M.L. Outsourcing Services Pvt. Ltd. Vs. ITO (ITAT Delhi)– The notification issued by the CBDT at Serial No. 8, mentions “human resource services” as a notified service eligible for deduction u/s 10A. It was also observed that the Assessee is just processing the potentiality of candidates employable by any software development company and the customised data is prepared for the US Company. By whatever means the data is collected, once such customised data is stored in an electronic form, it becomes a customised electronic data which can be exported to qualify for deduction under section 10A.
The process of actually collecting the data need not be IT enabled.If the intention of the Legislature was that in order to qualify for deduction under section 10A, every activity should be carried out through electronic means, then the purpose of enacting section 10A would have been totally defeated. Thus, if the result of the entire exercise of recruitment is stored in an electronic device, it is not possible to say that it is not a customised electronic data. The only condition requiring fulfilment is whether there is export of any customised electronic data relating to any of the services specified by the Board or not. As the taxpayer carries out notified service i.e., Human Resource Service, the condition stands fulfilled the moment customised electronic data collected through such service is exported.
M.L. Outsourcing Services Pvt. Ltd. Vs. ITO
Decided by – ITAT Delhi
I.T.A No. 1204/Del/11
Asstt. Year- 2007- 08
Date of Decision- 27.05.2011.
PER RAJPAL YADAV, JM:
The assessee is in appeal before us against the order of Ld. CIT(A) dated 30th November, 2010 passed for asstt. year 2007- 08. The grounds of appeal taken by the assessee are not in consonance with Rule 8 of ITAT Rules. They are descriptive and argumentative in nature. In brief, the grievance of assessee relates to denial of deduction u/s 10A of the Act.
“Assessee company provides recruitment services by extensively using information technology skills. The services provided by the assessee company are different as it uses various softwares and IT enabled technology for providing such services. Mind lance Inc. USA required IT consultants for the development of software etc. in U.S. The assessee company was appointed to hire the consultants for Mind lance. The assessee company has a team of technical recruiters who provides the candidate’s information etc. through online application tracking tools called CATS. The userid and password is provided to each ML recruiter.
The recruitment process involves the following stages :-
a) Placement of orders from Mind lance Inc. to MLOS for placement of IT consultants in USA during a specific period.
b) Sourcing of technical consultants from US job boards like Monster. com. Careerbuilder.com and Dice.com
c) Technical Interviewing of such candidates and on line technical assessment of the passed candidates by using internet sites like skillometer. com.
d) Submitting of shortlisted technical candidates to Mindlance, Inc, Applicant Tracking Software called CATS
e) Managing the workflow of the candidate using the same CATS application
All the above steps involve ITES tools like interest, VOIP phone, proprietary software and subscription-based best sites.”
4. The AO did not accept the contention. He primarily held that assessee is not carrying out any activity which comes within the ambit of eligibility criteria provided in section 1 0A. Apart from the non fulfilment of the main criteria, the AO had made a reference to two peripheral circumstances. In the first peripheral circumstances, he raised the suspicion with regard to its potentiality for providing such services at its Bangalore operations. In the second circumstance, he made a reference about constitution of the assessee company and he has a suspicion that amount has been transferred by the family members of the assessee working in USA.
9. We have duly considered the rival contention and gone through the record carefully. Section 1 0A and explanation 2 appended to this section have a direct bearing on the controversy. Therefore, it is salutary upon us to take note of the relevant clauses of this section.
“(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 10 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 appellant.
