TMI Blog2005 (4) TMI 251X X X X Extracts X X X X X X X X Extracts X X X X ..... e or lease, hire or otherwise deal in computers, computer machinery, spare parts, hardware, software, computer stationery, peripherals, line printers, monitors, modems, hard disc, plotters, digitizers, electronic and electrical machines, controllers for machines, technical know-how related to software and computer programmes and accessories, telecommunication instruments and systems, facsimile transreceiver, electronic private automatic branch exchange, cordless telephones and pay phones. 2. To design, develop, process, compile, service, renovate, remode, construct, assemble, render technical know-how to run education centre and coaching classes, consultancy services concerning computer scientific knowledge and to compile, make available, render, assist in the field of electronics, mechanical engineering, marketing economic and research and also to render services and know-how in systems and management relating to computers, computer machinery, computer installations, data processing and computer science." 4. The assessee-company has been approved by the Government of India in the Ministry of Industry as an export oriented unit (EOU). The approval was granted by the Ministry th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contents of the server to see if any such requests/queries have been pasted. The assessee's engineers would then look into the complaint, make the necessary changes and modifications, develop new patches of programs and thus try to rectify the errors painted out by the customer or develop new programs for meeting the business dynamics of the customer. After the necessary rectification/modification and developments of new programs for the customers of Unisys, the camp any would telephonically or through e-mail communicate with the customer and ask him to test the changes/new developments as designed by the company on their system. After the customer of Unisys confirms the fulfilment of the requirement, the same would be released as a new version of the product and be saved as such in the library maintained by the assessee." 8. M/s Unisys remunerated the assessee-company for its services an monthly basis in consonance with annual contracts. 9. The agreement between the assessee-company (CSSL) and RIPL was entered into on 24th Nov., 1995. As per the agreement RIPL would run training facilities for SAP known as 'Cybertec Advanced Learning Centre' to train the recruitees' as the lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch teams. 3. Formation of conceptual design documents. 4. Setting up features in SAP and other computer software. 5. Customization of various modules to meet the specific needs of clients. 6. Developing and writing new patches of programmes which are not available in the standard format of system. 7. Testing the functional competence of new modules designed by the assessee. 8. Functional integration of modules and testing of its functional accuracy and finally storing the results projectwise. 13. During the previous period relating to the assessment years under appeal, the assessee-company had provided services to CIC, Unisys and also to associate concerns of CIC like CTE (Cybertec, Europe) and CSI (Cybertec Systems Inc.). According to the assessee, it was engaged in implementation and customization of SAP software; the assessee has bought licenses from SAP Ag. and installed it at its offshore centre in Thane, India for the purpose of carrying out the customization, implementation activities and enhancing the skills of employees for such activities through internal training programmes; in the case of Unisys, the company has provided on its software called C-TOS sold b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of various observations. One of the observations made by the assessing authority was on the basis of advertisements released by the assessee-company inviting applications from software professionals to join the assessee-company for getting trained and later on getting migrated to USA and other foreign countries. The AO examined the nature of those advertisements and found that all those advertisements are worded in a similar manner mainly for inviting applications from qualified professionals to take up employment outside India after getting appropriate training with the assessee-company in India. Another observation made by the assessing authority was that the assessee-company is remunerated by CIC on the basis of the number of recruitees finally migrated to USA on the basis of visas arranged by CIC. As far, as the services rendered to M/s Unisys are concerned, the AO held that the software called "C-TOS" is owned by Unisys and assessee-company has been merely providing support to the users of the said software, and such type of activity cannot be considered as manufacturing or producing of computer software or programmes. "16. The AO after examining the various agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest income was assessed as income from other sources and the, interest payments were allowed as expenditure in computing the business income. 