REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

C.A.No.235/2010  @  SLP(C) No. 4719/2008

Commr. of Income Tax-V, New Delhi  … Appellant(s)

              versus

M/s. Oracle Software India Ltd. … Respondent(s)

with

C.A.No.238/2010  @  SLP(C) No.5143/2009 C.A.No.239/2010  @  SLP(C) No.6847/2008

J U D G M E N T

S.H. KAPADIA, J.

1. Leave granted.

2. A  short  question  which  arises  for  determination  in  

this batch of civil appeals is whether the process by which a  

blank Compact Disc (CD) is transformed into software loaded  

disc constitutes “manufacture or processing of goods” in terms  

of Section 80IA(1) read with Section 80IA(12)(b), as it stood  

then, of the Income Tax Act, 1961?

3. For  the  sake  of  convenience,  we  may  refer  to  bare  

facts mentioned in Civil Appeal @ SLP (C) No. 6847 of 2008.  

In this appeal, we are concerned with the Assessment Years  

1995-96 and 1996-97.

4. Assessee  is  100%  subsidiary  of  Oracle  Corporation,  

USA.   It  is  incorporated  with  the  object  of  developing,

designing,  improving,  producing,  marketing,  distributing,  

buying,  selling  and  importing  of  computers  softwares.  

Assessee is entitled to sub-licence the software developed by  

Oracle Corporation, USA.  Assessee imports Master Media of the  

software from Oracle Corporation, USA which is duplicated on  

blank discs, packed and sold in the market along with relevant  

brouchers.   Assessee  pays  a  lump-sum  amount  to  Oracle  

Corporation, USA for the import of Master Media.  In addition  

thereto, assessee also pays royalty at the rate of 30% of the  

price  of  the  licensed  product.   The  only  right  which  the  

assessee has is to replicate or duplicate the software.  They  

do not have any right to vary, amend or make value addition to  

the software embedded in the Master Media.  According to the  

assessee, it uses machinery to convert blank CDs into recorded  

CDs which along with other processes become a Software Kit.  

According to the assessee, it is the blank CD in the present  

case  which  constitutes  raw-material.   According  to  the  

assessee, Master Media cannot be conveyed as it is.  In order  

to sub-licence, a copy thereof has to be made and it is the  

making  of  this  copy  which  constitutes  manufacture  or  

processing of goods in terms of Section 80IA and consequently  

assessee is entitled to deduction under that Section.  On the  

other hand, according to the Department, in the process of  

copying, there is no element of manufacture or processing of  

goods.  According to the Department, since the software on the  

Master Media and the software on the recorded media remains  

unchanged,  there  is  no  manufacture  or  processing  of  goods

involved in the activity of copying or duplicating, hence, the  

assessee was not entitled to deduction under Section 80IA.  

According to the Department, when the Master Media is made  

from what is lodged into the computer, it is a clone of the  

software in the computer and if one compares the contents of  

the Master Media with what is there in the computer/ data  

bank,  there  is  no  difference,  hence,  according  to  the  

Department, there is no change in the use, character or name  

of the CDs even after the impugned process is undertaken by  

the assessee.

5. Before answering the controversy, we need to reproduce  

relevant provisions of Sections 80IA(1), 80IA(12)(b) as also  

Explanation  to  Section  33B  of  the  Income  Tax  Act  in  the  

following terms:

“80IA - Deduction in respect of profits and gains  from industrial undertakings, etc.in certain cases.     (1)  Where  the  gross  total  income  of  an  assessee  includes  any  profits  and  gains  derived  from  any  business of an industrial undertaking or a hotel or  operation of a ship (such business being hereinafter  referred to as the eligible business), there shall,  in accordance with and subject to the provisions of  this  section,  be  allowed,  in  computing  the  total  income  of  the  assessee,  a  deduction  from  such  profits  and  gains  of  an  amount  equal  to  the  percentage specified in sub-section (5) and for such  number of assessment years as is specified in sub- section (6).  

*** *** **

(12) For the purposes of this section, -  (a) *** *** (b) “industrial  undertaking”  shall  have  the  meaning assigned to it in the Explanation to Section  33B;”

Explanation to Section 33B

“Explanation:  In  this  section,  “industrial  undertaking” means any undertaking which is mainly  engaged  in  the  business  of  generation  or  distribution  of  electricity  or  any  other  form  of  power  or  in  the  construction  of  ships  or  in  the  manufacture or processing of goods or in mining.”

6. Section 80IA occurs in Chapter VIA which deals with  

Deductions in respect of certain Incomes.  Where the gross  

total income of an assessee includes any profits derived from  

any business of an industrial undertaking to which Section  

80IA applies, there shall in accordance with and subject to  

the provisions of Section 80IA, be allowed, in computing the  

total income of the assessee, a deduction from such profits  

and gains of an amount equal to a specified percentage for  

such number of assessment years as specified in Section 80IA.  

