TMI Blog2014 (4) TMI 738X X X X Extracts X X X X X X X X Extracts X X X X ..... carryout the customization work of software and development of programme as per the specific requirement of clients - the method of invoice cannot be the basis of rejection of the claim of the assessee. When the assessee has been collected the customised data, stored and transmitted the same through electronic media, then this activity of the assessee falls under the definition of computer programme as provided under sec. 10A as well as under Explanation 2 of sub sec. 10A thereby the definition of software has been expended as customised electronic data or any product or service of similar nature as may be notified by the Board - The assessee definitely engaged in the export of customised electronic data as recorded by the Assessing Officer in his order. The AO has not disputed the fact that the assessee was engaged in customising the software as per the needs of the clients - the definition of “produce” is wider than the term "manufacture" and does not require to produce or manufacture altogether a new product - but if the outcome of the process is a different product than the input it would fall under the definition of ‘produce’ – thus, the customised SAP software after pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are development filed its return of income for the A.Y. 2007-08 on 30.9.2008 declaring nil income. The AO completed the assessment u/s. 143(3) by making the following additions: Sl. No. Particulars Amount (Rs.) 1) Disallowance of deduction u/s. 10A. 27,11,890 2) Disallowance of purchase and development of software 1,11,46,514 3) Disallowance u/s. 40(a)(ia) 5,45,036 4. On appeal, the CIT(A) decided the issue regarding disallowance of purchase and development of software and disallowance u/s. 40(a)(ia) in favour of the assessee. However, he decided the issue relating to deduction u/s. 10A against the assessee. Aggrieved, the assessee is in appeal before us. 5. The learned AR submitted that the AO disallowed the claim amounting to Rs. 27,11,899/- which was claimed as exemption u/s 10A on account of export of software. The AO asked the assessee to submit copies of FIRCs in support of the claim. The assessee only produced a commercial invoice raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t correct and justifiable and it is only AO's presumption when actually there is apparent material evidence supporting the factual position that the assessee company, in fact, developed computer software solutions and exported the same outside India. Whenever the assessee-company gets any work contract in the matter of computer software, on that particular job details, first the assessee-company develop software solutions/program and thereafter they depute their computer software personnel to that country and after they reach their clients' premises outside India they work on their clients' computers by getting such computer programs/ solutions transferred by downloading from the assessee- company's computer to their clients' computers and after making further changes or amendments in the software programs/solutions of telecom billing so as to satisfy the requirements of its clients outside India, and complete the entire assignment given by Seavus. To activate, implement, operate such software solutions/programs, services of software personnel are required. 8. The AR submitted that the Central Board of Direct Taxes, in their Notifications No. SO. 890(E) dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us made payments to the assessee- company the above said amounts through the assessee-company's Citibank A/c (70% thereof credited in Euros A/c and 30% thereof credited in Indian Rupees A/c of Citibank. (iii) As per the Agreement dated 1-6-2006 and dated 4-1-2007 between the assessee-company and its knowledge-partners viz., Solrhibus Consulting Inc, Canada and Tricolor Solutions, USA, who were to provide services of technically qualified and experienced personnel for developing Telecom Billing Software Solutions and actually these two knowledge-partners have provided such personnel to the assessee-company during the year. (iv) The assessee-company made payment through its Citibank Euro A/c amounts of 1,22,685.18 (Euros) to Solrhibus Consulting Inc and the same was credited in their bank A/c maintained at Komercijalnea Banka Skopje during the year and similarly the assessee-company made payment through its Citibank Euro A/c amounts of 61,900 (in Euros) to Tricolor Solutions LLC and the same was credited in their bank A/c at Lloyds TSB Bank. As such, a total amount in Euros 1,88,585 (equivalent to Rs. 1,11,46,514/-) was paid by the assessee-company to the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulation) Act, 1992, the Central Government hereby notifies the following amended Software Technology Park (STP) Scheme. 2.0 Software Technology Parks (STP) Scheme : 2.1 The Software Technology Park (STP) Scheme is a 100 per cent Export Oriented Scheme for undertaking software development for export using data communication link or in the form of physical exports including export of professional services. 2.2 A Software Technology Park (STP) may be set up by the Central Government, State Governments, public or private sector undertakings or any combination thereof. An STP may be an individual unit by itself or it may be one of such units located in an area designated as STP Complex by the Department of Electronics. 