TaxTMI 
TaxTMI 
2008 (4) TMI 334
X X X X Extracts X X X X
X X X X Extracts X X X X
.... services. Also according to the Revenue, CIT(A) admitted new evidence in contravention to r. 46A. In its Ground 4, Revenue is aggrieved that CIT(A) allowed overseas maintenance allowance of Rs. 75,18,365 debited by the assessee in its P&L a/c, which was disallowed by the AO. 4. Related facts run as follows. 4.1 Assessee is a firm which, as per the assessee is carrying on the business of computer software development. It seems the dispute also starts here itself since the AO does not accept that the assessee is engaged in computer software development. Incidentally, in the assessment order, in Form ITNS 65, at Sl. No. 10 meant for showing 'nature of business' of the assessee, is seen left blank by the AO. 4.2 For the relevant previous year, assessee had claimed deduction of Rs. 1,56,95,244 under s. 80BHE of the IT Act, 1961 (hereinafter referred to as the Act). It had also debited in its P&L a/c a sum of Rs. 75,18,365 as overseas maintenance allowance. During the assessment proceedings AO required the assessee to substantiate its claim for deduction under s. 80HHE, as also the overseas maintenance allowance charged in the P&L ale. In response thereto assessee produced agre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t. 17th Sept., 2002, AO informed the assessee that she had drawn the following adverse inferences and sought assessee's reply thereon. These are given hereunder: 4.5 AO's inference number one 4.5.1 Sec. 80HHE is allowable only for 'either' of the following: (i) export out of India of computer software or its transmission from India to a place outside India by any means; (ii) providing technical services outside India in connection with the development or production of computer software. 4.5.2 According to the AO assessee was doing neither of these. 4.6 Assessee's reply to AO's inference number one 4.6.1 The word 'either' is not there in s. 80HHE. Further Expln. (1) to sub-s. (1) of the said section states 'For removal of doubts, it is hereby declared that the profits and gains derived from onsite development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer outside India'. 4.6.2 Assessee is a firm engaged in business of software development and scope of operation vide agreements signed by it with M/s KBS was as per the scope of work mentioned therei....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and execution of the said agreement can therefore be deemed to be complete only on 20th March, 1997. This date viz., 20th March, 1997 was clearly mentioned by representative of KBS who signed the agreement. 4.10.2 Minor technical irregularities have no bearing whatsoever on the validity, substance and enforceability of the contract. In any case, this has got no relevance With the deduction claimed under s. 80HHE. 4.11 AO's inference number four 4.11.1 From the agreement with M/s KBS it is difficult to conclude the nature of assessee's business with them and hence assessee does not seem to be eligible for deduction under s. 80HHE. 4.11.2 Assessee's representative mentioned the nature of business in their individual capacity only, and not as that of the firm. 4.12 Assessee's reply to AO's inference number four 4.12.1 Both the partners are equally qualified professionals. In any case, they were not personally doing software development and technical consultancy at Dublin for M/s KBS, but had employed technically competent personnel for that work. 4.12.2 The scope of work and the term of duration are clearly mentioned in Appendix A to the agreement. 4.12.3 Work....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../s ABN Amro Bank clearly proved that such payments were made by account payee drafts. All such payments were made through normal banking channels only. 4.14 However, the AO did not accept any of the explanations of the assessee as given above. For not accepting assessee's explanations with regard to the services rendered by it to M/s KBS, AO has given the following reasons: (i) Employees mentioned were working at assessee's client's places and none of the employees examined were able to clearly state the software work undertaken by them. (ii) Employees who were examined could not produce on CDs or floppies, a copy of the software developed by them, which they were supposed to execute at the client's premises. (iii) Majority of the employees summoned did not attend. (iv) Agreements assessee had with M/s KBS were without any time-frame and could have been terminated with one month's notice. This agreement did not have any legal sanctity since it was not on stamp paper, did not bear the name and signature of the parties, and were not registered or notorised. (v) Appendix A referred to in the agreements cannot be called as part of the agreements. (vi) The channel f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... different names specified in the column for giving name and place of residence of remitter. (xvi) Assessee could not prove software development and export. Assessee's managing partner was not even aware of the work being carried out by its employees. Assessee failed to prove the nature of software exported either physically or electronically and invoices raised by the assessee only specifies man-months, and amounts. (xvii) Assessee also failed to prove that consideration brought to India in converting foreign exchange was in respect of computer software exports. 