TaxTMI 
TaxTMI 
2009 (11) TMI 550
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....der s. 10A to the assessee as claimed by the assessee. 3. The learned CIT(A) has failed to note that the Software Technology Parks of India has expressed its inability to certify the exports of the assessee in the absence of guidelines. 4. The learned CIT(A) failed to consider the fact that the magnitude or scale of operation carried out by the assessee had not resulted in actual exports out of India and export out of India is the primary and sine qua non criterian for allowing deduction under s. 10A. 5. The learned CIT(A) has failed to consider the fact that the assessee has shifted its operations from H.R. services to software development in the subsequent assessment year thereby the possibility of recruiting and sending further candidates abroad is ruled out. 6. The learned CIT(A) ought to have seen that many of the candidates allegedly recruited had denied having been trained or offered employment abroad. Out of 54 allegedly recruited 23 were absorbed by the assessee. The learned CIT(A) ought to have appreciated that the turnover disclosed had no correlation to either the amount receivable as per agreement or actual services rendered. 7. For these and other groun....
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....approved vide No. STPIC/IMSC/2091, dt. 31st Oct., 2000. The unit is into Software Development and Sourcing of Technical Talent (Recruitment) and Training. The unit has requested for the no objection certificate for Sourcing of Technical Talent (Recruitment) and Training. This office is unable to certify the invoices raised by the unit for the above job, due to the non-availability of suitable guidelines for the same. However, this office has verified the following documents submitted by the unit and satisfied with the genuineness of the work executed vs. the PE earned. 1. Agreement between Pinnacle Systems Inc., USA and M/s Pinnacle Info Solutions (P) Ltd., Chennai, dt. 19th Sept., 2000. - Scope of services: To provide software development and other services. - Fees: The Pinnacle Systems Inc., shall pay fees for actual time spent for all the services performed by the unit in accordance with the following rate schedule as per the contract: ------------------------------------------------------------ Sl.No. Service description Rates in US $ ------------------------------------------------------------ ....
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....p; - US$ 55/person hr (project & leaders) ------------------------------------------------------------ 5. Any other service as Actual cost plus service mutually agreed from charges as negotiated on time to time each instance. ------------------------------------------------------------ 2. ............. 3. ............. 4. ............. 5. ............. 6. Skill sets of the candidates: - Java, JSP, Services, XML, XSL - SQL server, ASP, COM, VB, VC++ - HTML, DHTML - J2ME, Oracle, XML-RPL, Palm OS Since, human resource services fall within the listed information technology enabled services as per the policy, the FE earnings by M/s Pin....
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....nbsp; 6,400 one person ------------------------------------------------------------ Other incidental 10,000 16,430 charges ------------------------------------------------------------ Total income 3,48,48,962 ------------------------------------------------------------ 8. The CIT(A) allowed the assessee's claim for deduction under s. 10A of the Act, for the reasons given in paras 6.14, 6.15 and 6.16 of his order as under: "6.14 The facts of the case discussed above clearly show that the appellant has fulfilled the conditions laid down for deduction under s. 10A of the Act and entitled for the same, and there is no material/evidence to suspect the bona fide or genuineness of the transactions claimed and....
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.... - that the assessee's claim that it was exporting computer software is not correct for the above reasons. - that the CBDT notification containing the words 'human resource services' does not help the case of the assessee. - that the notification was issued by the CBDT only for the purpose of identifying certain areas where services or products similar to customized electronic data would be considered for deduction under s. 10A. - that the items mentioned in the CBDT notification are subject to all other conditions stipulated in s. 10A which are mandatory. - that the principle of ejusdem generis is applicable to the words 'products or services of similar nature' appearing in Expln. 2(i). - that the 'customized electronic data' is information in electronic media according to the requirement of the customer. - that the assessee did not export any such item, did not comply with the conditions, and was not eligible for deduction under s. 10A. - that the activities done by the assessee did not amount to export/transmission from India to abroad. - that reliance was placed on the decisions in the following cases: (i) Abdulgafar A. Nadiadwala vs. Asstt. CIT (20....
