Case Law Details

Case Name : CIT Vs. Kiran Kapoor (Delhi High Court)
Appeal Number : ITA No. 13-15/2015
Date of Judgement/Order : 19/02/2015
Related Assessment Year :
Courts : All High Courts (4589) Delhi High Court (1355)

Issue before court:

Whether assessee’s engagement in activities of collection, collation, formatting of data, editing, digital designing etc. can be termed at manufacturing to avail the benefits of section 10B of the Income-tax Act.

Brief facts:

♠ Assessee claimed to be software exporter to The Netherland engaged in the manufacturing of e-book software namely 100 Wonders of India and hence claimed exemption under section 10 amounting to Rs. 39,32,594/-.

♠ AO being unsatisfied denied exemption and disallowed the amount claimed by assessee u/s 10 B.

♠ The process deployed by the assessee was neither “manufacture” nor did it amount to creation of software. Assessee was unable to prove that computer software was produced or manufactured by her.

♠ That the mere compilation of data without anything more, could not be said to have resulted in a customized or “legal database”. The database had to be such as was capable of use by the customer or client, as software. Else, activity of any description even if it could not be characterised as “manufacture” or “production” would successfully claim benefit under Section 10B.

♠ Learned counsel relied on the judgment of the Supreme Court reported as Commissioner of Income Tax v Gem India Manufacturing Co Ltd 2001 (249) ITR 307 (SC). It was inter alia, held in that judgment that:

“There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached.”

♠ It was submitted that preparation of data for its ready printing use could not amount to manufacture of software, entitling the assessee to claim benefit of Section 10B. Reliance was placed on CBDT Circular S.O. 890 (E) dated 26.09.2000.

Contention of the assessee:

  • The process of manufacturing computer software includes four stage processes. Firstly, collection of raw material i.e. photographs, text etc. that goes into the making of final files.
  • Secondly, designing and layout.Here the designers use the said material to prepare the layout of the book within the given parameter and specifications of clients. This involves designing and lay out of materials in a manner which fits the size.
  • The third stage is the scanning and color correction. For that the images used in the book have to be of a good print quality; and have to go through the “scanning and colour correction” stage.
  • The last stage is the embedding of high resolution colour corrected images into the lay out and preparation of the ready to be exported final files (software), on a CD or electronically, onto the servers of their client.

Held by the Court:

  • The four stage process of compiling material, collating the text, designing the layout, scanning, digital image editing (to remove distortion) and final arrangement of the data, ultimately transmitted according to the customer’s specification and ready to be used for printing, (or even e-Book publication) is undoubtedly manufacture or production.
  • The expression “computer software” is wide enough to embrace diverse activities. To eliminate any doubt, the reference to “customized electronic data” in the second Explanation to Section 10B (2), Parliament enabled the Board (CBDT) to include (by notification) diverse activities which involve export of software, etc.


“computer software” is defined by the Copyright Act, 1957 by Section 2 (ffc) as follows:

“(ffc)”computer programme” means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result.”

Here in particular case ITAT examined the four stage process deployed by the assessee in manufacturing of a final product ready to export and on the basis of such examination High Court held assessee qualified as manufacturer and liable to claim exemption u/s 10 B.

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