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2022 (9) TMI 981 - Income Tax
Exemption u/s 10A - STP unit - exclusion of hardware component from export turnover - AO has denied the benefit u/s 10A that the hardware was purchased by the assessee but was not manufactured by it - HELD THAT:- AO has denied the benefit u/s 10A that the hardware was purchased by the assessee but was not manufactured by it. It is not the case of AO that hardware was not required at all. On the other hand, the reason for denying the benefit is that assessee had not manufactured the software. The view of CIT(A) is also the same. ITAT considered altogether different points and held that it was not established that software cannot be used without hardware. This was not the question considered by the AO and CIT(A). We may reiterate that ITAT has recorded that wherever software and hardware are inextricably connected and the software cannot be used without hardware, the sale of hardware would be a part of software.
The intention of purchaser was to buy the software and the intention of the assessee was to sell the software. It is to be noted that assessee is not a manufacturer or a dealer in hardware. Software will have to be stored/loaded onto a medium for transmission/use. When compared to the cost of software, the cost of hardware is insignificant. Assessee's specific case is, the software and the hardware are inextricably connected.
With regard to bifurcation of price in two components, namely consideration for supply of equipments and supply of software, the Delhi High Court has held the payment received by the assessee therein was towards the title and GSM system of which software was an inseparable part incapable of independent use.
In the case on hand too, Software could not be exported without loading onto the Hardware. Therefore, in our view software and hardware are inseparable.
ITAT has been swayed by its reasoning that sale had been effected by separate invoices and therefore, assessee is not entitled for the benefit u/s 10A. The ratio in Arun Electrics [1965 (12) TMI 122 - SUPREME COURT] makes it clear that sale by separate invoices is inconsequential and we are in respectful agreement with that view. Therefore, the said reasoning is unsustainable.
In this case, 'manufacture' has to be understood in common parlance as developing software and loading onto the hardware. Software will be written in binary code and it is intangible. It can be used only when loaded onto a compatible hardware. Therefore, in our view, hardware becomes an integral part of the exported commodity.
Software without loading onto the hardware could not be used and the hardware with the software loaded into it would be unfit for the intended purpose. On a careful consideration of the entire material on record and the authorities cited before us, we are of the considered view that the Assessing Officer framed an incorrect question for his consideration that whether sale of Hardware which is not manufactured by the assessee could be considered as part of export. - Decided in favour of assessee.