3.5 We have heard rival contentions on this aspect. The taxpayer company was incorporated on 10.6.1988 . The taxpayer is stated-to be engaged in the business of software development since 1994 and its unit has been granted the status of 100% export oriented software technology park on 31.8.1995 under the software export scheme of Department of Electronics and thus, has been granted the status of 100% EOU. As per annexure-A to the assessment order, the company was granted license [license no. 2/95/100% EOU(STP)] for private bonded ware house by the Assistant commissioner, Central Excise on 19.12.1995 in the name of Solmac Solution Machines. Copies of export declarations for export of consultancy services are also annexed to the assessment order as Annexure C-2 to C-5. The agreement dated 1.4.2000 between the taxpayer and the purchaser e-infochips Inc. stipulates provision for suitable qualified personnel for providing services concerning computer programming, software development and computer software and is enclosed as Annexure B-2 to the assessment order. Annexure D is an application form for conversion of an existing software export unit to STP unit while Annexure F is an agreement executed on 8.9.1995 for software export technology park. Both the parties are in unison when they say that what is to be examined is the nature of activities actually undertaken in the light of the objects clause. In the case under consideration, main object clause in the Memorandum of Association reads as under:
“To provide, supply, maintain, and operate for the benefit of individual, firm, society, trust, company body corporate, corporation, government or any other person actual or artificial, technical, executive engineering consultancy services in the filed of data processing, computer, micro processor, process control equipments, telecommunication, mass communication, development for chemical, power, computer, instrumentation and telecommunication industries.”
The AO held that the aforesaid clause does not talk of software development while the Id AR vehemently argued that the said objects entitle them to undertake software development. As is apparent from the aforesaid objects, taxpayer company was set up to provide for technical, executive engineering consultancy services in the filed of data processing, computer, micro processor, process control equipments, telecommunication, mass communication, development for chemical, power, computer, instrumentation etc. By virtue of these objects, taxpayer claims to have undertaken manufacture or production of software programmes for the computer. Now how far objects are relevant in deciding the actual activities under taken? Here we may refer to the decisions relied upon in this connection. Hon’ble Supreme Court in the case of Oriental Investment Company Limited, vs Commissioner Of Income-Tax, Bombay,32 ITR 664(SC) observed.
“.In the instant case the Appellate Tribunal in its appellate order has set out the amount of profits made by the assessee company in the years of assessment 1943-44 to 1948-49. It has also mentioned the inconsistent positions taken up by the assessee in first claiming to be a dealer and then to be an investor which according to the Tribunal was due to the fact that it was incurring losses in the earlier years and had begun making profits when the claim of being an investor was put forward. But the two basic facts on which the Tribunal has based its findings are :
(1) the objects set out in the, memorandum of association of the assessee company;
(2) the previous assertion by the assessee company that it was a dealer in investments and not merely an investor.
Counsel for the assessee relies on the decision of Kishan Prasad’s case, where this Court held that the circumstances whether a transaction is or is not within the powers of the company has no bearing on the nature of the transaction or on the question whether the profits arising there from are capital or revenue income and, therefore, it is contended that the Tribunal has relied upon an irrelevant circumstance. Counsel for Revenue on the other hand refer to the judgment in Lakshminarayan Ram Gopal v. Government of Hyderabad, where the objects of an incorporated company were held not to be conclusive but relevant for the purpose of determining the nature and scope of its activities. Merely because the company has within its objects the dealing in investment in shares does not give to it the characteristics of a dealer in shares. But if other circumstances are proved it may be a relevant consideration for the purpose of determining the nature of activities of an assessee. Whether in the instant case it will have any relevance because of other materials on which the assessee company was relying in support of its case that it was merely an investor and not a dealer will have to be considered when the suggested questions of law are answered.”
3.52 In the light of aforesaid decisions, it is apparent that the objects of an incorporated company alone are not conclusive but of course are relevant for the purpose of determining the nature and scope of its activities. What are the actual activities undertaken by the taxpayer and whether or not these fall within the definition of software development has to be analysed. A lot has been said in the order of AO and Id. CIT (A) about the activities. In fact, Id. CIT (A) has analysed various activities in the light of definition of computer software and arrived at the conclusions. It is not that the Id. CIT (A) ignored the activities or overlooked any finding of the AO. The main contention of the AO is that the employees of the taxpayer, including its CMD have admitted during the survey that the taxpayer company was not undertaking any manufacturing activities. Now what is manufacture or production of software has to be decided in the light of relevant provisions of law and the activities actually undertaken by the taxpayer and not on the basis of statement of employees. The words `manufacture or production’ have been subject matter of judicial interpretation under various enactments. What their meaning is in common parlance may not necessarily be so on interpretation of relevant provisions of an enactment. In any case interpretation of these words for the purpose of deduction u/s10B of the Act, can not solely be decided on the statement of employees alone. Let us now examine what are these activities which have been actually undertaken by the taxpayer and whether or not these can be termed as manufacture or production of software.
6.12 The taxpayer supplied manpower in terms of the work agreements annexed to the assessment order in order to provide services dealing with “Design Verification” of a network co-processor chip with tasks including creation of functional tests suites for certain modules in the design, writing behavioral models in C/Verilog. Apparently, these services can not be provided without developing highly sophisticated software. Similarly other consultancy services were in respect of tasks in the field of computer programming and computer software development. The AO has not brought on record any evidence that if these personnel were not deputed for software development, then what else these highly skilled personnel were doing overseas and what for the clients paid the taxpayer.
6.14 In view of the foregoing, we are in agreement with the findings of Id. CIT(A) that activities undertaken by the taxpayer were in respect of production and export of computer software within the meaning of provisions of section 10B of the Act, especially when the AO himself concluded so for the purpose of section 80HHE of the Act. We are also in agreement with the uncontroverted submission of the Id. AR on behalf of the taxpayer that the taxpayer did not claim any deduction in AY 1996-97 and for the first time claimed deduction u/s 10B in AY 19987-98 and this being the 5th year, claim has to allowed.