4.15 With the above observations, AO came to the conclusion that assessee failed to prove that it was engaged in the business of: (i) export out of India of computer software or its transmission from India to a place outside India by any means; (ii) providing technical services outside India in connection with the development or production of computer software. 4.16 In this view of the matter, AO disallowed the deduction of Rs. 1,56,95,244 claimed by the assessee under s. 80HHE. 4.17 For disallowing overseas maintenance allowance of Rs. 75,18,365 claimed to have been paid by the assessee to its 17 empl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tial experience in Bank Master System of M/s KBS. (iii) It is due to such experience of assessee, that M/s KBS chose to enter into agreement with the assessee for providing services in the field of software development work at their office at Dublin, Ireland. (iv) Assessee's work with M/s KBS involved development of software programmes, trouble shooting and systems support. Bank Master Software had number of operational modules and continuous monitoring and upgradations were required. (v) Appellant was unable to raise item-wise bills since a number of small tasks were being undertaken by its employees on site and, therefore, it was feasible to charge on man-hour basis. (vi) Copyrights of all the programme modules of 'Bank Master System' were held by M/s KBS and though system interface programme, maintenance programmes, and migration routines required as per the norms for different countries were developed by assessee's consultants onsite KBS, such newly developed software developed also became the sole property of the clients as per agreement. Therefore, assessee could not take back-ups of these programmes nor provide floppies or CDs thereof as required by the AO. Such ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g of software packages in line with the need of the end users. (v) Assessee did not sent its manpower to be employed by M/s KBS directly but on the other hand, such persons were employees of the assessee itself and were deputed for the work of M/s KBS only for a specified period. (vi) That assessee did not have sufficient infrastructure to develop software or the partners themselves did not have knowledge of the actual programmes used were of no consequence since lack of technical expertise of the partners did not debar it from employing technically qualified and competent persons to work for it. (vii) An agreement just because it is executed on a plain sheet of paper or because it was not legally notarized could not be doubted, since there were no such requirements under the Act. (viii) Fact was that assessee had sent out technically qualified persons to provide services to its clients and had received payment in foreign exchange through normal banking channels. (ix) Sec. 80HHE of the Act not only covered export out of India of computer software but also covered the business of providing technical service outside India in connection with the development or productio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al expertise was developed in India by the assessee, could its employees provide services relating to such expertise to a third party. He pointed out paper book page No. 54, which mentioned at para 3.3.3 of the agreement that software resources were to be provided by M/s KBS. According to him, this meant that manpower alone was provided by the assessee. Learned Departmental Representative further submitted that Appendix A to the agreement clearly stated the scope of work to be analysis, programming and testing skills to Bank Master Development Projects and such Bank Master Development Project was a software owned by M/s KBS and not the assessee. In a nutshell, according to him, there was no export of computer software by the assessee or its personnel in Dublin. According to him, whatever services they had provided at Dublin had no nexus with any technical expertise they obtained on account of their association or employment with the assessee or on account of any training they received from the assessee, and the arrangement was only a transfer of manpower for which remuneration was received on an hourly basis. 5.2 As regards disallowance of overseas maintenance allowance, accordi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom India to a place outside India, deduction shall be allowed to its profits from such business. Similarly, according to him, if an assessee is providing technical service outside India in connection with development, or production of computer software then also a deduction shall be allowed to its profits from such business. Therefore, he submitted, what has to be seen is whether the assessee has been engaged in export outside India of computer software and/or was providing technical service outside India in connection with development or production of computer software. 5.4 According to the learned senior counsel, the Explanation, referred supra, which had retrospective effect, as clarified by Circular No. 3 of CBDT clearly stated that onsite development of computer software including services for development of software outside India is equivalent to export of computer software outside India, and hence profits therefrom eligible for deduction under s. 80HHE of the Act. According to the learned senior counsel, such onsite development of software or service for such development shall be treated on par with export of computer software outside India. 5.5 The learned counsel, f....