TMI Blog2012 (4) TMI 246X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, had any meaningful software ever been produced, it could definitely have been exported via the medium of a compact disc or a computer cartridge. It is pertinent to note that the provisions of sec. 10B required the transmission of customized data of computer programme through electronic media and email is no doubt an electronic media and therefore, the objection raised by the Assessing Officer is unfounded - raising of bill on the basis of man-hour further supports the case of the assessee that the assessee is carryout the customization work of software and development of programme as per the specific requirement of CIC clients - direct the Assessing Officer to allow deduction u/s 10B of the Act. The relief under section 80HHE, in the facts and circumstances of the ease, as an alternative prayer, becomes academic - in favour of assesee. - ITA No.2781/Mum/2003, ITA No.2782/Mum/2003, ITA No.2863/Mum/2003 - - - Dated:- 2-3-2012 - G E Veerabhadrappa, Vijay Pal Rao, JJ. For Appellants: Shri Farrokh V Irani Shri Yogesh Thar For Respondent: Shri Subachan Ram ORDER Per: Vijay Pal Rao: These cross appeals three by the assesse and three by the revenue are direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modem, hard disk, plotters, digitizers, electronic and electrical machines, controllers for machines, technical know-how related software and computer programmes and accessories, telecommunication instruments and system, facsimile Tranreceiver, electronic private automatic branch exchange, cordless telephone and pay phones. To design, develop, process, compile, service, renovate, remode, construct, assemble, render technical know-how to run education centre and coaching classes, consultancy services concerning computer scientific knowledge and to compile, make available render, assist in the field of electronics, mechanical engineer, marketing economic and research and also to render services and know how in system and management relating to computers, computer machinery, computer installation, data processing and computer science. 4. The assessee filed its return of income declaring the total income at nil by claiming the exemption u/s 10B of the Act. The Assessing Officer denied the exemption u/s 10B. 4.1 On appeal, the CIT(A) vide order dated 27th April 2000 set aside the assessment order with a direction to examine the assessee s claim u/s 80HHE and 80-O besides secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customization of software i.e. SAP which was carried out by the assessee. The authorities below have denied the claim of exemption u/s 10B on the ground that the billing is based on man-hours and therefore, the assessee is only a recruitment agency. 6.1 The ld counsel has explained the relevant facts and submitted that the assessee has brought the license from SAP Ag in West Germany and installed it at its offshore centre in Thane, India for carrying out the customization, implementation activities and to improve the skill and expertise of its employees. He has referred the certificate issued by Ministry of Industry whereby the assessee is recognized as 100% EOU and the said recognition has been granted only after satisfying that the assessee company is engaged in the manufacture of computer software and in providing technical services outside India in connection with the development or production of computer software. He has referred section 10BB and submitted that the meaning of computer programme has been expanded by sec. 10BB for the purpose of sec. 10B which includes computer programmes or processing or management of electronic data. 6.2 The ld counsel for the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... things manufactured by it. The assessee fulfils this condition fully as it exports all its computer programmes. 6.4 The ld counsel has then contended that even for the sake of argument, it is assumed that the assessee was engaged partly in training, the exemption u/s 10B, as it stood in the relevant year, cannot be denied to the assessee when the assessee exports the computer software programmes not less than 75% of its total production/manufacture. 6.5 The ld counsel has submitted that only after the amendment w.e.f 1.4.2001, the assessee may not have got the full deduction but only proportionate exemption. He has relied upon the decision of the coordinate Bench of the Tribunal in the case of iS3C consultancy services Ltd vs DCIT in ITA No.319/Mum/2002 dated 29.8.2002 and submitted that while dealing with a similar issue, the Tribunal in that case has held that the customization exercise involves intellectual process and at the end of the process, new things come into existence. Accordingly, the ld counsel has submitted that as it has been held by the Tribunal that the activity of customization of software amounts to manufacture and production of computer software and thus e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e process of development of computer programme and submitted that the entire work programme is in systematic order and the input of the programme which is passed through various processes and then finally to the process of working for the output offsite. 