Transfer of computer software by an Indian Branch of a foreign Company (approved as 100 percent EOU) to its head office is an eligible transaction for

Court : Delhi bench of Income-tax Appellate Tribunal

Citation : DDIT Vs. Virage Logic International (ITA No. 494(Del) 2010)

Brief  : The Delhi bench of Income-tax Appellate Tribunal (the Tribunal) in the case of DDIT v. Virage Logic International (ITA No. 494(Del) 2010) held that transfer of a computer software by an Indian branch of a foreign company [approved as 100 percent Export Oriented Unit (EOU) by Software Technology Parks of India (STPI)] to its head office is a transaction eligible for claiming tax benefits under section 1 0A of the Income-tax Act, 1961 (the Act).

Facts of the case

• The taxpayer, a non-resident company having Permanent Establishment (PE) in India, was engaged in the business of development of computer software. The taxpayer was a 100 percent EOU duly approved by STPI. The taxpayer had developed a computer software and transmitted electronically to its head office and received consideration in the form of convertible foreign exchange. For the year under consideration (i.e. Assessment Year [AY] 2006-07), the taxpayer claimed benefits provided under section 1 0A of the Act which were rejected by the Assessing Officer (AO).
• The Commissioner of Income-tax (Appeals) [CIT(A)] observed that Tribunal in taxpayer’s own case for AY 2001-02 to 2005-06 on similar facts had allowed the benefit provided under section 1 0A of the Act. Accordingly, the CIT(A) allowed the claim of the taxpayer.

Tax department’s contentions

• The tax department contended that the CIT(A) has failed to distinguish between the actual export and mere transfer to the head office. The taxpayer had merely transmitted the software to its head office, which cannot entitle the taxpayer to claim tax benefit under section 10A of the Act.
• The stipulation provided by section 1 0A(3) of the Act to bring sale proceeds of computer software exported out of India in convertible foreign exchange was not complied with since the taxpayer was a foreign company. Accordingly, there was no question of retaining sale proceeds in India, and only tax on a fraction of the profit payable to the India branch of the foreign company can be retained in India.

Taxpayer’s contentions :-The taxpayer contended that from AY 200 1-02 to 2005-06, the Tribunal had allowed the claim of the taxpayer and the CIT(A) following such decisions of the Tribunal correctly held that the taxpayer was eligible to claim benefits provided under section 1 0A of the Act.

Tribunal’s ruling

• The Tribunal while granting benefit under section 10A of the Act in taxpayer’s own case for AY 2002-03 observed that the taxpayer was approved as 100 percent EOU by STPI for development of computer software. Further, the export of software during the previous year was evidenced by the Softex form duly certified by the competent officer of STPI and consideration had been received by the taxpayer in the form of convertible foreign exchange.
• The Tribunal while rejecting the tax department’s contention observed that the legal fiction of treating taxpayer as a separate entity vis-à-vis sale by it and transfer by it from an eligible business is recognized under section 1 0A(7) and 80IA(8) of the Act. Therefore, the Tribunal rejected the tax department’s contention that transfer of computer software from branch to head office is merely a transaction with self and can not result in export of software for allowing deduction under section 10A of the Act.
• The Tribunal also observed that the Transfer Pricing Officer had already held that the price at which the taxpayer transmitted the computer software to its head office was at arms length price and therefore there was no doubt about the market price.
• Accordingly, the Tribunal held that since there was no difference in facts from the earlier AY’s, the taxpayer was eligible to claim tax benefit under section 1 0A of the Act.

Our Comments

The Delhi Tribunal in the present ruling while upholding its own decision of earlier AY’s held that transfer of a computer software by a 100 percent EOU (Indian branch) duly approved by STPI to its head office is an transaction eligible for claiming tax benefits under section 10A of the Act.

It is pertinent to note that the Tribunal while deciding the issue also considered that the taxpayer transferred the software at arms length price to its head office.

This decision is very useful in the case of those taxpayers where the computer software is transferred by the Indian branch to its head office (outside India) or vice versa to claim deduction under section 1 0A of the Act and counter the argument of the tax department that the export of software from branch office to head office being transaction with self, can not be treated as export for the purpose of deduction under section 10A of the Act.