2012 (8) TMI 331 - AT - Income Tax

Deduction u/s 10A and alternative claim u/s 80IB(8A) - export of computer software - assessee contended to be STP involved in software development - denial of deduction on ground that assessee s operations do not have computer as primary and predominant hardware tool and scientific methods/tool are used - end products could not be treated as as service similar to export of customized electronic data - Held that - Neither AO nor the DRP have taken cognizance of the findings of the Tribunals given in ITO Vs Accurum India (P) Ltd (2009 (11) TMI 550 - ITAT MADRAS-A ), M.L.Outsourcing Services Pvt. Ltd v. ITO (2011 (5) TMI 594 - ITAT, DELHI ), while deciding the issue of the present assessee, though according to the assessee, the issue in question is squarely covered by the above orders of the Tribunal. Also, assessee was not given proper opportunities to present his case before the Assessing Officer and the DRP and hence, the matter requires re-examination by the Assessing Officer. Therefore, in the interests of principles of natural justice and equity, the issue should be remitted back to the file of the AO for fresh consideration - Assessee s appeal is treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Deduction under section 10A of the Income Tax Act.
2. Alternative claim for deduction under section 80-IB(8A) of the Income Tax Act.
3. Transfer pricing adjustment under section 92CA of the Income Tax Act.
4. Deduction under section 10A on the addition of Rs.2,06,44,054.
5. Levy of interest under section 234B and 234D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deduction under section 10A of the Income Tax Act:

The core issue revolves around whether the assessee, engaged in research and development activities, qualifies for deduction under section 10A of the Act. The assessee claimed to be involved in software development and exporting customized electronic data, engineering, and design services. The Assessing Officer (AO) denied this deduction, arguing that the assessee's operations primarily involved scientific research and development rather than IT-enabled services. The AO highlighted that the investment in plant and machinery was significantly higher than in computers, indicating the primary use of scientific hardware for research rather than IT tools.

The assessee countered, stating that their activities fit the definition of 'computer software' under Explanation 2(i) to section 10A, which includes customized electronic data and IT-enabled services as notified by the CBDT. The assessee detailed their process involving multiple phases, from receiving client work requests to exporting final customized electronic data electronically. The assessee also cited several case laws, including ITO v. Accurum India (P) Ltd and Bechtel India Pvt. Ltd v. ACIT, to support their claim that their activities qualify as export of customized electronic data.

The Tribunal noted that the AO and the Dispute Resolution Panel (DRP) did not adequately consider the relevant case laws cited by the assessee. The Tribunal emphasized the need for a re-examination of the issue by the AO, taking into account the case laws and the detailed submissions made by the assessee.

2. Alternative claim for deduction under section 80-IB(8A) of the Income Tax Act:

The assessee's alternative claim for deduction under section 80-IB(8A) was also denied by the AO, who pointed out several procedural and technical flaws. The AO noted that the assessee did not exclusively engage in scientific research and development, failed to file annual returns and reports within the stipulated time, and did not obtain prior permission from the prescribed authority before transferring outputs to its parent company.

The Tribunal, however, did not delve deeply into this issue, as the primary focus was on the section 10A deduction. The Tribunal directed the AO to re-examine the assessee's claims, including the alternative claim under section 80-IB(8A), in light of the relevant case laws and detailed submissions.

3. Transfer pricing adjustment under section 92CA of the Income Tax Act:

The assessee did not press the issue of the transfer pricing adjustment of Rs.64,83,64,363 during the appeal hearing. Consequently, this issue was not addressed in detail by the Tribunal.

4. Deduction under section 10A on the addition of Rs.2,06,44,054:

Similarly, the assessee did not press the issue regarding the deduction under section 10A on the addition of Rs.2,06,44,054, which was debited in the profit and loss statement as a provision for doubtful advance. This issue was also not addressed in detail by the Tribunal.

5. Levy of interest under section 234B and 234D of the Income Tax Act:

The assessee did not press the issue of the levy of interest under sections 234B and 234D during the appeal hearing. Consequently, this issue was not addressed in detail by the Tribunal.

Conclusion:

The Tribunal concluded that the AO and the DRP did not adequately consider the relevant case laws and detailed submissions made by the assessee regarding their eligibility for deduction under section 10A. The Tribunal remitted the issue back to the AO for fresh consideration, directing the AO to take into account the case laws cited by the assessee and provide the assessee with an opportunity to present their case. The appeal was treated as allowed for statistical purposes.