6.9 The ld counsel further submitted that billing on the basis of man-hours as unit has been done for mark up for the work of software development done by the assessee. Therefore, merely because the assessee is raising the bill on the basis of man-hours to be on the work of development of software programme would not change the nature of the activities of the assessee. The ld counsel has further submitted that the Assessing Officer has heavily relied upon the advice of the Chartered Accountant about the eligibility of exemption u/s 10B at the time of survey which is not relevant because the Assessing Officer is bound to act as per the provisions of the I.T Act and not as per the advise of the CA at the time of survey. He has submitted that the CIT(A) has recorded in para 5.3 of the impugned order that the assesse had extensively worked on various projects of CIC which shows that the assessee was doing the work of development prog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Explanation is any computer programme recorded on any disc, tape perforated media or other information storage device or any electronic data or product or service on similar nature as may be defined by the Board which is transmitted to India, a place outside India by any means. The ld counsel has further submitted that when the assessee has undisputedly customized the electronic data with respect to SAP programme and transmitted the same through e-mail to outside India then the profit and gain from such export of other software is eligible for deduction/s 80HHE. He has further submitted that even for the AY under consideration the CIT(A) has allowed the claim of deduction u/s 80HHE in respect of the receipt from Unisys and the department has not filed any appeal against the order of the CIT(A). Though the department tried to raise an additional ground to challenge the order of the CIT(A) in respect of the deduction allowed u/s 80HHE however, the Tribunal vide order dated 4.1.2005 has specifically and comprehensively rejected the said application of the department for raising the additional ground. 7.2 The ld counsel has further contended that once the claim of deduction u/s 80H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l which was recalled by the subsequent order dated 22.11.2006 in the Miscellaneous Applications filed by the assessee and submitted that the factual aspect considered by the tribunal in the original order has to be considered. For which, the ld counsel has raised an objection and submitted that once the original order has been recalled by the Tribunal, then the same is not relevant for the proceedings of fresh hearing and therefore case has to be decided without taking into account the earlier order. He has further pointed out that the revenue has challenged the order of the Tribunal passed in MA Nos.402 to 404/Mum/2005 whereby the earlier order was recalled; but the writ petition filed by the revenue has been dismissed by the Hon ble jurisdictional High Court vide order dated 22.1.2010. The ld counsel for the assessee has filed a copy of the order dt 22.1.2010 of the jurisdictional High Court. 8. At this stage, we may mention that once the order of the Tribunal has been recalled by a subsequent order and consequently the appeals filed by the parties have been posted for fresh hearing and disposal, then the earlier order of the Tribunal, which is no more in existence, does not ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys, and the eligibility for exemption u/s 10B and alternatively u/s 80HHE. For the Assessment Year 1999-00, the receipt from Cybertech Europe is also subject matter of dispute for the exemption u/s 10B and alternatively for deduction u/s 80HHE. The assessee has entered into agreements with all the three companies i.e CIC, Unisys, Cybertech Europe. In its contractual obligation the assessee has to carry out the respective activities and to provide technical services. 11.1 As regards the services rendered to CIC, the assessee s project was to produce, create computer programme i.e. customization of SAP programme for better, efficient and useful implementation of SAP software to meet the needs of the clients of CIC, the end user. For execution of the project involving the customization of SAP programme and transmitting the same to offshore clients of CIC as per their needs. The assessee was required to follow the standard as per Medline SAP ABAP/4 programme under which the assessee has to perform the following activities: i) Most of the data migrations programs for SAP data migration are developed using the SAP programming Language as per Medline defined standards for developing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise scope, document expressing the scope of work, receive design by interacting with the customer of CIC. All these communications were exchanged through e-mail or electronic media. Thus, in pursuance to the agreement, the assessee carried out the above said activities and sent the data in the electronic form through e-mail. In carrying out the task of development and customization of SAP programme, the assessee also engaged analyst/programmers/engineers and trained them in the specific field of customisation of SAP programme. In this process, the assessee developed the customised software programme as per the specification provided by the CIC and the needs of its clients. Thus, the developed programme/customisation of SAP as well as the information of providing the training and other knowledge imparted to the concerned analyst and programmers/engineers were collected, stored in electronic media as per the specific requirement of each clients and transmitted through e-mail. 11.3 The Assessing Officer has disallowed the claim of the assessee u/s 10B on the ground that the assessee has not manufactured