X x x x x x x X x x x x x x
(2) This section applies to any undertaking which fulfils all the following conditions, namely :-
(i) It has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year:
(a) commencing on or after the 1st day of April, 1981 in any free trade zone; or
(b) commencing on or after the 1st day of April, 1994 in any electronic hardware technology park, or as the case may be, software technology park
(c) x x x x x x
Explanation 2 to section 1 0A Computer software means-
(a) Any computer programme recorded on any disc, tape, perforated media or other information storage device; or
(b) Any customised electronic data or any product or service of a similar nature, as may be notified by the Board”
10. The board was supposed to notify certain product or services which are of similar nature under sub clause ‘b’ of explanation 2, i.e. any customise electronic data is qualified for treatment as a computer software on whose export deduction would be admissible to an assessee. This sub clause further classify that any other service if notified by the board then those services would also qualify for treatment as computer software. The board by exercising its power has notified 15 services for the purpose of this clause. The notification bearing No. SO890(E) read as under :-
“S.O.890(E) – In exercise of the powers conferred by clause (B) of item (i) of Explanation 2 of section 10A, clause (b) of item (i) of Explanation 2 of section 10B and Clause (b) Explanation to section 80HHC of the Income-tax Act, 1961 (43 of 1961) the Central Board of Direct Taxes hereby specifies the following Information Technology enabled products or services as the case may be for the purpose of said clauses namely :-
i) Back-Office Operations
vii) Human Resources Services
[Notification No. 11512/F. No.142/49/2000- TPL]”
11. From the above discussion, it emerges out that basic issue required adjudication by us is whether income derived by the assessee from transmission of data in respect of eligible employees for appointment in software development company in the United State of America would qualify the deduction u/s 10A of the Act or not. We are required to adjudicate this issue in the light of meaning flowing out from the expression “computer software” as explained in explanation 2 (i) of the section 10A of the Act and the expression “human resource services” employed in the notification issued by the CBDT (extracted supra).A bare perusal of section 10A of the Income Tax Act would indicate that it provide a deduction on profit and gain derived by an undertaking from export of articles or things or computer software. As per the clause ‘a’ of the explanation 2 of section 10A of the Act, computer software means any computer programme recorded on any disk, tape, perforated media from other storage device. Thus the case of the assessee does not fall within this meaning. According to the Ld. Counsel for the assessee as well as the discussion emerging out from the impugned orders, the case of the assessee falls within the ambit of clause ‘b’ of explanation 2. The Ld. First Appellate Authority is of the opinion that sub clause ‘b’ is having two parts. The first part represent any customize electronic data and second part any product or service of similar nature as may be notified by the board. According to the Ld. CIT(A) the principle of ejusdem generis is applicable to the second part of sub clause (b) of Clause (i) of explanation 2. He observed that the board has notified 15 products or services in this respect. The board has specified the information technology enabled (ITE) product or services as the case may be for the purpose of the said clause. Therefore, according to the Ld. CIT(A) products of services referred to in the notification have to the information technology enabled, which is a pre condition for the product or service for the purpose of sub clause ‘b’ of explanation 2. Ld. CIT(A) further explained the meaning of human resources and thereafter rejected the case of assessee by summarising following reasons :-
Role of Board’s circular
“6. This is best explained by the Supreme Court in the case of UCO Bank v. CIT  237 ITR 8891. After referring to the various provisions of section 119 of the Act, at page 896 of the report, the Court observed that the Board has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing Circulars in exercise of its statutory powers under section 119 of the Act, which are binding on the authorities in the administration of the Act. It is also observed on the same page that the power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly applied. Again, at page 898 of the report, it is observed that the task of interpretation of the laws is the exclusive domain of the Courts. However, the Board has the statutory power under section 119 to tone down the rigour of the law for the benefit of the assessee by issuing Circulars to ensure a proper administration of the fiscal statute and such Circulars would be binding on the authorities administering the Act.
7. Let us consider the above role of the Circulars in the context of sub-clause (b) of clause (i) of Explanation 2 to section 10A of the Act. The said clause (i) gives the meaning of the term “Computer Software”. One of the meanings given is “any customised electronic data or any product or service of similar nature, as may be notified by the Board”. In other words, if the assessee is engaged in the export of any customised electronic data, then, profit earned from such export would qualify for deduction under section 10A of the Act. It may be noted that whereas sub-clause (a) refers to any computer programme, sub-clause (b) refers to any customised electronic data. Computer programme referred to in sub-clause (a) may or may not be customised and may be useful for general application. On the other hand, the electronic data referred to in sub-clause (b) has necessarily to be customised. By the word “customised” is meant that the data is suitable for a specific customer only. Considering the fact that the expression “customised electronic data” is quite general in nature and also considering the fact that computer applications are fast expanding, one cannot visualise as to what type of products or services will come up in future. Considering this ever-expanding horizon of software products and services, the Board has been given the power to notify such products and services which in its opinion should qualify for deduction under section 10A. In other words, this power of the Board when exercised, it will ensure proper administration of the fiscal statute as observed by the Supreme Court in UCO Bank’s case (supra). It is in this sense the ld. A.M. has observed that the Board’s Circular has made the job of the Assessing Officer quite simple. Thus, it is this role, as explained by the Supreme Court, which is played by the Board by issuing the Circular, dated 26-9-2000.Ejusdem generis
