TaxTMI 
TaxTMI 
2012 (4) TMI 246
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....oftware eligible for deduction u/s. 80HHE. 3. The learned CIT (A) erred in not giving retrospective effect to the CBDT notification dated 26.9.2000, which allowed benefit of Sec.10B and Sec. 80HHE to human resource services. 4. The learned CIT (A) erred in not allowing the netting off of interest and also erred in excluding 90% there of u/s 80HHE(3) while the Bombay High Court has held that each and every and interest income can't be excluded. 5. The CIT (A) erred in confirming levy of interest u/s. 234B and 234C though the A.O. had not made any speaking order and also had not given any opportunity before levy of the same. 6. The learned CIT (A) erred in denying exemption u/s 10B on interest income earned by the appellant. 3. The assessee is a company and registered with the ministry of Industry as 100% Export Oriented Unit to carry out the following activities: i) Advance learning canter to train SAP consultants ii) to undertake & provide worldwide customer support on behalf of Unisys from India providing onsite technical service and development of software iii) Onsite services iv) Offshore projects v) Software development The aforesaid activities ....
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....irements of CIC. Accordingly, the Assessing Officer denied the exemption/deduction u/s 10B and 80HHE as well as 80-O. 4.3 On appeal, the CIT(A) confirmed the denial of exemption u/s 10B in respect of the entire receipts collected by the assessee; but allowed the claim u/s 80HHE towards the services rendered by the assessee to Unisys by holding that it amounts to providing technical services out of India in connection with development or production of computer software. 4.4 Since the issue relating to deduction u/s 10B as well as 80HHE regarding the interest income also involved, the CIT(A), though denied the entire claim of exemption u/s 10B; however, he has directed the Assessing Officer to exclude 90% of gross receipts of the interest while computing deduction u/s 80HHE. In this way, the CIT(A) has rejected the assessee's claim regarding the netting off of interest while passing the impugned order. 5. Ground no.1 to 4 regarding disallowance of exemption u/s 10B/80HHE of the I T Act. 6. Before us, Shri Farrokh V Irani Ld. Counsel for the assessee has submitted that the assessee deals in implementing the software as well as Systems Application Products (SAP). To carryou....
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....nd submitted that the Tribunal in that case has held that when the main object of the assessee is to act as a technical and management consultant in relation to all aspects of computer software, then merely because the invoices were raised on candidate basis would not show that the assessee was not producing any software. The ld counsel has further submitted that software engineers, who were recruited by the assessee are bound to work with the assessee in India prior to their overseas posting, if any. This can never be in the case of a recruiting agency. Software Engineers have contributed in the software development programme of the assessee which is exported. The assessee had made huge investment in building, plant and software. He has referred the assessment order for the Assessment Year 1997-98 and submitted that the assessee has invested Rs. 1.57 crores in purchase of SAP software; Rs. 5 crores for purchase of servers and other hardware; Rs. 33 crores invested in land upto 31.3.99; Rs. 7.16 crores invested in building upto 31.3.99; Rs. 7.96 crores invested in furniture upto 31.3.99 and Rs. 4.92 crores invested in plant & machinery upto 31.3.99. Thus, if the assessee is only a ....
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....he work orders placed by clients.; explaining the exact functional requirement to the professionals and programmers comprised of such teams; formation of conceptual design documents; setting up features in SAP and other computer software; customization of various modules to meet the specific needs of clients; developing and writing new patches of programmes which are not available in the standard format of system; testing the functional competence of new modules designed by the assessee; Functioning integration of modules and testing of its functional accuracy and finally storing the results project wise etc. etc. The final process would take 4 to 6 months and then the project would be put to implement upon the client. 6.7 The ld counsel has submitted that the entire process is intergraded programme which involves the training and update the knowledge of development programme, implementation of programme development in the client's project and then, the trained engineers/programmers travelled to abroad to carry out the result of the development programme on the client's project. This activity of the assessee come within the ambit of sec. 10B being manufacture and products articl....
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....tood as defined in Copyright Act and should be interpreted broadly, liberally and consistently with other relevant legislation of Government to include export of data processing software as well. The ld counsel has further submitted that the authorities below have totally ignored the technological developments and the principle of "updating construction" as applied by the Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Podar Cement Pvt. Ltd. reported in 226 ITR 625. 6.10 He has stressed the point that section 10B is an incentive provision and designed to encourage as important and vital an industry identity like the software industry and therefore, the said provision has to be liberally construed as held by the Supreme Court in the case of Bajaj Tempo Ltd. v. Commissioner of Income-tax reported in 196 ITR 188. 7. He has further submitted that for the AY 2000-01, the Tribunal has allowed the claim of the assessee u/s 10B with respect to the export made to Unisys. He has filed a copy of the order of the coordinate Bench of the Tribunal dated 30.11.2005 in ITA No. 4857/Mum/2004 and submitted that the said decision has attained the finality as the revenue has a....
