TaxTMI 
TaxTMI 
2014 (4) TMI 815
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....or the assessment year : 2004-05. Ground no.1 raised by the assessee is general in nature and calls for no specific adjudication. Ground no.2 raised by the assessee reads as follows; " 2. The learned CIT(A) has erred, in law, and in facts, in confirming the order of the learned AO by upholding the disallowance of the deduction claimed by the assessee u/s 10A of the IT Act, 1961 amounting to Rs.282,595,891/- for the assessment year 2004-05". We will also take up for consideration Gr.No.2 raised by the Assessee in A.Y.05-06 in ITA No.1493/Bang/12 which is identical to ground No.2 referred to above, for the reason that the facts and circumstances are identical and the reasoning of AO in AY 04-05 has been followed by the AO in AY 05-06, while the reasoning given by the CIT(A) for AY 05-06 has been followed by the CIT(A) in AY 04-05. The sum claimed as deduction u/s.10A of the Act, in AY 05-06 is a sum of Rs.39,22,60,237. 3. SAP AG, headquartered in Germany, is one of the world's leading provider of enterprise resource planning and related application software, with sales and development locations in more than 50 countries worldwide, and customers in mo....
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....n -Domestic software implementation and related services rendered to customers in India. These services are not rendered from the STP unit and constitute a different segment of the Appellant. 4. Training services segment In addition to the above, the Assessee provides training services/ facilities to Indian and foreign customers, on the usage and application of SAP software products. 4. The Assessee claimed deduction of Rs.28,25,95,891 u/s.10A of the Income Tax Act, 1961, ('the Act') in respect of profits of its unit which renders Software development/ implementation support services, viz., the Export division/Global Delivery Centre(GDC). It is not in dispute that the software development services rendered to overseas customers from this unit was offshore Software Technology Park unit of the Assessee i.e., the Global Delivery Centre ("GDC"), which is physically separate, distinct and is housed in a separate Customs bonded premises. 5. According to the AO (in A.Y.04-05), deduction u/s.10A of the Act can be allowed only when the Assessee produces manufactures articles or things or computer software. According to the AO as ....
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.... make it customer convenient viz., need of a retail unit will be different from manufacturing unit and need of a steel unit will be different from the chemical unit. Probably, the Assessee company might have done customization of that nature to the clients in India and there may not be necessarily any export of software. 8.7 It is important to mention over here that the SAP AG group has bifurcated its activities of development of software and marketing and sale of software. While development is looked after by a separate company known as SAP labs having its R& D Centre in Whitefield, Bangalore, the marketing and sales of SAP software is looked after by SAP India. In fact, during the course of visit of SAP labs premises, this fact was mentioned by the Authorities of SAP labs. Accordingly, the claim of the Assessee company towards development of software appears to be farfetched and thus unacceptable." 7. The claim of the Assessee for deduction u/s.10A of the Act was rejected for the aforesaid reasons in AY 04-05 and 05-06. It would be appropriate to mention that apart from the above reasons given for rejecting the claim of the Assessee for deduction u/....
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....ely the Assessee pointed out that the Assessee can be considered to have rendered computer software development as defined under the extended definition of software development as given in Expln.2 to Sec.10A of the Act. Sec.10A of the Act and Expln.-2 thereto reads thus: "SECTION 10A: Special provision in respect of newly established undertakings in free trade zone, etc. (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 articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee .......... 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 cu....
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....ping software. The Assessee had claimed that it was modifying/implementing changes to Software code for SAP group entitles. The Assessee filed E-mail correspondences between consultants of SAP with overseas customers. The A0 called for sample invoices and softex forms. On perusal of the same the AO was of the view that the invoices are essentially raised against overseas SAP group entitles and SAP AG. Softex forms only state that software exports are made pursuant to agreement dated 8.4.2004 which is Cross Service Agreement between the Assessee and SAP AG. The payments were found to be made to individuals depending upon the man hours spent. Based on the above, the AO in AY 06-07 held in the order of assessment that the Assessee was not entitled to deduction u/s.10A of the Act for the following reasons: 1. The assessee's STP Unit is not developing any specific software product to any overseas customer directly or any specific software product to SAP AG or any SAP Group entity. 2. The bills raised by the Assessee show that the assessee's employees are rendering some unspecified services to group entities and assessee is charging....
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.... 1. Though, the assessee insists that it is involved in production of software, it was unable to specify the exact software product it manufactures at its STP. 2. The claim of the Assessee that even if unspecified software is produced the benefit of deduction u/s.10A of the Act should be extended to the Assessee cannot be accepted. 3. The method of invoicing and billing serves to confirm the presumption that the assessee is not actually producing software but only rendering support services, on a 'borrowal of services' basis to its group entities and billing for these by the hour on the basis of the manpower rate for the same. 4. The requirements of sec.10A cannot be said to be satisfied by the Assessee merely carrying out a "process", but should manufacture or produce a "product". Sec.10A specifies clearly that an 'article or thing' has to be produced and exported, and includes within this requirement computer software also, it is obvious that the law requires that a particular software product should emerge from the process, unless the activity is restricted to one of the specified IT enable....
