TaxTMI 
TaxTMI 
2009 (11) TMI 550
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.... 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 grounds that may be adduced at the time of hearing, it is p....
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....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 $ ------------------------------------------------------------ 1. Recruitment of software 15% of annual pay of the &nbs....
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.... & 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 Pinnacle Info. Solutions (P) Ltd. to an extent of US$ 3,72,450 is justified. This may please be taken note of." 6. The assessee entered into an agreement dt. 19th Sept.....
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....nbsp; 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 reflected by the assessee in its accounts and the return. 6.15 The AO has also cited several decisions in support of conclusion that the profits in respect of the deduction was claimed are not derived from the export of so....
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....tion 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 (2004) 188 CTR (Bom) 232 : (2004) 267 ITR 488 (Bom); (ii) CIT vs. V.C. Kuganathan (2007) 293 ITR 15 (Mad); (iii) CIT vs. A.V.M. Production (2007) 293 ITR 22 (Mad); (iv) Eastman Consultants (P) Ltd. vs. CBDT (1981) 24 CTR (Bom) 140 : (1981) 132 ITR 637 (Bom). 10. ....
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....------------------------------------------------------ 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 section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such article....
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....ld 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 transport protocol (HTTP) and hypertext mark-up language (HTML) are intrinsic parts of WWW sites. The linking and accessing of various documents located on various sites that may be spread all over the globe by HTTP and HTML is a convenient method of extracting information from internet. 14.4 It appears that, in business, a fusion of 'service sector' and 'information technolog....
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.... 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 Expln. 2(i). In other words, a company situated anywhere in the world can interact with its existing and prospective customers through a 'call centre' situated at any other place. It is a typical example of 'business process outsourcing' (BPO), and a significant part of the overall ITES-BPO market. 19.2 In a 'call centre' what is outsourced is a business 'process', and the company which run....
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.... 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 - Developers (2 + years) (6 + years) - Java - e-Commerce, client/server ....
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.... 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 Solutions (P) Ltd. To: [email protected] Cc: [email protected]; [email protected]; [email protected] Sent: 10/13/2000 2:19 AM Subject: 09-0201-xxxx/Maruti Mohan Babu Kambhampati. Dear Mr. Satya Rao: Request technical evaluation of Mr. Maruti Mohan Babu Kambhampati. Candidate qualifying sheet, technical interview evaluation form and the resume are attached. Interview schedule: Day/Date: Sunday/15th Oct., 2000 Time: 8:30 - 9:30 AM EST (6:00 - 7:00 PM o....
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....------------------------------------------ (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 training. She is currently getting approximately Rs. 10,000. We can offer her the same or little more for Chennai location starting 1st December. She may have to work there at least 4-6 months and we will process the h-1 in the mean time. Venkat ------------------------------------------------------------ (iv) Good candidate. Please offer 55K per annum and explain the Califor....
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.... 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, 'Haridhamam Residency', Plot No.: 195, Flat No. G1, Managapuram Colony, H.B. Colony, Hyderabad - 500 043. Andhra Pradesh, India. Dear Mr. Sreebhashyam Shashi Kanth, Congratulations! We are pleased to extend an offer as a programmer/analyst at an annual salary of $ 50,000 on the understanding that you will improve your knowledge in DHTML and MTS. Pinnacle Systems Inc. is a solutions provider offering consulting and software development services in the areas of web, knowledge management and e-commerce. Some of our fortune 500 clients include Chase Manhattan Bank, Merill Lynch, Johnson & Johnson and Concert Communications. As a full-time employee of Pinnacle Systems, you wil....
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....pecified 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-company was an ITE service. The decisions relied upon by the learned Departmental Representative are distinguishable on facts and do not help the case of the Department. Therefore, the ground No. 2, which is the main ground in this appeal by the Department, is rejected. 30. Now, we like to make a few observations about the stand taken by the AO in his order. In para 2 on p. 5 of his order, the AO has mentioned the details submitted by the assessee as proof of the 'export of human resources'. After examining these details the AO observed. These details go to show that the company has actually conducted interviews, resumes of the candidates have been obtained, and bank guarantees have been obtained in case they are inducted (eit....
