1. This is an appeal filed by the assessee, directed against the order of the CIT (Appeals) III, Hyderabad, dated 22-2-2002, for asst year 1998-99. Brief facts of the case are as follows.
2. The assessee is a private limited company engaged in the business of market research and consultancy. For the asst. year 1998-99, the assessee filed return of income declaring business income at Rs. 3.62 lakhs and taxable Income of Rs. 11.6 lakhs under Section 115JA of the Income-tax Act, 1961. While arriving at the figure of Rs. 3.62 lakhs, the assessee claimed deduction under Section 80-O amounting to Rs. 19,18,836 and deduction under Section 80IA amounting to Rs. 9,77,533.
The Assessing Officer did not allow the claim of deduction under Section 80IA and Section 80-O. On appeal, the first appellate authority concurred with the findings of the AO as far as denial of exemption under Section 80IA was concerned. Further aggrieved, the assessee is in appeal on the following grounds: 1. The order of the Assessing Officer and the CIT (A) is contrary to law, facts and circumstances of the case.
2. The Assessing Officer erred in not allowing the claim of the assessee for deduction Under Section 80IA of the Income-tax Act.
3. The CIT (A) erred In confirming the findings of the Assessing Officer with respect to not allowing the claim of deduction Under Section 80 IA of the Income-tax Act.
4. Any other ground which the appellant may urge at the time of hearing.
3. The learned Counsel for the assessee submitted that the main business as per the objects of the company is to any on data processing, marketing research, consultancy, promotion in the field of marketing, management, distribution management, sales and other related fields. The various types of research handled by the assessee company inter alia include quantitative research, qualitative research, International research, Special Product Tracking Study, Desk research, syndicated research. The company also handles various data collection techniques such as face-to-face interviews, central location Test, Focus Group Discussions, In-depth Interviews and continuous research.
4. The learned Counsel submitted that in the Various types of activities mentioned above the role of EDP is very crucial. The filled up questionnaires from the field are coded, tabulated and punched in the computers and data tables are generated accordingly. However the final generation of the output is basically dependent on the various specialized software which the company uses. The company apart from standard software programme like FoxPro etc., also uses custom made software like - X-Cross Tabulation ( which is specially developed for the company ), - Quanvert (which is a survey analysis package specially for research Investigation), --SPSS, developed in USA for comprehensive advanced and flexible Statistical analysis, He thus submitted that the functioning of the company is not the routine data collection but specialized and sophisticated tools and research. The activity of the company is to be considered as industrial activity and can be classified as industrial undertaking or company, involved in the manufacture or production or processing. As such the company is entitled to claim deduction Under Section 80 IA of the Income Tax Act. He invited the attention of the Bench to Section 80 IA of the Income Tax, Act, under which the assessee has made a claim. The relevant provisions referred to by him are Sub-section (1) of Section 80IA read with Sub-section (2) Clauses (iii) and (iv)(a), and read with Sub-section (5) Clause (i)(a) and proviso thereto, and read with Sub-section (6) Clause (ii).
5. The learned Counsel for the assessee further submitted that in a computer system or a data processing system, the inputs which are fed are entirely different, in a different form with different indicators.
The end products, which may be Balance sheets, Statements, analysis etc., which emerge by way of printouts, are distinct and different from the inputs inasmuch as they come out as different connotation and use.
Thus, according to him, the activity of date processing through the use of computers is one, which would amount to business of manufacture or production of articles or things and the unit, which undertakes such computer services from other concerns Would be an Industrial undertaking. This being the case, he submitted, the reports, analysis and other data processed and generated by the Assessee would come within the expression "article" or "thing" which is capable of a very wide meaning and accordingly would be entitled to deduction Under Section 80 IA. He relied on the following case laws:CIT v. IBM World Trade Corporation 5. CIT v. Peerless Consultancy Services Private Limited 186 ITR 609 (Cal) 7. CIT v. Computerized Accounting and Management Services Private Limited 235 ITR 502 (Kerala) 9. CIT v. Peerless Consultancy Services Private Limited 248 ITR 178 (SC)CIT v. Vinay Kumar Sigtia 13. CIT v. Professional Information Systems & Management 274 ITR 242 (Guj) 14. Datamatix Financial Services Limited v. JCIT (Spl.rg. 25) 95 ITD 23 (Mum) 6. He also gave a brief note on the activities and business of the company as follows: The Company's activities involve Market Research/Market Information field of business operations which cover and provide market insights, researched information, and analysis to clients in various industries and sectors like multi-national companies, FMCG companies, consumer durables industry, information technology industry, media organizations, pharmaceutical, telecommunications, healthcare, automotive and social organizations.
