TaxTMI 
TaxTMI 
2012 (8) TMI 331
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.... objected to before the Dispute Resolution Panel (DRP) by the assessee. The DRP had, in its directions dated 26.9.2011, more or less ratified the draft assessment order. The AO had, accordingly, concluded the assessment, determining the assessee's income at Rs.131,82,36,262/- which included that of the adjustment u/s 92CA of the Act of Rs.64.83 crores. 3. Aggrieved, the assessee has come up with the present appeal raising the following grounds of appeal:- i) That on the facts and in law, the Assessing Officer erred in not allowing the appellant's claim of deduction under section 10A of the Act. ii) That on the facts and in law, the Assessing Officer erred in not allowing the appellant's alternative claim for deduction under section 80-IB(8A) of the Act made without prejudice to its claim under section 10A of the Act. iii) That on facts and in law, the Assessing Officer erred in adding the transfer pricing adjustment of Rs.64,83,64,363/- proposed by the TPO under section 92CA of the Act and confirmed by DRP. iv) That on facts and in law, the Assessing Officer erred in not allowing deduction under section 10A of the Act on the addition of Rs.2,06,44,054/- (an amount th....
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...., it is seen that the investment in Plant and Machinery is three times that of investment in computers. This is excluding investment in buildings, furniture, office belongings, vehicles and the like. These plant and machinery are scientific hardware used for the purpose of making basic and applied scientific research and development. A detailed examination of the breakup of the plant and machinery worth more than Rs.260 crores also reveal the business practice of the assessee. The assessee's operations do not have computer as primary and predominant hardware tool. They make use of the best of the scientific research laboratory tools available and have produced newer and improved methods of various manufacturing. The end products of the assessee should not be belittled by calling it as service similar to export of customized electronic data. The assessee should have taken pride in claiming its production and services to be of scientific research and development in line with its claim of having set up a 'Global Technology Centre' in India. 30. Considering the cumulative reasons and explanations as above, it is held that the services and the products of the assessee are not eligibl....
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....d down in rule 18DA. Nothing prevents the assessing officer from verifying other conditions specified in rule 18DA. (g) In fact, even in the approval letter and extension letters, the following conditions are noted by the prescribed authority: 'The above extension of the approval is subject to the provisions of sec.80IB (8A) read along with the general provisions of section 80IB of the Income-tax Act, 1961 as well as the provisions of rule 8D and Rule 18DA of I.T. Rules, 1962, as amended from time to time.' This also strengthens and restores the power of the assessing officer in making all enquiries to verify whether the assessee has met with all eligibility conditions. (h) On the one hand, assessee claims to be an exporter of 'article and goods' and on the other hand, it is claiming to be involved in IT enabled services. Assessee has submitted opinions of Shri A.S. Rao and Shri Dinesh Vyas to prove its contention that it is indeed exporting 'articles or goods' and 'engineering and designs.' The submissions of the assessee are self-contradictory. (i) Assessee is the scientific R&D Indian arm of GE Inc, USA. It is not an independent entity. It does apply scientific R&....
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....technical specifications; (b) Phase 2 - Processing work Request - In this Phase the assessee's Engineers processes the raw data provided by its clients by conducting repetitive and continuous research, testing and analysis through the use of specialized computer software computers and IT enabled tools and equipments; assessee's process is a continuous loop which involves research, testing and analysis customized to the specifications and instructions of the overseas client at every stage; (c) Phase 3 - Final Output - Final output customized to the specifications of its overseas clients is generated through use of computers in the form of one or more of the following: detailed reports containing engineering analysis, data sheets containing supporting technical data, supporting designs and diagrams, 2D or 3D designs, supporting design calculation and computer codes electronic data; and (d) Phase 4 - Export of Final Output - The final output is in electronic format and is transmitted electronically to its overseas clients via email or through uploading of data on the servers of overseas clients (v) that based on the aforementioned process, the assessee undoubtedly has been....
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....ays stored and transmitted electronically is 'customized electronic data' which by definition is 'computer software' within the meaning assigned to such term under Explanation 2 of s.10A of the Act. (vii) That the AO had admitted that [paras 18,21 & 22 of asstt. order] that - (a) the assessee is in the business of understanding and analyzing the requirements of each of its clients, understanding existing systems of the clients and coming out with solutions customized to the requirements of its clients; (b) the assessee uses computer and most of the work is done computers; (c) the assessee makes use of high end computers; (d) the assessee delivers and exports the outputs through computer and internet; and (e) the assessee definitely use the services of the computer and internet Taking refuge in the findings of Hon'ble Chennai Tribunal in the case of Accurum India (P) Ltd which has been followed by the Tribunal in the case of M.L Outsourcing Services Pvt. Ltd v. ITO (2011) 140 TTJ 59, it was contended that the assessee is entitled to deduction u/s 10A of the Act; (viii) that the Delhi Tribunal in Bechtel India Pvt. Ltd v. ACIT - ITA NO.3316/Del/04 analyzing en....
