TMI Blog2014 (4) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... exported computer software/ITES out of India – Held that:- There can be no doubt on the satisfaction of this condition - Sample copies of Software Export Declaration (Softex) forms filed with the STPI (relating to/ corresponding to the invoices raised by the Assessee on overseas SAP entities) have been filed before the Revenue authorities - The Softex forms are certified by the STPI authorities as being exported out of the country - the arguments raised by the assessee are not being considered elaborately for the reason that the nature of services rendered needs to be ascertained first – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Levy of interest u/s 234D of the Act – Held that:- Assessee contended that the interest u/s 234C of the Act, can be levied only when there is a shortfall in payment of advance tax instalment by considering the advance taxes paid on the tax due on the "returned income" and not the "assessed income" - the grievance has probably not been properly projected by the assessee nor appreciated by the CIT(A) in proper perspective - thus, the AO is directed to charge interest accordingly. Disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CIT(A)-III, Bangalore relating to assessment year : 2008-09. 2. First we shall take up for consideration ITA No.1492(B)/2012 assessee's appeal for the assessment year : 2004-05. Ground no.1 raised by the assessee is general in nature and calls for no specific adjudication. Ground no.2 raised by the assessee reads as follows; " 2. The learned CIT(A) has erred, in law, and in facts, in confirming the order of the learned AO by upholding the disallowance of the deduction claimed by the assessee u/s 10A of the IT Act, 1961 amounting to Rs.282,595,891/- for the assessment year 2004-05". We will also take up for consideration Gr.No.2 raised by the Assessee in A.Y.05-06 in ITA No.1493/Bang/12 which is identical to ground No.2 referred to above, for the reason that the facts and circumstances are identical and the reasoning of AO in AY 04-05 has been followed by the AO in AY 05-06, while the reasoning given by the CIT(A) for AY 05-06 has been followed by the CIT(A) in AY 04-05. The sum claimed as deduction u/s.10A of the Act, in AY 05-06 is a sum of Rs.39,22,60,237. 3. SAP AG, headquartered in Germany, is one of the world's leading provider of enterprise resource planni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware implementation and related services rendered to customers in India. These services are not rendered from the STP unit and constitute a different segment of the Appellant. 4. Training services segment In addition to the above, the Assessee provides training services/ facilities to Indian and foreign customers, on the usage and application of SAP software products. 4. The Assessee claimed deduction of Rs.28,25,95,891 u/s.10A of the Income Tax Act, 1961, ('the Act') in respect of profits of its unit which renders Software development/ implementation support services, viz., the Export division/Global Delivery Centre(GDC). It is not in dispute that the software development services rendered to overseas customers from this unit was offshore Software Technology Park unit of the Assessee i.e., the Global Delivery Centre ("GDC"), which is physically separate, distinct and is housed in a separate Customs bonded premises. 5. According to the AO (in A.Y.04-05), deduction u/s.10A of the Act can be allowed only when the Assessee produces manufactures articles or things or computer software. According to the AO as per the details furnished in the return of income, the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing unit and need of a steel unit will be different from the chemical unit. Probably, the Assessee company might have done customization of that nature to the clients in India and there may not be necessarily any export of software. 8.7 It is important to mention over here that the SAP AG group has bifurcated its activities of development of software and marketing and sale of software. While development is looked after by a separate company known as SAP labs having its R D Centre in Whitefield, Bangalore, the marketing and sales of SAP software is looked after by SAP India. In fact, during the course of visit of SAP labs premises, this fact was mentioned by the Authorities of SAP labs. Accordingly, the claim of the Assessee company towards development of software appears to be farfetched and thus unacceptable." 7. The claim of the Assessee for deduction u/s.10A of the Act was rejected for the aforesaid reasons in AY 04-05 and 05-06. It would be appropriate to mention that apart from the above reasons given for rejecting the claim of the Assessee for deduction u/s.10A of the Act, certain other reasons were given in A.Y. 06-07 to 08-09. The same are as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Expln.2 to Sec.10A of the Act. Sec.10A of the Act and Expln.-2 thereto reads thus: "SECTION 10A: Special provision in respect of newly established undertakings in free trade zone, etc. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee . 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;" 10. As can be seen from Expln.