2.3 The scheme is administered by the Department of Electronics, Government of India, through Directors of respective Software Technology Parks which form part of the Software Technology Parks of India, a society established by the Department of Electronics, Government of India and registered under the Societies Registration Act, 1860. An application in the prescribed format for establishing a Software Technology Park unit may be submitted to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generated for each month by the Company based on the inputs (time, work, expenses) identified by the Seavus Company. These draft email based invoices will be reviewed by Company and Seavus for 2 weeks, before the finalized invoices can be prepared and payments from Seavus can be made to Company. 14. Further the AR relied on the judgement of Delhi High Court in the case of CIT vs. EDS Electronic Data Systems (India) Pvt. Ltd., in ITA No. 474/09 dated 4th October 2012 specifically to the following paras: 9. Regarding Question (b), As discussed in the preceding paragraph of this judgment the assessee claimed benefit of Section 10A w. e. f. assessment year 2001-02. Concededly its unit was set up in Chennai. It secured the benefit of Section 80HHE for the assessment year 1997-98. The Assessing Officer seems to have vaguely suggested that the assessee ought to have claimed deduction under Section 10A from the assessment year 1997-98 itself. This Court finds no principle of law or factual basis for such an assumption. The assessee s case throughout has been that it sought to open a unit and was granted permission to do so in a Software Technology Park on 27.4.2004 in Chenna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard as under: - It is submitted that the program management services as mentioned in the invoices raised by the assessee company for the subject assessment year are in the nature of software development eligible for deduction u/s 80HHE or exemption section 10A of the Act, as the case may be. The term project management services is merely a nomenclature assigned by the assessee to software development services rendered by the assessee company. The reply of the assessee is not acceptable. The assessee has not given the exact nature of service provided by it and how it is eligible to the deduction u/s 10A or 80HHE. The term used by the assessee programme management service in its invoices cannot in any way be said to be covered as computer software within the meaning of section 10A. In view of the detailed reason given supra, no exemption u/s 10A shall be allowed to the assessee as per section 10(2) of the Act. 12. In appeal, the CIT (Appeals) sought a remand report. He also noticed that the assessee filed a certificate during the assessment proceedings to the effect that the project management services rendered by the assessee are ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be capable of catering to different services capable of customization having regard to the peculiar needs of a given situation. In this case the materials placed by the assessee on record reveal that its program management system was nothing but a development of software which assisted in management services. The CBDT itself has treated a wide array of services which are assisted by computer software i.e. back office support, call centre, medical transcription, etc. as falling within the rubric of computer software . The assessee s program management services which is a method of providing software to achieve a particular end cannot be said to be excluded from the term computer software . This Court accordingly holds that the findings of the Tribunal are sound and do not require any interference. 15. On the other hand, the learned DR submitted that it is very important to understand the fundamental provisions of section 10A of the Income-tax Act, 1961 and then read the notifications of the CBDT to decide whether the said exemption is allowable to the assessee or not. 16. The DR submitted that the term derived directly from the export of software is to be considered f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y requires some sort of on-site development of software and also the utilisation of services of technical personnel to install the software and train the employees of the purchasing organisation. However, this term i.e., human resource services does not engulf in its ambit every form of human resource service. Indeed, if this were the case then the notification would effectively defeat the very purpose of section 10A where tax exemption is given for the development and export of computer software. This has been done to encourage the Indian IT industry so as to make it globally competitive and vibrant. The purpose of this section is not the export of human resources or personnel from this country. Therefore, the construction of section 10A, explanation 2 and the clarificatory notification 890 are to be read by considering section 10A as the superset, explanation 2 as the subset and the notification and its list of 15 services as a further subset. This is the correct and only way to understand the legislative intent and the scope of the aforementioned section of the statute. 18. The DR submitted that with this background the specific facts of the assessee's claim are to be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly spelt out as to who would be trained and in what area. All these aspects are absent in the schedule shown above. Clearly, the personal exported were not assigned to perform any of the tasks which have been mentioned by the assessee. 