Vs. M/S. Mastek Ltd.  INSC 120 (10 February 2010)
APPELLATE JURISDICTION CIVIL APPEAL NO.1667 OF 2010 (Arising out of S.L.P. (C)
No.18545 of 2009) Commissioner of Income Tax, Ahmedabad ...Appellant(s) Versus
M/s. Mastek Limited ...Respondent(s) W I T H Civil Appeal No.1668 of 2010
(Arising out of S.L.P. (C) No.16713 of 2009)
O R D E R
learned advocates on both sides.
civil appeals are filed by the Department against the order dated 2nd
September, 2008, of the Gujarat High Court refusing to formulate, inter alia,
the following question of law:
the Income Tax Appellate Tribunal, in the facts and circumstances of this case,
was right in confirming the order passed by the Commissioner of Income Tax
(Appeals) deleting the additions made by the Assessing Officer on account of
lead matter, which is civil appeal arising out of S.L.P. (C) No.18545 of 2009,
the facts are as under:
carries on the business of development of Software Package and Packaged
Software Products divisible into four groups, namely, (i) Customized Software;
(ii) Packaged Software Products; (iii) Agency Products; and (iv) Exports.
lead matter, we are concerned with Assessment Year 1996-1997 and with the
Agency Products. In that year, assessee claimed deduction under Section 37 of
the Income Tax Act, 1961 [`Act', for short] in respect of royalty expenses of
Rs.3,23,28,158/-. The Assessing Officer held that, only one-sixth of the amount
was allowable in view of Section 35AB of the Act and, accordingly, after
allowing the benefit under Section 35AB of the Act, the Assessing Officer made
a disallowance of Rs.1,12,12,352/-, which was added back to the income of the
assessee. On appeal filed by the assessee, the Commissioner of Income Tax
(Appeals) deleted the additions made by the Assessing Officer, which view was
confirmed by the Income Tax Appellate Tribunal [`Tribunal', for short]
following it's earlier decision in the assessee's own case in I.T.A.
No.4968/1995 and others dated 25th November, 1999.
aggrieved by the decision of the Tribunal, the Department instituted Tax Appeal
No.606 of 2008 in the High Court which, as stated hereinabove, refused to
formulate the above proposed question, hence, these civil appeals.
the year under consideration, the assessee claimed that it had paid royalty as
Corporation Rs.27969750 Comshare Rs.2727591 LMB Rs.1639817 Rs.32328158 In
respect of the said payments, the assessee claimed deduction under Section 37
of the Act on the ground that the assessee had made the said payments towards
royalty for "duplicating" the software by the name `Ingres' in India
and supplying the same to the end-users. According to the assessee, the
ownership of the said software was retained by Ingres Corporation [which is an
American based Multi-National Company in United States]; that for each copy,
which stood duplicated and sold to the customers in India, the assessee had
paid royalty to the Corporation based on its sale value and, thus, such payment
towards royalty formed part of the expenditure incurred by the assessee in
making the sales.
us, it was argued on behalf of the assessee that the payment of royalty was for
duplicating the software `Ingres' in India and for supplying the same to the
end-users. In this connection, it was pointed out that there is a vital
difference between payment of consideration for acquisition of a software and payment
for acquisition of the right to use the said software. According to the
assessee, in the former case, the payment would constitute capital expenditure
whereas, in the latter case, it would constitute an expenditure under Section
37 of the Act.
outset, we may reiterate what we have stated earlier in so many judgements,
namely, that the Department has to analyse the process undertaken by the
assessee(s), analyse the contracts and the price structure to ascertain the
nature of payment Depending upon the analysis of the process of
"duplication" in the context of the contracts signed by the assessee
with the American Corporation, one has to find out whether the expense incurred
is a Revenue expenditure or a capital expenditure. Moreover, one cannot proceed
to decide such cases merely on the basis of the labels affixed to a given
process. In this case, the assessee contends that it makes payment to the
American Corporation in the United States for "duplicating" the
software. Before coming to the dictionary meaning of the word
"Duplication", we may state that `Ingres', according to the
Department, is a software which is a `Back-end System', which, in turn, is used
to develop other softwares therefrom depending on the needs of the customers.
In the present case, the customers of the assessee are Reliance Industries
Limited, Anand Bazar Patrika, Air India, etc. One more aspect needs to be
highlighted. The contract/arrangement between the assessee and the American
Corporation in this case consists of two parts, namely, commercial and
manufacture. From the said contract/ arrangement, it, prima facie, appears that
the above customers are given direct access to the software `Ingres' and,
according to the Department, this is one reason why royalty is shared between
the assessee and the American Corporation in the ratio of 60 : 40. According to
the Department, such high ratio itself suggests that the impugned payment is
not for "duplication", simpliciter.
to the Dictionary of Computer by W.R. Spencer, a "Database System"
[which is also called as `Database Management System'] is an integrated
software system that facilitates accessing, entering and deletion of data.
According to the Dictionary of Computer by Prentice Halls, `Database Management
System' is a collection of software programmes designed to manage and maintain
a collection of records [Database] by providing facilities for storing,
organizing 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 graphic processor dedicated
to painting images of a video display operates in response to commands passed
"back" 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 specialized task, such as providing rapid access to a database,
freeing the main processor for other work. Such function is called `Back-end'
because it is supporting to the computer's main function.
in mind the fact that none of the above- mentioned aspects has been considered
by the High Court, we are of the view that the High Court should have framed,
on the facts and circumstances of these cases, the following question of law
allowance of royalty expenses, as claimed by the assessee, are to be allowed in
its entirety under Section 37 of the Income Tax Act, 1961, or only one-sixth
thereof, as mandated by Section 35AB(1) of the Income Tax Act, 1961, are
allowable during the relevant Assessment Years?"
we hereby remit these cases to the High Court for answering the above question.
concluding, we may clarify that we have highlighted some technical and legal
aspects mentioned hereinabove only for the purpose of pointing out that
applicability of Section 37 vis-a-vis Section 35AB of the Act can be decided if
there is a proper factual foundation on those aspects. Our reasons, mentioned
above, should not be treated as conclusive. We are of the view that an in-depth
exercise needs to be carried out to understand the actual process undertaken by
the assessee to be examined in the light of the contract/arrangement with the
American Corporation [including the purchase order and the position of the
royalty shared by the assessee and the said Corporation].
we have not examined the case on merits. Our reasons given herein are only to
support this Order remanding the case to the High Court. We leave contentions
on both sides expressly open. If the High Court comes to the conclusion that
further foundational facts are required to be examined, it may remit the case
to the Authorities below, if it deems fit.
to what is stated above, civil appeals filed by the Department are allowed and
the matter stands remitted to the High Court for deciding the question framed
by us hereinabove.
as to costs.
February 10, 2010.