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TMI Blog2006 (4) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer the assessee s agreement with MTN Network (P) Ltd. showed that the assessee had the right to sub-license the pre-paid software of Total Tel International, a company based in Australia, and in that capacity the assessee had provided a turnkey system for the management of pre-paid telecommunication services and related services to the MTN Networks (P) Ltd. (hereinafter called "Carrier"). The assessee-company was also charging maintenance and support fee from the Carrier on the warranties provided to them on behalf of Total Tel. The assessee entered into a similar agreement with Telekom Networks Malawi (P) Ltd., Malawi. The learned Assessing Officer asked the assessee to show cause as to why the deduction under section 80HHB should not be disallowed as the assessee-company had only provided the services which were of maintenance and consultancy nature. In reply the assessee submitted that apart from the export of hardware and software, the assessee had also executed turnkey projects and installation of projects. This amounted to be "a foreign project" undertaken outside India. Provisions of section 80HHB(2)( b ) included activities, commitments and obligations ancilla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2001-02 were the same. While denying the assessee deduction, the learned Assessing Officer totally misinterpreted and had drawn wrong inferences and conclusions that the assessee had discharged restricted or limited obligations and did not satisfy the conditions laid down under section 80HHB. 5. The assessee submitted that the preamble of the agreement opened with the words, "Estel agrees to provide the system and related services to the Carrier and the Carrier agrees to purchase the system and related services in terms and conditions set out in the agreement". Clause 3 of the agreement obliged the assessee to grant the Carrier a licence to use the pre-paid software, a sub-license to use support software and to obtain for Carrier hardware and third party software. The assessee was also required to provide the Carrier with installation and integration services; maintenance and support services; training services and marketing services. The assessee was obliged to follow delivery schedule, that is shipment of all components and systems and installation and integration of system within stipulated time and in accordance with the contract conditions, technical specifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry or plant outside India and the execution of such other work (of whatever nature) as may be prescribed". This definition could not be restricted to the mere physical activity or putting up the super structure, machinery or plant but should be understood to take within its fold utilization of technical knowledge necessary to being about the construction, assembly and installation. The assessee relied upon the judgment of Hon ble Supreme Court in the case of Continental Construction Ltd. v. CIT [1992] 195 ITR 81 1 and also the dictionary meaning of the word "execution" as per Webster s dictionary. The assessee emphatically argued that it had entered into independent contracts and Total Tel International, Australia had no contractual obligation with the parties nor had it any financial interest or involvement in the projects. The learned Assessing Officer was not justified in his contention that the assessee had rendered services to the Carrier on behalf of Total Tel. It was the assessee who purchase software/hardware and it was the assessee who received the payments as per the Payment Plan. 7. The assessee submitted that it had obtained a letter from Total Tel, Australia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to certain terms and conditions in the agreement between the assessee-company with the Carrier dated 1-2-1999. The learned CIT(Appeals) referred to the following terms and conditions : "( i )On the first page itself under the head Background , it is mentioned- Estel is the authorized distributor of Total Tel International for India and Sri Lanka. By virtue of being Total Tel s distributors, Estel has the right to enter into this contract with Carrier. Estel also has the right to sub-license Total Tel s pre-paid software and all third party software to carrier and to provide warranties on all software to Carrier on behalf of Total Tel... As per this agreement, in the schedule, it is mentioned that the appellant company has to provide prepaid software, supported software, hardware and services consisting of installation and integration services, training services and maintenance and support services. ( ii )On page No. 12 of the schedule, it is mentioned that system means , a system consisting of prepaid software and third party software integrated with or installed on the hardware in accordance with the proposal and the terms of the agreement. ( iii )On page No. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrier and Malawi the assessee-company was distributor of Total Tel in India as well as Sri Lanka. The agreements were entered into by the assessee in that capacity. The assessee-company itself did not execute any foreign project. While it was true that the requirement of section 80HHB was not that the assessee itself should do the execution and it could get the work executed through its employees or through sub-contract, but in the case of the assessee the assessee was only distributor of its principal. 11. On the basis of the reasoning as referred to in the foregoing paragraphs, the learned CIT(Appeals) held that the assessee-company was just a marketing agent of M/s. Total Tel and did not qualify for deduction under section 80HHB of the Act because foreign project meant a project for the assembly or installation of any machinery or plant outside India while the assessee-company was only a marketing agent. 