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(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.

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)."

"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 :