or produced any software or computer programme and merely work as a recruitment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaking which has been approved as a hundred per cent export- oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 1469 of the Industries (Development and Regulation) Act, 1951(65 of1951), and the rules made under that Act; (ii) relevant assessment years means the five consecutive assessment years specified by the assessee at his option under sub-section (3) or sub-section (5), as the case may be; (iii) manufacture includes any- (a) process, or (b) assembling, or (c) recording of programmes on any disc, 4ape, perforated media or other information storage device;] (iv) produce , in relation to any article or thing referred to in clause (i) of sub-section (2) includes production of computer programmes.] As per clause (iii) of Explanation the term manufacture includes; any process, or assembling, or recording of programmes on any disc, tape, perforated media or other information stage device. As per clause (iv), the term produce in relation to any article or thing referred to in clause (i) of sub.sec. (2) Includes production of computer programmes. 11.4 The term comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under that Act; (v) relevant assessment years means any assessment years falling within a period of ten consecutive assessment years, referred to in this section.] 11.6 By way of this Explanation, the computer software, which was not earlier defined has been defined and apart from recording of programme on disc, tape, perforated media or other information storage device as contemplated under clause (iii) of Explanation to pre-amended sec. 10B clause (i) of Explaination-2 to amended provision also includes in the definition of computer software any customised electronic data or any product or services of similar nature as notified by the Board which is transmitted or exported from India to any place outside by any means. 11.7 Consequently, the CBDT notified the products and service for the purpose of clause (i) of Explanation 2 vide notification dated 26.9.2000 as under: "S.O.890(E) - In exercise of the powers conferred by clause (b) of item (i) of Explanation 2 of section 10A. Clause (b) of item (i) of Explanation 2 to section 10B and clause (b) to Explanation to section 80HHC of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous 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 on development of SAP computer programme is well within the main object of the assessee as envisaged in the Memorandum of Association as reproduced in para 3.1 of this order. 13. In view of these facts, raising of bill on the basis of man-hour further supports the case of the assessee that the assessee is carryout the customization work of software and development of programme as per the specific requirement of CIC clients. Therefore, this method of invoice cannot be the basis of rejection of the claim of the assessee. In any case, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical expertise. It is these skills, knowledge and technical expertise, which is used and work performed on site at the project of the foreign client, and for what the customer pays the agreed charges. I quote from letter dtd.9.3.2001(submitted during the course of assessment proceedings for AY. 1 998-99) of the assessee company: The activity of the company which was called as training involved a lot of work such as formation of a conceptual design documents, setting up features in SAP and other software, customization of various modules etc. These submissions clearly show that the assessee was merely engaged in the customization of software already available, according to the needs of various clients of CIC. The assessee company has agreed that it was paid for the skills, knowledge and technical expertise of various professionals. 13.1 It is clear from the above that the Assessing Officer has not disputed the fact that the assessee was engaged in customising the software as per the needs of the clients. 13.2 One of the main objections of the Assessing Officer is that the assessee customised the software which was already available and has not created altogether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware from BaaN, Netherlands and the standard software had to undergo transformation through the process of customer level customization. The customization exercise converts standard software into customized software rendering-the standard software practically operational in a manner that it runs as per- the demands of the customer and garners the desired results. In the customization process, the assessee harnesses the development tools and programming platforms embedded in the standard software as raw materials and manufacture/produce end usable software applications thereby furnishing to the customer his special and individualistic product. This fact is clear from the graphic representation of the customization placed at pages 219 to 277 of PB No.11 which has been discussed by us in p ra 8 above. The whole customization drill entails creation and addition of new programs. The assessee only utilizes the development and programming platforms embedded in the standard software to develop and evolve the customized software program. Customization exercise involves intellectual process and at the end of the process, new things come into existence. The customization process carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions u/s 10B. 16. The Assessing