By TIOL News Service

AHMEDABAD, JULY 19, 2013: THE issues before the Bench are - Whether the development of Geographical Information System Software based on raw customer inputs and the fact that it is not a mere compilation of map simplicitor, satisfies the test of manufacture as per Sec 80IB; Whether the fact that it is produced on a platform not owned by the assessee is relevant, when what is being transferred by the assessee is not the platform but the end product; Whether the mere fact that one of the input is owned by the client itself, does not mean that the property in the product never belonged to the assessee and Whether it was relevant for the AO to consider these foregoing issues, when there was a specific direction from a coordinate bench that all that is to be seen is the point of time when property in end product is transferred. And the verdict goes in favour of the assessee.

Facts of the case

Assessee is engaged in development of Geographical Information System (GIS) software, which, includes converting the raw data into maps by digitizing and vectorizing it. The GIS is a computer based information system to digitally represent and analyze the geographical features present on earth's surface and activities thereon. This is done to meet the daily functions of municipalities and is said to be built on the Visual Studio platform. The maps of municipality were collected in paper form which were then digitized and registered on IKONOS satellite data and further sustained by the ground surveys so as to incorporate in them demographic features, geographical features and other infrastructure available in particular areas. The map so prepared is then integrated into software solution to attach further attribute information and to provide reports and analytical options to the municipalities. Thus, the ultimate project which is given to the client comprises of development of GIS software which has interface with digitized and vectorized maps which are quite different and distinct from the raw data supplied by the client.

The assessee claimed that it was engaged in the manufacture or production of article or thing and wanted to avail deduction u/s 80IB of the Act. However, in the opinion of the AO, the assessee was not engaged in manufacture or production of article, and therefore, denied the deduction claimed. On appeal, the CIT(A) confirmed the order of the AO.

It may be noted that this was the second round of litigation before the Tribunal. In the first round of proceedings a coordinate bench of this Tribunal had remitted the matter back to the file of the AO. The AO was required to examine was whether or not the point of time at which customer acquired the property in the software. In case, it was held that the property was transferred only on development of software and upon its transmission to the customer, according to the coordinate bench, the assessee was entitled to deduction u/s 80 IB. However, in case, the customer was to get property all along at each stage of work, it was a case of rendering of services and, accordingly, deduction was not to be available. However, when matter came up before the AO in remand proceedings, he expressed the view that since project involved “geo referencing of village maps using high resolution satellite images” and since the existing village maps were available with the land records department, which were used for geo referencing and to be returned within stipulated time, it was a case for “providing basic materials, which is also having nature of secrecy and engages the party to create an item of property which is owned by the first party, and, therefore, the transaction should be characterized as provision for services”. In other words, the AO was essentially of the view that since basic area maps were the material on the basis of which the software was developed, and since basic area maps always belonged to the customer, it was only a case for provision for services.

Aggrieved, the assessee has filed this appeal before the Tribunal.

The counsel of the assessee contended that both the AO and the CIT(A) failed to appreciate that the software developed and maps produced by the assessee on the basis of material and raw data supplied by the customers of the assessee which are capable of being maneuvered electronically are different and distinct products the property in which gets transferred to the customer after they came into existence and are sold/transferred by delivery to the customers. It was further contended that the AO did not confine himself to the direction issued by the Tribunal in the original proceedings and went on to decide the issues which were not in dispute in the original proceedings. It was also highlighted that the CIT(A) also similarly erred in doing the same thing.

Having heard the parties, the Tribunal held that,

++ in order to adjudicate on this issue, it is also appropriate to understand what precisely the assessee does;

++ what is thus produced by the assessee is not a mere compilation of map simplictitor but a much value added product which is big help in efficient administration of the municipal work. The basic inputs are given by the customer, i.e. the municipality itself, but the product is much more than the compilation of the input. We had an occasion to see demonstration of this software in our court and what we noticed is that the software, though essentially with the basis of raw customer inputs as the basic material, produces a variety of information to assist efficient management in the municipalities. In fact, it is an outstanding example of how the technology can help the Government function much better. Given below are some of the screen shots of various stages of product development as also various outputs, reflected by the software, in the course of demonstration before us and in response to various queries fired;

++ as the above screen shots would show the software produced by the assessee is not a map simpliciter but an interactive digital product which produces lots of reports and relevant information, on the basis of various inputs including maps of the area. The fact that it is produced on a platform not owned by the assessee is irrelevant inasmuch as what is being transferred by the assessee is not the platform but the end product. The mere fact that one of the input is owned by the client itself, does not mean that the property in the product never belonged to the assessee. In any case, all this is really irrelevant inasmuch as there is a specific direction from a coordinate bench to the effect that all that is to be seen is the point of time when property in end product is transferred. It is clear that the product, i.e. software, comes into existence after carrying on several processes, and its only on completion of these processes, the property in the product can be transferred to the customer. The transfer of property is therefore not an ongoing process at the each stage of work as will be the case of a provision for services. For this short reason alone, the assessee deserves to succeed. As we are deciding the appeal on this short issue, it is not really necessary to deal with other erudite contentions so strenuously argued before us.

++ as we part with the matter, we may mention that the authorities below have addressed themselves to a variety of issues, much beyond the scope of directions of the coordinate bench, and other reasons why the deduction cannot be granted. All these heroics, in our humble understanding, are simply out of place. The issues against the order of the coordinate bench could have been raised in the higher appellate forums, but it cannot be open to again raise these issues in this round of proceedings. Right now, we are dealing with a limited issue of whether or not the directions of the coordinate bench have been properly implemented or not, and whether, in the light of these directions, the assessee was entitled to relief sought. This issue, for the reasons set out above, has been decided in favour of the assessee. We leave it at that.

(See 2013-TIOL-624-ITAT-AHM)