-2 (b) to Sec.10A of the Act even customization of electronic data or any produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding upon the man hours spent. Based on the above, the AO in AY 06-07 held in the order of assessment that the Assessee was not entitled to deduction u/s.10A of the Act for the following reasons: 1. The assessee's STP Unit is not developing any specific software product to any overseas customer directly or any specific software product to SAP AG or any SAP Group entity. 2. The bills raised by the Assessee show that the assessee's employees are rendering some unspecified services to group entities and assessee is charging those entities for such services on hour basis at specific rate applicable to each of its employees. The charges in the invoice are not the earnings of those employees but it is only a basis for charging other entities. Such charges were not for any overseas onsite development charges or services for development of software overseas. 3. Software development contracts/projects are actually taken up by SAP AG and other Group entities and in fact they are actually executing those projects. In the course of executing those projects, they may be borrowing some services of other group entities including the assessee. 4. The Assessee could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "product". Sec.10A specifies clearly that an 'article or thing' has to be produced and exported, and includes within this requirement computer software also, it is obvious that the law requires that a particular software product should emerge from the process, unless the activity is restricted to one of the specified IT enables services as per CBDT Notification. The latter not being the case here as per the assessee's own admission, and no defined software product having emerged from the services rendered (also admitted by the assessee in the Rejoinder to the remand report), the STPI activities of the assessee do not fall within the eligibility requirements of sec.10A. 14. The conclusion of the CIT(A) in short is that the Assessee was not able to show the software product developed by it and therefore cannot be said to be engaged in manufacture or production of computer software. Since the Assessee maintained that it was manufacturing or producing Computer Software, by Assessee's own admission, the alternative case of the Assessee that it was rendering IT enabled services as per CBDT notification is deemed to have been given up. 15. The other reasons given by the revenue for de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 90 of Paper book for AY 2005-06). 18. The learned counsel for the Assessee brought to our notice the terms of the Cross Service Agreement. This agreement describes Assessee as ND and the parent company as SAP AG. Under this agreement, the Assessee has agreed to provide services to SAP AG. Article 3 of the cross services agreement describes the nature of services thus: "Art-3 ND's Services ND hereby agrees to provide SAP AG with Services as explicitly required by SAP AG on a case to case basis to assist SAP AG in the design and development of SAP AG's Products for marketing and sales. Furthermore ND agrees to provide other subsidiaries of SAP AG which have entered into cross services agreement with SAP AG with services as explicitly requested by the respective other subsidiary of SAP AG. The Services to be provided by ND either to SAP AG or to another subsidiary can include the following: (a) The entire development of a version of a Product, including but not limited to, translation from English/ German to the local language of the Product and its testing; enhancements of and, if necessary, extensions to Products, so as to meet the special requirements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssly provided herein, the provisions of Article-7 ( Proprietary information) 9 ( Limitation of liability) and 10 (Indemnification) of the Software Distribution Agreement shall apply to the SAP AG services and are incorporated by reference herein. Article -5 Development Projects 5.1 ND may from time to time ask for the development of Modifications and/or extensions to products required by an End User (Development Project) 5.2 Upon receipt of a request for a Development Project SAP AG shall decide by its Development Management, within reasonable time and before the project is started whether and to what extent the results of such Development Project will become part of the Products without limitation of ND's Territory ("Standard")In such case, this Agreement and in particular, Articles-8 and 9 apply for the eservices rendered by ND. 5.3 If SAP AG decides that the result of a Development Project will not automatically become a Standard, the following applies; After termination of the Development Project SAP AG will test the result and determine its quality, in the light of the outcome of such test. SAP AG will decide whether the results of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along with personnel from the overseas SAP entity to understand the systems/IT operating environment of customer and finalize the modifications to be made to the SAP software. 