For deciding the present controversy, it would be sufficient  

to notice that the gross total income of an assessee must  

include profits derived from any business (eligible) of an  

industrial undertaking which in terms of Section 80IA(12)(b)  

is given the same meaning as is assigned to that expression  

vide Explanation to Section 33B.  As can be seen from the  

Explanation to Section 33B, an industrial undertaking inter  

alia has been defined to mean any undertaking which is engaged  

inter alia in the manufacture or processing of goods.

7. At the outset, we may state that Section 80IA comes in  

Chapter VIA.  That Chapter, in a way, is a code by itself.  It  

provides  for  special  deductions.   Broadly,  these  special  

deductions are incentives provided for setting up industrial  

undertakings in backward areas, for earning profits in foreign

exchange,  for  setting  up  hotels,  etc.   It  is  in  this  

background  that  one  has  to  interpret  the  meaning  of  the  

expression “manufacture or processing of goods”.  One more  

aspect needs to be highlighted.  Technological advancement in  

computer  science  makes  knowledge  as  of  today  obsolete  

tomorrow.  We need to move with the times.  At the same time,  

one needs to take note of the fact that unlimited deductions  

are not permissible under Chapter VIA.  Therefore, in each  

case, where an issue of this nature arises for determination,  

the Department should study the actual process undertaken by  

the assessee.  Duplication can certainly take place at home,  

however, one needs to draw a line between duplication done at  

home and commercial duplication.  Even a pirated copy of a CD  

is  a  duplication  but  that  does  not  mean  that  commercial  

duplication as is undertaken in this case should be compared  

with home duplication which may result in pirated copy of a  

CD.  The point to be noted by the Department in each of such  

cases  is  to  study  the  actual  process  undertaken  by  the  

licensee who claims deduction under Section 80IA of the Income  

Tax Act, 1961.  At this stage, we may clarify that in this  

case we are concerned with the Income Tax Act, 1961, as it  

stood during the relevant Assessment Years.

8. From the details of Oracle Applications, we find that  

the software on the Master Media is an application software.  

It is not an operating software.  It is not a system software.  

It  can  be  categorized  into  Product  Line  Applications,  

Application Solutions and Industry Applications.  A commercial

duplication process involves four steps.  For the said process  

of commercial duplication, one requires Master Media, fully  

operational computer, CD Blaster Machine (a commercial device  

used  for  replication  from  Master  Media),  blank/  unrecorded  

Compact  Disc  also  known  as  recordable  media  and  printing  

software  /  labels.   The  Master  Media  is  subjected  to  a  

validation  and  checking  process  by  software  engineers  by  

installing and rechecking the integrity of the Master Media  

with  the  help  of  the  software  installed  in  the  fully  

operational computer.  After such validation and checking of  

the Master Media, the same is inserted in a machine which is  

called as the CD Blaster and a virtual image of the software  

in  the  Master  Media  is  thereafter  created  in  its  internal  

storage device.  This virtual image is utilized to replicate  

the software on the recordable media.

9. What is virtual image?  It is an image that is stored  

in computer memory but it is too large to be shown on the  

screen.  Therefore, scrolling and panning are used to bring  

the unseen portions of the image into view. [See Microsoft  

Computer Dictionary, Fifth Edition, page 553]  According to  

the same Dictionary, burning is a process involved in writing  

of a data electronically into a programmable read only memory  

(PROM) chip by using a special programming device known as a  

PROM programmer, PROM blower, or PROM blaster. [See Pages 64,  

77 of Microsoft Computer Dictionary, Fifth Edition]

10. In our view, if one examines the above process in the  

light of the details given hereinabove, commercial duplication

cannot be compared to home duplication.  Complex technical  

nuances are required to be kept in mind while deciding issues  

of  the  present  nature.   The  term  “manufacture”  implies  a  

change, but, every change is not a manufacture, despite the  

fact  that  every  change  in  an  article  is  the  result  of  a  

treatment of labour and manipulation.  However, this test of  

manufacture  needs  to  be  seen  in  the  context  of  the  above  

process.   If  an  operation/  process  renders  a  commodity  or  

article fit for use for which it is otherwise not fit, the  

operation/  process  falls  within  the  meaning  of  the  word  

“manufacture”.  Applying the above test to the facts of the  

present case, we are of the view that, in the present case,  

the assessee has undertaken an operation which renders a blank  

CD fit for use for which it was otherwise not fit.  The blank  

CD is an input.  By the duplicating process undertaken by the  

assessee, the recordable media which is unfit for any specific  

use gets converted into the programme which is embedded in the  

Master Media and, thus, blank CD gets converted into recorded  

CD by the afore-stated intricate process.  The duplicating  

process changes the basic character of a blank CD, dedicating  

it to a specific use.  Without such processing, blank CDs  

would  be  unfit  for  their  intended  purpose.   Therefore,  

processing of blank CDs, dedicating them to a specific use,  

constitutes a manufacture in terms of Section 80IA(12)(b) read  

with Section 33B of the Income Tax Act.  

11. One  of  the  arguments  advanced  on  behalf  of  the  

Department is that since the software on the Master Media and

the software on the pre-recorded media is the same, there is  

no manufacture because the end product is not different from  

the original product.  We find no merit in this argument.  

