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TMI Blog2012 (8) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... e should be remitted back to the file of the AO for fresh consideration - Assessee’s appeal is treated as allowed for statistical purposes. - ITA No.950/Bang/2011 - - - Dated:- 20-6-2012 - N K Saini, George George K, JJ. For Appellant: Shri Pawan Sharma, Adv. For Respondent: Shri Jayaram Raipura, Addl. CIT ORDER Per: George George K, JM: The assessee company is engaged in the business of research and development activity in the areas of material science and process technology; providing engineering analysis and related software development science. 2. For the assessment year [AY] under consideration, the assessee company [ the assessee in short] had international transactions exceeding Rs.15 crores and, accordingly, the learned AO made a reference to the Transfer Pricing Officer (TPO) u/s 92CA of the Act. The learned TPO had passed an order for the adjustment to the extent of Rs.64,83,64,363/- to be made u/s 92CA of the Act for the detailed reasons recorded therein. Accordingly, in the draft assessment order, adjustment u/ s 92CA of the Act to the tune of Rs.64.83 crores was proposed which was objected to before the Dispute Resolution Panel (DRP) by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h and Development Centre in India. After obtaining necessary licenses from various Wings of the State Government, the assessee had set up John F Welow Technology Centre and has undertaken its research and development activities which include electromagnetic analytics, colour technology, additive technology, nondestructive evaluation, corrosion technology, molecular modeling, power electronics, analysis technologies, computational fluid dynamics and engineering analysis from its Centre established at Bangalore. 4.1. During the assessment year under consideration, the assessee had claimed deduction u/s 10A of the Act, claiming to be a STP involved in software development. During the course of assessment proceedings, in compliance to various queries raised by the AO, the assessee had furnished lengthy submissions under various heads and also copies of service agreements entered into with various units/divisions of GE Company. After examining the assessee s claims and also its submissions, the AO had, for the detailed reasons recorded in the impugned order under challenge, observed thus: 29. From the above, it is seen that the investment in Plant and Machinery is three times that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per sub-clause (f) assessee company has not filed annual return and annual report within 8 months from the close of 31.3.2007 to the prescribed authority. (d) It is also not known whether the assessee has a system of monitoring cost of its R D projects. The assessee bills it parent company on a markup basis. (e) The asssessee ought to have obtained prior permission of the prescribed authority before selling all its outputs from it laboratories or private plants. However, it is regretfully noted that assessee company has not obtained prior permission from the prescribed authority before transferring its output from is laboratories to its parent company. (f) The grant of approval/extension by the prescribed authority cannot be the only eligibility condition u/s 80IA (8A). The said R D undertaking shall comply with each and all conditions prescribed under rule 18DA by the CBDT. Conditions like the undertaking being engaged exclusively on scientific R D and similar conditions shall be verified only by the assessing officer. The prescribed authority shall verify the scientific aspects of conditions laid down in rule 18DA. Nothing prevents the assessing officer from verif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 26th September, 2000, notified certain IT enabled services to be eligible for deduction u/s 10A of the Act which, inter alia includes (i) . (iv) Data Processing; (v) Engineering and design; (iii) that the assessee has been engaged in the business of exporting (a) computer programme (within the meaning of Explanation 2(i)(a); (b) customized electronic data (within the meaning of Explanation 2(i)(b); and (c) engineering design services (within the meaning of CBDT Notification) and the entire output is exported/transmitted electronically outside India. (iv) that the process by which GEITC [the assessee] provides its services to its overseas clients involves the following four phases: (a) Phase 1 client work request in this phase the assessee receives a specific work request from is overseas clients outlining in detail the scope of work to be done, the manner in which such work is to be processed, the form in which the output is to be delivered and the estimated budget for such assignment along with the raw data and information in the form of designs or technical specifications; (b) Phase 2 Processing work Request In this Phase th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in connection with the project was processed and stored in electronic form; and (c) Output transmitted electronically: the data constituting the output produced by the assessee for each of its project was always transmitted to its overseas client in electronic form via internet; (vi) that all of the services/output exported by the assessee to its overseas clients were undoubtedly customized to the requirements of its overseas clients and the same has been accepted by the AO that the assessee is in the business of understanding and analzing the requirements of each of its clients, understanding existing systems of the clients and coming out with solutions customized to the requirements of its clients.