REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
C.A.No.235/2010 @ SLP(C) No. 4719/2008
Commr. of Income Tax-V, New Delhi ... Appellant(s)
versus
M/s. Oracle Software India Ltd. ... Respondent(s)
with
C.A.No.238/2010 @ SLP(C) No.5143/2009
C.A.No.239/2010 @ SLP(C) No.6847/2008
J U D G M E N T
S.H. KAPADIA, J.
1. Leave granted.
2. A short question which arises for determination in
this batch of civil appeals is whether the process by which a
blank Compact Disc (CD) is transformed into software loaded
disc constitutes “manufacture or processing of goods” in terms
of Section 80IA(1) read with Section 80IA(12)(b), as it stood
then, of the Income Tax Act, 1961?
3. For the sake of convenience, we may refer to bare
facts mentioned in Civil Appeal @ SLP (C) No. 6847 of 2008.
In this appeal, we are concerned with the Assessment Years
1995-96 and 1996-97.
4. Assessee is 100% subsidiary of Oracle Corporation,
USA. It is incorporated with the object of developing,
designing, improving, producing, marketing, distributing,
buying, selling and importing of computers softwares.
Assessee is entitled to sub-licence the software developed by
Oracle Corporation, USA. Assessee imports Master Media of the
software from Oracle Corporation, USA which is duplicated on
blank discs, packed and sold in the market along with relevant
brouchers. Assessee pays a lump-sum amount to Oracle
Corporation, USA for the import of Master Media. In addition
thereto, assessee also pays royalty at the rate of 30% of the
price of the licensed product. The only right which the
assessee has is to replicate or duplicate the software. They
do not have any right to vary, amend or make value addition to
the software embedded in the Master Media. According to the
assessee, it uses machinery to convert blank CDs into recorded
CDs which along with other processes become a Software Kit.
According to the assessee, it is the blank CD in the present
case which constitutes raw-material. According to the
assessee, Master Media cannot be conveyed as it is. In order
to sub-licence, a copy thereof has to be made and it is the
making of this copy which constitutes manufacture or
processing of goods in terms of Section 80IA and consequently
assessee is entitled to deduction under that Section. On the
other hand, according to the Department, in the process of
copying, there is no element of manufacture or processing of
goods. According to the Department, since the software on the
Master Media and the software on the recorded media remains
unchanged, there is no manufacture or processing of goods
involved in the activity of copying or duplicating, hence, the
assessee was not entitled to deduction under Section 80IA.
According to the Department, when the Master Media is made
from what is lodged into the computer, it is a clone of the
software in the computer and if one compares the contents of
the Master Media with what is there in the computer/ data
bank, there is no difference, hence, according to the
Department, there is no change in the use, character or name
of the CDs even after the impugned process is undertaken by
the assessee.
5. Before answering the controversy, we need to reproduce
relevant provisions of Sections 80IA(1), 80IA(12)(b) as also
Explanation to Section 33B of the Income Tax Act in the
following terms:
“80IA – Deduction in respect of profits and gains
from industrial undertakings, etc.in certain cases.
(1) Where the gross total income of an assessee
includes any profits and gains derived from any
business of an industrial undertaking or a hotel or
operation of a ship (such business being hereinafter
referred to as the eligible business), there shall,
in accordance with and subject to the provisions of
this section, be allowed, in computing the total
income of the assessee, a deduction from such
profits and gains of an amount equal to the
percentage specified in sub-section (5) and for such
number of assessment years as is specified in sub-
section (6).
*** ***
**
(12) For the purposes of this section, -
(a) *** ***
(b) "industrial undertaking" shall have the
meaning assigned to it in the Explanation to Section
33B;”
Explanation to Section 33B
“Explanation: In this section, “industrial
undertaking” means any undertaking which is mainly
engaged in the business of generation or
distribution of electricity or any other form of
power or in the construction of ships or in the
manufacture or processing of goods or in mining.”
6. Section 80IA occurs in Chapter VIA which deals with
Deductions in respect of certain Incomes. Where the gross
total income of an assessee includes any profits derived from
any business of an industrial undertaking to which Section
80IA applies, there shall in accordance with and subject to
the provisions of Section 80IA, be allowed, in computing the
total income of the assessee, a deduction from such profits
and gains of an amount equal to a specified percentage for
such number of assessment years as specified in Section 80IA.
