TMI Blog2015 (10) TMI 2062X X X X Extracts X X X X X X X X Extracts X X X X ..... he above we are of the opinion that in the facts of the present case, the income earned by the assessee through 'on- site' development of software by the AE on behalf of the assessee, would be eligible for deduction under Section 10A of the Act - Decided in favour of the assessee. - IT APPEAL NOS. 263 - 264 OF 2014 - - - Dated:- 29-7-2015 - VINEET SARAN AND ARAVIND KUMAR, JJ. For The Appellant : E.I. Sanmathi, Adv. For The Respondent : T. Suryanarayana and Ms. Tanmaye Rajkumar, Adv. JUDGMENT Vineet Saran, J. The moot question in these appeals is whether an assessee can sub-contract a part of its software development work to an agency outside India and yet claim the income therefrom as its income eligible for deduction under Section 10A of the Income Tax Act, 1961 (for short 'Act'). 2. These appeals are filed by the Revenue challenging the order of the Income Tax Appellate Tribunal by which the assessee/respondent has been held eligible for deduction under Section 10A of the Act. 3. The assessee company is engaged in the business of development of software and is also rendering business process outsourcing services. For relevant assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he detailed findings of the Assessing Officer on the issue? 5. We have heard Sri E I Sanmathi, learned counsel for appellant- Revenue as well as Sri T Suryanarayan, learned counsel for respondent/assessee at length and have perused the record. 6. Briefly the work carried by the respondent/assessee is of two types, which is described as under: (a) Type-1 - Composite contracts for performing both offshore and onsite services entered by AE with the end customer and offshore work sub-contracted to the company. The company has earned an amount of ₹ 70,64,43,329 under this model. (b) Type-2 - Composite contracts for performing both offshore and onsite services entered by the company with the end customer and onsite work sub-contracted to AEs. The company has earned an amount of ₹ 1,65,69,138/- under this model . 7. For clarity, it may be explained here that 'off-shore' activities of the assessee are those which the assessee caries out at the specified place of work in India; whereas 'on-site' activities are those which the assessee performs or carries outside India at the site of the end customer. 8. As regards Type-1, there is no dispute i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any undertaking which fulfils all the following conditions namely: (i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year- (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park; (c) commencing on or after the 1st day of April, 2001 in any special economic zone; Explanation 3 - For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. 11. Submission of learned counsel for appellant/Revenue is that though there is a finding that supervision and control of the work carried out by the AE for the 'on-site' work remains with the assessee as per the Master Service Agreement (for short 'MSA') entered into between the assessee and AE, but as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-site' by the AE outside India and not with regard to 'off-shore' work carried out by the assessee in India. It has been submitted that the object of introducing Section 10A of the Act was to encourage exports for generating foreign exchange, as would be clear from the Budget Speech delivered by the then Finance Minister at the time of introduction of Section 10A of the Act and since by the 'off-shore' work carried by the assessee and as well as 'on-site' work through the AE, would both generate foreign exchange or bring foreign exchange to the country, assessee would be entitled to benefit of Section 10A of the Act and same would not disturb the concept or the purpose of the said Section, as has been contended by learned counsel for appellant/Revenue, because in either case, the foreign exchange would be earned for the country. He has submitted that Circulars of 1994 and 2013 issued by the CBDT are in favour of the assessee and not against it, as neither in the Section nor in the Explanation or the Circulars has it been anywhere mentioned that 'on-site' work has to be carried out by the assessee through its own personnel, and in this regard, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and passes it on to the AE and nothing is done by it as its 'off-shore' activity in India. Sri Sanmathi, learned counsel for appellant could, however, not point out from the order of Assessing Officer or the appellate Commissioner that in performance of the contract, no 'off-shore' activity was carried out by the assessee in India. 