M/s GE India Technologies Center Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 950/BANG/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7767 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 22-05-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 25-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAYARAM RAIPURA
• Keywords: Transfer pricing; Principle of natural justice
• Section: 143(3); 234B; 80IB; 10B

Judgement Text

PAGE 1 OF 34 ITA NO.9 50/BANG/2011 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B BEFORE SHRI N K SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.950/BANG/2011 (ASST. YEAR 2007-08) M/S GE INDIA TECHNOLOGY CENTRE PVT. LTD., 122, EXPORT PROMOTION INDL. PARK, WHITEFIELD ROAD, BANGALORE-66. PA NO. AABCG0559J VS THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE- 11(3), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING : 22.05.2012 DATE OF PRONOUNCEMENT : 20.06.2012 APPELLANT BY : SHRI PAWAN SHARMA, ADVOCATE RESPONDENT BY : SHRI JAYARAM RAIPURA, ADDL. CIT O R D E R PER GEORGE GEORGE K : THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF RESEARCH AND DEVELOPMENT ACTIVITY IN THE AREAS OF MATERIAL SC IENCE AND PROCESS TECHNOLOGY; PROVIDING ENGINEERING ANALYSIS AND RELATE D SOFTWARE DEVELOPMENT SCIENCE. 2. FOR THE ASSESSMENT YEAR [AY] UNDER CONSIDERATION , THE ASSESSEE COMPANY [THE ASSESSEE IN SHORT] HAD INTER NATIONAL TRANSACTIONS EXCEEDING RS.15 CRORES AND, ACCORDINGLY, THE LEARNED AO MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) U/S 92CA OF T HE ACT. THE LEARNED TPO HAD PASSED AN ORDER FOR THE ADJUSTMENT TO THE E XTENT OF PAGE 2 OF 34 ITA NO.9 50/BANG/2011 2 RS.64,83,64,363/- TO BE MADE U/S 92CA OF THE ACT FO R THE DETAILED REASONS RECORDED THEREIN. ACCORDINGLY, IN THE DRAFT ASSESSM ENT ORDER, ADJUSTMENT U/ S 92CA OF THE ACT TO THE TUNE OF RS.64.83 CRORES WAS PROPOSED WHICH WAS OBJECTED TO BEFORE THE DISPUTE RESOLUTION PANEL (DR P) BY THE ASSESSEE. THE DRP HAD, IN ITS DIRECTIONS DATED 26.9.2011, MORE OR LESS RATIFIED THE DRAFT ASSESSMENT ORDER. THE AO HAD, ACCORDINGLY, CONCLUDE D THE ASSESSMENT, DETERMINING THE ASSESSEES INCOME AT RS.131,82,36,2 62/- WHICH INCLUDED THAT OF THE ADJUSTMENT U/S 92CA OF THE ACT OF RS.64.83 C RORES. 3. AGGRIEVED, THE ASSESSEE HAS COME UP WITH THE PR ESENT APPEAL RAISING THE FOLLOWING GROUNDS OF APPEAL:- I) THAT ON THE FACTS AND IN LAW, THE ASSESSING OFFICER ERRED IN NOT ALLOWING THE APPELLANTS CLAIM OF DEDUCTION UNDER SECTION 10A OF THE ACT. II) THAT ON THE FACTS AND IN LAW, THE ASSESSING OFFICER ERRED IN NOT ALLOWING THE APPELLANTS ALTERNATIVE CLAIM F OR DEDUCTION UNDER SECTION 80-IB(8A) OF THE ACT MADE WITHOUT PREJUDICE TO ITS CLAIM UNDER SECTION 10A OF THE ACT. III) THAT ON FACTS AND IN LAW, THE ASSESSING OFFICER ERR ED IN ADDING THE TRANSFER PRICING ADJUSTMENT OF RS.64,83,64,363/- PROPOSED BY THE TPO UNDER SECTION 92CA OF THE ACT AND CONFIRMED BY DRP. IV) THAT ON FACTS AND IN LAW, THE ASSESSING OFFICER ERR ED IN NOT ALLOWING DEDUCTION UNDER SECTION 10A OF THE ACT ON THE ADDITION OF RS.2,06,44,054/- (AN AMOUNT THAT WA S DEBITED IN THE PROFIT AND LOSS STATEMENT OF THE APP ELLANT AS PROVISION FOR DOUBTFUL ADVANCE) TO THE BUSINESS PROFITS OF THE APPELLANT. V) THAT ON FACTS AND IN LAW, THE ASSESSING OFFICER ERR ED IN LEVYING INTEREST UNDER SECTION 234B AND 234D OF THE ACT. PAGE 3 OF 34 ITA NO.9 50/BANG/2011 3 THE LEARNED AR IN COURSE OF HEARING OF THE APPEAL D ID NOT PRESS/ARGUE THE ISSUE RELATING TO GROUND NO. (III), (IV) AND (V). H ENCE, THE SURVIVING ISSUE IS REGARDING DEDUCTION UNDER SECTION 10A AND IN THE AL TERNATIVE, WHETHER THE ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 80I B(8A) OF THE ACT. 4. THE ISSUE, IN BRIEF, IS AS UNDE R: THE ASSESSEE HAS BEEN ONE OF THE SUBSIDI ARIES OF M/S. GE CORP. USA. THE ASSESSEE IS ONE OF THE MOST PROMINENT SCI ENTIFIC TECHNOLOGY COMPANIES IN TERMS OF INNOVATION AND THE INVESTMENT MADE IN RESEARCH AND DEVELOPMENT. DURING THE YEAR IN 2000, THE ASSESSEE HAD SET UP ITS GLOBAL TECHNOLOGY CENTRE AT EXPORT PROMOTION INDUSTRIAL PAR K NEAR WHITE FIELD, BANGALORE, IN LIEU OF HIGH COST OF MANPOWER AND REL ATED INFRASTRUCTURE FOR RESEARCH AND DEVELOPMENT. WHILE ACQUIRING THE LAND FROM KIADB AND OBTAINING INDUSTRIAL LICENSE FROM THE STATE GOVERNM ENT, IT HAD BEEN CLAIMED THAT GE GLOBAL TECHNOLOGY CENTRE BEING SET UP BY THE ASSESSEE WOULD BE A PIONEER IN SCIENTIFIC RESEARCH AND DEVELOPMENT CENT RE IN INDIA. AFTER OBTAINING NECESSARY LICENSES FROM VARIOUS WINGS OF T HE STATE GOVERNMENT, THE ASSESSEE HAD SET UP JOHN F WELOW TECHNOLOGY CENT RE AND HAS UNDERTAKEN ITS RESEARCH AND DEVELOPMENT ACTIVITIES WHICH INCLUDE ELECTROMAGNETIC ANALYTICS, COLOUR TECHNOLOGY, ADDITIV E TECHNOLOGY, NON- DESTRUCTIVE EVALUATION, CORROSION TECHNOLOGY, MOLECU LAR MODELING, POWER ELECTRONICS, ANALYSIS TECHNOLOGIES, COMPUTATIONAL FL UID DYNAMICS AND ENGINEERING ANALYSIS FROM ITS CENTRE ESTABLISHED AT BANGALORE. 4.1. