[CIT v. Oracle Software India Ltd., (2010) 320 ITR 546 (SC)]
The assessee, a 100% subsidiary of Oracle Corporation, USA,
was incorporated with the object of developing designing, improving, producing,
marketing, distributing, buying, selling and importing of computer software. The
assessee was entitled to sub-licence the software development by Oracle
Corporation, USA. The assessee imported master media of the software from Oracle
Corporation, USA which it duplicated on blank discs, packed and sold in the
market along with relevant brochures. The assessee made a payment a lump-sum
amount to Oracle Corporation, USA for the import of master media. In addition
thereto, the assessee also had to pay royalty at the rate of 30% of the price of
the licensed product. The only right which the assessee had was to replicate or
duplicate the software. It did not have any right to vary, amend or make value
addition to the software embedded in the master media. According to the assessee,
it used machinery to convert blank CDs into recorded CDs which along with other
processes became a software kit. According to the assessee, the blank CD
constituted raw materials. According to the assessee, the master media could not
be conveyed as it is. In order to sub-licence, a copy thereof had to be made and
it was the making of this copy which constituted manufacture or processing of
goods in terms of S. 80-IA and consequently the assessee was entitled to
deduction under that Section. On the other hand, according to the Department, in
the process of copying, there was 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 remained unchanged, there was no manufacture
or processing of goods involved in the activity of the copy or duplicating,
hence, the assessee was not entitled to deduction u/s.80-IA. According to the
Department, when the master media was made from what was lodged into the
computer, it was a clone of the software in the computer and if one compared the
contents of the master media with what was there in the computer/data bank,
there was no difference, hence, according to the Department, there was no change
in the use, character or name of the CDs even after the impugned process was
undertaken by the assessee.
The Supreme Court observed that duplication could certainly
take place at home, however, one should draw a line between duplication done at
home and commercial duplication. Even a pirated copy of a CD was a duplication,
but that did not mean that commercial duplication as it was undertaken in the
instant case should be compared with home duplication which may result in
pirated copy of a CD.
The Supreme Court held that from the details of Oracle
applications, it found that the software on the master media was an application
software. It was not an operating software. It was not a system software. It
could be categorised into product line applications, application solutions and
industry applications. A commercial duplication process involved four steps. For
the said process of commercial duplication, one required 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 was 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 was
inserted in a machine which was called the CD Blaster and a virtual image of the
software in the master media was thereafter created in its internal storage
device. This virtual image was utilised to replicate the software on the
recordable media.
According to the Supreme Court, if one examined the above
process in the light of the details given hereinabove, commercial duplication
could not be compared to home duplication. Complex technical nuances were
required to be kept in mind while deciding issues of the above nature. The
Supreme Court held that 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, the
Supreme Court was of the view that, in the instant case, the assessee had
undertaken an operation which rendered a blank CD fit for use which it was
otherwise not fit. The blank CD was an input. By the duplicating process
undertaken by the assessee, the recordable media which was unfit for any
specific use got converted into the programme which was embedded in the master
media and, thus, the blank CD got converted into recorded CD by the aforestated
intricate process. The duplicating process changed 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, constituted a manufacture in terms of S.
80-IA(12)(b) read with S. 33B of the Income-tax Act.
