M/s J.V.H.Solutions Private Limited, Hyderabad V. ITO, Ward 2(1), Hyderabad

ITA 640/HYD/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5567 (ITAT-HYDERABAD)
• Duration Of Justice: 10 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 02-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: A V RAGHURAM
• Keywords: Business income
• Section: 10AA; 80HHC; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 640/HYD/2013 ASSESSMENT YEAR 2008-09 M/S. J.V.H. SOLUTIONS PVT. LTD., HYDERABAD PAN: AACCK2815J VS. THE INCOME TAX OFFICER WARD-2(1) HYDERABAD [APPELLANT] [RESPONDENT] APPELLANT BY: SRI A.V. RAGHU RAM RESPONDENT BY: SRI JEEVAN LAL LAVIDIYA DATE OF HEARING: 21.02.2014 DATE OF PRONOUNCEMENT: 28.03.2014 ORDER PER CHANDRA POOJARI, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE CIT(A)-III, HYDERABAD DATED 8 TH MARCH, 2013 FOR ASSESSMENT YEAR 2008-09. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APPEAL : (1) THE ORDER OF THE LEARNED CIT(A) IS ERRONEOUS BOTH O N FACTS AND IN LAW SO FAR AS IT IS PREJUDICIAL TO THE APPELLANT.. (2) THE APPELLANT-COMPANY IS 100% EXPORT ORIENTED UNIT UNDER THE STP SCHEME AND GOT PERMISSION ON 11-11-20 05 TO PRODUCE AND EXPORT COMPUTER SOFTWARE FOR FIVE YEARS . SINCE THE APPELLANT-COMPANY ACTUALLY PRODUCED AND DEVELOPED C OMPUTER SOFTWARE SOLUTIONS DURING THE YEAR AND ALSO DEVELOP ED ONSITE COMPUTER SOFTWARE, INCLUDING SERVICES FOR DEVELOPME NT OF SOFTWARE OUTSIDE INDIA WHICH SHALL BE DEEMED TO BE THE PROFITS AND GAINS DERIVED FROM THE EXPORT OF COMPUTER SOFTW ARE OUTSIDE INDIA, THE APPELLANT IS ELIGIBLE FOR EXEMPTION U/S 10A OF THE INCOME-TAX ACT AS WAS REPORTED BY THE ASSESSING OFF ICER IN HIS REMAND REPORT SENT TO THE CIT(A)-III, HYDERABAD, FO R A.Y. 2008-09 IN THE APPELLANT'S CASE. ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 2 (3) SINCE THE CIT(A) SATISFIED AND DELETED THE ADDITION OF RS. 1,11,46,514/- BEING AMOUNT OF CHARGES PAID TO T HE KNOWLEDGE-PARTNERS FOR ONSITE DEVELOPMENT OF COMPUT ER SOFTWARE ABROAD, IT IS NOT PROPER AND JUSTIFIED NOT TO ALLOW THE EXEMPTION U/S 10A OF THE INCOME-TAX ACT, TO THE AP PELLANT- COMPANY. (4) THE APPELLANT-COMPANY, THEREFORE PRAYS THE HONOURABLE INCOME-TAX APPELLATE TRIBUNAL TO ALLOW T HE EXEMPTION U/S. 10A OF THE INCOME-TAX ACT AND DELETE THE ADDITION OF RS. 27,11,899/- MADE BY THE ASSESSING O FFICER AND SUSTAINED BY THE CIT(A), FOR A.Y. 2008-09, CONSIDER ING THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE A COM PANY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT FIL ED ITS RETURN OF INCOME FOR THE A.Y. 2007-08 ON 30.9.2008 DECLARING NIL INCOME. THE AO COMPLETED THE ASSESSMENT U/S. 14 3(3) BY MAKING THE FOLLOWING ADDITIONS: SL. NO. PARTICULARS AMOUNT (RS.) 1) DISALLOWANCE OF DEDUCTION U/S. 10A. 27,11,890 2) DISALLOWANCE OF PURCHASE AND DEVELOPMENT OF SOFTWARE 1,11,46,514 3) DISALLOWANCE U/S. 40(A)(IA) 5,45,036 4. ON APPEAL, THE CIT(A) DECIDED THE ISSUE REGARDING DISALLOWANCE OF PURCHASE AND DEVELOPMENT OF SOFTWAR E AND DISALLOWANCE U/S. 40(A)(IA) IN FAVOUR OF THE ASSESSE E. HOWEVER, HE DECIDED THE ISSUE RELATING TO DEDUCTION U/S. 10A AGAINST THE ASSESSEE. AGGRIEVED, THE ASSESSEE IS I N APPEAL BEFORE US. ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 3 5. THE LEARNED AR SUBMITTED THAT THE AO DISALLOWED THE CLAIM AMOUNTING TO RS. 27,11,899/- WHICH WAS CLAIME D AS EXEMPTION U/S 10A ON ACCOUNT OF EXPORT OF SOFTWARE. THE AO ASKED THE ASSESSEE TO SUBMIT COPIES OF FIRCS IN SUP PORT OF THE CLAIM. THE ASSESSEE ONLY PRODUCED A 'COMMERCIA L INVOICE' RAISED ON SEAVUS AB, A SWEDISH COMPANY WHI CH INDICATED THE NUMBER OF DAYS IN WHICH THE PERSONS W HOSE NAMES WERE MENTIONED ON THE INVOICES HAD WORKED IN SWEDEN. ACCORDINGLY, BY GIVING THE FOLLOWING REASO NS. THE AO DISALLOWED THE CLAIM OF EXEMPTION: 'THE RELEVANT PROVISION OF SECTION 10A IS AS FOLLOW S ' ... SUBJECT TO THE PROVISIONS OF THIS SECTION, A DEDUCT ION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY THE HUNDRED PER CENT EXPORT ORIENTED UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE A SSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT T O THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MA NUFACTURE OR PRODUCE ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF T HE ASSESSEE.' A PLAIN READING OF THE SECTION- SHOWS' THAT THE LEG ISLATURE HAS INTENDED THE FOLLOWING WHILE FRAMING THE PROVISIONS OF THIS SECTION: A) THAT THE ARTICLES OR THINGS OR COMPUTER SOFTWARE MANUFACTURED SHOULD BE EXPORTED OUT OF INDIA THE AS SESSEE IS NEITHER MANUFACTURING NOR EXPORTING SOFTWARE OUT OF INDIA, THE ASSESSEE IS ONLY SUPPLYING MANPOWER AND IS BEING PA ID FOR EVERY PROFESSIONAL HOUR, THE ASSESSEE HAS CLAIMED RS. 27,11,899/- AS DEDUCTI ON U/S. 10A. HOWEVER THE CLAIM OF THE ASSESSEE FOR THE DEDU CTION U/S. 10A. HOWEVER, THE CLAIM OF THE ASSESSEE FOR THE DE DUCTION U/S. 10A IS REJECTED FOR THE REASONS DISCUSSED ABOVE AND THE INCOME IS TAXED AS BUSINESS INCOME. ADDITION RS. 27,11,899 /-' ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 4 6. THE AR SUBMITTED THAT THE ASSESSEE HAD AN AGREEMENT WITH THE SWEDISH COMPANY FOR DEVELOPMENT OF TELECOM BILLING SOFTWARE. THIS HAS BEEN DONE BY THE ASSESSEE COMPAN Y. THEREAFTER IT DEPLOYED TRAINED MANPOWER IN SWEDEN F OR RUNNING THE SOFTWARE, INSTALLING AND DEBUGGING IT. IT WAS ALSO CONTENDED BY THE AR THAT THERE WERE CIRCULARS OF TH E CBDT WHEREIN THE SPECIFIC SERVICES RENDERED BY THE ASSES SEE WERE MENTIONED. ACCORDINGLY, IT WAS ARGUED BY THE AR THA T THE SAID EXEMPTION SHOULD BE ALLOWED U/S. 10A OF THE ACT. 7. THE AR SUBMITTED THAT WITH REGARD TO THE CLAIM OF EXEMPTION U/S. 10A OF THE ACT IN RESPECT OF THE NET INCOME OF RS. 27,11,889/- FOR THE A.Y. 2008-09, THE AO'S VERS ION IS THAT THE ASSESSEE DID NOT MANUFACTURE OR DEVELOP ANY COM PUTER SOFTWARE BUT ONLY SUPPLIED MANPOWER TO SEAVUS, SWED EN DURING THE YEAR RELEVANT TO THE A.Y. 2008-09 IS NOT CORRECT AND JUSTIFIABLE AND IT IS ONLY AO'S PRESUMPTION WHEN AC TUALLY THERE IS APPARENT MATERIAL EVIDENCE SUPPORTING THE FACTUAL POSITION THAT THE ASSESSEE COMPANY, IN FACT, DEVELO PED COMPUTER SOFTWARE SOLUTIONS AND EXPORTED THE SAME O UTSIDE INDIA. WHENEVER THE ASSESSEE-COMPANY GETS ANY WORK CONTRACT IN THE MATTER OF COMPUTER SOFTWARE, ON THA T PARTICULAR JOB DETAILS, FIRST THE ASSESSEE-COMPANY DEVELOP SOFTWARE SOLUTIONS/PROGRAM AND THEREAFTER THEY DEPU TE THEIR ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 5 COMPUTER SOFTWARE PERSONNEL TO THAT COUNTRY AND AFT ER THEY REACH THEIR CLIENTS' PREMISES OUTSIDE INDIA THEY WO RK ON THEIR CLIENTS' COMPUTERS BY GETTING SUCH COMPUTER PROGRAM S/ SOLUTIONS TRANSFERRED BY DOWNLOADING FROM THE ASSES SEE- COMPANY'S COMPUTER TO THEIR CLIENTS' COMPUTERS AND AFTER MAKING FURTHER CHANGES OR AMENDMENTS IN THE SOFTWAR E PROGRAMS/SOLUTIONS OF TELECOM BILLING SO AS TO SATIS FY THE REQUIREMENTS OF ITS CLIENTS OUTSIDE INDIA, AND COMP LETE THE ENTIRE ASSIGNMENT GIVEN BY SEAVUS. TO ACTIVATE, IM PLEMENT, OPERATE SUCH SOFTWARE SOLUTIONS/PROGRAMS, SERVICES OF SOFTWARE PERSONNEL ARE REQUIRED. 