Himachal Pradesh High Court
Commissioner Of Income Tax vs M/S Shoghi Communication Ltd on 3 August, 2017
Author: Sandeep Sharma
Bench: Sanjay Karol, Sandeep Sharma
IN THE HIGH COURT OF HIMACHAL
PRADESH
SHIMLA
.
ITA No.5 of 2007
Judgment Reserved on : 28.06.2017
Date of decision: 03.08.2017
Commissioner of Income Tax, Shimla ....Appellant
Versus
M/s Shoghi Communication Ltd. ....Respondent
Coram
The Hon'ble Mr.Justice Sanjay Karol, Acting Chief Justice.
The Hon'ble Mr.Justice Sandeep Sharma, Judge.
Whether approved for reporting ?1yes.
For the Appellant:
r Mr.Vinay Kuthiala, Senior Advocate
with Ms.Vandana Kuthiala, Advocate.
For the Respondent: Mr.Rupesh Jain and Ms.Tim
Saran, Advocates.
Per Sandeep Sharma,J.:
Instant appeal filed under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as 'IT Act') is directed against the order dated 4.8.2006, passed by Income Tax Appellate Tribunal, Chandigarh Bench 'A' Chandigarh in Income Tax Appeal No.359/Chandi/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 1 Whether the reporters of Local Papers may be allowed to see the judgement?
::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 21B(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 under Section 250(6) of Income Tax Act before the Commissioner, Income Tax (Appeals), Shimla, which came to be registered as IT/182/2003- 04/SML. However, fact remains that aforesaid appeal preferred by respondent-assessee was dismissed, as a result of which order of assessment passed by Assessing Officer dated 1.3.2004 under Section 143(3) came to be upheld.
::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 34. Respondent-assessee, being dis-satisfied with the aforesaid rejection of appeal preferred by it, filed an appeal before the learned Income Tax Appellate Tribunal.
.
Learned Appellate Tribunal, taking into consideration the facts of the case vis-à-vis orders impugned before it, having been passed by Assessing Officer and further upheld by Commissioner, Income Tax (Appeals), set aside the same and remanded the case back to the Assessing Officer for fresh adjudication in accordance with law after giving due and reasonable opportunity of being heard to the assessee.
Learned Appellate Tribunal, while allowing appeal of respondent-assessee, categorically held that since assessee has fulfilled all the four conditions, as contained in Section 80 1B(2), it was eligible for deductions under Section 80 1B of the IT Act.
5. In the aforesaid background, appellant Income Tax Department has approached this Court by way of instant appeal, which was admitted on 2.3.2007 on the following substantial questions of law:-
"1. Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was right in law in holding that the assessee was engaged in the manufacture of encryption software and was hence eligible for the deduction under section 801B of the Income-tax Act, when the assessee was merely importing such software and customizing the same to suit the needs of its customers?::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 4
2. Whether on the facts and in the circumstances of the case, the Hon'ble Appellate Tribunal was right in law in holding that the condition specified in section 801B(2)(iv) was fulfilled by the .
assessee, when the assessee had failed to establish that ten or more workers were employed by the undertaking during the relevant year, and the onus was on the assessee to establish this fact for availing of the deduction?
3. Whether on the facts and in the circumstances of the case, the Hon'ble Appellate Tribunal was correct in holding that the non-maintenance of separate books of account including production records, in respect 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 ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 5 actually carried out by respondent-assessee and as such deduction claimed by assessee under Section 80 1B and 80 1C was rightly disallowed by Assessing Officer. She further .
stated that so called integration of software in the assessee's premises at Shogi did not amount to manufacture and as such software could not/ought not be said an article or thing. Mrs.Kuthiala, learned counsel further contended that learned Appellate Tribunal wrongly applied ratio of judgment passed by Hon'ble Supreme Court in case of Tata Consultancy Services vs. State of Andhra Pradesh 271 ITR 401 (SC) because aforesaid decision of Hon'ble Apex Court only implies that software loaded on to a tangible medium would constitute "goods" and it does not deal with issue as to whether customization of software amounts to manufacture.