16. We may notice here that the assessee was given a notice by the Assessing Officer, in which the assessee was asked to explain with regard to such part of the software development which was undertaken by the AE for 'on-site' development. The relevant extract of the notice dated 20.12.2010 is reproduced below : Your company followed two Business models. One among the two models is such that the onsite software development activity is given on sub-contract to your AEs and other companies. Accordingly, the Mumbai unit reflects such export proceeds in its turnover. It was stated that onsite entity operates purely as a contract services provider, without assuming any related risks and functions attached to the contractors. You have also submitted that sub-contractor charges were paid by this unit in foreign currency vide le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out by the AE, on behalf of the assessee. In such agreement, the task order was to be given by the assessee to the AE, for which the responsibility was of the AE, subject to the supervision and all pervasive control of the assessee. The product which was to be delivered would be that of the assessee, after payment was made to the AE. As such, it is clear that the AE was carrying on the work under the supervision and control of the assessee, as well as on behalf of the assessee. The proprietorship of the product was also to remain with the assessee. 19. We may explain the transaction with an example. If a total contract (Type II Model) was procured by the assessee, say for an amount of ₹ 10 crores, for carrying on the work of the end customer, out of which 'off shore' work was to be carried out by the assessee to the extent of, say ₹ 8 crores and the remaining 'on-site' work of ₹ 2 crores was sub-contracted to the AE, then, the question for consideration would be with regard to the profits earned from 'on-site' development work of ₹ 2 crores which had been sub-contracted to the AE. There is, admittedly, no dispute with regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, it is clear that the profits and gains which are derived from 'on-site' development of computer software would also be covered under Section 10A of the Act. What we notice is that the main Section 10A no where provides that the 'on-site' work of software development should be carried out by the own personnel of the assessee. As such, it would be wrong to deny the benefit under the said section merely because the 'on-site' work was not done by the personnel of the assessee as we are of the firm view that authorities or Courts are not to read something into the provision of law which is not there in the Section or its Explanation; more so, in the case of a beneficial piece of legislation, as is the present one. 21. With regard to denial of benefit of Section 10A because of the personnel of the assessee having not performed the 'on-site' work, emphasis has been laid by the learned counsel for Revenue on the Circular No.694 dated 23.11.1994 issued by the Central Board of Direct Taxes (CBDT). The relevant paragraph 7 of the said Circular is reproduced below: Similarly, for the purpose of s.10A or 10B, as long as a unit in the EPZ/EOU/STP itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or by this Court. 24. Learned counsel for the Revenue has also submitted that the conditions laid down in sub-section (2) of Section 10A of the Act have not been fulfilled by the assessee, which have to be strictly construed and as such, the assessee would not be entitled to the benefit of Section 10A. According to the learned counsel for the Revenue, the production or manufacture should be in any free trade zone and if the same is not done in the free trade zone, the assessee would not get benefit of such manufacture or produce. The benefit is site specific and not project specific. According to him, only such production or manufacture which is carried at the site of the assessee's unit in the free trade zone would alone be eligible for the benefit under section 10A and not such production or manufacture which has been carried outside or by a third party. A mere reading of sub-section (2) would not be sufficient. The entire section has to be read in conjunction with Explanation 3, which clarifies that profits and gains derived from 'on-site' development of software outside India shall also be deemed to be profits and gains derived from the export of software outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of Indian Income Tax Act, 1961 are not applicable. 26. The Tribunal has considered this aspect and has come to the conclusion that the assessee company was solely responsible for the risks and rewards arising out of the sub-contract to the AE. It has given a clear finding that the assessee is solely responsible for the discharge of its obligations under the contract to the customer and the sub-contractor has no say in the matter. It is seen from the Master Services Agreement that it is the assessee which is under an obligation to discharge its obligation of specific requirement of the customer and in pursuance thereof, to pass on the specification of the products to the AE and also to reserve right to reject the product if the AE does not produce the product in conformity with the product as given in the task order. Therefore, it can be safely concluded that the development of the software by the AE is under the supervision and control of the assessee . 27. From the record it is not borne out that the entire 'on-site' work has been sub-contracted to the AE. The MSA provides for the AE to work under total supervision and control of the assessee. The softw ..... X X X X Extracts X X X X X X X X Extracts X X X X
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