IN THE ITAT HYDERABAD BENCH ‘B’
Assistant Commissioner of Income-tax,
Technics Consulting Ltd.
IT Appeal Nos. 876 (Hyd.) of 2007 & 79 (Hyd.) of 2008
[Assessment years 2003-04 & 2004-05]
July 19, 2012
D. Karunakara Rao, Accountant Member
These two appeals by the Revenue are directed against separate orders of the CIT(A) VI, Hyderabad dated 27.12.2006 for assessment year 2003-04 and dated 30.11.2007 for assessment year 2004-05. Since a common issue is involved, these appeals are being disposed off by this common order for the sake of convenience.
2. Effective grounds of appeal of the Revenue, identical in both these appeals, as taken from appeal for assessment year 2003-04 read as follows-
2. The CIT(A) ought to have upheld the AO’s view that the assessee’s business activity did not constitute development of software.
3. The CIT(A) did not correct in holding that the assessee is entitled to exemption u/s. 10A of the Act.”
3. Facts of the case in brief, as taken from the appeal folder for assessment year 2003-04, are that the assessee company, Technics Consulting Ltd was incorporated as a private limited company with effect from 23.3.2000 under the Companies Act, 1965 and originally was titled as LVS E-Commerce Solutions Ltd. Subsequently, the name of the company was changed to Technics Consulting Ltd. with effect from 14.6.2000. The main objects of the company as specified in the Memorandum of Association comprise of development of software products/solutions and customization/technical support/networking services/customer services/certification/marketing of software, hardware, on/off site consultants/providing of internet and intra net services/e-commerce/e-mail services/products and commercial training/image processing and products/data communications /data warehousing/multimedia applications/data conversion and migration/euro conversions/solid modeling/cartography/CNC/CMM programming /electronic design automation/bios and video communicated net work. The company also included in its principal object-buying, selling, dealing, importing, exporting, designing and developing systems and software. From the date of incorporation the assessee has been carrying on the business of primarily the development of computer software on the basis of export contracts received from foreign clients and also carried on the business of providing IT enabled services such as web maintenance. For assessment years 2000-01 to 2006-07 the company filed its income-tax returns showing profits and gains from the business of execution of export contract works, claiming exemption/deduction u/s. 10A of the Income-tax Act, 1961. While for assessment year 2000-01, 2001-02 and 2002-03, the returns filed were processed under S.143(1), thereby allowing the companies’ claim of exemption/deduction u/s. 10A of the Act, for the assessment year 2003-04, scrutiny assessment proceedings were initiated. During the assessment proceedings, the assessing officer had called for various details/evidence from the company to examine the admissibility of the claim for deduction under S.10A of the Act. The findings of the assessing officer in that behalf, as summarized by the CIT(A) on pages-3 and 4 of the impugned order for the assessment year 2003-04 read as follows-
“(a) The company TCL for the financial year 2002-30 had got certain export contracts relating to the maintenance of website of a foreign client named Technics Consulting INC. USA in which a relative of the Director of the Indian Company TCL happens to be a major promoter.
(b) The Indian company TCL had no full time computer engineers/software professionals/manpower in its pay roll as its employees.
(c) The entire export contract for web maintenance received from foreign company Technics, INC, USA was sub-contracted in toto to four other parties such as P.V. Sastry, K. Narmada Rani, P. Nagarjuna, P. Kasinath.
(d) The company had factually not executed the export contract of web maintenance itself with its own regular employees but through the sub-contract agents/parties. As such the company could not be treated to be a manufacturer or producer of computer software including IT enabled services such as web maintenance during the Financial Year 2002-03 but can only be treated as some kind of trader/broker/agent.
(e) The statutory provisions of sec.10A of the Income-tax Act, 1961 in the opinion of the Assessing officer cannot be applicable to the case of any export of computer software where the exporter had not done at least 51% of the total contract works itself with its own manpower/infrastructure. There by where an exporter of computer software had executed either 100% or more than 51% of the export contract through sub-contractors the exemptions/deductions u/s. 10A of the Income-tax Act, 1961 cannot be allowed in respect of such exporter.
(f) In views of the Assessing officer even if an assessee is registered with software technology park of INDIA and all the regulations governing export of computer software as per the STPI Scheme might have been complied with by an Indian concern including realization of export, proceeds in foreign currency through the approval of RBI -where a substantial portion or the whole of the export contract is factually executed through subcontractors – the fulfillment of the STPI regulations will not entitle such software 3edporte for the benefit of section 10A of the Income-tax Act, 1961.”