She further stated that learned Appellate Tribunal wrongly interpreted Circular dated 7.10.2005 issued by CBDT, wherein, taking note of aforesaid judgments of Hon'ble Apex Court, it was clarified that software is to be regarded as goods and service tax is leviable on any service in relation to maintenance or repair or servicing of software. Learned counsel contended that aforesaid circular, having been taken into consideration by learned Appellate Tribunal while allowing appeal of respondent-assessee, was actually issued by CBEC in relation to service tax and not by CBDT and as such same had no binding force on Income Tax Authorities.
::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 67. Learned counsel representing the appellant-
department further contended that in the instant case learned Appellate Tribunal has failed to examine the precise .
activity carried on by the assessee because it is evident from the record that encryption hardware and software were imported by the assessee and thereafter the only development stated to have been done was to customize the software in accordance with the needs of the customers. The assessee imported encryption software and sold the same and no change was made in the commercial identity of the commodity being sold and as such the same could not be held to be an article or thing and even if it is presumed that development of new and original software amounts to manufacture, it cannot be said that the assessee carried out any manufacture or production by the mere process of customization. While concluding her arguments, Mrs.Vandana Kuthiala, learned counsel stated that under Copyright Law, the right to modify or customize a copyrighted 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, ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 7 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 that by no stretch of imagination the same can be termed to be the substantial questions of law, rather the same are pure questions of facts, which have been rightly adjudicated by learned Appellate Tribunal taking into consideration the material adduced on record by both the parties. Mr.Jain further contended that bare examination of aforesaid arguments, having been made by learned counsel representing the appellant-department, nowhere suggest that questions of law much less substantial have been raised in the appeal, which could persuade this Court to interfere in the well reasoned order passed by the learned Appellate ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 8 Tribunal. While concluding his arguments, learned counsel made this Court to travel through the impugned order passed by learned Appellate Tribunal to demonstrate that all .
the questions raised before this Court have been answered in detail by learned Tribunal taking note of Rules occupying the field as well as judgment passed by the learned Appellate Tribunal. Mr.Jain further contended that issue whether software developed by assessee comes under the category of manufacture of thing, stands answered in the judgment passed by the Hon'ble Apex Court in case of Tata Consultancy Services supra.
10. We have heard learned counsel for the parties and gone through the record of the case.
11. Before ascertaining the genuineness and correctness of the aforesaid submissions having been made by learned counsel representing the parties vis-à-vis impugned order passed by learned Appellate Tribunal, this Court deems it fit to take note of Section 80 1B, which is reproduced as under_ "80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11), (11A) and (11B) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 9 and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.
.
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :--
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence :
Provided that this condition 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, namely :--::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 10
(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;
(b) such machinery or plant is imported into .
India from any country outside India; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.
Explanation 2.--Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with;
(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power."
12. Perusal of aforesaid provisions of law suggests that industrial undertaking, which is not formed of splitting up or reconstruction of business already in existence, is entitled to deduction in respect of profit and gains. In the instant case, assessee claimed that it manufactured software, which was an Encryption Algorithm and also manufactured Serial Encryption Hardware. Assessee also ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 11 claimed that the Encryption Algorithm was programmed & down loaded on the hardware device. The moot question, which arose for determination of the learned Appellate .
Tribunal below was whether the software developed by the assessee comes under the category of manufacture of thing or not.
13. Before ascertaining the correctness and genuineness of findings of learned Appellate Tribunal below qua the aforesaid issue, it may be pertinent to take note of findings returned by learned Commissioner, Income Tax (Appeals) in para-4 of order which is reproduced as under:-
"4. I have perused the facts and carefully considered the submissions. As regards the issue whether the assessee's business 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 Rs.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 ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 12 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 case, no machinery has been transferred from M/s .
Secure Telecom Ltd., Delhi. Both the companies are doing their business, though there is sharing of expenses as the corporate office of the two companies is at the same place and the directors are common. In such a case, it can not be held that this is a case of splitting up of the business already in existence. Thus, the appellant does not violate conditions laid down u/s 801B(2)(i) of the Act."