4. A Project Charter is drawn up between SAP's overseas entity and GDC detailing the project overview, the implementation strategy, the technical specifications, the project related software modules to be developed, the quality testing process, the deliverable reports and the timelines. The GDC team carries out the agreed steps in its STP units in Bangalore or Gurgaon, as per the project charter in coordination with SAP's overseas project. 5. Once the software modules are developed, GDC tests the software and then exports the software modules to the SAP overseas entity or directly to the customer. 6. The customer then tests the software module and confirms acceptance. If there are any errors, the customer intimates the SAP team/GDC to modify the software to remove the errors. 21. The learned counsel for the Assessee also gave us a detailed process flow of the actual software development activities that is carried out in the GDC once the work is transferred to the GDC by SAP's overseas e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urce system will not be retired at the end of the conversion, an interface may be built instead of a conversion. In which case, all necessary data is loaded at the time of 'cutover' using the interface. o Enhancement module: Enhancements are programs that control, change or create data that is generated by the standard SAP system. Enhancements are required wherever the configurations provided by the standard SAP system are not sufficient to realize the requirements of the implementation or the system. These can be validations, extra user inputs, additionally captured data, additionally created data, alerts etc. In general, when the program/object affects the update of data and the target system is the same as the source system, then the program/object can be classified as an enhancement. o Form module: Forms are programs that create readable, formatted and printable outputs that are often exchanged with partners (customers, vendors, banks, employees, benefit providers, governments, etc.). The outputs can be printed or sent via fax or sent in an email as an attachment (pdf, otf, rtf, doc) or even simply displayed on the screen (and a user can choose to print, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... later part of this order. 24. The learned DR reiterated the stand of the revenue as reflected in the order of the AO/CIT(A). It was her submission that there was no proof of export of computer software and in this regard she drew our attention to the observation of the AO in pare-13 for the assessment year 2005-06. She also placed reliance on the decision of the Cochin Bench of the ITAT in the case of Dy. CIT v. Girnar Industries [2010] 35 SOT 11 (URO) wherein it was held that blending of Tea and exporting the different grades so blended would not amount to manufacture so as to claim the benefit of deduction u/s 10A of the IT Act, 1961. 25. The learned counsel for the assessee in his rejoinder brought to our notice that it is not correct to say that the assessee did not export any computer software. In this regard, our attention was drawn to page-23 24 of the paper book filed for the assessment year 2004-05 in which the particulars of exports out of India have been given. Our attention was also drawn to page-110 of the paper book which is the report of the Chartered Accountant in Form-56F certifying that the assessee had developed and exported software and was entitled to cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ependently and cumulatively met, to enable an undertaking to claim deduction under Section 10A of the Act: The undertaking is set up under the STP scheme of the Government of India; The undertaking manufactures or produces computer software; and The computer software or IT enabled services are exported/ transmitted out of India. 28. It is not disputed by the Revenue that the GDC unit of the Assessee is not an undertaking set up under the STP scheme of the Government of India. In fact the necessary approval of the STPI is at page-68 to 74 of Assessee's paper book filed for AY 05-06. The approval mentions that the same is for development/manufacture of Computer Software. 29. As far as the condition as to whether the Assessee manufactures or produces "Computer Software", it has been the contention of the learned counsel for the Assessee before us that the Assessee manufactures or produces articles or things or computer software. In this regard reference was made to the definition of the term "manufacture" as has been defined under Section 2(29BA) of the Act and certain judicial pronouncements rendered thereunder. It was contended that the Assessee's GDC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a perusal of the evidence on record is necessary. In AY 04-05 the Assessee has filed before the CIT(A) two Project Charter. As a sample we will consider the first project charter which is at page 66 to 88 of Assessee's paper book filed for AY 04-05. As can be seen from the project charter, British Council had approached SAP UK for implementing R/3 Solution. The scope of the work is to prepare technical specification for customer developments (interfaces), ABAP Program development, unit testing, support (bug fixing) for specified period. Scope of the work includes development of 22 interface objects in the area of