8. THE AR SUBMITTED THAT THE CENTRAL BOARD OF DIRECT TAXES, IN THEIR NOTIFICATIONS NO. SO. 890(E) DATED 26-9-2000 AND ALSO ANOTHER NOTIFICATION NO. 11521 DATED 26-9- 2000, CLARIFIED AND BROUGHT 'HUMAN RESOURCE SERVICES', 'D ATA PROCESSING', 'ENGINEERING AND DESIGN' AND 'REMOTE MAINTENANCE' UNDER THE AMBIT OF INFORMATION TECHNOL OGY ENABLED SERVICES WITHIN THE DEFINITION OF 'COMPUTER SOFTWARE' IN EXPLANATION- 2 FOR THE PURPOSE OF SECTION 10A OF THE IT ACT. 9. THE AR SUBMITTED THAT IN THE CASE OF WIPRO LTD. V. DCIT IN ITA NOS. 896-896/BANG/2003 DATED 21.6.2005 TRIBUNA L, 'B' BENCH, BANGALORE, HELD THAT 'ON A PERUSAL OF THE EX PLN. 2 TO S. 10A WHICH DEFINES COMPUTER SOFTWARE, PARTICULARLY S UB. S. (B) ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 6 MAKES A REFERENCE TO ANY PRODUCT OR SERVICE OF SIMI LAR NATURE TO THAT OF WHAT IS CONTENDED IN SUB. S. (A). FURTH ER, NOTIFICATION NO. 890(E) DT. 26TH SEPT. 2000, ISSUED ALSO LISTS 15 DIFFERENT NATURE OF PRODUCTS AND SERVICES. FROM THIS, IT IS CLEAR THAT RENDERING OF ANY TECHNICAL SERVICE, DEVE LOPMENT OF PRODUCT, ENABLING THE USE OF PRODUCT, LICENSING OF PRODUCTS, DEPUTING ENGINEERS FOR RENDERING FROM INDIA TO OUTS IDE INDIA FOR EXPORT OF PRODUCTS OR SERVICES SPECIFICALLY MEN TIONED IN SUB. S. (A) OR IN SUB. S. (B) OF EXPLANATION MENTIO NED SUPRA AND AS LISTED IN NOTIFICATION, ALL OF WHICH FALL INTO T HE EXPORT OF COMPUTER SOFTWARE FOR WHICH DEDUCTION UNDER SECTION 10A MUST BE GIVEN.' MATERIAL EVIDENCE SUPPORTING THAT T HE ASSESSEE-COMPANY MANUFACTURES AND DEVELOPS COMPUTER SOFTWARE ON TELECOM BILLING. 10. FURTHER THE AR SUBMITTED THAT: (I) ON THE BASIS OF THE ASSESSEE-COMPANY'S APPLICATION FOR 100% EXPORT ORIENTED UNIT UNDER STP SCHEME THE DIRECTOR OF SOFTWARE TECHNOLOGY PARKS OF INDIA (AN AUTONOMOUS SOCIETY UNDER DEPARTMENT OF INFORMATION TECHNOLOGY MINISTRY OF COMMUNICATION & INFORMATION TECHNOLOGY, GOVT. OF INDIA IN THEIR LETTER STPH/MSC/05- 06/1411/4907 DATED 11-11-2005 ACCORDED ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 7 PERMISSION AND APPROVAL TO THE ASSESSEE- COMPANY, TO PRODUCE AND EXPORT COMPUTER SOFTWARE FOR A PERIOD OF FIVE YEARS. AS PER THE AGREEMENT DATED 1-6-2006 BETWEEN THE APPELLANT- COMPANY AND SEAVUS, SWEDEN, THE ASSESSEE- COMPANY HAS TO PROVIDE SOFTWARE DEVELOPMENT SOLUTIONS TO SEAVUS, SWEDEN. (II) THE ASSESSEE-COMPANY SENT NINE BILLS TO SEAVUS AB, SWEDEN DURING THE PERIOD 1-4-2007 TO 31-3- 2008 IN RESPECT OF 'TELECOM BILLING SOFTWARE DEVELOPMENT CHARGES' FOR A TOTAL AMOUNT IN EUROS 5,14,502-47 (EQUIVALENT TO RS. 2,89,27,296) AND THE SEAVUS MADE PAYMENTS TO THE ASSESSEE- COMPANY THE ABOVE SAID AMOUNTS THROUGH THE ASSESSEE-COMPANY'S CITIBANK A/C (70% THEREOF CREDITED IN EUROS A/C AND 30% THEREOF CREDITED IN INDIAN RUPEES A/C OF CITIBANK. (III) AS PER THE AGREEMENT DATED 1-6-2006 AND DATED 4-1-2007 BETWEEN THE ASSESSEE-COMPANY AND ITS KNOWLEDGE-PARTNERS VIZ., SOLRHIBUS CONSULTING INC, CANADA AND TRICOLOR SOLUTIONS, USA, WHO WERE TO PROVIDE SERVICES OF TECHNICALLY QUALIFIED AND EXPERIENCED PERSONNEL FOR DEVELOPING TELECOM ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 8 BILLING SOFTWARE SOLUTIONS AND ACTUALLY THESE TWO KNOWLEDGE-PARTNERS HAVE PROVIDED SUCH PERSONNEL TO THE ASSESSEE-COMPANY DURING THE YEAR. (IV) THE ASSESSEE-COMPANY MADE PAYMENT THROUGH ITS CITIBANK EURO A/C AMOUNTS OF 1,22,685.18 (EUROS) TO SOLRHIBUS CONSULTING INC AND THE SAME WAS CREDITED IN THEIR BANK A/C MAINTAINED AT KOMERCIJALNEA BANKA SKOPJE DURING THE YEAR AND SIMILARLY THE ASSESSEE-COMPANY MADE PAYMENT THROUGH ITS CITIBANK EURO A/C AMOUNTS OF 61,900 (IN EUROS) TO TRICOLOR SOLUTIONS LLC AND THE SAME WAS CREDITED IN THEIR BANK A/C AT LLOYDS TSB BANK. AS SUCH, A TOTAL AMOUNT IN EUROS 1,88,585 (EQUIVALENT TO RS. 1,11,46,514/-) WAS PAID BY THE ASSESSEE-COMPANY TO THE AFORESAID KNOWLEDGE- PARTNERS DURING THE YEAR IN THE MATTER OF DEVELOPMENT OF COMPUTER SOFTWARE. 11. THE LEARNED AR FURTHER DREW OUR ATTENTION TO THE CB DT CIRCULAR NO. 01/2013, F. NO. 178/84/2012-ITA-1 DATED 1 7 TH JANUARY, 2013 SPECIFICALLY PARA 2(I)(B)(A) WHICH RE ADS AS UNDER: 'CBDT HAD EARLIER ISSUED A CIRCULAR (CIRCULAR NO. 6 94, DATED 23-11-1994) WHICH PROVIDED THAT A UNIT SHOULD NOT B E DENIED ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 9 TAX-HOLIDAY UNDER SECTION 10A OR 10B ON THE GROUND THAT THE COMPUTER SOFTWARE WAS PREPARED ON-SITE, AS LONG A S IT WAS A PRODUCT OF THE UNIT, I.E., IT IS PRODUCED BY THE UN IT. HOWEVER, CERTAIN DOUBTS APPEAR TO HAVE ARISEN FOLLOWING THE INSERTION OF EXPLANATION 3 TO SECTIONS 10A AND 10B (VIDE FINANCE ACT, 2001) AND EXPLANATION 2 TO SECTION 10AA (VIDE SPECI AL ECONOMIC ZONES ACT, 2005) PROVIDING THAT THE PROFI TS AND GAINS DERIVED FROM ON SITE DEVELOPMENT OF COMPUTER SOFTWARE (INCLUDING SERVICES FOR DEVELOPMENT OF SOFTWARE) OU TSIDE INDIA SHALL BE DEEMED TO BE THE PROFITS AND GAINS DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE OUTSIDE INDIA, AND A C LARIFICATION HAS BEEN SOUGHT ON THE IMPACT OF THE EXPLANATION ON THE TAX- BENEFITS AS COMPARED TO THE SITUATION THAT EXISTED PRIOR TO THE AMENDMENTS.' 12. HE ALSO DREW OUR ATTENTION TO CBDT CIRCULAR NO. 694 DATED 23.11.1994 WHICH READS AS UNDER: CIRCULAR : NO. 694, DATED 23-11-1994. 157. FREE TRADE ZONES SPECIFIED FOR THE PURPOSES OF SECTION 10A UNDER EXPLANATION (I) THERETO - EFFECTIVE FROM ASSE SSMENT YEAR 1988-89 ONWARDS IN EXERCISE OF THE POWERS CONFERRED BY CLAUSE (I) O F THE EXPLANATION TO SECTION 10A OF THE INCOME-TAX AC T, 1961 (43 OF 1961), THE CENTRAL GOVERNMENT HEREBY SPECIFY THE FOLLOWING FREE TRADE ZONES FOR THE PURPOSES OF THE SAID SECTI ON FOR THE ASSESSMENT YEARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1988: (I) FALTA EXPORT PROCESSING ZONE IN WEST BENGAL; (II) MADRAS EXPORT PROCESSING ZONE IN TAMIL NADU; (III) COCHIN EXPORT PROCESSING ZONE IN KERALA; (IV) NOIDA EXPORT PROCESSING ZONE AT NOIDA IN UTTA R PRADESH. NOTIFICATION : NO. SO 3231, DATED 29-9-1987. 