COMMISSIONER OF INCOME TAX-V, NEW DELHIversusM/S. ORACLE SOFTWARE INDIA LTD.

                     [2010) 1 S.C.R. 543

    COMMISSIONER OF INCOME TAX-V, NEW DELHI                       A
                              v.
          MIS. ORACLE SOFTWARE INDIA LTD.
              (Civil Appeal No. 235 of 2010)
                     JANUARY 13, 2010
                                                                  B
  [S.H. KAPADIA, H.L. DATIU AND SURINDER SINGH
                     NIJJAR, JJ.]

     Income Tax Act, 1961: s.801A(1) r.w. s.801A(12)(b):
 Transformation of blank Compact Disc (CD) into software          C
loaded disc - Held: Amounts to manufacture/processing of
goods in terms of s.801A(1) r.w. s.801A(12)(b) - Blank CD is
an input- By duplicating process, the reco_rdable media which
is unfit for any specific use gets converted into the programme
which is embedded in the Master Media and, thus, blank CD         D
gets converted into recorded CD by this intricate process -
Duplicating process cfianges the basic character of a blank
CD, dedicating it to a specific use - Therefore, processing of
blank CDs constitutes manufacture in terms of s.801A(12)(b)
r.w. s.33B of the Act.                                            E
     The question which arose for consideration in these
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 801A(1) read with Section 801A(12)(b),        F
as it stood then, of the Income Tax Act, 1961.

    Dismissing the appeals, the Court

    HELD: 1. A blank CD is different and distinct from a          G
pre-recorded CD. 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 801A(12)(b)
read with Section 338 because an industrial undertaking
                             543                                  H
    544    SUPREME COURT REPORTS               [2010] 1 S.C.R.


A. has been defined in Section 33B to cover manufacture
   or processing of goods. [Para 12] [554-B-C]

        Gramophone Co. of India Ltd. v. Collector of Customs,
    Calcutta 114 ELT 770, relied on.
B         2.1. The details of Oracle Applications show that the
    software on the Master Media is an application software.
    It is not an operating software or a system software. It can
    be categorized into Product Line Applications,
    Application Solutions and Industry Applications. A
C   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
D   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.
E   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
F   software on the recordable media. [Para 8] [550-C-D]

      2.2. Virtual image 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. The
G examination of the process shows that commercial
  duplication cannot be compared to home duplication.
  Complex technical nuances are required to be kept in
  mind while deciding such issues. The term
  "manufacture" implies a change, but, every change is not
H
  COMMR .OF INCOME TAX-V, NEW DELHI v. MIS.               545
       ORACLE SOFTWARE INDIA LTD.
a manufacture, despite the fact that every change in an A
article is the result of a treatment of labour and
manipulation. 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 said test to the B
facts of 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 a:;sessee,
the recordable media which is unfit for any specific use c
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 D
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 801A(12)(b) read with Section 338 of the
_Income Tax Act. (Paras 9 and 10) (550-E; 551-D-G]
                                                                 E
    Tata Consultancy SeNices v. State of Andhra Prad(!!sh
137 STC 620, relied on.

    Microsoft Computer Dictionary, Fifth Edition, referred to.

    2.3. The intelligence/logic (contents) of a programme F
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 G
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. [Para 11) (552-G-H; 553-A-B]                     ' H
    546      SUPREME COURT REPORTS                [2010] 1 S.C.R.


A         United States v. International Paint Co. 35 C.C.P.A. 87,
    C.A.D. 76, referred to.

                          Case Law Reference:
          137 STC 620             relied on             Para 11
B
          35 C.C.P.A. 87, C.A.D. 76 referred to         Para 11
          114 ELT 770             relied on             Para 12
         CIVIL APPELLATE JURISDICTION: Civil Appeal No. 235
c   of 2010.

        From the Judgment & Order dated 09.05.2007 of the High
    Court of Delhi at New Delhi in ITA No. 811 of 2006.

                                WITH
D
    C.A. Nos. 238 & 239 of 2010.

         Bishwajit Bhattacharya, ASG, Arijit Prasad, Rahul Kaushik,
    B.V. Balaram Das for the Appellant.

