TMI Blog2006 (8) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee commenced its business operation on 21-3-1999 and the year under consideration, was the 3rd year of the business. For the year under consideration, the assessee declared total income at Rs. 11,75,450 after claiming deduction under section 80-IB amounting to Rs. 1,47,95,357. Besides manufacturing activities at Shoghi, in respect of which deduction under section 80-IB had been claimed, the assessee had also carried on the trading activities. The Assessing Officer observed that the profit percentage in respect of manufacturing activities, was 63 per cent as compared to in other activities which was at 12 per cent. He further observed that the average profit worked out to 48.26 per cent. It was also pointed out that in the succeeding assessment year, the profit rate had been shown at 9.40 per cent only. 3.1 In this case, survey under section 133A was conducted on 19-2-2002 at the business premises of the assessee. During the course of survey, it was noticed that major RCC work for erection of building had been completed and only first floor had been finished and that there were about 8 computers in half portion of first floor, another half portion was used as Office. Durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was merged with the assessee-company in March, 2001 and its employees had also been included in the list. According to the Assessing Officer the work was done at Delhi and payment was made at Delhi. He also stated that only seven employees were covered under the Provident Fund Contribution Scheme. The Assessing Officer observed that the consumption of electricity shown by the assessee was on very low side and that huge RCC Building was under construction during the year. According to him the assessee was also carrying on the computer training course in the same premises. He, therefore, opined that the assessee was not entitled for deduction under section 80-IB of IT Act because it did not fulfil the conditions laid down in section 80-IB(2)( iv ) and also did not manufacture or produce any article or thing as required under section 80-IB(2)( iii ) of IT Act. The Assessing Officer asked the assessee as to why claim of deduction under section 80-IB should not be rejected. In response to that the assessee submitted that it was manufacturing/producing hardware and software products using computers, specialized man power and other equipments. It was further stated that the end products w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding computer software. ( d )The section 80HHC was inserted by the Finance Act, 1988 to allow deduction to exporters of goods or merchandise. But section 80HHE was inserted by the Finance Act, 1991 specifically to allow deduction on profits from export of computer software. ( e )In section 80-IB there is no specific provision for allowing deduction on profits and gains of computer software. Had the Legislature an intention to give benefit of deduction under section 80-IB on profits and gains of computer software then Legislature would have amended the provisions of section 80-IB or inserted Explanation to this section so as to give benefit of deduction on business income of computer software. In other words, the deduction under section 80-IB is not allowable on profits and gains of computer software business. The Assessing Officer rejected the claim of the deduction under section 80-IB on the following grounds : ( i )the assessee concern has been formed by splitting up from M/s. Secure Telecom Ltd. Delhi. Thus failed to fulfil condition in 80-IB(2)( i ). ( ii )The assessee does not manufacture or produce any article or thing in the Backward State i.e., Shoghi Himachal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that date of commencement of the production of the company was 21-3-1999 and a certificate in this regard had been issued to the assessee-company by the Department of Industries. It was stated that the assessee got the products endorsed on the P.R.C. which was the requirement of the procedure followed by the Industrial Department and thereafter the assessee started making Encryption products and Algorithms etc. and the final products was verified by the department of industries on 15-1-2000. It was further stated that the assessee carried on the software and hardware activities related to the following services : ( i )Encryption Products and Algorithms, ( ii )Telecom and Telecommunication Products ( iii )E-Commerce Products Accordingly it was pleaded that the activities relating to manufacturing of products were undertaken by the assessee from time to time and the inspection and verification were conducted by Industries Department from time to time and relevant endorsements were made on PRC of the company which proved that the manufacturing activities were undertaken at the premises of the industrial unit at Shoghi. It was stated that the assessee was primarily engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quipments installed in the unit were purchased new and copy of supporting bills were submitted to the Department for verification. The details of products made during the year with the approval of the authority were submitted to the Assessing Officer and it was also explained that the assessee had imported other equipments and sold the same by way of trading. 