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2016 (8) TMI 763 - ITAT MUMBAI

2016 (8) TMI 763 - ITAT MUMBAI - [2016] 52 ITR (Trib) 54 - Deduction u/s 10(B)- denial of claim holding that the assessee, a firm of Advocate & Solicitors engaged in production and export of customized electronic data or legal database is not eligible for deduction - Held that:- The work of the assessee i.e. compiling, editing, data processing and legal data-base is transmitted or exported from India to outside India by any means and lieu earned foreign exchange, which is eligible for deduction .....

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ders of CIT (A) in appeal No.CIT (A)-2/IT/376 to 379/2010-11 for the assessment years 2004-05 to 2005-06 and 2008-09 vide order of common date 07-02-2012, in appeal No.CIT (A)-2/IT/382/2009-10 dated 07-02-2012 and in appeal No.CIT (A)-2/IT/210/2011-12 order dated 23- 08-2012. Assessments were framed by the ACIT-11 (3), Mumbai for the assessment years 2004-05 to 2009-10 vide his orders of different dates u/s 143 (3) read with section 147 of the Income Tax Act, 1961 (hereinafter the Act ). 2. The .....

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der:- 1. On the facts and the circumstances of the case and in law, the ld. CIT(A) erred in holding that the assessee, a firm of Advocates and Solicitors, was engaged in the production and export of customized electronic data or legal database and was hence eligible for deduction under section 10 B of the Income Tax Act. 2. Ld. CIT(A) failed to appreciate that the assessee was merely rendering client specific legal services to foreign clients in the normal course of profession, using an existing .....

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) failed to appreciate that the assessee had always been rendering the same services to its foreign clients, in the same manner and with the same resources, and hence the alleged export oriented undertaking was formed by a mere splitting up and reconstruction of the existing activity and consequently no deduction under section 10 B was allowable. 5. Without prejudice to the foregoing grounds, the Ld. CIT(A) erred in allowing deduction under section 10 B on the entire profits for the present A.Y. .....

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cal and hence, we will take up the lead year i.e. assessment year 2007-08 and will decide the issue. 3. Brief facts leading to the above issue are that the AO during the course of assessment proceedings noticed that the assessee firm had claimed deduction u/s 10B of the Act amounting to ₹ 3,41,08,341/- in its return of income on account of rendering of legal service to overseas clients and the money brought in convertible foreign exchange in India. During the scrutiny assessment, the AO to .....

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rmation to its clients. The unit of the firm was recognized as a 100% EOU by the Development Commissioner SEZ, SEEPZ and its entire sale proceeds from export of such legal services was brought in India in convertible foreign exchange. Since, the assessee firm has transferred the customized electronic data to its client therefore it forms part of computer software as per explanation 2 to section 10B of the Act. Further, the grant of registration from the Development Commissioner of EOU for Legal .....

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e firm itself has claimed that it was engaged in providing legal services to its overseas client. The certificated issued by the Development Commissioner, SEEPZ Form 56G and the Tax Audit report also confirms this fact. Thus, the assessee was engaged in providing legal services to its foreign clients and not engaged in exporting legal database which was one of the items notified by the CBDT for the purpose of Computer Software on which deduction u/s. 10B was admissible. b) Rendering of legal ser .....

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ndered by the assessee firm were personalized and client based specific services rendered by the assessee firm based on the request of its foreign clients. Legal database is for the purpose of general use, whereas legal services are made for specific clients for specific use. Legal database can be used and retrieved by any person having access to the same whereas legal services are made strictly for a particular client on the confidential basis. Therefore, since the assessee had not created any .....

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address does not tally. Further, the application for change of office by the assessee firm from Ismail Building, Fort to Free Press House, Nariman Point was only accepted by the Development Commissioner, SPEEZ vide their letter dated July 28, 2006. Mere intimation by the assessee that it wants to change its office from Fort to Nariman Point without the approval of the prescribed authority cannot make it eligible to claim deduction u/s. 10B. g) During the course of assessment proceedings a lette .....

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refore, the assessee firm is not eligible to claim deduction under section 10B of the Income Tax Act. Based on the above reasoning, the Assessing Officer has disallowed the claim of the assessee firm regarding deduction claimed u/s. 10B of the I.T. Act for the detailed reasons given in the assessment Order for the A.Y. 2007-08 . 4. Aggrieved against the findings of the AO, the assessee preferred appeal before the CIT (A), who allowed the claim of the assessee of deduction u/s 10(B) of the Act by .....