19. The assessments for the impugned three assessment years have been completed by the assessing authority in the above manner after denying the assessee-company, the exemption claimed under s. 10B and deduction claimed under s. 80HHE of the IT Act, 1961. 20. The assessments were taken in first appeal. In the first, appeal considered for the asst. yr. 1997-98, the CIT(A) examined the detailed order passed by the assessing authority on the issue of exemption under s. 10B and finally came to agree with the AO that the assessee-company was not entitled for the exemption available under s. 10B of the IT Act insofar as the services rendered to M/s CIC and Unisys. The CIT(A) held that the materials collected by the assessing authority including the newspaper advertisements put in by the assessee-company have established that the assessee-company was in fact training computer professionals and exporting them to foreign countries at the instance of CIC. The CIT(A) held that this view is strengthened by the finding of the assessing authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0HHE(1)(ii) of the Act. The concept of providing offsite services is very much in vogue. In view of the definition of computer programs provided in Copy Rights Act that is required to be considered for examining whether the services rendered for development and production of software programmes, it has to be held that the receipt for services rendered to Unisys fall in the category provided in s. 80HHE(1)(ii) of the Act. Consequently the appellant shall be eligible for deduction in terms of s. 80HHE(1) of the profits arising out of the said transaction." 22. On the same analogy, the CIT(A) further held that 10 per cent of the total receipts of the assessee from CIC could be considered in the nature of services eligible for exemption under s. 80HHE. Accordingly, he further gave a relief by way of exemption under s. 80HHE to 10 per cent of the total receipts, the assessee-company had from CIC. 23. The deduction under s. 80HHE was directed to be given on the relevant receipts excluding the element of reimbursements of travelling expenses. 24. As far as the ground relating to tax treatment of interest was concerned, the CIT(A) held that the interest income received by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has held as follows: (i) the assessee-company is not entitled for the exemption under s. 10B. (ii) the assessee-company is entitled for the deduction under s. 80HHE in respect of the revenue collected from Unisys and CTE. (iii) the assessee-company is entitled for the deduction under s. 80HHE to the extent of 10 per cent of the revenue collected from CIC. (iv) the interest received by the assessee-company was in the nature of business income; 90 per cent of gross interest needs to be excluded while computing the benefits under s. 80HHE while there is no scope for netting off of interest receipts and payments inter se. 30. The present appeals are filed before us against the above findings of the CIT(A). In the appeals filed for the asst. yrs. 1997-98 and 1998-99, the Revenue has raised a solitary ground which is common. The said ground reads as follows: "On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to take the interest income as part of business profit instead of income from other sources without appreciating the facts of the case." 31. The ground raised by the Revenue in its appeal for the asst. yr. 1999-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, implementation, customization/SAP related services without appreciating the facts brought out by the AO that the above receipts are not eligible for deduction." 34. In. view of the admission of the additional ground mentioned above, in total, the grounds raised by the Revenue in the impugned appeals are the following: (i) that the CIT(A) has erred in allowing the deduction under s. 80HHE on the receipts in respect of services rendered to CIC (Asst. yrs. 1997-98, 1998-99 and 1999-2000) (ii) that the CIT(A) has erred in treating the interest income as part of business profit instead of income from other sources. (Asst. yrs. 1997-98 and 1998-99) 35. The grounds raised by the assessee-company in all the three appeals are common and those grounds are as follows: "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in denying exemption under s. 10B to the appellant. 2. The learned CIT(A) erred in restricting benefit of deduction under s. 80HHE only to the extent of 10 per cent of receipts from CIC Inc. USA (excluding reimbursements for travelling), while the appellant has Claimed the whole of the revenue towards customization and dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd expertise of its employees. The assessee is a recognized 100 per cent. export oriented unit (EOU) recognized by Government of India in the Ministry of Industry. The recognition has been granted only after satisfying that the assessee-company is engaged in the manufacture of computer software and in providing technical services outside India in connection with the development or production of computer software. 2. Manufacture or production of computer software also includes customization of a software which requires development of software programme. 