The activities of the company are broadly split into the following functional areas: Project understanding, design and development of the market research scope covered by the project assigned to the company by clients.
Data processing and analysis using sophisticated computers & proprietary software coupled with proprietary business solutions and dedicated tools to enable an effective insight into the results of the study for reporting and presentation to the client.
- Quantitative and qualitative criteria are integrated to form the basis for the result of the study to enable the client to get an exhaustive set of information, analysis etc to take a well informed, well-planned business strategy.
- Report preparation carried out by highly qualified and skilled professionals.
- Submission of findings, analysis and opinion and future course of action based on the findings.
a. Once a study has been commissioned by the client to the company, there is extensive set-up work that is required based on the specific need of the clients to ascertain the modalities that need to be fulfilled for the study, the setting up of the parameters for the study, the ascertaining of the sample sizes, the locations that need to be covered and the socio-economic sections of the society that the company needs to address, the design of the questionnaire which is different in content and style for each study, the data collection methodology, the locations where the study could represent the sample as whole for the desired result and the manpower resources and sophisticated software tools that would need to be put to use to render the best result. This part of any project is carried out by highly qualified professionals who are management and marketing professionals having expertise in the designing of the study.
b. The sample size, questionnaire, budgets, collection methodology and the resources being finalized, the field team that will actually engage in data collection activity are briefed on all aspects of each job and how the assignment needs to be carried out. After the briefing, the field team moves into the pre-decided locations and carry out the data collection that presently is handled out of almost 25 to 30 locations in the country. The data collection is an extensive exercise, which is again supported by two to three levels of data back-check to ensure that the data collected has been accurately done and also to check whether the understanding of the respondents on the information sought has been recorded accurately.
This is one of the production departments of the company where the primary production of data begins.
c. The data thus collected in the form of questionnaires is sent to the data entry teams situated at various locations to enter the data that has been collected in predetermined formats into sophisticated computers and data processors. This will allow the data to be processed on the company's proprietary software systems and methodologies. Post-data entry, this data in the structured format is sent to the data analysis team who handle the data processing and analysis on the various softwares that are tuned to cater to the needs of the client's information needs. Each project needs to be handled differently at this stage of data analysis since the needs of the clients are diverse and hence need software processing to be customized to render the specific results that may be needed on each project. This area of analyzing based on the proprietary methodologies and software of the company is the vital ingredient in the delivering of a well-informed study. Faulty processing and analysis of data at this stage can result in the results being wrongly interpreted and hence suitably qualified and trained technical staff with a strong grounding In research are employed in this critical area so as to ensure that data processing inconsistencies resulting in wrong interpretations of data are cleaned out and only relevant and formatted information trends are sent for advanced analysis. This section of activity is the quality control area in the process. This is another production department of the company, which actually ensures that the processing done is checked, analyzed using software tools and then quality-checked for final clearance of output.
d. The analysis thus turned out by the department is sent to the research analysts who further analyze the data processed with specialized software and check for inconsistencies vis-a-vis the defined requirements for the project assigned by the client.
Feedback from the data processing and analysis team is obtained on the parameters adopted for processing the data so as to have a double-check on the processing parameters adopted to cater to the client's specific needs.
e. Once the data has been through the quantitative and qualitative checks and analytical scrutiny, dedicated research managers can effectively interpret the data and its analysis to the client by preparing a detailed report on the study that would cover the specific requirements of the market information required by the client and also specific insights into the project. This is the stage that a substantial value addition is rendered since the essence of the data and analysts goes into the processing of a document that meets the client requirements fully.
f. These findings are presented to the client. A senior manager of the company also uses extracts from the analyzed data in the reports, which are also supported by a presentation to the clients.
The process of market research done by the company uses many proprietary and other software which support dedicated and proprietary methodologies used in the formulation/processing of a market research report.
Some of the proprietary methodologies and softwares as well as research software that are used in the company for data and research analysis etc are as follows: 1. STOCHASTIC REACTION MONITOR/ MARKETMIND/MARKETWHYS: This is a brand and advertising tracking system that goes beyond basic awareness measures to understand the real impact of marketing activities. In fact this could also be called brand development monitors that help in brand tracking projects. This system helps in understanding the effects and impact of both the media and creative parts on the brand. It also helps in client understanding how advertising works to retain existing and acquire new customers.