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION , THE ASSESSEE HAD CLAIMED DEDUCTION U/S 10A OF THE ACT, CLAIMING TO BE A STP INVOLVED IN PAGE 4 OF 34 ITA NO.9 50/BANG/2011 4 SOFTWARE DEVELOPMENT. DURING THE COURSE OF ASSESSM ENT PROCEEDINGS, IN COMPLIANCE TO VARIOUS QUERIES RAISED BY THE AO, THE ASSESSEE HAD FURNISHED LENGTHY SUBMISSIONS UNDER VARIOUS HEADS AND ALSO COP IES OF SERVICE AGREEMENTS ENTERED INTO WITH VARIOUS UNITS/DIVISION S OF GE COMPANY. AFTER EXAMINING THE ASSESSEES CLAIMS AND ALSO ITS SUBMIS SIONS, THE AO HAD, FOR THE DETAILED REASONS RECORDED IN THE IMPUGNED ORDER UND ER CHALLENGE, OBSERVED THUS: 29. FROM THE ABOVE, IT IS SEEN THAT THE INVESTMENT IN PLANT AND MACHINERY IS THREE TIMES THAT OF INVESTMEN T IN COMPUTERS. THIS IS EXCLUDING INVESTMENT IN BUILDIN GS, FURNITURE, OFFICE BELONGINGS, VEHICLES AND THE LIKE . THESE PLANT AND MACHINERY ARE SCIENTIFIC HARDWARE USED FOR THE PURPOSE OF MAKING BASIC AND APPLIED SCIENTIFIC RESE ARCH AND DEVELOPMENT. A DETAILED EXAMINATION OF THE BRE AKUP OF THE PLANT AND MACHINERY WORTH MORE THAN RS.260 CRORES ALSO REVEAL THE BUSINESS PRACTICE OF THE ASS ESSEE. THE ASSESSEES OPERATIONS DO NOT HAVE COMPUTER AS PRIMARY AND PREDOMINANT HARDWARE TOOL. THEY MAKE USE OF THE BEST OF THE SCIENTIFIC RESEARCH LABORATORY TO OLS AVAILABLE AND HAVE PRODUCED NEWER AND IMPROVED METH ODS OF VARIOUS MANUFACTURING. THE END PRODUCTS OF THE ASSESSEE SHOULD NOT BE BELITTLED BY CALLING IT AS SE RVICE SIMILAR TO EXPORT OF CUSTOMIZED ELECTRONIC DATA. T HE ASSESSEE SHOULD HAVE TAKEN PRIDE IN CLAIMING ITS PRODUCTION AND SERVICES TO BE OF SCIENTIFIC RESEARC H AND DEVELOPMENT IN LINE WITH ITS CLAIM OF HAVING SET UP A GLOBAL TECHNOLOGY CENTRE IN INDIA. 30. CONSIDERING THE CUMULATIVE REASONS AND EXPLANAT IONS AS ABOVE, IT IS HELD THAT THE SERVICES AND THE PROD UCTS OF THE ASSESSEE ARE NOT ELIGIBLE FOR DEDUCTION U/S 10A OF THE IT ACT. PAGE 5 OF 34 ITA NO.9 50/BANG/2011 5 4.2. WHEN THE ASSESSEES CLAIMS FOR DEDUCTION EITH ER U/S 10A OR 10B OF THE ACT CANNOT BE ACCEDED TO AS PROPOSED BY THE A O IN HIS DRAFT ASSESSMENT ORDER, THE ASSESSEE CAME UP WITH AN ALTE RNATIVE CLAIM THAT IT WAS, OTHERWISE ELIGIBLE FOR DEDUCTION U/S 80IB(8A) OF THE ACT. DULY ANALYZING THE PROVISIONS OF S. 80IB (8A) OF THE ACT, RULE 18DA AND ALSO EXAMINING THE ASSESSEES SUBMISSIONS, THE LD AO HAD MADE THE FOLLOWING OBSERVATIONS: (ON PAGE 46) 3) (A) AS PER SUB-RULE (B), THE ASSESSEE SHOULD HAV E HAD THE OBJECT OF SCIENTIFIC AND INDUSTRIAL R&D. HOWEV ER, IT IS SEEN THAT ASSESSEE HAS CLAIMED TO BE AN IT ENABL ED INFORMATION SERVICE PROVIDER. THE ASSESSEE IS SEEN AS UNWILLING TO MAKE UP ITS MIND ON THE NATURE OF ITS BUSINESS. (B) AS PER SUB-RULE (E), THE ASSESSEE OUGHT TO HAVE BEEN ENGAGED EXCLUSIVELY IN SCIENTIFIC R&D LEADING TO DEVELOPMENT, IMPROVEMENT AND TRANSFER OF TECHNOLOGY BY THEMSELVES. HOWEVER, IT IS NOTED THAT THE ASSESSEE IS DOING SCIENTIFIC R&D WORK FOR ITS PARENT COMPANY M/S GE INC. USA. THE ASSESSEE COMPANY IS NOT DOING THE SCIENTIFIC R&D AND TRANSFER OF TECHNOLOGY BY ITSELF. IT IS NOT EXCLUSIVELY OPERATING BY ITSELF. IT CLAIMS TO BE DOING ALL SCIENTIFIC R&D FOR ITS PARENT COMPANY. (C) AS PER SUB-CLAUSE (F) ASSESSEE COMPANY HAS NOT F ILED ANNUAL RETURN AND ANNUAL REPORT WITHIN 8 MONTHS FRO M THE CLOSE OF 31.3.2007 TO THE PRESCRIBED AUTHORITY. (D) IT IS ALSO NOT KNOWN WHETHER THE ASSESSEE HAS A SYSTEM OF MONITORING COST OF ITS R&D PROJECTS. THE ASSESSEE BILLS IT PARENT COMPANY ON A MARKUP BASIS. PAGE 6 OF 34 ITA NO.9 50/BANG/2011 6 (E) THE ASSSESSEE OUGHT TO HAVE OBTAINED PRIOR PERMISSION OF THE PRESCRIBED AUTHORITY BEFORE SELLIN G ALL ITS OUTPUTS FROM IT LABORATORIES OR PRIVATE PLANTS. HOWEVER, IT IS REGRETFULLY NOTED THAT ASSESSEE COMPA NY HAS NOT OBTAINED PRIOR PERMISSION FROM THE PRESCRIB ED AUTHORITY BEFORE TRANSFERRING ITS OUTPUT FROM IS LABORATORIES TO ITS PARENT COMPANY. (F) THE GRANT OF APPROVAL/EXTENSION BY THE PRESCRIBE D AUTHORITY CANNOT BE THE ONLY ELIGIBILITY CONDITION U/ S 80IA (8A). THE SAID R&D UNDERTAKING SHALL COMPLY WITH EA CH AND ALL CONDITIONS PRESCRIBED UNDER RULE 18DA BY THE CBDT. CONDITIONS LIKE THE UNDERTAKING BEING ENGAGE D EXCLUSIVELY ON SCIENTIFIC R&D AND SIMILAR CONDITIO NS SHALL BE VERIFIED ONLY BY THE ASSESSING OFFICER. THE PRESC RIBED AUTHORITY SHALL VERIFY THE SCIENTIFIC ASPECTS OF CON DITIONS LAID DOWN IN RULE 18DA. NOTHING PREVENTS THE ASSES SING OFFICER FROM VERIFYING OTHER CONDITIONS SPECIFIED IN RULE 18DA. (G) IN FACT, EVEN IN THE APPROVAL LETTER AND EXTENS ION LETTERS, THE FOLLOWING CONDITIONS ARE NOTED BY THE PRESCRIBED AUTHORITY: THE ABOVE EXTENSION OF THE APPROVAL IS SUBJECT TO THE PROVISIONS OF SEC.80IB (8A) READ ALONG WITH THE GEN ERAL PROVISIONS OF SECTION 80IB OF THE INCOME-TAX ACT, 1 961 AS WELL AS THE PROVISIONS OF RULE 8D AND RULE 18DA OF I.T. RULES, 1962, AS AMENDED FROM TIME TO TIME. THIS ALSO STRENGTHENS AND RESTORES THE POWER OF THE ASSESSING OFFICER IN MAKING ALL ENQUIRIES TO VERIFY WHETHER THE ASSESSEE HAS MET WITH ALL ELIGIBILITY CONDITIONS. (H) ON THE ONE HAND, ASSESSEE CLAIMS TO BE AN EXPOR TER OF ARTICLE AND GOODS AND ON THE OTHER HAND, IT IS CL AIMING TO BE INVOLVED IN IT ENABLED SERVICES. ASSESSEE HAS PAGE 7 OF 34 ITA NO.9 50/BANG/2011 7 SUBMITTED OPINIONS OF SHRI A.S. RAO AND SHRI DINESH VYAS TO PROVE ITS CONTENTION THAT IT IS INDEED EXPORTING ARTICLES OR GOODS AND ENGINEERING AND DESIGNS. THE SUBMISSIONS OF THE ASSESSEE ARE SELF-CONTRADICTORY. (I) ASSESSEE IS THE SCIENTIFIC R&D INDIAN ARM OF G E INC, USA. IT IS NOT AN INDEPENDENT ENTITY. IT DOES APPL Y SCIENTIFIC R&D FOR ITS PARENT COMPANY. IT ALSO DOES MANY OTHER SERVICES TO IS PARENT COMPANY. IT IS NOT AN EXCLUSIVE R&D CENTRE AS PER ITS OWN ADMISSION. I T HAS ALSO NOT SOLD ITS OUTPUTS FROM ITS LABORATORIES W ITH PRIOR APPROVAL FROM THE PRESCRIBED AUTHORITY. NO SUCH EVIDENCE HAS BEEN MADE