4.2 As regards to observation of the Assessing Officer that the main activities of the assessee were being carried out in Delhi, it was submitted that proof of transportation of manufactured goods from Shoghi to Gurgaon/Delhi were furnished to the Assessing Officer during assessment proceedings. Reference was made to the following items by stating that these were furnished to the department under the cover of a letter dated 20-1-2004 : ( i )Copy of Bills ( ii )Form No. 26 of Sales Tax barrier at Parwanoo ( iii )G.R. Forms of transporters It was emphasized that assessment order acknowledged that Shri Pradeep Kumar, Manager had stated during the survey that Encryption Adaptors were manufactured at Shoghi. Thus, one of the major products manufactured by the company was mentioned by Shri Pradeep Kumar to the DCIT at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial year 2001-02, during that period sales were mainly of imported equipments of ITI Ltd. and some repeat orders of software, which explained the availability of lesser number of employees at the time of survey. It was emphasized that all the employees were highly skilled and technically qualified. Therefore, it would not be correct to say that they were looking after the marketing only rather they were engaged in the development/manufacturing/ installation and also marketing development activities because of nature of the products. It was further stated that the assessee was working on the specialised technology (I.E. communication security/Encryption) i.e., to secure the communication for critical applications and the end-users were Defence and other Government Organisations. It was emphasized that the technology in manufacture of various equipments was not told/made public to all the employees of the organisation and the modules/sub-modules were given to different people for the development purpose keeping in view the security issues. That was the reason why total projects and details being worked on, were not known to the number of employees of the organization of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted out that in the present case, no machinery had been transferred from M/s. Secure Telecom Ltd. Both the companies were doing their businesses, though there was sharing of expenses as the corporate office of the two companies was at the same place and the Directors were common. Thus the assessee did not violate the conditions laid down under section 80-IB(2)( i ) of the IT Act. Reliance was placed on the judgment of Hon ble Karnataka High Court in the case of T. Satish U. Pai v. CIT [1979] 119 ITR 877. 5.1 Regarding manufacturing activities claimed to be undertaken by the assessee, Ld. CIT(A) pointed out that the main products as mentioned in the Certificate of Registration issued by the Manager, District Industries Centre, Shimla, were following : Telephone Information Recorder (TIR) Telephone Security Unit (TSU) Information Gathering System (IGS) And as per item No. 14, its main raw materials were following : Telephone Security Unit (TSU) Telephone Information Recorder (TIR) Information Gathering System (IGS) Electronic/Electrical Component On the basis of above, he stated that the raw material and the final products were same which implied that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as manufactured was handed over and is not retained in the best interests of the secrets of the country as also in the best interests of Code of Conduct of the company which factor enables the company to procure such orders." According to the Ld. CIT(A), since no record was available, it was necessary to look into the other evidences available and most important evidence was in the form of information gathered by the Assessing Officer during the course of survey conducted under section 133A of IT Act at the business premises of the assessee at Shoghi. According to him, during the course of survey, survey team did not come across any manufacturing activities being carried out at Shoghi and all the employees, whose statements were recorded during the course of survey, categorically stated that no manufacturing activities were being carried out at Shoghi. Ld. CIT(A) mentioned the names of 10 persons at page 14 of the impugned order, statements of whom were recorded on the date of survey. He, therefore, opined that the assessee did not have any evidence to support that any manufacturing activities were being carried out at Shoghi and all the employees present during survey operation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the claim of the assessee that the machinery had been taken to Delhi/customer location for installation, maintenance etc. of equipments sold, Ld. CIT(A) observed that the claim could not be accepted as no such claim was made at the time of survey nor any evidence was furnished in support of the claim. He further stated that the assessee was selling most of the goods to the sister concerns namely M/s. Secure Telecom Ltd. and M/s. Shyam Telecom Ltd. who were the dealers and not the ultimate users of this kind of equipment and had also their own equipments, tools, plants machinery etc., so would not require assessee s equipments, tools etc. According to him, the Shoghi was only a camou- flage and was being maintained to claim deduction under section 80-IB although everything concerning assessee s business was being done in its office at Delhi. He, therefore, opined that the assessee was not actually engaged in the software and hardware during the relevant period and this fact was supported by the fact that no plant machinery was found at assessee s premises at the time of survey on 19-2-2002. Ld. CIT(A) further observed that purchase bills revealed that along with hardware items ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der : "In fact, major sales activities are conducted by the corporate office at Delhi. And at Shoghi, only limited work of software and Website development is done. Inscription equipments are Telecommunication Security systems. These systems are procured from various other countries and customization is done by M/s. Shoghi Communications as per needs and requirement of each user and customer i.e., customers. These all activities are done by our Delhi corporate office except for R D customization." On the basis of above, Ld. CIT(A) observed that the Vice President of assessee-company, himself had admitted that except for R D, customization of other activities were being done at Delhi and no manufacturing was done at Shoghi. Ld. CIT(A) further stated that during the course of survey, Shri Anand stated that development/manufacturing of software commenced in December 2000 at Shoghi, if that be so, it was not clear, how the assessee could sell software worth over Rs. 60 lakhs in financial year 1999-2000 and software worth Rs. 1.53 crores till 5-5-2000 in financial year 2000-01. According to the Ld. CIT(A), all those sales took place before December, 2000 when the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture or production of an article or thing , the Ld. CIT(A) observed that the term industrial undertaking had been assigned the same meaning under section 80-IA as given to it in Explanation to section 33B and no new definition had been given in the present section and according to that definition industrial undertaking which was mainly engaged with the manufacture or processing of goods, was an industrial undertaking . According to the Ld. CIT(A) software programme was a outcome of processing of any raw material which was designed and developed using the intangible resources of the human mind and hence did not fit into the context in which the words had been used in the section 80-IB and that the words computer software had not been included in the term manufacture of an article or thing but had been specifically added where the Legislature intended to refer to it. The reference was made to the definitions given in sections 10A, 10B and 10(15) of IT Act. Ld. CIT(A) held that activity of computer software was not covered under the clause (A) of section 10(15) of IT Act which concerns manufacturing or processing of goods. Ld. CIT(A) relied on the following judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for lifting water. All these electrical gadgets would leave little amount of energy for the alleged manufacturing activities. Ld. CIT(A) was of the view that no manufacturing activity of hardware or software was undertaken at Shoghi since the total consumption of electricity was hardly 1100 to 1200 units equivalent to about Rs. 3,000 to Rs. 4,000 only on or before 5-5-2000 whereas software worth Rs. 1.53 crores had been sold up to that date. Ld. CIT(A) referred to section 101 of the Evidence Act which provides that "whoever desires any court of give judgment as to any legal right or liability dependent on the existence of facts which he asserts, must prove that those facts exists." He also referred to section 102 of the Evidence Act which provides that the burden to prove in a suit or proceeding lies on that party who would fail if no evidence at all were given or no more evidence as the case may be, were added by either side. Ld. CIT(A) stated that in the present case it was claimed by the assessee that it was entitled to deduction under section 80-IB of IT Act and therefore, he must have proved it and if no evidence was adduced by it, it should fail. According to him the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch as Peon, Accountant etc. will have to be excluded. Thus bringing the number of workers to figure below 10, therefore, the conditions laid down under section 80-IB remains unsatisfied. 3. Legally development of software does not amount to production of article or things in the light of various judgments discussed herein before." Accordingly the disallowance made by the Assessing Officer was sustained. Now the assessee is in appeal. 6. Ld. Counsel for the assessee reiterated the submissions made before the authorities below and submitted that deduction under section 80-IB had been denied by the revenue authorities entirely on erroneous grounds, legal as well as factual. It was submitted that most of the evidences filed by the assessee as well as string of judicial authorities cited in support of the claim that production of software and hardware had been carried out by the assessee at its industrial undertaking at Shoghi (Shimla) which is a notified backward region, had been unfairly brushed aside by the revenue authorities. He further submitted that standard of proof in civil cases is based on the test of preponderance of probabilities and not proof beyond reasonable doub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 21-3-1999 and application for permanent registration as small scale industry was furnished to the Director of Industries, H.P. Items manufactured were duly indicated at page 4 of the said application being (1)Telephone Information Recorder (2)Telephone Security Unit (3)Information Gathering System and the details of plant machinery installed in the unit included inter alia computers, Digital Multimeters, Soldering Stations and Resoldering Stations etc. Reference was made to page 93 of assessee s compilation. It was further stated that the detail of raw material to be used for manufacturing had been given at Sr. No. 14 of the Registration application which included following : (1)Module for Code 8031/51 (2)ICE Box (3)TSU cabins (4)TIR cabins (5)IGS cabins (6)Electronic Electrical components It was argued that subsequently on 15-1-2000 additional items of manufacture namely Encryption board had been started and duly entered on the registration certificate. Again on 20-1-2000 manufacture of following additional items had been started and recorded on the registration certificate. Software Hardware Development ( i ) Encryption prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with copies of sale bills, Form No. 26A as well as GR receipts were furnished before the Assessing Officer during assessment proceedings. Reference was made to page Nos. 33 to 88 of paper book. It was stated that books of account along with the bills and vouchers were produced before the Assessing Officer and this documentary evidence had not been controverted by the Assessing Officer or the Ld. CIT(A) which amply established that the goods which were sold had been manufactured at the industrial unit at Shoghi. It was submitted that this fact was evidenced by the prescribed declarations in Form No. 26A under HP General Sales Tax Rules and was duly verified by the concerned Sales Tax authorities at Parwanoo barrier, further transportation of goods from Shoghi to the destination was also evidenced by the respective GRs issued by the transporters. It was clarified that certain sales which were transit sales whereby imported products were cleared and delivered to the vendees at New Delhi, the proper narration to this effect had been made on the Sale Bills itself. Reference was made to the bills placed at page Nos. 51, 53 and 68 etc. of paper book. It was further stated that bill-wise d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icity expenses as required by the Assessing Officer were furnished vide