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rvices of legal database as eligible information technology enabled products or services for grant of deduction u/s. 10B of the Income Tax Act. The services provided by the assessee firm are Customized electronic data transmission and are user/client specific. Further the legal services provided by the assessee firm were rendered by use of legal database created by the assessee firm over a period of more than 60 years of its professional experience. The legal services were rendered by the assess .....

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er, I find that Hon ble ITAT Mumbai Bench E in the case of DCIT, Range 9(3), Mumbai Vs. Tecnimont ICB (P) Ltd., (2009) 119 ITD 151 (MUM) has clarified that the services provided by an assessee by use of emails and FTP sites are eligible as computer programme as defined under section 10B read with section 10BB. Therefore, the claim of the assessee firm is fully justified. Coming to the issue of custom bonding as raised by the Assessing Officer, I rely on the decision of the Hon ble ITAT Delhi A B .....

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bonding procedure by itself cannot be a basis for denying deduction u/s. 10B of the Income Tax Act to the assessee firm. Finally, I am inclined to agree with the views of the authorized representative of the assessee firm that any transmission of customized electronic data fails within the expression of computer software as per explanation 2(i)(b) to the section 10B of the I.T. Act. Therefore, the assessee firm is entitled to claim deduction u/s. 10B of the I.T. Act in respect of its 100% EOU un .....

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egal service rendered by use of legal database were also eligible for deduction u/s. 10B in view of the notification issued by the CBDT vide No. S.O. 890(E) dated September 26, 2000. Consequently, this ground of appeal is decided in the favour of the assessee firm. Aggrieved against the order of the CIT (A), Revenue is in second appeal before the Tribunal. 5. Before us, the learned Counsel for the Assessee Shri Arvind Sonde argued that assessee firm is engaged in providing legal services through .....

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pplied to the Development Commissioner SEEPZ, Special Economic Zone for grant for EOU Status vide it application dated 14th January 2003 for the item Legal Services which was covered under item 1A (a) of Appendix 36 of EXIM Policy 2002-2007. On the basis of this application, the Asst. Development Commissioner, vide his letter no. SEEPZ/28/EOU/129/2002-03/67 dated April 16, 2003, granted the approval for EOU status to the assessee firm in-principle. Subsequently, vide their letter no. PER: 121/(2 .....

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is agreement, the Assistant Development Commissioner, SEEPZ-SEZ, vide his letter no. SEEPZ/EOU/IAII/121/2002-03/6235 dated December 03, 2003 granted the assessee registration as EOU and issued of GREEN CARD No. 0001191 dated 24.10.2003 which was valid up to 31.03.2006. After obtaining the registration as 100% EOU, the assessee firm approached Shri Vijay H. Patil, Advocate - Supreme Court, for his opinion on various queries for availing benefits under section 10B of the Act by the assessee firm. .....

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gh electronic data would be customized electronic data and, as such, it would be a software for claiming deduction u/s. 10B and, therefore, in my opinion, the Querist s case would squarely fall under the definition of Computer Software which is entitled to deduction under the provisions of section 10B of the Act. Under the provisions of section 10B, hundred percent deduction is available in respect of income arising out of export-oriented undertaking. According to Ld. Counsel, based on the above .....

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vice; or b) any customized electronic data or any product or service of similar nature as may be notified 34 by the Board. 6. The learned Counsel for the assessee argued that from the above definition it is clear that assessee s client as per the requirement of their client transmits data in the electronic form, they are covered under computer software and hence eligible for deduction u/s. 10B of the Act. He also argued that our client s export customize electronic data they have also been regis .....

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that when the Act itself provides a dictionary for the words- interpretation of the words used un the statute. We are not concerned with any presumed intention of the legislature; our task is to get at the intention as expressed in the statute . (Emphasis added) 7. The learned Counsel explained the meaning of the words customised , electronic and data and explained that as is apparent from the above definition, customized electronic data is clearly computer software. The words customized electr .....

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with electronic apparatus (e.g. Computers): this dictionary is available in electronic form (Oxford Advanced Learners Dictionary, 4th edition, page 389) Data: As per Websters, the word means a known fact . The Oxford Advanced learners dictionary defines the word to be information prepared for or stored by a computer (Oxford Advanced Learners Dictionary, 4th edition, page 302) The learned Counsel referred to the provision of the Information Technology Act, 2000 ( the IT Act ). Under the Act, the .....

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e memory of the computer. The term information has been defined under clause (v) of Section 2 of the IT Act as under:- Section 2 (v): information includes data, text, images, sound, voice, codes, computer programmes, software and database or micro film or computer generated micro fiche. Electronic Form has been defined under clause (R) of Section 2 of the IT Act as under: Section 2 (r): electronic form with reference to information means any information generated, sent, received or stored in med .....

