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TMI Blog2002 (8) TMI 840X X X X Extracts X X X X X X X X Extracts X X X X ..... 31 to 233 of PB No.II), the assessee company has to manufacture computer software systems and attain an overall value addition of 85% for the project as a whole. 3. In furtherance of its business objectives and purposes, the assessee company entered into agreements dated 20-5-1997 and 5-2-1996 with BaaN Netherlands and BaaN India respectively (Pages 119 and 115 of PB I) which authorize the assessee to customize BaaN standard software. 4. Broadly speaking, the arrangement the assessee and BaaN Netherlands may be depicted as follows :- BaaN - to achieve economies of scale and division and specialization of labour produces on a large scale Standard Software also known as Development Tools e.g. high end databases, software engineering tools, standard programming platforms, BaaN tools, lotus notes, IBM Web Commerce Suite and the like. These Standard Software are sold by BaaN to customers all over the world either directly or through its subsidiaries. The customers who purchase standard software from BaaN enter into a software license and support agreement with BaaN. It is essential and fundamental to note that the Standard Software cannot be mobilized and deployed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the BaaN; that the original software programmes were produced and developed by BaaN and are sold by them; that the assessee comes into picture only if any changes or modifications are required therein; that the activities of such changes or modifications done by the assessee company cannot be said to be manufacturing activities. In support of his findings, he relied upon the following decisions :- (i) Indian Hotels Co. Ltd. v. ITO [2000] 245 ITR 5381 (SC) (ii) Lucky Minmat (P.) Ltd. v. CIT [2000] 245 ITR 830 (SC) (iii) CIT v. Gem India Mfg. Co. [2001] 249 ITR 3072 (SC). 7. Shri S.E. Dastur, the learned counsel for the assessee submitted that the authorities below have failed to appreciate the assessee s facts and circumstances and they ought to have upheld the assessee s claim under section 10A inasmuch as its activities fall within the scope and purview of section 10A. The assessee company is engaged in the manufacture of software and it had entered into agreements with BaaN, Netherlands and BaaN India, thereby it got the standard software and then such a standard software had to undergo the metamorphosis by a technique known as customization. He submitted that C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n operation more thoroughly and readily, the learned counsel for the assessee illustrated by way of an example as under :- In a typical all embracing customization operation, a country level customization on the said customized software would result in addition of about 1500 new software programs (Pg. 214 of P.B. No. II) and customer specific customization on the same standard software would yield further 800 new programs (Pg. 216 of P.B. No. II) de hors the 6000 standard programs already comprised in the standard product and 1500 new software programs added under country level customization. In all there would be an aggregate of 8100 new programs at the end of the country level and customer level customizations (6000 + 1500 + 600 = 8100) (Standard) + (Country) + (Customer) (Pg. 216 of P.B. No. II). 10. The learned counsel for the assessee submitted that the whole customization drill entails creation and addition of the new programs. The assessee only utilizes the development and programming platforms embedded in the standard software to develop and evolve the customized software program. He drew our attention to Clause 2.1 of the agreement which defines customization servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnotation of the term Manufacture are satisfied in the case of the assessee company, without prejudice, Shri Dastur submitted that the customization process undertaken by the assessee at least constitutes production inasmuch as in CIT v. N.C. Budharaja Co. [1993] 204 ITR 4124 , (423 424) (SC) has held that the production has a wider connotation than manufacture and emphasized that every manufacture can be characterized as production, but every production need not amount to manufacture. Again, pointing out to Explanation to section 10A of the Act, the learned counsel for the assessee submitted that the expression Manufacture includes any process and in the premises, and without prejudice and purely as an alternative and independent submission, the assessee avers that the activities embarked upon by the assessee at least amount to a process. In this connection, he placed reliance on the CBDT Circular No. 528 dated 16-12-1988 (Pages 208 to 211 of P.B.). The learned counsel for the assessee relied upon the CBDT Circular No. 495 dated 29-9-1987 (Pgs. 236 to 239 of P.B. No. II) which explains that units which assemble or process imported components for export which benefit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return of income was filed on 30-11-1988. He submitted that the claim under section 10A has been made on the strength of Agreement dated 7-10-1998 which is available on Page 1 of the Paper Book filed by the assessee. He submitted that it is important to mention here that the date of signing the Agreement is 19/20-10-1998. So, the Agreement could be effective only with effect from assessment year 1999-2000 onwards and not for the assessment year 1998-99, the previous year, which expired on 31-3-1999. The Agreement cannot be made retrospective. He referred to the Agreement effective for assessment year 1998-99 placed at Pages 114 to 118 of the Paper Book which is between ISC Consultancy i.e., the assessee and BaaN Software India (an Indian Company). The Agreement was signed on 5-2-1996 and was initially valid for a period of 2 years i.e., assessment years 1996-97 to 1998-99. The scope of services to be provided by the assessee are given in detail in paras 3.1 to 3.4 of the Agreement and according to the learned D.R., the relevant page is 116. He pointed out that as per Para 4.1, the area is restricted to Indian sub-continent. He pointed out that according to this Agreement, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation.-For the purpose of this section,- ****** (iii) Manufacture includes any- (a )Process, (b)Assembling, (c )Recording of programs on any disk, tape, perforated media or other information storage device. ****** (vi) Produce , in relation to articles or things referred to in clause (i) of sub-section (2) includes production of computer programs. 