158. SOFTWARE TECHNOLOGY PARKS SCHEME 1.0 ATTENTION IS INVITED TO THE MINISTRY OF COMMERC E NOTIFICATION NO. 33/(RE)/ 92-97, DATED 22ND MARCH, 1994, NOTIFYING THE ABOVE SCHEME. IN EXERCISE OF THE POWE RS CONFERRED IN SUB-SECTION (1) OF SECTION 3 OF THE FOREIGN TRAD E (DEVELOPMENT AND REGULATION) ACT, 1992, THE CENTRAL GOVERNMENT HEREBY NOTIFIES THE FOLLOWING AMENDED SO FTWARE TECHNOLOGY PARK (STP) SCHEME. ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 10 2.0 SOFTWARE TECHNOLOGY PARKS (STP) SCHEME : 2.1 THE SOFTWARE TECHNOLOGY PARK (STP) SCHEME IS A 100 PER CENT EXPORT ORIENTED SCHEME FOR UNDERTAKING SOFTWAR E DEVELOPMENT FOR EXPORT USING DATA COMMUNICATION LIN K OR IN THE FORM OF PHYSICAL EXPORTS INCLUDING EXPORT OF PROFES SIONAL SERVICES. 2.2 A SOFTWARE TECHNOLOGY PARK (STP) MAY BE SET UP BY THE CENTRAL GOVERNMENT, STATE GOVERNMENTS, PUBLIC OR PR IVATE SECTOR UNDERTAKINGS OR ANY COMBINATION THEREOF. AN STP MAY BE AN INDIVIDUAL UNIT BY ITSELF OR IT MAY BE ONE OF SUCH UNITS LOCATED IN AN AREA DESIGNATED AS STP COMPLEX BY THE DEPARTMENT OF ELECTRONICS. 2.3 THE SCHEME IS ADMINISTERED BY THE DEPARTMENT OF ELECTRONICS, GOVERNMENT OF INDIA, THROUGH DIRECTORS OF RESPECTIVE SOFTWARE TECHNOLOGY PARKS WHICH FORM PAR T OF THE SOFTWARE TECHNOLOGY PARKS OF INDIA, A SOCIETY ESTAB LISHED BY THE DEPARTMENT OF ELECTRONICS, GOVERNMENT OF INDIA AND REGISTERED UNDER THE SOCIETIES REGISTRATION ACT, 18 60. AN APPLICATION IN THE PRESCRIBED FORMAT FOR ESTABLISHI NG A SOFTWARE TECHNOLOGY PARK UNIT MAY BE SUBMITTED TO THE CHIEF EXECUTIVE OF THE SOFTWARE TECHNOLOGY PARK COMPLEX ALONG WITH THE DETAILS OF THE SOFTWARE PROJECT. SUCH APPLICATION W ILL BE CONSIDERED BY AN INTER-MINISTERIAL STANDING COMMITT EE (IMSC) CONSTITUTED UNDER THE CHAIRMANSHIP OF THE SECRETARY , DEPARTMENT OF ELECTRONICS, GOVERNMENT OF INDIA, NOT IFIED, VIDE GAZETTE NO. 294 [G.S.R. NO. 526(E)], DATED AUGUST 1 3, 1991, PUBLISHED IN SUB-SECTION (I) OF SECTION 3 OF PART I I OF THE EXTRAORDINARY GAZETTE OF INDIA AND RECONSTITUTED BY NOTIFICATION NO. SO 177(E), DATED FEBRUARY 22, 1993 , PUBLISHED IN PART II, SECTION 3, SUB-SECTION (II) O F THE EXTRAORDINARY GAZETTE OF INDIA. 2.4 AN STP UNIT MAY IMPORT, FREE OF DUTY, ALL TYPES OF GOODS, INCLUDING CAPITAL GOODS, REQUIRED BY IT FOR MANUFAC TURE, PRODUCTION OR PROCESSING PROVIDED THEY ARE NOT PROH IBITED ITEMS IN THE NEGATIVE LIST OF IMPORTS. THE SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI), MAY ALSO IMPORT, FREE OF DUT Y, ALL TYPES OF GOODS, FOR CREATING THE CENTRAL FACILITY FOR USE BY SOFTWARE DEVELOPMENT UNITS IN THE STP COMPLEX. STP UNITS SHA LL ALSO BE PERMITTED TO IMPORT CAPITAL GOODS ON LOAN FROM CLIE NTS FOR SPECIFIED PERIODS FOR EXECUTING SPECIFIED PROJECTS. 2.5 THE STP UNIT WILL BE A DUTY-FREE CUSTOM-BONDED AREA. THE NORMAL PROCEDURE APPLICABLE FOR CUSTOM BONDING WILL BE FOLLOWED. ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 11 13. THE AR FURTHER DREW OUR ATTENTION TO THE MOU ENTERE D BY THE ASSESSEE WITH THE CUSTOMER PLACED AT PAPER B OOK NOS. 66-70, 71-73, 74-76 AND 77-79 SPECIFICALLY TO SHOW ALL THE SERVICES PROVIDED BY THE ASSESSEE AND ALSO DETAILS OF INVOICES: NATURE OF SERVICES PROVIDED BY SOFTWARE DEVELOPERS: (A) PERFORM ONSITE TECHNICAL FEASIBILITY ANALYSIS. (B) ASSIST IN EFFORT ESTIMATION AND SCHEDULING. (C) PREPARE THE SOFTWARE DEVELOPMENT PROJECT PLANS. (D) WRITE TECHNICAL SPECIFICATION REQUIREMENTS. (E) WRITE HIGH LEVEL AND DETAILED LEVEL DESIGN DOCUMENT S. (F) SYSTEM ANALYSIS. (G) SOFTWARE DESIGN, PROGRAMMING AND CODING. (H) SOFTWARE TESTING. (I) SOFTWARE DOCUMENTATION. (J) PERIODIC REVIEW AND APPROVAL OF THE DELIVERABLES. INVOICES: ON A MONTHLY BASIS, COMPANY IS RESPONSIBLE FOR CREA TING CENTRALIZED INVOICES FOR THE TOTAL EFFORT PUT IN BY ALL THE TEL ECOM BILLING EXPERTS (COMPANY'S INDIAN EMPLOYEES AS WELL AS NON-INDIAN T ELECOM BILLING EXPERTS/KNOWLEDGE PARTNERS). DRAFT EMAIL BASED INV OICES WILL BE GENERATED FOR EACH MONTH BY THE COMPANY BASED ON TH E INPUTS (TIME, WORK, EXPENSES) IDENTIFIED BY THE SEAVUS & COMPANY. THESE DRAFT EMAIL BASED INVOICES WILL BE REVIEWED BY COMPANY AN D SEAVUS FOR 2 WEEKS, BEFORE THE FINALIZED INVOICES CAN BE PREPARE D AND PAYMENTS FROM SEAVUS CAN BE MADE TO COMPANY.' 14. FURTHER THE AR RELIED ON THE JUDGEMENT OF DELHI HIG H COURT IN THE CASE OF CIT VS. EDS ELECTRONIC DATA SY STEMS (INDIA) PVT. LTD., IN ITA NO. 474/09 DATED 4 TH OCTOBER 2012 SPECIFICALLY TO THE FOLLOWING PARAS: '9. REGARDING QUESTION (B), AS DISCUSSED IN THE PRE CEDING PARAGRAPH OF THIS JUDGMENT THE ASSESSEE CLAIMED BEN EFIT OF SECTION 10A W. E. F. ASSESSMENT YEAR 2001-02. CONCE DEDLY ITS UNIT WAS SET UP IN CHENNAI. IT SECURED THE BENEFIT OF SECTION ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 12 80HHE FOR THE ASSESSMENT YEAR 1997-98. THE ASSESSIN G OFFICER SEEMS TO HAVE VAGUELY SUGGESTED THAT THE ASSESSEE O UGHT TO HAVE CLAIMED DEDUCTION UNDER SECTION 10A FROM THE A SSESSMENT YEAR 1997-98 ITSELF. THIS COURT FINDS NO PRINCIPLE OF LAW OR FACTUAL BASIS FOR SUCH AN ASSUMPTION. THE ASSESSEE S CASE THROUGHOUT HAS BEEN THAT IT SOUGHT TO OPEN A UNIT A ND WAS GRANTED PERMISSION TO DO SO IN A SOFTWARE TECHNOLOG Y PARK ON 27.4.2004 IN CHENNAI; SUCH BEING THE CASE, THE ASSE SSING OFFICER APPEARS TO HAVE ADOPTED A RESTRICTIVE INTER PRETATION OF SECTION 10A TO HOLD THAT THE ASSESSEE CAN CLAIM THE BENEFIT UNDER SECTION 10A ONLY FROM THE INCEPTION OF ITS UN IT UNDER SECTION 80HHE. NO SUCH IMPLIED OR EXPRESS PROVISION TO SUPPORT THE FINDINGS IN THAT REGARD CAN BE SEEN FRO M THE ACT. 10. AS REGARDS THE FINDING OF THE ASSESSING OFFICER VIS--VIS THE SPLITTING UP OF THE UNIT, THE ASSESSEES CLAIM WAS THAT IT SET UP A UNIT IN CHENNAI FOR THE FIRST TIME IN MARCH, 2000. BESIDES A MERE STATEMENT THAT THE SETTING UP OF THE UNIT IN C HENNAI AMOUNTED TO SPLITTING UP OF AN ALREADY EXISTING UNI T, THE ASSESSING OFFICER DOES NOT SEEM TO HAVE RECORDED AN Y OTHER FINDING. THIS COURT IS OF THE OPINION THAT THE SECT ION 10A(2)(II) STATES THAT THE