Income Tax Appellate Tribunal - Mumbai
Isbc Consultancy Services Ltd. vs Deputy Commissioner Of Income Tax on 29 August, 2002
Equivalent citations: [2004]88ITD134(MUM), (2004)83TTJ(MUM)597
ORDER
B.L. Chhibber, A.M.
1. The vital issue for adjudication in this appeal by the assessee is whether the assessee is engaged in "manufacture" or "production" of software programmes as mandated in Clauses (iii) and (vi) of Explanation to Section 10A of the IT Act, as it then stood for the asst. yr. 1998-99, i.e., the year under consideration.
2. The assessee-company has a software unit located in Santacruz Electronics Export Processing Zone (SEEPZ). The approval granted by the Development Commissioner to the assessee-company to create the unit in SEEPZ is in pursuance of guidance issued by the Government of India for setting up of a unit in export processing zones exhaustively enunciated in the Exim Policy (p. 202 of paper book No. II). In conformity with the sanction letter of the Development CIT (pp. 231 to 233 of paper book No. II), the assessee-company has to "manufacture" computer software systems and attain an overall value addition of 85 per cent for the project as a whole.
3. In furtherance of its business objectives and purposes, the assessee-company entered into agreements dt. 20th May, 1997 and 5th Feb., 1996, with BaaN Netherlands and BaaN India, respectively (pp. 119 and 115 of paper book I) which authorize the assessee to customize BaaN standard software.
4. Broadly speaking, the arrangement between the assessee and BaaN Netherlands may be depicted as follows :
"BaaN--to achieve economies of scale and division and specialization of labour produces on a large scale "standard software" also known as "development tools" e.g. high end databases, software engineering tools, standard programming platforms, BaaN tools, lotus notes, IBM Web Commerce Suite and the like. These "standard software" are sold by BaaN to customers all over the world either directly or through its subsidiaries. The customers who purchase standard software from BaaN enter into a software license and support agreement with BaaN. It is essential and fundamental to note that the "standard software" cannot be mobilized and deployed for specific end-use applications. To render them practically effective and facilitate their specific utilization by the customers to whom the standard software has been sold the standard software has to undergo a metamorphosis by a technique known as 'customization'."
5. For the year under appeal, the assessee-company filed its return of income on 30th Nov., 1991, declaring Nil income. While computing the income at Nil, it claimed deduction under Section 10A of the IT Act, amounting to Rs. 3,34,23,920 in respect of profits of the units set up in SEEPZ. The AO did not allow the claim of the assessee of exemption under Section 10A of the IT Act, as according to him, the assessee-company acts as a consultant to provide professional services for software implementation and the said services are provided from its office situated at Santacruz Electronic Export Processing Zone, i.e., SEEPZ, Andheri (East), Mumbai. The assessee stated before the AO that it carried on business of developing, improving, designing, setting, distributing, marketing, implementing and licensing computer software and programme packages and thus, it is eligible for exemption under Section 10A of the Act. But according to the AO, the assessee was an agent of software developing company of BaaN, based at Netherlands. According to the AO, BaaN develops software programme and sells them all over the world and the assessee is required to make necessary modifications in the above programmes as per the requirements of the customers and it is paid for such services offered by it. He held that it does not develop any software programme of its own but offers the services for implementation of BaaN's products. The AO held that in view of this, the assessee's above noted activities cannot be said to be manufacturing activities nor by the above activities, the assessee manufactures or produces any article or thing which is one of the foremost conditions for availing the benefit under Section 10A of the Act. Concluding that it was clear that the assessee was not manufacturing or producing any article or thing, he denied the exemption under Section 10A claimed by the assessee.
6. On appeal, the CIT(A) agreed with the findings of the learned AO. He held that the assessee had worked as an agent of the BaaN; that the original software programmes were produced and developed by BaaN and are sold by them; that the assessee comes into picture only if any changes or modifications are required therein; that the activities of such changes or modifications done by the assessee-company cannot be said to be manufacturing activities. In support of his findings, he relied upon the following decisions :
(i) Indian Hotels Co. Ltd. and Ors. v. ITO and Ors. (2000) 245 ITR 538 (SC)
(ii) Lucky Minmat (P) Ltd. v. CIT (2000) 245 ITR 830 (SC)
(iii) CIT v. Gem India Mfg. Co. (2001) 249 ITR 307 (SC).