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....---------------------------------------------- Training ------------------------------------------------------------ 1. Training for recruited candidates 5 ------------------------------------------------------------ 2. Training for recruited by others 18 ------------------------------------------------------------ Total training 23 ------------------------------------------------------------ 13. Before proceeding further, it appears necessary to have a quick look at the relevant parts of s. 10A and the CBDT notification dt. 26th Sept., 2000. The sub-ss. (1) and 2(i) of s. 10A read as under: "10A. (1) Subject to the provisions of this secti....
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....sists of two parts; its hardware and the software. The hardware consists of the physical and tangible units, like central processing unit (CPU), hard disc, keyboard, monitor, etc. 14.1 Anything that can be stored electronically in the computer is 'software'. A 'computer software' can be of two types; a program and a data. An 'electronic data' stored in a computer could be written text, numerical data, sound, or images. 14.2 Initially the computer was used for 'computing'-from simple arithmetical calculations to solving complex, mathematical problems; but gradually its usage expanded to cover almost every part of human activity on the planet. The secret is its boundless capacity to store/retrieve data and to arrange, rearrange, modify, manipulate, analyze, and erase it, as per the commands known as 'computer programs'. It gave rise to emergence of information technology services (ITS) as a distinct market-segment. 14.3 The world wide web (WWW) is composed of thousands of computers called 'websites', linked together by different modes in an endless manner, and is an organized reservoir of information. It transports information from one computer to another. The hypertext tran....
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....e and see how the conditions given in cl. (b) of Expln. 2(i) can be taken to have been fulfilled in respect of the information technology enabled services (ITES) mentioned in the CBDT notification (supra). We could take 'the example of a 'call centre' for this purpose. In fact, the concept of a 'call centre' has revolutionized the manner in which businesses will be done in the globalised economy. 19. Let us see, for a moment, how a typical 'call center' operates. A company is situated in USA, and its customer in UK asks a question, which is answered by a 'call centre' in Bangalore. The question could be one of the FAQs (frequently asked questions) for which standard answers might have been provided by the company in USA to the company which operates the 'call centre'. This is a very simplistic model of a 'call centre'. The 'call centers' are being used in innumerable ways. 19.1 The conversations, in the above example, are monitored and followed up by the company in USA, through internet/e-mail, and this is how the requirements of s. 10A can be said to be fulfilled. The subject-matter of such communications are the 'customized electronic data' within the meaning of cl. (b) of ....
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....f recruitment and training undertaken by the assessee-company, for Pinnacle Systems Inc., USA. Some of these documents, forming part of the paper books are mentioned in the following paras. 22. In paper book, Vol. V, from page Nos. 963 to 972, are copies of advertisements in Indian newspapers in several cities. The advertisement material was e-mailed to Pinnacle Systems Inc, USA, for approval, before being given for publication. One such advertisement is reproduced below: ------------------------------------------------------------ "Walk in interview for USA To join our Elite Club of e-Professionals ------------------------------------------------------------ Pinnacle Systems Inc., a leading provider of e-Services is looking for e-professionals for the following positions in USA. We offer excellent compensation and benefits. ------------------------------------------------------------ - Project manager/team leaders - Dev....
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....-------------- Pinnacle Info Solutions (P) Ltd. AB-5, 3rd Floor, 2nd Avenue, Anna Nagar, Chennai-600 040 Website: www.pinnacle-sys.com" ------------------------------------------------------------ 23. In paper book Vol. II, from page Nos. 238 to 279, are copies of e-mails exchanged between Pinnacle Systems Inc., USA and the assessee-company, relating to the recruitment exercise. It is seen that the assessee-company conveyed the results of its talent search exercise in respect of each candidate to Pinnacle Systems Inc., USA, through e-mails. While making a request for technical evaluation of the candidate, the assessee-company attached with its e-mails, following data. - Candidate qualifying sheet. - Technical interview evaluation form, and - Resume of the candidate 24. A copy of one such e-mail message, sent by Shri P. Krishna Rao of the assessee company, to Shri Satya Rao of Pinnacle Systems Inc., USA, is reproduced below: "--------Original message------- From: Pinnacle Info Solut....