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.... 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 mentioned the name of even one person who had denied what was stated by the assessee-company. The objections made in the grounds of appeal can, at best, be mere suspicion without any basis whatsoever. 31.2 It is stated in the ground No. 6 that out of 54 candidates allegedly recruited only 23 were absorbed and that the turnover disclosed had no correlation to either the amount as per agreement or actual services. The precise objection/grievance of the Department or the logic behind this statement is not clear to us. The Department appears to be saying, obliquely, that the receipts had a disproportionately large component of profit; but could this really be a grievance for the Department. Further, the onus was on the AO to show that the rece....
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....le 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 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. The case of the assessee does not fall in sub-cl. (a) of cl. (i) of Expln. 2 as the assessee is not exporting any computer program recorded on any disk, tape, perforated media or other information storage device. Therefore, the scope of the controversy is limited to sub-cl. (b) of cl. (i) of Expln. 2 of s. 10A of the IT Act, 1961. The sub-cl. (b) of cl. (i) is having two parts and the first part representing "any customized electronic data and second part any product or services of similar nature as may be notified by the Board. Therefore, the principle of ejusdem generis is applicable to the ....
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....e 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 to be ITE for the purpose of sub-cl. (b) of cl. (i) of Expln. 2. The CBDT circular has not touched any of the conditions provided in the provisions of s. 10A of the IT Act, 1961. The notification is not to specify that the products and services mentioned in the notification are ITEs but it has prescribed a condition for such products and services as if they are ITE, the same will be part of the sub-cl. (b) of cl. (i) of Expln. 2. 37. On the principle of ejusdem generis in the case of Abdulgafar A. Nadiadwala vs. Asstt. CIT relied upon by the learned Departmental Representative, the Hon'ble Bombay High Court has held at pp. 518 and 519 as under: "Now, let us find out the meaning of the word 'otherwise' appearing in the scheme of s. 80HHC of the Act. In....
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....f 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 escape. Those words are not words of limitation but extension so as to cover all possible ways of escaping from the rigor of s. 80HHC. The apparent intention is to cover cases which may not come within the meaning of the preceding word 'sale', for example a case where the goods are transferred by assignment or on consignment basis. The word 'otherwise' as interpreted by the Supreme Court in the case of George Da Costa vs. CED (1967) 63 ITR 497 (SC) can be understood to mean some kind of legal obligation or some transaction enforceable at law or in equity which may not be in the form of sale but may generate foreign exchange and may pass through the gamut of customs clearance as contemplated under s. 80HHC of the IT Act." 38. On the Board's circular, the Hon'b....
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....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 taken a similar view by relying upon the decision of the Hon'ble Bombay High Court as well as the Hon'ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh (2004) 192 CTR (SC) 257 : (2004) 271 ITR 401 (SC) 40. Thus, it is clear that the words "similar nature" appearing in the sub-cl. (b) of cl. (i) of Expln. 2 cannot be given a different meaning than to term 'customized electronic data'. Accordingly, the CBDT notification dt. 26th Sept., 2000 is also only in the implementation of the scheme of the provision and cannot construe other than the meaning of the main provision itself. 41. The Hon'ble Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh has discussed the definition of computer program, software and info....
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....oduct/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 assessee was having correspondence with its parent company through e-mails, it is claimed that the services provided by the assessee falls under the definition of software under the second part of the sub-cl. (b) of Expln. 2 of s. 10A of the IT Act, 1961. The question arises is whether the correspondence between the assessee and the parent company amounts to export of software in the form of customized data or information technology enabled product or service. This is not a case where the assessee has collected any data or conducted any survey for gathering the information regarding the availability of the talent in specific field or availability of human resources. The assessee was undertaking the work of recruitment of candidates as per the requirement of its parent company and in some cases....
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....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 under: "The assessee has been acting, in substance as a mere employment or recruiting bureau. All that it does is to locate prospective candidates or employees and collect their bio-data or particulars. The very approval applications state that the assessee is not providing technical know-how but is claiming exemption under 'information', which is imparted by means of 'conveying the names' of suitable candidates by trunk call, telex or post, this process of information can by no stretch, be said to partake of the nature of '.........industrial, commercial or scientific knowledge, experience or skill' within the meaning of s. 80-O of the IT Act, 1961. These words have to be construed in their context as also considering the substance of the matter rather than its form. Attempt to mechanically....