PROVISION IS APPLICABLE TO AN UNDER TAKING WHICH IS NOT FORMED BY THE SPLITTING UP, OR THE RECONSTR UCTION OF, THE BUSINESS ALREADY IN EXISTENCE. THE EXPRESSION SPL ITTING UP AND RECONSTRUCTION HAVE TO BE READ ALONG WITH THE WORD BUSINESS. WHAT PARLIAMENT SEEMS TO HAVE INTENDED HERE IS THAT THE SETTING UP OF UNIT SHOULD NOT BE A DEVICE IN ORDER TO SECURE DEDUCTION. THIS COURT HERE NOTICES THAT THER E IS A CERTAIN STRINGENCY IN THE SECTION 10A; APPROVAL IS TO BE GI VEN BY A PRESCRIBED AUTHORITY IN TERMS OF SECTION 10A (EXPLA NATION 2 CLAUSE (VII) TO SECTION 10A). IN THIS CASE IT IS NO T DISPUTED THAT SUCH APPROVAL WAS GIVEN AND THE UNIT, SET UP IN THE SPECIAL ECONOMIC ZONE TERMED AS A SOFTWARE TECHNOLOGY PARK. HAVING REGARD TO THESE ESSENTIAL CONDITIONS, THE ASSUMPTIO N OF THE ASSESSING OFFICER THAT THE EXISTING SECTION 80HHE U NIT WAS IN FACT SPLIT UP FOR THE FORMATION OF A UNIT IN CHENNA I WHICH CLAIMED STP BENEFIT WAS UNFOUNDED ON FACTS. 11. THE THIRD LIMB OF THIS QUESTION IS AS TO WHETHE R THE ASSESSEE IN FACT ENGAGED ITSELF IN THE MANUFACTURE OF COMPUT ER SOFTWARE DEFINED IN EXPLANATION 2 TO SECTION 10A OF THE ACT. THE ASSESSING OFFICER HAD INQUIRED AS TO WHAT THE ASSES SEE MEANT BY PROGRAMME MANAGEMENT SERVICES. THE RELEVANT EX TRACT OF THE ASSESSING OFFICERS ORDER IN THIS REGARD IS AS FOLLOWS:- THE ASSESSEE WAS ASKED TO EXPLAIN THE NATURE OF SE RVICE PROVIDED IN THIS REGARD BECAUSE AS PER THE COPIES O F INVOICES ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 13 RAISED BY THE ASSESSEE THE NATURE OF SERVICE PROVID ED IS MENTIONED AS PROGRAM MANAGEMENT SERVICES. THE ASSESSEE HAS EXPLAINED IN THIS REGARD AS UNDER: - IT IS SUBMITTED THAT THE PROGRAM MANAGEMENT SERVI CES AS MENTIONED IN THE INVOICES RAISED BY THE ASSESSEE CO MPANY FOR THE SUBJECT ASSESSMENT YEAR ARE IN THE NATURE OF SO FTWARE DEVELOPMENT ELIGIBLE FOR DEDUCTION U/S 80HHE OR EXE MPTION SECTION 10A OF THE ACT, AS THE CASE MAY BE. THE TER M PROJECT MANAGEMENT SERVICES IS MERELY A NOMENCLATURE ASSIG NED BY THE ASSESSEE TO SOFTWARE DEVELOPMENT SERVICES RENDE RED BY THE ASSESSEE COMPANY. THE REPLY OF THE ASSESSEE IS NOT ACCEPTABLE. THE AS SESSEE HAS NOT GIVEN THE EXACT NATURE OF SERVICE PROVIDED BY I T AND HOW IT IS ELIGIBLE TO THE DEDUCTION U/S 10A OR 80HHE. THE TERM USED BY THE ASSESSEE PROGRAMME MANAGEMENT SERVICE IN I TS INVOICES CANNOT IN ANY WAY BE SAID TO BE COVERED AS COMPUTER SOFTWARE WITHIN THE MEANING OF SECTION 10A. IN VIEW OF THE DETAILED REASON GIVEN SUPRA, NO EXEM PTION U/S 10A SHALL BE ALLOWED TO THE ASSESSEE AS PER SECTION 10(2) OF THE ACT. 12. IN APPEAL, THE CIT (APPEALS) SOUGHT A REMAND RE PORT. HE ALSO NOTICED THAT THE ASSESSEE FILED A CERTIFICATE DURING THE ASSESSMENT PROCEEDINGS TO THE EFFECT THAT THE PROJ ECT MANAGEMENT SERVICES RENDERED BY THE ASSESSEE ARE A CTUALLY SOFTWARE DEVELOPMENT SERVICES RENDERED IN AND OUTSI DE INDIA, THUS ELIGIBLE TO DEDUCTION UNDER SECTION 10A OF THE ACT. THE CIT (APPEALS) FURTHER NOTICED THAT THE QUARTERLY RE TURN FILED BY THE STP UNIT, CHENNAI AND THE DOCUMENTS FILED WITH IT SHOWED CUMULATIVE EXPORT OF SOFTWARE, TYPE OF SOFTWARE, NA ME OF THE COUNTRY TO WHICH THE EXPORTS WERE MADE AND THAT 35 SOFTWARE ENGINEERS WERE EMPLOYED BY IT FOR PROVIDING THE SER VICES. THE CIT (APPEALS) SOUGHT A REMAND REPORT WHICH WAS GIVE N IN 16.02.2005. THE CIT (APPEALS) NOTICED THAT IN THE R EMAND REPORT THE ASSESSING OFFICER HAD NOT TAKEN ANY OBJE CTION IN RESPECT OF THE COMPLIANCE OF VARIOUS CONDITIONS OR THAT THEY HAVE NOT BEEN FULFILLED BY THE ASSESSEE UNDER SECTI ON 10A. THE RELEVANT DISCUSSION IS AT PAGE 36 OF THE PAPER-BOOK : - THEREFORE, BOTH THE NAMES, I.E. THE NAME OF EDS EL ECTRONIC DATA SYSTEM (INDIA) PRIVATE LIMITED AND ELECTRONIC DATA SYSTEMS (INDIA) PRIVATE LIMITED ARE BEING USED INTE RCHANGEABLY AND OTHERWISE ALSO ARE IMMATERIAL AS FAR AS THE CLA IM OF EXEMPTION U/S 10A IS CONCERNED WHICH IS IN RESPECT OF THE UNDERTAKING OF THE ASSESSEE QUALIFYING THE CONDITIO NS ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 14 PRESCRIBED IN THE SECTION. IN VIEW OF THE ABOVE FAC TS, THE AO IS DIRECTED TO ALLOW THE EXEMPTION CLAIMED BY THE APPE LLANT. THIS GROUND OF APPEAL IS ALLOWED. 13. THE ABOVE REASONING WAS UPHELD BY THE ITAT. THI S COURT IS OF THE OPINION THAT THE VIEW TAKEN BY THE ASSESSING OFFICER, THAT THE NATURE OF SERVICES RENDERED OR EXTENDED BY THE ASSESSEE WERE NOT COMPUTER SOFTWARE, IS CONTRARY TO THE RE CORD. THE ASSESSING OFFICERS ORDER HAS ALLUDED TO THE CBDT C IRCULAR DATED 26.09.2000 WHICH EXTENDS OR EXPLAINS THE SERV ICES AS INCLUDING BACK-OFFICE; OPERATIONS; CALL CENTRES; CO NTENT DEVELOPMENT OR ANIMATION; DATA PROCESSING ENGINEERI NG AND DESIGN; GEOGRAPHIC INFORMATION SYSTEM SERVICES, HUM AN RESOURCE SERVICES; INSURANCE CLAIM PROCESSING; LEGA L DATABASES; MEDICAL TRANSCRIPTION, PAY ROLL; REMOTE MAINTENANCE, REVENUE ACCOUNTING, SUPPORT CENTRES; W EB-SITE SERVICES ETC. IT IS APPARENT THAT THE CBDT ITSELF H AD INTERPRETED THE TERM COMPUTER SOFTWARE OCCURRING IN EXPLANATI ON 2 TO SECTION 10A OF THE ACT IN AN EXPANSIVE RATHER THAN A NARROW MANNER AS WAS DONE IN THE PRESENT CASE BY THE ASSES SING OFFICER. COMPUTER SOFTWARE EVEN OTHERWISE, GENERI CALLY, HAS TO BE GIVEN A WIDER INTERPRETATION SINCE IT IMPLIES A SYSTEM OR SOFTWARE WHICH WOULD BE CAPABLE OF CATERING TO DIFF ERENT SERVICES CAPABLE OF CUSTOMIZATION HAVING REGARD TO THE PECULIAR NEEDS OF A GIVEN SITUATION. IN THIS CASE THE MATERI ALS PLACED BY THE ASSESSEE ON RECORD REVEAL THAT ITS PROGRAM MAN AGEMENT SYSTEM WAS NOTHING BUT A DEVELOPMENT OF SOFTWARE W HICH ASSISTED IN MANAGEMENT SERVICES. THE CBDT ITSELF HA S TREATED A WIDE ARRAY OF SERVICES WHICH ARE ASSISTED BY COMPUT ER SOFTWARE I.E. BACK OFFICE SUPPORT, CALL CENTRE, MEDICAL TRAN SCRIPTION, ETC. AS FALLING WITHIN THE RUBRIC OF COMPUTER SOFTWARE . THE ASSESSEES PROGRAM MANAGEMENT SERVICES WHICH IS A METHOD OF PROVIDING SOFTWARE TO ACHIEVE A PARTICULAR END C ANNOT BE SAID TO BE EXCLUDED FROM THE TERM COMPUTER SOFTWAR E. THIS COURT ACCORDINGLY HOLDS THAT THE FINDINGS OF THE TR IBUNAL ARE SOUND AND DO NOT REQUIRE ANY INTERFERENCE. 15. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT IT IS VERY IMPORTANT TO UNDERSTAND THE FUNDAMENTAL PROVIS IONS OF SECTION 10A OF THE INCOME-TAX ACT, 1961 AND THEN RE AD THE NOTIFICATIONS OF THE CBDT TO DECIDE WHETHER THE SAI D EXEMPTION IS ALLOWABLE TO THE ASSESSEE OR NOT. ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 15 16. THE DR SUBMITTED THAT THE TERM 'DERIVED DIRECTLY FR OM THE EXPORT OF SOFTWARE' IS TO BE CONSIDERED FOR EXE MPTION U/S 10A. THE ASSESSEE HAS RELIED HEAVILY ON THE DECISIO N OF THE ITAT BANGALORE BENCHES IN THE CASE OF WIPRO LTD VS. CIT IN ITA NUMBER 895- 896/BANG/2003 DATED 21 ST JUNE 2005. VIDE THIS DECISION THE TRIBUNAL HAS REFERRED TO THE NOTI FICATION NUMBER 890 DATED 26 TH SEPTEMBER 2000 GIVEN BY THE CBDT WHEREBY RENDERING OF TECHNICAL SERVICE, DEVELOPMENT OF PRODUCT, ENABLING THE USE OF PRODUCT, LICENSING OF PRODUCTS, DEPUTING ENGINEERS WERE RENDERING SERVICES FROM IND IA TO OUTSIDE INDIA FOR EXPORT OF PRODUCTS OR SERVICES SP ECIFICALLY MENTIONED IN, THAT WOULD VACATION FALL WITHIN THE M EANING OF EXPORT OF COMPUTER SOFTWARE FOR WHICH DEDUCTION U/S 10A MUST BE GIVEN. 17. ACCORDING TO THE DR, THE ABOVE ORDER IS NOT APPLICA BLE TO THE ASSESSEE'S CASE. THAT ORDER IS PERTAINING T O ASSESSMENT YEARS 1998-99 AND 1999-2000. THE TRIBUNAL HAS STATE D CLEARLY THAT WITH EFFECT FROM 1 ST APRIL, 2001 SUBSECTION (2) OF SECTION 10A WAS AMENDED AND NOW ONLY SUCH PROFIT WHICH IS D ERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER S OFTWARE WAS TO BE ALLOWED AS DEDUCTION. HOWEVER, PRIOR TO THIS AMENDMENT THE ENTIRE PROFIT OF SUCH UNDERTAKING WAS TO BE EXCLUDED. THEREFORE, THERE IS NO DIRECT APPLICATION OF THE ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 16 AFOREMENTIONED DECISION TO THE PRESENT CASE. HE ALS O SUBMITTED THAT NOTIFICATION NUMBER 890(E) DATED 26 TH SEPTEMBER 2000 BY THE CBDT SPECIFIES 15 INFORMATION TECHNOLOGY ENABLED PRODUCTS AND SERVICES WITH REGAR D TO EXPLANATION TO SECTION 10A OF THE INCOME-TAX ACT. HOWEVER, IT HAS TO BE UNDERSTOOD THAT THIS NOTIFICATION DOES NO T OVERRIDE THE SECTION ITSELF. IT ONLY GOES ON TO ACTUALLY CLA RIFY THE SCOPE OF THE TERM 'COMPUTER SOFTWARE'. THE ASSESSEE HAS C LAIMED THAT ITEM NUMBER 7 ON THE LIST OF THIS NOTIFICATION PERTAINS TO HUMAN RESOURCES SERVICES. IT HAS STATED THAT IT PR OVIDED SUCH HUMAN RESOURCE SERVICES TO ITS PRINCIPAL IN SWEDEN AND WAS THUS ELIGIBLE FOR THE AFOREMENTIONED DEDUCTION U/S 1 0A. HOWEVER, THE TERM 'HUMAN RESOURCE SERVICES' APPEARI NG IN THIS LIST OF THE AFOREMENTIONED NOTIFICATION HAS TO BE READ IN CONJUNCTION WITH EXPLANATION TO SECTION 10A I.E., I N CONJUNCTION WITH THE TERM 'COMPUTER SOFTWARE'. IN O THER WORDS, HUMAN RESOURCE SERVICES WHICH RELATED TO THE DEVELOPMENT OF COMPUTER SOFTWARE OR ITS EXPORT/ INS TALLATION/ SERVICE WOULD QUALIFY FOR THE DEDUCTION. THIS NOTIF ICATION TAKES INTO ACCOUNT THE REALITY OF BUSINESS WHEREBY HIGH END SOFTWARE TYPICALLY REQUIRES SOME SORT OF ON-SITE DE VELOPMENT OF SOFTWARE AND ALSO THE UTILISATION OF SERVICES OF TECHNICAL PERSONNEL TO INSTALL THE SOFTWARE AND TRAIN THE EMP LOYEES OF THE PURCHASING ORGANISATION. HOWEVER, THIS TERM I.E ., 'HUMAN ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 17 RESOURCE SERVICES' DOES NOT ENGULF IN ITS AMBIT EVE RY FORM OF HUMAN RESOURCE SERVICE. INDEED, IF THIS WERE THE CA SE THEN THE NOTIFICATION WOULD EFFECTIVELY DEFEAT THE VERY PURP OSE OF SECTION 10A WHERE TAX EXEMPTION IS GIVEN FOR THE DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE. THIS H AS BEEN DONE TO ENCOURAGE THE INDIAN IT INDUSTRY SO AS TO M AKE IT GLOBALLY COMPETITIVE AND VIBRANT. THE PURPOSE OF TH IS SECTION IS NOT THE EXPORT OF HUMAN RESOURCES OR PERSONNEL F ROM THIS COUNTRY. THEREFORE, THE CONSTRUCTION OF SECTION 10A , EXPLANATION 2 AND THE CLARIFICATORY NOTIFICATION 89 0 ARE TO BE READ BY CONSIDERING SECTION 10A AS THE SUPERSET, EX PLANATION 2 AS THE SUBSET AND THE NOTIFICATION AND ITS LIST O F 15 SERVICES AS A FURTHER SUBSET. THIS IS THE CORRECT AND ONLY WAY TO UNDERSTAND THE LEGISLATIVE INTENT AND THE SCOPE OF THE AFOREMENTIONED SECTION OF THE STATUTE. 18. THE DR SUBMITTED THAT WITH THIS BACKGROUND THE SPECIFIC FACTS OF THE ASSESSEE'S CLAIM ARE TO BE EX AMINED. THE ASSESSEE HAS STATED IN ITS EXPLANATION THAT IT IS A SPECIALIST IN DEVELOPMENT OF TELECOM BILLING SOFTWARE. THIS SOFTW ARE CAPTURES THE CALL USAGE OF ALL CUSTOMERS ON A DAILY BASIS, RATES THE CALLS, APPLIES THE DISCOUNTS, RATE PLANS AND GE NERATES THE MONTHLY BILLS THAT CAN BE SENT TO CUSTOMERS. IT MAI NTAINS ALL DATA RELATED TO CUSTOMERS, PRODUCTS, OFFERS, RATE P LANS, ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 18 PREVIOUS BILLS ETC. SEAVUS GROUP PROVIDES IT SERVIC ES AND SOFTWARE SOLUTIONS FOR BUSINESSES ACROSS EUROPE AND AMERICA. IT HAS A WORKFORCE OF 300 PEOPLE WITH OFFICES AND O PERATIONS IN SWEDEN, MACEDONIA, USA, LATVIA, BILL RS AND SERB IA. AS PER THE ASSESSEE, IT HAD A TIE-UP WITH THIS EUROPEAN PA RTNER TO DEVELOP TELECOM BILLING SOFTWARE. ONCE THE SYSTEM W AS READY, THE EMPLOYEES OF THE ASSESSEE WOULD MOVE TO EUROPE AND INTEGRATE AND INSTALL THIS SYSTEM INTO THE EUROPEAN COMPANY. IN THIS REGARD IT IS TO BE SEEN THAT THE INCOME EAR NED BY THE ASSESSEE IS NOT WITH RESPECT TO ANY EXPORT OF SOFTW ARE BUT WITH RESPECT TO EXPORT OF ITS MANPOWER TO ITS EUROP EAN PARTNER. THE ASSESSEE HAS ABSOLUTELY GIVEN NO DETAI LS AS TO WHEN WAS THE SOFTWARE DEVELOPED, WHAT WAS THE SCOPE OF THE SOFTWARE AND ITS NATURE OF INTEGRATION INTO THE SYS TEM OF THE EUROPEAN PARTNER. THE DR SUBMITTED THAT THE PERSONN EL OF THE ASSESSEE COMPANY WHO HAD BEEN SENT TO THE EUROPEAN PARTNER WERE SENT FOR A PERIOD OF 3 YEARS. 19. THE DR SUBMITTED THAT THERE IS ABSOLUTELY NO SCOPE AND NO DETAIL MENTIONED REGARDING ANY DEVELOPMENT OF SO FTWARE. EUROS 275 PER DAY ARE TO BE PAID TO THE ASSESSEE FO R 40 WORKING HOURS PER WEEK WITH RESPECT TO THIS PERSON. IDENTICAL CONTRACTS ARE THERE WITH RESPECT TO OTHER PEOPLE. BY NO STRETCH OF IMAGINATION IS THIS A CONTRACT FOR SOFTW ARE ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 19 DEVELOPMENT. IT IS CLEARLY A CONTRACT FOR SERVICES RENDERED BY PERSONNEL. NO DETAILS OF SOFTWARE IS MENTIONED. 