7. Shri S.E. Dastur, the learned counsel for the assessee submitted that the authorities below have failed to appreciate the assessee's facts and circumstances and they ought to have upheld the assessee's claim under Section 10A inasmuch as its activities fall within the scope and purview of Section 10A. The assessee-company is engaged in the manufacture of software and it had entered into agreements with BaaN Netherlands and BaaN India, thereby it got the standard software and then such a standard software had to undergo the metamorphosis by a technique known as customization. He submitted that customization has two levels, viz., country level and customer level. The country stage customization involves development of peripheral modules to cater to country specific statutory requirements like value added taxes (sales-tax, service tax, excise duty, octroi and other levies), withholding taxes (TDS) disclosure requirements and accounting policies/standards. The customer level customization is warranted because the standard software only incorporates generic business processes that are common over all industries and business environment. However, to cater to and fulfil the unique, peculiar, and tailor made organizational and business needs of each customer, the standard software has to undergo transformation through the process of customer level customization. The customization exercise converts standard software into customized software rendering the standard software practically operational in a manner that it runs as per the demands of the customer and garners the desired results. In both the types of customization, the assessee harnesses the development tools and programming platforms embedded in the standard software as 'raw materials' and manufacture/produce end usable software applications thereby furnishing to the customer his special and individualistic wants.
8. The learned counsel for the assessee then took us to the graphic representation of the customization placed at pp. 219 to 277 of paper book No. II and submitted that a typical customization task would comprise of the following steps :
(a) Customization gap identification indicating the divergence between the needs of the customer and standard features already present in the standard software.
(b) To determine the exact and precise requirements/specifications in the form requirement, specification document and test plan.
(c) To undertake feasibility of the customization effort.
(d) If it is not feasible, suggest alternative solutions.
(e) On accomplishing feasibility an estimate of financial implications of customization.
(f) On acceptance by customer, a functional design document is formulated by the designer.
(g) Coding, programming, online help documentation and testing.
(h) System and integration testing containing removal of errors, bugs and matching design document.
(i) User acceptance testing and endorsement by customer.
9. To comprehend the customization operation more thoroughly and readily, the learned counsel for the assessee illustrated by way of an example as under :
"In a typical all embracing customization operation, a country level customization on the said customized software would result in addition of about 1,500 new software programs (p. 214 of paper book No. II) and customer specific customization on the same standard software would yield further 800 new programmes (p. 216 of paper book No. II) de hors the 6,000 standard programmes already comprised in the standard product and 1,500 new software programmes added under country level customization. In all there would be an aggregate of 8,100 new programmes at the end of the country level and customer level customizations (6,000 + 1,500 + 600 - 8,100) (standard) + (country) + (customer) (p. 216 of paper book No. II)."
10. The learned counsel for the assessee submitted that the whole customization drill entails creation and addition of the new programmes. The assessee only utilizes the development and programming platforms embedded in the standard software to develop and evolve the customized software programme. He drew our attention to Clause 2.1 of the agreement which defines customization services as under:
"Customization services means services to be provided to customers who wish specific modifications to be made to licensed programmes in order to implement in the licensed programmes local standards and requirements of a customer."
The learned counsel for the assessee submitted that the customization brings out an altogether new product. Moreover, the assessee-firm also customizes standard programmes developed by companies other than BaaN. For example, the agreement with ACER Inc. is a non-BaaN customized assignment performed by the assessee (pp. 16 to 25 of paper book No. I). In this connection, he drew our attention to invoices drawn on ACER coupled with detailed time sheets as to the actual work done (pp. 26 to 29 to paper book No. I).
11. The learned counsel for the assessee submitted that the assessee's total receipts of Rs. 9,13,47,409 from export of software can be dissected as under :
Rs. Per cent
(a) BaaN country level customization 4,00,95,557 33.33
under understanding with BaaN,
affiliates overseas.
