9911796707
TMI Blog2014 (4) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... in production or manufacture of Computer Software or was rendering notified IT-Enabled Services. Whether the Assessee exported computer software/ITES out of India – Held that:- There can be no doubt on the satisfaction of this condition - Sample copies of Software Export Declaration (Softex) forms filed with the STPI (relating to/ corresponding to the invoices raised by the Assessee on overseas SAP entities) have been filed before the Revenue authorities - The Softex forms are certified by the STPI authorities as being exported out of the country - the arguments raised by the assessee are not being considered elaborately for the reason that the nature of services rendered needs to be ascertained first – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Levy of interest u/s 234D of the Act – Held that:- Assessee contended that the interest u/s 234C of the Act, can be levied only when there is a shortfall in payment of advance tax instalment by considering the advance taxes paid on the tax due on the "returned income" and not the "assessed income" - the grievance has probably not been properly projected by the assessee nor appreciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the order of the CIT(A)-III, Bangalore relating to assessment year : 2008-09. 2. First we shall take up for consideration ITA No.1492(B)/2012 assessee's appeal for the assessment year : 2004-05. Ground no.1 raised by the assessee is general in nature and calls for no specific adjudication. Ground no.2 raised by the assessee reads as follows; " 2. The learned CIT(A) has erred, in law, and in facts, in confirming the order of the learned AO by upholding the disallowance of the deduction claimed by the assessee u/s 10A of the IT Act, 1961 amounting to Rs.282,595,891/- for the assessment year 2004-05". We will also take up for consideration Gr.No.2 raised by the Assessee in A.Y.05-06 in ITA No.1493/Bang/12 which is identical to ground No.2 referred to above, for the reason that the facts and circumstances are identical and the reasoning of AO in AY 04-05 has been followed by the AO in AY 05-06, while the reasoning given by the CIT(A) for AY 05-06 has been followed by the CIT(A) in AY 04-05. The sum claimed as deduction u/s.10A of the Act, in AY 05-06 is a sum of Rs.39,22,60,237. 3. SAP AG, headquartered in Germany, is one of the world's leading provider of enterprise reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd related services rendered to customers in India. These services are not rendered from the STP unit and constitute a different segment of the Appellant. 4. Training services segment In addition to the above, the Assessee provides training services/ facilities to Indian and foreign customers, on the usage and application of SAP software products. 4. The Assessee claimed deduction of Rs.28,25,95,891 u/s.10A of the Income Tax Act, 1961, ('the Act') in respect of profits of its unit which renders Software development/ implementation support services, viz., the Export division/Global Delivery Centre(GDC). It is not in dispute that the software development services rendered to overseas customers from this unit was offshore Software Technology Park unit of the Assessee i.e., the Global Delivery Centre ("GDC"), which is physically separate, distinct and is housed in a separate Customs bonded premises. 5. According to the AO (in A.Y.04-05), deduction u/s.10A of the Act can be allowed only when the Assessee produces manufactures articles or things or computer software. According to the AO as per the details furnished in the return of income, the Assessee was stated to be in the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it will be different from the chemical unit. Probably, the Assessee company might have done customization of that nature to the clients in India and there may not be necessarily any export of software. 8.7 It is important to mention over here that the SAP AG group has bifurcated its activities of development of software and marketing and sale of software. While development is looked after by a separate company known as SAP labs having its R& D Centre in Whitefield, Bangalore, the marketing and sales of SAP software is looked after by SAP India. In fact, during the course of visit of SAP labs premises, this fact was mentioned by the Authorities of SAP labs. Accordingly, the claim of the Assessee company towards development of software appears to be farfetched and thus unacceptable." 7. The claim of the Assessee for deduction u/s.10A of the Act was rejected for the aforesaid reasons in AY 04-05 and 05-06. It would be appropriate to mention that apart from the above reasons given for rejecting the claim of the Assessee for deduction u/s.10A of the Act, certain other reasons were given in A.Y. 06-07 to 08-09. The same are as follows: 1. No specific software product was being devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reads thus: "SECTION 10A: Special provision in respect of newly established undertakings in free trade zone, etc. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee ………. Explanation 2 : For the purposes of this section,-- (i) "computer software" means,-- (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means;" 10. As can be seen from Expln.-2 (b) to Sec.10A of the Act even customization of electronic data or any product or service of similar nature which are notified by the CBDT are also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the order of assessment that the Assessee was not entitled to deduction u/s.10A of the Act for the following reasons: 1. The assessee's STP Unit is not developing any specific software product to any overseas customer directly or any specific software product to SAP AG or any SAP Group entity. 2. The bills raised by the Assessee show that the assessee's employees are rendering some unspecified services to group entities and assessee is charging those entities for such services on hour basis at specific rate applicable to each of its employees. The charges in the invoice are not the earnings of those employees but it is only a basis for charging other entities. Such charges were not for any overseas onsite development charges or services for development of software overseas. 3. Software development contracts/projects are actually taken up by SAP AG and other Group entities and in fact they are actually executing those projects. In the course of executing those projects, they may be borrowing some services of other group entities including the assessee. 4. The Assessee could not identify a specific process undertaken by it for which it is charging the group entities. Not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputer software also, it is obvious that the law requires that a particular software product should emerge from the process, unless the activity is restricted to one of the specified IT enables services as per CBDT Notification. The latter not being the case here as per the assessee's own admission, and no defined software product having emerged from the services rendered (also admitted by the assessee in the Rejoinder to the remand report), the STPI activities of the assessee do not fall within the eligibility requirements of sec.10A. 14. The conclusion of the CIT(A) in short is that the Assessee was not able to show the software product developed by it and therefore cannot be said to be engaged in manufacture or production of computer software. Since the Assessee maintained that it was manufacturing or producing Computer Software, by Assessee's own admission, the alternative case of the Assessee that it was rendering IT enabled services as per CBDT notification is deemed to have been given up. 15. The other reasons given by the revenue for denying the assessee deduction u/s 10A of the IT Act, in the orders passed for AY 06-07 to 08- 09 can be summarized as follows; 1. Sec.10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent describes Assessee as ND and the parent company as SAP AG. Under this agreement, the Assessee has agreed to provide services to SAP AG. Article 3 of the cross services agreement describes the nature of services thus: "Art-3 ND's Services ND hereby agrees to provide SAP AG with Services as explicitly required by SAP AG on a case to case basis to assist SAP AG in the design and development of SAP AG's Products for marketing and sales. Furthermore ND agrees to provide other subsidiaries of SAP AG which have entered into cross services agreement with SAP AG with services as explicitly requested by the respective other subsidiary of SAP AG. The Services to be provided by ND either to SAP AG or to another subsidiary can include the following: (a) The entire development of a version of a Product, including but not limited to, translation from English/ German to the local language of the Product and its testing; enhancements of and, if necessary, extensions to Products, so as to meet the special requirements of the certain market segments (b) All research and development activities in the areas of the Products which is in connection with and necessary to perform a particular de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.1 ND may from time to time ask for the development of Modifications and/or extensions to products required by an End User (Development Project) 5.2 Upon receipt of a request for a Development Project SAP AG shall decide by its Development Management, within reasonable time and before the project is started whether and to what extent the results of such Development Project will become part of the Products without limitation of ND's Territory ("Standard")In such case, this Agreement and in particular, Articles-8 and 9 apply for the eservices rendered by ND. 5.3 If SAP AG decides that the result of a Development Project will not automatically become a Standard, the following applies; After termination of the Development Project SAP AG will test the result and determine its quality, in the light of the outcome of such test. SAP AG will decide whether the results of the Development will become Standard. If SAP AG decides that the result of the Development becomes Standard, this Agreement and, in particular, Article-8 and 9 apply. If SAP AG decides that the result of the Development Project will not become Standard, ND is already hereby notified that SAP AG assumes no maintenanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e project related software modules to be developed, the quality testing process, the deliverable reports and the timelines. The GDC team carries out the agreed steps in its STP units in Bangalore or Gurgaon, as per the project charter in coordination with SAP's overseas project. 