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....the interest income is eligible for exemption u/s 10B in view of the fact that the assessee is a 100% EoU. He has further submitted that for the AY 2000-01, the Tribunal has allowed the claim of deduction u/s 10B on interest income. 7.4 On the other hand, the ld DR has heavily relied upon the orders of the authorities below and submitted that the Assessing Officer has given a factual finding that the assessee's primary activity is imparting training and employment for the holding/principle company. The source of the income is not manufacture or produce of article or software computer programme but from placement of trained personnel. He has further submitted that the programme which was opted by the assessee was only to train the personnel for placement with the parent company. The Assessing Officer has specifically asked the details about the remuneration received by the CIC from its clients for which the assessee has claimed to have customized the SAP programme but the assessee has failed to produce such information. The Assessing Officer has given a factual finding which remains uncontroverted. The ld DR has further submitted that the assessee has given much emphasis on the c....
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....nce and the CIT(A) has committed an error by allowing the claim of the assessee u/s 80HHE with respect to the receipt from Unisys 10.1 As regards the claim of exemption u/s10B on interest income, the ld DR has relied upon the decision of the Hon'ble Supreme Court in the case of Liberty India ltd reported in 317 ITR 218 (SC) and submitted that when the interest income has no nexus with the income derived from the undertaking then the deduction u/s 10B is not allowable. 10.2 In rebuttal, the ld AR of the assessee has submitted that the assessee has fully explained all the details before the Assessing Officer. He has referred page 1 & 2 of the paper book 3 and submitted that the process of customisation of the SAP includes:(i) most of the data migrations programmes for SAP data migration include developing of data extraction programme (ii) from old version developed data programme to validate a new version data and (iii) develop uploaded programme to upload data in a new version. He has referred the SAP ABAP/4 standards and submitted that in the process of customization of SAP programme, the assessee has to work according to the Medline SAP ABAP/4 programme standard which has a ....
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....ce list. vii) Copy of the developed program to validate the Plant Record. This program is written in ABAP to read the old version source list and validate sources fields with the new version data requirements. viii) Tables giving the type of output expected from the data validation program and test script to test the functioning of the program. the data from the old version of SAP. ix) Copy of the sample developed programme to extract the data from the old version of SAP. x) Copy of the programmed to upload the extract data to a new version, after the date is validated and corrected. xi) Each of the written programmes to extract, validate and upload are to be tested for all valid, invalid conditions. The test cases and test conditions are written to test these programs. These pages gives the different test cases/conditions to test the programs. xii) Sample of a program development checklist to ensure that programmer completes all components of the program and also gives the program development tracking data sheet. xiii) Sample program specifications for source data validation program. xiv) Sample of programs developed by CSSL staff for this project (This giv....
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....rt-oriented 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 articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : (2) This section applies to any undertaking which fulfils all the following conditions, namely (i) it manufactures or produces any articles or thing; (ia) in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1994, its exports of such articles and things are not less than seventy five per cent of the total sales thereof during the previous year; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period spec....
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.....e.f 1.4.2001, the definition of computer software has been given in the Explanation 2 after sub.sec. (9A) of sec 10B as under: (9A)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; (ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force; (iii) "export turnover" means the consideration in respect of export [by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable ....
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....of Explanation 2 includes the contents development, data process, human resources services etc. as part of computer software eligible for exemption, if other conditions are satisfied. Consequently, the human resource service in the field of development of software programme as notified falls under the definition of computer programme as stipulated in the Explanation as well as the definition u/s 10BB. 12. Even otherwise, the production of computer software programme is basically a job requiring more of human skills and expertise than machine work. Further, section 10BB enlarges the ambit of term 'computer programme' by including the process or management of electronic data. Therefore, the engagement of analyst/programmer and imparting training to them in the process of development and customization of SAP programme is part and part of process of the customization of SAP and customization of data and cannot be treated as a separate activity of the assessee undertaking, which has been approved by the Government of India as 100% EoU to carry out such activity to train SAP consultant for the purpose of providing customisation support and development of software for the specific need....
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.... to the needs of the clients. This software is a very elaborate one which helps in running almost all the activities of an organisation. This software runs activities like Enterprise Management, Customer Relationship Management, Product Design and Engineering, Planning, Component Procurement, Manufacturing, Sales and Distribution, Human Resource Development, Financial Management and Accounting etc. SAP AG, a German company is the owner of this software. (Vc) Customisation or implementation or production: SAP Ag the German company does not have manpower to help its clients in implementation of the software. The German company has appointed various partners who are recommended to the clients for the installation & implementation of the software. CIC, the holding company of the assessee company is one of such partners. In short, CIC helps the purchasers of this software in its proper implementation. The manpower required for this task is sourced from the assessee company. This fact is proved by the submission made during the course of initial assessment proceedings for the assessment year in consideration. During the course of initial assessment proceedings, the assessee company....