AVAILABLE OR CLAIMED. ON ACCOUNT OF THE INDIVIDUAL AND CUMULATIVE REASONS AS ABOVE, IT IS HELD THAT ASSESSEE COMPANY IS NOT ELIGI BLE FOR DEDUCTION U/S 80IB (8A) ALSO 4.3. DURING THE COURSE OF HEARING, THE WIDE-RANGIN G SUBMISSIONS MADE BY THE LEARNED A.R ARE SUMMARIZED AS UNDER: (I) THAT S.10A PROVIDES A DEDUCTION OF PROFITS AND GAINS DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THI NGS OR COMPUTER SOFTWARE. THAT COMPUTER SOFTWARE HAS BE EN DEFINED IN EXPLANATION 2(I) TO S.10A WHICH DESCRIBES THAT - COMPUTER SOFTWARE MEANS (A) ANY COMPUTER PROGRAMME RECODED ON ANY DISC, TAPE, PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVIC E; 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 P LACE OUTSIDE INDIA BY ANY MEANS; (II) THAT THE CBDT HAS, PURSUANT TO EXPLANATION 2(I ) TO S. 10A VIDE NOTIFICATION NO. 890E DATED 26 TH SEPTEMBER, 2000, PAGE 8 OF 34 ITA NO.9 50/BANG/2011 8 NOTIFIED CERTAIN IT ENABLED SERVICES TO BE ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT WHICH, INTER ALIA INCLUDES (I) . (IV) DATA PROCESSING; (V) ENGINEERING AND DESIGN; (III) THAT THE ASSESSEE HAS BEEN ENGAGED IN THE BUS INESS OF EXPORTING (A) COMPUTER PROGRAMME (WITHIN THE MEANIN G OF EXPLANATION 2(I)(A); (B) CUSTOMIZED ELECTRONIC DATA (WITHIN THE MEANING OF EXPLANATION 2(I)(B); AND (C) ENGINEERING & DESIGN SERVICES (WITHIN THE MEANING OF CBDT NOTIFICATION) AND TH E ENTIRE OUTPUT IS EXPORTED/TRANSMITTED ELECTRONICALLY OUTSIDE INDIA . (IV) THAT THE PROCESS BY WHICH GEITC [THE ASSESSEE] PROVIDES ITS SERVICES TO ITS OVERSEAS CLIENTS INVOLVES THE FOLLO WING FOUR PHASES: (A) PHASE 1 CLIENT WORK REQUEST IN THIS PHASE T HE ASSESSEE RECEIVES A SPECIFIC WORK REQUEST FROM IS OVERSEAS C LIENTS OUTLINING IN DETAIL THE SCOPE OF WORK TO BE DONE, THE MANNER IN WHICH SUCH WORK IS TO BE PROCESSED, THE FORM IN WHICH THE OUTP UT IS TO BE DELIVERED AND THE ESTIMATED BUDGET FOR SUCH ASSIGNM ENT ALONG WITH THE RAW DATA AND INFORMATION IN THE FORM OF DESIGNS OR TECHNICAL SPECIFICATIONS; (B) PHASE 2 PROCESSING WORK REQUEST IN THIS PHA SE THE ASSESSEES ENGINEERS PROCESSES THE RAW DATA PROVIDED BY ITS CLI ENTS BY CONDUCTING REPETITIVE AND CONTINUOUS RESEARCH, TEST ING AND ANALYSIS THROUGH THE USE OF SPECIALIZED COMPUTER SOFTWARE CO MPUTERS AND IT ENABLED TOOLS AND EQUIPMENTS; ASSESSEES PROCESS IS A CONTINUOUS LOOP WHICH INVOLVES RESEARCH, TESTING AND ANALYSIS C USTOMIZED TO THE SPECIFICATIONS AND INSTRUCTIONS OF THE OVERSEAS CLI ENT AT EVERY STAGE; (C) PHASE 3 FINAL OUTPUT FINAL OUTPUT CUSTOMIZE D TO THE SPECIFICATIONS OF ITS OVERSEAS CLIENTS IS GENERATED THROUGH USE OF COMPUTERS IN THE FORM OF ONE OR MORE OF THE FOLLOWI NG: DETAILED REPORTS CONTAINING ENGINEERING ANALYSIS, DATA SHEETS CONTAINING SUPPORTING TECHNICAL DATA, SUPPORTING DESIGNS AND D IAGRAMS, 2D OR PAGE 9 OF 34 ITA NO.9 50/BANG/2011 9 3D DESIGNS, SUPPORTING DESIGN CALCULATION AND COMPU TER CODES ELECTRONIC DATA; AND (D) PHASE 4 EXPORT OF FINAL OUTPUT THE FINAL OU TPUT IS IN ELECTRONIC FORMAT AND IS TRANSMITTED ELECTRONICALLY TO ITS OVERSEAS CLIENTS VIA EMAIL OR THROUGH UPLOADING OF DATA ON T HE SERVERS OF OVERSEAS CLIENTS (V) THAT BASED ON THE AFOREMENTIONED PROCESS, THE ASSESSEE UNDOUBTEDLY HAS BEEN IN THE BUSINESS OF EXPORTING C USTOMIZED ELECTRONIC DATA FOR THE FOLLOWING REASONS: (A) CUSTOMIZED NATURE OF PROJECTS: EACH OF THE CLIENT P ROJECT THAT THE ASSESSEE WORKED ON DURING THE RELEVANT AY WAS ENTIRELY CUSTOMIZED TO THE NEEDS AND SPECIFICATIONS OF ITS OVERSEAS CLIENT; IN FACT, AS ILLUSTRATED THROUGH TH E DESCRIPTION OF THE PROCESS INVOLVED IN EACH OF THE SAMPLE PROJECTS FILED WITH THIS HONBLE TRIBUNAL, AT THE S TART OF EACH PROJECT, THE CLIENT PROVIDES THE ASSESSEE WIT H RAW DATA IN ELECTRONIC FORM AND PROVIDES SPECIFIC INSTR UCTIONS REGARDING SCOPE OF THE PROJECT, THE TEAM STRUCTURE OF THE PROJECT, THE MANNER IN WHICH THE PROJECT WAS TO BE PROCESSED, THE TYPE AND FORM OF OUTPUT; FOR A NUMBER OF PROJECTS, THE CLIENT EITHER SPECIFIES OR PROVIDES T HE SPECIALIZED COMPUTER SOFTWARE THAT ASSESSEE SHOULD USE TO PROCESS THE DATA AND GENERATE THE CLIENT SPECIFI ED OUTPUT; CLEARLY, THE CLIENT IS INTIMATELY INVOLVED A T EVERY STAGE OF THE ASSESSEES PROCESS INITIALLY AT THE S TART OF THE PROJECT PROVIDING DETAILED INSTRUCTIONS TO ASSE SSEE REGARDING THE SCOPE OF THE PROJECT, DURING EVERY INT ERIM STAGE OF PROCESSING OF THE PROJECT BY ASSESSEE AND FINALLY, AT THE TIME OF PRODUCTION OF THE FINAL OUTP UT OF THE PROJECT; (B) ELECTRONIC DATA: THE DATA GENERATED BY THE ASSESSEE IN CONNECTION WITH THE PROJECT WAS PROCESSED AND STORE D IN ELECTRONIC FORM; AND PAGE 10 OF 34 ITA NO. 950/BANG/2011 10 (C) OUTPUT TRANSMITTED ELECTRONICALLY: THE DATA CONSTIT UTING THE OUTPUT PRODUCED BY THE ASSESSEE FOR EACH OF ITS PROJECT WAS ALWAYS TRANSMITTED TO ITS OVERSEAS CLIEN T IN ELECTRONIC FORM VIA INTERNET; (VI) THAT ALL OF THE SERVICES/OUTPUT EXPORTED BY THE ASSESSEE TO ITS OVERSEAS CLIENTS WERE UNDOUBTEDLY CUSTOMIZED TO THE REQUIREMENTS OF ITS OVERSEAS CLIE NTS AND THE SAME HAS BEEN ACCEPTED BY THE AO THAT THE ASSESSEE IS IN THE BUSINESS OF UNDERSTANDING AND AN ALZING THE REQUIREMENTS OF EACH OF ITS CLIENTS, UNDERSTAND ING EXISTING SYSTEMS OF THE CLIENTS AND COMING OUT WITH SOLUTIONS CUSTOMIZED TO THE REQUIREMENTS OF ITS CLIENTS.