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2015 (10) TMI 2062 - KARNATAKA HIGH COURT

2015 (10) TMI 2062 - KARNATAKA HIGH COURT - TMI - Eligibility for deduction under Section 10A - income earned by the assessee through the development of the software by the Associated Enterprise - sole ground for denying the benefit of section 10A is that 'on-site' development of computer software has not been executed by the assessee itself through its own personnel - Held that:- The entire 'on-site' work has been sub-contracted to the AE. The MSA provides for the AE to work under total supervi .....

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be said that there is no nexus between 'off-shore' development and 'on-site' development.

In view of the 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 Appe .....

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ate 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 year 2007-08, the assessee had declared an income of ₹ 2,52,18,171/-. However, during the assessment proceedings under Section 143(3) of the Act, the Assessing Officer found that the assessee had claimed a sum of ͅ .....

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der section 10A of the Act on account of 'on-site' work sub-contracted to Associated Enterprise (for short 'AE') and also exclusion of telecommunication and travelling expenses incurred in foreign currency towards delivery of software in export term. In appeal filed by the assessee, the appellate Commissioner, after following Judgment of this court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98, directed the Assessing Officer to exclude telecommunication and travelling e .....

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ce made by the Assessing Officer. The Tribunal dismissed the appeal of the Revenue and allowed the claim of the assessee and granted benefit under Section 10A for the 'on-site' work carried out by the assessee through its sub-contractor i.e., AE. Aggrieved by the said order, these appeals have been filed, which have been admitted on the following question of law: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income .....

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h 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/- und .....

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tomer and sub-contracts a part of the same to the assessee company and such part of the contract is performed by the assessee company in India as its 'off-shore' activity and remaining work is carried out by the AE at its own end. For such part of the contract which has been performed by the assessee in India as its 'off-shore' activity, it has been given benefit under Section 10A of the Act, regarding which there is no dispute. 9. It is the earning from Type-2 contracts which is .....

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r deduction of such profits and gains as are derived from export of articles or things or computer software which shall be allowed from the total income of the assessee. Sub-section (2) of Section 10A provides for the applicability of Section only when certain conditions are fulfilled. Explanation-2 of the said Section gives definition of certain phrases and Explanation-3 clarifies that the profits and gains derived from 'on-site' development of computer software outside India shall be d .....

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ant 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." Sub-section (2) "This section applies 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 afte .....

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hall 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 the 'on-site' development work outside India was not carried o .....

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ee) personnel. Sri Sanmathi, learned counsel for appellant has stated that the assessee has, in its written statement, admitted that the entire 'on-site' work had been transferred to AE and the assessee only retained supervision and control (not manufacture and production) with itself. Learned counsel has relied on the findings recorded by the Assessing Officer as well as appellate Commissioner in this regard and has submitted that such findings which have been recorded by the Tribunal a .....

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urther, it would disturb the whole concept and purpose of said Section. In support of his contention, he also relies on the Circulars issued by Central Board of Direct Taxes (CBDT) on 23.11.1994 and 17.01.2013, which shall be dealt at the time of considering the submissions. Sri Sanmathi, learned counsel for appellant has submitted that for granting the benefit of Section 10A, unless the assessee fulfils the conditions, which are to be strictly construed, no benefit could be granted to the asses .....

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ng 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 .....

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nnel, and in this regard, the contention is, that nothing should be read into the said Section by the authorities or this Court while interpreting Section 10A of the Act. It has been submitted that the assessee fulfils all the conditions laid down under Section 10A, which are undisputedly liable to be construed very strictly, but once the conditions are fulfilled by the assessee, a liberal interpretation has to be given by Courts for granting the benefit under the Section. 13. Section 10A of the .....

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d stated that it was "with a view to encouraging the establishment of export-oriented industries in the free trade zone, the Finance Act has inserted a new section 10A in the Income-tax Act which makes special provision in respect of newly established industrial undertakings in free trade zones." 14. While interpreting a beneficial piece of legislation, though this Court has to be very strict in ensuring the compliance of the conditions laid down for granting such benefit, but once the .....