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....a similar issue in para 17 and 18 as under: "We have considered the rival submissions and perused the facts record. Sec.10A of the I.T. Act was brought to Statute Book by the Finance Act, 1981 with effect from 1 .4.81 and contains special provision in respect of newly established undertakings in free trade zone. It was amended from time to time and as it stood for Asst. Year 1998-99, I.e., the year under consideration, this section applies to any industrial undertaking which "has begun/begins to manufacture or produce articles or things during the previous year relevant to the Assessment year.". The explanation to Sec.10A in so far as it is relevant for our purpose provides as under :- "Explanation:- For the purpose of this section, i) ii) - iii) "Manufacture" indudes any - (a) Process, (b) Assembling c) Recording of programs on any disk, tape, perforated media or other information storage device. iv) v) vi) Produce in relation to articles or things referred to in clause (i) of subsection(2) includes production of computer programs." 18. The central and pivotal question before us is whether the assessee is engaged in the "Manufacture" or "Prod....
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.... which occupies a position mid-way between the two fulfils, it will be clear from the facts stated above, the functions of a programme exporter, it does not add mere entries to the data base as done by the travel agent. In fact it has no direct interest in adding to, or drawing extracts from the data base built into the computer like the several operators all the world over. What it does actually is to supplement the functions of the Amadeus Group by preparing and transmitting programmes to the latter for incorporation into portions or "partitions" in its mega-computer at Erding in Germany, so as to enable the travel agents in its marketing region draw on the available information for their benefit. Its activities are to issue instructions to the mastercomputer to recognise the operators, identify them and provide them access to specific portions of the data base. There can be no doubt whatever, for the reasons discussed above, that the assessee manufactures, produces and exports software within the meaning of the three specified sections of the Act. It is open to it to claim exemption under any one of these sections and as is well established by pertaining to interpretation of tax....
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.... clearly establish that Government of India has granted approval to the assessee for manufacture of accessories and software service. In the Memorandum of Association one of the main object s is to act as technical and management consultants in relation to all aspect of computer software. The CBDT has also clarified this issue and has held that merely because the software is developed at client's site aboard, the tax holiday u/s 10A or 10B should not be denied as long as the software is a product of the unit i.e produced by the unit. The assessee was supply its professional for developing the computer software as is evident from page 6 of the paper book which is the letter addressed to the United Software Services. Inc. dated 18.11.1987 by the assessee. The relevant portion of para 4 reads as under: ....This computer will be used initially to train programmers/analysts and later on to develop computer software for export to USA. The ownership of this computer will rest with us." Exemption u/s 10A is a beneficial liabilities and should not be interpreted and the exemption could not canter on irrelevant consideration. Merely because the invoice was raised on candidates basis, i....
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....nterface with external Unisys support organizations as previously supplied by the San Jose Engineering organization. In order to mutually accomplish the goals stated herein: Unisys will: (i) provide CyberTech with CTOS hardware and Operating software for both the Yardley, PA and Bombay, India Sites, as identified in Addendum E. Enough hardware and/or software will be provided to allow Cyber Tech to analyses/duplicate reported problems, develop ... build and test products to verify all changes, create and ... scenarios to respond to Contacts or other questions, build any required special or other system releases and to, in at least a similar environment, verify the overall system performance of the modified software product. The development systems will include, test beds, special controllers (slices), test equipment and administrative systems at least two of each unique hardware system or peripheral released by Unisys for the CTOS customer base plus enough components to assemble the following complete systems. Yardley PA office: (front and support) Five complete systems, one or more controller slices as required for CSC telephone support, and one server configurat....
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....rt policy. CyherTech will make every effort to follow Unisys policy for Priority A and Priority B problems. Priority C problems will be treated as New Feature Suggestions. Statistics for response and closure will be maintained and reported to Unisys as required" The payment for these work is provided in article 4, which is also reproduced below "A. Compensation: The total Software Support compensation to CONTRACTOR for the WORK performed hereunder shall not exceed one million two hundred thousand dollars (USD 1.200,000.00 as outlined below, plus any authorized travel and having expenses as specified in Sub paragraph A2 of this Article and any applicable sales and/or use tax as specified in Paragraph C of this Article. The following payments for support are in United States Dollars and based on monthly billing by Cyber Tech: Transfer cos USD50,000 June 1996 through May 1997 300.000 (the first two months payment (USD500O0) will be due upon contract signing) June 1997 through May 1998 250,000 June 1998 through May 1999 200,000 June 1999 through May 2000 200,000 June 2000 through May 2001 200,000 2. Upon Unisys reasonable request Cyber....