[PARA 18 OF THE ASST. ORDER]. RELY ON CASE LAW : ITO V. ACCURUM INDIA (P) LTD (2010) 128 TTJ CHENNAI 249. THEREFORE, BASED ON THE FACT THAT THE ENTIRE ACTIVI TY OF THE ASSESSEE IS CUSTOMIZED TO THE SPECIFIC REQUIREMENTS AND NEEDS OF EACH OF ITS CLIENTS AND PRODUCED FOR THE S PECIFIC USE OF SUCH CLIENT, THERE CAN BE NO DOUBT THAT THE FINA L OUTPUT PRODUCED BY THE ASSESSEE WHICH IS ALWAYS STORED AND TRANSMITTED ELECTRONICALLY IS CUSTOMIZED ELECTRONIC DATA WHICH BY DEFINITION IS COMPUTER SOFTWARE WITHIN TH E MEANING ASSIGNED TO SUCH TERM UNDER EXPLANATION 2 OF S.10A OF THE ACT. (VII) THAT THE AO HAD ADMITTED THAT [PARAS 18,21 & 22 OF ASSTT. ORDER] THAT (A) THE ASSESSEE IS IN THE BUSINESS OF UNDERSTANDING AN D ANALYZING THE REQUIREMENTS OF EACH OF ITS CLIENTS, UNDERSTANDING EXISTING SYSTEMS OF THE CLIENTS AND COMING OUT WITH SOLUTIONS CUSTOMIZED TO THE REQUIREMENTS OF ITS CLIENTS; PAGE 11 OF 34 ITA NO. 950/BANG/2011 11 (B) THE ASSESSEE USES COMPUTER AND MOST OF THE WORK IS DONE COMPUTERS; (C) THE ASSESSEE MAKES USE OF HIGH END COMPUTERS; (D) THE ASSESSEE DELIVERS AND EXPORTS THE OUTPUTS THROUGH COMPUTER AND INTERNET; AND (E) THE ASSESSEE DEFINITELY USE THE SERVICES OF THE COMPUTER AND INTERNET TAKING REFUGE IN THE FINDINGS OF HONBLE CHENNAI T RIBUNAL IN THE CASE OF ACCURUM INDIA (P) LTD WHICH HAS BEEN FOLLOWED BY THE TRIBUNAL IN THE CASE OF M.L OUTSOURCING SERVICES PVT. LTD V. ITO (2011) 140 TTJ 59, IT WAS CONTENDED THAT THE ASSESSEE IS ENTITLED TO DEDUCTI ON U/S 10A OF THE ACT; (VIII) THAT THE DELHI TRIBUNAL IN BECHTEL INDIA PV T. LTD V. ACIT ITA NO.3316/DEL/04 ANALYZING ENGINEERING AND DESIGN ACTIVITIES AND OUTPUT OF BECHTEL WHICH WERE SIMILAR TO THE ENGINEERING AND DESIGN ACTIVITIES AND OUTPUT OF THE ASSESSEE ADJUDICATED ON TWO POINTS THAT (A) THE DATA GENERATED BY BECHTEL TO THE MINUTEST DETAILS CANNOT BE GENERATED MANUALLY WITH THE SAME LEVEL OF PRECISION, SPEED AND ACCURACY AS IS ACHIEVE D BY USE OF COMPUTERS; AND (B) THE OUTPUT PRODUCED BY BECHTEL IN FROM OF ENGINEERING DRAWINGS IS UNDOUBTEDLY CUSTOMIZED ELECTRONIC DATA WITHIN THE DEFINITION OF COMPUTER SOFTWARE APPEARING U/S 80HHE OF THE ACT WHICH DEFINITION IS IDENTICAL TO THE DEFINITION OF COMPU TER SOFTWARE UNDER EXPLANATION 2 OF S.10A OF THE ACT; THAT WHEN APPLYING THE AFOREMENTIONED ANALYSIS TO THE ISSUE UNDER DISPUTE MAKES IT CRYSTAL CLEAR THAT THE ENTIRE PROCE SS OF THE ASSESSEE IS IT ENABLED AND WHAT IS PRODUCED THROUGH THE PROCESS IS CUSTOMIZED ELECTRONIC DATA; PAGE 12 OF 34 ITA NO. 950/BANG/2011 12 (IX) THAT EVEN THOUGH SPECIFIC ATTENTION OF THE LEA RNED AO AND THE DRP WERE DRAWN TO THE FINDINGS OF THE HONB LE CHENNAI AND DELHI TRIBUNALS (SUPRA), THEY HAVE FAILE D TO TAKE COGNIZANCE OF THE SAME WHILE CONCLUDING THE RESPECT IVE PROCEEDINGS; (X) COUNTERING THE AOS THEORY THAT WHAT THE ASSESSE E DOES ON COMPUTER CAN ALSO BE DONE MANUALLY AND, THEREFOR E, THE SERVICES PROVIDED BY THE ASSESSEE WERE MERELY IT ASS ISTED BUT NOT IT ENABLED AND, THUS, THE ASSESSEE WAS DENI ED DEDUCTION U/S 10A OF THE ACT, IT WAS CLAIMED THAT T HE AO HAD FAILED TO APPRECIATE THAT THE CUSTOMIZED ELECTR ONIC DATA TRANSMITTED TO THE OVERSEAS CLIENT CANNOT BE PROCES SED OR GENERATED WITHOUT THE USE OF COMPUTERS AND SPECIALI ZED ENGINEERING SOFTWARE. IT IS IMPORTANT TO APPRECIAT E THAT THE PROJECTS GIVEN BY THE OVERSEAS CLIENT TO THE ASSESSE E WERE HIGHLY TECHNICAL AND DEMAND A HIGH DEGREE OF PRECISI ON AND ACCURACY; THAT FOR EXAMPLE, THE AVIATION FUNCTION GR OUP AT GEITC (THE ASSESSEE) RECEIVES CUSTOMIZED REQUEST FR OM ITS OVERSEAS CLIENTS THAT INVOLVES ENGINEERING ANALYSIS AND DESIGN OF AIRCRAFT PARTS AND COMPONENTS AND SIMILARLY, THE TRANSPORTATION FUNCTION GROUP OF THE ASSESSEE RECEI VES PROJECTS WHICH REQUIRE ENGINEERING ANALYSIS AND DESI GNING OF PART OR COMPONENTS OF LOCOMOTIVES SUCH AS DESIGNING OF A LOCOMOTIVE FUEL TANK, DESIGNING OF CAMSHAFT ASSEMBL Y OF A MARINE ENGINE ETC., - THAT EACH OF THESE PROJECTS DEMANDS AND INVOLVES THE USE AND ANALYSIS OF HIGHLY COMPLICATED ENGINEERING FORMU LAS AND TECHNICAL DATA AND REQUIRES THE PROCESSING OF SUCH LARGE VOLUME OF DATA WITH A VERY HIGH LEVEL OF PRECISION AND ACCURACY THAT WAS NOT HUMANLY POSSIBLE TO PROCESS WIT HOUT COMPUTERS OR IT ENABLED TOOLS OR EQUIPMENTS EMBEDDE D WITH SPECIALIZED TECHNICAL OR ENGINEERING SOFTWARE; THAT IT WAS IMPOSSIBLE FOR THE ASSESSEE TO ANALYZE AND PRODUCE T HE CUSTOMIZED ELECTRONIC DATA IN FORM OF ENGINEERING D ESIGNS PAGE 13 OF 34 ITA NO. 950/BANG/2011 13 THAT WERE DEMANDED BY ITS OVERSEAS CLIENTS WITHOUT COMPUTERS OF IT ENABLED TOOLS OR EQUIPMENTS. (XI) THAT THE OUTPUT WHICH WAS DEMANDED BY THE OVERS EAS CLIENTS WAS BASICALLY OF TWO TYPES (A) COMPUTER PROGRAMMES IN FORM OF COMPUTER CODES OR ALGORITHMS; OR (B) ENGINEERING ANALYSIS AND DESIGNS. - NOW THE QUESTION BEING AS TO WHETHER THE OUTPUT P RODUCED BY THE ASSESSEE WAS COMPUTER PROGRAMME OR ENGINEERIN G ANALYSIS AND DESIGN WAS PURELY A QUESTION OF FACT AND WAS CLEARLY IDENTIFIABLE BY LOOKING AT THE CONTENT OF OUT PUTS PRODUCED BY ASSESSEE IN FORM OF REPORTS, DESIGNS AND COMPUTER CODES AND THAT A COMPUTER CODE DEVELOPED B Y THE ASSESSEE CUSTOMIZED TO THE SPECIFICATIONS OF THE CL IENT WHICH WAS IN FACT ELECTRONICALLY TRANSMITTED TO THE OVERSE AS CLIENTS FOR THEIR USAGE; THAT THE ASSESSEE PROVIDED ITS OVE RSEAS CLIENTS WITH REPORTS AND CAD/CAM DESIGNS THAT CONTA INED THE DETAILED FINDINGS, OBSERVATIONS AND RESULTS OF THE ANALYSIS CONDUCTED BY THE ASSESSEES ENGINEERS AND S CIENTISTS TO ANALYZE THE BEHAVIOUR OF CERTAIN PARTS OR COMPONE NTS