14. Learned Commissioner, Income Tax (Appeals) in the aforesaid order has categorically held that respondent-
Company is not formed of splitting up of business already in existence. Commissioner, Income Tax(Appeals) further held that in the present case, no machinery has been transferred from M/s Secure Telecom Ltd., Delhi and both the companies are doing their business, though there is sharing of expenses as the Corporate Office of the two Companies is at the same place and the Directors are common and it can not be held that this is a case of splitting up of the business already in existence. As such, the assessee does not violate conditions laid down u/s 80 1B(2)(i) of the IT Act.
15. Interestingly, aforesaid findings having been returned by the Commissioner, Income Tax (Appeals) were not challenged by the appellant-department and as such it can be safely concluded that respondent-assessee-Company being industrial undertaking is entitled to deductions under ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 13 the 80 1B of the IT Act. Another condition to be eligible for benefit of deductions under Section 80 1B is that assessee did not manufacture or produce any article or thing, .
specified in the list in the Eleventh Schedule. In the instant case, claim of the respondent-assessee is that it produced software and it is/was eligible for deduction under Section 80 IB of the IT Act. 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.
16. Hon'ble Apex Court in the case of Tata Consultancy Service vs. State of Andhra Pradesh, which has already been taken note by learned Appellate Tribunal, has held as under:-
"The term "goods", for the purposes of sales tax, cannot be given a narrow meaning. It 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. ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 14 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.
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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 tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value.
The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper or cassette or disc or CD."
17. It is ample clear from the aforesaid law laid down by the Hon'ble Apex Court that software both, canned and uncanned, comes under the category of goods. In the instant case also claim of the respondent-assessee is that software developed by the assessee is put on hardware and then marketed, so, it comes under the category of goods.
18. The CBDT in Circular No.81/2/2005-ST dated 7th October, 2005, taking note of the judgment passed by Hon'ble Apex Court in Tata Consultancy Services case supra, has clarified that "All the tests required to satisfy the ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 15 definition of goods are possible in the case of software and in computer software the intellectual property has been incorporated on media for the purposes of transfer and .
software and media 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."
19. Taking note of the aforesaid judgment passed by the Hon'ble Apex Court, 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 u/s 65(105)(zzg) read with section 65(64) of the Finance Act, 1994".
20. After having carefully perused the aforesaid instructions issued by the CBDT, arguments having been made by learned counsel representing the appellant-
Department, that Circular dated 7.10.2005 was issued by CBEC in relation to service tax and not by CBDT 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 ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 16 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 assessee fulfilled the conditions laid down under Section 80 IB(2)(iii) as the software is not an article/ thing specified in the list of 11th Schedule.
22. Apart from above, this Court finds that plant and machinery installed by the respondent-assessee was verified by the G.M., D.I.C. after having got spot verification and personal inspection. Similarly, there appears to be no dispute that the assessee was having General Sales Tax and Central Sales Tax exemption and also Central Excise Duty ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 17 was not leviable in accordance with the Central Excise Tariff Act, 2005. The Sales Tax Department also framed the assessment vide order dated 26.3.2003, wherein the total .
sales had been accepted at Rs.3,30,88,268/-, out of which sale within the State was at Rs.39,249/-. It is not understood that why sale, which was assessed by the Sales Tax Department, was accepted by the Income Tax Department also, so it cannot be said that the assessee was not dealing with the software.
23. Another condition laid down in aforesaid Section 81 1B is r that where the industrial undertaking manufactures or processing the articles or things, must be employed ten or more workers in the manufacturing process carried out with the aid of power. Clause (iv) of sub-section (2) of Section 80 1B provides that deduction under Section 80 1B of the IT Act is allowable to an industrial undertaking if it manufactures or produces articles or things and employs 10 or more workers in a manufacturing process carried on with the aid of power or employs 20 or more workers in the manufacturing process carried on without the aid of power.