For the above reasons, the assessing officer disallowed the assessee’s claim for exemption under S.10A of the Act.
4. On appeal, the CIT(A) on detailed examination of the contentions of the assessee in the light of the provisions of S.10A of the Act, held that denial of exemption under S.10A in principle to the assessee company is patently misconceived. The relevant portion of the order of the CIT(A) reads as follows-
“10. On a combined appreciation of the statutory provisions of the STPI Act and Scheme and the provisions of section 10A of the Income-tax Act, 1961, it appears that the assessee company had not infringed any provisions in such status and scheme. The only suspicion or surmise that had arisen in the minds of the Assessing officer related to certain findings that all the parts of the I.T. enabled services i.e. Web Maintenance were not carried out in the assessee’s business premises. But since the re-outsourcing or sub-contracting of an export order obtained by an Indian concern is not restricted under statutory provisions where the facts clearly establish to the satisfaction of the controlling and monitoring authority, i.e. STPI regarding actual exports of computer software, the denial of exemption contemplated u/s. 10A in principle to the assessee company in the assessment order is patently misconceived.
17. Even in normal business undertakings where all of the phases of manufacturing process are not carried out within the business premises of the industry but part of such activities are carried out, it has been judicially held that the undertaking can still be considered to have carried out manufacturing or processing activities for the purposes of the IT statute.”
He drew support from the relevant case-law in support of the above findings, duly discussing the ratio laid down therein on pages 28 to 30 of the impugned order. The CIT(A) further held that the assessee can be entitled to the deduction under S.10A if actual export of computer software has been effected during the financial year 2002-03 and the conditions specified under S.10A have been satisfied. As per the documentary evidence produced before the assessing officer and the appellate authority, the competent authority being STPI Hyderabad under the Ministry of Technology, Government of India has certified not only the actual exports of computer software by the assessee company, but also realisation of the export proceeds and foreign currency. On further consideration of the arguments of the assessee before him, the CIT(A) ultimately concluded that the assessee is eligible for reliefs under S.10A of the Act, and consequently deleted the addition of Rs. 68,14,570/- made by the assessing officer by disallowing the claim for the assessee for relief under S.10A of the Act.
5. Facts of the case for the assessment year 2004-05 are similar o those for assessment year 2003-04 discussed at length hereinabove, but for the amount of disallowance involved for that year. The amount of disallowance made by the assessing officer, by rejecting the assessee’s claim for relief under S.10A of the Act, is Rs.12,75,960. The addition thus made by the assessing officer for that year has been deleted by the CIT(A), following the order of the CIT(A) for the assessment year 2003-04.
6. Aggrieved by the orders of the CIT(A) for these two years, granting reliefs to the assessee as above, Revenue is in appeal before us.
7. During the proceedings before us, the Learned Departmental Representative relied heavily on the orders of the assessing officer and mentioned that in a case where IT enabled services for web maintenance were not done at the premises of the assessee, the benefits of the provisions of S.10A should not be made available. This aspect was not appreciated by the CIT(A), while granting relief to the assessee, in the impugned orders. Further, he objected to the way the CIT(A) relied on the various judgments, which were not decided in the context of provisions of S.10A, for deciding the issue in favour of the assessee. However, he is silent about the clarification issued by the CBDT vide circular No.697 dated 23.11.1999, and it was relied upon by the assessee. This circular mentions that as long as the unit in the STPI zone produces the computer programmes and exports them, it would be eligible for the benefits of S.10A of the Act. The Learned Departmental Representative also took objection to the CIT(A)’s line of approach that outsourcing or sub-contracting part of the Web maintenance works does not disentitle the assessee to the benefits of S.10A. Further, the Learned Departmental Representative also took objection to the liberal interpretation of the provisions relying on the decision of the Hon’ble Supreme Court in the case of CIT v. Straw Board Mfg. Co. Ltd.  177 ITR 431 and CIT v. Gwalior Rayon Silk Mfg. Co. Ltd.  196 ITR 149. The Learned Departmental Representative also relied on the decision of the Jodhpur Bench decision of the Tribunal in the case of Kwal Pro Exports v. Asstt. CIT  110 ITD 59 (Jodh.), for the proposition that the assessee is not entitled for benefits of S.10B, when assessee was not engaged in manufacturing or producing any article or thing, but simply engaged in the polishing and finishing of the fully manufactured items purchased by it.