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....entation support services for overseas customers, SAP India established a physically separate and independent unit in May 2002 i.e., GDC unit, consisting of one STP unit in Bangalore and (another STP unit in Gurgaon in December 2006). The implementation support services carried out by GDC comprises mainly modifying/enhance the existing functions of SAP's software like SAP Business Suite, SAP Business By design, Partner Edge, SAP Business One, my SAP ERP etc, to suit the requirements of overseas customers who have purchased these SAP software. This work is outsourced by overseas SAP entities to the GDC unit after the sale of the SAP software to overseas customers. For these services, SAP India is remunerated by the respective overseas SAP entities on a man-hour basis under a Cross Services Agreement entered between SAP AG (for itself and on behalf of its subsidiaries) and SAP India ( copies of the said agreement is at Page 77 to 90 of Paper book for AY 2005-06). 18. The learned counsel for the Assessee brought to our notice the terms of the Cross Service Agreement. This agreement describes Assessee as ND and the parent company as SAP AG. Under this agreement, the Assessee has agr....
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....grade check service for routine analysis of the End User's installed Software under individual service contracts. ND shall remit to SAP AG for providing these services under individual services contracts to its Eng Users a fee determined according to the provisions of Exhibit-3 to this agreement. The fee to be paid for providing these services not rendered under individual service contracts is determined according to the terms of the Software Distribution Agreement. The respective pro-active support service will be performance directly for End Users by SAP AG or its sub-contractors. 4.2 SAP AG may certify ND's service partners as competent to render support services for the Software. The fee for such certification are to be borne by ND in accordance with Exhibit-2. 4.3 Other services, including but not limited to, global projects initiated by SAP AG and/or global initiatives to support the marketing and distribution of the Software as well as to enhance the network and conditions for other services, eg. Consulting and/or training may be agreed from time to time between SAP AG and ND. &nb....
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....SAP AG with the services by itself or if there are reasonable economical reasons to believe that an appointment is necessary. Nevertheless, the subcontractors shall covenant, in a written statement made to ND to observe the obligations under this agreement (especially the duties according to Article-8 and 10) with respect of SAP AG". 19. As already stated the software development work/implementation support services carried out in the GDC under the aforesaid agreement is separate from the other lines of business carried out by the Assessee viz, licensing and training. It is also different from software development services provided by SAP Labs to SAP AG since the Assessee which is SAP India Pvt. Ltd. in its GDC unit provides software modification/development services to the end-user customer post sales of SAP's software products, and are based on the customer's requirements, while SAP Labs provides software research and development services to SAP AG to develop its proprietary software. 20. The learned Counsel for the Assessee drew our attention to the broad overview of the process involved in the implementation services undertaken by the Assessee whenever a customization req....
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.... the work-plan to the GDC team members. Phase-II : Technical specifications Phase Under this phase, the GDC team undertakes the following steps - Adopt technical standards; - Create the technical specifications; - Ensure the approval of the technical specifications. Phase-III Development Phase Under this phase, the key steps involved are - Develop and review the code: develop/write the software code based on technical specifications. Typically, the key types of software development work carried out by the GDC team would be- o Workflow module: Workflows are programs and objects that enable a multi-step process. They can be simple alerts or may involve user decision, action, review or a background process involving an update. o Report module: Reports are programs that generate info....
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....ent via fax or sent in an email as an attachment (pdf, otf, rtf, doc) or even simply displayed on the screen (and a user can choose to print, fax or email it). - Perform unit acceptance test: prepare the unit test environment, conduct the unit test and issue the unit test report. If there are defects, rewrite the software code and test again. Phase- IV : Integration test Phase Under this phase, the key steps involved are - Prepare the quality assurance environment; - Prepare and send delivery document; - Perform integration test; and - Sign off delivery document. Phase-V : Customer Acceptance Phase Under this phase, the key steps involved are - Release transport request to Production; and - Perform Customer Acceptance testing and inform the customer of the results Phase-VI : Post go-live support phase Under this phase, the key steps involved are - Post integration testin....