For deciding the present controversy, it would be sufficient
to notice that the gross total income of an assessee must
include profits derived from any business (eligible) of an
industrial undertaking which in terms of Section 80IA(12)(b)
is given the same meaning as is assigned to that expression
vide Explanation to Section 33B. As can be seen from the
Explanation to Section 33B, an industrial undertaking inter
alia has been defined to mean any undertaking which is engaged
inter alia in the manufacture or processing of goods.
7. At the outset, we may state that Section 80IA comes in
Chapter VIA. That Chapter, in a way, is a code by itself. It
provides for special deductions. Broadly, these special
deductions are incentives provided for setting up industrial
undertakings in backward areas, for earning profits in foreign
exchange, for setting up hotels, etc. It is in this
background that one has to interpret the meaning of the
expression “manufacture or processing of goods”. One more
aspect needs to be highlighted. Technological advancement in
computer science makes knowledge as of today obsolete
tomorrow. We need to move with the times. At the same time,
one needs to take note of the fact that unlimited deductions
are not permissible under Chapter VIA. Therefore, in each
case, where an issue of this nature arises for determination,
the Department should study the actual process undertaken by
the assessee. Duplication can certainly take place at home,
however, one needs to draw a line between duplication done at
home and commercial duplication. Even a pirated copy of a CD
is a duplication but that does not mean that commercial
duplication as is undertaken in this case should be compared
with home duplication which may result in pirated copy of a
CD. The point to be noted by the Department in each of such
cases is to study the actual process undertaken by the
licensee who claims deduction under Section 80IA of the Income
Tax Act, 1961. At this stage, we may clarify that in this
case we are concerned with the Income Tax Act, 1961, as it
stood during the relevant Assessment Years.
8. From the details of Oracle Applications, we find that
the software on the Master Media is an application software.
It is not an operating software. It is not a system software.
It can be categorized into Product Line Applications,
Application Solutions and Industry Applications. A commercial
duplication process involves four steps. For the said process
of commercial duplication, one requires Master Media, fully
operational computer, CD Blaster Machine (a commercial device
used for replication from Master Media), blank/ unrecorded
Compact Disc also known as recordable media and printing
software / labels. The Master Media is subjected to a
validation and checking process by software engineers by
installing and rechecking the integrity of the Master Media
with the help of the software installed in the fully
operational computer. After such validation and checking of
the Master Media, the same is inserted in a machine which is
called as the CD Blaster and a virtual image of the software
in the Master Media is thereafter created in its internal
storage device. This virtual image is utilized to replicate
the software on the recordable media.
9. What is virtual image? It is an image that is stored
in computer memory but it is too large to be shown on the
screen. Therefore, scrolling and panning are used to bring
the unseen portions of the image into view. [See Microsoft
Computer Dictionary, Fifth Edition, page 553] According to
the same Dictionary, burning is a process involved in writing
of a data electronically into a programmable read only memory
(PROM) chip by using a special programming device known as a
PROM programmer, PROM blower, or PROM blaster. [See Pages 64,
77 of Microsoft Computer Dictionary, Fifth Edition]
10. In our view, if one examines the above process in the
light of the details given hereinabove, commercial duplication
cannot be compared to home duplication. Complex technical
nuances are required to be kept in mind while deciding issues
of the present nature. The term “manufacture” implies a
change, but, every change is not a manufacture, despite the
fact that every change in an article is the result of a
treatment of labour and manipulation. However, this test of
manufacture needs to be seen in the context of the above
process. If an operation/ process renders a commodity or
article fit for use for which it is otherwise not fit, the
operation/ process falls within the meaning of the word
“manufacture”. Applying the above test to the facts of the
present case, we are of the view that, in the present case,
the assessee has undertaken an operation which renders a blank
CD fit for use for which it was otherwise not fit. The blank
CD is an input. By the duplicating process undertaken by the
assessee, the recordable media which is unfit for any specific
use gets converted into the programme which is embedded in the
Master Media and, thus, blank CD gets converted into recorded
CD by the afore-stated intricate process. The duplicating
process changes the basic character of a blank CD, dedicating
it to a specific use. Without such processing, blank CDs
would be unfit for their intended purpose. Therefore,
processing of blank CDs, dedicating them to a specific use,
constitutes a manufacture in terms of Section 80IA(12)(b) read
with Section 33B of the Income Tax Act.