OF EQUIPMENTS AND PRODUCTS PROVIDED BY ITS CLIENTS OR C HEMICALS USED OR TO BE USED BY THE CLIENTS IN ITS PRODUCTS OR SERVICES AND/OR TO DEVELOP A DESIGN OR TO REDESIGN CERTAIN P ARTS OR COMPONENTS OF EQUIPMENTS OR PRODUCTS PROVIDED BY ITS CLIENTS AS PER TECHNICAL DIMENSIONS, PARAMETERS OR SPECIFIC ATION PROVIDED BY SUCH CLIENTS FOR SUCH PURPOSES; AND THA T TO RENDER ENGINEERING ANALYSIS AND DESIGN TO ITS OVERSE AS CLIENTS, THE ASSESSEE HAS EMPLOYED A SIGNIFICANT NUMBER OF EN GINEERS AND SCIENTISTS WHO HAVE THE EXPERTISE AND THE KNOWL EDGE THAT WAS ESSENTIAL NOT JUST FOR PURPOSES OF RENDERI NG THE SERVICES BEING DEMANDED BY ITS OVERSEAS CLIENTS BUT ALSO TO UNDERSTAND THE ENGINEERING AND DESIGN UNDERLYING THE CLIENTS PRODUCTS IN RESPECT OF WHICH THEY WERE DEMANDING THE SE SERVICES OF THE ASSESSEE. FURTHER, THE ENGINEERS O F THE ASSESSEE USE THEIR EXPERT ENGINEERING KNOWLEDGE AND APPLY THEIR SCIENTIFIC KNOWLEDGE IN ANALYZING OR DRAWING D ESIGNS PAGE 14 OF 34 ITA NO. 950/BANG/2011 14 DEMANDED BY ITS OVERSEAS CLIENTS. IN THE ABSENCE OF ANY DEFINITION OF ENGINEERING AND DESIGN IN THE ACT, SUCH PRACTICAL APPLICATION OF SCIENCE BY THE ENGINEERS HA S BEEN DEFINED BY LAW LEXICON AND THE OXFORD ENGLISH DICTIO NARY AS ENGINEERING. GIVEN THE TECHNICAL AND COMPLEX NATU RE OF THE SERVICES BEING DEMANDED BY ITS OVERSEAS CLIENTS, IT WAS ARGUED, IN ORDER TO RENDER THE SERVICES WITH THE PR ECISION, RELIABILITY AND ACCURACY WHICH THE CLIENTS EXPECT FRO M THE ASSESSEE, ITS ENGINEERS USE COMPUTERS AND IT ENABLE D TOOLS AND EQUIPMENTS TO PROVIDE AND PRODUCE THE FINAL OUT PUT THAT WAS TRANSMITTED TO ITS OVERSEAS CLIENTS. SUCH IT E NABLED ENGINEERING ANALYSIS AND DESIGNING SERVICES HAS BEEN NOTIFIED IN THE BOARDS NOTIFICATION NO.890E TO QUALIFY AS C OMPUTER SOFTWARE WITHIN THE MEANING LF EXPLANATION 2 TO S. 10A OF THE ACT AND, THEREFORE, ELIGIBLE FOR DEDUCTION AS SUCH; - THUS, THE ACTIVITIES OF THE ASSESSEE FALL UNDER T HE CATEGORY OF - (A) EXPORT OF COMPUTER PROGRAMME; (B) EXPORT OF CUSTOMIZED ELECTRONIC DATA; AND (C) EXPORT OF ENGINEERING & DESIGN SERVICES AS NOTI FIED BY THE BOARD IN THE AFORESAID NOTIFICATION; (XII) THAT THE ASSESSEE HAS BEEN ALLOWING DEDUCTI ON U/S 10A OF THE ACT BY THE REVENUE SINCE THE AY 2002-03 [U/S 143(3) OF THE ACT] ; THAT THE REVENUE HAD NOT POINTED OUT ANY CHANGE IN THE ACTIVITIES OF THE ASSESSEE IN THE PRE SENT AY AS COMPARED TO THE EARLIER AYS; AND THAT NO CONTRARY VI EW HAS BEEN CITED TO DENY THE ASSESSEES ENTITLEMENT FROM T HAT OF THE EARLIER AYS; (XIII) THAT THE CORRECT INTERPRETATION OF S.10A OF THE ACT, THE ELIGIBILITY OF A PARTICULAR UNDERTAKING TO AVAIL OF THE BENEFIT OF THIS PROVISION HAS TO BE DETERMINED IN THE INITI AL YEAR IN WHICH THE ASSESSEE FIRST SOUGHT TO AVAIL THE BENEFI T UNDER THIS SECTION; AND THAT THERE IS NOTHING IN THE SAID SECTION WHICH ENTITLES THE REVENUE TO REEXAMINE THE ISSUE O F THE PAGE 15 OF 34 ITA NO. 950/BANG/2011 15 ASSESSEES ENTITLEMENT OF DEDUCTION U/S 10A OF THE ACT IN EACH AY. RELIES ON CASE LAWS: SAMI LABS LTD V. ACIT 334 ITR 157 (KAR); & NIPPON ELECTRONICS 181 ITR 518 (KAR) (XIV) THAT THE REVENUE HAD RESORTED TO REOPEN THE ASSESSMENTS OF THE ASSESSEE FOR THE AYS 2004-05 TO 06-07 TO DISALLOW THE DEDUCTION U/S 10A OF THE ACT, HOWEV ER, THE SAME HAS BEEN STAYED BY THE JURISDICTIONAL HONBLE HI GH COURT THROUGH INTERIM ORDERS; (XV) REBUTTING THE REVENUES STAND TO DENY DEDUCTIO N U/S 10A TO THE ASSESSEE SOLELY ON THE GROUND THAT THE AS SESSEE HAS BEEN ENGAGED IN RESEARCH AND DEVELOPMENT WHICH , ACCORDING TO THE REVENUE, CANNOT BE SAID TO BE THE EXPORT OF CUSTOMIZED ELECTRONIC DATA, COMPUTER PROGRAMME OR ENGINEERING AND DESIGN SERVICES, IT WAS CONTENDED T HAT - (A) THE CHARACTERIZATION OF THE ASSESSEES BUSINESS AS RESEARCH AND DEVELOPMENT WAS INCORRECT AS IT DEFINE S THE BUSINESS OF THE ASSESSEE BASED ON MERELY ONE OF THE MANY ACTIVITIES THAT THE ASSESSEE ENGAGES IN TO PROD UCE THE FINAL OUTPUT DEMANDED BY ITS OVERSEAS CLIENT IN FORM OF COMPUTER PROGRAMMES, CUSTOMIZED ELECTRONIC DATA OR ENGINEERING AND DESIGNS; THAT THERE WAS NO DOUBT TH AT THE ASSESSEE HAS TO NECESSARILY ENGAGE IN THE ACTIVI TY OF RESEARCH TO GATHER RELEVANT DATA TO ENABLE IT TO PR ODUCE AND RENDER THE FINAL OUTPUT DEMANDED BY ITS OVERSEAS CLIENTS; AND THAT BECAUSE OF THE IMPORTANCE OF RESE ARCH AND DEVELOPMENT AS AN ACTIVITY IN THE ASSESSEES PRO CESS FOR PRODUCING THE FINAL OUTPUT, THE ASSESSEE HAS INTERCHANGEABLY IDENTIFIED ITSELF WITH RESEARCH AND DEVELOPMENT INDUSTRY AND ENGINEERING AND DESIGN INDUSTRY WHICH IS QUITE COMMONLY DONE AMONG OTHER PARTICIPANTS IN SIMILAR INDUSTRY; PAGE 16 OF 34 ITA NO. 950/BANG/2011 16 (B) NEITHER THE ACT NOR ANY CASE LAW SUGGESTS THAT ANY UNDERTAKING DOING RESEARCH AND DEVELOPMENT AS A M EANS TO GENERATE THE OUTPUT REQUIRED BY THE CLIENTS WILL NOT BE ENTITLED TO DEDUCTION U/S 10A; AND (C) WHAT IS RELEVANT FOR DEDUCTION U/S 10A IS WHETHER T HE ASSESSEE IS ENGAGING IN IT ENABLED SERVICES AND WHE THER IT IS EXPORTING IT OUTPUT ELECTRONICALLY AND NOT WHE THER ANY RESEARCH AND DEVELOPMENT IS CONDUCTED IN PRODU CING THE OUTPUT; AND THAT ADMITTEDLY, AS AFORESAID, THE SERVICES OF THE ASSESSEE ARE IT ENABLED AND ITS OUT PUT IS TRANSMITTED ELECTRONICALLY. WHETHER THE ASSESSEE DO ES SOME RESEARCH AND DEVELOPMENT IN PRODUCING THE OU TPUT IS WHOLLY IRRELEVANT FOR THE PURPOSE OF CONSIDERING THE ELIGIBILITY FOR DEDUCTION U/S 10A AND, THUS, THE