Officer has also not disputed the medium through which the service of implementation was rendered as under: (vd) Medium through which the service of implantation was rendered: It has been claimed that the software developed was uploaded into the server of CIC through e-mail. In this ground, I wish to point out that as per the details of expenses furnished by assessee company, it is clear that no compact disc. tape, perforated media or other information storage device was ever exported physically out of India, Had any meaningful software ever been produced, it could definitely have been exported via the medium of a compact disc or a computer cartridge. The very fact that the assessee company claims that the computer programmes were sent to the parent company via E-mail shows that no meaningful computer programme was over written. The assessee company has not been able to produce a single document which would indicate that any software recorded on any physical medium ever left the custom bonded area. It is worthwhile to note that under the EOU scheme, the premises of the assessee company lies in a Customs bonded area. 16.1 It is cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the ld CIT(A). 17. We also find fore in the contion of ld. Counsel of the assesse that the assessee had made huge investment in building, plant and software and if the assessee is only a recruitment agency, then there was no need of making such a huge investment. In view of the above discussion, we find that the assessee is entitled for exemption u/s 10B in respect of the receipt from CIC. Further, we note that the issue of exemption u/s 10B has been considered and decided by the coordinate Bench of the Tribunal for the Assessment Year 2000-01 and after elaborate discussion in ITA No. 4857/Mum/04 vide order dated 30th Nov 2005 has held in paars 9 to 16 as under: 9. We now take up the agreements in each of the cases and see whether the assessee has only acted as a recruitment agent or the assessee has engaged itself in manufacture or production of articles or things in the form of computer programme, which is also a part of manufacture as explained by the statute and has specifically given an extended meaning to the provisions of section 10BB already extracted hereinbefore. The agreement with Unisys is placed at pages 87 to 119 of the paper-book. This is a technical s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IP, BNet, SNA and OSI. (3) provide access to and license to use source and object Code for all CTOS products and the Compilers and Utilities required for development. System generation and configuration management. Written ..and object code for each supported release level must be established and agreed between Unisys and CyberTech. If special system configurations are required to test any specific release, Unisys will provide access to either Unisys or Customer equipment for this testing. (4) provide CyberTech with complete documentation of all CTOS products, including product specifications, user documentation, release notes, patch listings, release status reports and statistics for each release level to be supported (5) will provide active on-line, update access to the Unisys PRIMUS database, the MAPPER database for tracking escalated problems by WALERTs and CSRs and Internet Web Pages and Patch Net system Cybertech will additionally need CTOS OFIS Mail connections with the San Jose (and thus all other Unisys sites) Electronics Mail services for both Yardley and Bombay (I) provide Technical expertise for the following: -CTOS operating syste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revity we have extracted the relevant portions but going through the copies of the agreement as also the several addendums, it does not, in any way, lead to the conclusion that the assessee has been paid so much of money just for recruiting the employees or for imparting training of the employees for and on behalf of Unisys. In our view, it is taking too a narrow view of the matter, if the agreement were to be construed as agreement for recruitment of personnel. In any event, the CIT(A) himself granted both in earlier years as also in the assessment year under consideration relief u/s 8OHHE of the Act. The Tribunal has confirmed the order of the CIT(A) giving deduction u/s 80HHE of the Act in the earlier years. But appreciating the facts of the case in the light of the agreement provided, we are unable to accept the departmental view that the assessee cannot considered as engaged in the business of manufacture of production of articles or things within the meaning of section 108 and 10BB of the Act in respect of the profits and gains arising out of this agreement. The denial of such relief, in our view, is on a wrong reasoning that export of articles and things under this agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he SOW attached hereto as Exhibit A. The specific scope of any work and details of details of particular Consulting Services including proposed time and materials cost estimates, fixed price, or Not To Exceed amounts shall be set forth in the Statement of Work or any other document that references the appropriate Statement of Work to the jointly prepared by Customer and Consultant and approved be Customer prior to the start of any work. Consultant shall not be bound to perform and Customer shall not be required to pay for, any Consulting Services not contained in the Statement of Work or associated documents, unless accompanied by a Change order as set forth in