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Kiran Kapoor W-23, Greater Kailash, New Delhi 110048 Vs. ITO Ward-23(2) New Delhi
May, 09th 2014
                   INCOME TAX APPELLATE TRIBUNAL
                      DELHI BENCH "D": NEW DELHI
            BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER
                                  AND
                  SHRI A. T. VARKEY, JUDICIAL MEMBER

                               ITA No. 3911/Del/2009
                             (Assessment Year: 2006-07)

               Kiran Kapoor               ITO
               W-23, Greater
               Kailash,             Vs.   Ward-23(2)
               New Delhi 110048
                                          New Delhi
               (Appellant)                (Respondent)

       Appellant by : Sr. Adv. M. S. Syali, Tarandeep Singh and Harkund Singh
                        Respondent by: S. N. Bhatia, Sr. DR


                                    ORDER

PER A. T. VARKEY, JUDICIAL MEMBER

      This is an appeal preferred by the assessee against the order of the ld
CIT(A)-XXII, New Delhi dated 20-08-2009 for the Assessment Year 2006-07.

2.    The grounds of appeal are as follows:-
      "1.    That on the facts and in law the Commissioner of Income Tax
             (Appeals) (hereinafter referred to as the ,,CIT(A)) erred in upholding
             the disallowance of deduction u/s 10B of the Income Tax Act
             (hereinafter referred to as the ,,Act)
      2.     That on facts and in law the CIT(A) erred in holding that condition
             stipulated by section 10B(2)(i) is not satisfied.
      3.     That on facts and in law the CIT(A) erred in upholding the levy of
             interest u/s 234B and 234D of the Act.
      4.     That on the facts and in law the orders passed by both the
             CIT(A)and the Assessing Officer are void ab initio and bad in law."
3.    Ground No. 1 and 2 are same therefore it is adjudicated together.

4.     Apropos disallowance on deduction u/s 10B(2)(i) of the Income Tax Act,
1961 (herein after ,,the Act).

5.    The brief facts of the case are as follows. The assessee is an individual,
who filed her return declaring an income of Rs. 6,34,607/-. Subsequently a
notice u/s 143(2) was issued by the Assessing Officer, which culminated in an
order u/s 143(3) dated 24.12.2008. During the assessment proceedings, the
Assessing Officer found that the assessee had claimed exemption u/s 10B of the
                                     Page No. 2

Act to the tune of Rs. 39,32,654/-. Assessee has claimed to be a software
exporter to Netherland to one Mr. Rolli Jansen B. V. and had claimed
deduction u/s 10B, which has been disallowed by the Assessing Officer. During
the assessment proceedings the Assessing Officer sent a notice dated
05.12.2008 to the assessee which reads as under:-

      "In your return you have shown exempt income u/s 10B of the Income
      Tax Act, 1961 amounting Rs. 39,32,653/-. While examining the details and
      documents filed on record it came to my knowledge you have shown
      exemption on account of DESIGN LAYOUT FORMATION AND SCANNING
      OF BOOKS"
6.    After reproducing the reply of the assessee in the assessment order the
Assessing Officer has observed while disallowing the claim made u/s 10(b) as
under:-

      "Reply of the assessee is not as per Act definition hence addition of Rs.
      39,32,654/- is being made.
      In view of the above facts and material available on records, the income
      of the assessee is computed as under:-
      INCOME RETURNED                                   Rs. 6,34,607.12
      (As per computation)
      Addition on account of section
      10B(2)(i) as discussed above                      Rs. 39,32,654.00
      NET TAXABLE INCOME                                Rs. 45,67,261.13
      NET TAXABLE INCOME ROUNDED OFF                    Rs. 45,67,260.00"

7.    Aggrieved by the said order of the Assessing Officer the assessee
preferred an appeal before the ld CIT(A), who was pleased to dismiss the same.
Aggrieved by the said order of the ld CIT(A) the assessee is before us.