MM, PS, FI/CO and Campus Management as listed in the worksheet attached to the Charter. The Assessee is to implement the work. The person in-charge of the project at SAP-UK, British Council and the Assessee has been set out in the Project Charter. As far as the Assessee is concerned one Mr.Vijay Reddy, Ramesh Kumar and Sundara Iyer have been assigned the responsibility of carrying out the project. The Charter was initially settled on 28.11.2003 and changed on 9.12.2003, after discussion by Mr. Sundara Iyer at London. The schedule for completion is from Dec. 2003 to June, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out by the Assessee when in fact the Assessee claimed that the nature of work done by it would fall within either one or the other of the three categories of service referred to above. This again will depend on the nature of service to be rendered for which the foreign exchange was received. 34. The same is the position with regard to factual position in AY 05-06 also. The Assessee has not established correlation between the receipts in foreign exchange and the nature of services rendered for which the payment was received. Let us take a Project Charter at page-91 of the paper book of Assessee filed for AY 05-06. This project charter relates to a client by name Shell of Nederland which had approached SAP Nederland who in turn have approached the Assessee. The scope of the work is development of two Business application Programming interfaces. 35. Softex forms at Page-197 refers to about 12 invoices and is in respect of total foreign exchange receivable of 1158021.09 Euros. Invoice No.9071001535 dated 30.4.2004 is referred to in the softex form. As usual the invoice is raised on SAP AG. The invoice relates to Agreement dated 8.4.2004. The invoice also refers to the man h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to billing mechanism adopted by the Assessee. It was submitted that the revenue has concluded that the Assessee was raising bills for hourly charges and not on the basis of cost plus or product/solution based bills and therefore the Assessee is not engaged in any software development. Our attention was drawn to the Assessee billing mechanism by referring to Article 9 of Cross Services Agreement which provides for compensation arrangement between SAP India and its holding company, SAP AG, where in it has been provided that if the services are rendered as per Article 3(a) and (b) i.e., development of version of product, translation, testing, research and development, etc (including assessment for administration and facilities), then the same would be charged at cost plus six percent. However, if the services are as per Article 3(c) which involves consulting services of the STPI unit, then the payment would be in according to SAP India's rates for consultants determined as average realised market rate of such consultant. It was argued that from the above, it would be clear that SAP India, has invoices of both kinds i.e., which are invoiced on man-hour basis and also those which are i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 that the AO will examine the issue afresh. We give liberty to raise all these arguments before the AO after placing before him the nature of services rendered by the Assessee. Thus Gr.No.2 raised by the Assessee in A.Y. 04-05 05-06 are treated as allowed for statistical purposes. 42. Ground no.3 with regard to the plea of the assessee for allowing credit in respect of foreign taxes paid by the assessee on an income earned in foreign jurisdictions. The learned counsel for the assessee did not press for adjudication of the ground as the assessee has got necessary relief from the AO, pursuant to an application filed by the assessee u/s 154 of the IT Act, 1961. Therefore, ground no.3 is dismissed as not pressed. 43. Ground no.4 raised by the assessee is with regard to levy of interest u/s 234D of the IT Act, 1961. On this issue, the CIT(A) held as under: "With regard to the ground relating to charging of interest u/s 234B 234C, it may be noted that charging of interest u/s 234B 234C is mandatory according chargeable wherever there is incidence of the same. Therefore, no appeal can lie against the order charging interest if there is incidence, unless it concerns a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. The Assessee had claimed a deduction in respect of certain employee costs and operating expenses incurred by it for the AY 2005-06, in the course of its business. These expenses consist of Staff welfare expenses of Rs 43,448,120 and Advertising sales promotion of Rs 113,071,570. The above expenses, which were debited to the Profit and Loss Account of the Assessee, for the year ended 31 March 2005, were claimed as a deduction by the Appellant in accordance with the provisions of Section 37(1) of the Act. A detailed break-up of these expenses was called for by the AO and were adequately provided by the Assessee. The Assessee claimed that these expenses were incurred wholly and exclusively for its business purposes and satisfy the test of commercial expediency. However, the AO, while computing the total income of the Assessee disallowed a portion of the employee costs and operating expenses as under: Staff Welfare expenses: (Gr.No.3) 52. The Assessee incurred a sum of Rs 1,02,37,186 towards food and refreshments, which was included in the expenditure claimed under the head "Staff Welfare expenses". The AO was of the view that expenses incurred towards free meals to employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 55. In respect of provision of free meals to employees, it cannot be denied that such expenses are essential for the purpose of employee welfare, and hence are clearly allowable as business expenditure. In fact it is an industry-wide practice followed in India by IT companies. Such facilities are extended in the industry to ensure low employee attrition which will progress the growth of the Assessee. With effect from AY 2005-06, value of free food and non-alcoholic beverages provided by the employer to an employee is not even treated as "perquisites" in the hands of employees [as per clause (iii) under sub-rule 7 to Rule 3 of the Income-tax Rules, 1962]. In fact, even under the Fringe Benefit Taxes ("FBT") regime, though inapplicable for AY 2005-06, it may be pertinent to note that a specific exemption has been provided in respect of expenditure incurred on food or beverages procured by the employer for providing to his employees in an office or factory. Thus even the legislature thought such benefits not to be expenditure which would provide any benefit of a personal nature for the employees. We do not find any basis for disallowance of the remaining expenses out of staff welf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis restricted the disallowance made by the AO to 10% of the expenses. In this regard it is seen that the Assessee claims that it is responsible for advertising and promotion of SAP products in the Indian sub-continent and undertakes advertising for SAP products including designing product brochures, deciding the medium of advertising and developing advertising content for the products. These facts have not been disputed by the Revenue. In these circumstances we are of the view that sales promotion expenses, being incurred wholly and exclusively for the purpose of the Assessee's business, are fully allowable as deduction under Section 37(1) of the Act. Gr.No.4 is accordingly allowed. 59. Ground no.5 was not pressed and the same is dismissed as not pressed. Ground no.6 is with regard to charging of interest u/s 234B of the IT Act, 1961 is consequential in nature and the AO is directed to give consequential relief. Ground no.7 is with regard to interest levied u/s 234C of the IT Act, 1961. While deciding the similar ground of appeal for the assessment year 2004-05, we have already held that interest u/s 234C of the IT Act, 1961 are to be levied by taking income declared in the ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred towards providing technical services outside India and should be reduced from export turnover while computing the deduction u/s 10A of the Act. e. The learned AO has erred in law and in facts by not considering the alternative plea of the assessee that if the expenses mentioned in Ground no.3.1 to 3.3 above are reduced from export turnover, an equal amount should also be reduced from total turnover for computing the deduction under section 10A of the Act. f. The learned AO has erred in la and in facts by reducing an amount of Rs.30.198,542 (representing export sales proceeds realised beyond six months from the end of relevant FY) from the export turnover while re-computing the deduction u/s 10A of the IT Act, though the entire proceeds were received before completion of assessment u/s143(3) of the Act." 63. The CIT(A) in his order, did not adjudicate these grounds for the following reasons: "7. These grounds involve expenses incurred in foreign currency towards support charges, cost of purchased services, travel and conveyance, expenses incurred in providing technical services outside India and foreign expenses attributable to the delivery of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In this appeal, the assessee has raised as many as four grounds which are as under:' "1. The learned CIT(A) has erred in law and in facts, in confirming the order issued by the joint Commissioner of Income-tax (OSD) Circle-12(3), Bangalore (The learned AO) u/s 143(3) of the Act. The assessee craves that the order of the learned CIT(A) inasmuch as it confirms the order of the learned AO being unsustainable and bad in law, be set aside. 2.The learned CIT(A) has erred in law and in facts in confirming the order of the learned AO by upholding the disallowance of the deduction claimed by the assessee u/s 10A of the Act, amounting to Rs.1,652,643,181 for AY: 2008-09. 3. The learned CIT(A) has erred in law and in facts in not allowing credit in respect of foreign taxes paid by the assessee on income earned in foreign jurisdictions. 4.The learned CIT(A) has erred in law and in facts in confirming the order of the learned AO by upholding the levy of interest u/s 234D of the Act, amounting to Rs.120,511,853 for AY: 2008-09". 73. Ground no.1 is general in nature and calls for no adjudication. Gr.No.2 raised by the assessee is identical to ground no.2 raised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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