20. THE DR SUBMITTED THAT THE ASSESSEE HAS STATED THAT THE MAJOR PART OF SOFTWARE IS DEVELOPED BY IT IN INDIA. THEREAFTER SOME OF ITS TRAINED PERSONNEL ARE SENT TO SWEDEN TO FINE TUNE THE SOFTWARE, INSTALL IT AND TO TRAIN THE EMPLOYEES OF THE EUROPEAN PARTNER. HOWEVER THERE IS NO MENTION OF AN Y OF THESE IN THE ASSIGNMENT SCHEDULE SHOWN ABOVE. FOR T HIS KIND OF CONTRACT, DETAILS OF SOFTWARE DEVELOPMENT, SCHED ULE OF DEVELOPMENT, INTEGRATION AND EXACT TRAINING SCHEDUL ES ARE CLEARLY SPELT OUT. PAYMENT IS MADE AS PER THE NUMBE R OF TRAINING SESSIONS AND IT IS ALSO CLEARLY SPELT OUT AS TO WHO WOULD BE TRAINED AND IN WHAT AREA. ALL THESE ASPECT S ARE ABSENT IN THE SCHEDULE SHOWN ABOVE. CLEARLY, THE PE RSONAL EXPORTED WERE NOT ASSIGNED TO PERFORM ANY OF THE TA SKS WHICH HAVE BEEN MENTIONED BY THE ASSESSEE. 21. THE DR FURTHER SUBMITTED THAT THE ASSIGNMENT IS FOR THREE YEARS. IT IS NOT UNDERSTOOD AS TO HOW SUCH A LONG TIME IS TAKEN TO ONLY INSTALL THE SOFTWARE AND TO TRAIN THE PERSONNEL. IT IS INTERESTING TO SEE THAT THE EUROP EAN PARTNER OPERATES IN SIX COUNTRIES. IT ONLY HAS A WORKFORCE OF 300 PEOPLE. THIS TRANSLATES TO AN AVERAGE OF 50 PEOPLE PER COUNTRY. IF THE TOP AND MIDDLE MANAGEMENT IS REMOV ED IT ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 20 WOULD LEAVE VERY LITTLE MANPOWER FOR OPERATIONAL WO RK. VERY CLEARLY, THE EUROPEAN PARTNER REQUIRED MANPOWER FOR OPERATIONAL WORK I.E. FOR DOING BILLING AND OTHER R OUTINE WORK. THE AMOUNT PAID WORKS OUT TO EUROS 35 PER HOUR. THI S IS NOT THE SALARY OF A SOFTWARE PROFESSIONAL OR A TRAINER IN EUROPE. THIS IS CLEARLY THE SALARY OF A BASE LEVEL OPERATOR . 22. THE DR SUBMITTED THAT FROM THE AVAILABLE INFORMATIO N IT IS NOT CLEAR WHETHER THE SOFTWARE FOR BILLING WAS D EVELOPED BY THE ASSESSEE OR NOT. HOWEVER, EVEN IF THIS SOFTWAR E WAS DEVELOPED, THE EXPORT OF THE PRESENT PERSONNEL WAS NOT AT ALL RELATED TO THE DEVELOPMENT, INTEGRATION AND TRAININ G WITH RESPECT TO THE SOFTWARE. IT IS VERY CLEAR THAT HIRI NG OF PERSONNEL FROM EUROPE WOULD COST MUCH MORE. ACCORDI NGLY THE ACTUAL OPERATION WORK WAS OUTSOURCED FOR THREE YEARS TO THE ASSESSEE. THE ASSESSEE SENT ITS LOWER-LEVEL PER SONNEL TO RUN THE BASIC OPERATIONS. THIS OPERATION IS SIMILAR TO THE RUNNING OF A BPO. UNDER SECTION 10A OF THE INCOME TAX ACT, SOFTWARE DEVELOPMENT RELATING TO A BPO WOULD BE COV ERED PROVIDED THE CONDITIONS ARE SATISFIED. HOWEVER, CON TRACT PERTAINING TO SUPPLY OF MANPOWER FOR ACTUALLY RUNNI NG THE BPO IS NOT COVERED UNDER THE AFOREMENTIONED SECTION AS THIS IS NOT THE OBJECTIVE OF THE SECTION. THE OBJECTIVE IS CLEARLY THE DEVELOPMENT OF SOFTWARE INDUSTRY AND NOT OF BPO PER SONNEL. ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 21 IN THE PRESENT CASE THE MANPOWER CONTRACTS, AS ALRE ADY DISCUSSED DO NOT PERTAIN TO THE DEVELOPMENT OF SOFT WARE. THESE ARE CLEARLY OUTSIDE THE SCOPE OF SECTION 10A OF THE INCOME TAX ACT. ACCORDINGLY, HE SUBMITTED THAT THE ACTION OF THE AO AS CONFIRMED BY THE CIT(A) IS TO BE UPHELD. 23. WE HAVE CONSIDERED RIVAL SUBMISSIONS. THE DISPUTE BEFORE US IS WITH REGARD TO TREATMENT OF RECEIPT RE CEIVED BY THE ASSESSEE FROM M/S. SEAVUS GROUP VIDE AGREEMENT D ATED 1 ST JUNE, 2006 AND ENTITLEMENT OF DEDUCTION U/S. 10A OF THE ACT. THE ASSESSEE HAS ENTERED INTO AGREEMENT WITH M/S. SE AVUS GROUP ON 1 ST JUNE, 2006 AND THE SAID AGREEMENT WAS SUBJECT TO AMENDMENT ON THE SAME DAY. THESE AGREEMENTS ARE PLACED ON RECORD AT PAGE NOS. 66 TO 73 OF THE PAPER BOOK. BY THESE AGREEMENTS, THE ASSESSEE IS REQUIRED TO CARRY ON THE FOLLOWING ACTIVITIES: 1. PURPOSE AND SCOPE OF THIS AGREEMENT THIS AGREEMENT IS BETWEEN SEAVUS AND COMPANY. COMP ANY WILL PROVIDE THE TELECOM BILLING RELATED SOFTWARE DEVELO PMENT SOLUTIONS TO SEAVUS. 2. DELIVERABLES BY COMPANY COMPANY WILL PROVIDE SOFTWARE DEVELOPMENT SOLUTIONS FOR NEW APPLICATION DEVELOPMENT, EXISTING APPLICATION ENHAN CEMENT AND APPLICATION MAINTENANCE FOR SEAVUS. COMPANY IS RES PONSIBLE FOR DESIGNING AND DEVELOPMENT OF THE TELECOM BILLING AP PLICATIONS FOR SEAVUS BY DEPLOYING AND PUTTING TOGETHER BEST FIT T EAM OF TELECOM BILLING ANALYSIS, TELECOM BILLING ARCHITECTS, TELEC OM BILLING SENIOR MANAGERS QUALITY ASSURANCE, TELECOM BILLING DEVELOP ERS AND TELECOM BILLING TESTERS FROM ALL OVER. 3. NATURE OF SERVICES PROVIDED BY SOFTWARE DEVELOPE RS: ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 22 FOLLOWING TELECOM BILLING SOFTWARE DEVELOPMENT ACTI VITIES NEED TO BE PERFORMED BY COMPANY/COMPANY KNOWLEDGE PARTNERS TO SEAVUS: (A) PERFORM ONSITE TECHNICAL FEASIBILITY ANALYSIS. (B) ASSIST IN EFFORT ESTIMATION AND SCHEDULING. (C) PREPARE THE SOFTWARE DEVELOPMENT PROJECT PLANS. (D) WRITE TECHNICAL SPECIFICATION REQUIREMENTS. (E) WRITE HIGH LEVEL AND DETAILED LEVEL DESIGN DOCUMENT S. (F) SYSTEM ANALYSIS. (G) SOFTWARE DESIGN, PROGRAMMING AND CODING. (H) SOFTWARE TESTING. (I) SOFTWARE DOCUMENTATION. (J) PERIODIC REVIEW AND APPROVAL OF THE DELIVERABLES. INVOICES: ON A MONTHLY BASIS, COMPANY IS RESPONSIBLE FOR CREA TING CENTRALIZED INVOICES FOR THE TOTAL EFFORT PUT IN BY ALL THE TEL ECOM BILLING EXPERTS (COMPANY'S INDIAN EMPLOYEES AS WELL AS NON-INDIAN T ELECOM BILLING EXPERTS/KNOWLEDGE PARTNERS). DRAFT EMAIL BASED INV OICES WILL BE GENERATED FOR EACH MONTH BY THE COMPANY BASED ON TH E INPUTS (TIME, WORK, EXPENSES) IDENTIFIED BY THE SEAVUS & COMPANY. THESE DRAFT EMAIL BASED INVOICES WILL BE REVIEWED BY COMPANY AN D SEAVUS FOR 2 WEEKS, BEFORE THE FINALIZED INVOICES CAN BE PREPARE D AND PAYMENTS FROM SEAVUS CAN BE MADE TO COMPANY.' 24. FURTHER AS PER THE AGREEMENT, ASSESSEE-COMPANY HAS TO PREPARE DETAILED LEVEL SOFTWARE DESIGN DOCUMENT, DEVELOPMENT OF SOFTWARE AND CODING, CREATING OF TES T PLAN AND TESTING SOFTWARE, CREATING SOFTWARE DESIGN DOCU MENT, TEST PLAN PREPARATION, TEST DATA PREPARATION, CREATION O F TEST DOCUMENT, CREATION OF TRAINING DOCUMENT IN ADDITION TO THE ACTIVITIES MENTIONED IN CLAUSES (2) AND (3) OF THE AGREEMENT. FURTHER AS PER CLAUSE NO. 6 THE ASSESSEE HAS TO DO THE FOLLOWING ACTIVITIES: TELECOM BILLING SOFTWARE DEVELOPMENT WORK WOULD BE TRACKED BY MAN DAYS (EACH MAN-DAY CONSISTS OF 8 WORKING HOU RS PER DAY). ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 23 APART FROM COMPANY FULL-TIME INDIAN EMPLOYEES DEPLO YED FOR DEVELOPING THE TELECOM BILLING SOLUTION TO SEAVUS, COMPANY WILL ENGAGE SENIOR MOST TELECOM BILLING EXPERTS/TEL ECOM SOFTWARE DEVELOPMENT FIRMS (NON-INDIAN FIRMS) AS KN OWLEDGE PARTNERS FOR JVH SOLUTIONS TO BE BASED OUT OF EUROP E TO INTERACT WITH SEAVUS/SEAVUS CLIENTS FOR SMOOTH FACILITATION OF DEVELOPMENT OF TELECOM BILLING SOFTWARE SOLUTION FO R SEAVUS COMPANY AND SEAVUS WILL EQUALLY SHARE ALL THE EXPEN SES OF THE COMPANY DEPLOYED PERSONNEL'S RELATED TO ACCOMMODATI ON, UTILITIES, TRAVEL, VISA FEES, REFERRAL FEES, TRANSF ER FEES, FLIGHT CHARGES AND FOOD EXPENSES. 