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Exemption-Deduction: Export oriented unit - Export of software purchase from others
November, 12th 2008

ITO vs Techdrive India (P) Ltd.
Citation 2008 25 SOT 152

Exemption-Deduction: Export oriented unit - Export of software purchase from others
The assessee was a 100 percent Export Oriented Unit (EOU). It exported computer software purchased from a sister concern. It was not necessary under s.10B that assessee itself must produce articles or software. It was entitled to deduction under s.10B.

ITAT, New Delhi

ITO vs Techdrive India (P) Ltd.

ITA No. 2407/Del/2006, Assessment Year: 2002-2003

R.V. Easwar, V.P and Deepak R. Shah, A.M

27 June 2008

M.P. Rastogi and P.N. Shastry, CAs for the Appellant
K.C. Jain, CIT DR and A.M. Govil, Sr. DR for the Respondent

ORDER

R.V. Easwar:

The following ground has been taken by the revenue in this appeal:

"On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the addition of Rs. 46,34,091/- made by the A.O. for not allowing deduction u/s 10B of the I.T. Act."

2. The appeal relates to the assessment year 2002-2003. The assessee is a private limited company. In the return of income filed, it claimed deduction of Rs. 1,56,70,680/- under section 10B of the Income-tax Act. The return was first processed under section 143(1) but was later picked up for scrutiny. The Assessing Officer verified the claim under section 10B. He found that the assessee did not have any plant or machinery to develop any computer software on its own. It had purchased computers/accessories only for a paltry amount of Rs. 24,872/- towards the end of the year. It had however paid Rs. 41,87,577/- to another company in this group by name M/s. Seacom Solutions (India) Limited (hereinafter referred to as 'Seacom') for development/purchase of computer software. The Assessing Officer further held that even if it is presumed that the computer parts were purchased in the beginning of March 2002 and were thus available with the assessee for a considerable period of time, the facts disclosed that the export orders were executed before March 2002 and this was possible only because the assessee had outsourced the development of software business to Seacom. According to the Assessing Officer, one of the basic conditions for claiming deduction under section 10B is that the assessee company should have its own infrastructure and should develop the software itself. The condition was not satisfied by the assessee as it had got the software developed by Seacom for which software development charges were paid. The Assessing Officer further found that the amount of Rs. 41,88,577/- paid to Seacom was accounted for by Seacom as "domestic software sales. The Assessing Officer, for these reasons, held that the assessee was not entitled to the exemption. He however allowed deduction under section 80HHE in respect of the export of software.

3. On appeal, the assessee submitted the following facts before the CIT(A):

    (a) The actual export of the software was done by the assessee. The project of developing the software was given to it by M/s. Techdrive Inc. USA. The software was exported to the USA company which paid the assessee company which fact was accepted by the Assessing Officer while granting deduction under section 80HHE.

    (b) Software development is primarily a human resource oriented exercise. The assessee had highly qualified software development experts in its rolls, whose skills were used for the development of the software. These persons were (1) Raj Singh, Director of the company who was involved in software development as Executive President of PCL Mindshare from 1986 to 1996; (2) Rajender Reddy, Electronic Engineer who worked as software engineer developing programmes on Oracle platforms; (3) Anant Mishra, computer science graduate from IIT, Kanpur who had worked as project manager to develop web organizers on Windows platform; and (4) Vivek Mishra, computer engineering graduate from Nanyang Technological University, Singapore with specialization in developing trading sides on the internet using Java programming.

    (c) Seacom was a subsidiary company of the assessee and was located at SEZ, Pune. Its income was fully exempt under section 10A. The assessee therefore did not gain any tax advantage by shifting the income of the Seacom to itself.

    (d) Section 10B does not insist that the software must be developed by the assessee in its own premises. It could be developed with the assistance of infrastructure and computer work stations which were available with Seacom.

    (e) Seacom did not claim any exemption or deduction in respect of the software sales to the assessee either under section 10A or under section 80HHE.

