2021 (4) TMI 1039 - HC - Income Tax

Deduction u/s 10B - appellant is engaged in the business of exporting of collaborative research customized data largely on Computer Aided Design (CAD) platform which falls within the ambit of computer software - HELD THAT - The activities undertaken by the assessee do fall within the meaning of Engineering and Design. The assessee is producing customized electronic data. The electronic data is received by the assessee from its clients who are abroad and the same after research and development is sent back as customized electronic data to the assessee s clients and therefore, in the considered opinion of this Court, the assessee is certainly entitled for the benefit of deductions under Section 10A of the IT Act. Thus the questions of law framed in this case are answered against the revenue and in favour of the assessee.

Summary

Issues Involved:
1. Eligibility for deduction under Section 10B of the Income Tax Act.
2. Classification of the appellant's activities as "Engineering & Design" or "Computer Software."
3. Consistency in the application of tax benefits across different assessment years.
4. Interpretation of the term "computer software" under Section 10B.
5. Relevance of previous judgments and notifications by the CBDT.
6. Validity of directions issued by the Additional CIT under Section 144A.

Detailed Analysis:

1. Eligibility for Deduction under Section 10B:
The appellant, a 100% export-oriented unit, claimed a deduction under Section 10B for exporting customized electronic data. The assessing officer denied the deduction, a decision upheld by the Commissioner of Income-tax Appeals and the Income Tax Appellate Tribunal (ITAT). The core issue was whether the appellant's activities fell within the scope of "Engineering & Design" or "Computer Software" as per Section 10B and the relevant CBDT notifications.

2. Classification of Activities:
The appellant's activities included engineering design, redesigns, testing, modifying, prototyping, and validation of concepts, which were captured in customized data and exported. The ITAT characterized these activities as research collaboration and technical services, not as manufacturing or producing computer software. The appellant argued that these activities fell within the scope of "Engineering & Design" and "Computer Software" as defined in the CBDT notification dated 26.9.2000.

3. Consistency in Tax Benefits:
The appellant had been granted deductions under Section 10B for the assessment years 2006-2007 to 2008-2009. However, the department denied the same for the subsequent years, which was inconsistent. The court noted that the department's predecessors had accepted similar claims, and the sudden change in stance was unjustified.

4. Interpretation of "Computer Software":
The court examined the definition of "computer software" under Section 10B, which includes any computer program or customized electronic data exported from India. The court found that the appellant's activities of processing and managing electronic data qualified as "computer software" under this definition. The court also referred to judgments in similar cases (e.g., ITO vs. E-Infochips Ltd., Cybertech Systems & Software Ltd. vs. ACIT) to support this interpretation.

5. Relevance of Previous Judgments and Notifications:
The court referred to the CBDT notification dated 26.9.2000, which included "Engineering & Design" as eligible activities for deduction under Section 10B. The court also cited the Rangachari Committee report and subsequent CBDT circulars clarifying that R&D activities related to software development are covered under the definition of "computer software." The court emphasized that the CBDT notification was intended to broaden the scope of eligible activities, not restrict them.

6. Validity of Directions by Additional CIT:
The appellant argued that the directions issued by the Additional CIT under Section 144A were invalid as they were issued without giving an opportunity for a hearing. The court did not find it necessary to delve into this issue in detail, as the primary focus was on the eligibility for deduction under Section 10B.

Conclusion:
The court concluded that the appellant's activities fell within the scope of "Engineering & Design" and "Computer Software" as per the CBDT notification and Section 10B. The appellant was entitled to the deduction under Section 10B for the relevant assessment years. The court allowed the appeals filed by the appellant and dismissed those filed by the Income-tax Department, answering the questions of law in favor of the appellant and against the revenue.