9911796707
TMI Blog2014 (4) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 planning and related application software, with sales and development locations in more than 50 countries worldwide, and customers in more than 120 countries. SAP AG offers standard software like R/3, SAP Business Suite, SAP Busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 Assessee was stated to be in the business of sub-licensing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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: &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extended definition of software development as given in 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltants of SAP with overseas customers. The A0 called for sample invoices and softex forms. On perusal of the same the AO was of the view that the invoices are essentially raised against overseas SAP group entitles and SAP AG. Softex forms only state that software exports are made pursuant to agreement dated 8.4.2004 which is Cross Service Agreement between the Assessee and SAP AG. The payments were found to be made to individuals depending 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the Assessee that even if unspecified software is produced the benefit of deduction u/s.10A of the Act should be extended to the Assessee cannot be accepted. 3. The method of invoicing and billing serves to confirm the presumption that the assessee is not actually producing software but only rendering support services, on a 'borrowal of services' basis to its group entities and billing for these by the hour on the basis of the manpower rate for the same. 4. The requirements of sec.10A cannot be said to be satisfied by the Assessee merely carrying out a "process", but should manufacture or produce a "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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cember 2006). The implementation support services carried out by GDC comprises mainly modifying/enhance the existing functions of SAP's software like SAP Business Suite, SAP Business By design, Partner Edge, SAP Business One, my SAP ERP etc, to suit the requirements of overseas customers who have purchased these SAP software. This work is outsourced by overseas SAP entities to the GDC unit after the sale of the SAP software to overseas customers. For these services, SAP India is remunerated by the respective overseas SAP entities on a man-hour basis under a Cross Services Agreement entered between SAP AG (for itself and on behalf of its subsidiaries) and SAP India ( copies of the said agreement is at Page 77 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the provisions of Exhibit-3 to this agreement. The fee to be paid for providing these services not rendered under individual service contracts is determined according to the terms of the Software Distribution Agreement. The respective pro-active support service will be performance directly for End Users by SAP AG or its sub-contractors. 4.2 SAP AG may certify ND's service partners as competent to render support services for the Software. The fee for such certification are to be borne by ND in accordance with Exhibit-2. 4.3 Other services, including but not limited to, global projects initiated by SAP AG and/or global initiatives to support the marketing and distribution of the Software as well as to enhance the network and conditions for other services, eg. Consulting and/or training may be agreed from time to time between SAP AG and ND. Unless otherwise signed between the parties, the remuneration for said global projects and/or global initiatives shall be determined in accordance with the provisions of Exhibit-4 to this agreement. & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the duties according to Article-8 and 10) with respect of SAP AG". 19. As already stated the software development work/implementation support services carried out in the GDC under the aforesaid agreement is separate from the other lines of business carried out by the Assessee viz, licensing and training. It is also different from software development services provided by SAP Labs to SAP AG since the Assessee which is SAP India Pvt. Ltd. in its GDC unit provides software modification/development services to the end-user customer post sales of SAP's software products, and are based on the customer's requirements, while SAP Labs provides software research and development services to SAP AG to develop its proprietary software. 20. The learned Counsel for the Assessee drew our attention to the broad overview of the process involved in the implementation services undertaken by the Assessee whenever a customization request is made by the customer after the sale of the SAP software: 1. SAP's overseas entity sells the SAP software to overseas customer. 2. Customer provides his customization requirements/ modifications on the SAP softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; - Create the technical specifications; - Ensure the approval of the technical specifications. Phase-III Development Phase Under this phase, the key steps involved are - Develop and review the code: develop/write the software code based on technical specifications. Typically, the key types of software development work carried out by the GDC team would be- o Workflow module: Workflows are programs and objects that enable a multi-step process. They can be simple alerts or may involve user decision, action, review or a background process involving an update. o Report module: Reports are programs that generate information from the SAP database. Mostly, reports are viewed online, on the screen. But often, these reports maybe downloaded or sent as attachment in emails (usually spreadsheets or xls) or may be printed. o Interface module: Interfaces are programs that enable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, rewrite the software code and test again. Phase- IV : Integration test Phase Under this phase, the key steps involved are - Prepare the quality assurance environment; - Prepare and send delivery document; - Perform integration test; and - Sign off delivery document. Phase-V : Customer Acceptance Phase Under this phase, the key steps involved are - Release transport request to Production; and - Perform Customer Acceptance testing and inform the customer of the results Phase-VI : Post go-live support phase Under this phase, the key steps involved are - Post integration testing if there are any defects, rectify the same and release correction from development to quality assurance and from quality assurance to production team; and - End of GDC involvement. 