2016 (11) TMI 456 - HC - Income Tax

Entitlement to claim benefit of Section 10A - Transfer of computer software by the Indian branch to the head office - whether can be said to be sale to the head office out of India - whether as the software is developed by the branch as per the requirement of Head Office and not sold to any third party? Held that - In this case the AO carried out the exercise mandated by Section 10A(7) read with Section 80-IA(8). Consequently the particulars of the price or cost reported by the assessee were not binding or conclusive but rather they attained finality in the assessment proceedings, after due addition. It underwent further inquiry/scrutiny under Chapter X of the Act. It is undoubtedly aphorism that a legal fiction ought to be taken to its logical conclusion and the mind should not be allowed to boggle. This merely implies that a fiction should logically take a direction; the train of thought however cannot divert elsewhere. The absence of a deemed export provision in Section 10A similar to the one in Section 80HHC does not logically undercut the amplitude of the expression transfer of goods under Section 80-IA(8) which is now part of Section 10A. Such an interpretation would defeat Section 10A(7) entirely. Substantial questions of law framed are to be answered in favour of the assessee and against the Revenue.

Issues:
1. Whether the transfer of computer software by the Indian branch to the head office constitutes a 'sale' to the head office out of India?
2. Whether the assessee is eligible for claiming benefits under Section 10A of the Income Tax Act, 1961, for software developed by the branch as per the head office's requirement and not sold to any third party?

Analysis:
1. The appellant, engaged in software development, had approval from the RBI to establish a branch office in India for software development for export under the STP Scheme. The software developed was transmitted to the head office abroad, with the head office bearing all costs with a 15% mark-up. The appellant developed "Softex Form" software, exported it, received consideration, and reported profits for AY 2002-03, seeking exemption under Section 10A.
2. The Assessing Officer (AO) rejected the claim, stating the transfer of software did not amount to export as the appellant and head office were part of the same entity, and the transfer was considered remuneration for services, not proceeds of a sale. The AO also noted the absence of a provision deeming such transfers as exports under Section 10A.
3. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to an appeal before the ITAT. The ITAT analyzed Section 10A(7) and concluded that the appellant, being an approved export unit, was entitled to exemption under Section 10A despite the transfer to the head office.
4. The Revenue argued that the absence of a provision similar to Section 80HHC(8) implied exclusion of the appellant's transaction. However, the appellant contended that the legislative intent was to treat such transfers as exports, aligning with Section 80-IA(8).
5. The Court, referring to a previous case, emphasized that the absence of a specific provision like Section 80HHC did not negate the treatment of software transfer as export under Section 10A. It highlighted that the legislative intent supported treating inter-branch transfers involving exports as such.
6. The Court held that the AO's exercise under Section 10A(7) with Section 80-IA(8) was crucial, making the reported prices non-binding and subject to adjustment during assessment. The absence of a "deemed export" provision in Section 10A did not undermine the scope of the expression "transfer of goods" under Section 80-IA(8), now part of Section 10A.
7. Consequently, the Court ruled in favor of the assessee, dismissing the appeals and allowing the AO to adjust taxes based on the Court's interpretation, emphasizing that legal fictions should logically lead to conclusions without deviation.

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