8.    Ld Sr. Advocate Shri M. S. Syali appearing for the assessee stated that the
assessees business involved the export of software of ready to print books. The
term "software" means ready to print files for illustrated books which their client
have to forward to their respective printers to get the finished physical
products. According to the ld Sr. counsel there are four stages for the
completion of their products and pointed our attention to Page 58 of the Paper
Book. The first stage is the collection of material, where the assessee has to
collect the raw material that goes into making of the final files. This raw material
comprises mainly of text and photographs. Various authors, photographs,
photo agencies are the providers of this material depending on the subject of
                                     Page No. 3

the book. It was stated that this is done by collecting data from various sources
including internet. Referring to a specific work conducted by the appellant in a
book titled ,,100 wonders of India it was submitted that the appellant had
engaged a freelance Mr Nirad Grover for collection of photographs necessary
for production of the book. The Senior Counsel also specifically referred to copy
of agreement with Mr Nirad Grover enclosed at pages 63 ­64 of the paper
book. Thus, all this materials collected by the assessee will be in an edited state.
When this exercise is over, then it proceeds to the next stage of design and
layout. Here the designers take the raw material and use it to make the layout
of the book within the given parameter and specifications of their clients. The
materials need to be designed and laid out in a manner which fits the size and
number of pages given for the particular book. According to the Sr. counsel,
this stage is a specialized stage and the assessees book designers are experts
in the field of making layouts that are unique and user friendly. After designing
and laying out of the materials in the manner prescribed by their customers,
comes the next stage. The third stage is the scanning and color correction. For
that the images which are used in the book need to be of a good print quality;
and they have to go though a stage that is known as "scanning and color
correction". Here each photograph is scanned (which is provided to them in a
hard format) and the color correction happens on the digital format.
According to the Sr. counsel, experts in this field uses application in softwares
like Acrobat Reader and QuarkX Press, tweak the date, photographs and
colours and remove blemishes so as to make the final product i.e. the book
appearing to the eyes of the client and customers. A hard copy of the "Book
100 Wonders of India" was also shown to us to demonstrate the entire
transformation process, so that the best results can be seen in the final product.
After this stage finishes, the next stage i.e stage four, then has to embed the
high resolution color corrected images into the lay out and prepare the final
files (software) that are ready to be exported on a CD or electronically onto the
servers of their client. These files, according to the Sr. counsel are the final
designed and laid out files which have the high resolution images embedded in
it; and according to him, satisfies the definition of software as per Section 10(B)
of the Act; and also it falls under the notification issued by the CBDT and relied
                                    Page No. 4




upon the judgement of Chennai Bench of ITAT in the case of the ITO, Chennai
Vs. Accurum India (P) Ltd; and the ld Sr. counsel contended that sub-clause (b)
of clause (i) of explanation 2 to section 10A gives the meaning of the term
computer software. One of the meaning given is any "customized electronic
data" or any product or service of similar nature, as may be notified by the
board. In other words, if an assessee is engaged in the export of any
customized electronic data, then, profit earned from such export would qualify
for deduction u/s 10A.   ld sr. counsel pointed out that sub-clause (a) refers to
any computer programme, sub-clause (b) refers to any customized electronic
data. According to the Sr. counsel, the computer programme referred to in
sub-clause (a) may or may not be customized and may be useful for general
application. Therefore, the ld Sr. counsel emphasized that the electronic data
referred to in sub-clause (b) necessarily has to be customized. The word
,,customized means that the data is suitable for a specific customer only; and
he added that since the expression customized electronic data is quite general
in nature and also considering the fact that the computer applications are fast
expanding, one cannot visualize as to what type of products or services will
come up in future, that the parliament in its wisdom has delegated this power
to CBDT to issue necessary notification in this regard. Taking into consideration
this aspect the CBDT has exercised its delegated power to specify information
technology enabled products or services as per clause (b) of (1) of Explanation
to Section 10B and has notified the same. The Sr. Counsel drew our attention to
the said notification of the CBDT which is reproduced as under:-

   "13.2 The Notification, referred to in clause (b) of Explanation 2(i)
   above, issued by the Central Board of Direct Taxes dated 26-9-2000,
   is as under:
     "S.O.890(E) - In exercise of the powers conferred by clause (b) of item
     (l) of Explanation 2 of section lOA. Clause (b) of item (l) of
     Explanation 2 to section lOB and clause (b) to Explanation to section
     80HHC of the Income-tax Act, 1961 (43 of 1961), the Central Board of
     Direct Taxes hereby specifies the following Information Technology
     enabled products or services as the case may be for the purpose of
     said clauses namely :-
       (l) Back-Office Operations
       (ii) Call Centres
       (iil) Content Development or animation
       (iv) Data Processing
       (v) Engineering and Design
                                      Page No. 5