8. The above maxim serves to restrict the meaning of a general word to things or matters of the same genus as the preceding particular words. It is a well-recognised rule of construction that when two or more words which are susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. The term is chiefly used in cases where general words have a meaning attributed to them less comprehensive than they would otherwise bare, by reason of particular words preceding them. In order to attract the principle of ejusdem generis, it is essential that a distinct genus or category must be discernible in the words under examination. As an illustration, clause (a) provides that any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall be allowed as deduction in the previous year in which such sum is actually paid. Here, while determining whether a particular payment falls within the expression “by whatever name called”, the principle of ejusdem generis will apply. Similarly the said principle will apply while determining whether a particular receipt is analogous to brokerage, commission, interest, rent, charges mentioned in clause (baa) of the Explanation to section 80HHC. On the other hand, so far as customised electronic data is concerned, or a service of similar nature is concerned, deduction under section 10A in respect of profits therefrom will not be allowed unless the service is notified by the Board. To reiterate, statutory liabilities by whatever name called in section 43B(a) or receipts of similar nature mentioned in clause (baa) of the Explanation to section 80HHC need not be notified by the Board. In those cases, the revenue authorities have to see whether the liability claimed by the assessee under section 43B is a statutory liability or not and whether it fits into the description of a tax, duty, cess, etc. Similarly, the receipts mentioned in clause (baa) need not be notified by the Board and the revenue authorities will consider whether the receipts are of the nature of brokerage, rent, etc. While deciding these issues, the principle of ejusdem generis will have to be kept in mind. However, so far as services which are Information Technology Enabled are concerned, the assessee can take the benefit of deduction only if they are notified by the Board. If this power of notifying the services was not given to the Board, principle of ejusdem generis would have applied. Since the power is exercised under the specific provision of section 10A, it is pre-supposed that the services in respect of which the assessee is claiming deduction are I. T. enabled. Of course, as a matter of normal precaution taken while making an assessment, the Assessing Officer will satisfy himself as to whether the customised data is in electronic form or not and whether it is electronically transmitted outside India or not. If the data of recruitment and training collected by the present assessee is in a manual form and is sent to US by post, the assessee will not be entitled to deduction under section 10A. Therefore, I fail to understand as to what further condition, the assessee need to fulfil in the present case, as observed by the ld. J.M., when undisputedly the entire data is in electronic form.
Human resources services
9. The ld. JM is right in mentioning that software is not merely knowledge but, rather is knowledge recorded in a physical form having a physical existence, taking up space on a tape, disc or hard drive, making physical things happen and can be perceived senses. However, he misdirected himself by misunderstanding that since the recruitment and training of the personnel was by itself not I.T. enabled, the profit earned by the assessed is not eligible for deduction under section 10A of the Act. The requirement of the provision is that there should be a customised electronic data and such data should be exported outside India. The data which a customer may require, may be gathered either by manual effort or by electronic means, as for example, through internet. By whatever means the data is collected, once it is stored in an electronic form, it becomes a customised electronic data which can be exported to qualify for deduction under section 10A. The process of actually collecting the data need not be IT enabled. What all is required is that the data collected should be in an electronic form. If one were to go by the understanding of the ld. JM, then perhaps the purpose of giving impetus to software industry or to the computerisation as a whole, would be defeated. As an illustration, if a person wants to open a garment shop in a particular locality, it may approach a consulting firm to explore the market potentiality of that area. In that case, the consulting firm will have to initially work manually to collect data like, number of garment shops in the locality, the economic strata to which the population residing in that locality belongs, the spending habits of the people residing in the locality, etc. All these activities will have to be carried out manually and once the data is collected, it may be collated and analysed and may be stored in an electronic device. This becomes the IT enabled customised electronic data. If this data is exported outside India, the consulting firm will be eligible for deduction under section 10A. Similar is the situation in the present case. The assessee invited applications for recruitment through newspapers, carried out interviews, selected them and trained them. It is worth noting that this exercise was carried out not for namesake but it was a serious and sincere effort which is reflected by the magnitude on which the assessee worked. More than 7,000 applications were received which were vetted and then the process of recruitment was undertaken. All these data were stored in an electronic device and transmitted to US for the use of the parent company. Recruitment can be done online also, but perhaps the scale of operation may not be as huge as it was in the present case. Training can also be carried out online but it cannot be as effective as a classroom training. If the intention of the Legislature was that in order to qualify for deduction under section 10A, every activity should be carried out through electronic means, then the purpose of enacting section 10A would have been totally defeated. The exact language of sub-clause (b) of clause (1) of Explanation 2 is “any customised electronic data”. Thus, if the result of the entire exercise of recruitment and training is stored in an electronic device, it is not possible to say that it is not a customised electronic data. If the data is in a form other than electronic, then the export thereof will not qualify for the deduction. This aspect, as mentioned earlier, has to be examined by the Assessing Officer in the course of the assessment and which in this case, there is no dispute that the data was in the electronic form.