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rvision and control remained with the assessee and no work was carried out by the assessee 'off-shore' in India to claim benefit under section 10A of the Act. He thus contends that under Type-2 contract, when no work is carried out by the assessee in India, it would not be entitled to the benefit of Section 10A of the Act for the simple reason that the assessee would then be a mere trader or broker who gets the contract and passes it on to the AE and nothing is done by it as its 'off .....

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#39;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 att .....

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at various client locations involving your employees. Admittedly, it is a software sub-contract work. In that situation the profit shown in these units cannot be stated as profits derived by you out of the export turn over related to computer software development in terms of explanation 3 under section 10A of the IT Act, 1961. In view of the above, you are asked to show cause as to why proportionate profits (in the proportion of sub-contract charges out software expenses) should not be excluded .....

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not the entire contract which was passed on to the AE by the assessee but some part of it was done by the assessee itself in India as 'off-shore' work and the remaining part was sub-contracted to the AE for 'on-site' work. It may be relevant to notice here that the sub-contracted part carried out 'on- site' outside India by the sub-contractor, did not have the personnel of the assessee but admittedly the supervision and control (with regard to the quality and specificatio .....

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k which was to be 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 a .....

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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 regard to profits earned from 'off-shore' work carried out by the assessee, amounting to ₹ 8 crores. For such 'on-site' development work, the assessee has an option of sending its own personnel for which it will have to have an establishment at the place of the end cu .....

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; work done would, in such a case, be made by the assessee to the AE and not by the end customer, who would make the entire payment of ₹ 10 crores to the assessee. There could be a marginal difference in the expenses which the assessee would have incurred if it would have carried out the 'on- site' work through its own personnel as against the payment which is made to the AE for doing such work, but such decision of passing on part of the work to be done by a sub-contractor (AE) or .....

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t would it be permissible for the benefit under Section 10A to be given to the assessee if the 'on-site' work carried outside the country is not done through its own personnel. For this, we may refer to Explanation-3 to Section 10A, which is clarificatory in nature and does not limit the benefit provided by Section 10A but only enlarges its scope. In the said explanation, it is provided that the profits and gains derived from 'on-site' development of computer software outside Ind .....

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nefit 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, .....

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nit in the EPZ/EOU/STP develops software sur place, that is, at the client's site abroad, such unit should not be denied the tax holiday under s.10A or 10B on the ground that it was prepared on site, as long as the software is a product of the unit, i.e., it is produced by the unit." 22. In our view, the said Circular is in favour of the assessee and not against it. Learned counsel for Revenue has laid much stress on the wordings that the assessee unit should have produced the computer .....

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e product of the assessee and since in the present case, the ownership of the product (software), after payment by the assessee for the work done by the AE, would be of the assessee, the same would be nothing but the product of the assessee and not a product of AE. The other Circular dated 17.1.2013 on which the learned counsel for Revenue has relied upon, also does not any where specify that the personnel of the assessee should only be deputed for carrying on the work. Even otherwise, the Circu .....

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cuted by the assessee itself through its own personnel. Such interpretation of the Section cannot be accepted because what is not there in the Section or the Explanation, cannot be read into by the authorities 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 .....

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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 India, and same would also be entitled to such benefit. If the interpretation, as contended .....

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e the profits and gains of the assessee company w.r. to export of computer software outside India. To be precise, the deduction is available only if the on-site development of computer software is executed by the assessee itself through its own personnel. The sub-contracting of "On site" part of the software development to other entity and the resultant profit is not covered in Explanation 3 to Section 10A of IT Act and such profits and gains would not qualify for deduction under secti .....

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al properties i.e., software product (Deliverables). Hence it is abundantly clear that the assessee never involved either directly or indirectly in the on-site software development activity executed by the AEs. Even if it is involved administratively for co-ordination between the AEs and its clients in getting the contract executed, the assessee shall not be eligible for deduction since the core function of software development function was executed by the AEs. Neither the plant and machinery no .....

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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 produc .....

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