22. The learned counsel for the Assessee thus submitted that: * The Assessee provides software modification services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 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 claim deduction u/s 10A of the IT Act, 1961. Our attention was also drawn to page-92 of the paper book which contained the softex form which is a form be given under the STPI Scheme, when the software is exported. The softex form gives the details of software exports and the amount realised on such exports. It was pointed out by the learned counsel for the assessee that the assessee had exported computer software. The AO in his remand report filed before the CIT(A), a copy of which is placed at page-62 of the assessee's paper book has not chosen either deny or affirm the contentions put forth by the assessee before the CIT(A) and the evident filed by the assessee in support of its contention. The learned counsel therefore, submitted that it is too late in the day for the DR to contend that the assessee has not exported computer software. It was also submitted that the learned counsel for the Assessee that the decision of the ITAT Cochin Bench in the case of Girnar Industries (supra) relied upon by the learned DR is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puter 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 unit modifies the SAP software as per the requirements of the end-user customer post sales of SAP software made by the overseas SAP entities. These services include development/ writing of additional software codes and software programs which is then added to the SAP software. Without prejudice it was submitted that activities of GDC unit would nevertheless also qualify as "production" of any article or thing. While the terms "produce" or "production" have not been defined under the Act, they are generally understood to mean "something that is brought forth either naturally or as a result of effort and work; a result produced" or to "bring into view or notice; to bring to surface". Reliance in this regard was placed on the decision of Hon'ble Supreme Court in the case of India Cine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 2004. The number of man hours on site and off-shore are all set out in the charter. 32. Softex Forms is a declaration given by the Assessee for Exchange Control purposes, duly certified by STPI authorities regarding software export through data-communication links. The invoice No. and date of invoice are also given in the Softex Forms. By way of sample we may have a look at Softex Form dated 25.10.2004 together with ten invoices referred to in the said form. Copies of these documents are placed at pages-92 to 105 of Assessee's paper book filed for AY 05-06. The Assessee has to realise 643499.68 Euros on the basis of Softex copy of which is at page 91 to 94. Let us look at Invoice at Sl.No.1 referred to in column-6 of the said Softex form viz., Invoice No.8999000327 dated 25.4.2003. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hour charges in respect of 9 software professionals who are employees of the Assessee. As to what is the nature of services performed by the Assessee for which the payments were to be received cannot be correlated. The Assessee has not made any such attempts to demonstrate that it was engaged in production or manufacture of Computer Software or was rendering notified IT-Enabled Services. 36. We are of the view that it would be just and appropriate to decide the issue raised by the Assessee in Gr.No.2 in AY 04-05 and 05-06 by restoring the issue to the AO for fresh consideration and by directing the Assessee to establish the nature of service rendered for which payments were received in foreign exchange and in respect of which deduction u/s.10A has been claimed. This can be done on a test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 invoiced on cost plus 6%. It was submitted that it was a common practice in the software services industry to invoice customers on a time and material basis, i.e., in accordance with the billing/ charge-out rates of the personnel incurring time on the particular software development assignment. It was further submitted that the billing mechanism adopted was completely irrelevant while determining whether the Assessee is carrying on software development & related services and the same should not, in any way impact the eligibility to claim deduction under Section 10A of the Act. 39. It was submitted that even activities such as software consulting/ implementation/ maintenance services have been held to qualify for a deduction under Section 10A of the Act and in this regard our attention was dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 perceived and apparent misapplication of mind. The assessee has not pointed out any such circumstances in his grounds. The AO is accordingly directed to levy the interest applicable as per law after taking into consideration the findings of this appellate order. Accordingly, this ground of appeal is not adjudicated upon". 44. In this regard, we find that the grievance of the assessee as projected before the CIT(A) was that 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". This grievance has probably not been properly projected by the assessee nor appreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 during office hours, cannot be treated as allowable expenditure. The AO therefore disallowed Rs 25,59,297, viz., 25 per cent of the said expenses. The AO also disallowed a sum of Rs 2,00,000 (out of the total sum of Rs 7,41,660) incurred by the Assessee towards giving of gifts to the employees, on an ad-hoc basis. Further the AO disallowed a sum of Rs 24,18,622 (being 25% of other staff welfare expenses), while computing the taxable income of the Assessee. In aggregate, the AO made a disallowance of Rs 51,77,919 in respect of Staff Welfare expenses incurred by the assessee, on the ground that there was no Fringe Benefit Tax during the FY 2004 05. 53. The CIT(A) concurred with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 welfare expenses also. We therefore hold that the disallowance sustained by the CIT(A) be deleted. Gr.No.3 is allowed. Sales promotion expenses; (Gr.No.4) 56. The AO disallowed Rs 2,00,000,00 out of sales promotion expenses, on the basis that these expenses (specifically, expenses incurred towards sponsorship of events, hosting of conferences, promotional gifts, public relations), cannot be said to be incurred exclusively for business purposes. The CIT(A) reduced the disallowance made by the AO from Rs 20,000,000 to approximately Rs 11,307,150 (i.e., 10% of the total claim). 57. The submission of the learned counsel for the Assessee in this regard was that the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 return of income, as criteria. For the reasons stated therein, we direct the AO to calculate interest u/s 234C of the IT Act, 1961 by considering the returned income and not the assessed income. 60. In the result, the appeal is partly allowed. ITA No.1494(B)/12 (AY: 2006-07) 61. Ground no.1 is general in nature and calls for no adjudication. Ground no.2 raised by the assessee is identical to ground no.2 raised by the assessee in the appeal relating to assessment year 2004-05. For the reasons stated while deciding the similar grounds in AY: 2004-05, this ground of appeal of the assessee is treated as allowed for statistical purpose. 62. Ground No.3 raised by the assessee reads as follows: "3. The learned CIT(A) is erred in law and in facts in not adjudicating gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount 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 computer software outside India. Since they all concern nuances of the exemption u/s 10A, once I have already determined above that the assessee is not entitle to the basic exemption u/s 10A, the question of adjudicating upon the different aspects of the exemption as covered by the grounds under consideration does not arise. Accordingly, these grounds are dismissed". 64. Since we have remanded to the AO the question of eligibility of the assessee to deduction u/s 10A of the IT Act, 1961, the AO is directed to adjudicate the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 the assessee for the assessment year 2004-05. For the reasons stated while deciding similar ground of appeal in AY: 2004-05, this ground of appeal of the assessee is treated as allowed for statistical purpose. Ground no.3 raised by the assessee with regard to credit for foreign taxes paid is not pressed as the assessee has obtained necessary relief by filing an application u/s 154 of the IT Act, 1961. Hence, Gr.No.3 is dismissed. Gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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