8. Per contra, learned counsel for the assessee, strongly opposing the above contentions of the Learned Departmental Representative, relied heavily on the order of the CIT(A) and mentioned that the same is a well reasoned speaking order and the same does not call for any interference.
9. We heard both the parties and perused the orders of the Revenue authorities and other material available before us. We find that the CIT(A) has decided the case in favour of the assessee mainly on finding that the product i.e. IT enabled services for web maintenance were actually manufactured by the assessee in the STPI area, which is an undisputed fact. Revenue’s objection is that the said product was not manufactured at the premises of the assessee, but through outsourcing methods, which was not appreciated by the CIT(A). In this regard, the CIT(A) has applied the ratio of the judgments of various High Courts, as discussed in para 17. In our opinion, these decisions laid a legal principle that outsourcing is part and parcel of the manufacturing activity and helpful in producing product or article or thing. The case-law mentioned by the CIT(A) in the impugned orders may not be in the context of either STPI cases or under S.10A or 10B of the Act, but in our opinion, they are relevant as they throw light on the relevant concepts in the matter of manufacturing of an article or thing. The CIT(A) has rightly relied on them. We have also perused the Circular of the CBDT No.697 dated 23.11.1999 and the relevant portion of the same reads as follows-
“For the purpose of section 10A or 10B as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them it should not matter whether the programme is actually written within the premises of the unit”.
From the above circular, it is evident that the writing of the computer programme at the premises of the assessee’s unit is not relevant matter and so long as the product is produced by the assessee in the STPI zone, the assessee would be entitled for the benefit of S.10A of the Act.
10. As such we do not find any mistake in the orders of the CIT(A) in interpreting the provisions of S.10A liberally. In the case of Straw Board Mfg. Co. Ltd. (supra), the Hon’ble Supreme Court has held inter alia as follows-
“the law providing for concession for tax purposes to encourage industrial activity should be liberally construed …… since a provision intended for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the section and not to frustrate it.”
11. In view of the decisions of the Supreme Court cited above and also considering the fact that these provisions are beneficial provisions; the explanation given by the CBDT in Circular No.697 dated 23.11.1999 entitling the assessee to the benefits of S.10A; and also the legal position that the Act has not restricted the assessee from outsourcing of certain services necessary for producing an article or a thing, say, web maintenance in this case, assessee should be held as eligible for relief under S.10A of the Act.
12. We have also gone through the conclusions drawn by the CIT(A) in paras 24 and 25 of his impugned order for the assessment year 2003-04. We find that they do not call for any interference. For the sake of completeness of this order, the said paras are reproduced below-
“24. On the totality of the facts and circumstances of the case, the assessee company is considered to have actually carried on the business of IT enable services being maintenance of website of the foreign client Technics, INC, USA through certain consultants on contract basis under the direct supervision and control of the assessee company in India land also in coordination with the personnel of the foreign client. The direct contract of the consultants engaged by the Indian company with foreign clients could not lead to the conclusion that such clients engaged by the Indian company are hired by the foreign company or they were under the contractual obligation to perform specified works directed by the foreign client. For all practical purposes the Indian company was under contractual obligation to the foreign client. And it was at freedom to get the export order executed by its own employees or by outsourcing the work to certain consultants or third parties. Hence the actual export of computer software programme of the maintenance of the website for the foreign clients cannot be considered to be bogus or fictitious.
25. If the Assessing officer had any doubt regarding the possible collusion between the foreign client and India company for any over estimation of export proceeds or understating of Indian expenses necessary incriminating evidence should have been brought on record to prove such points. On the contrary a reference made by the AO to the transfer pricing authority at Hyderabad u/s. 92 of the Income Tax Act, 1961, it has been officially held by the concerned authority that the export proceeds shown by the assessee company for IT enabled services rendered comprising of wave maintenance for the foreign client could be taken as a correct reflection of the exports proceeds.”
13. We have also perused the decisions relied upon by the Learned Departmental Representative and find that the said decision in the case of Kwal Pro Exports (supra) was rendered on the fact that the assessee has purchased a completely manufactured product and has not done any manufacturing barring a bit of polishing and finishing. Therefore, the ratio of those decisions has no application to the facts of the present case.
14. In the light of the above, discussion, we find no infirmity in the impugned orders of the CIT(A). The same are accordingly upheld, and consequently, the grounds of the Revenue in both these appeals, are dismissed.
15. In the result, Revenue’s appeals are dismissed.