises mainly of text and photographs. Various authors, photographs, photo agencies are the providers of this material depending on the subject of the book. It was stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd according to him, satisfies the definition of software as per Section 10(B) of the Act; and also it falls under the notification issued by the CBDT and relied upon the judgement of Chennai Bench of ITAT in the case of the ITO, Chennai Vs. Accurum India (P) Ltd; and the ld Sr. counsel contended that sub-clause (b) of clause (i) of explanation 2 to section 10A gives the meaning of the term computer software. One of the meaning given is any customized electronic data or any product or service of similar nature, as may be notified by the board. In other words, if an assessee is engaged in the export of any customized electronic data, then, profit earned from such export would qualify for deduction u/s 10A. ld sr. counsel pointed out that sub-clause (a) refers to any computer programme, sub-clause (b) refers to any customized electronic data. According to the Sr. counsel, the computer programme referred to in sub-clause (a) may or may not be customized and may be useful for general application. Therefore, the ld Sr. counsel emphasized that the electronic data referred to in sub-clause (b) necessarily has to be customized. The word customized means that the data is suitable for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally and in a beneficial manner. Further he submitted that the phrase manufacture or produce has to be given a contextual interpretation. It was submitted that the way CIT(A) has interpreted this phrase would make the provisions of this section otiose as regards the services notified by CBDT. By relying upon the decision of Apex Court in case of Sultana Begum v. Prem Chand Jain [1997] 1 SCC 373 it was contend that the statute has to be read as a whole to find out the real intention of the legislature. It was further submitted by the ld Sr. advocate that the nature of activities carried out by the appellant need to be considered in the contextual requirements and definitely it would tantamount to production if not manufacture since the later is larger in magnitude and is more expansive and liberal than the term manufacture . In support of this proposition Shri Syali relied upon the decision of jurisdictional High Court in case of CIT vs. Lovesh Jain reported in 204 Taxman 134(Del). 11. During the course of hearing an example of Legal Database was given by the Senior Counsel. In regard to this he cited example of ITRs on CD and Taxmann on CD. According to him, these softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities below may not be disturbed. 14. We have carefully considered the submissions made by both the parties and material available on record and has gone through the case laws cited by both the parties. Since the dispute centers on applicability of provisions of section 10B of the Act, to the facts of the case it will be apposite to first consider the relevant statutory provisions. Section 10B provides as under: 10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. .. (2) This section applies to any undertaking which fulfills all the following conditions, namely : (i) it manufactures or produces any articles or things or computer software; (ii) it is not formed by the splitting up, or the reconstruction, of a bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it simply means to make, fabricate or bring into existence an article or product either by physical labour or by mechanical power. Given a narrower connotation it means transforming of the raw material into a commercial product/commodity or finished product which has a new, separate entity but this does not necessarily mean that the material by which the commodity is manufactured must lose its identity. The latter connotation has been accepted and applied with some moderation/clarification in several decisions, keeping in view the context in which the word manufacture has been used. The Supreme Court in Graphic Company India Ltd. v. Collector of Customs [2001] 1 SCC 549 and Union of India v. Delhi Cloth and General Mills Company Limited AIR 1963 SC 791 has held that manufacture has to be understood to mean transformation of goods into a new commodity commercially distinct and separate, and having its own character, use and name whether it be the result of one or several processes. However, every change does not result in manufacture though every change in an article may be a result of treatment or manipulation by labour or/and machines. If an operation or process that render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacture' a wider range of industrial activities than such a definition would suggest. It includes articles made in situ as well as articles made in a factory. 15. The Supreme Court of the United States of America has defined the term 'manufacture' a century ago in Anheuser-Busch Brewing Assn. v. United States (1907) 52 L Ed. 336. The definition has been followed in subsequent American, English and Indian cases. The definition reads as under: Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary. ..There must be transformation; a new and different article must emerge, .having a distinctive name, character or use. 12. As noticed above, Section 10A/10B is applicable when an undertaking manufactures, or is engaged in production of articles or things. The term production has a larger magnitude and is more expansive and liberal than the term manufacture . The terms manufacture and produce were interpreted in the CIT v. TATA Locomotive Engineering Co. Ltd. [1968] 68 ITR 325 (Bom.), and it was held:- In its roots the word manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brings into existence a product or an article by physical labour or power. The other shade of meaning which is the narrower meaning implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus both the words manufacture and produce apply as well to the bringing into existence of something which is different from its components. One manufactures or produces an article which is necessarily different from its components. 13. The difference in the words 'manufacture', 'production (to produce)' and 'process' was examined by the Supreme Court in Tara Agencies's case (supra). On the question of what is meant by the term 'production', it has been elucidated and explained as under:- 16. In Black's Law Dictionary (5th Edn.), the term production has been defined as under: Production. Process or act of producing. That which is produced or made; i.e. goods. Fruit of labor, as the productions of the earth, comprehending all vegetables and fruits; the product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fiscal statute as observed by the Supreme Court in UCO Bank s case (supra). It is in this sense the ld. A.M. has observed that the Board s Circular has made the job of the Assessing Officer quite simple. Thus, it is this role, as explained by the Supreme Court, which is played by the Board by issuing the Circular, dated 26-9-2000. .. 9. The ld. JM is right in mentioning that software is not merely knowledge but, rather is knowledge recorded in a physical form having a physical existence, taking up space on a tape, disc or hard drive, making physical things happen and can be perceived senses. However, he misdirected himself by misunderstanding that since the recruitment and training of the personnel was by itself not I.T. enabled, the profit earned by the assessed is not eligible for deduction under section 10A of the Act. The requirement of the provision is that there should be a customized electronic data and such data should be exported outside India. The data which a customer may require, may be gathered either by manual effort or by electronic means, as for example, through internet. By whatever means the data is collected, once it is stored in an electronic form, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning is stored in an electronic device, it is not possible to say that it is not a customized electronic data. If the data is in a form other than electronic, then the export thereof will not qualify for the deduction. This aspect, as mentioned earlier, has to be examined by the Assessing Officer in the course of the assessment and which in this case, there is no dispute that the data was in the electronic form. 17. In the instant case we find that the appellant after collecting raw data and pictures has utilized its expert designing skills in producing a ready to print e-book. Shri Syali in his submissions has neatly narrated the entire sequence of activities carried on by the appellant. The samples produced before us were also shown to the AO, however he has conveniently chosen to remain quite on this aspect. The final product is intended for use of a particular customer and therefore the case under consideration does fit in the category ofproduction of any customized electronic data as per the definition of computer software defined in Explanation 2 to section 10B of the Act. The above Third Member decision is germane to the issue before us and therefore it clearly supports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n draw on the available information for their benefit. Its activities are to issue instructions to the master-computer to recognise the operators, identify them and provide them access to specific portions of the database. There can be no doubt whatever, for the reasons discussed above, that the assessee manufactures, produces and exports software within the meaning of the three specified sections of the Act. It is open to it to claim exemption under anyone of these sections and as is well established by pertaining to interpretation of taxing statutes is entitled to choose that one which is most favourable to it in any particular assessment year. 18. We find that the ld CIT(A) has erred in considering the definition of Computer Software as per clause (i) of Explanation 2 to section 10B in a conjunctive manner and not disjunctive manner without considering that word used in between sub-clauses (a) and (b) is or . The ld CIT(A) has erred in comparing the work done by the assessee with Computer Programme . Here it is to noted that it is not assessee s case that its case falls under sub-clause (a) of clause (i) to Explanation 2 to section 10B. It is the consistent stand assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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