[para 18 of the asst. order]. Rely on case law: ITO v. Accurum India (P) Ltd (2010) 128 TTJ Chennai 249 . Therefore, based on the fact that the entire activity of the assessee is customized to the specific requirements and needs of each of its clients and produced for the specific use of such client, there can be no doubt that the final output produced by the assessee which is always stored and transmitted electronically is customized electronic da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided by the assessee were merely IT assisted but not IT enabled and, thus, the assessee was denied deduction u/s 10A of the Act, it was claimed that the AO had failed to appreciate that the customized electronic data transmitted to the overseas client cannot be processed or generated without the use of computers and specialized engineering software. It is important to appreciate that the projects given by the overseas client to the assessee were highly technical and demand a high degree of precision and accuracy; that for example, the Aviation Function Group at GEITC (the assessee) receives customized request from its overseas clients that involves engineering analysis and design of aircraft parts and components and similarly, the transportation function group of the assessee receives projects which require engineering analysis and designing of part or components of locomotives such as designing of a locomotive fuel tank, designing of camshaft assembly of a marine engine etc., - that each of these projects demands and involves the use and analysis of highly complicated engineering formulas and technical data and requires the processing of such large volume of data with a ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineering and design in the Act, such practical application of science by the engineers has been defined by Law Lexicon and the Oxford English Dictionary as engineering . Given the technical and complex nature of the services being demanded by its overseas clients, it was argued, in order to render the services with the precision, reliability and accuracy which the clients expect from the assessee, its engineers use computers and IT enabled tools and equipments to provide and produce the final output that was transmitted to its overseas clients. Such IT enabled engineering analysis and designing services has been notified in the Board s Notification No.890E to qualify as computer software within the meaning lf Explanation 2 to s.10A of the Act and, therefore, eligible for deduction as such; - Thus, the activities of the assessee fall under the category of - (a) export of computer programme; (b) export of customized electronic data; and (c) export of engineering design services as notified by the Board in the aforesaid Notification; (xii) that the assessee has been allowing deduction u/s 10A of the Act by the Revenue since the AY 2002-03 [u/s 143(3) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment as a means to generate the output required by the clients will not be entitled to deduction u/s 10A; and (c) what is relevant for deduction u/s 10A is whether the assessee is engaging in IT enabled services and whether it is exporting it output electronically and not whether any research and development is conducted in producing the output; and that admittedly, as aforesaid, the services of the assessee are IT enabled and its output is transmitted electronically. Whether the assessee does some research and development in producing the output is wholly irrelevant for the purpose of considering the eligibility for deduction u/s 10A and, thus, the assessee is entitled to deduction u/s 10A of the Act (xvi) Countering the Ld. D R s reliance on Form 3CD, accounting polices, Form 56F and annual report to conclude that the assessee involved in research and development activities and, therefore, ineligible for deduction u/s 10A of the Act etc., it was contended that - (a) the eligibility to claim deduction u/s 10A of the Act is to be determined based on the actual nature of the activities conducted by, and output produced and export by the assessee; (b) the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes is to provide user-friendly information to prospective employees or clients and often involves the companies highlighting certain features or aspects of their products, services or activities and is by no means demonstrative of the entire business of such company; that because of the importance of research and development, as an activity, in the assessee s process for producing the final output in the form of computer software within the meaning of Explanation 2 to s.10A of the Act, the assessee had at times, in describing its business, highlighted the importance of research and development as an activity necessary for producing the final output; (c) the content for advertisements and websites have not been drafted with the goal of ensuring that the description of the assessee s business matches with the assessee s claims for deduction; (d) that the Revenue was not only wrong in arbitrarily selecting and relying on employment based advertisements, but, had failed to appreciate that even in the advertisement so selected as an example the assessee s business is accurately described as soliciting engineers, scientists etc., to carry on research and development activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phisticated laboratories; (b) all of the laboratories of the appellant were equipped with IT enabled tools and equipments with embedded computer chips and processors; (c) the manpower employed by the appellant predominantly comprises of engineers who were supported by scientists and others in performing their engineering function; (d) the appellant s engineers and scientists use such laboratories equipped with IT enabled tools and equipments to collect data that is processed and analyzed through computers; (e) any research and development was just one of many activities or steps that the appellant engages in its process to produce the final output in the form of computer programmes, customized electronic data and engineering and design services that it exports to its overseas clients; (f) given the complexity, intricacy, precision and accuracy that was required for the production of the final output by the appellant in form of computer programmes, customized electronic data or engineering and design services, it can neither be imagined nor is it possible to produce such customized output without the use of computers or IT enabled tools or equipments. 