Commissioner of Income Tax v. Oracle Software India Ltd.
(2010) 2 SCC 677
In the Supreme Court of India
C.A. No. 235/2010
Before Justice S.H. Kapadia, Justice H.L. Dattu, and Justice S.S. Nijjar
Decided on January 13, 2010

Relevancy of the case: Whether copying a licensed software on to a CD falls under manufacturing process?

Statutes & Provisions Involved

• The Information Technology Act, 2000 (Section 72)
• The Income Tax Act, 1961 (Section 33B, 80-IA)
• The Copyright Act, 1957 (Section 14)

Relevant Facts of the Case

• The assessee is a subsidiary of Oracle Software Corporation in the United States of America. It was incorporated with the purpose of developing, designing, improving, producing, marketing, distributing, buying, selling and importing of computer software. The assessee is permitted to sub-license the software developed by Oracle Corporation.
• The assessee imports master copies of the software from the company. These are then duplicated on blank discs, packed and sold in the market along with the relevant brochures and information by way of a sublicense. They pay lump sum amount to Oracle Corporation for the import of the master copy and in addition, thereto it also pays royalty at 30% of the list price of the licensed product.
• The right which the assessee has is to duplicate the software. They do not have any right to diverge, amend or make value addition to the software embedded in the master media.
• The assessee asks for a deduction of tax. The process carried out in the business is questioned. It is required to establish the fact that the process carried out is “manufacture” in order to get the tax deducted according to Section 80-IA of the Income Tax Act.

Prominent Arguments by the Advocates

Counsels on behalf of the Appellant:

• The company uses machinery to convert blank CDs into recorded CDs which together with all the procedures become a software kit.
• In the present case, the blank CD is the raw-material. Master Media cannot be conveyed as it is.
• In order to sub-licence, a copy has to be made and it is the making of this copy which amounts to manufacture or processing of goods with respect to Section 80-IA of the Income Tax Act, 1961. Hence, the assessee is eligible to deduction of tax under that Section.

Counsels on behalf of the Respondent:

• In the process of copying, there is no element of manufacture or processing of goods.
• The software on the master media and the software on the recorded media remain unaffected. Therefore, there is no manufacture of goods.
• Since the software on the master media and the software on the pre-recorded media is the same, there is no manufacturing because the end product is not different from the original product.

Opinion of the bench

• The bench took into consideration the decision of the Supreme Court in Gramophone Co. of India Ltd. v. Collector of Customs wherein the Supreme Court considered the meaning of the word ‘manufacture’ as used in the Central Excise Act, 1944. This case was used by the bench to establish the fact that the conversion of a blank disc to a software loaded disc amounts to a manufacturing activity because a new commercial product enters the market which is a completely different product from the blank disc.

Final Decision

• The bench found no relevancy in Civil Appeals filed by the Department and so, dismissed with no order as to costs.

Personal Opinion

• I agree with the decision taken by the bench. It is precise as the process of converting blank CDs into recorded CDs can be considered a manufacturing activity. However, the definition of “manufacture” is not present in the Income Tax Act, 1961, but the definition is clearly mentioned in the Central Excise Act, 1944, as referred by the Supreme Court in the present case.