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TMI Blog2008 (6) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t charges were paid. The AO further found that the amount of Rs. 41,88,577 paid to Seacom was accounted for by Sea com as domestic software sales. The AO, for these reasons, held that the assessee was not entitled to the exemption. He however allowed deduction under s. 80HHE in respect of the export of software. 3. On appeal, the assessee submitted the following facts before the CIT(A): (a) The actual export of the software was done by the assessee. The project of developing the software was given to it by M/s Techdrive Inc.,USA. The software was exported to the USAcompany which paid the assessee company, which fact was accepted by the AO while granting deduction under s. 80HHE. (b) Software development is primarily a human resource oriented exercise. The assessee had highly qualified software development experts in its rolls, whose skills were used for the development of the software. These persons were (1) Raj Singh, director of the company. who was involved in software development as executive president of PCL Mindshare from 1986 to 1996; (2) Rajender Reddy, electronic engineer, who worked as a software engineer developing programmes on Oracle platforms; (3) Anant Mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention was that the intention of s. 10B was that the undertaking itself should own plant and equipment to develop the software for export and this was clear from the marginal heading to the section, that admittedly the assessee did not own the equipment and was, therefore, incapable of developing the software by itself, that therefore it had to engage the services of its subsidiary company in Pune, that there was nothing to show that the assessee exercised any supervision or control over the development of the software by Seacom nor was there anything to show that client based instructions were issued to the assessee which were carried out by it in the premises of Seacom and that in these circumstances, the assessee cannot be said to have fulfilled all the conditions of the section. Our attention was drawn to cl. (iii) of sub-s. (2) of the section and it was submitted that a reading thereof would indicate that the assessee itself should own the plant and machinery which condition has not been fulfilled by the assessee. It was vehemently argued that the circular dealt with a different situation and was not applicable to the assessee's case. It was pointed out in this behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciently indicative of the requirement that the assessee itself should own the plant and machinery for developing the software. But a look at the decided cases in which other sections of the IT Act and Finance Acts containing similar requirements have been examined, shows that the Courts were not inclined to read such a requirement into those provisions. We may consider some of them now. In the case of A. Mukherjee Co. (P) Ltd., the question was whether a publisher of books who did not own n a printing press nor had the facilities to bind the books, can be said to be a manufacturer of books where the books were got printed from an outside contract. This question arose under s. 104 of the IT Act (now omitted) r/w s. 109 (also omitted). Sec. 109 contained a definition of industrial company . It was defined as a company whose business consisted, inter alia, wholly in the manufacture or processing of goods. The Calcutta High Court held that it was wholly unnecessary for a publisher of books to be the owner of a printing press or to be himself a bookbinder to be a manufacturer of goods. It was observed that a publisher may get the books printed from any printer, but the printer would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. The products were manufactured in the premises of Ph armed in the direct supervision of the assessee's own technically qualified staff and under the assessee's own quality control. It was the assessee's name that was printed on the packing, labels and cartons. Pharmed kept accounts of all the materials supplied by the assessee and consumed in the manufacture. The risk for the entire operation was undertaken by the assessee. The products were manufactured at the cost of the assessee and were its property. On these facts, the question arose before the Bombay High Court as to whether the assessee company can be considered to be an industrial company entitled to the concessional rate of tax under s. 2(7)(d) of the Finance Act, 1966. Affirming the decision of the Tribunal, it was held that although the plant and machinery employed for the purpose of manufacture belonged to Pharmed and the services of certain employees of Pharmed were also utilised in that process, the manufacturing activity was really that of the assessee. Before the High Court, a specific contention was taken on behalf of the IT Department, which is referred to in the last para of p. 883, that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial company. 12. Again in CIT vs. Anglo French Drug Co. (Eastern) Ltd. (1991) 95 CTR (Bom) 176 : (1991) 191 ITR 92 (Bom), it was held by the Bombay High Court that in order to enjoy concessional tax treatment as an industrial company within the meaning of Finance Act it is not necessary that the manufacturing activity should be undertaken by the assessee itself and the concession would be available even if the assessee employs another company to manufacture the goods under the supervision and control of the assessee. It was held that it was not necessary that the assessee must manufacture the goods by its own plant and machinery at its own factory. 13. In Sand Bharat Pedals (India) vs. ITO (2004) 89 TTJ (Chd) 492 : (2003) 84 ITD 89 (Chd), the Chandigarh Bench of the Tribunal was concerned with the provisions of s. 80-I of the Act. In that case, the assessee did not have the necessary infrastructure to undertake all activities for the manufacture of cycle pedals. Some of the operations, such as, heat treatment, nickel plating, etc. were got done by outside agencies and even the conversion of MS wire and MS rounds into pedal axles and pedal rods was got done through outside a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the computer software to another entity which owns the necessary equipment and plant and the infrastructure. It is also argued that the marginal heading to the section indicates that the undertaking of the assessee should be newly established . The question before us is whether the existence of certain provisions in the section specifying conditions relating to the machinery or plant and the marginal heading to the section make any difference to the legal position adumbrated in the authorities to which we have already referred. 