4.3.1. In conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nabled activities which have happened in the last 10 - 15 years or so. (vi) It was further contended that the CBDT notified IT enabled services in the nature of design and engineering refers to the offshore or India shore activity of CAD-CAM related design and engineering related BPO/KPO activities. These BPOs take the designing activities based on CAD applications and prepare an export the engineering and such designs for their revenue earning activities. For this set of activities, the IT enabling has been at the core of the activity. These activities have come into being on account of the IT enabled environment in terms of IT revolution and connectivity established around the world enabling the creation of this set of business activities. (vii) that as per the vouchers submitted by the assessee during the course of scrutiny assessments, the assessee had claimed that it had rendered engineering analysis to its principals abroad. The assessee company had not given a break-up of the various deliverables as per the contracts and scope of works that the assessee had prepared the invoices to suit its claims that it has been exporting customized electronic data and IT enabled ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny cannot be called as rendering customized electronic data in an ITA enabled environment. The scientific R D labs., of the assessee company do have various high end computers. These computers assist the R D activities of the assessee. But the R D activities of the nature admitted by the assesee have been conducted for the last 200 years in scientific laboratories. In fact, M/s. GE India Technology Centre Pvt. Ltd. has been a pioneer in such scientific R D and invention activities. The Bangalore Centre is an extension of such R D and invention centres. The advantage of Bangalore is in terms of reduced employment and administrative costs. Bangalore has also been able to attract a large number of high end scientific pool. This does not make the R D Centre of the assessee to be an IT enabled services. (xi) that the auditors in their audit report have qualified that the assessee is into R D in material science and process technology. The auditors have also qualified that the assessee is in two sets of activities, one for R D in material sciences and process technology and the other for engineering analysis and related software development. However, it had not been abl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exporting manpower and, thus, disallowed the claim of s.10B of the Act to the assessee. 4.4.1. In conclusion, the learned D R had submitted that based on the detailed analysis of the assessee s submission, case laws and the business practices of the assessee, the learned AO had held that the activities of the assessee were not eligible for deduction u/s 10B of the Act. 4.4.2. With regard to the assessee s alternative claim u/s 80IA (8A) of the Act, it was contended that on account of technical flaws committed by the assessee as pointed by the learned AO in his impugned order, the AO was within his sphere to deny this claim also purely on technical and procedural lines. 5. We have carefully considered the rival submissions and perused the materials available on record and also various documentary evidences produced by the learned A R in the shape of voluminous paper books. 6. The learned AO s reasoning was that the assessee s operations do not have computer as primary and predominant hardware tool. It makes use of the best of the scientific research laboratory tools available and had produced newer and improved methods of various manufacturing. The end products of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd information in the form of designs or technical specifications; (b) Phase 2 Processing work Request In this Phase the assessee s Engineers processes the raw data provided by its clients by conducting repetitive and continuous research, testing and analysis through the use of specialized computer software computers and IT enabled tools and equipments; assessee s process is a continuous loop which involves research, testing and analysis customized to the specifications and instructions of the overseas client at every stage; (c) Phase 3 Final Output Final output customized to the specifications of its overseas clients is generated through use of computers in the form of one or more of the following: detailed reports containing engineering analysis, data sheets containing supporting technical data, supporting designs and diagrams, 2D or 3D designs, supporting design calculation and computer codes electronic data; and (d) Phase 4 Export of Final Output The final output is in electronic format and is transmitted electronically to its overseas clients via email or through uploading of data on the servers of overseas clients. 6.2.3. On the basis of the process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chennai and it is entitled for deduction u/s 10A of the Income Tax Act . (c) Yet another finding on a similar issue, the Hon ble Delhi Tribunal, in the case of Bechtel India Private Ltd v. ACIT ITA No.3316/Del/04 , after duly analyzing engineering and design activities and output of Bechtel that were similar to the engineering and design activities and output of the assessee coherently adjudicated on the following twin points, namely [at the cost of repetition]: (a) the data generated by Bechtel to the minutest details cannot be generated manually with the same level of precision, speed and accuracy as is achieved by use of computers; and (b) the output produced by Bechtel in from of engineering drawings is undoubtedly customized electronic data within the definition of computer software appearing u/s 80HHE of the Act which definition is identical to the definition of computer software under Explanation 2 of s.10A of the Act; To make it unambiguously clear that the data exported by Bechtel was customized electronic data , the Hon ble Bench had observed thus: it is do doubt true, as mentioned by the CIT (Appeals) and by the learned DR that such designs and ..... 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