2. ADEVAL/ADD+IMPACT : This is an advertising pre-testing system which evaluates an advertisement's performance using unique and powerful diagnostics, to show how advertising can be optimized. This system also helps in rectifying an advertisement that could otherwise fail in the marketplace.
3. MIRIAD: This is one of the most advanced data integration, analysis and delivery tool for all types of research studies. This software tool is custom-built to each specification as assists in decision-making at both strategic and tactical levels.
4. NEEDSCOPE/IMPSYS SYSTEM: This is a system for measuring consumer needs and motivations, which uses a proven psychological framework to uncover the fundamental elements linking successful brands and their consumers. This system identifies profitable consumer need segments so that clients can manage global brand portfolios, prevent other brands cannibalizing an existing range and identify new brand opportunities.
5. CONVERSION MODEL: This is used to have a measure of human behaviour that analyses customer commitment. It identifies which customers are committed to the brand or service, which are likely to defect and what the future direction for the brand will be. This system enables to improve market share by identifying how to strengthen a brand.
6. TRIM : This is an integrated stakeholder management system. This is a system which, measures, monitors and manages stakeholder relationships - levels and drivers of customer retention as well as strengths and weaknesses, compared with the client's competitors.
7. QUANTUM AND QUANVERT: The survey data being our important input, it is important that it be accurate, understandable, and current.
Quantum is a powerful tabulation tool that helps clean arid validate data and create useful tables. Quantum helps in managing single-coded, multi-coded, and numeric dataseks, from simple ASCII records to complex hierarchical structures with multiple records per respondent. Hence irrespective of the data collection methodology or a combination of these types, Quantum can be used to effectively manage different data formats. Quantum's editing features enable quick assess and improvement in the quality of data. We can use a variety of weighting methods to correct sampling imbalances, and automatically apply statistics and significance tests. By using Quanvert, SPSS' desktop survey analysis tool, Quantum can be used to automatically create Quanvert databases that reflect our preferred formatting. Quantum is the only tabulation tool that offers direct integration with Quanvert, Quanvert has been specifically designed for market research.
8. SPSS: This is a modular, tightly integrated, full-featured product line for the analytical process-planning, data collecting, data access, data management and preparation, data analysis, reporting, and deployment. SPSS provides a broad range of capabilities for the entire analytical process, With SPSS, we can generate decision-making Information quickly using powerful statistics, understand and effectively present results with high-quality tabular and graphical output, and share results with others using a variety of reporting methods, including secure Web publishing. Results from data analysis enable us to make smarter decisions more quickly by uncovering key facts, patterns, and trends. An optional server version delivers enterprise-strength scalability, additional tools, security, and enhanced performance.
7. Thus, the learned Counsel for the assessee prayed that the assessee may be granted deduction Under Section 80IA of the Income Tax Act.
8. The learned departmental representative, on the other hand, relied heavily on the order of the first appellate authority and submitted that the case of the assessee is that the data collected does not indicate any physical or chemical change, that the data is processed and re-presented according to the needs of the customers and that, therefore, the data collected does not indicate any change either physical or chemical. Thus, he submitted that the assessee was not manufacturing any article or thing. He relied on the judgment of the Hon'ble Supreme Court in the case of Sterling Foods v. State of Karnataka (1986) 63 SIC 239 (SC) and the judgment of the Hon'ble Bombay High Court in the case of CIT v. Ravi Ratna Exporters 212 ITR 588, wherein it was held that processing of prawns for making them fit for the market does not amount to manufacture of prawns.
10. We have heard rival contentions. On a careful consideration of the facts and circumstances of the case, we find that the issue is covered in favour of the assessee and against the Revenue by the decision of the Hon'ble Gujarat High Court in the case of CIT v. Professional Information Systems & Management 274 ITR 242. In that case, the assesses company was engaged in the business of providing computer services to various concerns and received income by way of service charges for such activity. During the year under consideration, the assessee company purchased Computer and claimed investment allowance on the same under Section 32A of the Income-tax Act, 1961, The Hon'ble High Court in that case held as follows (as per head note): Investment allowance is admissible in respect of machinery or plant installed in any industrial under taking for the purpose of business of construction, manufacture or production of any article or thing not being an article or thing specified in the list in the Eleventh Schedule to the Income-tax Act. There is no dispute that "data-processing" or "computer" is not mentioned in the Eleventh Schedule, The test for determination as to whether the machinery/apparatus can be termed as a plant or not would primarily depend upon the function to which the said machinery/apparatus is put, regardless of the location where the machinery/apparatus is situated. This is over and above the test of the end-product being an entirely different commercial commodity visa-vis the input.
