TaxTMI 
TaxTMI 
2008 (6) TMI 234
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....e year. It had however paid Rs. 41,87,577 to another company in this group by name M/s Seacom Solutions (India) Ltd. (hereinafter referred to as 'Seacom') for development/purchase of computer software. The AO further held that even if it is presumed that the computer parts were purchased in the beginning of March, 2002 and were thus available with the assessee for a considerable period of time, the facts disclosed that the export orders were executed before March, 2002 and this was possible only because the assessee had outsourced the development of software business to Seacom. According to the AO, one of the basic conditions for claiming deduction under s. 10B is that the assessee company should have its own infrastructure and should develop the software itself. The condition was not satisfied by the assessee as it had got the software developed by Seacom for which software development charges were paid. The AO further found that the amount of Rs. 41,88,577 paid to Seacom was accounted for by Sea com as domestic software sales. The AO, for these reasons, held that the assessee was not entitled to the exemption. He however allowed deduction under s. 80HHE in respect of the ....
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.... assessee exercises sufficient control and supervision over the process. (g) Circular No. 694, dt. 22nd Nov., 1994 [(1994) 122 CTR (St) 13] issued by the CBDT recognises the position that for the purpose of s. 10B it should not matter whether the programme is actually written within the premises of the assessee or outside. If the assessee develops software by writing the same at the client's site abroad the exemption cannot be denied on the ground that it was prepared on site, so long as the software is the product of the assessee. The AO has not doubted that the software was the product of the assessee. The contract to develop the software was given to the assessee by the USAcompany. The actual export was also done by the assessee company. 4. The CIT(A) accepted the above facts and submissions and held that the assessee was entitled to the exemption under s. 10B. 5. The Revenue is in appeal. Its main contention was that the intention of s. 10B was that the undertaking itself should own plant and equipment to develop the software for export and this was clear from the marginal heading to the section, that admittedly the assessee did not own the equipment and was,....
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....e exercises sufficient control and supervision over the same. 7. We have carefully considered the facts and the rival submissions. We have also gone through the paper book filed by the assessee and obtained clarifications during the hearing wherever necessary. 8. The real controversy in the present case is whether the assessee should own plant and equipment in which the software is developed for export or whether the job can be outsourced to a person who possesses the necessary equipment and infrastructure. It is necessary to look into the section first. The marginal heading of the section is "special provisions in respect of newly established hundred per cent export oriented undertakings". Clause (iii) of sub-s. (2) provides that the undertaking should not have been formed by the transfer to a new business of machinery or plant previously used for any purpose. The argument of the Department is that these are sufficiently indicative of the requirement that the assessee itself should own the plant and machinery for developing the software. But a look at the decided cases in which other sections of the IT Act and Finance Acts containing similar requirements have been examined, ....
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.... High Court disapproved the conclusion of the Tribunal and in doing so applied the judgment of the Calcutta High Court. It is significant to notice that the High Court did not consider it material that at least some work was done by the assessee in its own printing press. The ratio appears to us to be that even if the printing job was done by someone else it would not imply that that person is the manufacturer. 10. In CIT vs. Neo Pharma (P) Ltd. (1982) 28 CTR (Bom) 223 : (1982) 137 ITR 879 (Bom) the assessee company was incorporated with the object of manufacturing and processing pharmaceuticals. It entered into an agreement with another company by name Pharmed under which Pharmed was to make available to the assessee plant. machinery and services of its staff to the assessee company. The manufacturing licence was in the name of the assessee company. The raw materials and packing materials were also supplied by the assessee. The products were manufactured in the premises of Ph armed in the direct supervision of the assessee's own technically qualified staff and under the assessee's own quality control. It was the assessee's name that was printed on the packing, label....
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....ay High Court were almost similar. Sec. 2(6)(c) of the Finance Act, 1969, defines industrial company as including a company engaged in the manufacture or processing of goods. The Tribunal noticed the following facts: (1) The plant and machinery for fabrication was supplied by the assessee company to the other company; (2) the raw materials were mostly supplied by the assessee company; (3) the technical know-how was made available by the assessee through its sister concern in London; (4) the assessee exercised control over the manufacturing process undertaken by the other company and reserved to itself the right to inspect the process. On these facts, the High Court held relying upon, inter alia, its earlier judgment in Neo Pharma (P) Ltd.'s case and the judgment of the Calcutta High Court in A. Mukherjee & Co. (P) Ltd.'s case that the assessee must be taken to be the manufacturer of the goods and, hence, an industrial company. 12. Again in CIT vs. Anglo French Drug Co. (Eastern) Ltd. (1991) 95 CTR (Bom) 176 : (1991) 191 ITR 92 (Bom), it was held by the Bombay High Court that in order to enjoy concessional tax treatment as an industrial company within the meaning of Finan....
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....Indian company whose business consists wholly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power." 15. The definition in the Finance Act was that an industrial company means "a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining", The argument of the Department before us is that s. 10B of the Act makes elaborate provisions in connection with plant and machinery which is indicative of the requirement that the assessee should itself own the necessary equipment or plant to manufacture or produce computer software and the software should be produced with the help of such plant or equipment and it would not suffice if the assessee outsources the development of the computer software to another entity which owns the necessary equipment and plant and the infrastructure. It is also argued that the marginal heading to the section indicates that the undertaking of the assessee should be "newly established". The question b....