24. Record suggests that Assessing Officer disallowed the claim of the assessee taking note of the fact that at the time of survey carried on 19.2.2002, out of a list of 20 employees, only 10 were present and out the list of 29 persons for the month of March, 2001 only the names of four ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 18 persons appeared in the list of employees given by the representative of the assessee in his statement dated 19.4.2002, only seven persons were covered under the .
Provident Fund Contribution Scheme.
25. Learned Appellate Tribunal, after having carefully perused the record, rightly concluded that since case relates to assessment year 2001-02, 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, 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-à-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 ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 19 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 Rs.10,25,180/- were allowed and the expenses on account of establishment debited to P&L Account amounting to Rs.25,56,188 were taken into consideration as genuine, there was no scope left to doubt that the workers employed by the assessee were less during the relevant period.
27. Learned Tribunal, taking note of assessment order passed by Assessing Officer, held that when the wages paid to the workers and the payment made to the part time/temporary workers were considered to be genuine, no scope was left for Assessing Officer to doubt the list submitted by the assessee with regard to workers employed by the assessee. It also emerge from the record that 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 80 IB. Since Assessing Officer did not doubt the ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 20 payment of salary and wages to 29 workers and had also allowed expenses paid to the temporary and casual workers, there was no occasion for Assessing Officer to take into .
consideration statement, if any, recorded during the course of survey.
28. The Hon'ble Kerala High Court in the case of Paul Mathews and sons v. CIT, 263 ITR 101, which has also been taken note by learned Appellate Tribunal, has categorically held that:
"A power to examine a person on oath is specifically conferred on the authorized officer only u/s 132(4) in the course of any search or seizure. Thus, the IT act, whenever it thought fit and necessary to confer such power to examine a person on oath, has expressly provided for it, whereas section 133A does not empower any ITO to examine any person on oath.
Thus in contradistinction to the power u/s 133A, section 132(4) of IT Act enables the authorized officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the IT Act. On the other hand, whatever statement recorded u/s 133A of the IT Act is not given an evidentiary value."
29. It also emerge from the impugned order passed by learned Appellate Tribunal that the learned Income Tax Appellate Tribunal, Mumbai Bench 'C' in the case of ISBC Consultancy Services Ltd. vs. DCIT, 88 ITD 134 (Mum) has already held that process of customization of software amounts to manufacture. In case referred above, learned ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 21 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 applied in the instant case by the learned Income Tax Appellate Tribunal Chandigarh Bench.
31. Though this Court, after having gone through material adduced on record by appellant-department vis-à-
vis impugned order passed by learned Appellate Tribunal, is ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 22 of the view that no substantial question of law arises for determination of this Court, but otherwise also, as has been discussed hereinabove, learned Tribunal has correctly dealt .
with each and every aspect of the matter, taking into consideration law laid down by Hon'ble Apex Court as well as rule occupying the field.
32. This Court, after having carefully examined the text of questions of law formulated in the appeal vis-à-vis findings recorded by learned Appellate Tribunal, find that questions framed by the appellant-department are pure questions of fact, which definitely cannot be looked into in the present proceedings, and as such present appeal deserves to be dismissed. Section 260-A of the Income Tax Act, 1961 provides that "An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal before the date of establishment of the National Tax Tribunal, if the High Court is satisfied that the case involves a substantial question of law."
33. Taking note of the aforesaid provisions of law, the foremost question for consideration is as to whether any substantial question of law arises in this case or not. In this regard reliance is placed upon Kondiba Dagadu Kadam vs. Savitribai Sopan Gujar, (1999) 3 SCC 722, wherein the Hon'ble Apex Court has held as under:-
::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 23"6. If the question of law termed as a substantial question stands already decided by a larger bench of the High Court concerned or by the Privy Council or by the Federal Court or by the Supreme .
