TMI Blog2016 (9) TMI 1565X X X X Extracts X X X X X X X X Extracts X X X X ..... h decision. Therefore we delete the addition made by the AO and set aside the Lower authorities orders Deduction u/s 80JJAA - AO was of the view that the company was engaged in the business of software and its employees cannot be called as workmen - HELD THAT:- As per the memorandum to Finance Act, 1988, sec. 80JJAA, the Government of India considered it necessary to provide fiscal incentives in Income-tax Act, in order to encourage the employers to create more and more employment opportunities. When the assessee is creating new employment opportunities, the beneficial provisions should not be summarily rejected. Though the assessee is engaged in manufacture of computer software Firstly it is covered by Explanation 1 of sec. 10(15) of the Act within the meaning of industrial undertaking and it is supported by COMP-HELP SERVICES P. LTD. [ 1998 (10) TMI 15 - MADRAS HIGH COURT] . Secondly the employees working in the companies engaged in the computer software are also covered as workmen within the meaning of Industrial Dispute act as per the decisions of coordinate benches of Bangalore and Delhi cited supra. The Government of Tamilnadu vide letter dated 30/05/2016 clarified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in advance and returns are expected subsequently in the business. Therefore, it is not correct to disallow the expenditure since there was no income. Sometimes even if the expenditure is incurred it will take lot of time to make the sales and to expect the business receipts. A prudent businessman has to incur business expenditure in the shape of marketing and product promotion in advance. In the case of the assessee, the CIT(A) found that the payment was made for the compensation at the instance of Australian subsidiaries at Arm s length basis at a mark up of 10% on the operating expenses. The operating expenses also had been defined in clause 4.3 of the marketing support service agreement dated 1.7.2009 which was produced before the CIT(A). CIT(A) called for the details of the expenses incurred in connection with the transactions between the assessee and subsidiary companies for a period of four years and verified and then held that the disallowance has been made without examining the transactions perse. The CIT(A) also observed that the revenues have been generated in subsequent years, therefore, we agree with the order of the Ld. CIT(A) and uphold the same. Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t turnover. Aggrieved by the order of the CIT(A) the assessee filed appeal before us. 5. The Ld. A.R submitted that the foreign travel expenditure should not be excluded from the export turnover since the act does not provide for exclusion of foreign travel expenditure unless it is incurred in rendering the services outside India. He has taken our attention to the explanation Expln-2(iii) of section 10A wherein the export turnover was defined. Further the A.R referred the decisions of Hon'ble Special Bench decision in the case of Zylog systems reported in 8 Taxmann.com 276(Chennai) Bench and circular No.693 dated 23/11/1994. The A.R argued that prima facie the Assessing Officer is incorrect in excluding theForeign travel expenditure from the export turnover and even if is to be excluded it should be excluded both from the export turnover as well as total turnover. 6. On the other hand the learned DR argued that the expenditure was spent outside India and the same was not brought in into India. The Act provides for exemption of income relating to the Foreign exchange brought in to the country. Therefore he contended that the Assessing Officer has rightly excluded the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate accounts were maintained. There was also no dispute about the fact that there was approval of the authorized dealer namely C Bank for opening the overseas branch in USA. [Para 20] Now it was necessary to adjudicate whether the Assessing Officer and the Commissioner (Appeals) were right in excluding from the export turnover expenses incurred by the assessee outside India in foreign exchange in providing technical services, while computing deduction under section 10B. For adjudicating this issue first of all it was essential to consider what is software and what is technical services . The combined reading of the definition of software as given in clause (i) of Explanation (2) and export turnover as defined in clause (iii) of sub-section (9A) of section 10B would go to show that export turnover of computer software means consideration received in respect of export of computer software but does not include freight, telecommunication charges or insurance to the delivery of computer software outside India or expenses incurred in foreign exchange in providing technical services outside India. [Para 21] In the instant case, the assessee pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unrealized export proceeds from the export turnover. The AO excluded the amount of ₹ 23,89,578/- representing the unrealized export proceeds from the export turnover and the CIT(A) confirmed the AO s order. The A.R of the assessee has not made any argument on this issue. Therefore this ground is dismissed. 11. Ground No.5 to 9 are related to the deduction u/s 80JJAA. The Assessing Officer disallowed the claim of assessee amounting to ₹ 3,23,94,721/- made u/s 80JJAA. The Assessing Officer was of the view that the company was engaged in the business of software and its employees cannot be called as workmen. For ready reference we reproduce the relevant part of the assessment order which reads as under: The Company has made a claim of deduction u/s 80JJAA amounting to ₹ 3,23,94,721 during the year. This deduction is available to industrial undertakings employing new workmen. The Company being engaged in the business of software its employees cannot be called as workmen. The term is primarily meant to indicate blue collared workers employed in manufacturing industries. When this was put to the AR, he filed his submissions stating that - Though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s computer software are missing in the section. If the intention of the legislature is to extend the benefit to the companies engaged in the business of software, the legislature should have specifically mentioned and included the word computer software also. Since the legislature does not want the benefit to be extended to the computer software business, it was excluded from sec. 80JJAA. The ld. DR supported the orders of the lower authorities. 