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.... Thanks Satya" 26. A few other similar e-mail communications exchanged between Pinnacle Systems Inc., USA and the assessee-company are as under: ------------------------------------------------------------ (i) Dear Mr. Raghu, Important points for the week. Mr. Vijay has transmitted to US, advertisement material for proposed positions for review and suggestions from US office. ------------------------------------------------------------ (ii) I could contact him but the line was very noisy. I will try calling him tomorrow (Monday). Venkat ------------------------------------------------------------ (iii) She has got good concepts. Working on EJB project, but not industrial strength. I asked her for training program. She is ready for that. We should make her an offer at 50K and 3K increase after finishing the ....
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....anks Satya ------------------------------------------------------------ (ix) Dear Krishna Rao, I spoke lo him yesterday. He is OK in COM and has some knowledge with MTS. But he is not comfortable with web development. He says he is currently undergoing training. So we can consider him after he gains some expenditure in web development. Thanks, Vijay Meda Executive Vice President Pinnacle Systems, Inc. Phone: 732981 1400 Ext. 14 E-mail: [email protected] ------------------------------------------------------------ 27. Finally, the offer letters were addressed by Pinnacle Systems Inc., USA, to the candidates, and a copy of one such letter, at p. 571 of the paper book-Vol. III, is reproduced below: "Date: 23rd Aug., 2000 To: Mr. Sreebhashyam Shashi Kanth, ....
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....hat when benefits available to exporters of manufactured 'tangible' products like machinery or tools, are extended to exports of 'intangibles' like services of 'call centre', 'back-office operations', 'pay rolls', 'human resource services', some conceptual problems do arise. The AO indeed, faced this very problem when he observed, in para (v) at p. 10 of his order that, 'in the instant case, the assessee has not proved that what it has exported out of India', and he went ahead to initiate proceeding under s. 271(1)(c) too. 29.1 Therefore, while examining the claim of assessees engaged in such businesses one has to appreciate the necessary conceptual changes. In such cases what is necessary to examine is whether the 'specified service' was provided by the assessee from India and whether it was 'transmitted' to the recipient in a foreign country by any means. 29.2 In the present case, the material brought on record shows that the assessee-company provided the 'human resource service', which is a specified ITES, and that it was 'transmitted' to a company, at a place outside, by means of internet/e-mail. We have no doubt in our mind that the service provided by the assessee-compa....
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....ng a train-ticket, may decide not to travel. In these cases it cannot be inferred that the service-providers did not provide the services. The job of a service-provider ends when it provides the services, and it has nothing to do with the actual utilization of the services by the recipient of the services. Therefore, the action of the AO is devoid of merit and is unsustainable. 31. A few words about the grounds of appeals. The ground No. 1 is general in nature and, therefore, it does not require adjudication. The ground No. 2 is the main ground which has been rejected by us. The ground No. 3 quotes, out of context, from the letter of STPI, Chennai, dt. 31st Oct., 2001. It was a letter written by STPI, Chennai to RBI saying that the assessee-company was a 100 per cent EOU registered under the STP scheme, and that 'the unit was into Software Development and Sourcing of Technical Talent (Recruitment) and Training'. 31.1 The ground Nos. 4. 5 and 6 are in the nature of arguments-too general, vague and irrelevant. The copies of documents available in paper book Vol. II show that the full contact details of the candidates were available with the assessee-company. The AO has not ment....
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.... the sake of; brevity. However, I would refer the relevant facts whenever necessary at the appropriate stage/place in my order. 35. The issue involved in this appeal is whether the income derived by the assessee from recruitment and training of persons for its parent company in the USA would qualify for deduction under s. 10A of the IT Act, 1961. The entire dispute regarding this issue revolves and pertains to the meaning and interpretation of "computer software" as explained in Expln. 2(i) of s. 10A of the IT Act, 1961. It is an undisputed fact that the total income returned by the assessee for the assessment year under consideration representing the receipts for recruitment charges and training charges received from the parent company M/s Pinnacle Systems Inc., USA. There was no other activity or business conducted by the assessee during the period relevant to the assessment year. Sec. 10A of the IT Act. 1961 provides a deduction on profit and gain derived by an undertaking from exports of articles or things or computer software. As per cl. (i) of the Expln. 2 of s. 10A of the IT Act, 1961, computer software means (a) any computer program recorded on any disc, tape, perforated....