Section 2.2 (b) consultant will ensure that all personnel assigned shall have the skills necessary to complete the tasks set forth in the Statement of Work. (c) Any work request shall be via a Statement of Works issued in accordance with this Section 2.1. Nothing in this Agreement shall preclude Customer from obtaining the same or similar services from any other source at any time. Nothing in this Agreement shall preclude Consultant from providing similar services to another company, provided Consultant maintain the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act in the earlier years and that has become final. The only ground on which relief u/s. 10B was denied is that the assessee s export to this client did not exceed 75% of the assessee s total sales. In the light of the discussions elsewhere in this order, we do not agree with the stand of the revenue that the assessee is not entitled for relief u/s 10B of the Act in respect of the exports made to this client. Accordingly, we direct the Assessing Officer to allow relief u/s 10B of the Act in respect of the profits and gains derived as admittedly the agreement is an old agreement and on which the revenue has already granted relief u/s 80HHE of the Act, which is directed to he withdrawn 12. Now we take up the agreement No 4 with CIC e-worker. This agreement is newly entered into during the year under consideration. Although the assessee was to recruit and train software professionals, but in that process it develops a software of its own. Agreement in this case is entered into for development of e-worker software. A copy of the manual involving the development and supply of the software is placed at pages 138 to 541 of the paper-book. It may be pointed out that the revenue author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that are already spelt out in paragraph 8 hereinbefore. We may mention that the scope of the work as detailed in para 9 above does not show that the payment of so of contracted amount was just for recruitment of employees or for training them. In our opinion, having regard to the terms of the agreement, it was clearly for manufacture or production of articles or things within the meaning of section 10B and it is extended meaning as spelt out in section 1BB of the Act. We may also mention that merely because the payment is based on the man-hour spent on the job or the employees provided, it does not mean that the assessee was not engaged in the activity of manufacture or production of articles or things within the meaning of the provisions stated above. The complex and highly technical activities in the field of computer software, in our opinion, truly is an act of manufacture or production of articles or things as spelt out in the aforesaid provision. 13. Now coming to the agreement with SAP Arabia, the contract itself provides for carrying on the work of software development relief/processing/maintenance of electronic data for which software professional were deputed to custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that the assessee is only a recruiting and training agent while considering its claim for relief u/s 10B of the Act. We, therefore, in the light of all these discussions, accept the claim of the assessee for relief u/s 10B of the Act. As a result of this, the revenue may have to withdraw the relief granted u/s 10HHE of the Act as a consequence of this order. 18. Accordingly, in view of the discussion in the foregoing paras as well as respectfully following the earlier order of the Tribunal, we decide the issue of exemption u/s 10B in respect of all the receipts from CIC, Unisys and Cybertech Europe in favour of the assessee. 19. Next ground is regarding exemption u/s 10B on interest income. 20. We have heard the ld AR of the assessee as well as the ld DR and considered the relevant material on record. The ld AR of the assessee has submitted that the assessee undertaking has no other business than the computer software and programme therefore, the interest being the business income of the assessee is entitled for exemption u/s 10B. He has relied upon the decision of the Hon ble jurisdictional High Court in the case of Nagpur Engineering Co. Ltd. and in the case of Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue; therefore, to that extent the revenue s appeals are allowed. 26.1 The additional issue raised by the revenue was admitted by the Tribunal to the extent of deduction allowed u/s 80HHE by the CIT(A) in respect of 10% of the receipts from CIC, Unisys and Cybertech Europe in AYs 1997-98 and 1998-99 in ITA No. 3670 3671/Mum/2003 vide order dated 4th Jan 2005 in paras 9 10 as under: 9. Therefore, keeping in view all the facts and circumstances, we admit the following additional ground, which is similar to the original ground taken by the department for the Assessment Year 1999-2000, in the appeals of the department for the AY 1997-98 and 1998-99: on the facts and in the circumstances of the case and in law, the ld CIT(A) erred in directing the Assessing Officer to allow the deduction u/s 80HHE on the receipts in respect of services rendered to Cybertech International Corporation regarding development, implementation, customization/SAP related services without appreciating the facts brought out by the Assessing Officer that the above receipts are not eligible for deduction. 10. Accordingly, application fro admission of additional ground is allowed to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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