AS SESSEE IS ENTITLED TO DEDUCTION U/S 10A OF THE ACT (XVI) COUNTERING THE LD. D RS RELIANCE ON FORM 3CD, ACCOUNTING POLICES, FORM 56F AND ANNUAL R EPORT TO CONCLUDE THAT THE ASSESSEE INVOLVED IN RESEARCH AN D DEVELOPMENT ACTIVITIES AND, THEREFORE, INELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT ETC., IT WAS CONTENDED THAT - (A) THE ELIGIBILITY TO CLAIM DEDUCTION U/S 10A OF THE AC T IS TO BE DETERMINED BASED ON THE ACTUAL NATURE OF THE ACTIVITIES CONDUCTED BY, AND OUTPUT PRODUCED AND EXPORT BY THE ASSESSEE; (B) THE ASSESSEE HAS BEEN CLAIMING DEDUCTION U/S 10A AS IT IS ENGAGED IN THE BUSINESS OF ACTUALLY PRODUCING AND EXPORTING COMPUTER SOFTWARE IN THE FORM OF COMPUTER PROGRAMMES, CUSTOMIZED ELECTRONIC DATA OR OTHER IT ENABLED SERVICES NOTIFIED BY THE CBDT WHICH IS EVIDENCE FROM THE DETAILED DESCRIPTION OF SERVICES FURNISHED DURING THE COURSE OF ASSESSMENT PROCEEDINGS UNDER CHALLENGE; (C) TO ENABLE THE ASSESSEE TO PRODUCE AND EXPORT OUTPUT TO ITS OVERSEAS CLIENTS IN THE FORM OF COMPUTER SOFTWARE AS SUCH TERM IS DEFINED UNDER EXPLANATION PAGE 17 OF 34 ITA NO. 950/BANG/2011 17 2 TO S.10A OF THE ACT, THE ASSESSEE ENGAGES IN THE ACTIVITY OF RESEARCH AND DEVELOPMENT TO GATHER RELEVANT DATA; (D) BECAUSE OF THE IMPORTANCE OF RESEARCH AND DEVELOPMENT, AS AN ACTIVITY, IN THE ASSESSEES PROCE SS FOR PRODUCING THE FINAL OUTPUT, THE ASSESSEE HAS AT TIMES, IN DESCRIBING ITS BUSINESS, HIGHLIGHTED THE ACTIVITIES INVOLVED IN PRODUCING THE FINAL OUTPUT RATHER THAN THE DESCRIPTION OF THE FINAL OUTPUT ACTUALLY PRODUCED BY THE ASSESSEE; (E) IN ANY EVENT, WHETHER THE ASSESSEE DOES SOME RESEARCH AND DEVELOPMENT IN PRODUCING THE OUTPUT IS WHOLLY IRRELEVANT FOR THE PURPOSE OF CONSIDERING THE ELIGIBILITY FOR DEDUCTION U/S 10A OF THE ACT; & (F) NEITHER THE ACT NOR ANY CASE LAW SUGGESTS THAT ANY UNDERTAKING DOING RESEARCH AND DEVELOPMENT AS A MEANS TO GENERATE THE OUTPUT REQUIRED BY THE CLIENTS IS PRECLUDED OR EXCLUDED FROM BEING ELIGIBLE TO CLA IM DEDUCTION U/S 10A OF THE ACT. SUCH AN EXCLUSION OR EXEMPTION AS SUGGESTED BY THE REVENUE IS NEITHER SPECIFIED NOR IMPLIED S.10A OF THE ACT. (XVII) REVENUES SUBMISSION WITH REGARD TO THE ASS ESSEES ADVERTISEMENTS SOLICITING PROSPECTIVE EMPLOYEES AND DESCRIPTION OF ASSESSEES BUSINESS ON ITS WEBSITE E TC., AND ITS CONCLUSION THAT THE ASSESSEE WAS A SCIENTIFIC RESE ARCH AND DEVELOPMENT COMPANY AND, THEREFORE, WAS INELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT ETC., IT WAS CLAIMED T HAT - (A) THAT THE REVENUE HAD FAILED TO APPRECIATE THAT THE ASSESSEE IS AN EXPORTER OF COMPUTER PROGRAMMES, CUSTOMIZED ELECTRONIC DATA AND ENGINEERING AND DESIGN SERVICES AND, INSTEAD, HE HAS WRONGLY PLACED RELIANCE ON ARBITRARY AND SELECTIVE EVIDENCE (SUCH A S ADVERTISEMENTS SOLICITING POTENTIAL CANDIDATES FOR EMPLOYMENT AND WEBSITES) THAT IS NEITHER RELEVANT NOR CONTEXTUAL FOR PURPOSES OF DETERMINING THE ACTUAL BUSINESS OF THE ASSESSEE; PAGE 18 OF 34 ITA NO. 950/BANG/2011 18 (B) THE PURPOSE OF SUCH ADVERTISEMENTS AND WEBSITES IS TO PROVIDE USER-FRIENDLY INFORMATION TO PROSPECTIVE EMPLOYEES OR CLIENTS AND OFTEN INVOLVES THE COMPANIES HIGHLIGHTING CERTAIN FEATURES OR ASPECTS OF THEIR PRODUCTS, SERVICES OR ACTIVITIES AND IS BY NO MEANS DEMONSTRATIVE OF THE ENTIRE BUSINESS OF SUCH COMPANY; THAT BECAUSE OF THE IMPORTANCE OF RESEARCH AND DEVELOPMENT, AS AN ACTIVITY, IN THE ASSESSEES PROCESS FOR PRODUCING THE FINAL OUTPUT I N THE FORM OF COMPUTER SOFTWARE WITHIN THE MEANING OF EXPLANATION 2 TO S.10A OF THE ACT, THE ASSESSEE HAD AT TIMES, IN DESCRIBING ITS BUSINESS, HIGHLIGHT ED THE IMPORTANCE OF RESEARCH AND DEVELOPMENT AS AN ACTIVITY NECESSARY FOR PRODUCING THE FINAL OUTPUT; (C) THE CONTENT FOR ADVERTISEMENTS AND WEBSITES HAVE NOT BEEN DRAFTED WITH THE GOAL OF ENSURING THAT THE DESCRIPTION OF THE ASSESSEES BUSINESS MATCHES WITH THE ASSESSEES CLAIMS FOR DEDUCTION; (D) THAT THE REVENUE WAS NOT ONLY WRONG IN ARBITRARILY SELECTING AND RELYING ON EMPLOYMENT BASED ADVERTISEMENTS, BUT, HAD FAILED TO APPRECIATE THAT EVEN IN THE ADVERTISEMENT SO SELECTED AS AN EXAMPLE THE ASSESSEES BUSINESS IS ACCURATELY DESCRIBED AS SOLICITING ENGINEERS, SCIENTISTS ETC., TO CARRY ON RESEARCH AND DEVELOPMENT ACTIVITY IN HIGH IMPACT AREAS OF TECHNOLOGY THAT IS AN INTEGRAL AND ESSENTIA L PART OF THE FINAL AND ULTIMATE SERVICE AND OUTPUT THAT THE ASSESSEE PRODUCES AND EXPORTS TO ITS CLIENTS, NAMELY, COMPUTER PROGRAMMES, CUSTOMIZED ELECTRONIC DATA AND ENGINEERING AND DESIGN SERVICES . (XVIII) WITH REGARD TO THE REVENUES CONTENTIONS OF FILING OF PATENTS BY THE APPELLANT FOR ITS RESEARCH AND DEVELO PMENT ACTIVITIES CARRIED OUT AT R&D CENTRE IN BANGALORE, IT WAS CLAIMED THAT THE REVENUE HAD ERRONEOUSLY PLACED RELI ANCE UPON 185 PATENTS FILED BY THE APPELLANTS R&D CENTRE FOR ITS RESEARCH AND DEVELOPMENT ACTIVITIES IN CONCLUDING T HAT THE PAGE 19 OF 34 ITA NO. 950/BANG/2011 19 APPELLANT HAS INVOLVED IN SCIENTIFIC RESEARCH AND DEVELOPMENT AND, THEREFORE, WAS NOT ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT ETC., AND THE REVENUE HAD FAILED TO APPRECIATE THAT - THAT AS PER CLAUSE 3.5 OF THE SERVICES AGREEMENTS ENTERED BETWEEN THE APPELLANT AND ITS OVERSEAS CLIENT, ALL OF THE INTELLECTUAL PROPERTY IN THE OUTPUT PRODUCED AND EXP ORTED BY THE APPELLANT TO ITS OVERSEAS CLIENT, INCLUDING, WI THOUT LIMITATION, THE PATENTS IN SUCH OUTPUT, WAS OWNED B Y THE OVERSEAS CLIENT AND THE APPELLANTS ROLE