    (f) There are several judgments starting from that of the Calcutta High Court in Addl. CIT vs. A. Mukherjee and Co. Pvt. Ltd. 113 ITR 718 which have held that in order to claim tax deductions or exemptions on the footing that the assessee is engaged in the manufacture or production of priority items, it is not necessary that the assessee should own the plant and equipment. The manufacturing process can be carried out through other entities, which have the necessary facilities/ infrastructure subject to the condition that the assessee exercises sufficient control and supervision over the process.

    (g) Circular No.694 dated 22.11.1994 issued by the CBDT recognises the position that for the purpose of section 1 OB it should not matter whether the programme is actually written within the premises of the assessee or outside. If the assessee develops software by writing the same at the client's site abroad the exemption cannot be denied on the ground that it was prepared on site, so long as the software is the product of the assessee. The Assessing Officer has not doubted that the software was the product of the assessee. The contract to develop the software was given to the assessee by the USA company. The actual export was also done by the assessee company.

4. The CIT (Appeals) accepted the above facts and submissions and held that the assessee was entitled to the exemption under section 10B.

5. The revenue is in appeal. Its main contention was that the intention of section 10B was that the undertaking itself should own plant and equipment to develop the software for export and this was clear from the marginal heading to the section, that admittedly the assessee did not own the equipment and was, therefore, incapable of developing the software by itself, that therefore it had to engage the services of its subsidiary company in Pune. that there was nothing to show that the assessee exercised any supervision or control over the development of the software by Seacom nor was there anything to show that client-based instructions were issued to the assessee which were carried out by it in the premises of Seacom and that in these circumstances, the assessee cannot be said to have fulfill all the conditions of the section. Our attention was drawn to clause (iii) of subsection (2) to the section and it was submitted that a reading thereof would indicate that the assessee itself should own the plant and machinery which condition has not been fulfilled by the assessee. It was vehemently argued that the circular dealt with a different situation and was not applicable to the assessee's case. It was pointed out in this behalf that it was not the assessee's case that the software was being developed abroad in the place of the client (customized software) in which case alone the circular would apply and that it was not applicable to a case of outsourcing the development of the software. It was submitted that both the assessee and the CIT (Appeals) were wrong in relying on the circular.

6. In reply, the learned counsel for the assessee drew our attention to pages 49 and 80 of the paperbook and submitted that these contained the background of the arrangement between the assessee and Seacom and also showed that the software was developed at Seacom under the instructions, control and supervision of the assessee. It was reiterated that the circular was fully applicable to the assessee's case and provided a complete answer to all the arguments of the department. It was emphasized that no plant and machinery was essential as development of software was based on human skill and intellect which was the main requirement and if these are available the software can be developed wherever the equipment is available. Several authorities were also cited before us in support of the contention that in order to produce or manufacture an article or thing it was not necessary that the assessee should itself own the plant and machinery and it was sufficient compliance with the law if the manufacturing process is carried out on equipment belonging to other persons, provided the assessee exercises sufficient control and supervision over the same.

7. We have carefully considered the facts and the rival submissions. We have also gone through the paperbook filed by the assessee and obtained clarifications during the hearing wherever necessary.

8. The real controversy in the present case is whether the assessee should own plant and equipment in which the software is developed for export or whether the job can be outsourced to a person who possesses the necessary equipment and infrastructure. It is necessary to look into the section first. The marginal heading of the section is "special provisions in respect of newly established hundred per cent export oriented undertakings". Clause (iii) of sub-section (2) provides that the undertaking should not have been formed by the transfer to a new business of machinery or plant previously used for any purpose. The argument of the department is that these are sufficiently indicative of the requirement that the assessee itself should own the plant and machinery for developing the software. But a look at the decided cases in which other sections of the Income-tax Act and Finance Acts containing similar requirements have been examined, shows that the courts were not inclined to read such a requirement into those provisions. We may consider some of them now. In the case of A. Mukhejee and Co. (supra), the question was whether a publisher of books who did not own a printing press nor had the facilities to bind the books, can be said to be a manufacturer of books where the books were got printed from an outside contract. This question arose under section 104 of the Income-tax Act (now omitted) read with section 109 (also omitted). Section 109 contained a definition of "industrial company". It was defined as a company whose business consisted, inter alia, wholly in the manufacture or processing of goods. The Calcutta High Court held that it was wholly unnecessary for a publisher of books to be the owner of a printing press or to be himself a book-binder to be a manufacturer of goods. It was observed that a publisher may get the books printed from any printer, but the printer would be a mere contractor and it is the publisher (assessee) who carries on the business of manufacturing or processing of goods. This judgment has been accepted by the CBDT and a circular no.347 dated 7th July 1982 (137 ITR Statues 14) was accordingly issued that for the purpose of section 104 as well as for any concessional tax treatment to be given to industrial companies, book publishing companies may be treated as industrial companies even though they may themselves not being engaged in the printing of books.