25. FURTHER APART FROM THE ASSESSEE-COMPANY'S INDIAN EMPLOYEES DEPLOYED FOR DEVELOPING BILLING SOLUTIONS TO SEAVUS, THE ASSESSEE-COMPANY WILL ENGAGE SENIOR MOS T TELECOM BILLING EXPERTS/ TELECOM DEVELOPMENT FIRMS ( NON- INDIAN FIRMS) AS KNOWLEDGE-PARTNERS FOR JVH SOLUTIO NS TO BE BASED OUT OF EUROPE TO INTERACT WITH SEAVUS/SEAVUS C LIENTS FOR SMOOTH FACILITATION OF DEVELOPMENT OF TELECOM BILLI NG SOFTWARE SOLUTIONS FOR SEAVUS AND THE ASSESSEE-COMP ANY AND SEAVUS WILL EQUALLY SHARE ALL THE EXPENSES OF THE C OMPANY DEPLOYED PERSONNEL'S RELATED TO ACCOMMODATION, TRAV EL, VISA FEES, REFERRAL FEES ETC. 26. AS PER THE AGREEMENT DATED 1-6-2006 BETWEEN THE ASSESSEE-COMPANY AND SOLRHIBUS CONSULTING INC, CANA DA, SOLRHIBUS CONSULTING INC IS THE KNOWLEDGE-PARTNER O F THE ASSESSEE-COMPANY AND TO PROVIDE SERVICES OF TECHNIC ALLY QUALIFIED AND EXPERIENCED PERSONNEL IN DEVELOPING T ELECOM BILLING SOFTWARE SOLUTIONS AND STOCKHOLM, SWEDEN OR SKOPJE, ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 24 MACEDONIA WILL BE THE WORK LOCATION FOR ALL ASSESSE E-COMPANY DEPLOYED PERSONNEL. AS PER CLAUSE 5, INVOICING AND PAYMENTS WILL BE IN EUROPEAN EUROS. AS PER THE AMENDMENT-I D ATED 1-6- 2006 AND AMENDMENT-2 1-12-2006 WITH SOLRHIBUS CONSU LTING INC, CANADA, THE ASSESSEE-COMPANY HAS TO BEAR THE E XPENSES FOR ACCOMMODATION, TRAVEL ETC., OF THE PROJECT MANA GER QA (TELECOM BILLING) AND SENIOR TELECOM BILLING DEVELO PER PROVIDED BY SOLRHIBUS CONSULTING INC TO THE ASSESSE E- COMPANY. 27. AS PER THE AGREEMENT DATED 4-1-2007 BETWEEN THE ASSESSEE-COMPANY AND TRICOLOR SOLUTIONS LLC, USA, T RICOLOR SOLUTIONS WILL BE THE KNOWLEDGE-PARTNER FOR THE ASS ESSEE- COMPANY TO PROVIDE THE SERVICES OF THE QUALIFIED TE LECOM SOFTWARE BILLING DEVELOPER WHO WILL PERFORM TASKS F OR THE ASSESSEE-COMPANY IN AREAS OF DEVELOPING THE TELECOM BILLING SOFTWARE AND AS PER CLAUSE 5 INVOICING AND PAYMENTS WILL BE MADE IN EUROPEAN EUROS. AS PER AMENDMENT-I DATED 4- 1-2007 BETWEEN THE ASSESSEE-COMPANY AND TRICOLOR SOLUTIONS LLC, USA, EXPENSES FOR ACCOMMODATION, TRAVEL ETC., IN RE SPECT OF SENIOR SOFTWARE ARCHITECT (TELECOM BILLING) WOULD B E BORNE BY THE ASSESSEE-COMPANY. 28. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE U/S. 10A OF THE ACT ON THE GROUND THAT THE ASSESSEE HAS NOT MAN UFACTURED ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 25 OR PRODUCED ANY SOFTWARE OR COMPUTER PROGRAM AND ME RELY CARRIED ON BPO WORK FOR THE REASON THAT AS PER 'COM MERCIAL INVOICES' PRODUCED BY THE ASSESSEE RAISED NOT FOR E XPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE EXPORTED OU TSIDE INDIA AND BILLS WERE RAISED FOR MAN-DAYS IN WHICH T HE PERSONS HAVE WORKED AND THERE IS NO MENTION OF THE PRODUCT THAT WAS EXPORTED AND IT IS, THEREFORE, THE ASSESSEE SUPPLIE D MANPOWER TO SEAVUS GROUP, SWEDEN AND THE ASSESSEE HAS NOT EX PORTED ANY ARTICLE OR THING OR COMPUTER SOFTWARE OUTSIDE I NDIA. 29. IN OUR OPINION, AS PER THE AGREEMENT, THE ASSESSEE HAS TO PROVIDE SERVICES AT THE PLACE ASSIGNED BY THE SE AVUS GROUP AND THAT THE PAYMENT IS TO BE MADE AS PER MAN-HOURS SPENT BY THE PROFESSIONALS. ON THAT REASON IT IS NOT POS SIBLE TO HOLD THAT THE ASSESSEE HAS NOT EXPORTED ANY ARTICLE OR T HING OR COMPUTER SOFTWARE. 30. SECTION 10A AND EXPLANATION 2 AFTER SECTION 10A(9A) READ AS UNDER: 10A. (1) SUBJECT TO THE PROVISIONS OF THIS SECTION, A D EDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTA KING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWA RE FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS BEGINNIN G WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WH ICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE SUCH A RTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, SH ALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE : PROVIDED THAT WHERE IN COMPUTING THE TOTAL INCOME OF THE UNDERTAKING FOR ANY ASSESSMENT YEAR, ITS PROFITS AN D GAINS HAD ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 26 NOT BEEN INCLUDED BY APPLICATION OF THE PROVISIONS OF THIS SECTION AS IT STOOD IMMEDIATELY BEFORE ITS SUBSTITU TION BY THE FINANCE ACT, 2000, THE UNDERTAKING SHALL BE ENTITLE D TO DEDUCTION REFERRED TO IN THIS SUB-SECTION ONLY FOR THE UNEXPIRED PERIOD OF THE AFORESAID TEN CONSECUTIVE ASSESSMENT YEARS : PROVIDED FURTHER THAT WHERE AN UNDERTAKING INITIALLY LOCATED IN ANY FREE TRADE ZONE OR EXPORT PROCESSING ZONE IS SU BSEQUENTLY LOCATED IN A SPECIAL ECONOMIC ZONE BY REASON OF CON VERSION OF SUCH FREE TRADE ZONE OR EXPORT PROCESSING ZONE INTO A SPECIAL ECONOMIC ZONE, THE PERIOD OF TEN CONSECUTIVE ASSESS MENT YEARS REFERRED TO IN THIS SUB-SECTION SHALL BE RECKONED F ROM THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WH ICH THE [UNDERTAKING BEGAN TO MANUFACTURE OR PRODUCE SUCH A RTICLES OR THINGS OR COMPUTER SOFTWARE] IN SUCH FREE TRADE ZON E OR EXPORT PROCESSING ZONE : [ PROVIDED ALSO THAT FOR THE ASSESSMENT YEAR BEGINNING ON THE 1ST DAY OF APRIL, 2003, THE DEDUCTION UNDER THIS SU B-SECTION SHALL BE NINETY PER CENT OF THE PROFITS AND GAINS D ERIVED BY AN UNDERTAKING FROM THE EXPORT OF SUCH ARTICLES OR THI NGS OR COMPUTER SOFTWARE :] PROVIDED ALSO THAT NO DEDUCTION UNDER THIS SECTION SHALL BE ALLOWED TO ANY UNDERTAKING FOR THE ASSESSMENT YEAR BEGINNING ON THE 1ST DAY OF APRIL, [2012] AND SUBSEQUENT YEAR S. EXPLANATION 2. FOR THE PURPOSES OF THIS SECTION, (I) 'COMPUTER SOFTWARE' MEANS (A) ANY COMPUTER PROGRAMME RECORDED ON ANY DISC, TA PE, PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVIC E; OR (B) ANY CUSTOMIZED ELECTRONIC DATA OR ANY PRODUCT O R SERVICE OF SIMILAR NATURE, AS MAY BE NOTIFIED BY TH E BOARD, WHICH IS TRANSMITTED OR EXPORTED FROM INDIA TO ANY PLACE OUTSIDE INDIA BY ANY MEANS; 31. AS SEEN FROM THE ABOVE PROVISIONS OF THE ACT, THE MEANING OF COMPUTER PROGRAMME HAS BEEN EXPANDED AS 'COMPUTER PROGRAM' 'PROCESS' OR 'MANAGEMENT OF ELEC TRONIC DATA'. BY WAY OF ABOVE EXPLANATION, COMPUTER SOFTW ARE WHICH WAS NOT EARLIER DEFINED HAS BEEN DEFINED AND APART ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 27 FROM RECORDING OF PROGRAM ON DISC, TAPE, PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVICE AS CONTEMPLATED UN DER CLAUSE (III) OF EXPLANATION TO PRE-AMENDED SEC. 10A CLAUSE (I) OF EXPLANATION-2 TO AMENDED PROVISION ALSO INCLUDES IN THE DEFINITION OF COMPUTER SOFTWARE ANY CUSTOMISED ELEC TRONIC DATA OR ANY PRODUCT OR SERVICES OF SIMILAR NATURE A S NOTIFIED BY THE BOARD WHICH IS TRANSMITTED OR EXPORTED FROM INDIA TO ANY PLACE OUTSIDE BY ANY MEANS. 