letter dated 30-1-2004. A comparative chart of sales, gross profit and net profit as well as analysis of expenses were furnished and the Assessing Officer proceeded to make the assessment accepting the trading results of the assessee even after making vague observation that the assessee had inflated the profits. It was submitted that the Assessing Officer had denied the claim of deduction under section 80-IB of IT Act and the same had been sustained by the Ld. CIT(A) in spite of the fact that the written submissions had been made on various dates to the Ld. CIT(A) refuting the points raised by the Assessing Officer. Our attention was drawn towards page Nos. 1 to 88 of assessee s compilation. As regards to the observation of the Ld. CIT(A) that no production and manufacturing had been carried out at Shoghi unit and that the number of workers were below 10, as such conditions laid down under section 80-IB(2)( iv ) were not fulfilled, ld. Counsel for the assessee submitted that plethora of evidence had been placed on record in support of the activity of production of software and hardware products at the Shogh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction record, however, could not be the ground for reaching the finding that no manufacturing activity had been carried out particularly when plethora of evidence like books of account, vouchers, GRs as well as registration of the unit by the Industries Department etc. had been furnished, which had not been refuted or controverted by the revenue department. As regards to the observation of the Ld. CIT(A) that out of total turn over of Rs. 3.30 crores, Rs. 97 lakhs was on account of trading in goods and that the separate books of account were not maintained in respect of trading goods. It was submitted that the trading activity was only for an amount of Rs. 97.30 lakhs and the balance turn over including software of Rs. 1.90 crores and hardware amounting to Rs. 18.69 lakhs represented sales of self-manufactured products of the assessee. Thus substantial part of the turn over of the Shoghi unit of the assessee represented manufacturing activities. It was further stated that non-maintenance of separate account for trading as well as manufacturing, would not justify the rejection of claim under section 80-IB. Reliance was placed on the following case laws: CIT v. Mazagaon Docks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally conferred on the authorized officer only under section 132(4) of IT Act in the course of any search or seizure. The statement elicited during the survey operation has no evidentiary value." Reliance was placed on the following case laws: Paul Mathews Sons v. CIT [2003] 263 ITR 101 (Ker.) Ashok Manilal Thakkar v. Asstt. CIT [2005] 279 ITR (AT) 143 (Ahd.) Ld. Counsel for the assessee further submitted that without prejudice to aforesaid submissions that the statements were inadmissible evidence and had no evidentiary value, the inference drawn by the Ld. CIT(A) on the basis of these statements was factually incorrect. It was pointed out that Shri Vibhu Anand who had been working with the company as Vice President looking after Shoghi Unit, Shimla, in response to Q. No. 11, had given his residential address at Summer Hills residing in the house of Shri Dharan Das Sharma. Regarding the manufacturing activity, Shri Vibhu Anand stated that software development of encryption instrument had been carried out at the Shoghi Unit since December 2000 whereas sales activity were carried out at the corporate office at Delhi. With regard to plant machinery, he had given t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded, in some of the statements the employees had indicated the particulars of the workers who were employed with the assessee. From those details also it was evidently clear that number of workers working in the factory premises at Shoghi was much in excess of 10 workers and the condition under section 80-IB(2)( iv ) was clearly satisfied. With regard to statutory conditions concerning the number of workers necessary for grant of relief under section 80-IB, it was stated that new industrial undertaking should have employed 10 or more workers during the entire period in which the deduction under section 80-IB was claimed. It was emphasized that deduction would be allowable if the undertaking had employed 10 or more workers substantially during the period. Reliance was placed on the following case laws: CIT v. Harit Synthetic Fabrics (P.) Ltd. [1986] 162 ITR 640 (Bom.) CIT v. Ormerods Industries (P.) Ltd. [1989] 176 ITR 470 (Bom.) CIT v. KG Yediyurappa Co. [1985] 152 ITR 152 (Kar.) CIT v. Sultan Sons Rice Mill [2005] 272 ITR 181 (All.) Asstt. CIT v. Ms. Richa Chadha [2005] 96 ITD 325 (Mum.) Panorma Industries v. Dy. CIT [ITA No. 3104 (Mum.) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rit." On the basis of aforesaid submissions, it was argued that reliance placed by the Ld. CIT(A) on the so-called statements recorded during the course of survey was entirely mis-conceived and mis-placed which lend no support to the findings of the Ld. CIT(A) sustaining the disallowance under section 80-IB of IT Act. As regards to the observation of the Ld. CIT(A) that major sales took place during the initial 35 days of the accounting year relevant to assessment year under consideration, it was stated that the Ld. CIT(A) had unfortunately failed to appreciate that Shoghi unit started production of software in November - December, 1998 and the registration certificate of the Industries department certified the date of commencement of production as 21-3-1999, the development of software programme was ongoing process for any software unit and the assessee developed software which was duly included in the opening stock of Rs. 32,18,589 and that looking to the substantial profit margin in the software being developed by the assessee being indigenous development of security devices and products hitherto being imported and also looking to the facts of the case, there was nothing unu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely Elite 2000 XL, Hardware, Software and Encryption Algorithm and Serial Encryption Adapter (SEA). It was emphasized that