TaxTMI 
TaxTMI 
2023 (12) TMI 456
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.... (Appeals) ["CIT(A)"] erred in confirming the order passed by the Assessing Officer ["AO"] u/s. 143(3) r.w.s. 147 of the Income-tax Act, 1961 ["Act"] without appreciating that re-opening of assessment u/s. 147 after a period of four years from the end of relevant assessment year was not warranted having regard to the facts of the case. The CIT(A) ought to have appreciated that neither any income has escaped assessment nor the appellant has failed to disclose fully and truly all material facts necessary for assessment u/s. 143(3). Without prejudice to Ground No. 1, on the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the AO's action of treating the onsite software development services rendered by the appellant as "supply of manpower" and "body shopping" and not as "export of software" so as to reduce the claim of the appellant u/s. 10A of the Act by Rs. 17,98,78,041/- Without prejudice to Ground no. 1 and 2, on the facts and the circumstances of the case and in law, the CIT(A) erred in confirming the AO's action of treating revenue generated from overseas branches as not export service from India and as not derived fr....
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....A.Y. 2009-10, it was noted that the assessee has incurred substantial expenditure in foreign currency. Such expenditure is incurred in respect of employees posted abroad and also expenditure on maintenance of branches. In the scrutiny assessment for A.Y. 2009-10, copies of contract with the clients were also called upon. On perusal of these contracts, it is noted that the assessee has hot developed computer software as such, rather it has deputed its staff wholly and exclusively for the use of the clients. Further, the contracts with clients suggest that the assessee has a Permanent Establishment (P.E.) in the countries wherein its clients are located. On this factual finding it was held that the assessee has not developed any computer software in respect of expenditure incurred in foreign currency and such expenditure Incurred in foreign currency has not resulted into an income which is derived from the undertaking located in India and eligible for deduction u/s 10A. On verification, it is noted that in the current year also the assessee has incurred expenditure in foreign currency at Rs. 348.95 crores. Therefore, corresponding income earned in respect of this expenditure....
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....m is "body shopping" and the benefit derived from services cannot be treated as derived from export and computer software. Accordingly, he disallowed profits in ratio of software development expenses incurred out of India to the total software development expenses of the assessee company. He noted that total software development expenses were as under:- Nature of Exp. Cost incurred in India Cost incurred outside India Total Rs. Software Development Expenses 2,13,29,43,760 2,89,92,85,940 5,03,22,29,700 9. Thus, AO held that nearly 57.61% of the software development expenses had been carried out outside India, hence, income in respect of eligible units to the extent of 57.61% needs to be disallowed. Accordingly, he computed disallowance from the claim of deduction under Section.10A of Rs. 48,15,41,883/-. Thereafter, he observed that if without prejudice it is held that services provided by the assessee are not in the nature of "body shopping", the said profit derived from overseas branches cannot be considered export services from India allowable as exempt under Section.10A due to following reasons:- (i) The onsite staffs are controlled by the Over....
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....as deputed staff wholly and exclusively for the use of clients. This expenditure incurred in foreign currency has not resulted into any income and therefore, for this reason it is not eligible deduction u/s.10A. First of all, nowhere Assessing Officer has pointed out what was the failure to disclose truly and fully all material facts required for the assessment. A view taken in A.Y. 2009-10 cannot be taken as failure on the part of the assessee to disclose truly and fully all material facts because all the facts were already part of the record during the course of assessment proceedings. Further, in any case the Tribunal in A.Y. 2009-10 have rejected this view taken by the Assessing Officer in pursuance of the directions of the DRP and has allowed this issue in favour of the assessee after detailed discussion and wherein we found same contracts which have been discussed by the Assessing Officer. Thus, there cannot be any failure on part of the assessee and consequently, the assumption of jurisdiction under Section.147 is bad in law and on merits also the additions are not sustainable. 13. On the other hand, ld. DR strongly relied upon the order of the CIT(A) and further submitte....
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....e Karnataka High Court in the case of Infosys Ltd in Writ Petition No.29828/2011 and other writ petitions wherein on similar issue and similar kind of facts, the Hon'ble High Court had quashed the reopening u/s.147. 15. Undisputedly, the case of the assessee is hit by the proviso to Section 147, ergo, the limitation and the condition provided therein has to be satisfied, whether AO has assumed valid jurisdiction or not. The case of the AO is that, the issue of escapement is established in the A.Y 2009-10 when the fact came to light that the assessee is not eligible for deduction u/s 10A to the extent and in view of the same it was found that the assessee has been allowed excess deduction for the A.Y. 2006-07. There is no whisper that any material or information has come on record that assessee was not incurring expenditure for software development outside India, but doing body shopping by deputing the personnel for the outside clients, albeit, from same set of facts a different view has been taken in A.Y. 2009-10 that revenue generated from such employees and branches cannot be considered as export services from India and derived from STPI located in India, which inference of th....
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.... for SAP/ERP Development & Implementation which are required to be executed at client site. Employees working onsite are under the supervision and control of the Project/Delivery Manager from LTIL India. E.g. contract with Mushrif Trading & Contracting Company is enclosed herewith for your reference. Providing software services to overseas customers requires a combination of onsite services and offshore services. This is required for the following reasons: when a customer is transitioning the work from his IT team to outsourced vendor like us, detailed knowledge transfer is planned followed by scoping of work that needs to be done onsite as it requires proximity to customer and the work that can be offshored. Second, there is a need of certain technical staff to be onsite for better understanding of customer's ongoing requirements and translating the same to the offshore team for cost effective and timely delivery of services to the customer. Third, in cases where certain software development services are required to be integrated with other systems at customer's end, it requires interaction at customer site. Thus, onsite and offshore services are an integral part ....
