UDYOG SOFTWARE (I) LTD.

I-T- Sec 80IA - loading of software on blank disc from master media amounts to manufacture - assessee is entitled to deduction Supreme Court.doc
NEW DELHI, JAN 16, 2010: WHAT is 'manufacture'? The time is changing, and the concept of expression 'manufacture' must also change, with the advancement in technology. This is the message which one may infer from the Apex Court's latest decision given in the case of Oracale India. The issue before the Bench is that whether the process of loading software on blank discs from the master copy amounts to 'manufacture' and the assessee is entitled to deduction u/s 80IA(12)(v). And the answer that has come is YES. How does it amount to 'manufacture"? Let's go to some more details.
Facts of the case :
Assessee is 100% subsidiary of Oracle Corporation, USA. It is incorporated with the object of developing, designing, improving, producing, marketing, distributing, buying, selling and importing of computers softwares. Assessee is entitled to sub-licence the software developed by Oracle Corporation, USA. Assessee imports Master Media of the software from Oracle Corporation. USA which is duplicated on blank discs, packed and sold in the market along with relevant brouchers. Assessee pays a lump-sum amount to oracle Corporation, USA for the import of Master Media. In addition thereto, assessee also pays royalty at the rate of 30% of the price of the licensed product. The only right which the assessee has is to replicate or duplicate the software. They do not have any right to vary, amend or make value addition to the software embedded in the Master Media.
According to the assessee, it uses machinery to convert blank CDs into recorded CDs which along with other processes become a Software Kit. According to the assessee, it is the blank CD in the present case which constitutes raw-material. According to the assessee, Master Media cannot be conveyed as it is. In order to sub-licence, a copy thereof has to be made and it is the making of this copy which constitutes manufacture or processing of goods in terms of Section 80IA and consequently assessee is entitled to deduction under that Section.
On the other hand, according to the Department, in the process of copying, there is no element of manufacture or processing of goods. According to the Department, since the software on the Master Media and the software on the recorded media remains unchanged, there is no manufacture or processing of goods involved in the activity of copying or duplication, hence, the assessee was not entitled to deduction under Section 80IA. According to the Department , when the Master Media is made from what is lodged into the computer, it is a clone of the software in the computer and if one compares the contents of the Master Media with what is there in the computer/data bank, is no difference, hence, according to the Department, there is no change in the use, character or name of the CDs even after the impugned process is undertaken by the assessee.
Issue goes up to the High Court which ruled in favour of the assessee. And the issue finally goes to the Supreme Court Which has held
++ in this case, the software on the Master Media is an application software. It is not an operating software. It is not a system software. It can be categorized into Product Line Applications, Application Solutions and Industry Applications. A commercial duplication process involves four steps. For the said process of commercial duplication; one requires Master Media, fully operational computer. CD Blaster Machine, blank/ unrecorded Compact Disc also known as recordable media and printing software / labels. The Master Media is subjected to a validation and checking process by software engineers by installing and rechecking the integrity of the Master Media with the help of the software installed in the fully operational computer. After such validation and checking of the Master Media, the same is inserted in a machine which is called as the CD Blaster and a virtual image of the software in the Master Media is thereafter created in its internal storage device. This virtual image is utilized to replicate the software on the recordable media.
++ The term "manufacture" implies a change, but, every change is not a manufacture, despite the fact that every change in an article is the result of a treatment of labour and manipulation. However, this test of manufacture needs to be seen in the context of the above process. If an operation/ process renders a commodity or article fit for use for which it is otherwise not fit, the operation/ process falls within the meaning of the word "manufacture".
++ in the present case, the assessee has undertaken an operation which renders a blank CD fit for use for which it was otherwise not fit. The blank CD is an input. By the duplicating process undertaken by the assessee, the recordable media which is unfit for any specific use gets converted into the programme which is embedded in the Master Media and, thus, blank CD gets converted into recorded CD.
++ The duplicating process changes the basic character of a blank CD, dedication it to a specific use. Without such processing, blank CDs would be unfit for their intended purpose. Therefore, processing of blank CDs, dedicating them to a specific use, constitutes a manufacture in terms of Section 80IA(12)(b) read with Section 33B of the Income Tax Act.