the bill dated 7-4-2000 represented sale of 60 units of Encryption system to M/s. Shyam Telecom Ltd., Gurgaon which was described in the bill as Elite 2000 XL Secrecy Device for SCRR for a sum of Rs. 48 lakhs. It was explained that since the entire system had three components and the assessee while preparing the bill had given the break up price for each component instead of giving lump sum price of the system at Rs. 80,000 per unit. It was explained that the first component described as hardware Elite 2000 XL hardware was imported, this hardware when imported included the driver software which was used to connect the device to the PC/External Devices for programming this software, since this hardware had been imported this portion of the sale consideration had been taken as trading item sale. The second component of the system which was actually the heart and soul of the system, i.e., Encryption Algorithm was the computer software developed by the Shoghi unit and was actually the application software without which the system would not perform the point t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Narne Tulaman Mfrs. (P.) Ltd. v. CCE [1989] 1 SCC 172. It was submitted that the unit set up by the assessee at Shoghi was a genuine unit which had been engaged in the production of software and hardware products in the field of security communication and Encryp- tion devices and that unit was carrying on the manufacturing activity. It was stated that the HP Government has conferred the best industrial unit award on the assessee-company for its excellence and outstanding performance in the field of indigenous development of surveillance system and the award was conferred by the Dy. Prime Minister of India on 9th June, 2001 at the valedictory function held at Shimla when the top dignitaries of the State and the Senior officers of State Government were also present. It was further stated that several officers of the State Government visited the unit of the assessee several times and profusely commended the good work done by the assessee. It was submitted that the development of the software had been construed as production of an article or thing by the various Benches of ITAT and thus entitling the assessee for claim of deduction under section 80-IB. Reliance was placed on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm "produce" is clarificatory in nature and was inserted in 1993 primarily because, in that year, the tax holiday was extended to units in STPs which produce only computer software. " [Emphasis supplied] On the basis of above, it was stated that the CBDT had issued instructions to the field formations that manufacturing of software was to be construed as production of an article or thing. It was stated that the CBDT circulars are binding on the Income-tax authorities. Reliance was placed on the judgment of Hon ble Supreme Court in the case of CCE v. Dhiren Chemical Industries [2002] 254 ITR 554. On the basis of aforesaid arguments, Ld. Counsel for the assessee emphasized that the assessee fulfilled all the conditions to make it eligible for deduction under section 80-IB, therefore, the order of Ld. CIT(A) should be set aside and the directions may be given to allow the claim of the assessee. 7. On behalf of the department, Ld. CIT (Admn.), Shimla sought the permission to argue the case in place of regular Departmental Representative i.e., CIT (D.R. for the revenue), Addl. CIT, JCIT etc. In the beginning, Ld. Counsel for the assessee showed reluctance but later on did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of survey a statement of Shri Vibhu Anand, V.P of the assessee-company was recorded, in that statement he had admitted that no stock register/incoming or outgoing register or production register, were being maintained and also admitted that the Corporate office of the company was at Ansal Bhawan, New Delhi. He further submitted that the raw material and the final product shown in the certificate of registration issued by the GM, D.I.C were the same which implied that the assessee was engaged in the sale purchase of those goods. He further stated that the trading and other non-manufacturing activities of the assessee constituted a very sizeable part of its operation (87.3 per cent at Shoghi). It was argued that an industrial undertaking could not be engaged in non-manufacturing activities unless of course, such activities were incidental and ancillary to its main operations. According to him, Income-tax Act did not envisage deduction under section 80-IA/80-IB for units engaged in non-manufacturing activities in substantial way and since in assessee s case a substantial part of its turn over was on account of trading, so deduction was not allowable. The ld. CIT further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling the same either in the same form or after re-assembling them at the premises of the client/customers and that various sale bills revealed that the goods imported from abroad were sold in transit as well and those goods were sold only after 2-3 days of their receipt at the Airport. He submitted that the assessee itself admitted that sales of hardware worth Rs. 12 lakhs were a trading transaction and not a manufacturing transaction and that the sale of software worth Rs. 30 lakhs had been claimed as manufacturing of goods and thus exempt. The CIT submitted that the software too was not manufactured by the assessee which was borne from the purchase bills issued by M/s. Seven Hills Trading Inc. though those bills were dated 27-3-2000 and 29-3-2000 but the goods covered by those bills were received sometime in April, 2000 i.e., may be a day or two before the date of sale on 7-4-2000 and 25-4-2000 as per sale bills of the assessee. He further submitted that the hardware and software items were sold separately and there was no question of integrating the same which clearly proved that false description of manufacturing process was given by the assessee before the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efinition given in sections 10A, 10B, 10(15) and section 80HHE of Income-tax Act, 1961, it was abundantly clear that the words computer software had not been included