2008 (4) TMI 332 - AT - Income Tax

Eligibility for deduction u/s 10A - Export of Computer Software - Term of Computer software includes Maintenance of software or not - Whether the work in corrections of bugs in OVISS, customizing Programmes developed, code change in OVISS could be called as ''Manufacture or Development of Software'' - Assessee was working under contracts with M/s. OVI to modify the software called 'OVISS' in order to ensure full and proper functioning of such software, and also had to support M/s. OVI in the event of faults and damages due to improper use of the software, handle queries, make master data management and handle monitoring and trouble shooting - HELD THAT - Maintenance of software, especially when it involves ERP modules, or bought out software's would require routines and sub-programs for interfacing it with other legacy systems and also for migration from other legacy systems to new system and building in new functionalities, which could vary from user to another user. Thus, every maintenance or modification or bug repairing would require independent code and each such independent code/procedure including codes written of interfacing and specific problem solving relating to legacy programme would still be software's and nothing else. We also find from Explanation 2 to section 10A that computer software means any computer programme recorded on any disc, tape, perforated media or other information storage device which is transmitted or exported from India by any means. There is no dispute that whatsoever the software, the software which were in nature of bug repairing, interpreting and code maintenance programmes, could have been transmitted by the assessee to its client abroad only if it was recorded initially in some information storage device, which could be either the hard disc memory or any other memory devices temporarily or permanently used for the purpose of storing the programme codes. In taking this view, we are also fortified by the decision of the Tribunal in ISBC Consultancy Services Ltd. v. Dy. CIT 2002 (8) TMI 840 - ITAT MUMBAI , wherein it was held that even customization of software involves intellectual process, and it meets the criteria propounded by classical connotation of the term 'manufacture'. Thus, AO as well as CIT(A) fell in error in denying the assessee deduction u/s 10A for the work done by it on behalf of OVI and in considering the receipts therefrom as not from production or manufacture of computer software. Therefore, we set aside the orders of CIT(A) and AO in this regard and direct that assessee be allowed deduction u/s 10A received by it from M/s. OVI as well. In the result, appeal of the assessee is allowed.

Summary

Issues:
1. Denial of exemption under section 10A for a sum received for supply, site development, and modification of computer software.

Analysis:
The appeal was filed against the order of the CIT(A)-XII, Mumbai for the assessment year 2001-02. The dispute revolved around the denial of exemption under section 10A for a sum received from M/s. Otto Versand International (OVI) for software-related activities. The Assessing Officer excluded the receipts from OVI, stating they were not software exports. The CIT(A) upheld this decision, emphasizing that the receipts pertained to maintenance, not software export.

The assessee argued that the activities performed for OVI fell within the purview of section 10A. The dispute centered on whether the work done for OVI constituted the manufacture or production of computer software, making it eligible for the deduction under section 10A. The contract between the assessee and OVI outlined tasks such as software maintenance, bug correction, adaptation, and enhancement of the OVISS software. The agreement required the assessee to develop new software, maintain existing software, and provide support services.

The Tribunal analyzed the nature of software maintenance in the context of software development life cycle. It distinguished software maintenance from tangible asset maintenance, highlighting that software maintenance is an integral part of software development aimed at enhancing capabilities and correcting errors. The Tribunal referenced industry standards and definitions to establish that maintenance of software involves ongoing development and the creation of new codes for modifications and enhancements.

The Tribunal concluded that the services rendered by the assessee, including bug corrections, customization, and code changes, constituted the manufacture or production of computer software. It held that the software, even in the form of bug repairs and maintenance programs, could be exported if initially recorded on an information storage device. Referring to Explanation 2 of section 10A, the Tribunal emphasized that the software exported by the assessee met the criteria of computer software. Citing a previous Tribunal decision, the Tribunal ruled in favor of the assessee, directing that the deduction under section 10A be allowed for the sum received from OVI.

In summary, the Tribunal overturned the decisions of the Assessing Officer and CIT(A), ruling in favor of the assessee and allowing the deduction under section 10A for the amount received from OVI for software-related activities.