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.... The learned counsel for the assessee in his rejoinder brought to our notice that it is not correct to say that the assessee did not export any computer software. In this regard, our attention was drawn to page-23 & 24 of the paper book filed for the assessment year 2004-05 in which the particulars of exports out of India have been given. Our attention was also drawn to page-110 of the paper book which is the report of the Chartered Accountant in Form-56F certifying that the assessee had developed and exported software and was entitled to claim deduction u/s 10A of the IT Act, 1961. Our attention was also drawn to page-92 of the paper book which contained the softex form which is a form be given under the STPI Scheme, when the software is exported. The softex form gives the details of software exports and the amount realised on such exports. It was pointed out by the learned counsel for the assessee that the assessee had exported computer software. The AO in his remand report filed before the CIT(A), a copy of which is placed at page-62 of the assessee's paper book has not chosen either deny or affirm the contentions put forth by the assessee before the CIT(A) and the evident filed....
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.... Revenue that the GDC unit of the Assessee is not an undertaking set up under the STP scheme of the Government of India. In fact the necessary approval of the STPI is at page-68 to 74 of Assessee's paper book filed for AY 05-06. The approval mentions that the same is for development/manufacture of Computer Software. 29. As far as the condition as to whether the Assessee manufactures or produces "Computer Software", it has been the contention of the learned counsel for the Assessee before us that the Assessee manufactures or produces articles or things or computer software. In this regard reference was made to the definition of the term "manufacture" as has been defined under Section 2(29BA) of the Act and certain judicial pronouncements rendered thereunder. It was contended that the Assessee's GDC unit modifies the SAP software as per the requirements of the end-user customer post sales of SAP software made by the overseas SAP entities. These services include development/ writing of additional software codes and software programs which is then added to the SAP software. Without prejudice it was submitted that activities of GDC unit would nevertheless also qualify as "production"....
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....o prepare technical specification for customer developments (interfaces), ABAP Program development, unit testing, support (bug fixing) for specified period. Scope of the work includes development of 22 interface objects in the area of MM, PS, FI/CO and Campus Management as listed in the worksheet attached to the Charter. The Assessee is to implement the work. The person in-charge of the project at SAP-UK, British Council and the Assessee has been set out in the Project Charter. As far as the Assessee is concerned one Mr.Vijay Reddy, Ramesh Kumar and Sundara Iyer have been assigned the responsibility of carrying out the project. The Charter was initially settled on 28.11.2003 and changed on 9.12.2003, after discussion by Mr. Sundara Iyer at London. The schedule for completion is from Dec. 2003 to June, 2004. The number of man hours on site and off-shore are all set out in the charter. 32. Softex Forms is a declaration given by the Assessee for Exchange Control purposes, duly certified by STPI authorities regarding software export through data-communication links. The invoice No. and date of invoice are also given in the Softex Forms. By way of sample we may have a look at Softex ....
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....he Assessee has not established correlation between the receipts in foreign exchange and the nature of services rendered for which the payment was received. Let us take a Project Charter at page-91 of the paper book of Assessee filed for AY 05-06. This project charter relates to a client by name Shell of Nederland which had approached SAP Nederland who in turn have approached the Assessee. The scope of the work is development of two Business application Programming interfaces. 35. Softex forms at Page-197 refers to about 12 invoices and is in respect of total foreign exchange receivable of 1158021.09 Euros. Invoice No.9071001535 dated 30.4.2004 is referred to in the softex form. As usual the invoice is raised on SAP AG. The invoice relates to Agreement dated 8.4.2004. The invoice also refers to the man hour charges in respect of 9 software professionals who are employees of the Assessee. As to what is the nature of services performed by the Assessee for which the payments were to be received cannot be correlated. The Assessee has not made any such attempts to demonstrate that it was engaged in production or manufacture of Computer Software or was rendering notified IT-Enabled Se....
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.... Services Agreement which provides for compensation arrangement between SAP India and its holding company, SAP AG, where in it has been provided that if the services are rendered as per Article 3(a) and (b) i.e., development of version of product, translation, testing, research and development, etc (including assessment for administration and facilities), then the same would be charged at cost plus six percent. However, if the services are as per Article 3(c) which involves consulting services of the STPI unit, then the payment would be in according to SAP India's rates for consultants determined as average realised market rate of such consultant. It was argued that from the above, it would be clear that SAP India, has invoices of both kinds i.e., which are invoiced on man-hour basis and also those which are invoiced on cost plus 6%. It was submitted that it was a common practice in the software services industry to invoice customers on a time and material basis, i.e., in accordance with the billing/ charge-out rates of the personnel incurring time on the particular software development assignment. It was further submitted that the billing mechanism adopted was completely irrelevan....