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....m the above explanation of LTIL's business model, it can be observed that in LTIL'S business model of providing software development services through a combination of onsite and offshore services, the onsite services are effectively connected with offshore services. Hence, the onsite services are not in the nature of "Manpower Supply" which is referred to as "Body Shopping". Even in case of the small proportion of 2% business which is done through onsite project development, the onsite activities are under the control and supervision of LTIL-India. E.g. contract with Mushrif Trading & Contracting Company as also enclosed above for your reference. Hence we submit that LTIL India is eligible for exemption on its 100% export profits as it has complied with all the conditions required for claiming benefit of Sec 10A." In order to support the above submission, the Ld. Sr. Counsel for the Appellant took us through the relevant clauses of various contracts placed at Page 63 to 222 of the paper-book. 23. Further, the Ld. Sr. Counsel appearing for the Appellant also relied upon submissions, dated 12.02.2013, to contend that the Assessing Officer h....
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....lobal Solutions Ltd. [IT(TP)A No.286/BANG/2013, Assessment Year 2007-08, dated 05/08/2019] which read as under: "19. Section 10A is a special provision in respect of newly established undertakings in free trade zones etc. Sub-section (1) of this section provides for a deduction of profits and gains as are derived by an undertaking from the export, inter alia, of computer software for a specified period. It is not disputed that the assessee satisfied all the requisite conditions for becoming eligible to deduction under this section, which is apparent from the action of the AO in himself allowing deduction to some extent. The dispute is only to restricting the amount of deduction in respect of the alleged profits derived by the assessee from DTM and onsite charges, which in the opinion of the AO, were not derived from export of computer software. 20. The assessee is engaged in the business of computer software development from its eligible units. At this stage, it would be apposite to consider the meaning of `Computer software' given in Explanation 2(i) of section 10A as: `(a) any computer programme recorded on any disc, tape, perforated media or other information s....
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....re developer and the customer, which is almost present in most of the stages of software development, starting with conceptualization itself. In developing a computer software of large magnitude, it is quite possible that a Software Developer may have to visit the site of the customer several times for having an on the spot information and properly appreciating the needs so as to make the final product compliant with the requirements. There can be several other reasons necessitating a customer abroad insisting a software developer in India to develop software fully or partly at his site overseas. The stage of testing in a customized software can be properly done only at the site of the customer. The nitty-gritty of the matter is that a customized software cannot be ordinarily developed without spending some time on site with the customer. Considering the objective of deduction u/s 10A and realizing practical issues and difficulties, the Finance Act, 2001 inserted Explanation 3 w.e.f. 1.4.2001 providing: `For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) o....
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.... if they are not personally agreeable with the same. 22. On going through the directive of the Explanation 3 and the Circulars issued by the CBDT, which are binding on the authorities under the Act, it is vivid that the benefit of deduction under section 10A caters not only to profits earned from export simplicitor of computer software but also to any profits and gains derived from onsite development of computer software and also services for development of software rendered outside India. So long as there remains a live link between onsite development of computer software and services for development of software with the development of software from the eligible undertaking, the consideration awarded for onsite development for computer software and rendering services for development of services outside India cannot be excluded from the purview of deduction u/s.10A. However, what is essential for such onsite development or rendering of software development services outside India to qualify for the benefit of deduction is that these should be in furtherance of the development of the software product undertaken by the eligible enterprise. If onsite services are de hors the p....
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....ed, Japan [for short "Hitachi Agreement"] and (d) Fixed Price Agreement with Thales, France (DAG/S&HT/2007/A262) [for short "Thales Agreement"]. The Ld. Senior Counsel for the Appellant appearing before us relied upon the recitals and various clauses of the aforesaid agreement dealing with the scope/provision/location of services, obligations of the Appellant in relation to staff/personnel working on the project, price/consideration for services and its payment, to support the contention that the Appellant was engaged in providing software development services as per the contracts entered into by the Appellant with its clients. Countering the aforesaid submissions, the Ld. Departmental Representative placed reliance upon Clause 12 "Supplier Staff" of Chevron Agreement and Clause 14 "Staffing" of Hitachi Agreement to drive home the point that the Appellant was engaged in body shopping. He vehemently contended that Appellant was essentially supplying personnel who were under complete control and management of the clients and, therefore, Assessing Officer has rightly denied deduction claimed by the Appellant under Section 10A of the Act. However, on perusal of the agreements including....
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....he Ld. Departmental Representative must be read in understood in the context of the rights and obligations of the parties under the agreement. On perusal of various provisions contained in Clause 12 we find that the provisions are intended to ensure continuous supply of quality services as represented by the Appellant. The limited control exercised by the client over assignment for specified duration and removal of the staff for the project cannot be treated at par with the right to appoint and terminate the employment of staff. As per Clause 12.1, the "Supplier Account Executive" bares the responsibilities of managing/coordinating the Appellant's obligations and also has the authority to act on behalf of the Appellant. Clause 12.2(c)/(d) do not bar replacement/re-assignment of personnel and also recognizes the right to the Appellant to terminate services of the employee/staff. Clause 12.3 clearly castes obligation on the Appellant to recruit/hire "Project Staff" required for providing the services under the agreement. Clause 12.4 and 12.5 requires to application maintain "Buffer Staff" and "Relief Staff" of 15 to 20% of the Project Staff and 3 to 5% of Project Staff, respectively.....