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.... part of sub-cl. (b) of cl. (i) of Expln. 2, the same has to be ITE which means that the product or service would be a set of information or data arranged in a systematic desired manner or programed in a desired format so that the same is capable of being manipulated by using the computer or data processing machine/electronic media. 36. As per sub-s. (1) of s. 10A of the IT Act, 1961, the deduction is provided for profits and gains derived from export of articles or things or computer software. The meaning of computer software as per cl. (i) of Expln. 2 includes two types of components (a) any computer program (b) any customized electronic data or any product or services of similar nature. Therefore, these two components are in the nature of software and not other than software. The CBDT notification is always in furtherance of the statutory provision which empowers such notification and as such the notification cannot be in derogation of the statutory provision. Even otherwise, a notification/circular cannot, dilute the conditions provided under the provisions of statute but only be clarificatory in nature. The notification dt. 26th Sept., 2000 specifics the products/services t....
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....ous and thorough-going enough to bar all avenues of escape by using the words 'or otherwise'. Those words are not words of limitation but of extension, so as to cover all possible ways in which a vacancy may occur. Generally speaking, a tenant's occupation of his premises ceases when his tenancy is terminated by act of parties or by operation of law or by eviction by the landlord or by assignment or transfer of the tenant's interest. But the legislature, when it used the words 'or otherwise', apparently intended to cover other cases which may not come within the meaning of the preceding clauses, for example, a case where the tenant's occupation has ceased as a result of trespass by a third party. The legislature.........intended to cover all possible cases of vacancy occurring due to any reasons whatsoever. Hence, far from using those words ejusdem generis with the preceding clauses of the Explanation, the legislature used those words in all inclusive sense" [Vinayakrao vs. State of Maharashtra AIR 1976 Bom 10 (12, 13) : (1975) Mah LJ 566].' The word 'otherwise' appearing in Expln. (aa) to sub-s. (4A) of s. 80HHC appear to have been used by the legislature to bar all avenues of ....
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....CBDT to explain the substance of the provisions relating to direct taxes in the Finance Act, 1990. One of such provisions explained therein is s. 80HHC of the Act. Thus, to explain the scheme and various shades of s. 80HHC r/w s. 28, as amended by the Finance Act, came to be illustrated by the following examples: ......... ......... ......... Reading of the above illustrations in general and cls. (v) and (vi) thereof in particular make it clear that while describing the deduction under s. 80HHC the words used are 50 per cent of the 'export proceeds' brought into India. It is therefore, clear that even the CBDT has understood the words 'export proceeds' to be synonymous to 'sale proceeds'. If that be so, the amount received by way of consideration in the transaction in question can conveniently be termed as 'export proceeds' equal to that of 'sale proceeds'. Once we hold that the transaction involved in this case is akin to 'sale falling' within the sweep of the words 'sale or otherwise' then the consideration i.e., export proceeds received can be termed as 'sale proceeds'." 39. Similarly, in the case of CIT vs. V.C. Kuganathan, the Hon'ble jurisdictional High Court has tak....
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....adable form and capable of being manipulated or providing interactivity to a user by means of an automatic data processing machine falling under heading No. 84.71, but does not include software required for operation of any machine performing a specific function other than data processing and incorporating or working in conjunction with an automatic data processing machine. 42. Thus, as per the customs law any kind of data which is capable of being manipulated by means of automatic data processing machine would be covered by the term information technology software. As referred in sub-cl. (b) of cl. (i) of Expln. 2, the customized data or any product or services similar in nature shall be capable of being manipulated by means of data processing machine which means the data or the product/services in the nature of information should be program which is capable of being manipulated and provide interactivity to the user. 43. In the present case, the assessee was providing the services to its parent company by recruiting candidates and also giving training. Therefore, the assessee received the consideration against the services of recruitment and training. Only because the assess....