Therefore, in a computer system data processing system, the inputs which are fed in are entirely different, in a different form with different indicator's. As against that the end-product, viz., balance sheets, various accounts, statements, analysis, etc., which emerge by way of print outs are distinct and different from the inputs, inasmuch as what comes out has a different connotation and use. Thus, the activity of data processing through the use of computers is one which would amount to business of manufacture or production of articles or things and the unit which undertakes such computer services for other concerns would be an industrial undertaking.
The Hon'ble High Court thus held that the assessee company which provided computer services to other concerns was an industrial undertaking engaged in the business of manufacture or production and was thus eligible for Investment allowance under Section 32A of the Act on the cost of computer.
11. The first appellate authority has observed that the AO was wrong in holding that an article or thing manufactured should be in the form of discrete or tangible items and has also stated that there can be a case where an assessee manufacturing a computer programme can be said to have manufactured an article or thing even though the computer programme may not be in tangible form. A look at the activities and business of the assessee company reveals that certain projects in the field of market research and market information are undertaken by the company and these projects are designed in a certain manner and after collecting data on a particular strategy, the assessee company processes the data and thereafter analyses the same using sophisticated computers and proprietary software coupled with proprietary business solutions and dedicated tools, so as to provide market insight, research information and analysis to clients. This is not a case of mere processing of data. In CIT v. Ajay Printery Pvt Ltd. 58 ITR 811, it was a case of a private limited company carrying on business of printing balance-sheets, profits and loss accounts, pamphlets, dividend warrants and share certificates particularly required by a group of textile mills. The Income-tax Officer declined to accept the contention of the respondent-company that it was a manufacturing or a processing concern and was therefore bound to declare dividend to the extent of 45 per cent of its net income only and held that the respondent-company did not fall under Clause (ii) of Explanation 2 to Section 23A. Hon'ble Gujarat High Court, agreeing with the view taken by the Appellate Tribunal, held as follows: Considering the consistent view that has been adopted by the various High Courts while deducing the meaning of the word "manufacture" or "manufacturer" and the object with which Explanation 2 has been inserted in Section 23A of the Act, we are of the view that the business carried on by the respondent-company of printing balance-sheets, profit and loss accounts dividend warrants, pamphlets, share certificates, etc., required by the textile mills referred to in the statement of the case and other textile mills would be a business which consists wholly of manufacture and, therefore, Clause (ii) of Explanation 2 to Section 23A would apply in the present case.In CIT v. Computerised Accounting and Management Service (P.) Ltd. 235 ITR 502, Hon'ble Kerala High Court observed as follows:CIT v. Datacons (P.) Ltd. ; Union of India v. Delhi Cloth and General Mills Co. Ltd. and Name Tulaman Manufacturers Pvt Ltd. v. Collector of Central Excise , held that the computations and statements that a computer brings out after processing technical and commercial data which are fed into the computer as inputs are entirely different in content from the inputs fed into the computer and, therefore, the assessee-company is an industrial undertaking. The nature of the activity carried on by the assessee company being identical to that carried on by Shaw Wallace and Co. Ltd. we quite agree with the view taken by the Calcutta High Court in Shaw Wallace and Co. Ltd. [1993] 201 ITR 17, that after processing technical and commercial data which are fed into the computer as inputs, the computations; and statements that a computer brings out, are entirely different in content from the inputs fed into the computer and, therefore, the assessee-company can be said to be engaged in the production of mechanically prepared information, which is collected from the raw data being fed into the computer.
In the case of Datamatics Financial Services Ltd. v. JCIT 95 ITD 23, where the assessee is engaged in the business of data processing activities on a large scale, Bombay Bench 'A' of the Tribunal, allowing miscellaneous petition filed by the assessee, followed the judgment of the Hon'ble Bombay High Court in the case of CIT v. Emirates Commercial Bank Ltd. 262 ITR 55, and held that the assessee is entitled to get benefit of deduction under Section 80IA, 12. Respectfully following the judgments referred to above, we uphold the contention of the assessee and direct the Revenue to grant deduction under Section 80IA of the Income-tax Act, 1961.