9. In Orient Longman Limited vs. CIT (1981) 130 ITR 477, a similar question arose before the Delhi High Court. Section 2 (6)(c) of the Finance Act, 1970, contained a definition of an industrial company for purposes of concessional tax treatment and the same was substantially the same as in section 109 of the Act. In this case, the assessee did own a printing press, unlike the assessee in the case before the Calcutta High Court in the judgment cited supra, but the quantum of printing in the press was found to be less than 51% of the business and this led the Tribunal to reach the conclusion that merely because the manuscript was received from the author and touched up here and there and then handed over to the printer it would not mean that the assessee had converted the manuscript into something else so that it can be held to be a company manufacturing or processing books and hence an industrial company. The High Court disapproved the conclusion of the Tribunal and in doing so applied the judgment of the Calcutta High Court (supra). It is significant to notice that the High Court did not consider it material that at least some work was done by the assessee in its own printing press. The ratio appears to us to be that even if the printing job was done by someone else it would not imply that that person is the manufacturer.

10. In CIT vs. Neo Pharma Private Limited (1982) 137 ITR 879, the assessee company was incorporated with the object of manufacturing and processing pharmaceuticals. It entered into an agreement with another company by name Pharmed under which Pharmed was to make available to the assessee plant, machinery and services of its staff to the assessee company. The manufacturing licence was in the name of the assessee company. The raw materials and packing materials were also supplied by the assessee. The products were manufactured in the premises of Pharmed in the direct supervision of the assessee's own technically qualified staff and under the assessee's own quality control. It was the assessee's name that was printed on the packing, labels and cartoons. Pharmed kept accounts of all the materials supplied by the assessee and consumed in the manufacture. The risk for the entire operation was undertaken by the assessee. The products were manufactured at the cost of the assessee and were its property. On these facts, the question arose before the Bombay High Court as to whether the assessee company can be considered to be an industrial company entitled to the concessional rate of tax under section 2(7)(d) of the Finance Act, 1966. Affirming the decision of the Tribunal, it was held that although the plant and machinery employed for the purpose of manufacture belonged to Pharmed and the services of certain employees of Pharmed were also utilised in that process, the manufacturing activity was really that of the assessee. Before the High Court, a specific contention was taken on behalf of the income-tax department, which is referred to in the last paragraph of page 883, ''that this manufacturing activity was conducted not by the assessee but by Pharmed as the machinery and plant used in the process of manufacture belonged not to the assessee but to Pharmed. It was submitted by him that the idea of giving a concessional rate of tax was to give relief only to such companies as had invested their own funds in the purchase of plant and machinery and hence, in the present case, the assessee was not entitled to that benefit. It was submitted by him that the assessee in fact was merely a trader, and not a manufacturer at all". These arguments of the counsel for the income-tax department were rejected by the Bombay High Court at page 884 - 885 of the Report and we find therein that the High Court has referred to the judgment of the Calcutta High Court (supra) and have observed that their view finds strong support from the judgment of the Calcutta High Court. Reference was also made to the earlier judgment of the Bombay High Court in Griffon Laboratories (P.) Limited vs. CIT (1979) 119 ITR 145 where it was held that a manufacturer may hire a plant or machinery and employ hired labour and manufacture a goods and that the activity of manufacture may be undertaken by the assessee either by itself or by someone under its supervisory control or direction. The Bombay High Court also referred to the judgment of the Delhi High Court in Orient Longman (supra).