10. Another objection of the ld. JM is that there was only an exchange of correspondence through e-mails between the assessee and the parent company. Well, when the parent company received the data, naturally, there would be exchange of views over the candidates. In this connection, the ld. AM has given the apt example of a call centre. In the illustration given by him, a company is situated in USA and its customer in UK asks a question which is answered by a call centre in Bangalore. To reply to the question of the customer, the person sitting in the call centre, depending on the nature of question, may or may not require the help of a computer. Where the help of computer is not required, the person at the call centre will simply answer the question. Now, in this case, as a matter of fact, there is no use of any computer hardware of software and yet, by virtue of it being a call centre, it will be eligible for deduction under section 10A. Here also there was merely a communication between the parties over a telephone and nothing beyond that. One may raise a question that if there is no use of computer then why should it be included in the list of IT enabled services. It needs to be appreciated that in majority of the cases, the use of computer would be there. If a person in US has invested monies in India through a financial consultant in India, and if the US investor wants some information about his investments, the information so supplied through the call centre will be an export of customised electronic data. The information may have been given either on telephone or through e-mail. Thus, how the information is transmitted is not material, what is material is that some customised electronic data is transmitted. Therefore, the exercise carried out by the assessee cannot be over simplified by stating that it was merely an exchange of correspondence through e-mails. The ld. JM has mentioned that this is not a case where the assessee has collected any data or conducted any survey for gathering information regarding the availability of talent in a specific field. I simply fail to comprehend, considering the voluminous material placed on record as to how can it be said that the assessee has not collected any data. This observation is contrary to the facts on record. Finally, the objection of the Assessing Officer that all the candidates selected were not absorbed by the parent company is of no avail. The obligation of the assessee under the contract was only to recruit and train the candidates. The parent company was under no obligation to absorb all the selected candidates. It is also not a pre-condition for the assessee for claiming deduction under section 10A of the Act. The only condition is that whether it has exported any customised electronic data relating to any of the services specified by the Board or not. We have already observed that the assessee has fulfilled this condition. For whatever reason, the parent company may not have been able to absorb all the selected candidates, but that is neither the concern of the assessee nor the requirement under the item “human resources services”. Therefore, this objection of the Assessing Officer has no force.
11. Summarising the above discussion, I am of the view that the principle of ejusdem generis is not applicable when the Board has specifically notified the IT enabled products and services. What is the role and purport of the Circular of the Board is already discussed earlier. The ld. JM has mentioned that the CBDT notification is always in furtherance of the statutory provision, that it cannot be in derogation of the statutory provision and that it cannot dilute the conditions provided under the provisions of the statute but only be clarificatory in nature. In this connection, I have already quoted from the judgment in the case UCO Bank ( supra) that the Board has the statutory power to tone down the rigour of the law for the benefit of the assessee. In fact, at page 898 (of 237 ITR), it is observed by the Supreme Court that the binding character attaches to the Circulars even if they be found not in accordance with the correct interpretations of the sections and they depart or deviate from such construction. Accordingly, in the light of this discussion, I agree with the view taken by the ld. AM that the assessee is entitled to deduction under section 10A of the Act.”
14. With the assistance of Ld. Representative, we have gone through the order of the Ld. third member extracted supra at the time of hearing. The only disparity of facts between both these cases is that in the case of Accurum India, assessee was giving training also to the eligible candidates. In the present case, assessee has not given any training. For grant of deduction u/s 10A, training is an immaterial part. Deduction is admissible to the assessee because it has prepared the customised data of eligible candidates for employment in IT Industry. It is transmitting the data of those eligible candidates for employment in software industry. This export of customised electronic data would make the assessee eligible to claim deduction u/s 10A. As far as this part of service is concerned, there is no disparity on facts between these cases.
15. The other objections pointed out by the Ld. AO is that assessee has got approval from STP Authority for the Bangalore office on the last date of the accounting year. He was of the opinion that assessee has made the payment of certain fees in the month of May, 2007 and therefore in effect it be construed that approval was available to the assessee for asstt. year 2008-09 i.e. the next financial year. He also expressed his doubt about potentiality of assessee to raise the invoice on the last date of the accounting year for a consideration of Rs. 1,47,28,800/-. The case of the assessee on the other hand is that it was operating at Gurgaon when it was become unviable then it went to Bangalore and applied for registration with STPI Authority on 23rd January, 2007. The registration was granted w.e.f 31st March, 2007. The assessee has started commercial production on this date. According to the assessee in fact, it was carrying out all the activities prior to registration granted by STPI authorities. The assessee has placed on record copy of the lease agreement, list of its employees, details of salary paid, copy of the application made for grant of registration. It was already operating at Gurgaon. Thus on the strength of all these details, it has demonstrated that it was in commercial production. It has applied for the registration. Such registration was granted to it on the last date and it has raised the invoices accordingly. Ultimately, it has received the payment also. As far as the other objection pointed out by the AO about the share holding of family members, we are of the view that AO has just discussed the share holding patterns of two companies i.e. USA and of Indian Company. However, he did not dispute their status in the eyes of law. He has not recorded the statement of any Directors and come out with an argument that no such activity has been carried out by the assessee. The assessee has produced before the AO emails etc. for demonstrating its case. On due consideration of all the facts and circumstances, we are of the opinion that case of the assessee is duly covered by the decision of the ITAT, Chennai and it is entitled for deduction u!s 1 0A of the Income Tax Act. We allow the appeal of assessee and direct the AO to grant the deduction.
Order pronounced in the open court on 27.05.2011.