TMI Blog2023 (12) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the personnel for the outside clients, albeit, from same set of facts a different view has been taken in A.Y. 2009-10 that revenue generated from such employees and branches cannot be considered as export services from India and derived from STPI located in India, which inference of the AO on same fact ultimately has been found to be incorrect by Tribunal. Consequently the whole premise of reopening gets vitiated. Thus, reopening has been done merely on the basis of inference drawn by the AO on same facts and is not based on any material coming on record which can prove that there was failure on part of the assessee in so far as disclosure of correct facts are concerned. A different view taken on same set of facts which was part of the record in subsequent years does not tantamount to failure on part of the assessee. Accordingly, we hold that, there is no failure on the part of the assessee to disclose truly and fully material facts required for the assessment and the reopening has been done simply on the basis of a different view taken by the Assessing Officer in A.Y. 2009-10 and there is nothing tangible material which has been found in A.Y. 2009-10 pertaining to A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved from Software Technology Park Units ( STPI units ) located in India and on that basis holding that in any case the deduction under Section 10A needed to be recomputed and reduced by Rs. 17,98,78,041/-. 4. Apart from this, assessee has also raised additional ground challenging that the impugned order passed by the Assessing Officer under Section.143(3) r.w.s. 147 is bad in law as the same has been passed without issuance of notice under Section.143(2) which is a mandatory requirement for computation of assessment. Secondly, reopening under Section.147 is based on change of opinion ; and lastly, assessee has challenged the violation of principles of natural justice as the AO has passed assessment order within four days from the disposal of the objections. 5. The brief facts are that the assessee company is engaged in the business of software development and provisions of software solutions of varied applications and industries. It had 15 branches in various countries performing similar software development activities as performed in India. The software offshore development centres were extension of client onsite business performed through dedicated offshore centres. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed an income derived from undertaking eligible for deduction u/s 10A Therefore, to that extent, excess deduction is claimed u/s 10A which needs to be withdrawn. In A.Y. 2006-07, such information was not provided by the assessee and hence there is a failure on part of the assessee to disclose truly and fully all material facts required for assessment. Further, the amount of such excess deduction is more that Rs. 1 lakh. In view of the above, statutory approval is solicited for issue of notice u/s 148 of the Income Tax Act, 1961. 7. Thereafter, assessee filed detailed objections which has been rejected by the Assessing Officer vide separate order dated 28/03/2014 holding that assessee s objections are not acceptable because- a) Subsequent to the findings during the assessment proceedings for A.Y 2009-10 the fact came to light that the assessee is not eligible for deduction u/s 10A to the extent. Hence the assessment proceedings are validly initiated within the stipulated period as prescribed in the Act. b) The issue of escapement is established in the A.Y 2009-10 and in view of the same it was found that the assessee has been allowed excess deduction for the A.Y. 2006-07. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A due to following reasons:- (i) The onsite staffs are controlled by the Overseas branches of the assessee and such branches have Permanent Establishment in respective countries. Hence revenue generated from such employees and branches cannot be considered as export services from India and derived from STPI located in India. (ii) The billing to customers are made through such overseas branches and hence the revenue generated there from cannot be considered as having derived from exports from India. 10. Thus, he computed the disallowance after observing as under:- In aforesaid circumstances, it is justified to make the disallowance of profits in the ratio of Software Development Expenses/ Administration Other Expenses incurred out of India to the total Software Development Expenses/ Administration Other Expenses of the assessee company. Vide its letter dated 31.03.2014, the assessee has submitted break-up of Software Development Expenses/ Administration Other Expenses, as under:- Nature of Exp. Cost incurred in India Cost incurred outside India Total Rs Software D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re cannot be any failure on part of the assessee and consequently, the assumption of jurisdiction under Section.147 is bad in law and on merits also the additions are not sustainable. 13. On the other hand, ld. DR strongly relied upon the order of the CIT(A) and further submitted that once in A.Y. 2009-10 it was found that the assessee has done body shopping and has claimed deduction under Section.10A on such expenditure incurred on personnel which has not resulted into income from software development. 14. We have heard both the parties and also perused the relevant material referred to before us. As noted above, in this case already assessment under Section. 143 (3) was completed and the entire working of deduction and claim under Section.10A was fully and truly disclosed during the course of assessment proceedings. Based on those materials Assessing Officer has computed deduction under Section.10A and has also made disallowance of more than Rs. 4.88 Cores under Section.10A. Now, based on certain observations and finding given in the scrutiny assessment for A.Y. 2009-10, assessee s case has been reopened beyond the period of four years alleging that there is a failure on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personnel for the outside clients, albeit, from same set of facts a different view has been taken in A.Y. 2009-10 that revenue generated from such employees and branches cannot be considered as export services from India and derived from STPI located in India, which inference of the AO on same fact ultimately has been found to be incorrect by Tribunal. Consequently the whole premise of reopening gets vitiated. Thus, reopening has been done merely on the basis of inference drawn by the AO on same facts and is not based on any material coming on record which can prove that there was failure on part of the assessee in so far as disclosure of correct facts are concerned. A different view taken on same set of facts which was part of the record in subsequent years does not tantamount to failure on part of the assessee. Accordingly, we hold that, there is no failure on the part of the assessee to disclose truly and fully material facts required for the assessment and the reopening has been done simply on the basis of a different view taken by the Assessing Officer in A.Y. 2009-10 and there is nothing tangible material which has been found in A.Y. 2009-10 pertaining to A.Y. 2006-07 or 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delivery of services to the customer. Third, in cases where certain software development services are required to be integrated with other systems at customer's end, it requires interaction at customer site. Thus, onsite and offshore services are an integral part of software services delivery and are managed in a manner which ensures cost effective