      (vi) Geographic Information System Services
      (vii) Human Resources Services
      (viil) Insurance claim processing
      (ix) Legal Databases
      (x) Medical Transcription
      (Xl) Payroll
      (xii) Remote Maintenance
      (xiil) Revenue Accounting
      (xiv) Support Centres and
      (xv) Web-site Services
9.    It was submitted by Shri Syali that as stated before Section 10B grants a
benefit for "manufactures or produces any articles or things or computer
softwares". The terms "computer software" has thereafter been defined in
Explanation 2 to include as under:-

      (a)  any computer programme recorded on any disc, tape, perforated
      media or other information storage device; or
      (b)    any customized electronic data
      (c)  any product or service of similar nature as may be notified by the
      Board.
10.   Relying upon the above statutory provisions it was submitted by Shri Syali
that a statute granting exemption has to be interpreted liberally and in a
beneficial manner. Further he submitted that the phrase "manufacture or
produce" has to be given a contextual interpretation. It was submitted that the
way CIT(A) has interpreted this phrase would make the provisions of this section
otiose as regards the services notified by CBDT. By relying upon the decision of
Apex Court in case of Sultana Begum v. Prem Chand Jain [1997] 1 SCC 373 it
was contend that the statute has to be read as a whole to find out the real
intention of the legislature. It was further submitted by the ld Sr. advocate that
the nature of activities carried out by the appellant need to be considered in
the   contextual   requirements    and     definitely   it   would   tantamount   to
"production" if not "manufacture" since the later is larger in magnitude and is
more expansive and liberal than the term "manufacture". In support of this
proposition Shri Syali relied upon the decision of jurisdictional High Court in case
of CIT vs. Lovesh Jain reported in 204 Taxman 134(Del).
                                     Page No. 6

11.   During the course of hearing       an example of "Legal Database" was
given by the Senior Counsel. In regard to this he cited example of ITRs on CD
and Taxmann on CD. According to him, these softwares help in customizing
already existing court judgments (which are easily available in public domain)
in an electronic form so that they can be easily viewed and rummaged.
Likewise it was submitted that the activities carried on by the assessee are also
more akin to the Content Development or Animation Service, Data Processing
Service or Back-office Operation notified by CBDT under Explanation2 clause
(1) sub-clause(b) to section 10B.

12.   It was finally contended by Shri Syali that the nature of activities carried
out by the appellant in the instant case would undistinguishably be
"customized electronic data" which does qualify for deduction u/s 10B. It was
submitted that the ready to print e-books exported by the appellant are tailor
made to meet the requirements of a particular client / customer. It was
submitted that after collecting data and pictures from various sources, the
designing of the entire content is done as per the clients specific requirements.
To thrust his point further it was submitted by the Senior Counsel that e-prints of
book "100 wonders of India" was a project which was undertaken by the
appellant in many foreign languages including English. Lastly it was submitted
by Shri Syali that the above interpretation of phrase "customized electronic
data" has now been well settled by the following co-ordinate bench decisions:

      Accurum India Pvt Limited reported in 126 ITD 69(Del)(TM)

      M.L Outsourcing Services Pvt Limited 104 TTJ 59(Del)(URO)

      Cybertech Systems & Software Limited reported in 149 TTJ 17(Mum)

      Amadeus India (P.) Ltd.79 ITD 407 (Delhi)

13.   In reply the ld Senior DR on the other hand supported the orders passed
by Assessing Officer and ld CIT(A). It was submitted by the ld Sr DR that the
appellant has not been able to clearly demonstrate the computer software,
which it manufactures or produces. The ld Sr. DR argued that the conditions
given in clause (b) of Explanation 2(1), namely, "any customized electronic
data or any product or service of similar nature, as may be notified by the
                                      Page No. 7

CBDT, which is transmitted or exported from India to any place outside India by
any means, had to be fulfilled, before a claim could be allowed u/s 10A of the
Act. It was therefore submitted by the Ld Sr DR that both the authorities below
have rightly rejected the claim made by the appellant and therefore the
concurrent finding of the authorities below may not be disturbed.