(b) BaaN India 46,31,880 5.07
(c) Other overseas customization 4,66,19,972 61.60
assignments
9,13,47,409 100%
12. On the legal side, the learned counsel for the assessee drew our attention to the Explanation to Section 10A of the Act and contended that the customization processes carried out by the assessee meets the criteria propounded by the classical connotation of the term 'manufacture'. The classical exposition of the word 'manufacture' has been spelt out in a plethora of cases. For this, he relied upon the following decisions :
(1) CIT v. Sterling Foods (Goa) (1995) 213 ITR 851 (Bom) (2) CIT v. Tata Locomotive & Engg. Co. Ltd. (1968) 68 ITR 325 (Bom) (3) CIT v. Ajay Printery (P) Ltd. (1965) 58 ITR 811 (Guj) (4) CIT v. Peerless Consultancy & Services (P) Ltd. (2001) 248 ITR 178 (SC) (5) CIT v. Shaw Wallace & Co. Ltd. (1993) 201 ITR 17 (Cal) (6) CIT v. IBM World Trade Corporation (1981) 130 ITR 739 (Bom).
Reading extensively from the above cases, the learned counsel for the assessee submitted that the touchstones of the classification connotation of the term 'manufacture' are satisfied in the case of the assessee-company, without prejudice, Shri Dastur submitted that the customization process undertaken by the assessee at least constitutes production inasmuch as in CIT v. N.C. Budhaiaja and Co. and Anr. (1993) 204 ITR 412 (SC), has held that the production has a wider connotation than manufacture and emphasized that every manufacture can be characterized as production, but every production need not amount to manufacture. Again, pointing out to Explanation to Section 10A of the Act, the learned counsel for the assessee submitted that the expression 'manufacture' includes 'any process' and in the premises, and without prejudice and purely as an alternative- and independent submission, the assessee avers that the activities embarked upon by the assessee at least amount to a process. In this connection, he placed reliance on the CBDT Circular No. 528, dt. 16th Dec., 1988 (pp. 208 to 211 of paper book). The learned counsel for the assessee relied upon the CBDT Circular No. 495, dt. 29th Sept., 1987 (pp. 236 to 239 of paper book No. II) which explains that units which assemble or process imported components for export which benefit the country by way of value addition will also be eligible to claim exemption under Section 10A. Again, referring to Explanation to Section 10A, the learned counsel for the assessee submitted that the word 'manufacture' includes any recording of programmes on any disc, tape, perforated media or other information storage device and as demonstrated during the course of hearing the customized programmes are recorded on a floppy disc and stored therein and accessed whenever needed. Alternatively, the customized programmes after their development and creation are stored in the hard disc of the computer owned by the customer. He submitted that viewed from this perspective, the assessee's activities constitute manufacture as postulated in the statutory definition.
13. Shri Dastur, the learned counsel for the assessee submitted that the findings of both the authorities below that the assessee is only an agent of BaaN Netherlands is wholly and patently erroneous, misconceived and misplaced. He drew our attention to the agreement between the assessee and BaaN Netherlands and submitted that this agreement is on a principle-to-principle basis and none of the ingredients of the agency as postulated in Section 182 of the Contract Act, 1872 are present in the agreement with BaaN.
14. Finally, the learned counsel for the assessee submitted that Section 10A is an incentive provision intended to promote exports and to earn much needed foreign exchange for the country and it is a well accepted axiom that such an incentive and encouraging provision must be construed liberally so as to advance the objective and not to frustrate it as held by the highest Court of the land in Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC). Accordingly, the learned counsel for the assessee prayed that the claim of the assessee under Section 10A of the IT Act should be accepted.
15. Shri Karan Singh, the learned Departmental Representative strongly supported the orders of the authorities below. He submitted that for the relevant assessment year, i.e., asst. yr. 1998-99, which is the year under consideration, the assessee claimed deduction under Section 80HHE of the Act vide report dt. 24th Nov., 1998. Here, the activities mentioned are as providing technical services. Simultaneously, the company also made a claim of exemption under Section 10A of the Act vide letter dt. 24th Nov., 1998. The return of income was filed on 30th Nov., 1998. He submitted that the claim under Section 10A has been made on the strength of agreement dt. 7th Oct., 1998, which is available on p. 1 of the paper book filed by the assessee. He submitted that it is important to mention here that the date of 'signing the agreement is 19th/20th Oct., 1998. So, the agreement could be effective only w.e.f. asst. yr. 1999-2000 onwards and not for the asst. yr. 1998-99, the previous year, which expired on 31st March, 1999. The agreement cannot be made retrospective. He referred to the agreement effective for asst. yr. 1998-99 placed at pp. 114 to 118 of the paper book which is between ISG Consultancy, i.e., the assessee and BaaN Software India (an Indian company). The agreement was signed on 5th Feb., 1996 and was initially valid for a period of 2 years, i.e., asst. yrs. 1996-97 to 1998-99. The scope of services to be provided by the assessee are given in detail in paras 3.1 to 3.4 of the agreement and according to the learned Departmental Representative, the relevant page is 116. He pointed out that as per para 4.1, the area is restricted to Indian sub-continent. He pointed out that according to this agreement, the assessee was providing only technical services to the clients of BaaN and it was not carrying out any manufacture, production or process during the asst. yr. 1998-99 as alleged by it. Hence, the claim under Section 10A, made by the assessee, is untenable.
