2015 (3) TMI 930 - AT - Income Tax

Exemption under section 10B - disallowance of claim by CIT(A) concluding that supplying of computer software solution to various shipping companies is not export income from sale of such softwares - Held that - Software is generally developed by the software company and then the same is sold to various customers. The normal procedure for such sale is through a licence agreement by which the customer get to use the software. But the source code is normally not provided because that will enable the customer to make any number of copies and the developer would lose the premium which it can receive by selling it to various customers. We are of the opinion that example of selling of a book would clarify the situation. Whenever a person buys a book he gets the right to read but he does not get the copyright to produce the copies or any content of such books which does not mean that the books seller has not sold the books or customers has not purchased the books. Similarly it can be said about the usage of law journals which are being sold or purchased on licence basis. From the case of Tata Consultancy Services v. State of Andhra Pradesh 2004 (11) TMI 11 - Supreme Court it is clear that transfer of right to use the software in media form i.e. in the form of compact disc etc. was held to be sale of goods. Thus even the usage of the rights in a product would amount to export therefore in our opinion when the assessee has developed and sold the software on licence basis the same would amount to sale for the purpose of deduction under section 10B accordingly we set aside the order of the learned Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow the deduction under section 10B of the Act. - Decided in favour of assessee. Benefit of exemption under section 10B - CIT(A) allowed the claim as the company is doing data entry work as per agreement and does not fulfil the condition laid down under section 10B? - Held that - As relying on case of Bebo Technologies P. Ltd. 2011 (4) TMI 870 - ITAT Chandigarh wherein objection of the Assessing Officer regarding non-availability of production data has no merit as the assessee is carrying out back office operations for its clients which is a project of service industry for which production data is not required - Further finding of the Assessing Officer that there was restructuring of business already in existence as the assessee was found to be operating from three different places and no new computers were purchased by the asses see for carrying on its business is also not correct - Assessee was carrying on its business in two units at Chandigarh while its registered office is located in Mohali where no business activity was carried out-There was no restructuring of business-assessee has carried out its work on loaned equipments and evidence in this regard has been considered by Commissioner of Income-tax (Appeals)-There is no merit in the observation of the Assessing Officer that non-mentioning of the location from where invoices were issued disentitled the assessee to the claim of exemption under section 10B-There is no requirement to furnish the addresses of the individual places from where services were rendered as against mention of registered office on the invoices-Assessee has furnished the registration under the STPI as a 100 per cent. export-oriented unit. Therefore the assessee is entitled to deduction under section 10B - Decided in favour of assessee.

Summary

Issues Involved:
1. Eligibility for exemption under section 10B for supplying computer software solutions.
2. Determination of whether data entry work qualifies for exemption under section 10B.
3. Classification of income received from software export as royalty or sale proceeds.

Detailed Analysis:

Issue 1: Eligibility for Exemption under Section 10B for Supplying Computer Software Solutions
Summary:
The assessee argued that supplying computer software solutions to various shipping companies should qualify as export income, making it eligible for exemption under section 10B. The Assessing Officer (AO) disagreed, noting that the agreements with VOSCO and DEVCO were license agreements, not sales, and thus did not meet the criteria for exemption under section 10B. The Commissioner of Income-tax (Appeals) (CIT(A)) upheld the AO's decision.

Analysis:
- The assessee received payments from VOSCO and DEVCO under license agreements, which allowed use but not ownership of the software.
- The AO contended that the Income-tax Act does not recognize licenses as sales, thus disqualifying the assessee from section 10B benefits.
- The CIT(A) agreed with the AO, emphasizing that the agreements were for licenses, not sales.
- The assessee cited several judicial precedents, including the Supreme Court's decision in Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 (SC), which held that software sales, even through licenses, are sales of goods.
- The Tribunal found merit in the assessee's argument, noting that software sales typically occur through licenses to prevent unauthorized copying. The Tribunal ruled that such transactions qualify as sales for section 10B purposes, reversing the CIT(A)'s decision and directing the AO to allow the exemption.

Issue 2: Determination of Whether Data Entry Work Qualifies for Exemption under Section 10B
Summary:
The Revenue contended that the assessee's data entry work did not meet the conditions for exemption under section 10B. The CIT(A) disagreed, finding that the data entry work constituted back-office operations, which are eligible for section 10B benefits.

Analysis:
- The AO argued that the assessee's data entry work did not involve skilled technical software engineers and thus did not qualify under section 10B.
- The assessee countered that data entry is part of back-office operations, which are recognized as information technology-enabled services under Notification No. 890(E), dated September 26, 2000.
- The CIT(A) reviewed the service level agreement and found that the assessee provided skilled and experienced project teams, supporting the claim that the work involved more than mere data entry.
- The Tribunal upheld the CIT(A)'s decision, referencing the Chandigarh Bench's ruling in Bebo Technologies P. Ltd. v. Joint CIT [2011] 139 TTJ (Chandigarh) 428, which recognized data entry as eligible for section 10B benefits.

Issue 3: Classification of Income Received from Software Export as Royalty or Sale Proceeds
Summary:
The Revenue argued that the income from software export should be classified as royalty, not sale proceeds, and thus not eligible for section 10B exemption. The CIT(A) disagreed, citing relevant Supreme Court decisions.

Analysis:
- The AO classified the income from software export as royalty because the agreements allowed only the use of the software, not its ownership.
- The CIT(A) referenced the Supreme Court's decisions in Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 401 (SC) and CIT v. B. Suresh [2009] 313 ITR 149 (SC), which held that software sales, even through licenses, are sales of goods.
- The Tribunal found the issue identical to that in I.T.A. No. 1023/Chd/2008 and ruled in favor of the assessee, affirming the CIT(A)'s decision that the income should be classified as sale proceeds, not royalty.

Conclusion:
The Tribunal allowed the assessee's appeal in I.T.A. No. 1023/Chd/2008, granting exemption under section 10B for software sales through licenses. The Tribunal dismissed the Revenue's appeals in I.T.A. Nos. 1008/Chd/2008 and 652/Chd/2011, upholding the CIT(A)'s decisions that data entry work qualifies for section 10B benefits and that income from software exports should be classified as sale proceeds. The cross-objections raised by the assessee were dismissed as "not pressed."