18. The central and pivotal question before us is whether the assessee is engaged in the Manufacture or Production of software as mentioned in clauses (iii) and ( vi) of the Explanation to section 10A as it then stood for the assessment year 1998-99. As is evident from the facts of the case, the assessee company is engaged in the manufacture of software and it had entered into agreements with BaaN, Netherlands and BaaN India, whereby it got the standard software and then such a standard software had to undergo the metamorphosis by a technique known as Customization . The assessee company bought standard software from BaaN, Netherlands and the standard software had to undergo transformation through the process of customer level customization. The customization exercise converts standard software into cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s engaged in manufacture of articles or things, the activities embarked upon by the assessee also amount to process . It is well settled that an inclusive definition enlarges the ordinary meaning of the word and when it is so used, it must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include. Hence, those processes which ordinarily may not constitute manufacture will have to be construed as such in view of the artificial and widened definition in clause (iii) of Explanation to section 10A. The expression processing has been explained by the department in its Circular No. 528/16-12-88 in the context of section 44AC. Paragraph 24.6 of the Circular expounds the word processing as under :- The term processing has a wider meaning than the term Manufacture . Buyers carrying on the activity of processing will fall within the purview of section 206(1) of the Income-tax Act. Though sawing of logs of timber into different sizes may not fall within the meaning of the term Manufacture , a view could be taken that it constitutes processing. But, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, Produce in relation to articles or things. . . . includes production of computer programmes . In our opinion, customization process undertaken by the assessee constitutes production inasmuch as in N.C. Budharaja Co. s case (supra), the Apex Court has held that the production has a wider connotation than manufacture and emphasized that every manufacture can be characterized as production, but every production need not amount to manufacture. The term production takes in all by-products, intermediate products and residual products which emerge in the course of manufacture of goods (page 424). Examined from this vista, and particularly keeping in view the fact that the term production is interpreted by Courts in a broad and extensive manner, the assessee s activities can be construed as producing software programmes as engrafted in clause (vi) of the Explanation to section 10A. This is further fortified by the fact that the assessee adds new customized programmes to the existing standard programmes and is precluded in law from tampering and interfering with the programmes in the standard software in conformity with the use of source code agreement entered into by the assesee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lucky Minmat (P.) Ltd. (supra), the facts in this case are that the assessee was merely mining limestone and marble blocks then cutting and sizing them before being sold to the market and, therefore, the benefit of deduction under section 80HH was denied on the footing that it was not a manufacturing process. The Supreme Court in rejecting the assessee s appeal distinguished another decision namely, CIT v. Best Chem. Limestone Industries (P.) Ltd. [1994] 210 ITR 8831 (Raj.) relied upon by the assessee against which the Supreme Court had declined to grant special leave. The Supreme Court pointed out that in Best Chem. Limestone Industries (P.) Ltd. s case (supra ), the facts were different in that the assessee there, converted limestone into lime dust by crushers and hence that activity could be legitimately considered to be a manufacturing process. In fact, the decision is actually in favour of the assessee. The assessee s activity of customization falls within the four corners of the principle approved by the Supreme Court in Best Chem. Limestone Industries (P.) Ltd. s case (supra). The assessee converts the standard software into operational customized software and brings i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture. 30. Now, coming to the arguments of the learned Departmental Representative, we find that the main thrust of argument is that Agreement dated 20-10-1998 under which the assessee derives the authority to customize BaaN s programmes fall outside the assessment year 1998-99, the year under appeal, and hence arguments on the basis of that agreement are of no avail. This argument of the learned D.R., is of no assistance to the Revenue, because this Agreement merely formalizes and perfects an arrangement which was already in existence in February 1996 in a slotted legal frame work of documentary paper work. The agreement dated 20-10-1998 exhaustively and elaborately embodies the understanding, which was already subsisting between BaaN and the assessee. In fact, the original power of customization in form of license can be traced to the source of code agreement dated 20-5-1997, which is very much within the operative dates of assessment year 1998-99 (Pgs. 119 to 121 of the P.B. No.I). It is in this agreement vide clause 3.4 (page 119 of P.B. No. I), the assessee stands prohibited from copying, reproducing, translating, adjusting, decompiling, imitating, altering or reconst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals) is not justified in not directing the Assessing Officer to allow the assessee to carry forward the business loss of ₹ 8,28,130 in respect of the U.S. Branch for set off in subsequent years. 34. This ground is consequential in nature. The Assessing Officer disallowed the claim of the assessee as he denied exemption to the assessee under section 10A of the Act. Since we have allowed the exemption under section 10A in Ground No. 1 (supra), the assessee will be entitled to carry forward of loss of ₹ 8,28,130. This ground accordingly succeeds. 35. The last grievance of the assessee is that the learned DCIT erred in charging interest under sections 234B and 234C of the I.T. Act in the Demand Notice without levying the same in the Assessment Order. 36. We find that the Demand Notice was issued simultaneously with the Assessment Order. Both the documents are signed by the Assessing Officer. The quantum of interest and charging section are clearly given therein. So, in view of the decision of the Hon ble Supreme Court in the case of Kalyankumar Ray v. CIT [1991] 191 ITR 634 and the decision of Punjab Haryana High Court in the case of Vinod Khurana v. CIT [2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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