14.   We have carefully considered the submissions made by both the parties
and material available on record and has gone through the case laws cited by
both the parties. Since the dispute centers on applicability of provisions of
section 10B of the Act, to the facts of the case it will be apposite to first consider
the relevant statutory provisions. Section 10B provides as under:

      "10B. (1) Subject to the provisions of this section, a deduction of such
      profits and gains as are derived by a hundred per cent export-oriented
      undertaking from the export of articles or things or computer software for
      a period of ten consecutive assessment years beginning with the
      assessment year relevant to the previous year in which the undertaking
      begins to manufacture or produce articles or things or computer
      software, as the case may be, shall be allowed from the total income of
      the assessee.
      ...       .....
      (2) This section applies to any undertaking which fulfills all the following
      conditions, namely :--
      (i) it manufactures or produces any articles or things or computer
      software;
      (ii) it is not formed by the splitting up, or the reconstruction, of a business
      already in existence :
      ...       .....
      Explanation 2.--For the purposes of this section,--
      (i) "computer software" means--
                 (a) any computer programme recorded on any disc, tape,
      perforated media or other information storage device; or
         (b) any customized electronic data or any product or service of similar
      nature as may be notifiedby the Board,
      which is transmitted or exported from India to any place outside India by
      any means"
15.   Barring applicability of section 10B(2)(i) of the Act, which is the subject
matter of dispute in the instant case it is admitted by both the parties that all
other conditions relevant to applicability of section 10B are being satisfied by
the taxpayer. In our considered opinion the meaning of a phrase or word has
to be seen in the framework of the context in which it has been used. Phrase
"Manufacture or produce" will have a different contextual meaning when it is
                                      Page No. 8

read in a statute let us say for e.g. the Excise law, since the parliamentary
intention there will be to attract levy of tax, however in the present case we are
called upon to interpret this phrase as applicable to a statute granting benefit
of an exemption / deduction from taxable total income. In the instant case the
intention of legislature is to provide benefit of deduction to enterprises which
are not simply engaged in manufacture or produce any article or thing, but
even to those assesses whose end product is any customized electronics data.
Benefit of deduction u/s 10B of the Act, is also available on rendering of any of
the services as notified by the Board like the item (ii) in the notification (supra)
wherein even call centers, animation, etc which are brought in the sweep of
any product or services stated in clause (b) of item (i) of Explanation 2 to
Section 10B. Therefore we find merit in the submissions made by ld Sr Advocate
Shri Syali that the restricted scope of the meaning of this phrase as narrated by
the ld CIT(A) in its order would result in diffusing and diluting the real legislative
intention and therefore merits rejection. Support in this regard can be drawn
from the decision of Honble Jurisdictional High Court in case of Lovesh Jain
(supra) relied upon by Shri Syali. In this case it has been held by the Honble
High Court as under:

      "10. The word "manufacture" can be given, both a wider as well as a
      narrower connotation. In wider sense, it simply means to make, fabricate
      or bring into existence an article or product either by physical labour or
      by mechanical power. Given a narrower connotation it means
      transforming of the raw material into a commercial product/commodity
      or finished product which has a new, separate entity but this does not
      necessarily mean that the material by which the commodity is
      manufactured must lose its identity. The latter connotation has been
      accepted and applied with some moderation/clarification in several
      decisions, keeping in view the context in which the word "manufacture"
      has been used. The Supreme Court in Graphic Company India Ltd. v.
      Collector of Customs [2001] 1 SCC 549 and Union of India v. Delhi Cloth
      and General Mills Company Limited AIR 1963 SC 791 has held that
      manufacture has to be understood to mean transformation of goods into
      a new commodity commercially distinct and separate, and having its
      own character, use and name whether it be the result of one or several
      processes. However, every change does not result in "manufacture"
      though every change in an article may be a result of treatment or
      manipulation by labour or/and machines. If an operation or process that
      renders a commodity or article fit for use, which it is otherwise not fit, the
      change/process falls within the meaning of the word "manufacture".
                             Page No. 9