'Manufacture' is explained in s. 10B in Expln. (iii) in an inclusive manner. According to cl. (c) of the said Explanation, manufacture includes recording of programmes on any disc, tape, perforated media or other information storage device. Likewise the word 'produce' is explained in Expln. (iv) to include production of computer programmes. 3. Activities carried on by assessee-company to provide services to 'CIC' consisted of two parts. The first part is importing of SAP software. The second part is customization of above software and rewriting the same to make it compatible with clients' specific applications. 4. SAP software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided under that section. The Notification dt. 26th Sept., 2000 issued by CBDT clarified some more computer enabled services and products as eligible for exemption under s. 10B. The said notification included back-office operation, content development or animation, data processing, human resources services, support centres in the class of items eligible for the exemption under s. 10B. 2. Without prejudice to the contentions of the assessee-company already on record, even if the finding of the AO that the services rendered by assessee-company to CIC were that of manpower support alone, still the same is eligible for the exemption under the category "human resource services" listed in the notification. 3. The services rendered to Unisys could not be anything less than content development and data processing. The offshore centre should be treated at least as back office/support centre. These activities also are covered by the said notification. 4. As the notification only clarified the nature of computer enabled products and services eligible for exemption under s. 10B, the notification is clarificatory in nature. Therefore, it is retrospective in operation and so the entire act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Ltd. vs. Asstt. CIT (ITA No. 2022/Mum/2001 dt. 6th Aug., 2002) The contention of the assessee-company for the asst. yr. 1996-97 was accepted by the AO. The assessment order was later set aside by CIT under s. 263. In appeal, the Tribunal held that the view of the AO in accepting the contention of assessee-company of s. 10B was a possible view to be upheld. Revision order has been set aside. 2. Asstt. CIT vs. Amadeus India (P) Ltd. (2004) 89 TTJ (Del) 301 : (2001) 79 ITD 407 (Del) The words 'computer programme' having not been defined in the IT Act, meaning given in the Copy Right Act may be adopted. Computer programme included 'data processing software' as well. Intent and meaning of the relevant words and expression to be construed broadly, liberally and consistently. 3. Asstt. CIT vs. S S Consultants (P) Ltd. (ITA No. 6508/Bom/1997, dt. 21st Dec., 2001) Software development at clients' site was held eligible for exemption under s. 10A. Held that s. 10A was a beneficial provision and even though billing was done on the basis of candidates supplied, the activities need to be treated as manufacture-produce of computer programme/software. 4. ISBC Consultancy Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor every output of a computer is a computer programme. It is something which provides a framework for the manipulation of data and has applicability to several tasks of identical nature by one or more user. 3. In the case of CIC, the agreement with CIC, the mode of payment on the basis of number of personnel sent abroad after having been employed by CIC, the advertisements issued by the assessee, references made in the annual reports of the assessee-company to recruitment and training of software professionals clearly established that the assessee was merely engaged in recruitment and training of personnel. No evidence was produced by the assessee-company to make out a case that the assessee-company had in fact produced any computer programme. The credibility of the certificate produced from CIC is doubtful in the light of the details collected in the course of the survey conducted at the business premises of the assessee-company. 4. The voluminous paper books containing so-called evidences are by and large incomprehensible. Even if assumed that the assessee-company had done some data processing, whether they amounted to customization entailing production of computer programm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of doubt or ambiguity, benefit of it must go to the Revenue. Under such circumstances the onus is on the assessee to prove that it is covered by the said provision. 