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....res the processing of such large volume of data with a very high level of precision and accuracy that was not humanly possible to process without computers or IT enabled tools or equipments embedded with specialized technical or engineering software; that it was impossible for the assessee to analyze and produce the customized electronic data in form of engineering designs that were demanded by its overseas clients without computers of IT enabled tools or equipments. (xi) That the output which was demanded by the overseas clients was basically of two types - (a) computer programmes in form of computer codes or algorithms; or (b) engineering analysis and designs. - now the question being as to whether the output produced by the assessee was computer programme or engineering analysis and design was purely a question of fact and was clearly identifiable by looking at the content of out puts produced by assessee in form of reports, designs and computer codes and that a computer code developed by the assessee customized to the specifications of the client which was in fact electronically transmitted to the overseas clients for their usage; that the assessee provided its over....
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.... Revenue since the AY 2002-03 [u/s 143(3) of the Act] ; that the Revenue had not pointed out any change in the activities of the assessee in the present AY as compared to the earlier AYs; and that no contrary view has been cited to deny the assessee's entitlement from that of the earlier AYs; (xiii) that the correct interpretation of s.10A of the Act, the eligibility of a particular undertaking to avail of the benefit of this provision has to be determined in the initial year in which the assessee first sought to avail the benefit under this section; and that there is nothing in the said section which entitles the Revenue to reexamine the issue of the assessee's entitlement of deduction u/s 10A of the Act in each AY. Relies on case laws: * Sami Labs Ltd v. ACIT 334 ITR 157 (Kar) * Nippon Electronics 181 ITR 518 (Kar) (xiv) That the Revenue had resorted to reopen the assessments of the assessee for the AYs 2004-05 to 06-07 to disallow the deduction u/s 10A of the Act, however, the same has been stayed by the jurisdictional Hon'ble High Court through interim orders; (xv) Rebutting the Revenue's stand to deny deduction u/s 10A to the assessee solely on the ground tha....
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....t by the assessee; (b) the assessee has been claiming deduction u/s 10A as it is engaged in the business of actually producing and exporting 'computer software' in the form of computer programmes, customized electronic data or other IT enabled services notified by the CBDT which is evidence from the detailed description of services furnished during the course of assessment proceedings under challenge; (c) to enable the assessee to produce and export output to its overseas clients in the form of 'computer software' as such term is defined under Explanation 2 to s.10A of the Act, the assessee engages in the activity of research and development to gather relevant data; (d) because of the importance of research and development, as an activity, in the assessee's process for producing the final output, the assessee has at times, in describing its business, highlighted the activities involved in producing the final output rather than the description of the final output actually produced by the assessee; (e) in any event, whether the assessee does some 'research and development' in producing the output is wholly irrelevant for the purpose of considering the eligibility for dedu....
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....nd development activity' in high impact areas of technology that is an integral and essential part of the final and ultimate service and output that the assessee produces and exports to its clients, namely, computer programmes, customized electronic data and engineering and design services. (xviii) With regard to the Revenue's contentions of filing of patents by the appellant for its research and development activities carried out at R&D Centre in Bangalore, it was claimed that the Revenue had erroneously placed reliance upon 185 patents filed by the appellant's R&D Centre for its research and development activities in concluding that the appellant has involved in 'scientific research and development' and, therefore, was not eligible for deduction u/s 10A of the Act etc., and the Revenue had failed to appreciate that - - that as per Clause 3.5 of the Services agreements entered between the appellant and its overseas client, all of the intellectual property in the output produced and exported by the appellant to its overseas client, including, without limitation, the patents in such output, was owned by the overseas client and the appellant's role was limited to rendering help....
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....s. 4.3.1. In conclusion, it was alternatively claimed that if the Hon'ble Bench, based on the nature of the activities of the assessee determines that the claim u/s 80IB (8A) of the Act be more appropriate, the same may be extended. 4.4. On the other hand, the learned D R in his lengthy submission had supported the stand of the learned AO as well as learned DRP; the substance of his submission is extracted as under: (i) that it has been admitted by the assessee that it is not in the business of development or export of computer software. The assessee renders in its activities with its own holding company and other group concerns. To this extent, the assessee has claimed that it is in the business of export of the customizing of electronic data; (ii) it was claimed that the word 'customized' has been defined in the case of Accurum India Pvt. Ltd reported in 128 TTJ 249 as under: "On the other hand, electronic data referred to any sub-clause (b) has necessarily to be customized. By the word customized is meant that the data is suitable for a specific customer only." It has thus been defined by the Hon'ble Tribunal the word 'customized' to mean that an electronic dat....