E        M.S. Syali, Mahua Kalra, Jagjit Singh Chhabra, Shekhar
    Prit Jha, Pratyush Jain, Maryam Sharma, Mohan Pandey for
    the Respondent.

          The Judgment of the Court was delivered by
F         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
G constitutes "manufacture or processing of goods" in terms of
  Section 801A(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
H mentioned in Civil Appeal @ SLP (C) No. 6847 of 2008. In
  COMMR .OF INCOME TAX-V, NEW DELHI v. M/S. 547
 ORACLE SOFTWARE INDIA LTD. [S.H. KAPADIA, J.]

this appeal, we are concerned with the Assessment Years             A
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     8
 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.       C
 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        D
 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              E
 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        F
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         G
goods involved in the activity of copying or duplicating, hence,
the assessee was not entitled to deduction under Section 801A
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        H
    548         SUPREME COURT REPORTS                [2010] 1 S.C.R.


A 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.
B
         5. Before answering the controversy, we need to
    reproduce relevant provisions of Sections 801A(1), 801A(12)(b)
    as also Explanation to Section 338 of the Income Tax Act in
    the following terms:

c         "BOIA - 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
D         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
E
          specified in sub-section (5) and for such number of
          assessment years as is specified in sub-section (6).

          *** *** **

F         (12) For the purposes of this section, -

          (a)    *** ***

          (b) "industrial undertaking" shall have the meaning assigned
          to it in the Explanation to Section 338;"
G
          Explanation to Section 338

          "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
H
   COMMR .OF INCOME TAX-V, NEW DELHI v. MIS. 549
  ORACLE SOFTWARE INDIA LTD. [S.H. KAPADIA, J.]

      of power or in the construction of ships or in the              A
      manufacture or processing of goods or in mining."

       6. Section 801A 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        8
 any business of an industrial undertaking to which Section 801A
 applies, there shall in accordance with and subject to the
 provisions of Section 801A, 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          C
 number of assessment years as specified in Section 801A. 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 801A(12)(b) is given the same
 meaning as is assigned to that expression vide Explanation to        D
 Section 338. As can be seen from the Explanation to Section
 338, an industrial undertaking inter alia has been defined· to
 mean any undertaking which is engaged inter alia in the
 manufacture or processing of goods.
                                                                      E
      7. At the outset, we may state that Section 801A 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 F
 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 G
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 H
     550    SUPREME COURT REPORTS                (2010] 1 S.C.R.


A assessee. Duplication can certainly take place at home,
  however, one needs to draw a line between duplication done
  at home and c;:ommercial 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
B 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 801A of the Income Tax Act,
  1961. At this stage, we may clarify that in this case we are
c 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
D 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
E 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
F 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
G virtual image is utilized to replicate the software on the
   recordable media.

         9. Wllat 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
 H
  COMMR .OF INCOME TAX-V, NEW DELHI v. MIS. 551
 ORACLE SOFTWARE INDIA LTD. [S.H. KAPADIA, J.]
portions of the image into view. [See Microsoft Computer                  A
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,                  B
77 of Microsoft Computer Dictionary, Fifth 'Ed~tion]

       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               D
 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              E
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                 F
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              G
to a specific use, constitutes a manufacture in terms of Section
801A(12)(b) read with Section 338 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
                                                                          H
    552     SUPREME COURT REPORTS                  [2010] 1 S.C.R.


A 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
B 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
c  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,
D 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
E 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.
F 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
G 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
H
  COMMR .OF INCOME TAX-V, NEW DELHI v. MIS. 553
 ORACLE SOFTWARE INDIA LTD. [S.H. KAPADIA, J.]
confusion, particularly, in modern times when technology grows           A
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.        e
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   c
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 re{er to the
 judgment of this Court in Tata Consultancy Services (supra)
 in which as stated above, it has been held that there is no D
 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 E
 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 F
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 inpuU 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 G
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 judgmentof this
Court in Gramophone Co. of India Ltd. (supra) is squarely H
    554     SUPREME COURT REPORTS                 [2010) 1 S.C.R.


A 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
B 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 801A(12)(b) read with Section 338
C because an industrial undertaking has been defined in Section
  338 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.
D
    D.G.                                     Appeals disimissed.