11. We may refer with profit to the Supreme Court's elucidation in CIT v.
Tara Agencies [2007] 292 ITR 444 / 162 Taxman 337 (SC). Herein the
Supreme Court has turned to the definition provided in the Central Excise
Act, 1944 among other relevant definitions. The relevant paragraphs of
this decision are reproduced below:
"11. The term manufacture has not been defined in the Income-tax Act,
1961.
12. The term manufacture has been defined in section 2(f) of the Central
Excise Act, 1944. Parts (i) and (ii) of section 2(f) read as under:-
2(f). 'Manufacture' includes any process-
(i) incidental or ancillary to the completion of a manufactured product;
and
(ii) which is specified in relation to any goods in the Section or Chapter
notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting
to manufacture".
12A. Clause (f) gives an inclusive definition of the term 'manufacture'.
According to the dictionary, the term 'manufacture' means a process
which results in an alteration or change in the goods which are subjected
to the process of manufacturing leading to the production of a
commercially new article. In determining what constitutes 'manufacture'
no hard and fast rule can be applied and each case must be decided
on its own facts having regard to the context in which the term is used in
the provision under consideration.
13. The term manufacture has been defined by the Black Law Dictionary
(5th Edition) as under: 'Manufacture : The process or operation of making
goods or any material produced by hand, by machinery or by other
agency; anything made from raw materials by the hand, by machinery,
or by art. The production of articles for use from raw or prepared
materials by giving such materials new forms, qualities, properties or
combinations, whether by hand labor or machine.
14. The word 'manufacture' has been defined in Halsbury's Laws of
England, 3rd Ed. Vol. 29 p.23 as under:-
'Manufacture has been defined as a manner of adapting natural
materials by the hands of man or by man-made devices or machinery
and as the making of an article or material by physical labour or applied
power'; but the practice is to accept as 'manufacture' a wider range of
industrial activities than such a definition would suggest. It includes
articles made in situ as well as articles made in a factory.
15. The Supreme Court of the United States of America has defined the
term 'manufacture' a century ago in Anheuser-Busch Brewing Assn. v.
United States (1907) 52 L Ed. 336. The definition has been followed in
subsequent American, English and Indian cases. The definition reads as
under: Manufacture implies a change, but every change is not
manufacture, and yet every change in an article is the result of
treatment, labour and manipulation. But something more is necessary.
                              Page No. 10

..There must be transformation; a new and different article must emerge,
.having a distinctive name, character or use."
12. As noticed above, Section 10A/10B is applicable when an
undertaking manufactures, or is engaged in production of articles or
things. The term "production" has a larger magnitude and is more
expansive and liberal than the term "manufacture". The terms
manufacture and produce were interpreted in the CIT v. TATA
Locomotive & Engineering Co. Ltd. [1968] 68 ITR 325 (Bom.), and it was
held:-
"In its roots the word "manufacture" comes from the Latin word "manus"
which means "hand" (and "manu" is the ablative of the word "manus")
and the word "facere" which means "to make". In origin, therefore, the
word implied the making of anything by hand, by with the passing of
time and in the context of industrial development the word has acquired
a number of shades of meaning. In connection with industry or in
industrial undertaking, two shades of meaning are important. In the
Oxford Dictionary, vol. 6, the two shades of meaning are given as follows
: (1) The first is "the action or process of making articles or material (in
modern use, on a large scale) by the application of physical labour or
mechanical power." This is the most generic meaning in its application to
industry or industrial undertaking or establishments. (2) There is also
another more limited meaning which is found referred to in the authorities
as meaning the transforming of raw material into a commercial
commodity or a finished product which has a separate identity
(Commissioner of Income tax v. Ajay Printery Pvt. Ltd.(1)). This shade of
meaning is more appropriately used in the past participle
"manufactured". See Oxford Dictionary, Vol. 6, at page 143, sense No. 1,
where the meaning is "fabricated from raw material". In
Aswathanarayana v. Dy Commercial Tax Officer (1) at page 801 one
finds a useful compilation of meaning attached to the word
"manufacture" from various dictionaries and other sources.
Similarly, the word "produce" with reference to its meaning in industry or
political economy has two different senses. In vol. 8 of the Oxford
Dictionary, at page 1422, the two meaning are given as follows: "To bring
forth, bring into being or existence (a) generally to bring (a thing) into
existence from its raw materials or elements or as the result of a process"
and "(d) To compose or bring out by mental or physical labour (a work of
literature of art); to work up from raw material, fabricate, make,
manufacture (material object)".
In the Ajay Printer's case, a Division Bench of the Gujarat High Court
pointed out that the word "manufacture" has a wider and a narrower
connotation. In the wider sense it simply means to make, or fabricate or
bring into existence an article or a product either by physical labour or by
power. The word "manufacture" in ordinary parlance would mean a
person who makes, fabricates or brings into existence a product or an
article by physical labour or power. The other shade of meaning which is
the narrower meaning implies transforming raw materials into a
commercial commodity or a finished product which has an entity by
                                    Page No. 11