Court, its merely wrong application on the facts of the case would not be termed to be a substantial question of law. Where a point of law has not been pleaded or is found to be arising between the parties in the absence of any factual format, a litigant should not be allowed to raise that question as a substantial question of law in second appeal. The mere appreciation of the facts, the documentary evidence or the meaning of entries and the contents of the document cannot be held to be raising a substantial question of law. But where it is found that the first appellate court has assumed jurisdiction which did not vest 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 ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 24 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 Court to hear, for reasons to be recorded, the appeal on any other .
substantial question of law, not formulated by it, if the Court is satisfied that the case involves such a question. The proviso presupposes that the court shall indicate in its order the substantial question of law which it proposes to decide even if such substantial question of law was not earlier formulated ate by it. The existence of a "substantial question of law" is thus, the sine-qua-non for the exercise of the jurisdiction under the amended provisions of Section 100 C.P.C."
36. In Santosh Hazari v. Purushottam Tiwari (2001) 3 SCC 179, the court reiterated the statement of law that the High Court cannot proceed to hear a second appeal without formulating the substantial question of law.
"9. The High Court cannot proceed to hear a second appeal without formulating the substantial question of law involved in the appeal and if it does so it acts illegally and in abnegation or abdication of the duty cast on Court. The existence of substantial question of law is the sine qua non for the exercise of the jurisdiction under the amended Section 100 of the Code. [See Kshitish Chandra Purkait Vs. Santosh Kumar Purkait, (1997) 5 SCC 438, Panchugopal Barua Vs. Umesh Chandra Goswami, (1997) 4 SCC 413 and Kondila Dagadu Kadam Vs. Savitribai Sopan Gujar, (1999) 3 SCC 722].
10. At the very outset we may point out that the memo of second appeal filed by the plaintiff-appellant before the High Court suffered from a serious infirmity. Section 100 of the Code, as amended in 1976, restricts the jurisdiction of the High Court to hear a second appeal only on ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 25 "substantial question of law involved in the case". An obligation is cast on the appellant to precisely state in the memorandum of appeal the substantial question of law involved in the appeal and .
which the appellant proposes to urge before the High Court. The High Court must be satisfied that a substantial question of law is involved in the case and such question has then to be formulated by the High Court. Such questions or question may be the one proposed by the appellant or may be any other question which though not proposed by the appellant yet in the opinion of the High Court arises as involved in the case and is substantial in nature. At the hearing of the appeal, the scope of hearing is circumscribed by the question so formulated by 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 ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 26 "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 involve any question of law, much less a substantial question of law. A question of fact becomes a question of law, if the finding is either without any evidence or material, or if the finding is contrary to the evidence, or is perverse or there is no direct nexus between conclusion of fact and the primary fact upon which that conclusion is based. But, it is not possible to turn a mere question of fact into question of law by seeking whether as a matter of law the authority came to a correct conclusion upon a matter of fact.
7. In Edward Vs. Bairstow, (1955) 28 ITR 579, (H. L.), Lord Simonds observed that even a pure finding of fact may be set aside by the Court if it appears that the Commissioner has acted without a any evidence or on a view of the facts which could not be reasonably entertained. Lord Radcliffe stated that no misconception may appear on the face of the case, but it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances the Court may intervene.
8. The words "substantial question of law" has not been defined. But the expression has acquired a definite connotation through a catena of judicial pronouncements. Usually five tests are used to determine whether a substantial question of law is involved. They are as follows:
1. Whether, directly or indirectly, it affects substantial rights of the parties, or
2. the question is of general public importance, or
3. Whether it is an open question in the sense that the issue has not been settled by pronouncement of the Supreme Court or Privy Council or by the Federal Court, or
4. The issue is not free from difficulty, and ::: Downloaded on - 04/08/2017 23:57:29 :::HCHP 27
5. It calls for a discussion for alternative view."
.
39. Consequently, in view of detailed discussion made hereinabove, it cannot be said that any question of law much less substantial is involved in this appeal, which needs adjudication by this Court, therefore, judgment passed by the learned Appellate Tribunal is upheld and the present appeal is dismissed.
40. All interim orders are vacated and all the miscellaneous pending applications are disposed of.
(Sanjay Karol)
Acting Chief Justice
3rd August, 2017. (Sandeep Sharma)
(aks) Judge
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