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....onic data and IT enabled services. However, all the work done by the assessee company to its principals clearly shows that the assessee is not at all in the business of providing any engineering analysis to its principals and instead is clearly in the field of inventions. The deliverables as per contract submitted by the assessee clearly indicate that the assessee had invented various products manufacturing processes, compounds, material products and the like. These material inventions cannot be termed as customized electronic data or IT enabled services. (viii) the process of rendering service to the clients involves detailed study of R & D of the material/process technology over a fairly long period of research duration. During the said R & D, various prototypes of materials/components were developed and tested. These were in physical form as well as in the form of ideations. The assessee uses a host of scientific high end R & D equipments to conduct the study. Phd. scholars in material sciences and process technology work in assessee laboratories and invent a newer product/technology/component. This new invention is further tested. If it is acceptable to the client, the end p....
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....nt. However, it had not been able to prove that it was in any software development activity. The auditors have been consistent in the certificate issued by them under various sections of audit requirements. This proves that the assessee is not eligible for deduction u/s 10B of the Act as it is not in the business of any customized electronic data export. The assessee had not adduced any evidence in support of either of the claim u/s 10B of the Act or the alternative claim u/s 80IB (8A) of the Act. (xii) on the other hand, the learned AO had given the test of eligibility for understanding a particular revenue earning activity to be in the nature of customized electronic data or IT enabled services in his impugned order. Thus, in all such test of eligibility, the asessee had failed to muster sufficient proof of eligibility. (xiii) After analyzing the case laws relied upon by the assessee, the learned D R had opined as under: (a) M/s. Bechtel India Pvt. Ltd. - ITA 3316/Delhi/04 - ITAT Delhi: "27.1.4.Overruling the objections of the CIT (A) that the activity of the assessee was not included in its Memorandum of Association and that the exports were not made electronically, ....
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.... The end products of the assessee should not be belittled by calling it as service similar to export of customized electronic data. For the elaborate reasons recorded, the learned AO had neither allowed the claim of deduction u/s 10A of the Act nor the alternative claim for deduction u/s 80IB (8A) of the Act. This stand of the AO has been defended by the learned D R during his submission. 6.1. The learned AR had extensively quoted the provisions of s. 10A of the Act and placed strong emphasis on Explanation 2(i) to s.10A wherein the terms 'computer software' has been defined as: "(i) 'Computer software' means- (a) ............................................................................................. (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; 6.2. At a perusal of the Board's Notification No. SO 890 (E), dated 26.9.2000, it has been observed that - "The following Information Technology ('IT') enabled products or services are Back Office operations; (i) Call Centres; (ii) Content Development or animati....
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....he servers of overseas clients. 6.2.3. On the basis of the process outlined above, it was argued that the assessee has been in the business of exporting 'customized electronic data' the reasons adduced by the learned AR has already been cited supra [Para 4.3. (v)]. 6.2.4. To drive home his points, the learned A R had drawn the reference of this Bench to the effect that the AO had admitted that - (a) the assessee is in the business of understanding and analyzing the requirements of each of its clients, understanding existing systems of the clients and coming out with solutions customized to the requirements of its clients; (b) the assessee uses computer and most of the work is done computers; (c) the assessee makes use of high end computers; (d) the assessee delivers and exports the outputs through computer and internet; and (e) the assessee definitely use the services of the computer and internet [Courtesy: paras 18,21 & 22 of assessment order] 6.3. At this juncture, we would like to recall the case laws on which the learned A R had placed strong reliance. (a) ITO v. Accurum India (P) Ltd (2010) 128 TTJ 249 (Chennai): The Hon'ble Third Member Chenna....
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....doubt true, as mentioned by the CIT (Appeals) and by the learned DR that such designs and drawings can also be carried out on a black board However, in saying so, 'they are missing certain vital points. Firstly, the data which is generated by the assessee to the minutest details cannot be generated manually. Secondly, the same level of accuracy and precision cannot be expected if done manually. Last and the most important aspect is the speed at which such data is generated by the help of software cannot be generated manually. We fail to understand if this is not customized electronic data, then what else it is." 6.3.1. The learned A R had, during the course of hearing, strongly urged that though the attention of the learned AO as well as DRP were drawn to the findings of the Tribunals referred supra to consider the same while dealing with the assessee's case, they have failed to take into consideration of the same. 6.3.2. On perusal of the impugned orders of the learned AO as well as the directions of the DRP, it has been observed by this Bench that there was no trace of having considered the findings of the above mentioned Benches of the Tribunal as urged by the assessee dur....