Dy. Commissioner of Income-Tax Circle 1(1), , Pune V. M/s Capegemini Technology Services I Ltd (Formerly known as iGage Global Solutions Ltd), Pune

ITA 41/PUN/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 9535 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-07-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 18-02-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Keywords: Deemed export
• Section: 143(3); 10B

Judgement Text

आयकर अपीलीय अिधकरण “ए” Ɋायपीठ पुणे मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, PUNE BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER आयकरअपीलसं. / ITA No.41/PUN/2021 िनधाᭅरणवषᭅ / Assessment Year: 2005-06 The Dy.CIT, Circle-1(1), Pune. Vs . M/s.Capegemini Technology Services India Ltd., (Formerly known as iGate Global Solutions Ltd., ) Plot No.114, Rajiv Gandhi Infotech Park, Hinjewadi, Phase- III, MIDC SEZ, Pune – 411057. PAN: AABCM 4573 E Appellant/ Assessee Respondent /Revenue Assessee by Shri CH Naniwadekar– AR Revenue by Shri S P Walimbe –DR Date of hearing 24/06/2022 Date of pronouncement 07/07/2022 आदेश/ ORDER Per S.S.Godara, JM: This appeals for A.Y.2005-06 arises against the Commissioner of Income Tax(Appeals)-3, Pune’s order, dated 09.03.2020 passed in case no.PN/CIT(a)-1/DCIT Circ.1(1)/77/2013-14/38, involving proceedings under section 143(3) r.w.s 147 of the Income Tax Act [in short “the Act”]. Heard both the parties. Case files perused. 2. The Revenue raises the following grounds of appeal: “1) The order of the Ld.CIT(A) is contrary to law and to the facts and circumstances of the case. 2) Whether in the facts and circumstances of the case, the ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 2 Ld.CIT(A) was justified in deleting the disallowance of Rs.4,89,93,369/- and the consequent reduction made in the deduction allowable u/s. 1OA on account ofDTM and onsite software development income? 3) Whether in the facts and circumstances of the case, the Ld.CIT(A) was justified in deleting the disallowance of Rs.4,89,93,369/- and the consequent reduction made in the deduction allowable u/s. 1 OA on account of DTM and onsite software development income without considering the facts that the assessee did not exercise control and supervision over the onsite work carried out at the clients premises and also onsite work carried out at the clients’ premises was not referable to any STPs? 4) Whether in the facts and circumstances of the case, the Ld.CIT(A) did not err in holding that there is no requirement in law that the assessee has to link its profits and gains to particular STP or SEZ unit without appreciating that Circular No 1/2013 dated 17/01/2013 further clarifies Circular No. 694 dated 23/11/1994 that it is necessary that there must exist a direct and intimate nexus or connection of development of software done abroad with the eligible units set up in India and such development of software should be pursuant to a contract between the client and the eligible unit? 5) Whether in the facts and circumstances of the case, the Ld.CIT(A) did not err in rejecting the AO contention for disallowing the deduction claimed u/s.10A on account of Development of Technical Manpower without appreciating that circular No 1/2013 dated 17/01/2013 further clarifies that profits earned as a result of Deployment of Technical Manpower at the client’s place abroad specifically for software development work qualifies for deduction only if it is pursuant to a contract between the client and the eligible unit.” 2. There is hardly any issue that the Revenue’s foregoing pleadings seek to reverse the CIT(A)’s action holding the assessee as eligible for section 10A deduction on account of DTM and on site software development income derived in the relevant previous year. A perusal of the case file states the very issue had arises between the parties in A.Y. 2011-12 as well involving assessee’s and Revenue’s ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 3 cross appeals in ITA No.2395 & 2624/PUN/2017 decided on 26.10.2021 wherein the learned co-ordinate bench has declined the latter’s 0arguments as follows: “12. We note that the similar issue came up before this Tribunal in assessee‟s own case for A.Y. 2010-11 which is at Page No. 179 of the paper book. This Tribunal in A.Y. 2010-11 while granting relief to the assessee considered the order of this Tribunal for A.Y. 2007-08 being IT(TP)A No. 286/BANG/2013 for A.Y. 2007-08. The relevant portion at Para Nos. 16 to 28 are reproduced here-in- below for ready reference : “16. Ground nos.7 to 9 deal with another aspect of computation of deduction u/s.10A of the Act, being, the deletion of disallowance of Rs.14,61,44,712/- towards reduction of income from Deputation of Technical Manpower (DTM) and Onsite activities from the purview of eligible income u/s.10A of the Act. Succinctly, the facts of this issue are that the AO required the assessee to submit the Scope of works (SOWs) in respect of agreements for software development for which deduction was claimed u/s 10A. The assessee filed the same, on perusal of which the AO observed that the majority were onsite contracts without any STP/SEZ link to the Indian business and further inferred that the assessee was engaged in the business of Deputation of Technical Manpower to its clients. The assessee tendered a reply furnishing copies of Master Service Agreements (MSAs) along with SOWs and their correlation with several invoices, which did not find favour with the AO. The Officer noticed that DTM contract receipts were one of the major components of the revenue receipts of the assessee, under which software engineers were sent to the US or