16. The learned Departmental Representative relied on four copies of TDS certificates from the under mentioned concerns:
Sr. No. Name of the concern Nature of payment 1. Larsen & Toubro Contractor 2. Price Water House Professional fees 3. Samsonite Professional charges 4. BaaN Infosystem India (P) Ltd. Consultancy
Pointing out to the above certificates, the learned Departmental Representative, submitted that the assessee was providing technical services and it was not deriving any profits/gains from manufacture/production process. He submitted that the assessee is not engaged in development of any programme of its own but offers technical services alone for implementation of BaaN products in terms of the agreement entered into in February, 1996. He referred to the Director's report for the asst. yr. 1998-99 and submitted that it mentions clearly that the assessee is an authorized agent for implementation of BaaN software throughout the world and this fact cannot be brushed aside lightly. The learned Departmental Representative, specifically drew our attention to paras 10 and 11 of the order of the CIT(A) and further relied upon the judgments on which the CIT(A) had placed reliance.
17. We have considered the rival submissions and perused the facts on record. Section 10A of the IT Act was brought to statute book by the Finance Act, 1981 w.e.f. 1st April, 1981 and contains special provision in respect of newly established undertakings in free trade zone: It was amended from time to time and as it stood for asst. yr. 1998-99, i.e., the year under consideration, this section applies to any industrial undertaking which "has begun/begins to manufacture or produce articles or things during the previous year relevant to the assessment year." The Explanation to Section 10A insofar as it is relevant for our purpose provides as under :
"Explanation--For the purpose of this section ;
xxxx
(ii) "manufacture" includes any--
(a) process,
(b) assembling,
(c) recording of programs on any disk, tape, perforated media or other information storage device.
xxxx
(vi) "produce", in relation to articles or things referred to in Clause (i) of Sub-section (2) includes production of computer programmes."
18. The central and pivotal question before us is whether the assessee is engaged in the "manufacture" or "production" of software as mentioned in Clauses (iii) and (vi) of the Explanation to Section 10A as it then stood for the asst. yr. 1998-99, As is evident from the facts of the case, the assessee-company is engaged in the manufacture of software and it had entered into agreements with BaaN Netherlands and BaaN India, whereby it got the standard software and then such a standard software had to undergo the metamorphosis by a technique known as 'customization', The assessee-company bought standard software from BaaN Netherlands and the standard software had to undergo transformation through the process of customer level customization. The customization exercise converts standard software into customized software rendering the standard software practically operational in a manner that it runs as per the demands of the customer and garners the desired results. In the customization process, the assessee harnesses the development tools and programming platforms embedded in the standard software as "raw materials" and manufactures/produces end usable software applications thereby furnishing to the customer his special and individualistic product. This fact is clear from the graphic representation of the customization placed at pp. 219 to 277 of paper book No. II which has been discussed by us in para 8 above. The whole customization drill entails creation and addition of new programmes. The assessee only utilizes the development and programming platforms embedded in the standard software to develop and evolve the customized software programme. Customization exercise involves intellectual process and at the end of the process, new things come into existence. The customization process carried out by the assessee, in our opinion, meets the criteria propounded by the classical connotation of the term "manufacture".
