CIT Vs Oracle Software India Ltd.

Court: Supreme Court of India

Case No: C.A. No. 235/2010

Citation: CIT v. Oracle Software India Ltd., (2010) 2 SCC 677

Date of Judgment: January 13, 2010

Appellant: Commissioner of Income Tax

Respondents: Oracle Software India Ltd.

Bench: Justice S.H. Kapadia, Justice H.L. Dattu, and Justice S.S. Nijjar

Advocates of Appellant: Advs. Bishwajit Bhattacharya, Additional Solicitor General (Arijit Prasad, Rahul Kaushik and B.V Balram Das)

Advocates of Respondent: Advs. M.S Syali, Mahua Kalra, Jagjit Singh Chhabra, Shekhar Prit Jha, Pratyush Jain, Maryam Sharma and Mohan Pandey

Statutes:

1. The Information Technology Act, 2000 (Section 72)
2. The Income Tax Act, 1961 (Section 33B, 80-IA)
3. The Copyright Act, 1957 (Section 14)

Cases Referred:

1. Gramophone Co. of India Ltd. v. Collector of Customs 2001 SCC 549
2. Tata Consultancy Service v. State of AP 2005 1 SCC 308

Issue: Whether transferring licenced software on a CD qualifies as a manufacturing process or not

Facts:

1. In the United States of America, the assessee is a subsidiary of Oracle Software Corporation. It was founded with the goal of creating, enhancing, producing, promoting, distributing, buying, selling and importing computer software. The assessee is allowed to sublicense Oracle Corporation’s software.
2. From the firm, the assessee imports master copies of the programme. By way of a sublicense, these are then reproduced on blank discs, packaged, and sold in the market together with the appropriate brochures and information. They pay a flat fee to Oracle Corporation for the master copy’s import, as well as a royalty of 30% of the licenced product’s list price.
3. The assessee has the right to replicate the software. They have no authority to alter, edit, or add value to the programme included in the master media.
4. The assessee requests a tax deduction. The business’s process has been called into doubt. In order to deduct the tax under Section 80-IA of the Income Tax Act, it is necessary to show that the procedure performed is “manufacturing.”

Arguments by Appellant:

1. The firm uses machinery in order to turn blank CDs into recorded CDs, resulting in a software kit that includes all of the operations.
2. The blank CD is the raw material in this situation. It is impossible to communicate Master Media in its current state.
3. To sub-license, a copy must be created, and this copying constitutes the production or processing of goods for the purposes of Section 80-IA of the Income Tax Act of 1961.
4. As a result, the assessee is entitled to a tax deduction under that Section.

Arguments by Respondent:

1. In the copying process, there is no component of item manufacturing or processing.
2. Both the master and recorded media’s software are unaffected. As a result, no products are produced.
3. Because the software on the master media and the software on the pre-recorded media are identical, there is no manufacture.
4. Therefore, the final output is the same as the original.

Obiter Dicta:

1. Despite the fact that every change in an article is the product of treatment of labour and manipulation, the term “manufacturing” indicates a change, not every change is manufacture. However, this manufacturing test must be seen from the perspective of the preceding procedure.
2. The operation/process falls within the definition of “manufacture” if it makes a commodity or product fit for a purpose for which it would otherwise be unfit. Applying the foregoing criteria to the facts of the case, we believe that the assessee has performed an operation that allows a blank CD to be used for purposes for which it was previously unsuitable. A blank CD is used as an input.
3. The assessee’s duplicating process converts recordable media that is unsuitable for any specific application into the programme that is stored in the Master Media, and so a blank CD is turned into a recorded CD by the aforementioned complex procedure. The duplication process alters the fundamental essence of a blank CD, allowing it to be dedicated to a certain purpose.
4. Blank CDs would be unsuitable for their intended use without this procedure. As a result, in terms of Section 80IA(12)(b) read with Section 33B of the Income Tax Act, processing blank CDs and devoting them to a specified use constitutes manufacturing.

Judgment:

1. The Supreme Court’s ruling in Gramophone Co. of India Ltd. v. Collector of Customs, in which the Supreme Court reviewed the definition of the word “manufacturing” as used in the Central Excise Act, 1944, was taken into account by the court.
2. The bench utilised this case to establish that converting a blank disc to a software loaded disc constitutes a manufacturing activity since a new commercial product, which is entirely different from the blank disc, reaches the market.

Conclusion:

The court found no relevance in the Department’s Civil Appeals and dismissed them with no ruling as to costs.