Europe for working in companies on short term basis. He further observed that on an average, such companies abroad were paying to the assessee US$ 6000 for each of the software professionals, against which the assessee was paying equivalent of approximately US$ 4000 to them. He further held that the services rendered by the professionals at locations abroad were not under the control and supervision of the assessee. In the ultimate analysis, the AO recomputed the amount of deduction u/s.10A by considering the amount of deduction originally worked at Rs.62,06,33,422/-, from which a sum of Rs.2,43,57,452/-, being 4% of profits ascribed to Deputation of Technical Manpower business was reduced and a further sum of Rs.12,17,87,260/-, being 20% of profits ascribed to onsite software services not related to STP undertakings in India was reduced, which brought down the amount of revised deduction u/s.10A to Rs.47,44,88,710/-. The Ld. CIT(A) accepted the assessee’s claim and overturned the action of the AO on this point. ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 4 17. Having heard both sides and gone through the relevant material on record, it is observed that the AO reduced profit relatable to Deputation of Technical Manpower (DTM) and Onsite software services allegedly not related to STP undertakings in India at ad hoc 4% and 20% of the eligible software development income u/s 10A of the Act as computed by him. Primarily, no reason has been attributed by the AO as to how 4% and 20% rates were determined for reducing the amount of deduction on account of DTM and onsite activities. 18. The assessee earned income from software development activity in all of its six eligible units. The question which falls for our consideration is as to whether the AO was right in holding that a part of consideration received by the assessee from the Deputation of Technical Manpower (DTM) activities and Onsite activities should be excluded from the eligible revenue? 19. Section 10A is a special provision in respect of newly established undertakings in free trade zones etc. Sub-section (1) of this section provides for a deduction of profits and gains as are derived by an undertaking from the export, inter alia, of computer software for a specified period. It is not disputed that the assessee satisfied all the requisite conditions for becoming eligible to deduction under this section, which is apparent from the action of the AO in himself allowing deduction to some extent. The dispute is only to restricting the amount of deduction in respect of the alleged profits derived by the assessee from DTM and onsite charges, which in the opinion of the AO, were not derived from export of computer software. 20. The assessee is engaged in the business of computer software development from its eligible units. At this stage, it would be apposite to consider the meaning of `Computer software’ given in Explanation 2(i) of section 10A as: `(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’. It transpires from the definition of the `computer software’ that it has two clauses. The first clause deals with a computer programme which is recorded on any disc or tape etc., which may usually be off the shelf product or in other words, a product which is available as such with the assessee and is not required to be customized. The second clause deals with a customized electronic data or any product, which is required to be tailor-made. Whereas the first clause encompasses a computer programme which has already been developed by the assessee on a standard basis and is exported as such, the second clause covers developing a new computer software as per the specific requirements of the customer. 21. One has to pass through various stages to develop a computer software, such as, Conceptualization, Planning, Designing, ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 5 Developing, Testing and then Maintaining. In the Conceptualization stage, the requirements of the customer are first identified to form a view of the work to be done. In the Planning stage, an overall plan of proceeding with is formalized. In the Designing stage, blueprint of the work to be done is drawn. In the Development stage, which is also called coding stage, the actual work is started for translating the plan into action. It is one of the most important stages of software development. In this stage, the work is divided into several modules/programmes, each of which is independently developed and coded. This activity of development of modules and coding may be done simultaneously or one after another, depending upon the nature of module and its placement or setting within the overall product. The development stage produces a final software product, which is then tested on stringent standards to ensure that it measures up to the required specifications. Once the computer software or the product passes through the testing stage, it is given to the customer for actual use. Any product so developed may need maintenance and then upgradation with the passage of time. A close scrutiny of the life cycle of a customized software, as discussed above, discerns that a lot of interaction is required between the computer software developer and the customer, which is almost present in most of the stages of software development, starting with conceptualization itself. In developing a computer software of large magnitude, it is quite possible that a Software Developer may have to visit the site of the customer several times for having an on the spot information and properly appreciating the needs so as to make the final product compliant with the requirements. There can be several other reasons necessitating a customer abroad insisting a software developer in India to develop software fully or partly at his site overseas. The stage of testing in a customized software can be properly done only at the site of the customer. The nitty-gritty of the matter is that a customized software cannot be ordinarily developed without spending some time on site with the customer. Considering the objective of deduction u/s 10A and realizing practical issues and difficulties, the Finance Act, 2001 inserted Explanation 3 w.e.f. 1.4.2001 providing: `For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.’ The Explanation contains a deeming provision and gives a practical solution to the problem by providing that profits from on site development of computer software and services for development of software outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. Undeterred by the Explanation 3, some of the authorities kept on refusing the claim of the assesses u/s 10A, as is the case under consideration, to the extent of the profits derived from onsite development of computer software and rendering of services by technical manpower outside India. The CBDT had to step in by issuing a Circular no.1/2013 dated 17.1.2013 providing ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 6 that (a) : `it is clarified that the software developed abroad at a client’s place would be eligible for benefits under the respective provisions, because these would amount to 'deemed export’ and tax benefits would not be denied merely on this ground’ and (b) `that profits earned as a result of deployment of Technical Manpower at the client’s place abroad specifically for software development work pursuant to a contract between the client and the eligible unit should not be denied benefits under sections 10A, 10AA and 10B provided such deputation of manpower is for the development of such software and all the prescribed conditions are fulfilled.’ It was brought to the notice of the CBDT that the AOs were not even following the clarification given in the Circular dated 17.1.2013. Once again, the CBDT issued Instruction no. 17/2013 dated 19.11.2013 clarifying that: `The undersigned is directed to convey that the field authorities are advised to follow the contents of the Circular in letter and spirit. It is also advised that further appeals should not be filed in cases where orders were passed prior to issue of Circular but the issues giving rise to the disputes have been clarified by the Circular’. There is hardly any need to accentuate that income-tax authorities are mere implementing agencies of the Parliament intent expressed through the enactment. They cannot suo motu usurp the power to indirectly legislate by not following the mandate of the provisions. Other income-tax authorities are bound to follow the command of the CBDT given through Circulars, even if they are not personally agreeable with the same. 22. On going through the directive of the Explanation 3 and the Circulars issued by the CBDT, which are binding on the authorities under the Act, it is vivid that the benefit of deduction under section 10A caters not only to profits earned from export simplicitor of computer software but also to any profits and gains derived from onsite development of computer software and also services for development of software rendered outside India. So long as there remains a live link between onsite development of computer software and services for development of software with the development of software from the eligible undertaking, the consideration awarded for onsite development for computer software and rendering services for development of services outside India cannot be excluded from the purview of deduction u/s.10A. However, what is essential for such onsite development or rendering of software development services outside India to qualify for the benefit of deduction is that these should be in furtherance of the development of the software product undertaken by the eligible enterprise. If onsite services are de hors the product which the assessee undertook to deliver to the foreign customer, then any profit and gain arising from such services cannot be considered as eligible for deduction. The determinative test to qualify for the benefit of deduction, in our considered opinion, is that the rendition of onsite services etc. outside India by the assessee should be an integral part of the overall computer software development project, which the ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 7 assessee undertook to do for its foreign customer. So long as the onshore activities etc. performed outside India remain in furtherance of the final product to be delivered, there can be no doubt on the eligibility of profit from such activities for deduction. 23. The AO has drawn a table on page 24 of his order which gives a comparative number of professionals working onsite and offshore totalling 5062. Out of this, only 725 professionals worked outside India onsite and remaining 4337 worked offshore in India only. No evidence has been placed on record to demonstrate that the employees of the assessee sent abroad for rendering onsite services were working under the direct control and supervision of the overseas customers and further that their services were alien to the agreements for software development projects which the assessee had undertaken to perform, generating the income otherwise deductible u/s 10A of the Act. Rather the position of the employees of the assessee working outside India under its own control and guidance has been acknowledged by the AO in his order for the A.Y. 2009-10 and the ld. DR could not controvert that the nature of business in such later year was any different from that for the year under consideration. 