15. We have considered the rival submissions and perused the material placed on record. For ready reference, we reproduce hereunder sec. 80JJAA of the Act: Deduction in respect of employment of new workmen (1)Where the gross total income of an assessee, being an Indian company, includes any profits and gains derived from any industrial undertaking engaged in the manufacture or production of article or thing, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent. of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year relevant to the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the industries carrying on the business of manufacture of computer software are entitled for deduction u/s 80JJAA. 19. The meaning of workmen for the purpose of deduction u/s 80JJAA is according to the definition in Industrial Disputes Act, 1947. The workmen is defined in the Industrial Dispute Act as under: workman means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person- (i) Who is subject to the Air Force act, 1950 (45 of 1950) or the Army Act 1950(46 of 1950) or the Navy Act, 1957 (62 of 1957) or (ii) Who is employed in the police service or as an officer of other employee of a prison or (iii) Who is employed mainly in a managerial or administr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9632; Section 80JJAA refers to workmen as defined in section 2(5) of the Industrial Disputes Act, 1947. ■ The above definition includes employment of workmen having technical skill but excludes any workmen in managerial or administrative or supervisory capacity. In the case on hand, the persons in respect of which deduction under section 80JJAA is being claimed would fall within the above definition of the term 'workmen' as defined in the Industrial Disputes Act, 1947. [Para 6.5.4] ■ As the facts of the assessee in the case on hand are similar to the facts of the cited case of Texas Instruments India (P.) Ltd. (supra), the deduction under section 80JJAA is allowed on the basis of the following facts :- (i) The business of the assessee falls within the definition of the term 'industrial undertaking'; (ii) The assessee is engaged in providing Information Technology enabled services (computer software); (iii) The assessee has claimed deduction of only those payments made to 'workmen' who are not employed in supervisory capacity. ■ In view of the above, the decision of the Commissioner (Appeals) in allowing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... format such as balance sheet, it can be said in broad terms that there is production. The word production in s. 32A comprehends processing activity and the word article in that provision includes movables. The data processing computers involve processing and, therefore, capable of being regarded as part of process of production. The balance sheet, sales analysis, statements, etc. obtained as a result of processing are movables and are different from the data that was initially fed into the computer though based upon the data so fed in. The use to which end-product is put is different from the one to which raw data is put at the time it is fed into a computer. The end-product obtained as a result of data processing such as balance sheets, etc. are therefore, capable of being regarded as new articles. The data processing activity is an organised activity. The machines have to be operated by employing persons trained for that purpose. The employee and employer relationship in running a data processing company inevitably exists as between those who operate the system and the company which runs the business. The term industry is not defined in s. 32A, and is therefore, required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d seek remedy. (v) It is pertinent to note that already 9 IT employees have sought remedy for their non-employment issue under the Industrial Disputes Act, 1947. Hence no further action in this regard is required at Government Level. 25. As per the memorandum to Finance Act, 1988, sec. 80JJAA, the Government of India considered it necessary to provide fiscal incentives in Income-tax Act, in order to encourage the employers to create more and more employment opportunities. When the assessee is creating new employment opportunities, the beneficial provisions should not be summarily rejected. Though the assessee is engaged in manufacture of computer software Firstly it is covered by Explanation 1 of sec. 10(15) of the Act within the meaning of industrial undertaking and it is supported by Hon ble Madras High court judgment in the case of 246 ITR 722. Secondly the employees working in the companies engaged in the computer software are also covered as workmen within the meaning of Industrial Dispute act as per the decisions of coordinate benches of Bangalore and Delhi cited supra. The Government of Tamilnadu vide letter dated 30/05/2016 clarified that the IT in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ataka High Court in the case of Samsung on the same issue. The citation and the ratio of the above case was not discussed in the assessment order. The assessee went on appeal before the CIT(A) and the ld.CIT(A) deleted the addition relying on the decision of this Tribunal in the assessee s own case in I.T.A.No. 2190-2196 and 2199/Mds/2013 dated 5.6.2013 wherein it was held that transaction with non-resident towards purchase of software cannot be held as a royalty for use of copyrights u/s 9(1)(vi) r.w. Explanation 2, clause(v). 32. During the appeal, the ld. DR relied on the assessment order and the ld. AR relied on the CIT(A) s order. However, the ld. DR could not place any decision controverting the decision of the Tribunal in assessee s own case. The ld. DR also did not cite any High Court judgment supporting the decision of Assessing Officer. Therefore, we do not find any infirmity in the order of the ld.CIT(A) and the same is upheld. The ground on this issue stands dismissed. 33. Ground No.3 is related to marketing expenditure to subsidiaries. 34. During the assessment proceedings, the Assessing Officer found that the assessee-company has two foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he marketing expenditure is always incurred in advance and returns are expected subsequently in the business. Therefore, it is not correct to disallow the expenditure since there was no income. Sometimes even if the expenditure is incurred it will take lot of time to make the sales and to expect the business receipts. A prudent businessman has to incur business expenditure in the shape of marketing and product promotion in advance. In the case of the assessee, the CIT(A) found that the payment was made for the compensation at the instance of Australian subsidiaries at Arm s length basis at a mark up of 10% on the operating expenses. The operating expenses also had been defined in clause 4.3 of the marketing support service agreement dated 1.7.2009 which was produced before the CIT(A). The CIT(A) called for the details of the expenses incurred in connection with the transactions between the assessee and subsidiary companies for a period of four years and verified and then held that the disallowance has been made without examining the transactions perse. The CIT(A) also observed that the revenues have been generated in subsequent years, therefore, we agree with the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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