Sanchar Nigam Ltd v. Possessed

THE HON’BLE THE CHIEF JUSTICE SHRI MADAN B. LOKURANDTHE HON’BLE SHRI JUSTICE SANJAY KUMAR I.T.T.A. NO.42 OF 2011 DATED:2.1.2012 Between: The Commissioner of Income TaxA.P.-IHyderabad … Appellant And M/s. Ajay Automation (P) Ltd.,Hyderabad1-2-593/5, Gagan Mahal Colony Hyderabad … Respondent THE HON’BLE THE CHIEF JUSTICE SHRI MADAN B. LOKURAND THE HON’BLE SHRI JUSTICE SANJAY KUMAR I.T.T.A. NO.42 OF 1999 JUDGMENT:(per the Hon’ble the Chief Justice Shri Madan B. Lokur) This appeal under Section 260A of the Income Tax Act, 1961 (forshort, ‘the Act’) has been admitted on the following two substantialquestions of law:- 1.“Whether the Appellate Tribunal is justified in holding thatdevelopment of software amounts to manufacture of an articleor goods and the export of such goods secure the benefit ofdeduction to the assessee u/s.80HHC of the I.T. Act ?development of software amounts to manufacture of an articleor goods and the export of such goods secure the benefit ofdeduction to the assessee u/s.80HHC of the I.T. Act ? 2.Whether the Appellate Tribunal is justified in not holding thatinsertion of Sec. 80HHE of the I.T. Act w.e.f. 1.4.1991providing for grant of deduction on software development onlyw.e.f. 1.4.1991 militates against grant of such deductionu/s.80HHC for the anterior period ?”insertion of Sec. 80HHE of the I.T. Act w.e.f. 1.4.1991providing for grant of deduction on software development onlyw.e.f. 1.4.1991 militates against grant of such deductionu/s.80HHC for the anterior period ?” 3. The assessee carries on the business of developing computersoftware. For the relevant assessment year 1989-90, it claimed adeduction to the extent of Rs.21.55 crores under Section 80HHC of theAct. 4. The assessing officer accepted the claim made by the assessee,but the Commissioner of Income Tax, exercising powers under Section263 of the Act, revised the order of the assessing officer on the groundthat computer software recorded on magnetic tapes cannot beconsidered as “goods” for the purposes of Section 80HHC of the Act. The Commissioner also took note of the fact that Section 80HHE wasintroduced in the Income Tax Act with effect from 1.4.1991 and thatSection specifically intended to cover exports of computer software. 5. The Commissioner was, therefore, of the view that first of all computer software recorded on magnetic tapes was not “goods” withinthe meaning of Section 80HHC of the Act and in any event, in view ofthe introduction of Section 80HHE in the Act, the view that he had takenthat computer software recorded in magnetic tapes was not coveredunder Section 80HHC of the Act was fortified. Accordingly, the order ofthe assessing officer was set aside. 6. Feeling aggrieved, the assessee preferred an appeal before theIncome Tax Appellate Tribunal (for short, ‘the Tribunal’) and the appealwas allowed. This has led to the filing of the present appeal underSection 260A of the Act. 7. For the sake of convenience, Section 80HHC(1) of the Act, which is relevant, is extracted below:- “80HHC (1). Where an assessee, being an Indian company or aperson (other than a company) resident in India, is engaged in thebusiness of export out of India of any goods or merchandise to whichthis Section applies, there shall, in accordance with and subject to theprovisions of this Section, be allowed, in computing the total income ofthe assessee, a deduction to the extent of profits, referred to in sub-section (1B), derived by the assessee from the export of such goods ormerchandise: Provided that … … …” 8. The first question that arises in this regard is whether the computersoftware recorded on magnetic tapes is goods or not? 7. For the sake of convenience, Section 80HHC(1) of the Act, which is relevant, is extracted below:- “80HHC (1). Where an assessee, being an Indian company or aperson (other than a company) resident in India, is engaged in thebusiness of export out of India of any goods or merchandise to whichthis Section applies, there shall, in accordance with and subject to theprovisions of this Section, be allowed, in computing the total income ofthe assessee, a deduction to the extent of profits, referred to in sub-section (1B), derived by the assessee from the export of such goods ormerchandise: Provided that … … …” 8. The first question that arises in this regard is whether the computersoftware recorded on magnetic tapes is goods or not? 9. Learned counsel for the Revenue very frankly states that in view ofthe decision of the Supreme Court in Tata Consultancy Services v.State of A.P.[[1]], it must now be held that computer software, if it isrecorded on magnetic tapes or otherwise and is marketable, it becomes“goods” susceptible to sales tax. Learned Counsel for the Revenue alsofrankly states that in view of the decision of the Supreme Court in Bharat Sanchar Nigam Ltd. V. Union of India[[2]], the question is no longer resintegra. It is submitted that marketable computer software is goodsbecause of its utility, capability of being bought and sold and itscapability of being transmitted, transferred, delivered, stored and possessed. 