Firstly, as stated above, the input in this case is blank  

disc.  Secondly, the test applied by the Department may not be  

relevant in the context of computer technology.  One of the  

questions which arose for determination before this Court in  

the  case  of  Tata  Consultancy  Services  v.  State  of  Andhra  

Pradesh, 137 STC 620 was whether a software programme put in  

media for transferring or marketing is “goods” under Section  

2(h) of the Andhra Pradesh General Sales Tax Act, 1957.  It  

was held that a software programme may consist of commands  

which enable the computer to perform a designated task.  The  

copyright in the programme may remain with the originator of  

the programme.  But, the moment copies are made and marketed,  

they become goods.  It was held that even an intellectual  

property, once put on to a media, whether it will be in the  

form of computer discs or cassettes and marketed, it becomes  

goods.   It  was  further  held  that  there  is  no  difference  

between a sale of a software programme on a CD/ Floppy from a  

sale  of  music  on  a  cassette/  CD.   In  all  such  cases  the  

intellectual property is incorporated on a media for purposes  

of transfer and, therefore, the software and the media cannot  

be split up.  It was further held, in that judgment, that even  

though the intellectual process is embodied in a media, the  

logic  or  the  intelligence  of  the  programme  remains  an  

intangible property.  It was further held that when one buys a

software programme, one buys not the original but a copy.  It  

was further held that it is the duplicate copy which is read  

into the buyer’s computer and copied on memory device. [See  

Pages 630 and 631 of the said judgment]  If one reads the  

judgment  in  Tata  Consultancy  Services  (supra),  it  becomes  

clear that the intelligence/ logic (contents) of a programme  

do not change.  They remain the same, be it in the original or  

in the copy.  The Department needs to take into account the  

ground realities of the business and sometimes over-simplified  

tests  create  confusion,  particularly,  in  modern  times  when  

technology  grows  each  day.   To  say,  that  contents  of  the  

original and the copy are the same and, therefore, there is  

manufacture  would  not  be  a  correct  proposition.   What  one  

needs to examine in each case is the process undertaken by the  

assessee.  Our judgment is confined strictly to the process  

impugned in the present case.  It is for this reason that the  

American  Courts  in  such  cases  have  evolved  a  new  test  to  

determine as to what constitutes manufacture.  They have laid  

down  the  test  which  states  that  if  a  process  renders  a  

commodity or article fit for use which otherwise is not fit,  

the  operation  falls  within  the  letter  and  spirit  of  

manufacture.  [See United States v. International Paint Co.  

reported in 35 C.C.P.A. 87, C.A.D. 76]         

12. Before  concluding,  we  may  once  again  refer  to  the  

judgment of this Court in Tata Consultancy Services (supra) in  

which as stated above, it has been held that there is no  

difference  between  a  sale  of  software  programme  on  a  CD/

Floppy and a sale of music on a CD/ Cassette.  Therefore, in  

our view, the judgment of this Court in the case of Gramophone  

Co. of India Ltd. v. Collector of Customs, Calcutta, 114 ELT  

770 would apply.  In that case, the question which arose for  

determination  was  whether  recording  of  audio  cassettes  on  

duplicating music system amounts to manufacture.  The answer  

was  in  the  affirmative.   It  was  held  that  a  blank  audio  

cassette is distinct and different from a pre-recorded audio  

cassette and the two have different use and name.  Applying  

that test to the facts of the present case, we hold that a  

blank CD is different and distinct from a pre-recorded CD.  In  

Gramophone Co. of India Ltd. (supra), it was held that an  

input/  raw-material  in  the  above  process  is  a  blank  audio  

cassette.  It was further held that recording of an audio  

cassette on duplicating music system amounts to manufacture  

because blank audio cassette is distinct and different from  

pre-recorded audio cassette and the two have different uses  

and names.  In our view, the High Court was right in coming to  

the conclusion that the judgment of this Court in Gramophone  

Co. of India Ltd. (supra) is squarely applicable to the facts  

of the present case.  We may add that in the case of Tata  

Consultancy Services (supra), as stated above, it has been  

held that a software programme may consist of commands which  

enable  the  computer  to  perform  designated  task,  but,  the  

moment  copies  are  made  and  marketed,  they  become  goods.  

Therefore, applying the above judgment to the facts of the  

present case, we are of the view that marketed copies are

goods and if they are goods then the process by which they  

become goods would certainly fall within the ambit of Section  

80IA(12)(b)  read  with  Section  33B  because  an  industrial  

undertaking  has  been  defined  in  Section  33B  to  cover  

manufacture or processing of goods.   

13. For the afore-stated reasons, we find no merit in the  

Civil Appeals filed by the Department, which are accordingly  

dismissed with no order as to costs.

………………………..J. (S. H. Kapadia)

………………………..J. (H.L. Dattu)

………………………..J.        (Surinder Singh Nijjar)

New Delhi;  January 13, 2010.