5. Once the software modules are developed, GDC tests the software and then exports the software modules to the SAP overseas entity or directly to the customer. 6. The customer then tests the software module and confirms acceptance. If there are any errors, the customer intimates the SAP team/GDC to modify the software to remove the errors. 21. The learned counsel for the Assessee also gave us a detailed process flow of the actual software development activities that is carried out in the GDC once the work is transferred to the GDC by SAP's overseas entity. Phase-I: Functional Specifications Phase: Under this phase, the GDC team undertakes the following- - Preparation of the functional specifications in consultation with the customer; - Approval of the functional specifications by the customer; - Estimate of effort and plan work schedule; and - Assign the work-plan to the GDC team members. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the system. These can be validations, extra user inputs, additionally captured data, additionally created data, alerts etc. In general, when the program/object affects the update of data and the target system is the same as the source system, then the program/object can be classified as an enhancement. o Form module: Forms are programs that create readable, formatted and printable outputs that are often exchanged with partners (customers, vendors, banks, employees, benefit providers, governments, etc.). The outputs can be printed or sent via fax or sent in an email as an attachment (pdf, otf, rtf, doc) or even simply displayed on the screen (and a user can choose to print, fax or email it). - Perform unit acceptance test: prepare the unit test environment, conduct the unit test and issue the unit test report. If there are defects, rewrite the software code and test again. Phase- IV : Integration test Phase Under this phase, the key steps involved are - Prepare the quality assurance environment; - Prepare and send delivery document; - Perform integration test; and - Sign off delivery document. Phase-V : Customer Acceptance Phase Under this phase, the key steps inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit of deduction u/s 10A of the IT Act, 1961. 25. The learned counsel for the assessee in his rejoinder brought to our notice that it is not correct to say that the assessee did not export any computer software. In this regard, our attention was drawn to page-23 & 24 of the paper book filed for the assessment year 2004-05 in which the particulars of exports out of India have been given. Our attention was also drawn to page-110 of the paper book which is the report of the Chartered Accountant in Form-56F certifying that the assessee had developed and exported software and was entitled to claim deduction u/s 10A of the IT Act, 1961. Our attention was also drawn to page-92 of the paper book which contained the softex form which is a form be given under the STPI Scheme, when the software is exported. The softex form gives the details of software exports and the amount realised on such exports. It was pointed out by the learned counsel for the assessee that the assessee had exported computer software. The AO in his remand report filed before the CIT(A), a copy of which is placed at page-62 of the assessee's paper book has not chosen either deny or affirm the contentions put forth by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval mentions that the same is for development/manufacture of Computer Software. 29. As far as the condition as to whether the Assessee manufactures or produces "Computer Software", it has been the contention of the learned counsel for the Assessee before us that the Assessee manufactures or produces articles or things or computer software. In this regard reference was made to the definition of the term "manufacture" as has been defined under Section 2(29BA) of the Act and certain judicial pronouncements rendered thereunder. It was contended that the Assessee's GDC unit modifies the SAP software as per the requirements of the end-user customer post sales of SAP software made by the overseas SAP entities. These services include development/ writing of additional software codes and software programs which is then added to the SAP software. Without prejudice it was submitted that activities of GDC unit would nevertheless also qualify as "production" of any article or thing. While the terms "produce" or "production" have not been defined