24. To fortify the view point of the AO, the ld. DR placed on record a copy of the sample agreement between the assessee and its customers. This Consulting Service Agreement was entered into between the assessee and Royal Bank of Canada on 15-05- 2006. Clause 1 of the Agreement gives description of Services and states that the assessee has agreed to perform the services of: `Technical system analysis for Capital Markets Client Authentication Infrastructure Consolitation as well as RBC Express TruePass upgrade projects’. Dates of commencement and completion have been given as 15-05-2006 and 31-10-2006 respectively. Charges have been given in Clause 3 of the Agreement as hourly rates below $66 for two Technical System Analysts. Clause 3.2 provides that the assessee may invoice the Bank monthly for work performed during the previous month. Clause 4 states the number of personnel assigned to perform the services, which the assessee may replace with the Bank’s approval. Place for service has been given as Toronto, Ontario. 25. A perusal of the above clauses of the Agreement divulges that the assessee undertook to perform Technical systems analysis for Capital Markets Client Authentication Infrastructure Consolitation as well as RBC Express TruePass upgrade projects of its customer namely, RBC. The duration for completion of the project was fixed at 5 ½ months. Entire services were to be provided onshore at the premises of the customer in Canada. `Background and Scope’ of the Agreement shows that Royal Bank of Canada required two Resources in the role of TSAs from the assessee to work on the migration of the existing security/client authorization and authentication and infrastructure from Capital Markets Platform to a Centralized RBC Platform. Next para ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 8 provides that one iGate Resource will be working on existing RBC Express projects until end of August and the other iGate Resource will be working on CM Stage 1. Then both the persons were to work together on CM Stage 2 project for delivering the needful. A careful perusal of the Agreement reveals that DTM and onsite software services rendered through the 2 iGate Resources wholly related to the project undertaken by the assessee pursuant to the Agreement. This deciphers that the DTM and onsite software services rendered by the assessee were in relation to the main service undertaken by it to be performed as per the first clause of the Agreement, income from which has been otherwise held as eligible for deduction. Notwithstanding that, the ld. AR, in reply to ld. DR’s reliance on Consulting service agreement with Royal Bank of Canada, invited our attention towards another Agreement with Royal Bank of Canada dated 16-06-2005 in which services were to be rendered wholly in India. Showing to the same reference number of 2005164 in both the Agreements, viz., the one relied by the ld. DR and the one submitted by him, the ld. AR explained that there is one umbrella agreement with Royal Bank of Canada and these are subagreements, under which some part of the services were rendered in India while others onshore outside India. This fortifies the view point of the assessee that even the onshore services rendered abroad have link with agreement for services from eligible units in India. 26. On circumspection of the sample copy of the Agreement, filed by the ld. DR, between the assessee and Royal Bank of Canada as a representative of all such similar Agreements, it turns out that the assessee entered into Masters Service Agreement with several customers outside India. There was a specific tenure within which the assessee was to develop and deliver computer software or render the eligible service. A total consideration was received by the assessee under such Master Service Agreements. The AO has excluded a part of such total consideration as attributable to DTM and onsite software services by treating the same as unrelated to STP undertakings in India. The two amounts disqualified by the AO at Rs.2.43 crore and Rs.12.17 crore are part of the total consideration agreed between the assessee and its overseas customer for development of computer software or rendering of the eligible service, income from which has otherwise been held to be eligible for deduction u/s.10A. We fail to comprehend as to how a part of the total consideration as per Master Service Agreement with several customers can be separated as relatable to Deputation of Technical Manpower business and onsite software development services unrelated to STP undertakings. Such DTM and onsite software services are part and parcel of the overall computer software development projects which the assessee undertook and income from which has been otherwise held to be eligible for deduction u/s.10A. Such disqualified amounts are not independent of consideration for computer software development or rendering other eligible service, which has otherwise been conferred with deduction u/s.10A of the Act. The situation would have been otherwise if the ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 9 assessee had rendered onsite software services or sent some manpower on deputation to customers outside India without having any linkage with the computer software development projects undertaken by it. As in the facts under consideration, there is only one composite amount of consideration for the eligible computer software development, in our considered opinion, the ld. CIT(A) was fully justified in rejecting the AO’s point of view in bifurcating such consideration into two parts, namely, the one which is eligible towards computer software and the other which is not eligible towards DTM and onsite software services. 