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... This according to the learned senior counsel was quite sufficient to prove that what was involved in the contract was not transfer of manpower but rendering of technical service for software development. Learned senior counsel also stressed that if it had been a transfer of manpower there was no question of assessee taking responsibility for the negligence or misconduct of such personnel. 5.7 Learned senior counsel, then, brought to our attention, copies of professional services timesheet maintained by the client relating to each of assessee's employees based on which invoices were raised by the assessee, which specified the work done by such personnel at the site of M/s KBS, Dublin. According to the learned senior counsel the work description given in these timesheets clearly proved that the work involved programming and services for development of software. Learned senior counsel also brought to our attention invoices raised by the assessee, copies of which were given at paper book pp. 75 to 85, which again mentioned description of work as charges for change request, onsite software development services, enhancement to CBRS system, changes carried out to the BOSS system, etc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ior to joining assessee. 5.10 As for the competence of the managing partner, in the field of activity of the assessee firm, learned senior counsel brought to our attention examination of Shri Nikhil Avadhani. In answer to question No. 2 he has given his detailed experience in the field of computer systems wherein he mentions experience with one M/s International Computers Manufactures India Ltd., one M/s Link Software and his association with various other concerns/firms which were involved in developing software system and software support systems. Learned senior counsel pointed out that when Shri Nikhil gave names of ten programmes that he had written, in answer to query number 3, the learned AO asked him to jot down the program step-wise which Shri Nikhil could not do, since he could not recollect. Learned senior counsel wondered why the AO was conducting an examination of assessee's coding skills, which according to him was beyond the scope of AO's expertise. Learned senior counsel submitted that there was more than substantial proof before the AO that the persons sent by the assessee to the site of M/s KBS at Dublin were technically qualified software personnel to do softwa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of services of engineers and draftsmen for service abroad was not technical service. The Hon'ble High Court decided in this case that refusal to grant approval by arriving at a conclusion that the loaning of services of engineers and draftsman for service abroad was not a technical service, was not correct. 5.12 Learned senior counsel also brought to our attention the decision of Hon'ble Supreme Court in Continental Construction Ltd. vs. CIT (1992) 101 CTR (SC) 386 : (1992) 195 ITR 81 (SC) wherein, according to the learned Authorised Representative, Hon'ble Supreme Court had clearly held that an unduly narrow interpretation could not be given to s. 80-O and rendering of technical services through personnel/employees were permissible. 5.13 Learned senior counsel submitted that taking the above decisions into consideration an unduly narrow interpretation shall not be given to s. 80HHE also, where services are rendered through personnel/employees. The learned senior counsel also submitted that in the case of Cybertech Systems & Software India Ltd. vs. Asstt. CIT (2006) 7 SOT 230 (Mumbai), this Tribunal had held that merely because payments were made on man hour basis, it would n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or counsel also brought to our attention explanation given by the assessee in this letter that the amount of Irish Pounds 50 per day per employee was very conservatively estimated and such expenses paid on account of commercial expediency. Learned senior counsel also submitted that the employees had also confirmed that these allowances were used for their meeting living expense in Dublin. According to the learned senior counsel it was also explained in this letter that it was very difficult to get the bills from the concerned employees for each and every expense since cash registers were commonly used abroad and the number of transactions involved were numerous and relatively of small values, and to insist on the employees to produce accounts thereof would only antagonize them, which was against the business interest of the assessee. According to the learned senior counsel on the basis of these explanations, no further action was taken by the learned TDS Officer. Hence, it was submitted by the learned senior counsel that, having accepted the version of the assessee to be correct in a proceeding initiated by an officer of tax deduction section of the Revenue, it was improper for the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issued by the assessee, none of the employees could produce their bank accounts, and thereby it has not been proved whether such moneys were indeed paid to the employees. According to the learned Departmental Representative no tax deduction has been made at source by the assessee, on these payments which are in his opinion a part of salary and, therefore such expenses not allowable vide s. 40(a)(iii) of the Act. The learned Departmental Representative also submitted that even assuming such allowances to be not part of salary or perquisite, assessee had not shown it in its annual return for TDS under the head 'Salary', filed by it, though there was a separate column in that form for showing such exempt allowances. According to the learned Departmental Representative sub-s. (14) of s. 10 of the Act was not applicable in assessee's case and, therefore, the disallowance made by the AO was very much justified. 