2014 (4) TMI 738 - AT - Income Tax

Entitlement of deduction u/s 10A of the Act - Production and development of computer software solutions Held that - As per the agreement, the assessee has to provide services at the place assigned by the Seavus Group and that the payment is to be made as per man-hours spent by the professionals - it is not possible to hold that the assessee has not exported any article or thing or computer software - the meaning of computer programme has been expanded as computer program process or management of electronic data - the product and service as notified by the Board for the purpose of clause (i) of Explanation 2 includes the contents development, data process, human resources services etc. as part of computer software eligible for exemption, if other conditions are satisfied - the human resource service in the field of development of software programme as notified falls under the definition of computer programme as stipulated in the Explanation as well as the definition u/s 10A - raising of bill on the basis of man-hour further supports the case of the assessee that the assessee is carryout the customization work of software and development of programme as per the specific requirement of clients - the method of invoice cannot be the basis of rejection of the claim of the assessee. When the assessee has been collected the customised data, stored and transmitted the same through electronic media, then this activity of the assessee falls under the definition of computer programme as provided under sec. 10A as well as under Explanation 2 of sub sec. 10A thereby the definition of software has been expended as customised electronic data or any product or service of similar nature as may be notified by the Board - The assessee definitely engaged in the export of customised electronic data as recorded by the Assessing Officer in his order. The AO has not disputed the fact that the assessee was engaged in customising the software as per the needs of the clients - the definition of produce is wider than the term manufacture and does not require to produce or manufacture altogether a new product - but if the outcome of the process is a different product than the input it would fall under the definition of produce thus, the customised SAP software after passing through cumbersome process of customization is different product; i.e. software, then the original standard software and would certainly fall under the term produce thus, the claim of the assessee u/s. 10A is to be allowed as the deduction claimed by the assessee falls under the provisions of Explanation 2 after section 10A(9A) of the Act Decided in favour of Assessee.

Summary

Issues Involved:
1. Erroneous order by CIT(A).
2. Eligibility for exemption under Section 10A of the Income-tax Act.
3. Disallowance of charges paid for onsite development of software.
4. Disallowance of purchase and development of software.
5. Disallowance under Section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Erroneous Order by CIT(A):
The appellant contended that the CIT(A)'s order was erroneous both on facts and in law, prejudicial to the appellant. The appellant sought relief from the appellate tribunal to rectify the perceived errors in the CIT(A)'s judgment.

2. Eligibility for Exemption under Section 10A:
The appellant-company, a 100% Export Oriented Unit under the STP Scheme, claimed exemption under Section 10A for profits derived from the export of computer software. The AO disallowed the exemption on the grounds that the appellant did not manufacture or export software but only supplied manpower, thus not qualifying under Section 10A. The appellant argued that they developed telecom billing software and deployed trained personnel to Sweden for its implementation and debugging, which should qualify as export of software under Section 10A. The tribunal examined the agreements, invoices, and CBDT notifications, concluding that the appellant's activities fell within the ambit of "computer software" as defined under Section 10A, thus eligible for the exemption.

3. Disallowance of Charges Paid for Onsite Development of Software:
The CIT(A) had deleted the addition of Rs. 1,11,46,514/- being the amount paid to knowledge-partners for onsite software development but did not allow the exemption under Section 10A. The tribunal found that the services provided by the appellant, including software design, programming, and testing, were integral to software development. The tribunal held that the payments for these services were justifiable and should not affect the eligibility for Section 10A exemption.

4. Disallowance of Purchase and Development of Software:
The AO had disallowed Rs. 1,11,46,514/- for the purchase and development of software. The CIT(A) decided this issue in favor of the appellant. The tribunal upheld this decision, recognizing that the expenses were incurred for legitimate software development activities, which were part of the appellant's business operations.

5. Disallowance under Section 40(a)(ia):
The AO disallowed Rs. 5,45,036/- under Section 40(a)(ia) for non-compliance with TDS provisions. The CIT(A) ruled in favor of the appellant on this issue. The tribunal did not find any reason to overturn this decision, thus maintaining the CIT(A)'s ruling.

Conclusion:
The tribunal concluded that the appellant's activities, including the development and export of telecom billing software, qualified for exemption under Section 10A. The tribunal allowed the appeal, directing the AO to grant the exemption and delete the disallowed amounts. The decision emphasized the broad interpretation of "computer software" under Section 10A, including various IT-enabled services as notified by the CBDT.