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iour of electrons; Data - means information, which includes text or images. 8. In view of the above definitions the learned Counsel explained the facts that the assessee is exporting legal services based on legal database which is transmission of customized electronic data and therefore eligible for deduction u/s. 10B of the Act. According to him, the assessee is also rendering legal services, which have been notified by the board as an eligible service by use of legal database and accordingly t .....

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ted that software staff are not required for creating such a legal database which is a technical and legal work. The assessee firm has engaged legal personnel to prepare legal database in the electronic form readable, editable and retrievable by means of computer system and such legal database is used for providing legal services to its international clients. These legal personnel have been paid professional fees which are reflected under the head professional fees in the profit and loss account .....

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cable to it. Hence, if a particular requirement for furnishing of report of the auditors u/s. 92E of the Act is not applicable, the same is not liable to be filed and cannot be a reason of disallowance of claim under any other section of the Act. According to him, the AO has taken a view that legal database was general in nature whereas legal services rendered by the assessee were individual, personalized and/or client based specific services. According to him, legal database can be used and ret .....

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ppears that while raising this objection, he completely overlooked Explanation 2 (i) (b) to section 10B of the Act, which provides that computer software means any customized electronic data or any product or services of similar nature . Further in response to the objections raised by the AO, it was explained that the assessee, vide its application dated January 14, 2003 applied to the Development Commissioner SEEPZ, Special Economic Zone for granting the firm EOU Status for item description Leg .....

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er no. PER: 121/(2003)/SEEPZ- /EOU/21/03-04/1664 dated August 18, 2003, the Development Commissioner, SEEPZ granted the approval of EOU status to the firm, subject to certain conditions. (i) The unit shall export its entire production, excluding rejects and sales in the Domestic Tariff Area as per the provision of EOU, for a period of 5 years from the date of commencement of the production. For this purpose, the unit shall furnish the requisite legal undertaking as prescribed in EOU Scheme to th .....

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project and commence production and would automatically lapse if an application for the extension is not made before the end of the said period. Date of commencement of production shall be intimated to the Development Commissioner, SEEPZ-SEZ. (vii) The approval is based on the details furnished by you in your project applicable. (viii) You shall require to entre into a legal Agreement in the Prescribed Form (Appendix 14-IF) with DC SEEPZ-SEZ for fulfilling the terms and conditions mentioned in .....

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required under the Scheme of EOU. Finally, based on this submission the Development Commissioner vide his letter No. SEEPZ/EOU/IAII/121/2002-03/6235 dated December 03, 2003, confirmed the grant of EOU status to the unit and issued Green Card No. 0001191 effective from October 24, 2003 and valid up to March 31, 2006. We may highlight here that the said letter of confirmation of EOU status was issued by the Development Commissioner, SEEPZ to the assessee at its new office address of Free Press Hou .....

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No. 01723 dated July 28, 2006 up to August 31, 2007. During this period the assessee was carrying out the process of Custom Bonding, which was completed only on November 22, 2006. This furthers the intention of the authorities to not curtail the benefits of EOU to the unit. 10. We have heard rival contentions and gone through facts and circumstances of the case. We find from the facts of the case that the services provided by the assessee i.e. legal services are recognized by the Government of I .....

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of law since 1943), earned reasonable amount of valuable foreign exchange for our country, thereby fulfilling the most core intention of the law for introduction of EOU Scheme under EXIM Policy and Section 10B of the Act. The assessee has also fulfilled the specific requirements of Section 10B of the Act, by providing Legal Services using Legal database. Legal database being recognized by the Board vide its notification No. S.O.890(E) dated September 26, 2000 as one of the eligible information t .....

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provision of section 10B of the Act, which allows 100% tax exemption on income derived from exports of articles or things or computer software. The benefits are available to any undertaking (i.e., company, partnership firm, etc.) and the provision does not discriminate undertakings on the basis of type of business or services exported. Explanation 2(i)(b) of the IT Act defines computer software to mean any customized electronic data or any product or service of similar nature as may be specifie .....

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efinition and meanings of the term not defined under the Act. These includes Customized , Electronic , Electronic Form , Data , Computer Database , Computer System , Information . We find that the CIT(A) s order hold that any transmission of customized electronic data falls within the expression of computer software as per the Explanation 2 to section 10B of the IT Act. The CIT (A) observed as under:- Therefore, the assessee firm is entitled to claim a deduction under section 10B of the IT Act. .....