6.1 We have carefully gone through the orders of the authorities, the submissions made by the learned counsel and also the relevant pages in the paper book Vols. 1 and II, giving the agreements, copies of invoices raised by the assessee, certificates from banks, copies of TDS n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....appeared. AO has also acknowledged that Shri Sunil Nair and Ms. Padmakshi Madgaonkar had submitted part details. It is also acknowledged by the AO that the employees who had appeared at least vaguely stated regarding the software work being done by them vide para 4.2.3 of the assessment order. When examined, Shri Bharat R. Shah has in answer to question No. 2. clearly stated that he was a B.E. (Computers) from Bhartiya Vidyapeeth College of Engineering of Bombay University. He also states that his first employment was in M/s Information Architects (P) Ltd., as a software programmer from 10th July, 1997 till November, 1997. He further states that on 1st Dec., 1997, he was absorbed by the assessee*firm. It has also been deposed by him that from 8th Jan., 2000, he was working with M/s Kindall Systems (P) Ltd. 6.3.2 The second person examined by the AO Shri Mahendra Chaudhary, in answer to question No.2 has stated that he was Master of Computer Science from Pune University and had worked for M/s HICO and M/s Ajay Tech Me Systems before joining Information Architects (P) Ltd. in the year August, 1998. He also states that from April, 1999 he had been working with the assessee. In his ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bhat as an employee of the assessee. There is nothing to doubt the submission of learned senior counsel, that the records produced which were of Shri Bharat R. Bhat was a typical example and the methodology followed was the same in all other employees who were deputed. AO has given no adverse findings on any of the records submitted by the assessee relating to the visa, and visa applications of its employees. 6.4.2 Each of the persons sent abroad had filed his/her return as admitted by the AO in the assessment order itself and they had all themselves shown as employed by the assessee-firm and salary from assessee as their respective income. This being the case, we have to answer the second question also in the affirmative that the persons deputed by assessee to Dublin were its employees and not employees of M/s KBS or loaned to them. 6.5 Now the third question that is to be answered is whether it was necessary for the assessee to have trained its employees and whether the technical service imparted to the client by the assessee ought have been developed by the assessee itself and whether the partners of the assessee-firm were conversant in software development and/or maintena....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be clearly answered in the positive. 6.5.3 The proposition that every employer is supposed to know all the technical steps involved in a job done by their skilled employees, cannot be accepted. If that be so, we have to presume that Shri Anil Ambani of Reliance would know every step and every software used in the course of activities starting from finding of oil to its final refinement which is an unacceptable proposition. So, the submission of the learned Departmental Representative that the assessee could have provided technical service through its employees only if assessee itself had full technical knowledge of such service, cannot be accepted. In any case, the managing partner of the assessee was undoubtedly qualified enough to manage a software consultant firm. An employer employs skilled personnel to get those things done, which he personally may not be able to do. The personnel employed by the assessee, sent to Dublin were qualified and experienced. Hence, imparting of training by the assessee to its employees was not essential, for such employees to do the work assigned to them at Dublin. In any case, AO has not brought in any evidence to prove that the services rendere....
X X X X Extracts X X X X
X X X X Extracts X X X X
....agreement in rem but only an agreement in personem. In any case, an agreement does not become invalid only because the parties have signed therein on different dates. Non-stamping or deficient stamping might deprive a party to a contract from enforcing the terms thereof in a Court of law, but the terms and conditions therein remains binding on the parties. Regarding non-specification of periods or similarity between the agreements, as long as parties to the agreement had no issues between them and understood the period of its validity, there was no necessity for a third person to force his own interpretations to it. 6.6.3 In any case the AO never ever issued any notice or query to M/s KBS, if he doubted the genuineness of parties consent to the agreement or validity thereof. He also ignored that contracts could even be oral. 6.6.4 Further, there is no condition imposed under s. 80HHE that technical services relating to production or development of software has to be in pursuance of a legally valid written contract between parties. As long as the parties had an understanding regarding the terms and if the conditions set out under s. 80HHE were satisfied deduction under s. 80HH....