under the term manufacture of an article or thing but had been specifically added where the Legislature intended to refer to it. He further stated that by Finance Act, 1987 amendment had been made in section 10A(1) and the word computer software was added to the phrase "the export of article or thing" with a purpose. According to him had the computer software been manufacture or production of an article or thing, this would have automatically been covered by the natural definition of article or thing and the Legislature would not have added computer software at various places in the section 10 of IT Act. He further stated that the words computer software had been added in section 10B by the Finance Act, 2001 with effect from 1-4-2001, prior to the amendment, there was a special definition of "manufacture" and "produce" given in the said section which had shown that the term was not included in the ordinary meaning of "manufacture" or "produce", therefore, the development of computer software/programme could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moment that the development of software amounts to manufacturing activity, the assessee is admittedly not manufacturing the medium through which it is sold i.e. floppy, C.D. etc. Therefore, till the stage it is manufactured/developed on a computer, the software does not attain any characteristics or attributes of a good or article. vi. The Hon ble Supreme Court has held that canned software ( i.e., computer software packages off the shelf) can be termed as goods and as such assessable to sales tax. It has nowhere held that all software can be termed as goods. The meaning of canned software as given in para 61 on page 162 in the said decision by the Hon ble Supreme Court reads as under : (7) Canned Software means that is a not specifically for a particular consumer. The sale or lease of or granting a license to use, canned software is not automatic data processing and computer services. But is the sale of tangible personal property. When a vendor, in a single transaction sells canned software that has been modified or customized for that particular consumer, the transaction will be considered the sale of tangible personal property, if the charge for the modification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-2000 for manufacturing turnover of Rs. 6.92 lakhs electricity expenses were of Rs. 14,328 and in the next year against the manufacturing turnover of Rs. 64.75 lakhs, electricity expenses were of Rs. 49,555 and in assessment year 2001-02 while the manufacturing turnover had gone by four times i.e., to Rs. 2.34 crores, electricity consumption had increased by 10 per cent only. It was further stated that in the assessment year 2002-03 when the manufacturing turn over came down sharply to Rs. 60.16 lakhs which was about 1/3rd of the turn over in the preceding year, electricity expenses had gone up against all expectations of as much as three times. He, therefore, stated that there was no relation with the manufacturing turn over and the consumption of electricity and the assessee could not prove anything on this point that the manufacturing process was carrying on with the aid of power. He further submitted that although the assessee had claimed to have employed 20 or more people but most of them were posted in its Delhi office and those who were posted at Shoghi, many of them admittedly were engaged in the marketing and other non-manufacturing jobs and thus did not qualify to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to furnishing of copy of sales tax assessment order dated 26-3-2003 by the Ld. Counsel for the assessee by stating that this document was not produced either before the Assessing Officer or before the Ld. CIT(A). He further stated that the software allegedly developed by the assessee was not an article or thing since the assessee had not paid the sales tax, CST and Central Excise Duty. He accordingly submitted that the assessee was not eligible for deduction under section 80-IB of IT Act. Therefore, the Ld. CIT(A) was fully justified in confirming the action of the Assessing Officer who had rightly disallowed the claim of the assessee. 9. In his rejoinder, Ld. Counsel for the assessee submitted that it was not legally required that separate books should be maintained in respect of manufacturing and trading. He further stated that the sales tax assessment of the assessee had been framed and it was not necessary that the sales tax should be levied because the manufacturing of software was in the nil sales tax category. He further stated that in the form submitted for registration to the G.M., D.I.C. in the items to be manufactured, software and hardware were mentioned and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the assessee was a new industrial undertaking and was engaged in the manufacturing and that the sales of manufactured goods had been accepted by the department. He further stated that a detailed chart in respect of Gross Profit rate of the assessee as well as of the sister concerns, was furnished before the ld. CIT(A) which clearly had shown that the sister concerns were also selling the goods on profit. He further stated that software developed by the assessee was standardized and was eligible for deduction under section 80-IB. Reliance was placed on the decision of ITAT Mumbai Bench H dated 28-8-2002 in ITA No. 8620/Mum./95 in the case of R.S. Bhagwat ( supra ) (A copy of the same was furnished which is on the record). Ld. Counsel for the assessee concluded that all the conditions necessary for the claim of deduction under section 80-IB were satisfied by the assessee, therefore, Ld. CIT(A) was not justified in confirming the action of the Assessing Officer in not allowing deduction legally available to the assessee under section 80-IB of IT Act. He, therefore, prayed to allow the deduction. When the Ld. Counsel for the assessee concluded his arguments in the shape o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id by the assessee, therefore, the software was not a good or an article. We are of the view that the Ld. Counsel for the assessee had not given any new evidence or fresh material which required