19. In the case of Sterling Foods (Goa) (supra), the High Court at Bombay, after considering a few decisions has held that to determine whether there was manufacture, it must be ascertained whether the commodity which was subjected to a series of processes has undergone a transformation so that it can no longer be regarded as the original commodity, but recognized in a trade as a new and different commodity, having "distinctive name, character or use." As per the process of customization as explained by the learned counsel for the assessee in detail and reproduced (supra), it is noted that the customized software developed and created by the assessee-company for the customer with the support of the standard software passes the aforesaid yardstick propounded by the jurisdictional High Court. 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. We, therefore, hold that customization process undertaken by the assessee is "manufacture". Further, as per Clause (iii)(a) of the aforesaid Explanation, manufacture includes "any process". In the premises and without prejudice to our observation that the assessee is engaged in manufacture of articles or things, the activities embarked upon by the assessee 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 manufacture will have to be construed as such in view of the artificial and widened definition in Clause (iii) of Explanation to Section 10A. The expression "processing" has been explained by the Department in its Circular No. 528, dt. 16th Dec., 1988, in the context of Section 44AC. Para 24.6 of the circular expounds the word processing as under :
"The term 'processing' has a wider meaning than the term 'manufacture'. Buyers carrying on the activity of processing will fall within the purview of Section 206(1) of the IT Act. Though sawing of logs of timber into different sizes may not fall within the meaning of the term 'manufacture', a view could be taken that it constitutes processing. But, mere cutting of timber into smaller sizes to make its marketability and packing easy would not constitute processing. The broad distinction between 'manufacture' and 'processing' is that manufacture involves bring into existence of a new product; a product which is of a different chemical composition or whose integral structure is different. Processing could be said to be doing specific acts to something for changing its shape or size."
20. In Sterling Foods (Goa)'s case (supra), the term "processing" has been interpreted as subjecting a commodity to a process or treatment so as to develop it or make it fit for the market. Thus, processing according to it, is an operation on an article so that it undergoes a change. Accordingly, processing was held to be a much wider concept than production and manufacture (p. 860). Therefore, in our opinion, keeping in view the customization operations ventured by the assessee-company it can be concluded that in the worst scenario, the assessee's activities constitute "processing" as judicially understood.
21. In Peerless Consultancy & Services (P) Ltd.'s case (supra), the apex Court has already held processing of data on behalf of clients as "processing" of goods concurring with the decision of the Karnataka High Court on CIT v. Datacons (P) Ltd. (1985) 155 ITR 66 (Kar) which adopted a similar view. Furthermore, Circular No. 495 dt. 29th Sept., 1987, relied upon by the learned counsel for the assessee in para 12 (supra) explains that units which assemble or process imported components for export which benefit the country by way of value addition will also be eligible to claim exemption under Section 10A.
22. As per Clause (iii)(c) of the Explanation, the word "manufacture" includes "recording of programmes on any disc, tape, perforated media or other information storage device" and as illustrated in the facts of the case, customized programmes are recorded on a floppy disc and stored therein and accessed whenever needed. Alternatively, the customized programmes, after their development and creation are stored in the hard disc of the computer owned by the customer. Viewed from this perspective, we hold that the assessee's activities constitute "manufacture" as postulated in the statutory definition.
23. The provisions of Section 10A also apply to production of articles or things and as per Clause (vi) of the Explanation, "produce in relation to articles or things.... includes production of computer programmes". In our opinion, customization process undertaken by the assessee constitutes production inasmuch as in N.C. Budharaja & Co.'s case (supra), the apex Court has held that the production has a wider connotation than manufacture and emphasized that every manufacture can be characterized as production, but every production need not amount to manufacture. The term "production" takes in all by-products, intermediate products and residual products which emerge in the course of manufacture of goods (p. 424). Examined from this vista, and particularly keeping in view the fact that the term "production" is interpreted by Courts in a broad and extensive manner the assessee's activities can be construed as producing software programmes as engrafted in Clause (vi) of the Explanation to Section 10A. This is further fortified by the fact that the assessee adds new customized programmes to the existing standard programmes and is precluded in law from tampering and interfering with the programmes in the standard software in conformity with the use of source code agreement entered into by the assessee with BaaN Netherlands.