under the Act, they are generally understood to mean "something that is brought forth either naturally or as a result of effort and work; a resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PS, FI/CO and Campus Management as listed in the worksheet attached to the Charter. The Assessee is to implement the work. The person in-charge of the project at SAP-UK, British Council and the Assessee has been set out in the Project Charter. As far as the Assessee is concerned one Mr.Vijay Reddy, Ramesh Kumar and Sundara Iyer have been assigned the responsibility of carrying out the project. The Charter was initially settled on 28.11.2003 and changed on 9.12.2003, after discussion by Mr. Sundara Iyer at London. The schedule for completion is from Dec. 2003 to June, 2004. The number of man hours on site and off-shore are all set out in the charter. 32. Softex Forms is a declaration given by the Assessee for Exchange Control purposes, duly certified by STPI authorities regarding software export through data-communication links. The invoice No. and date of invoice are also given in the Softex Forms. By way of sample we may have a look at Softex Form dated 25.10.2004 together with ten invoices referred to in the said form. Copies of these documents are placed at pages-92 to 105 of Assessee's paper book filed for AY 05-06. The Assessee has to realise 643499.68 Euros on the basis of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. This project charter relates to a client by name Shell of Nederland which had approached SAP Nederland who in turn have approached the Assessee. The scope of the work is development of two Business application Programming interfaces. 35. Softex forms at Page-197 refers to about 12 invoices and is in respect of total foreign exchange receivable of 1158021.09 Euros. Invoice No.9071001535 dated 30.4.2004 is referred to in the softex form. As usual the invoice is raised on SAP AG. The invoice relates to Agreement dated 8.4.2004. The invoice also refers to the man hour charges in respect of 9 software professionals who are employees of the Assessee. As to what is the nature of services performed by the Assessee for which the payments were to be received cannot be correlated. The Assessee has not made any such attempts to demonstrate that it was engaged in production or manufacture of Computer Software or was rendering notified IT-Enabled Services. 36. We are of the view that it would be just and appropriate to decide the issue raised by the Assessee in Gr.No.2 in AY 04-05 and 05-06 by restoring the issue to the AO for fresh consideration and by directing the Assessee to establish t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation, testing, research and development, etc (including assessment for administration and facilities), then the same would be charged at cost plus six percent. However, if the services are as per Article 3(c) which involves consulting services of the STPI unit, then the payment would be in according to SAP India's rates for consultants determined as average realised market rate of such consultant. It was argued that from the above, it would be clear that SAP India, has invoices of both kinds i.e., which are invoiced on man-hour basis and also those which are invoiced on cost plus 6%. It was submitted that it was a common practice in the software services industry to invoice customers on a time and material basis, i.e., in accordance with the billing/ charge-out rates of the personnel incurring time on the particular software development assignment. It was further submitted that the billing mechanism adopted was completely irrelevant while determining whether the Assessee is carrying on software development & related services and the same should not, in any way impact the eligibility to claim deduction under Section 10A of the Act. 39. It was submitted that even activities such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee u/s 154 of the IT Act, 1961. Therefore, ground no.3 is dismissed as not pressed. 43. Ground no.4 raised by the assessee is with regard to levy of interest u/s 234D of the IT Act, 1961. On this issue, the CIT(A) held as under: "With regard to the ground relating to charging of interest u/s 234B & 234C, it may be noted that charging of interest u/s 234B & 234C is mandatory & according chargeable wherever there is incidence of the same. Therefore, no appeal can lie against the order charging interest if there is incidence, unless it concerns a perceived and apparent misapplication of mind. The assessee has not pointed out any such circumstances in his grounds. The AO is accordingly directed to levy the interest applicable as per law after taking into consideration the findings of this appellate order. Accordingly, this ground of appeal is not adjudicated upon". 