11. In CIT vs. Acrow India Limited (1991) 188 ITR 485, the facts before the Bombay High Court were almost similar. Section 2 (6)(c) of the Finance Act, 1969, defines industrial company as including a company engaged in the manufacture or processing of goods. The Tribunal noticed the following facts: (1) The plant and machinery for fabrication was supplied by the assessee company to the other company; (2) the raw materials were mostly supplied by the assessee company; (3) the technical know-how was made available by the assessee through its sister concern in London; (4) the assessee exercised control over the manufacturing process undertaken by the other company and reserved to itself the right to inspect the process. On these facts, the High Court held relying upon, inter alia, its earlier judgment in Neo Pharma (supra) and the judgment of the Calcutta High Court in A. Mukherjee and Co. Pvt. Ltd. (supra) that the assessee must be taken to be the manufacturer of the goods and hence an industrial company.

12. Again in CIT vs. Anglo French Drug Co. (Eastern) Limited (1991) 191 1TR 92, it was held by the Bombay High Court that in order to enjoy concessional tax treatment as an industrial company within the meaning of Finance Act it is not necessary that the manufacturing activity should be undertaken by the assessee itself and the concession would be available even if the assessee employs another company to manufacture the goods under the supervision and control of the assessee. It was held that it was not necessary that the assessee must manufacture the goods by its own plant and machinery at its own factory.

13. In Sond Bharat Pedals (India) vs. ITO (2003) 84 ITD 89, the Chandigarh Bench of the Tribunal was concerned with the provisions of section 80I of the Act. In that case, the assessee did not have the necessary infrastructure to undertake all activities for the manufacture of cycle pedals. Some of the operations, such as, heat treatment, nickel plating, etc. were got done by outside agencies and even the conversion of MS wire and MS rounds into pedal axles and pedal rods was got done through outside agencies. After these activities are carried out by the outside agencies, all the components were brought back, added with other components purchased from the market and fed to power driven machines for tightening of the components resulting in production of bye-cycle pedals. The question arose on these facts whether the assessee can be said to have itself manufactured the cycle pedals for purposes of section 80I. The Tribunal noticed that the Punjab government had issued a certificate showing the assessee as a registered small scale industrial unit, that the assessee paid labour/ service charges to the outside agencies and that it was not necessary that the assessee itself should carry out all the manufacturing operations by itself in order to be eligible for the deduction under section 801 and that the deduction was available even though part of the operations was got done by outsiders. Many of the judgments noticed by us in the earlier paragraphs, along with other relevant judgments, were adverted to by the Tribunal.

15. In all the above cases, except in the cases of Sond Bharat Pedals (India) decided by the Tribunal, the definition of "industrial company" contained either in section 109 of the Act or in the relevant Finance Acts was considered. It is pertinent to note that the definition did not contain elaborate provisions relating to plant and machinery. The definition of industrial company in section 109 (i-a) was as under:

"Industrial company means an Indian company whose business consists wholly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power".

The definition in the Finance Act was that an industrial company means "a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining". The argument of the department before us is that section 10B of the Act makes elaborate provisions in connection with plant and machinery which is indicative of the requirement that the assessee should itself own the necessary equipment or plant to manufacture or produce computer software and the software should be produced with the help of such plant or equipment and it would not suffice if the assessee outsources the development of the computer software to another entity which owns the necessary equipment and plant and the infrastructure. It is also argued that the marginal heading to the section indicates that the undertaking of the assessee should be "newly established". The question before us is whether the existence of certain provisions in the section specifying conditions relating to the machinery or plant and the marginal heading to the section make any difference to the legal position adumbrated in the authorities to which we have already referred.

16. On a careful consideration of the matter, we are of the view that the legal position has not changed and even under section 10B it is not the requirement that the assessee company should itself own plant, machinery or equipment and manufacture or produce computer software on the same in order to be eligible for the exemption. In order to understand and appreciate the nature of a computer software, it is necessary to look into the note dated 6th September 2004 filed before the Assessing Officer regarding creation of softwares for export. A copy of the note has been filed at pages 45 to 49 of the paperbook. It has firstly been explained that computer software is a package of programmes which enable the computer to do the desired work. It is an intellectual property and it is of no use without the hardware, namely, the computer itself along with the Servers, LAN, WAN, MODEMS, Printers, etc. Though for manufacturing computer hardware large plant and machinery is needed, for producing computer software what is required is more of human skill, intelligence and knowledge and less of physical equipment. The hardware has been compared to the laying of the road or producing the vehicles and the software has been compared to the road map showing the routes.