the comments of the opposite party because the Ld. Counsel for the assessee had only furnished those documents to strengthen his arguments during the course of hearing itself. However, the D. R. for the revenue i.e., the ld. CIT had furnished the written submissions to counter the rejoinder of the Ld. Counsel for the assessee and in the written submissions most of the arguments already advanced by him had been repeated. At this stage we may mention that in appellate proceedings, the parties are free to argue at length and may ask for the time which is needed to make the relevant submissions. However, when the arguments of both the parties are concluded the Bench should not consider anything new furnished by either of the party because in that event opportunity should also be given to another party and it will be a never ending process because after receiving the written submissions of one party, the opposite party will ask for time to argue the matter or will furnish written submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 35B, in the circumstances and within the period specified in that section; ( ii )it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; ( iii )it manufactures or produces any article of thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India: Provided that the condition in this clause shall, in relation to a small scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words "not being any article or thing specified in the list in the Eleventh Schedule" had been omitted. Explanation 1 For the purposes of clause ( ii ), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely: ( a )such machinery or pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had not filed any appeal and also the Ld. D.R. for the revenue i.e., the CIT (Admn.), Shimla who argued the case on behalf of the department, had not rebutted the observation of Ld. CIT(A). So, in the present case it cannot be said that the business of the assessee is formed by splitting up or the reconstruction of a business already in existence and that it is formed by the transfer of a new business machinery or plant machine/previously used for any purpose. The third condition to be eligible for deduction under section 80-IB is that the assessee did not manufacture or produce any article or thing specified in the list of 11th Schedule. In the present case the claim of the assessee is that it produced software, so it was eligible for deduction under section 80-IB. The Central Excise Tariff Act, defines the "software" and states that any representation of instructions, data, sound or image including source code and object code recorded in a machine readable form and capable of being manipulated or providing interactivity to a user by means of an automatic data processing machine. 10.1 In the instant case the assessee claimed that it manufactured software which was an Encr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee is put on hardware and then marketed, so, it comes under the category of goods. 10.2 In the case of ISBC Consultancy Services Ltd. ( supra ) ITAT Mumbai Bench C had held as under : "The customized software renders the standard software operational by adding new programmes keeping in perspective the commercial needs, requirements and end use applications to be implemented by the customers. Therefore, it could be said that customization process undertaken by the assessee was manufacture . Further as per clause ( iii )( a ) of Explanation to section 10A, manufacture includes any process . In the premises and without prejudice to the observation that the assessee was engaged in manufacture of articles or things, the activities embarked upon by the assessee would 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be split up. Therefore, sale of computer software falls within the scope of sale of goods Hon ble Supreme Court has also observed that they are in agreement with the view that there is no distinction between the branded and unbranded software." In the said circular the CBDT issued following instructions : "Software, being goods, any service in relation to maintenance or repair or servicing of software is leviable to service tax under section 65(105)( zzg ) read with section 65(64) of the Finance Act, 1994." From the above circular of CBDT it is crystal clear that the software comes under the definition of goods and there is no distinction between branded and unbranded software. In view of the judicial pronouncements as discussed herein above, and as per the instructions given by the CBDT in the aforesaid referred to circular, development of software can be considered as manufacturing. Deduction under section 80-IB is available to an industrial undertaking which manufactures goods. In the instant case software developed i.e., manufactured by the assessee comes under the category of goods and so, the assessee fulfilled the conditions laid down under section 80-IB(2)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record had not been kept and secrecy was maintained, had not been rebutted at any stage. The department had also doubted the manufacturing activity at Shoghi, however, the sales had been accepted and the goods sent through transport, had not been doubted. Moreover, the sales tax department had duly verified the declaration given by the assessee in Form No. 26A at Parwanoo Barrier to which the goods are taken first and then transported to other States. In other words, it is required to cross the barrier when the goods are sent to different States and the department had not dis-believed the crossing of barrier on the basis of declaration in Form No. 26A, GR notes, transportation bills etc. which established that the goods were manufactured at Shoghi unit. 10.8 As regards to the objection of the department that for few items sales were transit sales, the assessee had already given the explanation to the department that those sales were trading sales and no deduction under section 80-IB had been claimed on those sales, therefore, the objection of the department is without any merit. 