      itself, but this does not necessarily mean that the materials with which the
      commodity is so manufactured must lose their identity. Thus both the
      words "manufacture" and "produce" apply as well to the bringing into
      existence of something which is different from its components. One
      manufactures or produces an article which is necessarily different from its
      components."
      13. The difference in the words 'manufacture', 'production (to produce)'
      and 'process' was examined by the Supreme Court in Tara Agencies's
      case (supra). On the question of what is meant by the term 'production',
      it has been elucidated and explained as under:-
      "16. In Black's Law Dictionary (5th Edn.), the term "production" has been
      defined as under:
      "Production.--Process or act of producing. That which is produced or
      made; i.e. goods. Fruit of labor, as the productions of the earth,
      comprehending all vegetables and fruits; the productions of intellect, or
      genius, as poems and prose compositions; the productions of art, as
      manufactures of every kind."
      17. The term "produce", as defined in New Webster's Dictionary of the
      English Language (Deluxe Encyclopaedic Edition), is as follows:
      "Produce.--To bring forth into existence; to bring about; to cause or
      effect, esp. intellectually or creatively; to give birth to; to bear, furnish,
      yield; to make accrue; to bring about the performance of, as a movie or
      play; to extend, as a line. To bring forth or yield appropriate offspring,
      products, or consequences."
16.   Meaning of phrase "customized electronic data" need not detain us
longer. Recently a Third Member decision in case of Accurum India (sura) has
elaborately discussed the same. In this judgment it has been held by the Ld
Third Member as under:

      "7. Let us consider the above role of the Circulars in the context of sub-
      clause (b) of clause (i) of Explanation 2 to section 10A of the Act. The said
      clause (i) gives the meaning of the term "Computer Software". One of the
      meanings given is "any customised electronic data or any product or
      service of similar nature, as may be notified by the Board". In other words,
      if the assessee is engaged in the export of any customised electronic
      data, then, profit earned from such export would qualify for deduction
      under section 10A of the Act. It may be noted that whereas sub-clause
      (a) refers to any computer programme, sub-clause (b) refers to any
      customised electronic data. Computer programme referred to in sub-
      clause (a) may or may not be customised and may be useful for general
      application. On the other hand, the electronic data referred to in sub-
      clause (b) has necessarily to be customised. By the word "customised" is
      meant that the data is suitable for a specific customer only. Considering
                              Page No. 12

the fact that the expression "customised electronic data" is quite general
in nature and also considering the fact that computer applications are
fast expanding, one cannot visualise as to what type of products or
services will come up in future. Considering this ever-expanding horizon of
software products and services, the Board has been given the power to
notify such products and services which in its opinion should qualify for
deduction under section 10A. In other words, this power of the Board
when exercised, it will ensure proper administration of the fiscal statute as
observed by the Supreme Court in UCO Banks case (supra). It is in this
sense the ld. A.M. has observed that the Boards Circular has made the
job of the Assessing Officer quite simple. Thus, it is this role, as explained
by the Supreme Court, which is played by the Board by issuing the
Circular, dated 26-9-2000.
...   .....
9. The ld. JM is right in mentioning that software is not merely knowledge
but, rather is knowledge recorded in a physical form having a physical
existence, taking up space on a tape, disc or hard drive, making physical
things happen and can be perceived senses. However, he misdirected
himself by misunderstanding that since the recruitment and training of
the personnel was by itself not I.T. enabled, the profit earned by the
assessed is not eligible for deduction under section 10A of the Act. The
requirement of the provision is that there should be a customized
electronic data and such data should be exported outside India. The
data which a customer may require, may be gathered either by manual
effort or by electronic means, as for example, through internet. By
whatever means the data is collected, once it is stored in an electronic
form, it becomes a customized electronic data which can be exported
to qualify for deduction under section 10A. The process of actually
collecting the data need not be IT enabled. What all is required is that
the data collected should be in an electronic form. If one were to go by
the understanding of the ld. JM, then perhaps the purpose of giving
impetus to software industry or to the computerization as a whole, would
be defeated. As an illustration, if a person wants to open a garment shop
in a particular locality, it may approach a consulting firm to explore the
market potentiality of that area. In that case, the consulting firm will have
to initially work manually to collect data like,number of garment shops in
the locality, the economic strata to which the population residing in that
locality belongs, the spending habits of the people residing in the locality,
etc. All these activities will have to be carried out manually and once the
data is collected, it may be collated and analyzed and may be stored in
an electronic device. This becomes the IT enabled customized electronic
data. If this data is exported outside India, the consulting firm will be
                                    Page No. 13