9. Sec. 10B is applicable only if there is an export of article or thing. The term 'export' has not been defined in this section or in the Act. In the case of Abdul Gaffar Nadiyadwala vs. Asstt. CIT (2004) 188 CTR (Bom) 232 : (2004) 267 ITR 488 (Bom) the Mumbai High Court has held that export can only be said to have been made in case the goods or articles have been subjected to custom clearance. It is to be noted that both in s. 80HHE and in the amended provision of s. 10B introduced by Finance Act, 2000 the exemption/deduction is available to items which are exported or transmitted from India by "any other means". This implies that the statute makes a distinction between exports and transmission without customs clearance. Thus, for the eligibility of deduction under s. 10B of the Act in terms of provisions as it stood at the relevant point of time, custom clearance is necessary and "transmission by any other means" of computer software to a foreign destination will not qualify to be called export for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied is that in force in the assessment year, unless, otherwise provided expressly or by necessary implication." In the case of Gem Granites vs. CIT (2004) 192 CTR (SC) 481 : (2004) 271 ITR 322 (SC) the Supreme Court has opined that every statute is prima facie prospective unless it is expressly or by necessary implication made to have been retrospective operation. In the case of Tata Consultancy Services vs. Union of India (2002) 176 CTR (Kar) 480 : (2002) 257 ITR 710 (Kar), the Karnataka High Court has held that a notification issued on a particular date cannot be made retrospective by judicial interpretation. In the case of Union of India vs. Ganesh Das Bhojraj (2000) 159 CTR (SC) 178 : (2000) 244 ITR 691 (SC), the Supreme Court has held that the date from which a notification becomes effective is, the date of publication of the notification in the Official Gazette. Such views when read in conjunction with the decision in the case of ISBC Consultancy would imply in the context of s. 10B that where customization entails production of new software the exemption would be available prior to 1st April, 2001, but, where such customization does not entail actual production of any softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Tribunal is with reference to the ground raised by the Revenue against the direction of the CIT(A) to grant deduction under s. 80HHE in respect of receipts from CIC to the extent of 10 per cent of the gross revenue. 2. Even though the additional ground raised by the Revenue with reference to the Unisys has not been formally admitted as an additional ground, still it is within the powers of the Tribunal to examine the substance of the said contention as the relevant matter is open before the Tribunal for adjudication. Only for the technical reason that the said additional ground has not been admitted, the Tribunal should not go away from the duty cast on it to decide the issue in its entirety. The facts relating to the nature of receipts from Unisys have to be dealt in by the Tribunal in the context of the claim of the assessee for exemption under s. 10B. Therefore, the Tribunal is substantively seized with the issue of the nature of receipts from Unisys. Under the circumstances, notwithstanding the non-admission of the additional ground, the Tribunal is empowered to comment on the eligibility of deduction under s. 80HHE in respect of the receipts from Unisys. 3. The Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was conducted on 20th Feb., 2001 long after export of the previous year period involved relevant to the impugned appeals under consideration. Except for the modification of the bills which was in any way not untrue, no evidence against the activities carried on by the assessee-company was revealed at the time of survey. 4. The contention of the Revenue that no export activity can be construed in the present case is not relevant. The decisions relied on by the Revenue in CIT vs. Silver Art Palace (2003) 180 CTR (SC) 309 : (2003) 259 ITR 684 (SC) and Abdul Gaffar Nadiyadwala were in fact dealing with the provisions contained in s. 80HHC. The arguments of the Revenue have overlooked the "wording" of Expln. (b) to s. 80HHE. The argument is contrary to the decision of Tribunal, Delhi Bench 'A' in the case of Amadeus (India) (P) Ltd., wherein the Tribunal has followed the principles of "updating construction" applied by the Supreme Court in the case of CIT vs. Podar Cement (P) Ltd. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC). 5. An incentive provision which is designed to encourage an important and vital industry like the software industry is to be liberally construed in the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined.......... Explanation-For the purposes of this section,- (i) "hundred per cent export-oriented undertaking" means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by s. 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act; (ii) "relevant assessment years" means the five consecutive assessment years specified by the assessee at his option under sub-s. (3) or sub-s. (5), as the case may be; (iii) "manufacture" includes any- (a) process, or (b) assembling, or (c) recording of programmes on any disc, tape, perforated media or other information storage device; (iv) "produce", in relation to any article or thing referred to in cl. (i) of sub-s. (2) includes production of computer programmes.' 43. A reading of the section makes it clear that in order to claim the exemption under s. 10B, the assessee-company should have manufactured or produced any article or thing and the export of such articles and things was not less than 75 per cent of the total sales of the assessee-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the number of such professionals recruited and trained by the assessee-company and finally selected by CIC for foreign assignments. The recruits proceed to various work centres outside India on the strength of the visa arranged by CIC (USA) through the assessee-company. 