2008 (6) TMI 234 - AT - Income Tax

Allowability of deduction u/s 10B - computer software business - whether the assessee should own plant and equipment in which the software is developed for export or whether the job can be outsourced to a person who possesses the necessary equipment and infrastructure - HELD THAT - It is also necessary to bear in mind that no decision rendered u/s 109 of the Act or under the Finance Act was brought to our notice in which it was held that in order to enjoy the concessional rate of tax, the assessee itself should own plant and machinery and manufacture the goods himself with the help of those plant and machinery. In the light of this legal position, we are persuaded to hold that even u/s 10B it is not necessary that the manufacturing activity has to be carried on by the assessee himself by using his own plant and machinery. If this first condition of cl. (iii) of sub-s. (2) is satisfied then the other two conditions of the clause are not applicable and, therefore, there is no question of assessee fulfilling the same. Facts show that though the assessee was using the infrastructure and facilities available with Seacom for producing the computer software, it was being done under the supervision and control of the personnel of the assessee. The assessee company also had its own computers and its personnel also had their laptop computers for doing the integration of the component programmes produced at Seacom, Pune. This aspect has been brought to the notice of the AO in the assessee's note. The software development charges paid by the assessee were partly for the work stations provided by Seacom and the balance of represented reimbursement of salaries paid by Seacom to the assessee's employees and expenses on travelling, boarding and lodging for them reimbursed. Apparently, the assessee's employees were required to stay in Pune for sometime to carry out the work of developing the software and they have to be paid salaries and the expenses on their boarding and lodging had to be taken care of. The salaries and expenses were paid by Seacom and the assessee reimbursed Seacom the same. The software developed by the assessee with the help of the infrastructure and equipment provided by Seacom were exported by the assessee and for the year under appeal such exports sum. The other conditions of the section, such as, receipt of the sale proceeds into India in convertible foreign exchange within the prescribed period have been satisfied. In these circumstances, we are of the view that the CIT(A) has rightly accepted the assessee's claim for exemption u/s. 10B of the Act. We affirm his order and dismiss the appeal filed by the Department with no order as to costs.

Summary

Issues Involved:
1. Eligibility for deduction under Section 10B of the IT Act.
2. Ownership and use of plant and machinery for software development.
3. Outsourcing of software development.
4. Interpretation of Section 10B and related provisions.
5. Application of CBDT Circular No. 694.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 10B of the IT Act:
The primary issue was whether the assessee was entitled to a deduction under Section 10B of the IT Act. The assessee, a private limited company, claimed a deduction of Rs. 1,56,70,680 under Section 10B for the assessment year 2002-03. The AO disallowed Rs. 46,34,091, arguing that the assessee did not develop the software on its own but outsourced it to Seacom Solutions (India) Ltd. The CIT(A) accepted the assessee's claim, leading to the Revenue's appeal.

2. Ownership and Use of Plant and Machinery for Software Development:
The AO contended that for claiming deduction under Section 10B, the assessee must own the necessary infrastructure and develop the software itself. The assessee had only minimal computer equipment and had outsourced the software development to Seacom. The AO argued that this outsourcing disqualified the assessee from claiming the deduction, as the software was not developed using the assessee's own plant and machinery.

3. Outsourcing of Software Development:
The assessee argued that Section 10B does not mandate that the software must be developed on the assessee's premises. The software was developed by Seacom under the assessee's control and supervision. The assessee had highly qualified software development experts who provided the necessary instructions to Seacom's personnel. The assessee also pointed out that Seacom, being a subsidiary, did not claim any tax advantage from this arrangement.

4. Interpretation of Section 10B and Related Provisions:
The Tribunal examined whether Section 10B requires the assessee to own the plant and machinery. It referenced several judgments, including those of the Calcutta High Court in Addl. CIT vs. A. Mukherjee & Co. (P) Ltd. and the Bombay High Court in CIT vs. Neo Pharma (P) Ltd., which held that an assessee can claim tax benefits even if the manufacturing process is carried out using another entity's facilities, provided the assessee exercises control and supervision over the process. The Tribunal concluded that the legal position has not changed, and Section 10B does not require the assessee to own the plant and machinery.

5. Application of CBDT Circular No. 694:
The Tribunal also considered CBDT Circular No. 694, which clarifies that for Sections 10A and 10B, it does not matter whether the software is developed on the assessee's premises or at the client's site, as long as the software is the product of the assessee. The Tribunal extended this reasoning to cover cases where the software is developed using another entity's infrastructure, provided the assessee exercises control and supervision.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the assessee was entitled to the deduction under Section 10B. It concluded that the development of software, primarily a human resource-oriented exercise, did not necessitate the assessee to own the plant and machinery. The Tribunal dismissed the Revenue's appeal, emphasizing that the legal position and CBDT Circular No. 694 support the assessee's claim.