CIT v. Mastek Ltd.
In the Supreme Court of India
Civil Appeals 1667-1668/2010
Before Justice SH Kapadia and Justice Aftab Alam
Decided on February 10, 2010
Relevancy of the case: Definition of various phrases related to computer, its functions, and its operations.
Statutes & Provisions Involved
- The Income Tax Act, 1961 (Section 37, 35-AB)
Relevant Facts of the Case
- Appeals are filed against the order dated 2-9-2008 of the Gujarat High Court refusing to formulate, inter alia, the following question of law: Whether the Income Tax Appellate Tribunal was right in confirming the order passed by the Commissioner of Income Tax, deleting the additions made by the assessing officer because of royalty expenses?
- Assessee carries on the business of development of Software package and packaged software products.
- The assessee claimed deduction under Section 37 of Income Tax Act, 1961, in respect of royalty expenses. Assessing officer held that only one-sixth of the amount was allowable in view of Section 35-AB and acted accordingly.
- In respect of the said payments, the assessee had made the said payments towards royalty for duplicating the software in India and supplying the same to the end-users. According to the assessee, the ownership of the said software was retained by American Company while it was duplicated and sold to the customers in India.
Opinion of the Bench
- The court considered the following definitions of various computer related terms:
- According to the Dictionary of Computer by W.R. Spencer, “database system” is an integrated software system that facilitates accessing, entering and deletion of data.
- According to the Dictionary of Computer by Prentice Hall, “database management system is a collection of software programmes designed to manage and maintain a collection of records (database) by providing facilities for storing, organising and retrieving related information, as and when required.
- According to the same dictionary, “duplicating” is a process of copying from a source data medium to a destination data medium. Which has the same physical form: for example, to copy a file from one magnetic tape to another magnetic tape is duplication.
- According to Microsoft’s Computer Dictionary, a “back-end processor” is a processor that manipulates data sent to it from another processor: for example, a high-speed graphics processor dedicated to painting images of a video display operates in response to commands passed “hack” to it by the main processor.
- According to the same dictionary, the part of a compiler that transforms the source code into object code is called back-end.
- A back-end processor is a slave processor that performs a specialised task such as providing rapid access to a database, freeing the main processor for other work. Such a function is called “back-end” because it is supporting to the computer’s main function.
- The Court was of the view that the High Court should have framed the following question of law for determination: “Whether allowance of royalty expenses, as claimed by the assessee is to be allowed in its entirety under Section 37 of the Income Tax Act. 1961, or only one-sixth thereof, as mandated by Section 35-AB of the Income Tax Act, 1961?”
- Subject to what is stated above, the civil appeals filed by the Department are allowed and the matter stands remitted to the High Court for deciding the question framed by Supreme Court hereinabove.