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.... 44. As far as the contention of the learned senior counsel for the assessee that the AO has accepted the actual training imparted to seven persons but has allowed deductions under s. 10A of the IT Act, 1961 in respect of the training imparted to only one person which amounts to acceptance of the services of the assessee eligible for deduction under s. 10A of the IT Act, 1961 is concerned. When the work of the assessee is only regarding recruitment of candidates and imparting the training in some cases which does not fulfil the conditions provided under s. 10A of the IT Act, 1961 for claiming the deduction, then the assessee cannot take the benefit of the act of the AO allowing the deduction with respect of the training imparted to only one person. The assessee cannot take a defence or plea which is otherwise against the object and scheme of the provision itself and acceptance of the same will defeat the very object of the provision. On this aspect, the decision of the Bombay High Court in the case of Eastman Consultants {P} Ltd. vs. CBDT is very relevant as relied upon by the learned Departmental Representative. The Hon'ble Bombay High Court in the said decision has held as und....
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....dates goes abroad and works outside India is altogether beside the point. That work has nothing to do with the assessee's work within India. In such circumstances, to nevertheless accord approval as claimed would result in permitting evasion under the cover of deductions. Sec. 80-O of the Act provides for concessional tax treatment. Tax incentive contemplated thereunder is basically for encouraging Indian companies to export their know-how and skill abroad. Mere supply of particulars or bio-data of various Indians willing to work abroad and their selection or recruitment accordingly in India is a situation falling far too short of the requisites necessary for attracting the benefits of this section. Widely worded though it is the section does not cover a case as the present one. The contentions raised on behalf of the assessee are de hors the actual facts reflected in the agreements and constitute a strained effort to gravitate or bring the matter within the four corners of the said section. Acceptance thereof would militate against the object and purpose behind the law in question. A judicial interpretation should be so geared as to fairly serve the legislative intent. The impu....
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....lifies for deduction under s. 10A of the IT Act 1961." 2. The only point of dispute is whether the income earned by the assessee from its parent company in USA for providing recruitment and training services to software professionals qualify for deduction under s. 10A of the Act or not. The facts as mentioned in the orders of both the Members are not in dispute and hence the same are not repeated. Accordingly, I straight go to the submissions made by the parties before me. 3. The learned Departmental Representative referred to the provisions of s. 10A(1) and in particular my attention was drawn to Expln. 2 to s. 10A. Referring to the definition of the expression "computer software" given in cl. (1) of the said Explanation, it was submitted that the services rendered by the assessee is not a computer programme recorded on any disc, tape etc. and hence sub-cl. (a) is not applicable. However, it was contended that the assessee is trying to take advantage of sub-cl. (b) which specifies that any customised electronic data or any product or service of similar nature, as may be notified by the Board will also fall within the meaning of "computer software". The argument of the learne....
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....e Board notified the products or services under the delegated legislation, it is presumed that the Board has taken care to see that the products or services it is notifying are of similar nature as that of any customised electronic data. Therefore, according to him, the principle of ejusdem generis is not applicable. It was submitted that the role of the assessee was to create a resource bank for the parent company and recruitment and training was a part of a series of transaction. The assessee was not involved in body shopping but was involved in creating a resource bank of qualified personnel and which data was transmitted through electronic medium. According to the learned counsel, it was an oversimplification to say that no other business activity was carried out by the assessee. He vehemently opposed the observation of the learned JM that the services listed by the Board were by themselves not ITE but the Board's circular itself provides that these services would qualify for deduction if the assessee proves them to be ITE. He also assailed the observation of the learned JM that it was not a case where the assessee has collected any data or conducted any survey for gathering in....
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....of interpretation of the laws is the exclusive domain of the Courts. However, the Board has the statutory power under s. 119 to tone down the rigour of the law for the benefit of the assessee by issuing circulars to ensure a proper administration of the fiscal statute and such circulars would be binding on the authorities administering the Act. 7. Let us consider the above role of the circulars in the context of sub-cl. (b) of cl. (i) of Expln. 2 to s. 10A of the Act. The said cl. (i) gives the meaning of the term "computer software". One of the meanings given is "any customised electronic data or any product or service of similar nature, as may be notified by the Board". In other words, if the assessee is engaged in the export of any customised electronic data, then, profit earned from such export would qualify for deduction under s. 10A of the Act. It may be noted that whereas sub-cl. (a) refers to any computer programme, sub-cl. (b) refers to any customised electronic data. Computer programme referred to in sub-cl. (a) may or may not be customised and may be useful for general application. On the other hand, the electronic data referred to in sub-cl. (b) has necessarily to be....