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....ns 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 impugned order of the Board is correct and legal. It suffers from no infirmity." Therefore, only because the AO has acted against the object and purpose of the provisions itself, the same cannot be allowed as defence in total disregard to the provision itself. 45. In view of the above discussion, the CBDT notification does not help the assessee as the assessee has not exported any computer software as defined in cl. (i) of Expln. 2 of s. 10A of the IT Act, 1961 and therefore the work done by the assessee does not qualify for deduction under s. 10A of the IT Act, 1961. 46. The order of the CIT(A) is not sustainable and liable to be set aside and the order of the AO is liable to be restored. 47. In the result the appeal filed by the Revenue is allowed. REFERENCE UNDER S. 255(4) OF THE IT ACT, 196....
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....d 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 learned Departmental Representative was that the expression "service of similar nature" would mean that such service should be similar to customised data. According to him, merely training the person in India and not sending them out of India would not amount to any export and hence no deduction under s. 10A can be allowed. It was also pointed out that besides training the persons and recruiting them, no other business activity was carried out by the assessee. The learned Departmental Representative referred to the notification dt. 26th Sept., 2000 issued by the CBDT and submitted that the assessee was trying to take advantage of item No. (vii) which referred to human resources services. According to him, the assessee was stretching it too far to say that mere recruitment and training of persons in India would attract deduction ....
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....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 information regarding the availability of talent in the specific field. In his view, this observation was exactly opposite to what the assessee had actually done and hence what is mentioned by the JM is factually incorrect. Finally, it was submitted that when the AO granted deduction in respect of one person who was actually sent abroad, it means that the AO has accepted the fact that the assessee has undertaken an activity which is eligible for deduction. However, he restricted the allowance in respect of only one person on the mistaken belief that the deduction was available only if the trained personnel had actually gone abroad. According to him, it was not the lookout of the assessee whether the trained personnel are absorbed by the parent company or not. Its role was only to find out the talent, recruit them, train them a....
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....er 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 customised. By the word "customised" is meant that the data is suitable for a specific customer only. Considering the fact that the expression "customised electronic data" is quite general in nature and also considering the fact that computer applications are fast expanding, one cannot visualise as to what type of products or services will come up in future. Considering this ever-expanding horizon of software products and services, the Board has been given the power to notify such products and services which in its opinion should qualify for deduction under s. 10A. In other words, this power of the Board when exercised, it will ensure proper administration of the fiscal statute as observed by the Supreme Court in UCO Bank's case. It is in this sense the learned AM has observed that the Board's circular has made the job of the AO qu....
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....ces 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 of which the assessee is claiming deduction are information technology enabled (ITE). Of course, as a matter of normal precaution taken while making an assessment, the AO will satisfy himself as to whether the customised data is in electronic form or not and whether it is electronically transmitted outside India or not. If the data of recruitment and training collected by the present assessee is in a manual form and is sent to US by post, the assessee will not be entitled to deduction under s. 10A. Therefore, I fail to understand as to what further condition the assessee need to fulfil in the present case. as observed by the learned JM, when undisputedly the entire data is in electronic form. Human resources services 9. The learned JM is right in mentioning that software is not merely knowledge but rather is knowledge recorded in a p....
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.... 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 order to qualify for deduction under s. 10A, every activity should be carried out through electronic means, then the purpose of enacting s. 10A would have been totally defeated. The exact language of sub-cl. (b) of cl. (1) of Expln. 2 is "any customized electronic data". Thus, if the result of the entire exercise of recruitment and training is stored in an electronic device, it is not possible to say that it is not a customized electronic data. If the data is in a form other than electronic, then the export thereof will not qualify for the deduction. This aspect, as mentioned earlier, has to be examined by the AO in the course of the assessment and which in this case, there is no dispute that the data was in the electronic form. 10. Another objection of the learned JM is that there was only an exchange of correspondence through e-mails between....
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....ates. 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 observed that the assessee has fulfilled this condition. For whatever reason, the parent company may not have been able to absorb all the selected candidates, but that is neither the concern of the assessee nor the requirement under the item "human resources services". Therefore, this objection of the AO has no force. 11. Summarizing the above discussion. I am of the view that the principle of ejusdem generis is not applicable when the Board has specifically notified the ITE products and services. What is the role and purport of the circular of the Board is already discussed earlier. The learned JM has mentioned that the CBDT notification is always in furtherance of the statutory provision, that it cannot be in derogation of the statutory provision and that it cannot dilute the conditions provided under the provisions of the statute but only b....