2007 (1) TMI 299 - AT - Income Tax

Entitlement to claim benefit of Section 10A - Transfer of computer software by the Indian branch to the head office - Free trade zone - DTAA between India and USA - non-resident enterprise - 100 per cent export oriented unit - whether can be said to be sale to the head office out of India - HELD THAT - In the present case there is no dispute that the assessee developed Computer Software and transmitted electronically to its head office. The assessee is an approved 100 per cent export oriented unit for development of computer software duly approved by the STP of India. The export of software during the previous year is evidenced by the Softex form duly certified by the competent officer of STPI. The consideration has been received by the assessee in the form of convertible foreign exchange. The only reason assigned by the Revenue authorities for denying exemption u/s 10A of the Act is that there has been no export sale by the assessee, since the computer software was transmitted to head office and since the assessee and its head office were one entity, there was no sale to any third party. This approach of the Revenue authorities were not correct in view of the provisions of section 10A(7) of the Act. The legal fiction of treating an assessee as a separate entity vis-a-vis sale by it or transfer by it from an eligible business or to an eligible business has been recognized u/s 10A(7) of the Act. A plain reading of the provisions of section 10A(7) together with the provisions of section 80-IA(8) of the Act, which reads as follows reveals statutory recognition of such legal fiction. There cannot be any doubt about the market price also since the transfer pricing officer has already held that the price at which the assessee transmitted the computer software to its head office was at arm s length price. On this basis, the claim of the assessee deserves to be accepted. Thus, we deem it unnecessary to deal with the other arguments raised by the learned counsel for the assessee and the Ld DR regarding recognition of separate entity concept vis-a-vis an Indian PE and the foreign enterprise under the DTAA between India and USA, the Board Circulars as well as the decision of the Special Bench in the case of ABN Ambro Bank NV 2005 (8) TMI 294 - ITAT CALCUTTA-E . Assessing Officer is directed to allow the claim for exemption of the assessee u/s 10A of the Act. The appeal of the assessee is allowed. In the result, the appeal by the assessee, is allowed.

Summary

Issues Involved:
1. Eligibility for exemption under section 10A of the Income-tax Act, 1961.
2. Treatment of transactions between the Indian branch and its head office.
3. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and USA.
4. Relevance of Transfer Pricing regulations.

Issue-wise Detailed Analysis:

1. Eligibility for Exemption under Section 10A of the Income-tax Act, 1961:
The primary issue revolves around whether the assessee qualifies for exemption under section 10A of the Income-tax Act, 1961. The assessee, an Indian branch of a US-based company, develops software and transmits it to its head office. The profit earned was claimed to be exempt under section 10A, which provides for exemption of profits derived from the export of articles or things or computer software by units located in Software Technology Parks of India (STPI). The Assessing Officer denied this exemption, arguing that the assessee and its head office are one entity and thus cannot generate profit by selling to itself. The Tribunal, however, concluded that the assessee fulfills all conditions for exemption under section 10A, including the receipt of sale proceeds in convertible foreign exchange and certification by STPI.

2. Treatment of Transactions between the Indian Branch and its Head Office:
The Assessing Officer argued that the transactions between the Indian branch and its head office do not constitute a sale, as they are considered a single entity. The Tribunal disagreed, noting that section 10A(7) of the Act, read with section 80-IA(8), provides for treating the Indian branch and head office as separate entities for the purpose of computing profits eligible for exemption. The Tribunal emphasized that the legal fiction created by these provisions should be recognized, thus validating the assessee's claim of exporting software to its head office.

3. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and USA:
The assessee argued that under the DTAA between India and USA, the Indian branch (Permanent Establishment) should be treated as a separate entity from its head office. Article 7 of the DTAA stipulates that profits of an enterprise should be taxable only if they are attributable to a PE in the other state. The Tribunal acknowledged this argument but focused on the provisions of the Income-tax Act, which already recognize the Indian branch and head office as distinct entities for tax purposes.

4. Relevance of Transfer Pricing Regulations:
The assessee highlighted that the Transfer Pricing Officer had determined the price at which the software was transferred to the head office to be at arm's length. This compliance with Chapter X (sections 92 to 92F) of the Income-tax Act, which deals with transfer pricing, further supports the assessee's claim for exemption under section 10A. The Tribunal found this argument persuasive, noting that the arm's length price determination by the Transfer Pricing Officer reinforces the market value of the transactions between the Indian branch and its head office.

Conclusion:
The Tribunal concluded that the assessee is eligible for exemption under section 10A of the Income-tax Act, 1961. The legal fiction of treating the Indian branch and its head office as separate entities for tax purposes, as provided under section 10A(7) and section 80-IA(8), was upheld. The Tribunal directed the Assessing Officer to allow the exemption claim, thereby allowing the appeal filed by the assessee.