and timely execution. From customer's viewpoint, the customer is interested in keeping the onsite requirement to the minimum considering the higher cost involved for onsite services. The onsite as well as offshore employees work under the supervision and control of LTIL'S Engagement Manager/ Delivery Manager Project Manager. There are service level agreements on key parameters of service delivery such system up-time, response time, level of compliance to customer's standards etc. and these are jointly delivered by the onsite and offshore teams. LTIL has branch offices in various countries, through which ting is done to customers in both cases of Offshore and Onsite services provided to the customers. This is done basically to comply with the local laws of the respective countries and ease of collection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt clauses of various contracts placed at Page 63 to 222 of the paper-book. 23. Further, the Ld. Sr. Counsel appearing for the Appellant also relied upon submissions, dated 12.02.2013, to contend that the Assessing Officer had erred in excluding communication expenses of INR 9,54,60,091/- and other expenditure incurred in foreign currency aggregating to INR 8,82,15,41,969/- from the export turnover on the ground that provisions of Explanation 2(iv) to Section 10A of the Act are not attracted. In this regard, reliance was placed on the decision of the Tribunal in the case of M/s Patni Telecom P. Ltd. vs. ITO [2009] 308 ITR (AT) 414 (Hyderabad). Without prejudice to the aforesaid, the Ld. Senior Counsel appearing for the Appellant submitted that, in any case, as per the decision of the Special Bench of the Tribunal in the case of Income-tax Officer, Company Ward- VI(1), Chennai vs. Sak Soft Limited :[2009] 121 TTJ 865 (Chennai) (SB)[06-03-2009] if the export turnover is arrived at after excluding certain expenses, the same should also be excluded in computing the total turnover . 24. Per contra, the Ld. Departmental Representative vehemently contended that the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age, it would be apposite to consider the meaning of `Computer software given in Explanation 2(i) of section 10A as: `(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 India to any place outside India by any means . It transpires from the definition of the `computer software that it has two clauses. The first clause deals with a computer programme which is recorded on any disc or tape etc., which may usually be off the shelf product or in other words, a product which is available as such with the assessee and is not required to be customized. The second clause deals with a customized electronic data or any product, which is required to be tailor-made. Whereas the first clause encompasses a computer programme which has already been developed by the assessee on a standard basis and is exported as such, the second clause covers developing a new computer software as per the specific requirements of the customer. 21. One has to pass through various stages to develop a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w.e.f. 1.4.2001 providing: `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. The Explanation contains a deeming provision and gives a practical solution to the problem by providing that profits from on site development of computer software and 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. Undeterred by the Explanation 3, some of the authorities kept on refusing the claim of the assesses u/s 10A, as is the case under consideration, to the extent of the profits derived from onsite development of computer software and rendering of services by technical manpower outside India. The CBDT had to step in by issuing a Circular No.1/2013 dated 17.1.2013 providing that (a): `it is clarified that the software developed abroad at a client s place would be eligible for benefits under the respective provisions, because these would amount to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e India to qualify for the benefit of deduction is that these should be in furtherance of the development of the software product undertaken by the eligible enterprise. If onsite services are de hors the product which the assessee undertook to deliver to the foreign customer, then any profit and gain arising from such services cannot be considered as eligible for deduction. The determinative test to qualify for the benefit of deduction, in our considered opinion, is that the rendition of onsite services etc. outside India by the assessee should be an integral part of the overall computer software development project, which the assessee undertook to do for its foreign customer. So long as the onshore activities etc. performed outside India remain in furtherance of the final product to be delivered, there can be no doubt on the eligibility of profit from such activities for deduction. 26. In the appeal before us also, it is not disputed that the Appellant had units eligible for deduction under Section 10A of the Act. The Assessing Officer has allowed part deduction claimed by the Appellant under Section 10A of the Act and the dispute before us is limited to the Revenue derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrol and management of the clients and, therefore, Assessing Officer has rightly denied deduction claimed by the Appellant under Section 10A of the Act. However, on perusal of the agreements including the specific clauses highlighted by the Ld. Departmental Representative, we are of the view that the Appellant is not engaged in body shopping in view of the following: 26.1 Perusal of Mushrif Contract we find that according to the recital the Appellant has been engaged to implement, develop, create, test and deliver ERP/Software services. Clause 4 of the Mushrif Agreement dealing with Notice of Delay , inter alia, provides that the Appellant could hire sub-contractors to provide some or all of the services set out in the relevant work order with prior written consent of the client. Further, the compensation structure provided in Clause 5 included fixed price compensation payable on completion of the services/milestone. Clause 10 dealing with Ownership and Rights provided, inter alia, that the intellectual property rights developed pursuant to work orders shall be owned by the client. As per Clause 11 dealing with Representation and Warranties , the Appellant represented tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices under the agreement. Clause 12.4 and 12.5 requires to application maintain Buffer Staff and Relief Staff of 15 to 20% of the Project Staff and 3 to 5% of Project Staff, respectively. The aforesaid clauses when read with the Clause 3 Services read with Exhibit 2 Statement of Work giving details of possible services which could be availed by the client, clearly shows that the subject matter of the agreement under consideration is software development services and not supply of personnel as contended by the Revenue. 26.3 Under Hitachi Agreement also the Appellant has been engaged for providing program support and services as specified in Article 3 of the said agreement for a firm/fixed price to be settled between the parties for each work/supplement project. In our view, merely because the Hitachi Agreement requires that the personnel deployed for the contract would serve on a full time basis with the client (and not for any other client of the Appellant) cannot lead to a conclusion that the Appellant is supplying personnel and not providing services to its clients. 26.4. Perusal of Thales Agreement shows that it is a fixed price contract for work including so ..... 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