By TIOL News Service

SHIMLA, AUG 29, 2017: THE issue before the Bench is - Whether when the CBDT Circular specifically refers to software as goods, assessee can still be denied Sec 80IB benefits on the ground that software development is a service as per Finance Act, 1994. NO is the verdict.

Facts of the case

The assessee-company is engaged in the manufacture of voice and fax encryption systems and imported the necessary hardware as well as corresponding software from the United States. 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. Assessee claimed deductions under Section 801B and 80 HCC for the assessment purpose, which was disallowed by the AO contending that assessee was merely importing such software and customizing the same to suit the needs of its customers as well as assessee had failed to establish that ten or more workers were employed by the undertaking during the relevant year.

On appeal the CIT (A) upheld the decision. On further appeal the Tribunal remanded the case back to the AO for fresh adjudication contending that since assessee had 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.

On appeal, the High Court held 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 claimed that the Encryption Algorithm was programmed & downloaded on the hardware device. The moot question was whether the software developed by the assessee comes under the category of manufacture of thing or not;

++ in the clarification/instructions issued by the CBDT, "software" has been specifically referred to be as "goods". Once CBDT has considered the "software" as "goods", the Revenue 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 the Tribunal, taking note of aforesaid instructions issued by CBDT, rightly considered the development of software as manufacturing activity. Since, in the instant case, the 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;

++ plant and machinery installed by the 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 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.

(See 2017-TIOL-1682-HC-HP-IT)