TaxTMI 
TaxTMI 
TaxTMI 
2015 (10) TMI 2062
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....oceedings under Section 143(3) of the Act, the Assessing Officer found that the assessee had claimed a sum of Rs. 14,58,39,507/- as deduction under Section 10A of the Act in respect of its Mumbai unit. The Assessing Officer, in its assessment order, disallowed a portion of the deduction claimed by the assessee. 4. Out of the total earned revenue of Rs. 81,33,03,687/- declared by the assessee during the assessment period, a sum of Rs. 9,02,91,219/- was domestic revenue and balance of Rs. 72,30,12,268/- was from export of computer software. The Assessing Officer had disallowed certain claims under section 10A of the Act on account of 'on-site' work sub-contracted to Associated Enterprise (for short 'AE') and also exclusion of telecommunication and travelling expenses incurred in foreign currency towards delivery of software in export term. In appeal filed by the assessee, the appellate Commissioner, after following Judgment of this court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98, directed the Assessing Officer to exclude telecommunication and travelling expenses incurred in foreign currency towards delivery of software in export term under Section 10A o....
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....ts a part of the same to the assessee company and such part of the contract is performed by the assessee company in India as its 'off-shore' activity and remaining work is carried out by the AE at its own end. For such part of the contract which has been performed by the assessee in India as its 'off-shore' activity, it has been given benefit under Section 10A of the Act, regarding which there is no dispute. 9. It is the earning from Type-2 contracts which is in question in this appeal. In such contracts, the assessee enters into agreement with the end customer according to which, after performing the 'off-shore' activities in India, the assessee sub-contracts part of the contract to the AE situated outside India for 'on-site' activities. In the present case, the assessee company has earned an amount of Rs. 1,65,69,138/- under this Type-2 contract which is under consideration in this appeal. 10. Section 10A of the Act provides for deduction of such profits and gains as are derived from export of articles or things or computer software which shall be allowed from the total income of the assessee. Sub-section (2) of Section 10A provides for the appli....
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....h portion of 'on-site' work. It is contended that unless the manufacture or production is done by the assessee at the free trade zone, it would not be entitled to any benefit under the said Section because 'on-site' work, in the present case, has been carried out by the assessee through its AE outside India, without involvement of any of its own (assessee) personnel. Sri Sanmathi, learned counsel for appellant has stated that the assessee has, in its written statement, admitted that the entire 'on-site' work had been transferred to AE and the assessee only retained supervision and control (not manufacture and production) with itself. Learned counsel has relied on the findings recorded by the Assessing Officer as well as appellate Commissioner in this regard and has submitted that such findings which have been recorded by the Tribunal are against the facts on record and that the findings of the Assessing Officer and the appellate Commissioner be confirmed. He has contended that the conditions laid down in sub-section (2) of Section 10A are not satisfied in the present case, and for this reason also the benefit of said Section cannot be given to the assessee. ....
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....onditions laid down under Section 10A, which are undisputedly liable to be construed very strictly, but once the conditions are fulfilled by the assessee, a liberal interpretation has to be given by Courts for granting the benefit under the Section. 13. Section 10A of the Act is a beneficial piece of legislation i.e., it is for the benefit of the assessee, in order to encourage setting up of businesses which earn foreign exchange. Same has been introduced by the legislature in the year 1981 with the clear intention to grant benefit under the Income Tax Act to such units which earn foreign exchange. The Finance Minister while introducing the bill for insertion of a new Section 10A for granting a complete tax holiday for industrial units in the free trade zones had stated that it was "with a view to encouraging the establishment of export-oriented industries in the free trade zone, the Finance Act has inserted a new section 10A in the Income-tax Act which makes special provision in respect of newly established industrial undertakings in free trade zones." 14. While interpreting a beneficial piece of legislation, though this Court has to be very strict in ensuring the compliance of ....
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.... parts of the turnover of the Mumbai unit were arrived on account of the work executed by the AEs. In other words, you have not carried out the software development at various client locations involving your employees. Admittedly, it is a software sub-contract work. In that situation the profit shown in these units cannot be stated as profits derived by you out of the export turn over related to computer software development in terms of explanation 3 under section 10A of the IT Act, 1961. In view of the above, you are asked to show cause as to why proportionate profits (in the proportion of sub-contract charges out software expenses) should not be excluded from eligible profits of each unit for computing 10A deduction." 17. A plain reading of the said notice would make it clear that the Assessing Officer has himself accepted that it was only some part of the software development which was carried out 'on-site' by the assessee, meaning thereby that the other part of the contract was carried out by the assessee 'off-shore' i.e., at its site or workplace in India. Such being the position, we are of the clear opinion that it was not the entire contract which was passe....
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....an establishment at the place of the end customer situate outside India, for which it may have to incur travelling and other expenses for its personnel to go 'on-site' outside India for performing such work; or on the other hand, another option for the assessee is of sub-contracting the 'on-site' work to an AE which has to work under the supervision and all pervasive control of the assessee and carry out the 'on-site' work on behalf of the assessee at the place of the end customer. The payment for 'on-site' work done would, in such a case, be made by the assessee to the AE and not by the end customer, who would make the entire payment of Rs. 10 crores to the assessee. There could be a marginal difference in the expenses which the assessee would have incurred if it would have carried out the 'on- site' work through its own personnel as against the payment which is made to the AE for doing such work, but such decision of passing on part of the work to be done by a sub-contractor (AE) or not, has to be taken by the assessee as a prudent businessman keeping in view the business necessities and the comparative cost effectiveness and it is not for ....
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.... the client's site abroad, such unit should not be denied the tax holiday under s.10A or 10B on the ground that it was prepared on site, as long as the software is a product of the unit, i.e., it is produced by the unit." 22. In our view, the said Circular is in favour of the assessee and not against it. Learned counsel for Revenue has laid much stress on the wordings that the assessee unit should have produced the computer programme by itself or that it should be produced by the unit of the assessee itself. There is no denial of the fact that even the 'on-site' work of computer software development has been done under the direct supervision and control of the assessee through the AE, which would be nothing but on behalf of the assessee 'itself'. As indicated in the said Circular, 'itself' would not mean that personnel of the assessee will have to carry out the work. However, it should be the product of the assessee and since in the present case, the ownership of the product (software), after payment by the assessee for the work done by the AE, would be of the assessee, the same would be nothing but the product of the assessee and not a product of AE. T....
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....evenue has contended that there is no nexus between 'off-shore' production by the assessee in India and 'on-site' production by the AE outside India. He relies on the finding of the Assessing Officer given in this regard, which is as under: "Hence the profits and gains derived from Model No.2 cannot be deemed to be the profits and gains of the assessee company w.r. to export of computer software outside India. To be precise, the deduction is available only if the on-site development of computer software is executed by the assessee itself through its own personnel. The sub-contracting of "On site" part of the software development to other entity and the resultant profit is not covered in Explanation 3 to Section 10A of IT Act and such profits and gains would not qualify for deduction under section 10A of IT Act. ** ** ** From the discussion on relevant paras of the MSA, it is further brought on record that the execution of off-shore part of the contract had got nothing to do with the on site work executed from abroad by the AEs. The execution of off shore part of the contract was on a separate channel and the AEs were never involved in any implementation of the pr....