48. A perusal of the sequence of activities carried out by the assessee-company in respect of CIC (USA) clearly establishes that the activity carried on by the assessee-company with reference to CIC was that of a professional recruiting agency. The value added service provided by the assessee-company is that the recruits are trained in a specific software programme namely, SAP software. Imparting of such training is necessary in the line of computer software. The professionals going abroad must be trained properly and must be competent to take up assignments abroad. If the assessee-company was not ill a. position to impart such highly specialised training to these recruits, the assessee-company would not get any contract for placements from foreign companies. Therefore, it is to be seen that the training activities are conducted by the assessee-company as an integral part of recruiting professionals f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-company and therefore, does not satisfy the condition laid down in s. 10B(2)(ia). 51. In the facts and circumstances of the case, we hold that the assessee-company is not entitled for the exemption available under s. 10B. 52. The second issue to be considered is whether the assessee-company is entitled for deduction under s. 80HHE in respect of its entire income obtained for services rendered to CIC. 53. The relevant provision of law contained in s. 80HHE for the period under appeal reads as below: "80HHE. Deduction in respect of profits from export of computer software, etc.-(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of,- (i) export out of India of computer software or its transmission from India to a place outside India by any means; (ii) providing technical services outside India in connection with the development or production of computer software, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from such business." 54. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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; Section 10B Explanation 2-For the purposes of this section,- (i) "computer software" means- (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; Section 80HHE Explanation-For the purposes of this section,- (a) .............. (b) "computer software" means,- (i) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (ii) 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 a place outside India by any means; 60. The provisions of the Explanations to ss. 10A, 10B and 80HHE enable the CBDT to notify further products and services of similar nature as items coming within the meaning of "computer software". The Notifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his behalf by the Central Government in exercise of the powers conferred by s. 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act; (ii) "relevant assessment years" means the five consecutive assessment years specified by the assessee at his option under sub-s. (3) or sub-s. (5), as the case may be; (iii) "manufacture" includes any- (a) process, or (b) assembling, or (c) recording of programmes on any disc, tape, perforated media or other information storage device; (iv) "produce", in relation to any article or thing referred to in cl. (i) of sub-s. (2) includes production of computer programmes." 62. As seen from the law as stood for the impugned assessment years, the provisions of s. 10B do not provide anything which enabled the CBDT to issue notification to enlarge the scope of the expression "computer software". The power has been granted on the CBDT to issue such a notification only by the Finance Act, 2000. Thereafter, the impugned Notification No. SO 890(E) was issued by CBDT on 26th Sept., 2000. 63. It is to be seen that the law contained in s. 10B as it stood for the previous year period relevant to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well. Therefore, all the contentions raised by the assessee with reference to question of interest were also rejected. 67. The learned CIT had, in the course of the argument of the case contended that the Tribunal on the basis of the duty cast on it and in exercise of the appellate powers conferred on it should consider the ground of the Revenue against granting of deduction under s. 80HHE in respect of the income received from M/s Unisys, even though the relevant additional grounds raised by the Revenue have been rejected by the Tribunal. The objections of the Revenue were considered by the Tribunal while adjudicating its petition for admission of additional grounds. The Tribunal has held through its interim order dt. 4th Jan., 2005 that the said grounds of the Revenue were not admissible. As the Tribunal has already taken a conscientious view on this subject, it is not permissible for us to review the decision. 68. The last issue to be considered is with reference to levy of interest under ss. 234B and 234C. As these grounds are only consequential in nature, no formal adjudication is called for. The assessing authority will recompute the interest liability in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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