      eligible for deduction under section 10A. Similar is the situation in the
      present case. The assessee invited applications for recruitment through
      newspapers, carried out interviews, selected them and trained them. It is
      worthnoting that this exercise was carried out not for namesake but it
      was a serious and sincere effort which is reflected by the magnitude on
      which the assessee worked. More than 7,000 applications were received
      which were vetted and then the process of recruitment was undertaken.
      All these data were stored in an electronic device and transmitted to US
      for the use of the parent company. Recruitment can be done online also,
      but perhaps the scale of operation may not be as huge as it was in the
      present case. Training can also be carried out online but it cannot be as
      effective as a classroom training. If the intention of the Legislature was
      that in order to qualify for deduction under section 10A, every activity
      should be carried out through electronic means, then the purpose of
      enacting section 10A would have been totally defeated. The exact
      language of sub-clause (b) of clause (1) of Explanation 2 is "any
      customized electronic data". Thus, if the result of the entire exercise of
      recruitment and training is stored in an electronic device, it is not possible
      to say that it is not a customized electronic data. If the data is in a form
      other than electronic, then the export thereof will not qualify for the
      deduction. This aspect, as mentioned earlier, has to be examined by the
      Assessing Officer in the course of the assessment and which in this case,
      there is no dispute that the data was in the electronic form."
17.   In the instant case we find that the appellant after collecting raw data
and pictures has utilized its expert designing skills in producing a ready to print
e-book. Shri Syali in his submissions has neatly narrated the entire sequence of
activities carried on by the appellant. The samples produced before us were
also shown to the AO, however he has conveniently chosen to remain quite on
this aspect. The final product is intended for use of a particular customer and
therefore the case under consideration does fit in the category ofproduction
of"any customized electronic data" as per the definition of computer software
defined in Explanation 2 to section 10B of the Act. The above Third Member
decision is germane to the issue before us and therefore it clearly supports the
case of appellant. In our considered opinion even if it is said that the appellant
has merely customized the data, which was already available and has not
created altogether new software then too the appellant cannot be deprived
of the benefit of deduction. It is pertinent to note that the definition of
"produce" is wider than the term manufacture as held by the Hon'ble Supreme
                                    Page No. 14

Court in a number of decisions (referred to in Lovesh Jains case above) and
does not require to produce or manufacture altogether a new product; but if
the outcome of the process is a different product than the input, it would fall
under the definition of 'produce'.In our considered view, whatever form the
input data is, so long as the end product is in the form of electronic data which
is customised by the appellant for the end use of a particular customer, then
benefit of deduction u/s 10B of the Act cannot be denied. And there is no
dispute that the final product of the assessee was in electronic form. We may
also refer here another co-ordinate bench decision in case of Cybertech
Systems & Software (supra) wherein it has been held by a co-ordinate bench as
under:

      "14.1 Thus it is clear that when the process of customisation involve
      addition, modification and creation of new programmes as per the
      requirement of the individual clients by utilising the foundation of
      standard programme and such exercise involves human expertise and
      intellectual process to bring the end result a different product or thing
      and fit into the definition of term produce. Further, in the case of
      Amadeus India (P.) Ltd. (supra) the coordinate Bench of the Tribunal has
      considered and decided a similar question in para 35 as under:
      "35. The assessee which occupies a position mid-way between the two
      fulfils, it will be clear from the facts stated above, the functions of a
      programme exporter, it does not add mere entries to the database as
      done by the travel agent. In fact it has no direct interest in adding to, or
      drawing extracts from the database built into the computer like the
      several operators all the world over. What it does actually is to
      supplement the functions of the Amadeus Group by preparing and
      transmitting programmes to the latter for incorporation into portions or
      "partitions" in its mega-computer at Erding in Germany, so as to enable
      the travel agents in its marketing region draw on the available
      information for their benefit. Its activities are to issue instructions to the
      master-computer to recognise the operators, identify them and provide
      them access to specific portions of the database. There can be no doubt
      whatever, for the reasons discussed above, that the assessee
      manufactures, produces and exports software within the meaning of the
      three specified sections of the Act. It is open to it to claim exemption
      under anyone of these sections and as is well established by pertaining to
      interpretation of taxing statutes is entitled to choose that one which is
      most favourable to it in any particular assessment year."


