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2015 (7) TMI 1113 - ITAT BANGALORE

2015 (7) TMI 1113 - ITAT BANGALORE - TMI - Eligibility for deduction u/s 10B - income earned by the assessee from the on site development of software through its associated enterprises under sub contract - Held that:- We have gone through the agreements as well as the work orders received by the assessee from the clients and found that the work of software development was undertaken by the assessee and risk and reward under the agreements belongs to the assessee and not to the associated enterpr .....

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ssessee to the AE for the work done by the AE at the site of the customer has been accepted by the TPO to be at Armís Length Price. Therefore, there cannot be any imputation that the assessee has been trying to shift the profits out of India by outsourcing the work to the AE.- Decided in favour of the assessee. - ITA No.677/Bang/2014 & CO No.98/Bang/2014 - Dated:- 31-7-2015 - ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI VIJAYPAL RAO, JUDICIAL MEMBER Revenue by : Shri Sunil Kumar Agarwal, Jt. CIT .....

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e facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to allow the deduction u/s 10B (wrongly mentioned as 10A) with regard to the income earned by sub contracting of on site part of software development activity through assessee s Associated Enterprise without appreciating the fact that the deduction u/s 10B is to be allowed only for the profits earned from the activity of an site development of computer software and not for the profits earned from the .....

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ds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) is so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 5) The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 3. The only issue arises in the Revenue s appeal is whether the assessee is eligible for deduction u/s 10B with regard to income earned by the assessee from the on site development of software through .....

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essee under sub contract. The Assessing Officer has denied the claim of deduction u/s 10B on the ground that the income received by the assessee from the on site development of software through its associated enterprises is not eligible for deduction, as it was not the work of export of software by the assessee. 6. On appeal, the CIT(A) has allowed the claim of the assessee by following the decision of the coordinate bench of this tribunal in the case of other group company of the assessee namel .....

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ed profit on that part of the job executed by the associated enterprises under sub-contract after reducing the expenses incurred by the assessee. We find that an identical issue has been considered by the coordinate bench of this Tribunal in the case of group concern M/s Mphasis Software Services Pvt. Ltd., (Supra) in para 12 to 14 as under :- 12. Coming to the main issue in the assessee s appeal i.e reduction/deduction of the claim u/s 10A of the Income-tax Act in respect of onsite software dev .....

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customer and makes the payment of software development charges to the AE for the services rendered by it. The contract development charges paid by the assessee to the AE have been held to be at arm s length by the TPO u/s 92CA of the Income-tax Act. What is sought to be disallowed is the claim of deduction u/s 10A of the Act, the income arising out of the onsite development of software by the AE. According to the authorities below, the software is to be developed by the assessee and even the ons .....

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sessee company and if the assessee performs the work at the site of the customer outside India, even then it is eligible for deduction u/s 10A of the Income-tax Act. Thus, it is clear that the CBDT Circular No. 694 only clarifies that the entire work of development or manufacture of the product need not be carried out by the assessee in its own premises in India. The moot question before us is whether the assessee can sub contract part or whole of its development of software work to an agency ou .....

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bunal at para 17 has culled out the various steps involved in the development/creation or production of software and at para 19 has also held that sec. 10B of the Act only provides for certain negative requirements such as clause (iii) of sub sec. (2) which says that the undertaking could not have been formed by the transfer to a new business of machinery or plant previously used for any purpose. It was held that the section does not provide for a positive requirement that the assessee who claim .....

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the AE is under the supervision and the control of the assessee? 14. As seen from the Master Services Agreement (which is placed at page 36 of the paper book) entered into by the assessee with its AE at USA, the scope of the work is to provide onsite and offshore services relating to information technology to the assessee company, which shall include products developed by the contractor in accordance with the specifications provided by the assessee company as agreed for the purpose and set out .....

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reading of the agreement reveals that the rights and responsibilities attached to the deliverables vests with the contractor, only till the company has paid the compensation payable for such portion of the deliverables in accordance with the terms of the agreement and the applicable task order. Therefore, once the compensation is paid for the deliverables, it is to be understood that the intellectual property is owned by the assesse company. The contractors only possesses the intellectual proper .....

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ub contract the work, it shall alone be responsible for the risks and rewards arising out of the such sub-contract. Clause (23) of the agreement provides for sub contracting of the work, wherein it is stated that the supplier may not sub contract the performance of any of its obligations set out therein without the prior written consent of the customers and the approval of the contractor or sub contractor and the customer shall not constitute a superseding of events or wavier of any right of cus .....

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ely responsible for the discharge of its obligation under the agreement to the customer and the subcontractor 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 satisfying the requirement of the customers 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 .....

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