17. It has further been stated in the note that creation or production of computer software involves the following steps: (1) ANALYSIS, which means the understanding and appreciation of the requirements, problems and solutions for the clients. This step requires only knowledge and logical skills and no physical equipment is required. It has been stated that the directors of the assessee company, whose background has already been adverted to briefly, are by virtue of their knowledge and experience capable of understanding the requirements of the clients and possible solutions. (2) CONCEPT, which means developing the software programme with the help of flow charts and discussion with the clients and demonstrating to them as to how their requirements are being addressed and solutions are being offered. This step involves a clear and thorough understanding of the business intricacies and procedures adopted by the client. Again, this step involves purely human knowledge and skill without much of physical equipment. Here again, the directors of the assessee company and the key personnel (whose details were filed before the Assessing Officer) were capable of understanding the requirements of the clients and giving them the concept. (3) DESIGN, which means the deciding of the sub-programmes of the software which will address the problems of the client. This in turn involves three further steps, namely, the integration of the sub-programmes and creation of loops and sub-loops for the flow of data, the designing of master files, data files, etc. for storing the processed data and formatting the input and output, and lastly the deciding of the language in which the programmes are to be developed, such as, Visual Basic, Oracle, MS Office, etc. In order to select the language, judicious views of different languages may sometimes be necessary. It may also depend upon the type of hardware available to the client, the working of the internet and satellites, familiarity with the reports generated from various locations across the globe etc. All these steps in designing again are capable of being executed by the directors and key personnel of the assessee company by virtue of their educational background and experience. (4) CODING, which is required to put in place a tamper-proof system to prevent misuse of the data by competitors or other undesirable elements. Confidentiality of the data requires building of key codes and access codes which can be developed only by human skill, experience and background in the software field. Hardly any equipment is required. (5) WRITING OF SOFTWARE PROGRAMMES OR DTA ENTRY, which requires a large work force of programmers and computers for writing and entering the component programmes for actual use. This job is to be entrusted to the programmers in such a manner that no single programmer writes the entire programme. This is to maintain the confidentiality of the programme and to prevent copying. (6) TESTING and DEBUGGING, to ensure that the data is behaving properly and giving the necessary output. It requires the use of computer but for a very small period of time. The person who has written the component has to ensure that there are no bugs or errors and if there are any they would be removed. (7) INTEGRATION, which means the bringing together of all the component programmes that are developed and they are integrated into the main software which is to be delivered to the client. This is done by the personnel of the assessee company.

18. The aforesaid note filed before the Assessing Officer, the contents of which are not in doubt or in dispute, gives a complete picture of what are the various steps in the manufacture or production of a computer programme. The note shows that for development of a computer programme, what is required is more of human skill, training, intellect and experience compared to the use of physical equipment or plant. The development of the computer software is a very specialized field and requires specialized education, training and expertise in the concerned field. Since it has to be developed in such a manner as to address the particular requirements of the client or the customer, which may vary from client to client and may not be uniform, it may become necessary to customize the programme to suit the particular client or customer. The human element is brought to the forefront in this aspect. Development of the computer software is thus a highly specialized job which comes out of the specialized education, skills acquired and developed over a period of years, experience in dealing with different types of clients and customers and so on and so forth. It is not a mechanical job and more than the machines and equipments it is the value addition that is made by the application of the human skills that counts.

