2012 (12) TMI 625 - AT - Income Tax

Exemption u/s 10A & 10B - Development of Software - disallowance as said product was not manufactured at the premises of the assessee - CIT(A) allowed the claim - Held that - Outsourcing is part and parcel of the manufacturing activity and helpful in producing product or article or thing. Assessee company is considered to have actually carried on the business of IT enable services being maintenance of website of the foreign client Technics, INC, USA through certain consultants on contract basis under the direct supervision and control of the assessee company in India land also in coordination with the personnel of the foreign client. The direct contract of the consultants engaged by the Indian company with foreign clients could not lead to the conclusion that such clients engaged by the Indian company are hired by the foreign company or they were under the contractual obligation to perform specified works directed by the foreign client. For all practical purposes the Indian company was under contractual obligation to the foreign client. And it was at freedom to get the export order executed by its own employees or by outsourcing the work to certain consultants or third parties. Hence the actual export of computer software programme of the maintenance of the website for the foreign clients cannot be considered to be bogus or fictitious, if the Assessing officer had any doubt regarding the possible collusion between the foreign client and India company for any over estimation of export proceeds or understating of Indian expenses necessary incriminating evidence should have been brought on record to prove such points. On the contrary a reference made by the AO to the transfer pricing authority at Hyderabad u/s. 92 of the Income Tax Act, 1961, it has been officially held by the concerned authority that the export proceeds shown by the assessee company for IT enabled services rendered comprising of wave maintenance for the foreign client could be taken as a correct reflection of the exports proceeds - appeal by revenue is dismissed.

Summary

Issues Involved:
1. Whether the assessee's business activity constitutes the development of software.
2. Whether the assessee is entitled to exemption under Section 10A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Whether the assessee's business activity constitutes the development of software:

The Revenue contended that the assessee's business activity did not constitute the development of software, as the company did not have full-time computer engineers/software professionals on its payroll and subcontracted its web maintenance export contracts. The Assessing Officer (AO) argued that the company acted more like a trader/broker/agent rather than a manufacturer or producer of computer software, as it outsourced the entire contract. The AO believed that the statutory provisions of Section 10A of the Income-tax Act, 1961, could not be applied if the exporter did not execute at least 51% of the total contract work with its own manpower/infrastructure.

2. Whether the assessee is entitled to exemption under Section 10A of the Income-tax Act, 1961:

The CIT(A) held that the denial of exemption under Section 10A was patently misconceived. The CIT(A) noted that the assessee had not infringed any statutory provisions and that the re-outsourcing or sub-contracting of an export order was not restricted under statutory provisions. The CIT(A) emphasized that the competent authority, STPI Hyderabad, had certified the actual exports of computer software and the realization of export proceeds in foreign currency. The CIT(A) concluded that the assessee was eligible for relief under Section 10A, as the conditions specified under the section were satisfied, and deleted the addition made by the AO.

Appellate Tribunal's Analysis:

The Tribunal observed that the CIT(A) had decided the case in favor of the assessee based on the finding that the IT-enabled services for web maintenance were actually manufactured by the assessee in the STPI area. The Tribunal noted that the Revenue's objection was that the product was not manufactured at the assessee's premises but through outsourcing methods. The Tribunal referred to the CBDT Circular No. 697 dated 23.11.1999, which clarified that as long as the unit in the STPI zone produced and exported computer programs, the location of writing the program was irrelevant.

The Tribunal upheld the CIT(A)'s interpretation of Section 10A, emphasizing the liberal construction of provisions intended to promote economic growth, as held by the Supreme Court in CIT V/s. Straw Board Manufacturing Co. Ltd. (177 ITR 431). The Tribunal concluded that the assessee was entitled to the benefits of Section 10A, as the Act did not restrict outsourcing for producing an article or thing. The Tribunal found no infirmity in the CIT(A)'s orders and dismissed the Revenue's appeals.

Conclusion:

The Tribunal dismissed the Revenue's appeals, affirming that the assessee's business activity constituted the development of software and that the assessee was entitled to exemption under Section 10A of the Income-tax Act, 1961. The Tribunal upheld the CIT(A)'s orders, which were based on a detailed examination of the statutory provisions and the satisfaction of conditions specified under Section 10A.