24. The AO, in his order has held that the assessee is only an agent of BaaN Netherlands. The learned CIT(A) has confirmed the above finding of the AO, which in our opinion, is wholly and patently erroneous, misconceived and misplaced. We find that the agreement between the assessee and BaaN Netherlands is on a principal-to-principal basis and none of the ingredients of agency as postulated, in Section 182 of the Contract Act, 1872, are present in the agreement with BaaN Netherlands. On the contrary, as per the agreement, BaaN will not grant any support and maintenance for the customization done by the assessee. We find that the agreement clearly stipulates that the assessee is not the agent, subsidiary, branch or authorized representative of BaaN Netherlands. The assessee-company invoices the customer directly for the customization operations undertaken by it. BaaN has nothing to do with the payment received by the assessee, nor does the assessee receive any remuneration from BaaN for the customization effort of the assessee. The activities of customization are not carried out by the assessee for and on behalf of BaaN. In fact, the assessee is an authorized customization provider of BaaN and is entitled to use the standard software for carrying out the task of customization and for which BaaN is paid fees,
25. Now, we come to the cases relied upon by the learned CIT(A). The first case on which reliance was placed by the learned CIT(A) is Indian Hotels Co. Ltd. (supra). In that decision, preparing food packages or selling the same or preparing foodstuff for servicing in a hotel was held not to be manufacture or production. These were essentially and primarily held to be trading concerns and not an industrial undertaking as envisaged in Section 32A or 80J. The aforesaid authority is wholly and completely distinguishable and, therefore, inapplicable, in that the assessee is not a trader but undertakes several complex and complicated processes so as to manufacture and produce software programmes. Moreover, it must be remembered that for the purpose of Section 10A, processing is also manufacture as per the extended connotation under Section 10A, unlike Sections 32A and 80J.
26. As regards the reliance placed by the learned CIT(A) on the decision of the Supreme Court in the case of Lucky Minmat (P) Ltd. (supra), the facts in this case are that the assessee was merely mining limestone and marble blocks then cutting and sizing them before being sold to the market and, therefore, the benefit of deduction under Section 80HH was denied on the footing that it was not a manufacturing process. The Supreme Court in rejecting the assessee's appeal distinguished another decision namely, CIT v. Best Chem. & Limestone Industries (P) Ltd. (1994) 210 ITR 883 (Raj) relied upon by the assessee against which the Supreme Court had declined to grant special leave. The Supreme Court pointed out that in Best Chem. & Limestone Industries (P) Ltd.'s case (supra), the facts were different in that the assessee there converted limestone into lime dust by crushers and hence that activity could be legitimately considered to be a manufacturing process. In fact, the decision is actually in favour of the assessee. The assessee's activity of customization falls within the four corners of the principle approved by the Supreme Court in Best Chem. & Limestone Industries (P) Ltd.'s case (supra). The assessee converts the standard software into operational customized software and brings into existence a different and distinct article. In Lucky Minmat (P) Ltd.'s case (supra) merely mining, cutting and sizing was done without any further operations thereby the original commodity substantially retained its original identity. Furthermore, the Supreme Court there was concerned with Section 80HH which did not contain any expanded definition of manufacture to include processing, etc.
27. The last decision on which reliance was placed by the learned CIT(A) is in the case of Gem India Mfg. Co. (supra). In this case, raw and uncut diamond was subjected to a process of cutting and processing which yielded the polished diamond. The Tribunal held in favour of the assessee by holding that these activities constitute manufacture or production of thing or article for the purpose of Section 80-I on the foundation that in common parlance and commercially raw diamonds and polished and cut diamonds are not the same thing, but two different entities. The Supreme Court allowing the Revenue's appeal held that the Tribunal's observation that raw and polished and cut diamonds were two different entities in the commercial world was not bedrocked on any material placed on record and a pure ipse dixit of the Tribunal is no ground for reaching a conclusion.
28. We find that in the assessee's case, there is ample cogent and weighty material to demonstrate that the customized and standard software are two separate, independent and distinct entities as known in the commercial world. Besides, Section 80-I did not prescribe any amplified definition of manufacture as is done deliberately in Section 10A.
29. As against the above three cases relied upon by the learned CIT(A) which are distinguishable on facts, we find that computer documentation service converting raw data received to machine readable form has been accepted as manufacture for purposes of relief under Sections 80HH and 80-I in CIT v. Technotive Eastern (P) Ltd. (2002) 255 ITR 253 (Gau) following the decision in Shaw Wallace & Co. Ltd.'s case (supra). Similar view was taken in the context of investment allowance in CIT v. Oswal Data Processors (1997) 223 ITR 735 (MP), CIT v. R. Shroff Consultants (P) Ltd. (1999) 238 ITR 1018 (Bom) and Datacons (P) Ltd.'s case (supra). Courts have uniformly taken the view that such service should be treated as one involving processing in the nature of manufacture.