11. One of the arguments advanced on behalf of the
Department is that since the software on the Master Media and
the software on the pre-recorded media is the same, there is
no manufacture because the end product is not different from
the original product. We find no merit in this argument.
Firstly, as stated above, the input in this case is blank
disc. Secondly, the test applied by the Department may not be
relevant in the context of computer technology. One of the
questions which arose for determination before this Court in
the case of Tata Consultancy Services v. State of Andhra
Pradesh, 137 STC 620 was whether a software programme put in
media for transferring or marketing is “goods” under Section
2(h) of the Andhra Pradesh General Sales Tax Act, 1957. It
was held that a software programme may consist of commands
which enable the computer to perform a designated task. The
copyright in the programme may remain with the originator of
the programme. But, the moment copies are made and marketed,
they become goods. It was held that even an intellectual
property, once put on to a media, whether it will be in the
form of computer discs or cassettes and marketed, it becomes
goods. It was further held that there is no difference
between a sale of a software programme on a CD/ Floppy from a
sale of music on a cassette/ CD. In all such cases the
intellectual property is incorporated on a media for purposes
of transfer and, therefore, the software and the media cannot
be split up. It was further held, in that judgment, that even
though the intellectual process is embodied in a media, the
logic or the intelligence of the programme remains an
intangible property. It was further held that when one buys a
software programme, one buys not the original but a copy. It
was further held that it is the duplicate copy which is read
into the buyer’s computer and copied on memory device. [See
Pages 630 and 631 of the said judgment] If one reads the
judgment in Tata Consultancy Services (supra), it becomes
clear that the intelligence/ logic (contents) of a programme
do not change. They remain the same, be it in the original or
in the copy. The Department needs to take into account the
ground realities of the business and sometimes over-simplified
tests create confusion, particularly, in modern times when
technology grows each day. To say, that contents of the
original and the copy are the same and, therefore, there is
manufacture would not be a correct proposition. What one
needs to examine in each case is the process undertaken by the
assessee. Our judgment is confined strictly to the process
impugned in the present case. It is for this reason that the
American Courts in such cases have evolved a new test to
determine as to what constitutes manufacture. They have laid
down the test which states that if a process renders a
commodity or article fit for use which otherwise is not fit,
the operation falls within the letter and spirit of
manufacture. [See United States v. International Paint Co.
reported in 35 C.C.P.A. 87, C.A.D. 76]
12. Before concluding, we may once again refer to the
judgment of this Court in Tata Consultancy Services (supra) in
which as stated above, it has been held that there is no
difference between a sale of software programme on a CD/
Floppy and a sale of music on a CD/ Cassette. Therefore, in
our view, the judgment of this Court in the case of Gramophone
Co. of India Ltd. v. Collector of Customs, Calcutta, 114 ELT
770 would apply. In that case, the question which arose for
determination was whether recording of audio cassettes on
duplicating music system amounts to manufacture. The answer
was in the affirmative. It was held that a blank audio
cassette is distinct and different from a pre-recorded audio
cassette and the two have different use and name. Applying
that test to the facts of the present case, we hold that a
blank CD is different and distinct from a pre-recorded CD. In
Gramophone Co. of India Ltd. (supra), it was held that an
input/ raw-material in the above process is a blank audio
cassette. It was further held that recording of an audio
cassette on duplicating music system amounts to manufacture
because blank audio cassette is distinct and different from
pre-recorded audio cassette and the two have different uses
and names. In our view, the High Court was right in coming to
the conclusion that the judgment of this Court in Gramophone
Co. of India Ltd. (supra) is squarely applicable to the facts
of the present case. We may add that in the case of Tata
Consultancy Services (supra), as stated above, it has been
held that a software programme may consist of commands which
enable the computer to perform designated task, but, the
moment copies are made and marketed, they become goods.
Therefore, applying the above judgment to the facts of the
present case, we are of the view that marketed copies are
goods and if they are goods then the process by which they
become goods would certainly fall within the ambit of Section
80IA(12)(b) read with Section 33B because an industrial
undertaking has been defined in Section 33B to cover
manufacture or processing of goods.
13. For the afore-stated reasons, we find no merit in the
Civil Appeals filed by the Department, which are accordingly
dismissed with no order as to costs.
………………………..J.
(S. H. Kapadia)
………………………..J.
(H.L. Dattu)
………………………..J.
(Surinder Singh Nijjar)
New Delhi;
January 13, 2010.