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....rates and other terms reasonably necessary to govern work orders and shall be attached hereto as contained in "Statement C Work" Work Product As used in this agreement the term "work Product" means any deliverable items and other products of Consulting Services, 'whether or not ....and all related intellectual Property Rights, know how, ....mask works, trademarks, formulae, procession, manufacturing techniques, trade secrets ideas, artwork, software or other copyrightable or patentable work. Y2K Comp1iant shall remain with respect or Software, systems, Consulting Services and deliverables that the same shall not be affected adversely by the occurrence of use of dates before, on or after January 1st, 2001 AD including dates and leap years between the twentieth and twenty-first centuries ("Millennial Dates) Any Software and deliverables provided by Consultant(including any software, hardware or firmware product(s) delivery by Consultant to Customer) will without error or omission, create, receive, store, process and output (collectively," Compute") information related to Millennial Dates. This warranty includes without limitation that the deliverables and Software provided by C....
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.... helpdesk/call centre product that can be developed either as a fully licensed product or using the ASP delivery mode. Phase one research and development to visualize and conceptualize the best of breed product for Cresere inc. By studying other competing products available in the market for their features, functionality, architecture Phase two Product development Phase three- Product release and installation 3. Deliverables -Product Requirements document -High Level design document -Detailed Design document -Test plan data and test results -Application sources, libraries, executables -installation version of the product -Use Manual -Installation Guide 4. Period of work and Schedule of fees Milestone Projected End date Fixed Fee Phase One October 31, 1999 USD 1,115,000 Phase two August 31 1999 USD 435,000 Phase three December 31 2000 USD 50,000 Going through the above agreement also it cannot be said that the assessee is rendering just a recruitment service or training service as made out by the revenue. The assessee in our opinion, having regard to the nature of the work mentioned in this agreement, is e....
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.... in the market, to decide upon features, serviceability and technical architecture of the product. * Phase iwo-Product development * Phase three-Beta Product release * Phase Four- , Final Product release and installation 3. Deliverables -Deliverables at phase three of the project -Product Features and Functionality -High Level design document -Detailed Design document -Test plan and test records -Product source code and executables -Beta Installation version of the product -Installation Guide Deliverables at phase four of the project * User Manual * Finalized version of the product 4. Period of work and Schedule of fees Milestone Projected End date Fixed Fee Phase One October 31, 1999 USD 300,000 Phase two December 31 1999 USD 540,000 Phase three July 31 2000 USD 400,000 Phase four October 31 2000 USD 250,000 In terms of the contract user manual which was delivered to the parties is also part of the paper book and if one were to go through the same it can definitely be seen that this is not a contract pure and simple for recruitment and training of personnel. We, therefore. do not agree ....
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.... Geotronics-UK and Veritema-Sweden. These agreements are of the same nature a has been entered with SAF Arabia. In the light of our decision in relation to the agreement with SAF Arabia, we hold that the assessee is entitled to relief u/s 10B of the Act in respect to the profits and gains derived by the assessee under these agreements. 15 Now it leads us to the agreement with C1C-ATC, which s completely a new agreement dated 01.7.99. The agreement itself is placed at pages 19 to 27 or the paper. The agreement provides that the assessee has expertise in the followin fields and the scope of service is mentioned in clauses I.1 and 1.2 of the agreement: 1) Installation, implementation, enhancements and maintenance of Applications SAP and SIEBEL 2) Design. Content development, hosting and maintenance of corporate 'websites and portals 3) Developing sales and marketing collateral such as brochures, presentations, proposals, case studies etc 4) Developing documentation such as implementation methodology, project documentation etc 5) Design of networking and internet working systems architecture, estimations, networking diagrams etc." The assessee is obliged to grant t....
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....alternative ground of deduction u/s 80HHE, since we have allowed the claim of the assessee u/s 10B; therefore, we do not propose to go into the merit of the claim u/s 80HHE and the same is dismissed being infructuous. Revenue's appeals: 24. The revenue has raised the following ground: Assessment Year 1997-98 &1998-99 "On the facts and in the circumstances of the cased and in law, the CIT(A) erred in directing the Assessing Officer to take the interest income as part of business profit instead of income from other sources without appreciating the facts of the case." Asst Year 1999-00: On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to allow the deduction u/s 80HHE on the receipts in respect of services rendered to Cybertech International Corporation regarding development, implementation, customization/SAP related services without appreciating the facts brought out by the Assessing Officer that the above receipts are not eligible for deduction." 25. The revenue is aggrieved by the treatment of interest income as business income as directed by the CIT(A) as well as the eligibility of deduction u/s 8....