19. Thus in the very nature of things it appears to us that the plant and equipment required to produce the computer software is subsidiary to the element of human skill, training and experience that are the main requirements. The requirements of section 10B of the Act have to be understood in this context. It is significant to note that the section does not provide for a positive requirement that the assessee who claims the exemption should own plant and machinery, it only provides for certain negative requirements, such as in clause (iii) of sub-section (2), which says that the undertaking should not have been formed by the transfer to a new business of machinery or plant previously used for any purpose. This requirement is to be read with Explanations 1 and 2 below sub-section (2) of section 80-1. These Explanations provide for cases and circumstances in which machinery or plant previously used will not be considered as prohibited machinery or plant. For example, plant or machinery used outside India by a person other than the assessee is not a prohibited item of plant or machinery for use in India in the undertaking of the assessee, subject to certain conditions. A concession is also given to the effect that if the plant or machinery previously used and transferred to the assessee's undertaking does not exceed 20% of the total value of the plant and machinery, the exemption will not be denied. These provisions, in our opinion, apply where the manufacture or production of the article or thing or the computer software is done in the undertaking of the assessee; once it is carried out in the undertaking of the assessee, then all conditions of the section would apply. But where the activity is not carried out in the undertaking of the assessee or where the assessee does not have its own plant or machinery, in the absence of any provision in the section containing a positive requirement that the assessee shall own plant and machinery, then these requirements are not applicable. This, coupled with the fact that production of a computer software is basically a job requiring more of human skill and expertise than use of plant and machinery, persuades us to hold that there is no change in the legal position laid down earlier that even if the manufacture or production is got done by outside agencies or contractors but under the supervision and control of the assessee the claim for deduction or exemption has to be allowed.

20. The matter can be looked at from another angle also. Sub-section (2) of section 10B prescribes three conditions: (i) that the undertaking should manufacture or produce any articles or thing or computer software; (ii) that the undertaking should not have been formed by the splitting up, or the reconstruction, of a business already in existence and (iii) that the undertaking should not have been formed by the transfer to a new business of machinery or plant previously used for any purpose. These are cumulative conditions, as can be seen from the use of the word "all" in the opening part of the sub-section. In a number of decisions, which we have referred to earlier, it has been held that even if the assessee gets the articles manufactured by another person by using the plant and machinery owned by that person and by paying him some charges for the hire or use of the machinery, but under the control and supervision of the assessee who supplies the raw material etc., it must be taken as if it is the assessee who is the manufacturer. These decisions have held the field for a considerable period of time, though they were rendered in the context of the definition of an industrial company under section 109 or under the relevant Finance Act. The legislature was quite aware of the interpretation placed by the courts upon those provisions. However, in section 10B (and other sections such as 80-I, 80-IA, 80-HH, 80-IB etc.) no express provision was incorporated to the effect that the assessee which claims the deduction/exemption should itself own the plant and machinery and should itself manufacture or produce the article or thing or the computer software with the help of the said plant and machinery. In other words, the legal position laid down by the courts earlier, based on the maxim 'qui facit per alium facit per se' (one who does something through others does it himself), was not sought to be altered. In Banarasi Debi vs ITO (1964) 53 ITR 100 the Supreme Court, citing the decision in Barras vs. Aberdeen Steam Trawling and Fishing Co. Ltd (1933) A.C. 402, 411, held that where a word of doubtful meaning has received clear judicial interpretation, the subsequent statute which incorporates the same word or phrase in a similar context must be construed so that the word or phrase is interpreted according to the meaning that has previously been assigned to it. In F.S. Ghandhi vs. CWT (1990) 184 1TR 34, it was observed that where, while substituting section 2(e) of the Wealth-tax Act by the Finance Act, 1969, the Parliament repeated the same language which was used in the section as it stood prior to its substitution and the earlier section had received a particular way of interpretation by the Supreme Court in CWT vs. R.A. Muthukrishna Ammal (1969) 72 ITR 801, then "It must be assumed that while enacting the Finance Act, 1969, Parliament was aware of the construction placed by this court on these words in CWT vs. R.A. Muthukrishna Ammal (1969) 72 ITR 801. In repeating the said words in the amended clause (e) of section 2, Parliament must be taken to have used the said words to bear the meaning which has been put upon them by this court in CWT vs. R.A. Muthukrishna Ammal (1969) 72 ITR 801". Applying this rule of construction, it seems to us that when section 10B uses the word "manufacture" or "produce" without any conditions or reservations and in the same way in which they were used in the earlier provisions which were the subject-matter of interpretation by the courts, it must follow that the same meaning has to be given to those words and if there is no condition expressly added to the contrary or to express a different intention it must also follow that no condition can be read into the provision and it must be interpreted in exactly the same way in which it was interpreted earlier by the courts. It is also necessary to bear in mind that no decision rendered under section 109 of the Act or under the Finance Act was brought to our notice in which it was held that in order to enjoy the concessional rate of tax, the assessee itself should own plant and machinery and manufacture the goods himself with the help of those plant and machinery. In the light of this legal position, we are persuaded to hold that even under section 10B it is not necessary that the manufacturing activity has to be carried on by the assessee himself by using his own plant and machinery. If this first condition of clause (iii) of sub-section (2) is satisfied then the other two conditions of the clause are not applicable and, therefore, there is no question of assessee fulfilling the same.

