2006 (4) TMI 342 - AT - Income Tax

Summary

Issues Involved:
1. Deduction under section 80HHB.
2. Nature of services provided by the assessee.
3. Interpretation of contractual obligations and execution of foreign projects.
4. Relationship between the assessee and Total Tel.

Detailed Analysis:

1. Deduction under section 80HHB:
The primary issue in this appeal was whether the assessee was entitled to a deduction under section 80HHB. The assessee claimed a deduction amounting to Rs. 82,73,068 for the assessment year 2001-02 related to its business transactions with MTN Network (P) Ltd., Sri Lanka and Telekom Networks Malawi (P) Ltd., Malawi. The Assessing Officer (AO) disallowed this deduction, reasoning that the services provided by the assessee were of a consultancy and maintenance nature and did not constitute the execution of a foreign project as defined under section 80HHB. The CIT(Appeals) upheld the AO's decision, concluding that the assessee acted merely as a marketing agent for Total Tel and did not execute any foreign project.

2. Nature of Services Provided by the Assessee:
The AO held that the contractual obligations of the assessee were limited to maintenance, consultancy for purchase of third-party hardware/software, and sub-licensing the prepaid software of Total Tel. The AO argued that these activities did not amount to the execution of a foreign project. The CIT(Appeals) further noted that the assessee was only marketing the products of Total Tel and sub-contracting the execution of agreements back to Total Tel, thus acting as a marketing agent without adding any value.

3. Interpretation of Contractual Obligations and Execution of Foreign Projects:
The assessee contended that it executed turnkey projects, including the installation of hardware and software, and provided a fully functional prepaid mobile telephony system. The assessee argued that these activities fell within the ambit of a "foreign project" as defined under section 80HHB(2)(b), which includes activities ancillary and incidental to the execution of a foreign project. The Tribunal noted that section 80HHB does not require the entire foreign project to be executed by the assessee alone. The provision allows for subcontracting parts of the project, provided the assessee derives profits from such contracts.

4. Relationship between the Assessee and Total Tel:
The CIT(Appeals) and the AO both emphasized the relationship between the assessee and Total Tel, suggesting that the assessee acted as an agent for Total Tel. The CIT(Appeals) referred to a letter from Total Tel to MTN Networks, which indicated that the assessee was authorized by Total Tel to enter into sales and maintenance contracts. However, the Tribunal found that the agreements between the assessee and its clients in Sri Lanka and Malawi were on a principal-to-principal basis, and the assessee was responsible for the execution of the projects, including the supply, installation, integration, testing, and commissioning of the prepaid telephony system. The Tribunal concluded that the assessee's activities went beyond mere marketing and involved substantial execution of foreign projects.

Conclusion:
The Tribunal held that the assessee was entitled to the deduction under section 80HHB. It found that the assessee had entered into contracts in its own right and executed foreign projects, even if parts of the projects were subcontracted to Total Tel. The Tribunal reversed the orders of the lower authorities and directed the AO to grant the deduction under section 80HHB as admissible to the assessee. The appeal was allowed in favor of the assessee.