21. The DR further submitted that the assignment is for three years. It is not understood as to how such a long time is taken to only install the software and to train the personnel. It is interesting to see that the European partner operates in six countries. It only has a workforce of 300 people. This translates to an average of 50 people per country. If the top and middle management is removed it would leave very little manpower for operational work. Very clearly, the European partner required manpower for operational work i.e. for doing billing and other routine work. The amount paid works out to Euros 35 per hour. This is not the salary of a software professional or a trainer in Europe. This is clearly the salary of a base level operator. 22. The DR submitted that from the available information it is not clear whether the software for billing was developed by the assessee or not. However, even if this software was developed, the expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are developers: Following Telecom Billing software development activities need to be performed by Company/Company Knowledge Partners to Seavus: (a) Perform onsite technical feasibility analysis. (b) Assist in effort estimation and scheduling. (c) Prepare the software development project plans. (d) Write technical specification requirements. (e) Write high level and detailed level design documents. (f) System analysis. (g) Software design, programming and coding. (h) Software testing. (i) Software documentation. (j) Periodic review and approval of the deliverables. Invoices: On a monthly basis, Company is responsible for creating centralized invoices for the total effort put in by all the telecom billing experts (Company's Indian Employees as well as Non-Indian Telecom billing experts/knowledge partners). Draft email based invoices will be generated for each month by the Company based on the inputs (time, work, expenses) identified by the Seavus Company. These draft email based invoices will be reviewed by Company and Seavus for 2 weeks, before the finalized invoices can be prepared and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Amendment-I dated 1-6- 2006 and Amendment-2 1-12-2006 with Solrhibus Consulting Inc, Canada, the assessee-company has to bear the expenses for accommodation, travel etc., of the Project Manager QA (telecom billing) and Senior Telecom Billing Developer provided by Solrhibus Consulting Inc to the assessee- company. 27. As per the Agreement dated 4-1-2007 between the assessee-company and Tricolor Solutions LLC, USA, Tricolor Solutions will be the knowledge-partner for the assessee- company to provide the services of the qualified telecom software billing developer who will perform tasks for the assessee-company in areas of developing the telecom billing software and as per clause 5 invoicing and payments will be made in European Euros. As per Amendment-I dated 4-1-2007 between the assessee-company and Tricolor Solutions LLC, USA, expenses for accommodation, travel etc., in respect of Senior Software Architect (telecom billing) would be borne by the assessee-company. 28. The AO disallowed the claim of the assessee u/s. 10A of the Act on the ground that the assessee has not manufactured or produced any software or computer program and merely carried on BPO work for the reason t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software :] Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, [2012] and subsequent years. Explanation 2.-For the purposes of this section,- (i) computer software means- (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means; 31. As seen from the above provisions of the Act, the meaning of computer programme has been expanded as computer program process or management of electronic data . By way of above Explanation, computer software which was not earlier defined has been defined and apart from recording of program on disc, tape, perforated media or other information storage device as contemplated un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason that the assessee collected fees on man-hour basis. 35. It is pertinent to note that, to meet the current and future requirements of the clients, the assessee was required to do the various activities like formation of different teams of professionals, attend various functions to execute the work orders placed by clients; explaining the exact functional requirement to the professionals and programmers comprised of such teams; formation of conceptual design documents; and other computer software; customization of various modules to meet the specific needs of clients; developing and writing new patches of programmes which are not available in the standard format of system; testing the functional competence of new modules designed by the assessee; Functioning integration of modules and testing of its functional accuracy and finally storing the results project wise etc. etc. This entire process is intergraded programme which involves the training and update the knowledge of development programme, implementation of programme development in the client s project and therefore, the assessee s activity of engaging the analyst/programmer/ personnel for imparting training is we ..... 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