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....ness intricacies and procedures adopted by the client. Again, this step involves purely human knowledge and skill without much of physical equipment. Here again, the directors of the assessee company and the key personnel (whose details were filed before the AO) were capable of understanding the requirements of the clients and giving them the concept. (3) Design, which means the deciding of the sub-programmes, of the software which will address the problems of the client. This in turn involves three further steps, namely, the integration of the sub-programmes and creation of loops and sub-loops for the flow of data, the designing of master files, data files, etc. for storing the processed data and formatting the input and output, and lastly, the deciding of the language in which the programmes are to be developed, such as, Visual Basic, Oracle, MS Office, etc. In order to select the language, judicious views of different languages may sometimes be necessary. It may also depend upon the type of hardware available to the client, the working of the internet and satellites, familiarity with the reports generated from various locations across the globe, etc. All these steps in designing....
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.... out of the specialized education, skills acquired and developed over a period of years, experience in dealing with different types of clients and customers and so on and so forth. It is not a mechanical job and more than the machines and equipments it is the value addition that is made by the application of the human skills that counts. 19. Thus, in the very nature of things it appears to us that the plant and equipment required to produce the computer software is subsidiary to the element of human skill, training and experience that are the main requirements. The requirements of s. 10B of the Act have to be understood in this context. It is significant to note that the section does not provide for a positive requirement that the assessee who claims the exemption should own plant and machinery. It only provides for certain negative requirements, such as in cl. (iii) of sub-s. (2), which says that the undertaking should not have been formed by the transfer to a new business of machinery or plant previously used for any purpose. This requirement is to be read with Explns. 1 and 2 below sub-s. (2) of s. 80-I. These Explanations provide for cases and circumstances in which machiner....
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....nd by paying him some charges for the hire or use of the machinery, but under the control and supervision of the assessee who supplies the raw material etc., it must be taken as if it is the assessee who is the manufacturer. These decisions have held the field for a considerable period of time, though they were rendered in the context of the definition of an industrial company under s. 109 or under the relevant Finance Act. The legislature was quite aware of the interpretation placed by the Courts upon those provisions. However, in s. 10B (and other sections such as 80-I, 80-IA, 80HH, 80-IB, etc.) no express provision was incorporated to the effect that the assessee which claims the deduction/exemption should itself own the plant and machinery and should itself manufacture or produce the article or thing or the computer software with the help of the said plant and machinery. In other words, the legal position laid down by the Courts earlier, based on the maxim 'qui facit per alium facit per se' (one who does something through others does it himself), was not sought to be altered. In Banarsi Debi vs. ITO (1964) 53 ITR 100 (SC), the Supreme Court, citing the decision in Barra....
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.... own plant and machinery. If this first condition of cl. (iii) of sub-s. (2) is satisfied then the other two conditions of the clause are not applicable and, therefore, there is no question of assessee fulfilling the same. 21. The Circular No. 694, dt.23rd Nov., 1994also supports the assessee's stand. It is necessary to reproduce the relevant part of the circular which is as below: "5. Since computer programmes are not physical goods but are developed at a result of an intellectual analysis of the systems and methods followed by the purchaser of the programme, it is often prepared on site, with the software personnel going to the client's premises. Doubts have been raised whether units taking up such production of software at the client's premises would be eligible for the tax holiday. 6. The Government's policy on tax incentive to software exports is reflected in the provisions of s. 80HHE introduced in 1991. Under this provision, technical services provided outsideIndia, for the development or production of computer software, are included for the purpose of the tax incentive. 7. Similarly, for the purpose of s. 10A or 10B as long as a....
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....write the computer programme and thus it is the assessee who exercises supervision and control over the work and takes responsibility for the same, there should be no objection to considering it as a production of computer programme by the assessee. We were not presented with any convincing reason as to why the spirit and intention behind the circular cannot be extended to a case where the computer programme is produced, though not at the client's premises, but at the premises of a person whose infrastructure and equipment are utilised by the assessee on payment of necessary charges for using the facilities. In such a case also, there is production of software and the same is done under the control and supervision of the assessee. Thus, in our humble opinion, the circular seems to support the assessee's stand. 22. Coming to the facts of the present case, it is seen that the assessee was incorporated on21st March, 1994as "Next Overseas (P) Ltd." and did not do any business till31st March, 1999. It commenced computer software business in the financial year 1999-2000. On29th March, 2000, it got itself registered with Software Technology Park of India (STPI). It got export o....
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....sessee has also furnished in its letter dt. 22nd Nov., 2004 the details of the software development charges paid by it. These are as under: "Charges for work stations provided reimbursement of expenses on our aa/c Rs. 27,95,000 Debited to software development charges Salaries paid to our employees (except last two months) Rs. 7,51,800 Travelling, boarding and lodging expenses on their a/c Rs. 4,91,777 Rs. 12,43,577 ------------ ------------- Total &n....