THE HON’BLE THE CHIEF JUSTICE SHRI MADAN B. LOKUR
AND HON’BLE SRI JUSTICE SANJAY KUMAR
ITTA No.42 of 1999
The Commissioner of Income Tax, A.P.-I,Hyderabad
M/s. Ajay Automation (P) Ltd., Hyderabad
COUNSEL FOR PETITIONER: Shri S.R. Ashok, Senior Standing
Counsel for Income Tax
COUNSEL FOR RESPONDENT: –
JUDGMENT: (per the Hon’ble the Chief Justice Shri Madan B. Lokur)
This appeal under Section 260A of the Income Tax Act, 1961 (for short,
‘the Act’) has been admitted on the following two substantial questions of law:-
1. “Whether the Appellate Tribunal is justified in holding that development of
software amounts to manufacture of an article or goods and the export of such
goods secure the benefit of deduction to the assessee u/s.80HHC of the I.T. Act
2. Whether the Appellate Tribunal is justified in not holding that insertion of
Sec. 80HHE of the I.T. Act w.e.f. 1.4.1991 providing for grant of deduction on
software development only w.e.f. 1.4.1991 militates against grant of such
deduction u/s.80HHC for the anterior period ?”
3. The assessee carries on the business of developing computer software. For
the relevant assessment year 1989-90, it claimed a deduction to the extent of
Rs.21.55 crores under Section 80HHC of the Act.
4. The assessing officer accepted the claim made by the assessee, but the
Commissioner of Income Tax, exercising powers under Section 263 of the Act,
revised the order of the assessing officer on the ground that computer software
recorded on magnetic tapes cannot be considered as “goods” for the purposes of
Section 80HHC of the Act. The Commissioner also took note of the fact that
Section 80HHE was introduced in the Income Tax Act with effect from 1.4.1991 and
that Section specifically intended to cover exports of computer software.
5. The Commissioner was, therefore, of the view that first of all computer
software recorded on magnetic tapes was not “goods” within the meaning of
Section 80HHC of the Act and in any event, in view of the introduction of
Section 80HHE in the Act, the view that he had taken that computer software
recorded in magnetic tapes was not covered under Section 80HHC of the Act was
fortified. Accordingly, the order of the assessing officer was set aside.
6. Feeling aggrieved, the assessee preferred an appeal before the Income Tax
Appellate Tribunal (for short, ‘the Tribunal’) and the appeal was allowed. This
has led to the filing of the present appeal under Section 260A of the Act.
7. For the sake of convenience, Section 80HHC(1) of the Act, which is
relevant, is extracted below:-
“80HHC (1). Where an assessee, being an Indian company or a person (other
than a company) resident in India, is engaged in the business of export out of
India of any goods or merchandise to which this Section applies, 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 to the extent of
profits, referred to in sub-section (1B), derived by the assessee from the
export of such goods or merchandise:
Provided that … … …”
8. The first question that arises in this regard is whether the computer
software recorded on magnetic tapes is goods or not?
9. Learned counsel for the Revenue very frankly states that in view of the
decision of the Supreme Court in Tata Consultancy Services v. State of A.P.1 ,
it must now be held that computer software, if it is recorded on magnetic tapes
or otherwise and is marketable, it becomes “goods” susceptible to sales tax.
Learned Counsel for the Revenue also frankly states that in view of the decision
of the Supreme Court in Bharat Sanchar Nigam Ltd. V. Union of India2, the
question is no longer res integra. It is submitted that marketable computer
software is goods because of its utility, capability of being bought and sold
and its capability of being transmitted, transferred, delivered, stored and
10. On a reading of the aforesaid two judgments of the Supreme Court, it is
frankly stated by learned counsel for the Revenue that marketable computer
software has the attributes of goods for the purposes of Sales Tax and also for
the purposes of the Income Tax Act, particularly Section 80HHC thereof.
11. This view has also been taken by the Madras High Court in Commissioner of
Income Tax v. Superstar Music and another3.
12. We see no error in the concession given by learned counsel for the Revenue
inasmuch as it is quite clear that for the purposes of Section 80HHC (1) of the
Act, computer software recorded on magnetic tapes or floppies, discs or CDs
etc., would amount to goods or merchandise.
13. Under these circumstances, the first substantial question of law raised in
this appeal must be answered in the affirmative, in favour of the assessee and
against the Revenue.
14. Insofar as the insertion of Section 80HHE of the Act is concerned, the
relevant provision is Section 80HHE(1), which reads as follows:-
80HHE. (1) Where an assessee, being an Indian company or a person (other than a
company) resident in India, is engaged in the business of ,–
(i) export out of India of computer software or its transmission from India to a
place outside India by any means;
(ii) providing technical services outside India in connection with the
development or production of computer software,
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 to the
extent of the profits, referred to in sub-section (1B), derived by the assessee
from such business:
Provided that … … …”
15. It is quite clear that on a comparison of the provisions of Section 80HHC
(1) and Section 80HHE (1) of the Act, there is no substantial or material
16. At this stage, it is necessary to note that a similar provision was
introduced in the Income Tax Act with regard to export or transfer of film
software under Section 80HHF of the Act. While interpreting Section 80HHF, the
Madras High Court relied upon an earlier decision of the Bombay High Court in
Abdulgafar A. Nadiadwala v. Assistant Commissioner of Income Tax4 and held that
despite a specific provision having been introduced in the Income Tax Act
(Section 80HHF) for the purposes of export or transfer of film software, that
did not exclude the provisions of Section 80HHC of the Act prior to the
introduction of Section 80HHF. All that transpired was that so far as the
assessee is concerned, it could specifically claim a deduction under Section
80HHF of the Act instead of having to fall back on the general provision of
Section 80HHC thereof.
17. In our opinion, this rationale would apply to the interpretation of
Section 80HHE of the Act. Merely because Section 80HHE specifically deals with
the export of computer software with effect from 1.4.1991, it does not mean that
the operation of Section 80HHC of the Act is excluded prior to 1.4.1991. The
provisions of Section 80HHC(1) are more general in nature while Section 80HHE(1)
of the Act are more specific, but since the latter provisions operate with
effect from 1.4.1991 the provisions of the former would continue to operate
18. As mentioned above, we are concerned with the assessment year 1989-90.
Since the assessment year we are concerned with is prior to introduction of
Section 80HHE of the Act, we are of the opinion that the Tribunal was right in
coming to the conclusion that the assessee was entitled to the benefit of
Section 80HHC of the Act for the purposes of claiming a deduction for export of
19. Under the circumstances, the second substantial question of law is also
answered in the affirmative, in favour of the assessee and against the Revenue.
20. The appeal is disposed of on the above terms.
MADAN B. LOKUR, CJ
SANJAY KUMAR, J