30. Now, coming to the arguments of the learned Departmental Representative, we find that the main thrust of argument is that agreement dt. 20th Oct., 1998, under which the assessee derives the authority to customize BaaN's programmes fall outside the asst. yr. 1998-99, the year under appeal, and hence arguments on the basis of that agreement are of no avail. This argument of the learned Departmental Representative, is of no assistance to the Revenue, because this agreement merely formalizes and perfects an arrangement which was already in existence in February, 1996 in a slotted legal framework of documentary paper work. The agreement dt. 20th Oct., 1998, exhaustively and elaborately embodies the understanding, which was already subsisting between BaaN and the assessee. In fact, the original power of customization in form of license can be traced to the source of code agreement dt. 20th May, 1997, which is very much within the operative dates of asst. yr. 1998-99 (pp. 119 to 121 of the paper book No. I). It is in this agreement vide Clause 3.4 (p.119 of paper book No. I), the assessee stands prohibited from copying, reproducing, translating, adjusting, decompiling, imitating, altering or reconstructing the source code. By virtue of this agreement, the assessee has been conferred non-exclusive, non-transferable and non-assignable license to use the source code agreement.
31. Further, neither the AO nor the CIT(A) have, at any stage, disputed and controverted the fact that the assessee is the authorized customization provider in respect of the BaaN products. All the primary and essential documents embodying the understanding between the assessee and BaaN Netherlands were placed before the AO and the CIT(A) (p. 9 (AO) and 3 CIT(A) of paper book No. I) and hence have been perused and reviewed by both the Revenue authorities. In fact, Clause 1.2 of the source code agreement defining customization services has been culled out by the CIT(A) at p. 4 of his order. The findings of the AO extracted at p. 2 of the CIT(A)'s order reveal that the AO has also proceeded on the footing that the arrangement between the assessee and BaaN was valid, subsisting and binding during the assessment year under appeal. If such was not the case, how would the AO and CIT(A) conclude, though wrongly, that the assessee was the agent of BaaN. This only goes to vindicate the assessee's stand that the customization arrangement was in any view of the matter; in existence very much during the assessment year under appeal. The only narrow issue of deliberation before the authorities below was whether the customization activities of the assessee constitute "manufacture". The foundational and core factual canvas was never doubted or questioned. In view of aforesaid factual assertions, it is not open to the Revenue to upset the aforesaid basics and core factual matrix for the first time before the Tribunal. The Revenue cannot urge the Tribunal to make an assessment and investigate the rudimentary and intrinsic facts, when all along the Revenue has accepted them, more particularly when the Department has given adverse findings based on the same facts e.g., the appellant is an agent of BaaN.
32. In the light of the above discussion, we hold that the assessee is entitled to exemption under Section 10A of the IT Act. The AO is directed to allow the same. This ground accordingly succeeds.
33. The next grievance of the assessee is that the learned CIT(A) is not justified in not directing the AO to allow the assessee to carry forward the business loss of Rs. 8,28,130 in respect of the U.S. branch for set off in subsequent years.
34. This ground is consequential in nature. The AO disallowed the claim of the assessee as he denied exemption to the assessee under Section 10A of the Act. Since we have allowed the exemption under Section 10A in ground No. 1 (supra), the assessee will be entitled to carry forward of loss of Rs. 8,28,130. This ground accordingly succeeds.
35. The last grievance of the assessee is that the learned Dy. CIT erred in charging interest under Sections 234B and 234C of the IT Act in the demand notice without levying the same in the assessment order.
36. We find that the demand notice was issued simultaneously with the assessment order. Both the documents are signed by the AO. The quantum of interest and charging section are clearly given therein. So, in view of the decision of the Hon'ble Supreme Court in the case of Kalyankumar Ray v. CIT (1991) 191 ITR 634 (SC) and the decision of Punjab & Haryana High Court in the case of Vinod Khurana v. CIT (2002) 253 ITR 578 (P&H), interest has rightly been charged. However, after our observations, in ground No. 1 (supra), this ground has also become consequential. The AO is directed to charge interest, if any, under Section 234B/234C of the Act, after giving effect to this order.
37. In the result, the appeal filed by the assessee is allowed in part.