21. The circular no.694 dated 23.11.1994 also supports the assessee's stand. It is necessary to reproduce the relevant part of the circular which is as below:

"5. Since computer programmes are not physical goods but are developed as a result of an intellectual analysis of the systems and methods followed by the purchaser of the programme, it is often prepared on site, with the software personnel going to the client's premises. Doubts have been raised whether units taking up such production of software at the client's premises would be eligible for the tax holiday.

6. The Government's policy on tax incentive to software exports is reflected in the provisions of section 80HHE introduced in 1991. Under this provision, technical services provided outside India, for the development or production of computer software, are included for the purpose of the tax incentive.

7. Similarly, 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. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client's site abroad, such unit should not be denied the tax holiday under section 10A or 10B on the ground that it was prepared on site, as long as the software is a product of the unit, i.e., it is produced by the unit."

The circular recognises several aspects. Firstly, it accepts that computer programmes are not physical goods but are developed as a result of an intellectual analysis of the systems and methods followed by the purchasers of the program. This is exactly what the assessee before us contends. Secondly, it recognises that because of the fact that it represents an intellectual analysis it is often prepared on site with the software personnel of the assessee going to the client's premises to produce or prepare or develop the programme. Thirdly, the precise question that arose before the CBDT for being clarified was "whether units taking up such production of software at the client's premises would be eligible for the tax holiday". Taking cue from the language used (quoted), it appears to us that it was accepted by the CBDT that it is possible for the assessee to produce software at the client's premises. Obviously, if the software has to be produced or developed in the client's premises, the software personnel sent by the assessee will be using the equipment belonging to the client. Since the circular says that the tax holiday should not be denied under section 10A or 10B on the ground that the software was prepared on site at the client's premises, it seems to us that even according to the CBDT, it is not necessary, for the purpose of section 10A or section 10B, that the computer programme should be manufactured or produced by the assessee in his own premises by using his own plant or equipment. In paragraph 7 of the circular, the CBDT has recognised that so long as the assessee itself produces computer programmes and exports them, it should not matter whether the programme is actually written within (or without) the premises of the assessee. This means that so long as it is the assessee's personnel who go abroad and sit in the premises of the client to write the computer programme and thus it is the assessee who exercises supervision and control over the work and takes responsibility for the same, there should be no objection to considering it as a production of computer programme by the assessee. We were not presented with any convincing reason as to why the spirit and intention behind the circular cannot be extended to a case where the computer programme is produced, though not at the client's premises, but at the premises of a person whose infrastructure and equipment are utilised by the assessee on payment of necessary charges for using the facilities. In such a case also, there is production of software and the same is done under the control and supervision of the assessee. Thus, in our humble opinion, the circular seems to support the assessee's stand.