18.   We find that the ld CIT(A) has erred in considering the definition of
"Computer Software" as per clause (i) of Explanation 2 to section 10B in a
                                     Page No. 15

conjunctive manner and not disjunctive manner without considering that word
used in between sub-clauses (a) and (b) is "or". The ld CIT(A) has erred in
comparing the work done by the assessee with "Computer Programme". Here
it is to noted that it is not assessees case that its case falls under sub-clause (a)
of clause (i) to Explanation 2 to section 10B. It is the consistent stand assessee
that its case falls under sub clause (b) of clause (i) to Explanation 2 to section
10B. Here it is to be seen that whether the assessee is engaged in any
customization of electronic data. We find that ld CIT(A) has not recorded any
finding in this respect in his order. We find also that ld CIT(A) has tested
assessees case u/s 10BB. However we find that counsel for the assessee had
submitted that scope of section 10BB is limited in scope as compared to the
new definition in new section 10B. In this regard it is to be taken note that post
amendment old section 10B requires "processing or management of electronic
data" whereas new section 10B is larger in scope and only requires "any
customized electronic data". The difference is that old section 10B requires that
input data must necessarily be in electronic form where as in new section 10B
this requirement is done away with. This interpretation has found favour by ITAT
in Accurums case (Supra) were in at para 9 (of Third Member order) it has
been held that "The data which a customer may require, may be gathered
either by manual effort or by electronic means, as for example, through
internet. By whatever means the data is collected, once it is stored in an
electronic form, it becomes a customized electronic data which can be
exported to qualify for deduction u/s 10A".


19.   The requirement of the provision (Section 10B) is that there should be a
customized electronic data and such data should be exported outside India.
The data which a customer may require may be gathered either by manual
effort or by electronic means, as for example, through internet. By whatever
means the data is collected, once it is stored in an electronic form, it becomes
a customized electronic data which can be exported to qualify for deduction
u/s 10A. The process of actually collecting the data need not be IT enabled.
What all is required is that the data collected should be in an electronic form.
                                         Page No. 16

The exact language of sub-clause(b) of clause (1) of Explanation 2 is "any
customized electronic data.
20.        Thus we find that Assessees business involved export of ready to print
books which in the instant case is the "customized electronic data". The nature
of activity done by the assessee in the EOU was that of producing designs,
drawings, layouts and scanning for the projects of foreign clients on the basis of
their parameters and specifications. This activity is done by taking into
consideration the data collected by the assessee itself or from clients. Though
the steps/stages involved in completion of a particular assignment for the
foreign client has been reproduced by the AO at page 2 of the assessment
order, still neither the Assessing Officer nor ld CIT(A) have appreciated these
aspects in the right perspective.
21.        In the light of the decisions of Ld Third Member in the case of Accurum
India Limited and co-ordinate bench decision in case of Cybertech Systems
(supra), we find that the appellant merits to succeed in its claim for deduction
u/s 10B of the Act. We hold that the ready to print books exported by the
appellant in the form of a CD or e-mail are customised electronic data eligible
for claiming benefit of deduction as per law. Therefore the appeal filed by the
assessee is allowed and the AO is directed to allow deduction u/s 10B of the
Act in accordance to law.
22.        In the result the appeal is allowed.
           Order pronounced in the open court on 07.05.2014.
                  -Sd/-                                          -Sd/-
         (S.V. MEHROTRA)                                     (A. T. VARKEY)
       ACCOUNTANT MEMBER                                  JUDICIAL MEMBER
 Dated:07/05/2014
A K Keot

Copy forwarded to
      1.   Applicant
      2.   Respondent
      3.   CIT
      4.   CIT (A)
      5.   DR:ITAT
                                                           ASSISTANT REGISTRAR
                                                              ITAT, New Delhi

 
 
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