X X X X Extracts X X X X
X X X X Extracts X X X X
....we will look into the relevant clauses in the agreement assessee had with M/s KBS to clearly understand what assessee's employees were supposed to do in Dublin. Appendix A to its agreement dt. 9th Feb., 1999 with M/s KBS gives scope of work as 'Analysis Programming and Testing skills to 'Bank Master Development Project'. It is also stated at para 4 of the same Appendix under the caption, 'activities and time frame' as follows, 'design develop and test software including code maintenance as required by client, details of which will be provided at the commencement of the contract and to be updated, amended, added to, changed or revised during the lessor of contract'. The skill set requirements of the persons deputed by assessee is stated in cl. 5 of this Appendix, which are specified to cover software development life cycle of bank master product and include SDL, Cobol, Unix, bank master database structure, Standard Chartered Bank Operations TPS requirement and problem analysis, and testing and quality assurance skills with a rider that the persons should be able to efficiently produce good quality code. 6.7.5 The answers to the queries given by assessee's employees cited above an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment, object oriented system development, prototyping, rapid application development, re-engineering, reverse engineering and structured analysis, it is stated that a system is never static and system maintenance is a part of on-going development. Information Systems Audit and Control Association of USA, which is considered the top most professionally recognized body, prescribing standards for systems audit and audit of business application software development, has in its 2004 CISA Review Manual, in Charter 6 under the heading 'System Change Procedure and Programme Migration Process' given as follows 'Following the implementation and stabilization of a system, it enters into the ongoing development or maintenance stage.' Thus ongoing development of a software system is nothing but its 'maintenance'. Or in other words, in the world of computers systems and software, maintenance is a part of ongoing development. Maintenance of software, especially when it involves ERP modules, or bought out software like 'Bank Master Software' would require routines and sub-programmes for interfacing it with other legacy systems and also for migration from other legacy systems to new system and buil....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f sub-s. (1) thereof and taking into consideration the nature of work done by the persons at Dublin, explained in preceding paras it can be unhesitantly held that they were rendering technical service for onsite development of software including services for development of software outside India. 7. Based on the answers to the first five questions given at paras 6.3 to 6.7 above, we hold that assessee was very well eligible for deduction both under sub-cls. (i) and (ii) of sub-s. (1) of s. 80HHE and hence we decline to interfere with the order of CIT(A) in this regard. At this juncture, we may mention that though the learned senior counsel of assessee has referred to a number of cases for considering the meaning of 'technical service' in relation to s. 80-O, we feel that such references are not necessary in view of the facts of the case. As for the new evidence stated to have been admitted by CIT(A) in violation of r. 46A of the IT Rules, learned Departmental Representative was not able to point out which what were such evidence. 8. Answer to the sixth question would bring out whether the overseas maintenance allowance paid by the assessee or alleged to have been paid by the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from the submission of the assessee whether they had obtained from all the concerned employees at least a declaration that the whole of the amount that they had received for sustaining themselves were expended by them. We also find from the assessment order that confirmations from only five employees were produced before the AO against payments admittedly made to 17 employees. However, this has to be seen in the light of the submission of the assessee that all the payments were by account payee demand drafts only. Paper book p. 90 gives a summary payments to each of the employees in the month of March, 1998, which totals to 23,600 Irish Pounds. Names of each employee are clearly mentioned in this summary with week-wise workouts. Against this, paper book page No. 91 gives the ABN Amro Bank advise regarding drafts taken for 23,600 Irish Pounds equivalent to US Dollars 32,379.20, which it charged to assessee's account. These statements when seen along with the admission of such allowance by two of the employees who attended the summons, clearly establishes the fact that assessee had paid to its employees overseas maintenance allowance and accounted it as well, though it could not prod....