10. On a reading of the aforesaid two judgments of the SupremeCourt, it is frankly stated by learned counsel for the Revenue thatmarketable computer software has the attributes of goods for thepurposes of Sales Tax and also for the purposes of the Income Tax Act,particularly Section 80HHC thereof. 11. This view has also been taken by the Madras High Court in Commissioner of Income Tax v. Superstar Music and another[[3]]. 12. We see no error in the concession given by learned counsel forthe Revenue inasmuch as it is quite clear that for the purposes ofSection 80HHC (1) of the Act, computer software recorded on magnetictapes or floppies, discs or CDs etc., would amount to goods ormerchandise. 13. Under these circumstances, the first substantial question of lawraised in this appeal must be answered in the affirmative, in favour of theassessee and against the Revenue. 14. Insofar as the insertion of Section 80HHE of the Act isconcerned, the relevant provision is Section 80HHE(1), which readsas follows:- 80HHE. (1) Where an assessee, being an Indian company or a person(other than a company) resident in India, is engaged in the business of ,--(i) export out of India of computer software or its transmission fromIndia to a place outside India by any means; (ii) providing technical services outside India in connection with thedevelopment or production of computer software, there shall, in accordance with and subject to the provisions of thissection, be allowed, in computing the total income of the assessee, adeduction to the extent of the profits, referred to in sub-section (1B),derived by the assessee from such business: Provided that … … …” 15. It is quite clear that on a comparison of the provisions of Section80HHC (1) and Section 80HHE (1) of the Act, there is no substantial ormaterial difference. 16. At this stage, it is necessary to note that a similar provision wasintroduced in the Income Tax Act with regard to export or transfer of film (ii) providing technical services outside India in connection with thedevelopment or production of computer software, there shall, in accordance with and subject to the provisions of thissection, be allowed, in computing the total income of the assessee, adeduction to the extent of the profits, referred to in sub-section (1B),derived by the assessee from such business: Provided that … … …” 15. It is quite clear that on a comparison of the provisions of Section80HHC (1) and Section 80HHE (1) of the Act, there is no substantial ormaterial difference. 16. At this stage, it is necessary to note that a similar provision wasintroduced in the Income Tax Act with regard to export or transfer of film software under Section 80HHF of the Act. While interpreting Section80HHF, the Madras High Court relied upon an earlier decision of theBombay High Court in Abdulgafar A. Nadiadwala v. AssistantCommissioner of Income Tax[[4]] and held that despite a specificprovision having been introduced in the Income Tax Act (Section80HHF) for the purposes of export or transfer of film software, that didnot exclude the provisions of Section 80HHC of the Act prior to theintroduction of Section 80HHF. All that transpired was that so far as theassessee is concerned, it could specifically claim a deduction underSection 80HHF of the Act instead of having to fall back on the generalprovision of Section 80HHC thereof. 17. In our opinion, this rationale would apply to the interpretation ofSection 80HHE of the Act. Merely because Section 80HHE specificallydeals with the export of computer software with effect from 1.4.1991, itdoes not mean that the operation of Section 80HHC of the Act isexcluded prior to 1.4.1991. The provisions of Section 80HHC(1) aremore general in nature while Section 80HHE(1) of the Act are morespecific, but since the latter provisions operate with effect from 1.4.1991the provisions of the former would continue to operate until then. 18. As mentioned above, we are concerned with the assessment year1989-90. Since the assessment year we are concerned with is prior tointroduction of Section 80HHE of the Act, we are of the opinion that theTribunal was right in coming to the conclusion that the assessee wasentitled to the benefit of Section 80HHC of the Act for the purposes ofclaiming a deduction for export of computer software. 19. Under the circumstances, the second substantial question of lawis also answered in the affirmative, in favour of the assessee andagainst the Revenue. 20. The appeal is disposed of on the above terms. __________________ 2-1-2012bnr Note: L.R. copy to be marked. (B.O)bnr [1][2004] 271 ITR 401 (SC) [2][2006] 282 ITR 273 (SC)[3][2007] 291 ITR 8 (Mad.)[4][2004] 267 ITR 488 (Bom.) MADAN B. LOKUR, CJ _______________ SANJAY KUMAR, J