WAS LIMITE D TO RENDERING HELP TO THE OVERSEAS CLIENTS WITH THE REG ISTRATION OF THEIR TRADEMARK, COPYRIGHT, PATENT OR OTHER INTEL LECTUAL PROPERTY RIGHTS. ACCORDINGLY, THE DECISION WHETHER A PATENT APPLICATION SHOULD BE FILED FOR RESEARCH AND DEVELO PMENT WAS MADE BY THE OVERSEAS CLIENT AND NOT BY THE ASSESSEE; & - THE APPELLANT WAS PAID FOR ITS SERVICES IRRESPECT IVE OF WHETHER ITS SERVICES PRODUCES PATENTABLE INTELLECTU AL PROPERTY OR NOT. (XIX) IN RESPECT OF THE APPELLANTS FIXED ASSETS, P LANT AND MACHINERY, MANPOWER AND TYPES OF LABORATORIES, IT WAS CONTENDED THAT THE REVENUE HAD ERRONEOUSLY PLACED RELIANCE UPON THE APPELLANTS FIXED ASSETS, PLANT AND MACHINERY, MANPOWER AND TYPES OF LA BORATORIES IN CONCLUDING THAT THE APPELLANT WAS NOT ENGAGED IN AN Y OF THE BUSINESS ACTIVITIES MENTIONED U/S 10A OF THE ACT AND, THEREF ORE, WAS NOT ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. HOWEVER, THE REV ENUE HAD FAILED TO APPRECIATE THAT (A) THE LIST OF FIXED ASSETS ANNEXED CONSISTS OF FIXED ASSETS PURCHASED AND INSTALLED BY THE APPELLANT TO OPERATE 545000 SQ. FT. OF FACILITIES SUCH AS AIR CONDITIONERS, HEATING SYSTEMS, ELECTRICAL SYSTEMS, PAGE 20 OF 34 ITA NO. 950/BANG/2011 20 ELEVATORS ETC., AS WELL AS IT ENABLED EQUIPMENTS AN D TOOLS NECESSARY TO OPERATE HIGHLY SOPHISTICATED LABORATORIES; (B) ALL OF THE LABORATORIES OF THE APPELLANT WERE EQUIPPED WITH IT ENABLED TOOLS AND EQUIPMENTS WITH EMBEDDED COMPUTER CHIPS AND PROCESSORS; (C) THE MANPOWER EMPLOYED BY THE APPELLANT PREDOMINANTLY COMPRISES OF ENGINEERS WHO WERE SUPPORTED BY SCIENTISTS AND OTHERS IN PERFORMING THEIR ENGINEERING FUNCTION; (D) THE APPELLANTS ENGINEERS AND SCIENTISTS USE SUCH LABORATORIES EQUIPPED WITH IT ENABLED TOOLS AND EQUIPMENTS TO COLLECT DATA THAT IS PROCESSED AND ANALYZED THROUGH COMPUTERS; (E) ANY RESEARCH AND DEVELOPMENT WAS JUST ONE OF MANY ACTIVITIES OR STEPS THAT THE APPELLANT ENGAGES IN I TS PROCESS TO PRODUCE THE FINAL OUTPUT IN THE FORM OF COMPUTER PROGRAMMES, CUSTOMIZED ELECTRONIC DATA AND ENGINEERING AND DESIGN SERVICES THAT IT EXPORTS TO ITS OVERSEAS CLIENTS; (F) GIVEN THE COMPLEXITY, INTRICACY, PRECISION AND ACCURACY THAT WAS REQUIRED FOR THE PRODUCTION OF THE FINAL OUTPUT BY THE APPELLANT IN FORM OF COMPUTER PROGRAMMES, CUSTOMIZED ELECTRONIC DATA OR ENGINEERING AND DESIGN SERVICES, IT CAN NEITHER BE IMAGINED NOR IS IT POSSIBLE TO PRODUCE SUCH CUSTOMIZED OUTPUT WITHOUT THE USE OF COMPUTERS OR IT ENABLED TOOLS OR EQUIPMENTS. 4.3.1. IN CONCLUSION, IT WAS ALTERNATIVELY CLAIMED THAT IF THE HONBLE BENCH, BASED ON THE NATURE OF THE ACTIVITIES OF THE ASSESSEE DETERMINES THAT THE CLAIM U/S 80IB (8A) OF THE ACT BE MORE APP ROPRIATE, THE SAME MAY BE EXTENDED. PAGE 21 OF 34 ITA NO. 950/BANG/2011 21 4.4. ON THE OTHER HAND, THE LEARNED D R IN HIS LEN GTHY SUBMISSION HAD SUPPORTED THE STAND OF THE LEARNED AO AS WELL A S LEARNED DRP; THE SUBSTANCE OF HIS SUBMISSION IS EXTRACTED AS UNDER: (I) THAT IT HAS BEEN ADMITTED BY THE ASSESSEE THAT I T IS NOT IN THE BUSINESS OF DEVELOPMENT OR EXPORT OF COMPUTER S OFTWARE. THE ASSESSEE RENDERS IN ITS ACTIVITIES WITH ITS OWN HOLDING COMPANY AND OTHER GROUP CONCERNS. TO THIS EXTENT, TH E ASSESSEE HAS CLAIMED THAT IT IS IN THE BUSINESS OF EXPORT OF THE CUSTOMIZING OF ELECTRONIC DATA; (II) IT WAS CLAIMED THAT THE WORD CUSTOMIZED HA S BEEN DEFINED IN THE CASE OF ACCURUM INDIA PVT. LTD REPORTED IN 1 28 TTJ 249 AS UNDER: ON THE OTHER HAND, ELECTRONIC DATA REFERRED TO ANY SUB-CLAUSE (B) HAS NECESSARILY TO BE CUSTOMIZED. BY THE WORD CUSTOMIZED IS MEANT THAT THE DATA IS SUITABLE FOR A SPECIFIC CUSTOMER ONLY. IT HAS THUS BEEN DEFINED BY THE HONBLE TRIBUNAL THE WORD CUSTOMIZED TO MEAN THAT AN ELECTRONIC DATA WHICH IS PROCESSED FOR A SPECIFIC CUSTOMER CAN ONLY BE TAKEN WITHIN THE DEFINITION OF CUSTOMIZED. (III) TAKING A LEAF OUT FROM THE INFORMATION TECHNO LOGY ACT, THE DEFINITION OF WORD DATA IN ELECTRONIC DATA, IT WAS CONTENDED THAT - IT IS CLEAR THAT THE ELECTRONIC DATA SHOULD BE PREP ARED IN A FORMALIZED MANNER AND SHOULD BE INTENDED TO BE PROCESSED OR PR OCESSED IN A COMPUTER SYSTEM. THIS WOULD ALSO MEAN THAT NON-FORMALIZED IN FORMATION NOT NECESSARILY INTENDED TO BE PROCESSED IN ANY COMPUTER SYSTEM CANNOT BE CLAIMED AS ELECTRONIC DATA. PAGE 22 OF 34 ITA NO. 950/BANG/2011 22 (IV) IT WAS, FURTHER, CONTENDED THAT THE CBDT HAD N OTIFIED CERTAIN NUMBER OF SERVICES AS IT ENABLED SERVICES. IT WAS, HOWEVER, CLAIMED THAT THE SERVICES SHOULD BE IT ENABLED, BUT, NOT NECESSARILY BE IT ASSISTED. (V) UNDER THE SHELTER IN THE FINDING IN THE CASE OF M/S. CYBERTECH SYSTEMS AND SOFTWARE LIMITED REPORTED IN 3 SOT 121, IT WAS CLAIMED THAT THE INFORMATION TECHNOLOGY ENABLED ACTIVITIES SHOULD NOT BE INCIDENTAL TO THE REVENUE EARNING ACTIVITY FOR WHICH DEDUCTION OR EXEMPTION IS CLAIMED FROM TAX PAYMENTS. THE REVENUE EARNING ACTIVITIES SHOULD NOT BE IT ASSISTED. THEY SHOULD BE IT ENABLED IN THE SENSE OF ARISING ON ACCOUNT OF BEING INFORMATION TECHNOLOGY ENABLED ACTI VITIES WHICH HAVE HAPPENED IN THE LAST 10 15 YEARS OR SO. (VI) IT WAS FURTHER CONTENDED THAT THE CBDT NOTIFIE D IT ENABLED SERVICES IN THE NATURE OF DESIGN AND ENGIN EERING REFERS TO THE OFFSHORE OR INDIA SHORE ACTIVITY OF CAD-CAM R ELATED DESIGN AND ENGINEERING RELATED BPO/KPO ACTIVITIES. THESE BPOS TAKE THE DESIGNING ACTIVITIES BASED ON CAD APPLICAT IONS AND PREPARE AN EXPORT THE ENGINEERING AND SUCH DESIGNS FOR THEIR