12. During the course of hearing before us the learned counsel for the assessee submitted that the assessee executed two projects in Sri Lanka and Malawi on turnkey basis by way of providing fully functional pre-paid Mobile Telephony System for its clients. As this activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project. The learned CIT(Appeals) did not notice that the agreement between the assessee and its customers in Sri Lanka and Malawi were on principal to principal basis. The agreements had been entered into by the assessee at his own liabilities and risks and Total Tel was nowhere in picture. The proceeds of the project executed by the assessee were appropriated by the assessee and not shared with Total Tel. M/s. Total Tel only received the price of its software as it would have received from any other party, who adapted and integrated the Total Tel software for their own purpose. The learned counsel for the assessee read the aforesaid letter placed at page 98 of the paper book. He argued that while Total Tel assured Carried that they would supply the software as per specification in the attachment of contract between the assessee and Carrier, the letter also spelt out that it was the assessee and Carrier who were the parties to the contract and not Total Tel. No part of expenditure incurred by Carrier in Sri Lanka was paid to Total Tel directly. The amounts were paid as per contract to the assessee in his own right and it was not carrier s outlook as to what the assessee paid to To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tel, Australia on account of distribution agreement between the assessee and Total Tel. He referred to the judgment of Hon ble Supreme Court in 1959 (SC) 553 in support of this contention. The learned DR argued that the entire activity of the assessee in Sri Lanka and Malawi should be viewed keeping this in mind. That showed the assessee was merely contacting himself as an agent of Total Tel and it was a matter of convenience amongst the parties that the contract was signed between the assessee on the one hand and Carrier and Telekom Malawi on the other hand. It was to achieve this objective that Comfort Letter was furnished from Total Tel to the foreign customers to Sri Lanka and Malawi. By virtue of this Comfort Letter while the assessee was in the front, Total Tel operated behind that cover. The learned DR referred to the agreement between Total Tel and the assessee at pages 80 to 97 of the paper book. He pointed out that in the agreement the assessee was described as VAR i.e. , Value Added Reseller. He referred to clause 4 and pointed out that the agreement resulted into grant of certain territory to the assessee from Total Tel. The learned DR referred to the letter of Total T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tel and was also entering into agreements as authorized by the principals. The execution of the agreement had been sub-contracted to the assessee s principal only. Thus, the assessee did not qualify for deduction under section 80HHB because foreign project meant a project for assembly or installation of any machinery or plant outside India while the assessee-company was only a marketing agent. The case of the assessee, on the other hand, before us is that the assessee had undertaken a turnkey contract to provide its customers in Sri Lanka and Malawi not only a sub-license to use software and sub-license to use support software, it also obtained for its customers hardware and third party software; installation and integration services; maintenance and support services; training services and marketing services. The assessee was obliged to follow delivery schedule, technical specification and to ensure that the installed system functions, satisfactorily. The CIT (Appeals) has held that the assessee himself has not done these activities and he had in turn sub-contracted the same to Total Tel. Thus, the assessee acted only as the marketing agent and/or authorized distributor of Total Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project executed by the assessee himself. However, even if for arguments sake, the observations of either Assessing Officer or the learned CIT(Appeals) are not contested, it is difficult to see how the assessee s case falls outside the purview of provisions of section 80HHB(1). Following is, according to the Assessing Officer himself, a vivid description of the assessee s activities in Sri Lanka and Malawi : "In the case of the assessee in question, the contract agreements shows that obligations of assessee as mentioned in clause 3 of the agreements are restricted to maintenance, consultancy for purchase of third party hardware/software and to sub-license the prepaid software to Total Tel. The assessee has to ensure that the construction of the proposed system are done in accordance with the contract conditions, technical specification and any amendments thereto and they are accepted by the Carrier. These agreements also show that the limited obligation of the company is to provide license to use the prepaid software of Total Tel, to provide sub-license to use supported software, to obtain hardware and third party software as per specification of Carrier, to provide installatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided in section 80HHB that the assessee should execute a foreign project undertaken by him in pursuance of a contract entered into by him entirely on his own without sub-contracting any part of it to a third party. The learned CIT(Appeals) has failed to see that it is the assessee, who has undertaken the execution of the foreign project in question. It is the assessee who has entered into a contract to that effect with Carrier and Malawi. If any profits and gains are derived by the assessee by virtue of such a contract, it would be eligible to deduction under section 80HHB even if the assessee has got the execution of the foreign project done by engaging the services of a third party. The fact of the matter is that in the instant case, the assessee has entered into a contract in its own right and not in any representative capacity. Surely, it is not the case of the revenue that the income in relation to which the assessee has sought deduction did not accrue to the assessee before us but it belongs to someone else. We find considerable emphasis in the impugned order of the learned CIT(Appeals) that the execution of the foreign project was not done by the assessee himself. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to convert customer need into a product; modify documents in consultation with customers to suit their requirement; freeze specs of products; submit commercial proposal and freeze order after negotiation and thereafter to sign the agreement with the customer. The assessee then place, orders on hardware suppliers and software suppliers. These supplies were not restricted to Total Tel alone. The items were dispatched at customers site and the assessee participated in the project of integration, commissioning and installation of its customers prepared cellular network. 19. On consideration of the arguments of the parties and the material on the paper book filed by the assessee and on perusal of the agreements between the parties, we are of the view that it cannot be said that the assessee did not enter into agreements in question on principal to principal basis, but as an agent of Total Tel, Australia. The agreements had been entered into by the assessee at his own liabilities and risks. The proceeds of the project executed by the assessee were appropriated by the assessee and not shared with Total Tel. Total Tel was paid the price of its products and services rendered but there ..... X X X X Extracts X X X X X X X X Extracts X X X X
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