44. In this regard, we find that the grievance of the assessee as projected before the CIT(A) was that interest u/s 234C of the Act, can be levied only when there is a shortfall in payment of advance tax instalment by considering the advance taxes paid on the tax due on the "returned income" and not the "assessed inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred wholly and exclusively for its business purposes and satisfy the test of commercial expediency. However, the AO, while computing the total income of the Assessee disallowed a portion of the employee costs and operating expenses as under: Staff Welfare expenses: (Gr.No.3) 52. The Assessee incurred a sum of Rs 1,02,37,186 towards food and refreshments, which was included in the expenditure claimed under the head "Staff Welfare expenses". The AO was of the view that expenses incurred towards free meals to employees during office hours, cannot be treated as allowable expenditure. The AO therefore disallowed Rs 25,59,297, viz., 25 per cent of the said expenses. The AO also disallowed a sum of Rs 2,00,000 (out of the total sum of Rs 7,41,660) incurred by the Assessee towards giving of gifts to the employees, on an ad-hoc basis. Further the AO disallowed a sum of Rs 24,18,622 (being 25% of other staff welfare expenses), while computing the taxable income of the Assessee. In aggregate, the AO made a disallowance of Rs 51,77,919 in respect of Staff Welfare expenses incurred by the assessee, on the ground that there was no Fringe Benefit Tax during the FY 2004 05. 53. The CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven under the Fringe Benefit Taxes ("FBT") regime, though inapplicable for AY 2005-06, it may be pertinent to note that a specific exemption has been provided in respect of expenditure incurred on food or beverages procured by the employer for providing to his employees in an office or factory. Thus even the legislature thought such benefits not to be expenditure which would provide any benefit of a personal nature for the employees. We do not find any basis for disallowance of the remaining expenses out of staff welfare expenses also. We therefore hold that the disallowance sustained by the CIT(A) be deleted. Gr.No.3 is allowed. Sales promotion expenses; (Gr.No.4) 56. The AO disallowed Rs 2,00,000,00 out of sales promotion expenses, on the basis that these expenses (specifically, expenses incurred towards sponsorship of events, hosting of conferences, promotional gifts, public relations), cannot be said to be incurred exclusively for business purposes. The CIT(A) reduced the disallowance made by the AO from Rs 20,000,000 to approximately Rs 11,307,150 (i.e., 10% of the total claim). 57. The submission of the learned counsel for the Assessee in this regard was that the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of interest u/s 234B of the IT Act, 1961 is consequential in nature and the AO is directed to give consequential relief. Ground no.7 is with regard to interest levied u/s 234C of the IT Act, 1961. While deciding the similar ground of appeal for the assessment year 2004-05, we have already held that interest u/s 234C of the IT Act, 1961 are to be levied by taking income declared in the return of income, as criteria. For the reasons stated therein, we direct the AO to calculate interest u/s 234C of the IT Act, 1961 by considering the returned income and not the assessed income. 60. In the result, the appeal is partly allowed. ITA No.1494(B)/12 (AY: 2006-07) 61. Ground no.1 is general in nature and calls for no adjudication. Ground no.2 raised by the assessee is identical to ground no.2 raised by the assessee in the appeal relating to assessment year 2004-05. For the reasons stated while deciding the similar grounds in AY: 2004-05, this ground of appeal of the assessee is treated as allowed for statistical purpose. 62. Ground No.3 raised by the assessee reads as follows: "3. The learned CIT(A) is erred in law and in facts in not adjudicating grounds No.4 to 9 raised by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, did not adjudicate these grounds for the following reasons: "7. These grounds involve expenses incurred in foreign currency towards support charges, cost of purchased services, travel and conveyance, expenses incurred in providing technical services outside India and foreign expenses attributable to the delivery of computer software outside India. Since they all concern nuances of the exemption u/s 10A, once I have already determined above that the assessee is not entitle to the basic exemption u/s 10A, the question of adjudicating upon the different aspects of the exemption as covered by the grounds under consideration does not arise. Accordingly, these grounds are dismissed". 64. Since we have remanded to the AO the question of eligibility of the assessee to deduction u/s 10A of the IT Act, 1961, the AO is directed to adjudicate the aforesaid claim of the assessee in the order giving effect to the decision of the Tribunal. 65. Ground no.4 with regard to credit for foreign taxes paid was not pressed, as the assessee has obtained necessary relief by filing an application u/s 154 of the IT Act, 1961. Hence Gr.No.4 is dismissed. 66. Ground no.5 is with regard to levy of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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