10.9 Considering the totality of the facts and the evidences produced by the assessee in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new industrial undertaking from which deduction of the relevant percentage of capital employed during a particular assessment year is allowable under that provisions are the profits and gains includible in the computation of the total income chargeable to tax. There are no two modes of computation of the profits or gains of the new industrial undertaking contemplated by sub-section (1) of section 80J, one for determining the total income chargeable to tax and the other for applying the provision contained in that sub-section. The provisions of section 80J do not envisage that separate accounts should be submitted in respect of the new unit and it is also not necessary that a separate account should be maintained." It is noticed that in the aforesaid referred to cases, the issue under consideration of the various High Courts related to deduction under section 80J which had since been omitted by the Finance (No. 2) Act, 1996 with retrospective effect from 1-4-1989 however, the fact remains that the deduction under section 80J was available in respect of the profits and gains from a newly established industrial undertaking and the deduction under section 80-IB also relates to profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the month of March, 2001 only the names of four persons appeared in the list of employees given by Shri Tapan in his statement dated 19-4-2002, only seven persons were covered under the Provident Fund Contribution Scheme (in short PFCS ). Ld. CIT(A) had also agreed with the observation of the Assessing Officer. The instant case relates to assessment year 2001-02 i.e., the previous year ending on 31-3-2001. Therefore, the number of employees at the time of survey on 19-2-2002 is not important since the previous year relevant to the assessment year under consideration ended on 31-3-2001, therefore, the employees in the year ending on March 31, 2001 are to be considered to decide whether the assessee employed the requisite number of workers in the industrial undertaking or not. The assessee had submitted the list of employees to the Assessing Officer vide letter dated 30-1-2004. The Assessing Officer did not disbelieve the list furnished by the assessee. The only objection was that out of 29 employees shown as working in the month of March 2001 only four persons were there in the list furnished by Shri Tapan, the employee of the assessee in his statement dated 19-4-2002. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orkers having experience and knowledge of different processes involved in the development of software. 10.18 Now the question arises when the assessee employed the requisite number of employees substantially during the period, whether the relief was allowable under section 80-IB of the IT Act. 10.19 In this regard the Hon ble Bombay High Court in the case of Harit Synthetics Fabrics (P.) Ltd. s case ( supra ) has held that it is not requisite that a new industrial undertaking which manufactures or produces articles in a manufacturing process carried on with the aid of power, should have employed 10 or more workers throughout the entire period in which relief under section 80-I was claimed. It has further been held that the relief would be allowable if the undertaking has employed 10 or more workers substantially, during the period for which the relief was claimed. As per list furnished by the assessee which had been reproduced by the Assessing Officer at page 4 of the assessment order dated 1-3-2004, it would be clear that the workers employed for the months of April and May, 2000 were 17 and in the months of July, September, November and December, 2000 the employees w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contribution Scheme. In our opinion, the Assessing Officer ignore the provisions of Provident Fund Contribution Scheme, as per rule E.P.F. Scheme is mandatory only for those employees who were paid less than Rs. 6,500 p.m. moreover it was the discretion of the employees getting more than Rs. 6,500 p.m. to opt for the E.P.F. Scheme. In the list furnished by the assessee, which is available at page No. 96 of assessee s compilation, it is noticed that majority of the employees were employed in the year 2000. Some of them might have not completed the essential condition to work for minimum period. As such the Provident Fund Contribution Scheme was not applicable for all the employees. In that view of the matter, the Assessing Officer was not justified in rejecting the claim of the assessee on the basis that only four employees out of list furnished by the assessee for year under consideration, were working as on 19-2-2002 and only for seven employees, provident fund Contribution scheme was applicable. In our opinion, the condition to be fulfilled by the assessee was that there must have been at least 10 employees involved in the manufacturing process during the year under consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en an evidentiary value." In the instant case the statement had been recorded on oath during the course of survey under section 133A of IT Act and not under section 132(4) of IT Act i.e., in the course of any search or seizure. So in view of the ratio laid down by the Hon ble Kerala High Court in the above referred to case, these statements have no evidentiary value. 10.24 Similar view has also been taken by the Ahmedabad Bench of ITAT, in the case of Ashok Manilal Thakkar ( supra ). 10.25 In view of the above discussion, the statements recorded during the course of survey, on oath had no evidentiary value. In those circumstances, the Assessing Officer, during assessment proceedings should have taken note of the information provided by the assessee on the basis of books of account maintained during the regular course of business. In the present case, the Assessing Officer did not doubt the payment of salary and wages to 29 workers and had also allowed expenses paid to the temporary and casual workers. So, there was no occasion to hold that the assessee had not fulfilled the conditions laid down under section 80-IB (2)( iv ) of IT Act. 10.26 In view of the above di ..... 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