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....rd to the plea of the assessee for allowing credit in respect of foreign taxes paid by the assessee on an income earned in foreign jurisdictions. The learned counsel for the assessee did not press for adjudication of the ground as the assessee has got necessary relief from the AO, pursuant to an application filed by the assessee u/s 154 of the IT Act, 1961. Therefore, ground no.3 is dismissed as not pressed. 43. Ground no.4 raised by the assessee is with regard to levy of interest u/s 234D of the IT Act, 1961. On this issue, the CIT(A) held as under: "With regard to the ground relating to charging of interest u/s 234B & 234C, it may be noted that charging of interest u/s 234B & 234C is mandatory & according chargeable wherever there is incidence of the same. Therefore, no appeal can lie against the order charging interest if there is incidence, unless it concerns a perceived and apparent misapplication of mind. The assessee has not pointed out any such circumstances in his grounds. The AO is accordingly directed to levy the interest applicable as per law after taking into consideration the findings of this appellate order. Accordingly, this ground of ....
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.... Rs 43,448,120 and Advertising & sales promotion of Rs 113,071,570. The above expenses, which were debited to the Profit and Loss Account of the Assessee, for the year ended 31 March 2005, were claimed as a deduction by the Appellant in accordance with the provisions of Section 37(1) of the Act. A detailed break-up of these expenses was called for by the AO and were adequately provided by the Assessee. The Assessee claimed that these expenses were incurred wholly and exclusively for its business purposes and satisfy the test of commercial expediency. However, the AO, while computing the total income of the Assessee disallowed a portion of the employee costs and operating expenses as under: Staff Welfare expenses: (Gr.No.3) 52. The Assessee incurred a sum of Rs 1,02,37,186 towards food and refreshments, which was included in the expenditure claimed under the head "Staff Welfare expenses". The AO was of the view that expenses incurred towards free meals to employees during office hours, cannot be treated as allowable expenditure. The AO therefore disallowed Rs 25,59,297, viz., 25 per cent of the said expenses. The AO also disallowed a sum of Rs 2,00,000 (out of the total sum of....
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....ss expenditure. In fact it is an industry-wide practice followed in India by IT companies. Such facilities are extended in the industry to ensure low employee attrition which will progress the growth of the Assessee. With effect from AY 2005-06, value of free food and non-alcoholic beverages provided by the employer to an employee is not even treated as "perquisites" in the hands of employees [as per clause (iii) under sub-rule 7 to Rule 3 of the Income-tax Rules, 1962]. In fact, even under the Fringe Benefit Taxes ("FBT") regime, though inapplicable for AY 2005-06, it may be pertinent to note that a specific exemption has been provided in respect of expenditure incurred on food or beverages procured by the employer for providing to his employees in an office or factory. Thus even the legislature thought such benefits not to be expenditure which would provide any benefit of a personal nature for the employees. We do not find any basis for disallowance of the remaining expenses out of staff welfare expenses also. We therefore hold that the disallowance sustained by the CIT(A) be deleted. Gr.No.3 is allowed. Sales promotion expenses; (Gr.No.4) 56. The AO disallowed Rs 2,00,000,....
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....ng designing product brochures, deciding the medium of advertising and developing advertising content for the products. These facts have not been disputed by the Revenue. In these circumstances we are of the view that sales promotion expenses, being incurred wholly and exclusively for the purpose of the Assessee's business, are fully allowable as deduction under Section 37(1) of the Act. Gr.No.4 is accordingly allowed. 59. Ground no.5 was not pressed and the same is dismissed as not pressed. Ground no.6 is with regard to charging of interest u/s 234B of the IT Act, 1961 is consequential in nature and the AO is directed to give consequential relief. Ground no.7 is with regard to interest levied u/s 234C of the IT Act, 1961. While deciding the similar ground of appeal for the assessment year 2004-05, we have already held that interest u/s 234C of the IT Act, 1961 are to be levied by taking income declared in the return of income, as criteria. For the reasons stated therein, we direct the AO to calculate interest u/s 234C of the IT Act, 1961 by considering the returned income and not the assessed income. 60. In the result, the appeal is partly allowed. ITA No.1494(B)/12 (AY: ....
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....m export turnover while computing the deduction u/s 10A of the Act. e. The learned AO has erred in law and in facts by not considering the alternative plea of the assessee that if the expenses mentioned in Ground no.3.1 to 3.3 above are reduced from export turnover, an equal amount should also be reduced from total turnover for computing the deduction under section 10A of the Act. f. The learned AO has erred in la and in facts by reducing an amount of Rs.30.198,542 (representing export sales proceeds realised beyond six months from the end of relevant FY) from the export turnover while re-computing the deduction u/s 10A of the IT Act, though the entire proceeds were received before completion of assessment u/s143(3) of the Act." 63. The CIT(A) in his order, did not adjudicate these grounds for the following reasons: "7. These grounds involve expenses incurred in foreign currency towards support charges, cost of purchased services, travel and conveyance, expenses incurred in providing technical services outside India and foreign expenses attributable....