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....r nature is concerned, deduction under s. 10A in respect of profits therefrom will not be allowed unless the service is notified by the Board. To reiterate, statutory liabilities by whatever name called. In s. 43B(a) or receipts of similar nature mentioned in cl. (baa) of the Explanation to s. 80HHC need not be notified by the Board. In those cases, the Revenue authorities have to see whether the liability claimed by the assessee under s. 43B is a statutory liability or not and whether it fits into the description of a tax, duty, cess etc. Similarly, the receipts mentioned in cl. (baa) need not be notified by the Board and the Revenue authorities will consider whether-the receipts are of the nature of brokerage, rent etc. While deciding these issues, the principle of ejusdem generis will have to be kept in mind. However, so far as services which are ITE are concerned, the assessee can take the benefit of deduction only if they are notified by the Board. If this power of notifying the services was not given to the Board, principle of ejusdem generis would have applied. Since the power is exercised under the specific provision of s. 10A, it is presupposed that the services in respect....
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....f the people residing in the locality etc. All these activities will have to be carried out manually and once the data is collected, it may be collated and analyzed and may be stored in an electronic device. This becomes the ITE customized electronic data. If this data is exported outside India, the consulting firm will be eligible for deduction under s. 10A. Similar is the situation in the present case. The assessee invited applications for recruitment through newspapers, carried out interviews, selected them and trained them. It is worth noting that this exercise was carried out not for name sake but it was serious and sincere effort which is reflected by the magnitude on which the assessee worked. More than 7,000 applications were received which were vetted and then the process of recruitment was undertaken. All these data were stored in an electronic device and transmitted to US for the use of the parent company. Recruitment can be done online also, but perhaps the scale of operation may not be as huge as it was in the present case. Training can also be carried out online but it cannot be as effective as a classroom training. If the intention of the legislature was that in orde....
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....rial, what is material is that some customized electronic data is transmitted. Therefore, the exercise carried out by the assessee cannot be oversimplified by stating that it was merely an exchange of correspondence through e-mails. The learned JM has mentioned that this is not a case where the assessee has collected any data or conducted any survey for gathering information regarding the availability of talent in a specific field. I simply fail to comprehend, considering the voluminous material placed on record as to how can it be said that the assessee has not collected any data. This observation is contrary to the facts on record. Finally, the objection of the AO that all the candidates selected were not absorbed by the parent company is of no avail. The obligation of the assessee under the contract was only to recruit and train the candidates. The parent company was under no obligation to absorb all the selected candidates. It is also not a precondition for the assessee for claiming deduction under s. 10A of the Act. The only condition is that whether it has exported any customized electronic data relating to any of the services specified by the Board or not. We have already ob....
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....hat the profits of the assessee company did qualify for deduction under s. 10A of the Act, whereas the JM has taken a view that the assessee has not exported any computer software as defined in cl. (i) of Expln. 2 to s. 10A of the IT Act and, therefore, the work done by the assessee does not qualify for deduction under s. 10A of the IT Act. Since there was a difference of opinion between the Members of the Division Bench, they requested the Hon'ble President under s. 255(4) of the IT Act to constitute a Third Member for resolving the opinion expressed by each of them. 4. As per the provisions of s. 255(4), the Division Bench formulated and forwarded the question to be decided by the Third Member. The Hon'ble President was pleased to nominate the Zonal Vice President as Third Member and the point of difference formulated was referred to the Third Member as under: "Whether, on the facts and circumstances of the case, the profits of the assessee-company for asst. yr. 2001-02, qualifies for deduction under s. 10A of the IT Act, 1961." 5. Accordingly, the matter was heard by the Zonal Vice President constituted as Third Member on the question of reference. The Hon'ble Third Mem....