32. FURTHER, THE CBDT NOTIFIED THE PRODUCTS AND SERVICE FOR THE PURPOSE OF CLAUSE (I) OF EXPLANATION 2 VIDE NOT IFICATION DATED 26.9.2000 AS UNDER: 'S.O. 890(E) - IN EXERCISE OF THE POWERS CONFERRED BY CLAUSE (B) OF ITEM (I) OF EXPLANATION 2 OF SECTION 10A. CLAUSE (B) OF ITEM (I) OF EXPLANATION 2 TO SECTION 10B AND CLAUSE (B) TO EXPLANATION TO SECTION 80HHC OF THE INCOME TAX ACT, 1961 (43 OF 1961), THE CENTRAL BOARD OF DIRECT TAXES HEREBY SPECIFIES THE FOLLOWING INFORMATION TECHNO-LOGY ENABLED PRODU CTS OR SERVICES AS THE CASE MAY BE FOR THE PURPOSE OF SAID CLAUSES NAMELY :- (I) BACK-OFFICE OPERATIONS (II) CALL CENTRES (III) CONTENT DEVELOPMENT OR ANIMATION (IV) DATA PROCESSING (V) ENGINEERING AND DESIGN (VI) GEOGRAPHIC INFORMATION SYSTEM SERVICES (VII) HUMAN RESOURCES SERVICES (VIII) INSURANCE CLAIM PROCESSING (IX) LEGAL DATABASES (X) MEDICAL TRANSCRIPTION (XI) PAYROLL (XII) REMOTE MAINTENANCE (XIII) REVENUE ACCOUNTING (XIV) SUPPORT CENTRES AND (XV) WEB-SITE SERVICES ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 28 33. THE PRODUCT AND SERVICE AS NOTIFIED BY THE BOARD AB OVE FOR THE PURPOSE OF CLAUSE (I) OF EXPLANATION 2 INCL UDES THE CONTENTS DEVELOPMENT, DATA PROCESS, HUMAN RESOURCES SERVICES ETC. AS PART OF COMPUTER SOFTWARE ELIGIBLE FOR EXEMPTION, IF OTHER CONDITIONS ARE SATISFIED. CONSE QUENTLY, THE HUMAN RESOURCE SERVICE IN THE FIELD OF DEVELOPM ENT OF SOFTWARE PROGRAMME AS NOTIFIED FALLS UNDER THE DEFI NITION OF COMPUTER PROGRAMME AS STIPULATED IN THE EXPLANATION AS WELL AS THE DEFINITION U/S 10A. 34. FURTHER THE PRODUCTION OF COMPUTER SOFTWARE PROGRAMME IS BASICALLY A JOB REQUIRING MORE OF HUMA N SKILLS AND EXPERTISE THAN MACHINE WORK. FURTHER SECTION 1 0A ENLARGES THE AMBIT OF THE TERM 'COMPUTER PROGRAMME' BY INCLUDING THE PROCESS OF MANAGEMENT OF ELECTRONIC D ATA. THEREFORE, THE ENGAGEMENT OF SOFTWARE PROFESSIONALS / PROGRAMMERS/ANALYSTS AND RENDERING SERVICES TO THE ASSESSEE, AS DISCUSSED EARLIER, CANNOT BE TREATED A S A SEPARATE ACTIVITY OF THE ASSESSEE ON THE REASON THAT THE ASS ESSEE COLLECTED FEES ON MAN-HOUR BASIS. 35. IT IS PERTINENT TO NOTE THAT, TO MEET THE CURRENT A ND FUTURE REQUIREMENTS OF THE CLIENTS, THE ASSESSEE WA S REQUIRED TO DO THE VARIOUS ACTIVITIES LIKE FORMATION OF DIFF ERENT TEAMS OF PROFESSIONALS, ATTEND VARIOUS FUNCTIONS TO EXECU TE THE WORK ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 29 ORDERS PLACED BY CLIENTS; EXPLAINING THE EXACT FUNC TIONAL REQUIREMENT TO THE PROFESSIONALS AND PROGRAMMERS COMPRISED OF SUCH TEAMS; FORMATION OF CONCEPTUAL DE SIGN DOCUMENTS; AND OTHER COMPUTER SOFTWARE; CUSTOMIZATI ON OF VARIOUS MODULES TO MEET THE SPECIFIC NEEDS OF CLIEN TS; DEVELOPING AND WRITING NEW PATCHES OF PROGRAMMES WH ICH ARE NOT AVAILABLE IN THE STANDARD FORMAT OF SYSTEM; TESTING THE FUNCTIONAL COMPETENCE OF NEW MODULES DESIGNED BY TH E ASSESSEE; FUNCTIONING INTEGRATION OF MODULES AND TE STING OF ITS FUNCTIONAL ACCURACY AND FINALLY STORING THE RES ULTS PROJECT WISE ETC. ETC. THIS ENTIRE PROCESS IS INTERGRADED P ROGRAMME WHICH INVOLVES THE TRAINING AND UPDATE THE KNOWLEDG E OF DEVELOPMENT PROGRAMME, IMPLEMENTATION OF PROGRAMME DEVELOPMENT IN THE CLIENTS PROJECT AND THEREFORE, THE ASSESSEES ACTIVITY OF ENGAGING THE ANALYST/PROGRAMM ER/ PERSONNEL FOR IMPARTING TRAINING IS WELL WITHIN THE MAIN OBJECT OF THE ASSESSEE AS ENVISAGED IN THE AGREEMEN T. 36. IN VIEW OF THESE FACTS, RAISING OF BILL ON THE BASI S OF MAN-HOUR FURTHER SUPPORTS THE CASE OF THE ASSESSEE THAT THE ASSESSEE IS CARRYOUT THE CUSTOMIZATION WORK OF SOFT WARE AND DEVELOPMENT OF PROGRAMME AS PER THE SPECIFIC REQUIR EMENT OF CLIENTS. THEREFORE, THIS METHOD OF INVOICE CANNO T BE THE BASIS OF REJECTION OF THE CLAIM OF THE ASSESSEE. IN ANY CASE, ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 30 WHEN THE ASSESSEE HAS BEEN COLLECTED THE CUSTOMISED DATA, STORED AND TRANSMITTED THE SAME THROUGH ELECTRONIC MEDIA, THEN THIS ACTIVITY OF THE ASSESSEE FALLS UNDER THE DEFINITION OF COMPUTER PROGRAMME AS PROVIDED UNDER SEC. 10A AS WE LL AS UNDER EXPLANATION 2 OF SUB.SEC. 10A THEREBY THE DEF INITION OF SOFTWARE HAS BEEN EXPENDED AS CUSTOMISED ELECTRONIC DATA OR ANY PRODUCT OR SERVICE OF SIMILAR NATURE AS MAY BE NOTIFIED BY THE BOARD. THE ASSESSEE DEFINITELY ENGAGED IN THE E XPORT OF CUSTOMISED ELECTRONIC DATA AS RECORDED BY THE ASSES SING OFFICER IN HIS ORDER. 37. IT IS CLEAR FROM THE ABOVE THAT THE ASSESSING OFFIC ER HAS NOT DISPUTED THE FACT THAT THE ASSESSEE WAS ENGAGED IN CUSTOMISING THE SOFTWARE AS PER THE NEEDS OF THE CL IENTS. ONE OF THE MAIN OBJECTIONS OF THE ASSESSING OFFICER IS THAT THE ASSESSEE CUSTOMISED THE SOFTWARE WHICH WAS ALREADY AVAILABLE AND HAS NOT CREATED ALTOGETHER NEW SOFTWARE. IT IS PERTINENT TO NOTE THAT THE DEFINITION OF PRODUCE IS WIDER THAN THE TERM 'MANUFACTURE' AS HELD BY THE HONBLE SUPREME COURT IN A NUMBER OF DECISIONS AND DOES NOT REQUIRE TO PRODUCE OR MANUFACTURE ALTOGETHER A NEW PRODUCT; BUT IF THE OU TCOME OF THE PROCESS IS A DIFFERENT PRODUCT THAN THE INPUT I T WOULD FALL UNDER THE DEFINITION OF PRODUCE. THEREFORE, THE C USTOMISED SAP SOFTWARE AFTER PASSING THROUGH CUMBERSOME PROCE SS OF ITA NO. 640/HYD/2013 M/S. J.V.H. SOLUTIONS PVT. LTD. ========================== 31 CUSTOMIZATION IS DIFFERENT PRODUCT; I.E. SOFTWARE, THEN THE ORIGINAL STANDARD SOFTWARE AND WOULD CERTAINLY FALL UNDER THE TERM PRODUCE. 38. BEING SO, THE CLAIM OF THE ASSESSEE U/S. 10A IS TO B E ALLOWED AS THE DEDUCTION CLAIMED BY THE ASSESSEE FA LLS UNDER THE PROVISIONS OF EXPLANATION 2 AFTER SECTION 10A(9 A) OF THE ACT. 39. IN THE RESULT, ASSESSEE'S APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH MARCH, 2014. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 28 TH MARCH, 2014 TPRAO COPY FORWARDED TO: 1. M/S. J.V.H. SOLUTIONS PVT. LTD., H. NO. 12-13-167 7, 97, TARNAKA, HYDERABAD-500 016. 2. THE INCOME TAX OFFICER, WARD-2(1), BLOCK C, 8 TH FLOOR, INCOME TAX TOWERS, AC GUARDS, HYDERABAD 3. THE CIT(A)-III, HYDERABAD. 4. THE CIT-II, HYDERABAD. 5. THE DR BENCH 'B', ITAT, HYDERABAD