2011 (5) TMI 594 - AT - Income Tax

Deduction u/s 10A - whether income derived from transmission of data in respect of eligible employees for appointment in software development company in the USA would qualify the deduction under section 10A - Held 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, misunderstanding arose that since the recruitment and training of the personnel was by itself not IT enabled, the profit earned by the assessed is not eligible for deduction under section 10A. The requirement of the provision is that there should be a customized 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 customized electronic data which can be exported to qualify for deduction under section 10A. Approval from STP Authority for the Bangalore office on the last date of the accounting year - Held that - Assessee submitted that it was operating at Gurgaon when it was become unviable then it went to Bangalore and applied for registration with STPI Authority on 23-1-2007. The registration was granted with effect from 31-3-2007. 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. Share holding of family members - Assessing Officer 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 Assessing Officer e-mails etc. for demonstrating its case. Thus assessee is entitled for deduction under section 10A - in favour of assessee.

Summary

Issues Involved:
1. Denial of deduction under section 10A of the Income-tax Act.
2. Determination of whether the assessee's activities qualify as "computer software" under section 10A.
3. Validity of the assessee's operations and registration with STPI.
4. Assessing Officer's objections regarding the potentiality and constitution of the assessee company.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 10A:
The primary grievance of the assessee was the denial of deduction under section 10A of the Income-tax Act. The assessee claimed that it was involved in the business of exporting IT-enabled services and thus entitled to 100% exemption under section 10A. However, the Assessing Officer rejected this claim, arguing that the assessee's activities did not fall within the eligibility criteria provided in section 10A.

2. Determination of Whether Assessee's Activities Qualify as "Computer Software" under Section 10A:
The Assessing Officer and CIT(A) both concluded that the assessee's activities did not qualify as "computer software" under section 10A. The assessee contended that its services fell within the ambit of "human resource services" as notified by the CBDT under sub-clause (b) of Explanation 2 to section 10A. The assessee argued that it provided recruitment services using IT skills and tools, thus qualifying as IT-enabled services. The Tribunal examined the relevant clauses of section 10A and the CBDT notification, concluding that the assessee's activities of preparing and transmitting customized electronic data of eligible candidates for employment in the software industry qualified for deduction under section 10A.

3. Validity of Assessee's Operations and Registration with STPI:
The Assessing Officer raised doubts about the assessee's operations, particularly its potential to provide such services from its Bangalore office, and questioned the timing of the STPI registration. The assessee provided evidence of its operations, including lease agreements, employee details, salary payments, and the application for STPI registration. The Tribunal found that the assessee had demonstrated its commercial operations and that the registration was granted on the last date of the accounting year, making it eligible for the deduction.

4. Assessing Officer's Objections Regarding the Potentiality and Constitution of the Assessee Company:
The Assessing Officer expressed suspicion about the constitution of the assessee company and the potentiality of its services. However, the Tribunal noted that the Assessing Officer did not provide specific material to support these suspicions. The Tribunal also referenced the decision in the case of Accurum India (P.) Ltd., where similar services were deemed eligible for deduction under section 10A. The Tribunal concluded that the assessee's activities were legitimate and that the objections raised by the Assessing Officer were not substantiated.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the Assessing Officer to grant the deduction under section 10A. The Tribunal emphasized that the assessee's activities of preparing and transmitting customized electronic data of eligible candidates for employment in the software industry qualified as IT-enabled services, making it eligible for the deduction. The Tribunal also found that the assessee had demonstrated its commercial operations and that the objections raised by the Assessing Officer were not substantiated.