27. There is another aspect of the matter. The ld. DR. harped on the language of section 10A(1) of the Act to contend that only the profits and gains `derived by’ the eligible undertaking from export of computer software etc. are eligible for deduction. He laid a great deal of emphasis on the expression `derived from’ used in the provision as an opening gate for eligibility of deduction. It was contended that since income from DTM and onsite services was not derived from export of computer software, the same did not qualify for the benefit of deduction. 28. This contention, in our considered, is sans merit. There are two reasons. The first is that the Explanation 3 is a deeming provision, which specifically brings profits and gains derived from on site development of computer software and services for development of software outside India within the meaning of `the profits and gains derived from the export of computer software outside India’. The second is that subsection (1) of section 10A containing the words `derived from’ is not an exhaustive provision in itself. The expression `profits ... derived ...from .. export of ... computer software’ employed in sub-section (1) of section 10A of the Act has been further elaborated in sub-section (4) to mean: `the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.’ The expression `profits of the business of the undertaking’ as used in sub-section (4), in fact, gives meaning to the expression `derived... from ... export of ... computer software’ as used in sub-section (1) and amplifies the scope of the latter by mitigating the rigor and making the provision liberal and more inclusive. There is no gainsaying that `profits of the business of the undertaking’ are not only the profits derived from the export of computer software but also those which are attributable to the business of undertaking. So long as there exists a direct link between the eligible undertaking and some income, the same is profit of the business of undertaking, even if may not be derived from the export of computer software etc. Without accepting, even if we presume the contention of the ld. DR as correct that income from DTM and onsite software services rendered abroad cannot be considered as derived from the export of computer software, it, in any case, will have to be regarded as `profits of the business of ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 10 the undertaking’. In view of the foregoing discussion, we uphold the impugned order on this score.” 13. We note that, in assessee‟s own case i.e. IGATE Global Solution Ltd. as it was then in A.Y. 2007-08, being in IT(TP)A No. 286/BANG/2013, on transfer, Pune Benches of ITAT discussed the issue in great detail and turned down the contention of Revenue that the income from onsite/DTM was not derived from export of computer software and is not qualified for deduction u/s. 10A/10AA of the Act. Further, the Co-ordinate Bench held that Explanation 3 is a deeming provision, which specifically brings profits and gains derived from on site development of computer software and services for development of software outside India within the meaning of the profits and gains derived from the export of computer software outside India which means that not only the profits and gains derived by the eligible undertaking from export of computer software are eligible for deduction but also profits and gains derived from onsite development of computer software and services for development of software outside India. 14. Further, the words “derived from” contained in sub-section (1) of section 10A is not an exhaustive provision and it has been further elaborated in sub-section (4) to mean the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. The Co-ordinate Bench opined when there exists a direct link between the eligible undertaking and some income, the same is profit of the business of undertaking, even if may not be derived from the export of computer software etc. The proposition as enunciated by the Co-ordinate Bench in assessee’s own case i.e. iGATE Global Solution Ltd, as it was the then, in A.Y. 2007-08 has been followed by this Tribunal in assessee’s own case in A.Y. 2010- 11, therefore, we hold that the income from onsite/DTM rendered abroad is considered to be derived from the export of computer software, is eligible for deduction u/s. 10A/10AA of the Act.” 3. The Revenue is fair enough in not pin-pointing any distinction on facts or law in these assessment years. We thus adopt judicial consistency to affirm the CIT(A)’s lower appellate findings under challenge. The Revenue fails in its instant sole substantive grievance. ITA No.41/PUN/2021 for A.Y. 2005-06 DCIT Vs. M/s.Capegemini Technology Services India Ltd., (R) 11 4. Delay of 166 days in filing of the instant appeal is condoned since falling in the Covid-19 pandemic outbreak period. 5. This Revenue’s appeal is dismissed. Order pronounced in the open Court on 7 th July, 2022. Sd/- Sd/- (DR. DIPAK P. RIPOTE (S.S.GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER पुणे / Pune; ᳰदनांक / Dated : 7 th July, 2022/ SGR* आदेशकᳱᮧितिलिपअᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The CIT(A), concerned. 4. The Pr. CIT, concerned. 5. िवभागीयᮧितिनिध, आयकर अपीलीय अिधकरण, “ए” बᱶच, पुणे / DR, ITAT, “A” Bench, Pune. 6. गाडᭅफ़ाइल / Guard File. आदेशानुसार / BY ORDER, // TRUE COPY // Senior Private Secretary आयकरअपीलीयअिधकरण, पुणे/ITAT, Pune.