22. Coming to the facts of the present case, it is seen that the assessee was incorporated on 21-3-1994 as "Next Overseas Pvt. Ltd" and did not do any business till 31-3-1999. It commenced computer software business in the financial year 1999-2000. On 29-3-2000 it got itself registered with Software Technology Park of India (STPI). It got export orders from Techdrive Inc. of USA which insisted that its name be changed in such a manner that people in USA may get the impression that the assessee is a BPO of the USA company. Accordingly it changed its name to Techdrive India Pvt. Ltd. Seacom Solutions (India) Limited is a subsidiary of the assessee and is located in the SEZ at Pune. It is eligible for the exemption of income under section 10A for a period of 10 years commencing from the assessment year 2000-2001. The assessment order of Seacom passed under section 143(3) of the Act for the assessment year 2001-2002 has been filed from which it is seen that deduction of Rs. 91,89,903/- was .given under section 10A out of the claim of Rs. 92,92,451/-. Seacom, as seen from the assessee's note to the Assessing Officer, has nearly 100 computers and skilled programmers on its rolls. The assessee has admitted that all the computer software development was being done in Seacom. The assessee thought it prudent and economically more profitable to use the facilities available with Seacom instead of duplicating them in its own premises involving huge costs. Therefore, it availed of the services of the personnel as well as the infrastructure of Seacom and paid the cost thereof as "software development charges". In the note, the assessee has also stated that it has four directors and some key personnel who had all the capability of producing and developing the computer software and details of these persons were furnished as an enclosure to the note. It was further explained both in this note and in another letter dated 22.11.2004 addressed to the Assessing Officer that there is no written agreement between the assessee and Seacom, that Seacom charged a sum of Rs. 75,000/- per month per work station which consists of a working table with a computer (including CPU, Monitor, Keyboard and Mouse) with internet and printer facility and power back-up and a trained computer professional capable of carrying out the normal instructions on the computer. The assessee's directors and key personnel issue the necessary programming instructions and directions to the computer professional sitting at the work station. In its letter dated 20n November 2004 written by Seacom to the Assessing Officer (page 80 of the paperbook) in response to the notice issued under section 133 (6), it has been clearly stated by it that the representatives of the assessee "were responsible for giving the necessary programming instructions and directions of the work". The assessee has also furnished in its letter dated 22.11.2004 the details of the software development charges paid by it. These are as under:

"Charges for work-stations
provided Reimbursement of
expenses on our a/c
  Rs. 27,95,000
Debited to software
development charges
Salaries paid to
our employees
7,51,800  
(except last two months)
Travelling, boarding
and lodging exp.on their a/c
4,91,777 Rs. 12,43,577
Total   Rs. 40,38.577
Less Credit notes given   Rs. 16,168
Software Development
charges as per a/cs
  Rs. 40,21.409

Salaries for two months (Feb. and March) have been debited to the head of salaries as already submitted. It has also been submitted that the TDS has bee done on the total salaries (including those shown in software development charges) and the necessary TDS certificates etc. already furnished."

It was further clarified that the assessee did not give any certificate to Seaeom as a supporting manufacturer and that Seaeom has treated the software development charges received by it from the assessee as domestic receipts and has not claimed any deduction thereon under section 10A. This has been confirmed by Seaeom also in its letter dated 20.11.2004.

23. All the above facts, which have not been disputed by the Assessing Officer, show that though the assessee was using the infrastructure and facilities available with Seaeom for producing the computer software, it was being done under the supervision and control of the personnel of the assessee. The assessee company also had its own computers and its personnel also had their Laptop computers for doing the integration of the component programmes produced at Seaeom, Pune. This aspect has been brought to the notice of the Assessing Officer in the assessee's note dated 6.9.2004. The software development charges paid by the assessee were partly for the work stations provided by Seacom (Rs. 27,95,000/-) and the balance of Rs. 12,43,577/- represented reimbursement of salaries paid by Seacom to the assessee's employees (Rs. 7,51,800/-) and expenses on traveling, boarding and lodging for them reimbursed (Rs. 4,91,777/-). Apparently, the assessee's employees were required to stay in Pune for sometime to carry out the work of developing the software and they have to be paid salaries and the expenses on their boarding and lodging had to be taken care of. The salaries and expenses were paid by Seacom and the assessee reimbursed Seacom the same. The software developed by the assessee with the help of the infrastructure and equipment provided by Seacom were exported by the assessee and for the year under appeal such exports amounted to Rs. 2,04,82,556/-. The other conditions of the section, such as, receipt of the sale proceeds into India in convertible foreign exchange within the prescribed period, have been satisfied. In these circumstances, we are of the view that the CIT (Appeals) has rightly accepted the assessee's claim for exemption under section 10B of the Act. We affirm his order and dismiss the appeal filed by the department with no order as to costs.

Order pronounced in open court this day of June 27th 2008.

 
 
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