16. On a careful consideration of the matter, we are of the view that the legal position has not changed and even under s. 10B it is not the requirement that the assessee company should itself own plant, machinery or equipment and manufacture or produce computer software on the same in order to be eligible for the exemption. In order to understand and appreciate the nature of a computer software, it is necessary to look into the note dt.6th Sept., 2004filed before the AO regarding creation of softwares for export. A copy of the note has been filed at pp. 45 to 49 of the paper book. It has firstly been explained that computer software is a package of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guages may sometimes be necessary. It may also depend upon the type of hardware available to the client, the working of the internet and satellites, familiarity with the reports generated from various locations across the globe, etc. All these steps in designing again are capable of being executed by the directors and key personnel of the assessee company by virtue of their educational background and experience. (4) Coding, which is required to put in place a tamperproof system to prevent misuse of the data by competitors or other undesirable elements. Confidentiality of the data requires building of key codes and access codes which can be developed only by human skill, experience and background in the software field. Hardly any equipment is required. (5) Writing of software programmes or DTA entry, which requires a large work force of programmers and computers for writing and entering the component programmes for actual use. This job is to be entrusted to the programmers in such a manner that no single programmer writes the entire programme. This is to maintain the confidentiality of the programme and to prevent copying. (6) Testing and debugging, to ensure that the data is behavi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot have been formed by the transfer to a new business of machinery or plant previously used for any purpose. This requirement is to be read with Explns. 1 and 2 below sub-s. (2) of s. 80-I. These Explanations provide for cases and circumstances in which machinery or plant previously used will not be considered as prohibited machinery or plant. For example, plant or machinery used outsideIndiaby a person other than the assessee is not a prohibited item of plant or machinery for use inIndiain the undertaking of the assessee, subject to certain conditions. A concession is also given to the effect that if the plant or machinery previously used and transferred to the assessee's undertaking does not exceed 20 per cent of the total value of the plant and machinery, the exemption will not be denied. These provisions in our opinion apply where the manufacture or production of the article or thing or the computer software is done in the undertaking of the assessee. Once it is carried out in the undertaking of the assessee, then all conditions of the section would apply. But, where the activity is not carried out in the undertaking of the assessee or where the assessee does not have its o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Courts earlier, based on the maxim 'qui facit per alium facit per se' (one who does something through others does it himself), was not sought to be altered. In Banarsi Debi vs. ITO (1964) 53 ITR 100 (SC), the Supreme Court, citing the decision in Barras vs. Aberdeen Steam Trawling Fishing Co. Ltd. (1933) AC 402, 411, held that where a word of doubtful meaning has received clear judicial interpretation, the subsequent statute which incorporates the same word or phrase in a similar context must be construed so that the word or phrase is interpreted according to the meaning that has previously been assigned to it. In F.S. Gandhi (Dead) by LRs. vs. CWT (1990) 84 CTR (SC) 35 : (1990) 184 ITR 34 (SC), it was observed that where, while substituting s. 2(e) of the WT Act by the Finance Act, 1969, the Parliament repeated the same language which was used in the section as it stood prior to its substitution and the earlier section had received a particular way of interpretation by the Supreme Court in CWT vs. Smt. R.A. Muthukrishna Ammal (1969) 72 ITR 801 (SC), then It must be assumed that while enacting the Finance Act, 1969, Parliament was aware of the construction placed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uced in 1991. Under this provision, technical services provided outsideIndia, for the development or production of computer software, are included for the purpose of the tax incentive. 7. Similarly, for the purpose of s. 10A or 10B as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client's site abroad, such unit should not be denied the tax holiday under s. 10A or 10B on the ground that it was prepared on site, as long as the software is a product of the unit, i.e., it is produced by the unit. The circular recognises several aspects. Firstly, it accepts that computer programmes are not physical goods but are developed as a result of an intellectual analysis of the systems and methods followed by the purchasers of the programme. This is exactly what the assessee before us contends. Secondly, it recognises that because of the fact that it represents an intellectual analysis it is often prepared on site with the software pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Overseas (P) Ltd. and did not do any business till31st March, 1999. It commenced computer software business in the financial year 1999-2000. On29th March, 2000, it got itself registered with Software Technology Park of India (STPI). It got export orders from Techdrive Inc. ofUSAwhich insisted that its name be changed in such a manner that people inUSAmay get the impression that the assessee is a BPO of the USAcompany. Accordingly it changed its name to Techdrive India (P) Ltd. Seacom Solutions (India) Ltd. is a subsidiary of the assessee and is located in the SEZ at Pune. It is eligible for the exemption of income under s. 10A for a period of 10 years commencing from the asst. yr. 2000-01. The assessment order of Seacom passed under s. 143(3) of the Act for the asst. yr. 2001-02 has been filed from which it is seen that deduction of Rs. 91,89,903 was given under s. 10A out of the claim of Rs. 92,92,451. Seacom, as seen from the assessee's note to the AO, has nearly 100 computers and skilled programmers on its rolls. The assessee has admitted that all the computer software development was being done in Seacom. The assessee thought it prudent and economically more profitable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------- Salaries for two months (February and March) have been debited to the head of salaries as already submitted. It has also been submitted that the TDS has been done on the total salaries (including those shown in software development charges) and the necessary TDS certificates, etc. already furnished. It was further clarified that the assessee did not give any certificate to Seacom as a supporting manufacturer and that Seacom has treated the software development charges received by it from the assessee as domestic receipts and has not claimed any deduction thereon under s. 10A. This has been confirmed by Seacom also in its letter dt.20th Nov., 2004. 23. All the above facts, which have not been disputed by the AO, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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