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t for the various benefits under the scheme of EOU as per EXIM Policy 2002-2007. Section 10B of the Act has been introduced to give benefit to such EOU under the Act, reflecting the intention of law to provide encouragement to the genuine exporters of service and in turn to earn valuable foreign exchange for our country. We find from the case records that the assessee has attached list of database used as a precedent and which are made on the basis of the relevant applicable laws, Rules, Regulat .....

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dering services to overseas clients and, therefore, leased new premises and made an application to the SEEPZ, SEZ Development Commissioner ( DC ) for grant of EOU status on January 14, 2003 for providing legal services which is covered under item IA (a) of Appendix 36 of EXIM Policy 2002-2007. In- principle approval was granted for EOU status on April 16, 2003. Subsequently, approval of EOU status was granted on August 18, 2003. Green card was issued by the DC on October 24, 2003 which was valid .....

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media. The information may be a list of clients and their addresses or it may be the full text of various documents or it may be a set of co- ordinates relating to a three-dimensional building structure. The range of things which may be included in a computer database is enormous. Based on the above, and the case cited below the requirement of the provision is that there should be customized electronic data and such data should be exported outside India. The data which a customer may require may .....

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nature of activity done in the EOU was that of producing designs, drawings, layouts and scanning for the projects of foreign clients on the basis of specifications. The activity was done by taking into consideration the data collected by the assessee itself or from clients. Thus, ready to print books exported by the assessee in the form of CDs or e-mails are customized electronic data eligible for claiming deduction under section 10B of the Act. 14. We have also considered the case law of the M .....

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India to qualify for deduction. What all is required is that the data collected should be in an electronic form. And, further Mumbai Tribunal in the case of Cybertech Systems & Software Limited v. CIT 149 TTJ 17 (Mum), held that the main activity of the company is to train engineers and other professionals in administration of computer software, especially SAP and export them out of India as per the requirements of the client. The definition of computer programme and software as contemplate .....

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through the internet to its client abroad and that of data entry processing and claimed deduction under section 80HHE of the IT Act. The Court held that data entry was covered by the CBDT notification dated September 26, 2000 as being computer software service and, hence, allowed the deduction. Similarly, Delhi Tribunal in the case of M.L. Outsourcing Services Pvt. Ltd. 104 TTJ 59 (Del) has held that the assessee was engaged in hiring overseas IT consultants (sourcing, screening and interviewin .....

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evice and, hence, entitled to investment allowance. 17. We find from the facts of the case that the assessee maintained two separates books of account for these two offices. There was also substantial increase in the export turnover from the financial year 2004- 05 to 2009-10. Assessment year Exports turnover (in Rs. Crore) 2004-05 2.37 2005-06 2.67 2006-07 4.52 2007-08 3.41 2008-09 10.8 2009-10 15.98 But, it is a fact that no assets of the business carried out at Ismail Building were transferre .....

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Court in the case of CIT v. Yash International Inc (HP) in Appeal No 4002/2013, dated 2-10-2014, wherein it is held that the tax officer ignored the quantum of fresh capital, investment in plant and machinery, new building, new registration number, PAN number. The new unit cannot be presumed as reconstruction of the old existing business, much less the formation of the undertaking. The shifting of the employees would not affect the construction of the new firm to avail the benefit under Section .....

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usiness are transferred substantially to the new undertaking. There is so such transfer of assets. Once the new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are commercially tangible products and the undertakings can be carried on separately without losing their identity in the old business, they are not to be treated as being formed by reconstruction of the old business. About splitting of business and c .....

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unit have been transferred to the new unit nor has the identity of the first unit been impaired in any way. The mere fact that the second unit manufactures some of the items which were manufactured by the first unit does not make it an integral part of the first unit. It would survive independently of the first unit. 19. In view of the above proposition, the facts of the present case are that on February 28, 2006, as per the EOU procedure, the assessee submitted the green card and the LOP agree .....

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ers even if they do not import capital good or raw materials. The Ministry of Commerce issued this letter against a query asked by the DC by its letter dated February 28, 2006. The DC also instructed the assessee to reverse all benefits enjoyed as an exporter under the Customs Act and direct tax laws. It was explained by the assessee before us that in any event, customs bonding is not at all required and for this he relied on the decision of the Delhi ITAT in the case of DCIT v. Arts Beauty Expo .....

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EOU. A reasonable way of constructing the condition imposed by the Development Commissioner would be to understand the same as necessary only when imports are contemplated. We, therefore, do not see much merit in the objection. In view of the above, we are of the view that customs bonding which was never mentioned by the authorities as a condition for grant of registration can never be made a pre-condition for registration after 3 years. 20. Before us, no contrary decision was pointed out by th .....

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