TMI Blog2017 (8) TMI 382X X X X Extracts X X X X X X X X Extracts X X X X ..... were engaged in the manufacturing process i.e. in development of the software and it is not necessary that each and every employee alone should do all the works in the manufacturing process. Assessing Officer failed to place on record any material to substantiate that assessee had not employed the workers as mentioned in the list dated 31.1.2004 for the period relevant to the assessment year under consideration and merely on the basis that the old employees were not there at the time of survey, rejected the claim of assessee for deduction under Section 80IB. Mumbai Bench ‘C’ in the case of ISBC Consultancy Services Ltd. vs. DCIT (2002 (8) TMI 840 - ITAT MUMBAI) has already held that process of customization of software amounts to manufacture. In case referred above, learned Income Tax Appellate Tribunal held that rendering standard software operational by adding new programs, keeping in view the commercial needs, requirement and applications to be implemented by the customers, would amount to manufacture and further for the purpose of Section 10A, since manufacture includes ‘any process’ and as such customization of software would be eligible for the deduction under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2005 for the assessment year 2001-2002 (hereinafter referred to as the Appellate Tribunal ), whereby learned Tribunal, while partly allowing appeal having been filed by the respondent-assessee, held that since all the four conditions contained in Section 80 1B(2) of the IT Act are fulfilled by the assessee, it is entitled for deductions as claimed under Section 80 IB and 80 HHC. 2. Necessary facts for adjudication of the case, as emerged from the record, are that respondent-assessee, who is engaged in the manufacture of voice and fax encryption systems, imported the necessary hardware as well as corresponding software from the United States and subsequently imported hardware was integrated at the assessee s premises at Shoghi, District Shimla, Himachal Pradesh and the software was customized and modified before loading it to the hardware. Respondent-assessee claimed deductions under Section 801B and 80 HCC for the assessment purpose, which came to be disallowed by the Assessing Officer vide assessment order under Section 143(3) dated 1.3.2004. 3. Being aggrieved and dis-satisfied with the aforesaid assessment order dated 1.3.2004, respondent-assessee preferred an appeal und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of the eligible business, and consequent failure to fulfill the condition laid down in section 801B(13) read with section 801A(5), did not justify the rejection of the claim for deduction under section 801B in the present case? 4. Whether on the facts and in the circumstances of the case, Hon ble Tribunal was right in law in holding that statements of several persons admittedly recorded under section 133A(3)(iii) of the income-tax Act in the course of survey under-section on the assessee s premises did not have any evidentiary value, since the said section does not provide for recording a statement on oath, and since the statements recorded in the present case did not indicate the concerned officer/authority who recorded the same? 6. Ms.Vandana Kuthiala, learned counsel representing the appellant-department, vehemently argued that impugned order passed by learned Appellate Tribunal is not sustainable as the same is contrary to the facts as well as law. While referring to the impugned judgment passed by learned Appellate Tribunal, Ms.Vandana Kuthiala, strenuously argued that no manufacturing activity was actually carried out by respondent-assessee and as such dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed article has to be specifically transferred. But, in the instant case, there is nothing on record to suggest that whether such right was obtained by the assessee and whether any royalty was paid as consideration for the same. 8. Learned counsel, while inviting the attention of this Court to the assessment order passed by the Assessing Officer, which was further upheld by the Commissioner, Income Tax (Appeals), stated that it clearly emerge from the record that assessee did not employ more than 10 workers in any manufacture unit and also not maintained separate books of accounts in respect of the eligible manufacturing activity/business and as such, he failed to fulfill the conditions contained in Section 80 1B of the IT Act entitling him to claim deductions under the same. 9. Per contra Mr.Rupesh Jain, learned counsel appearing for the respondent-assessee, supported the impugned order passed by learned Appellate Tribunal. While refuting the aforesaid submissions having been made by learned counsel representing the appellant-department, Mr.Rupesh Jain, while inviting the attention of this Court to the questions of law framed at the time of admission, vehemently contended tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not apply in respect 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 33B, 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 or 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess is formed by splitting up of business already in existence, the AO has observed that the Directors of the appellant company and M/s.Secure Telecome Ltd., Delhi were common. They have shared common expenses and that appellant company paid a sum of ₹ 24,68,153/- to M/s.Secure Telecom Ltd. during the year towards its share of common expenses. In my considered view, the appellant company is not formed by splitting up of the business already in existence. The concept of splitting up involves a break-up of the integrity of the business. In order to hold that an Industrial undertaking was formed by splitting up business already in existence, there must be some material to hold that either some assets of the existing business is divided and another business is set up from such splitting of assets, or that the two businesses are the same and the one formed was an integral part of the earlier one. Where there is no tangible evidence of transfer of any assets from an earlier business to the new business, a conclusion can not be reached that the new business is formed by the splitting up of the business already in existence (T.Satish U.Pai Vs. CIT, 119 ITR 877 (kar.). In the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed etc. are goods for the purposes of sales tax. The submission of Mr. Sorabjee that this authority is not of any assistance as a software is different from electricity and that software is intellectual incorporeal property whereas electricity is not, cannot be accepted. In India the test, to determine whether a property is goods , for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc. Admittedly in the case of software, both canned and uncanned, all of these are possible. Intellectual property when it is put on a media becomes goods. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T and as such it does not have binding on Income Tax Authorities deserve outright rejection. 21. True, it is that aforesaid instructions/ clarifications, if any, have specifically been issued with regard to levy of service tax under Section 65(64) of the Finance Act, 1994, but in the clarification/instructions software has been specifically referred/termed to be as goods . Once CBDT has considered the software as goods , which levying service tax, appellant Income Tax Department cannot be allowed to state that goods defined under service tax are different from meaning construed by Income Tax. Aforesaid circular having been issued by the CBDT makes it ample clear that software comes under definition of goods and there is no distinction between branded and unbranded software and learned Appellate Tribunal, taking note of aforesaid instructions issued by CBDT, rightly considered the development of software as manufacturing activity. Since, in the instant case, learned Appellate Tribunal, on the basis of aforesaid notification as well as other documents, came to the conclusion that software developed is manufactured by the assessee and as such rightly concluded that assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration ended on 31.3.2001, as such, the employees in the year ending on March 31, 2001 were required to be considered to decide whether the assessee employed the requisite number of workers in the industrial undertaking or not. Learned Tribunal, after having peeped into the record, carefully examined/analyzed evidence adduced on record by the assessee vis- -vis order having been passed by Assessing Officer and concluded that the majority of the employees were having the technical educations who were engaged in the manufacturing process i.e. in development of the software and it is not necessary that each and every employee alone should do all the works in the manufacturing process. 26. Learned Tribunal, while deciding the question whether assessee required requisite number of employees during the relevant period to avail benefit of deduction under Section 80 1B of the IT Act, after having carefully perused the record as furnished by the assessee, which was also taken note by Assessing Officer in its assessment order dated 1.3.2004, rightly concluded that once the expenses claimed by the assessee for temporary and part time workers amounting to ₹ 10,25,180/- were allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT, 88 ITD 134 (Mum) has already held that process of customization of software amounts to manufacture. In case referred above, learned Income Tax Appellate Tribunal held that rendering standard software operational by adding new programs, keeping in view the commercial needs, requirement and applications to be implemented by the customers, would amount to manufacture and further for the purpose of Section 10A, since manufacture includes any process and as such customization of software would be eligible for the deduction under Section 10A. Learned Appellate Tribunal in the aforesaid case has categorically held that development of software falls within the definition of production as defined under Section 10A and 10B. 30. It also emerge from the record that similar view has been taken by learned Income Tax Appellate Tribunal Hyderabad Bench B in the case of Infotech Enterprises Ltd. vs. JCIT, 85 ITD 325 (Hyd). Learned counsel representing the appellant-department was unable to dispute aforesaid findings returned by learned Income Tax Appellate Tribunals Mumbai and Hyderabad Benches in cases referred above and as such ratio laid down in the aforesaid cases were rightly applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in it, the same can be adjudicated in the second appeal, treating it as a substantial question of law. Where the first appellate court is shown to have exercised its discretion in a judicial manner, it cannot be termed to be an error either of law or of procedure requiring interference in second appeal. This Court in Reserve Bank of India v. Ramakrishan Govind Morey, AIR (1976) SC 830 held that whether the trial court should not have exercised its jurisdiction differently is not a question of law justifying interference. 35. In Panchugopal Barua v. Umesh Chandra Goswami, (1997) 4 SCC 713, it has been laid down by Hon ble Apex Court that existence of substantial question of law is sine qua non for the exercise of jurisdiction. The Hon ble Apex Court has held as under:- 7. A bare look at Section 100 C.P.C. shows that the jurisdiction of the High Court to entertain a second appeal after the 1976 amendment is confined only to such appeals as involve a substantial question of law, specifically set out in the memorandum of appeal and formulated by the High court. Of course, the proviso to the Section shows that nothing shall be deemed to take away or abridge the power of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court. The respondent is at liberty to show that the question formulated by the High Court was not involved in the case. In spite of a substantial question of law determining the scope of hearing of second appeal having been formulated by the High Court, its power to hear the appeal on any other substantial question of law, not earlier formulated by it, is not taken away subject to the twin conditions being satisfied: (i) the High Court feels satisfied that the case involves such question, and (ii) the High Court records reasons for its such satisfaction. 37. All the aforesaid judgments have been referred to in the later judgment of K. Raj and Anr. v. Muthamma (2001) 6 SCC 279. A statement of law has been reiterated regarding the scope and interference of the court in second appeal under Section 100 of the Code of Civil Procedure. 38. Reliance is also placed upon the decision of the Hon ble Delhi High Court in Mahavir Woolen Mills v. C.I.T. (Delhi) (2000), 2000 245 ITR 297 Delhi, wherein meaning of substantial question of law has been explained. The Hon ble Court has held as under:- 6. The issue raised by the assessee in the appeal cannot be said to involv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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