The Hindu Business Line : Bytes of relief

MANY of the incentive provisions in the Income-Tax Act 1961, are available only to industrial undertakings engaged in the manufacture or processing of articles/things. Relief for new industrial undertakings, backward area industries and so on, requires that the taxpayer should earn profits from an industrial undertaking engaged in the manufacture/processing of articles/things. In this context, can computer documentation services be considered manufacture/processing?

It can be argued that computers are only office appliances and there can be no question of considering data processing as manufacture.

But recent judgments indicate that courts are moving with the times and are inclined to take a positive view about the nature of data processing through computers.

This requires a clear understanding of what manufacture means. The Permanent Edition of Words and Phrases (Volume 26 Page 795) describes manufacture thus:

"`Manufacture' implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."

Is a computer engaged in manufacture? In CIT vs Shaw Wallace & Co Ltd (201 ITR 17), the Calcutta High Court observed:

"In our view, having regard to the nature and function of the computer and the data processing system, it cannot be said that they are office appliances. An industrial company is a company engaged in the manufacture or processing of goods. Data processing means the converting of raw data to machine-readable form and its subsequent processing (as storing, updating, and combining, rearranging or printing out) by a computer.

"`Computer' means one that computes; specifically a programmable electronic device that can store, retrieve and process data. There cannot be any doubt that raw data cannot be equated with the result derived. It is different in form and substance. We are, therefore, of the view that the computer division is an industrial undertaking which satisfies the condition mentioned in Section 32A (2)(b)(iii) of the Income-Tax Act, 1961."

The Supreme Court had always made a distinction between `processing' and `manufacture' and held that where the commodity continues to possess its original identity, such processing will not amount to manufacture. That ruling was rendered in the context of a sale tax case concerning the canning of pineapple slices and putting the same in sealed cans. The popular concept is that there must be production of a new or a different article or the process must be such as converts one kind of article into another.

Applying these tests, the Gauhati High Court had denied relief under Sections 80 HH and 80 I in respect of hospitals and nursing homes. That was in the CIT vs Down Town Hospital Ltd (251 ITR 683) case.

The court even refused to remit the case for further examination by the Tribunal on the ground that the new Section 260A is confined only to substantial question of law and will not permit such remand. However, it was gracious enough to permit that the hospital may adduce materials in subsequent years to indicate manufacture or production of any article or thing.

The Gauhati High Court has now considered whether data processing through computers will amount to manufacture. In CIT vs Technotive Eastern (P) Ltd (255 ITR 253), the court decided the issue in favour of the company holding that it was entitled to deduction under Sections 80HH and 80 I on income earned through computer documentation services.

The court chose to fall in line with the above-mentioned Calcutta High Court ruling on claim under Section 32 A.

The Gauhati High Court's order made a welcome departure from established canons of interpretation. In the Technico Enterprises (P) Ltd (206 ITR 36) case, the Calcutta High Court held that no additional depreciation is admissible on computers installed in office premises for being used for accounting purposes and maintenance of record.

There are also the Bombay High Court decisions in two cases concerning the IBM World Trade Corporation (130 ITR 739 and 161 ITR 673).

But those judgments related to a claim for development rebate under the now defunct Section 33. The Gauhati High Court's ruling related to claims under Sections 80 HH and 80 I and concerned computer documentation service.

A welcome judgment to the many in computer documentation services.

The court incidentally referred to its earlier judgments in Down Town Hospital Ltd (supra), pointing out that it had discussed in detail what manufacture is.

One wonders how the same High Court, while being liberal in extending benefits to computer documentation services resorted to a strict interpretation vis-à-vis big hospitals engaged in life-saving services at enormous cost.

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