Section 80-IB – Assessee engaged in development of Geographical Information System software, claimed deduction u/s. 80IB –AO and CIT(A) denied deduction u/s. 80IB holding that the assessee was not engaged in the manufacture or production of any article– Tribunal held that the software came into existence after carrying on several processes and was transferred only on completion of the said processes. When transfer of property is an ongoing process at each stage of work, then it will amount to p<

Section 80-IB – Assessee engaged in development of Geographical Information System software, claimed deduction u/s. 80IB –AO and CIT(A) denied deduction u/s. 80IB holding that the assessee was not engaged in the manufacture or production of any article– Tribunal held that the software came into existence after carrying on several processes and was transferred only on completion of the said processes. When transfer of property is an ongoing process at each stage of work, then it will amount to provision for services. The fact that software is produced on a platform not owned by the assessee is irrelevant, when what is being transferred by the assessee is not the platform but the end product and hence assessee was held eligible for deduction u/s. 80-IB.

The assessee was engaged in the business of development of Geographical Information System (GIS) software for municipality. And it was undisputed fact that the assessee was engaged in the business of development of customised software on job work basis. The process of development of GIS software involved collection of maps in paper form from municipality. The maps were then digitised by the assessee and also demographic features, geographical features and other infrastructure available in particular areas were incorporated. The maps so prepared were then integrated into software solution to attach further attribute, information and to provide reports and analytical options to the municipalities. The assessee had claimed deduction u/s 80-IB in respect of his business income.

The Assessing Officer had disallowed claim of deduction u/s. 80-IB on the ground that the customised software developed by the assessee was not manufacture of articles or things. The CIT (A) had upheld the order of the Assessing Officer. The Tribunal, relying on decision of Supreme Court in case of CIT vs. Oracle Software India Ltd., (2010) 320 ITR 546, had held that if a process renders a software usable for which it is otherwise not fit then the said process can be termed as manufacture. However, Tribunal was also of the opinion that if one party engages another party to create an item of property that the first party will own from the moment of its creation, then no property will have been acquired by the first party from the other and the transaction should be characterised as the provision of services. However, in case of customised software when the originally developed software is owned by the developer and not by the receiver of such software prior to its transmission then the consideration paid by the receiver is towards the software and not towards the intellectual skills employed by the software developer and in such cases the developer can be held as engaged in manufacture of a customised software and thereby be entitled to deduction u/s. 80IB. Hence Tribunal remitted the matter to the Assessing Officer to show the point of time at which the client of the assessee acquired property in the software, developed by the assessee.

The Assessing Officer, in remand proceedings, expressed the view that since basic area maps were the material on the basis of which the software was developed, and since basic area maps always belonged to the client, it was a case of provision of services. The Commissioner (Appeals) also confirmed the view of the Assessing Officer. Aggrieved, the assessee filed appeal before Tribunal again.

Held:

On demonstration of this software in court, it was noticed that what was produced by the assessee was not a mere compilation of map simplictitor but a much value added product that produced a variety of information which was big help in efficient administration of the municipal work.

The software, came into existence after carrying on several processes, and it was only on completion of these processes, the property in the product could be transferred to the client and the mere fact that one of the inputs was owned by the client itself, did not mean that the property in the product never belonged to the assessee. The transfer of property was therefore not an ongoing process at each stage of work as it is in the case of a provision of services and therefore assessee was held eligible for deduction u/s. 80-IB.

The Tribunal also held that, though the basic inputs (area maps) were given by the client, i.e. the municipality itself, but the product was much more than the compilation of the input and the fact that was being produced, was on a platform (basic inputs) not owned by the assessee, was irrelevant, inasmuch as what was being transferred by the assessee was not the platform but the end product.