REVENUE EARNING ACTIVITIES. FOR THIS SET OF ACTIVI TIES, THE IT ENABLING HAS BEEN AT THE CORE OF THE ACTIVITY. THES E ACTIVITIES HAVE COME INTO BEING ON ACCOUNT OF THE IT ENABLED E NVIRONMENT IN TERMS OF IT REVOLUTION AND CONNECTIVITY ESTABLISH ED AROUND THE WORLD ENABLING THE CREATION OF THIS SET OF BUSI NESS ACTIVITIES. (VII) THAT AS PER THE VOUCHERS SUBMITTED BY THE ASS ESSEE DURING THE COURSE OF SCRUTINY ASSESSMENTS, THE ASSESSEE HAD CLAIMED THAT IT HAD RENDERED ENGINEERING ANALYSIS TO ITS PRI NCIPALS ABROAD. THE ASSESSEE COMPANY HAD NOT GIVEN A BREAK- UP OF THE VARIOUS DELIVERABLES AS PER THE CONTRACTS AND SCOPE OF WORKS THAT THE ASSESSEE HAD PREPARED THE INVOICES TO SUIT ITS CLAIMS THAT IT HAS BEEN EXPORTING CUSTOMIZED ELECTRONIC DA TA AND IT ENABLED SERVICES. HOWEVER, ALL THE WORK DONE BY THE ASSESSEE COMPANY TO ITS PRINCIPALS CLEARLY SHOWS THAT THE ASSE SSEE IS NOT PAGE 23 OF 34 ITA NO. 950/BANG/2011 23 AT ALL IN THE BUSINESS OF PROVIDING ANY ENGINEERING ANALYSIS TO ITS PRINCIPALS AND INSTEAD IS CLEARLY IN THE FIELD OF IN VENTIONS. THE DELIVERABLES AS PER CONTRACT SUBMITTED BY THE ASSESS EE CLEARLY INDICATE THAT THE ASSESSEE HAD INVENTED VARIOUS PRO DUCTS MANUFACTURING PROCESSES, COMPOUNDS, MATERIAL PRODUC TS AND THE LIKE. THESE MATERIAL INVENTIONS CANNOT BE TERMED A S CUSTOMIZED ELECTRONIC DATA OR IT ENABLED SERVICES. (VIII) THE PROCESS OF RENDERING SERVICE TO THE CLI ENTS INVOLVES DETAILED STUDY OF R & D OF THE MATERIAL/PROCESS TECH NOLOGY OVER A FAIRLY LONG PERIOD OF RESEARCH DURATION. DU RING THE SAID R & D, VARIOUS PROTOTYPES OF MATERIALS/COMPONENTS WE RE DEVELOPED AND TESTED. THESE WERE IN PHYSICAL FORM A S WELL AS IN THE FORM OF IDEATIONS. THE ASSESSEE USES A HOST OF SCIENTIFIC HIGH END R & D EQUIPMENTS TO CONDUCT THE STUDY. PHD . SCHOLARS IN MATERIAL SCIENCES AND PROCESS TECHNOLOGY WORK IN ASSESSEE LABORATORIES AND INVENT A NEWER PRODUCT/TECHNOLOGY/C OMPONENT. THIS NEW INVENTION IS FURTHER TESTED. IF IT IS ACC EPTABLE TO THE CLIENT, THE END PRODUCT IN THE FORM OF A NEWER TECH NOLOGY, NEWER PRODUCT, NEWER MATERIAL COMPONENT OR A NEWER PROCESS IS DELIVERED TO THE CLIENT. (IX) TO SAY THAT THE ASSESSEE DELIVERS CUSTOMIZED E LECTRONIC DATA WOULD BE GROSSLY INCORRECT AND BELITTLING THE SERVICE OF THE ASSESSEE. THE ASSESSEE HAS NEITHER RECEIVED E LECTRONIC DATA NOR CUSTOMIZED IT. IT DOES NOT EXPORT AN Y CUSTOMIZED ELECTRONIC DATA IN THE FORM OF IT ENABLED ENGINEER ING & DESIGN. THE ASSESSEES EXPORTS WERE IN THE FORM OF IDEATION S, NEWER MATERIAL/COMPONENT, NEWER MANUFACTURING TECHNOLOGIE S AND NEWER PRODUCTS. THE OUTPUTS COULD AS WELL BE IN PH YSICAL MATERIAL FORM OR IN PHYSICAL PROTOTYPES OF MANUFACTUR ING TECHNIQUES. THESE OUTPUTS WERE NOT IT ENABLED. THESE HAVE BEEN SCIENTIFIC INVENTIONS OUT OF THE R & D PROCESS . THE SAID R & D IS DEFINITELY IT ASSISTED AS ARE MOST OF OUR M ODERN DAY ACTIVITIES. (X) THAT THE ASSESSEE COMPANY HAD ALSO CLAIMED THAT ITS SERVICES WERE CUSTOMIZED IN ITS ENTIRETY. HOWEVER, IT IS SEEN PAGE 24 OF 34 ITA NO. 950/BANG/2011 24 THAT THE ASSESSEE COMPANY HAS ALSO VENTURED INTO VAR IOUS DEVELOPMENT ACTIVITIES ON ITS OWN. IT HAD ALSO APP LIED FOR MORE THAN 185 PATENTS AND HAD OBTAINED TWELVE PATENTS FO R ITS INVENTIONS. THIS CLEARLY GOES TO SHOW THAT THE ASSE SSEE COMPANY CANNOT BE CALLED AS RENDERING CUSTOMIZED ELE CTRONIC DATA IN AN ITA ENABLED ENVIRONMENT. THE SCIENTIFIC R & D LABS., OF THE ASSESSEE COMPANY DO HAVE VARIOUS HIGH END COM PUTERS. THESE COMPUTERS ASSIST THE R & D ACTIVITIES OF THE ASSESSEE. BUT THE R & D ACTIVITIES OF THE NATURE ADMITTED BY T HE ASSESEE HAVE BEEN CONDUCTED FOR THE LAST 200 YEARS IN SCIENT IFIC LABORATORIES. IN FACT, M/S. GE INDIA TECHNOLOGY CEN TRE PVT. LTD. HAS BEEN A PIONEER IN SUCH SCIENTIFIC R & D AN D INVENTION ACTIVITIES. THE BANGALORE CENTRE IS AN EXTENSION O F SUCH R & D AND INVENTION CENTRES. THE ADVANTAGE OF BANGALORE IS IN TERMS OF REDUCED EMPLOYMENT AND ADMINISTRATIVE COSTS. BAN GALORE HAS ALSO BEEN ABLE TO ATTRACT A LARGE NUMBER OF HIGH EN D SCIENTIFIC POOL. THIS DOES NOT MAKE THE R & D CENTRE OF THE A SSESSEE TO BE AN IT ENABLED SERVICES. (XI) THAT THE AUDITORS IN THEIR AUDIT REPORT HAVE Q UALIFIED THAT THE ASSESSEE IS INTO R & D IN MATERIAL SCIENCE AND PROCESS TECHNOLOGY. THE AUDITORS HAVE ALSO QUALIFIED THAT T HE ASSESSEE IS IN TWO SETS OF ACTIVITIES, ONE FOR R & D IN MATE RIAL SCIENCES AND PROCESS TECHNOLOGY AND THE OTHER FOR ENGINEERING ANALYSIS AND RELATED SOFTWARE DEVELOPMENT. HOWEVER, IT HAD NOT BEEN ABLE TO PROVE THAT IT WAS IN ANY SOFTWARE DEVELOPMEN T ACTIVITY. THE AUDITORS HAVE BEEN CONSISTENT IN THE CERTIFICAT E ISSUED BY THEM UNDER VARIOUS SECTIONS OF AUDIT REQUIREMENTS. THIS PROVES THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S 10B OF THE ACT AS IT IS NOT IN THE BUSINESS OF ANY CUSTOMIZED E LECTRONIC DATA EXPORT. THE ASSESSEE HAD NOT ADDUCED ANY EVIDE NCE IN SUPPORT OF EITHER OF THE CLAIM U/S 10B OF THE ACT O R THE ALTERNATIVE CLAIM U/S 80IB (8A) OF THE ACT. (XII) ON THE OTHER HAND, THE LEARNED AO HAD GIVEN THE TEST OF ELIGIBILITY FOR UNDERSTANDING A PARTICULAR REVENUE E ARNING ACTIVITY TO BE IN THE NATURE OF CUSTOMIZED ELECTRONI C DATA OR IT PAGE 25 OF 34 ITA NO. 950/BANG/2011 25 ENABLED SERVICES IN HIS IMPUGNED ORDER. THUS, IN A LL SUCH TEST OF ELIGIBILITY, THE ASESSEE HAD FAILED TO MUSTER SUFFIC IENT PROOF OF ELIGIBILITY. (XIII) AFTER ANALYZING THE CASE LAWS RELIED UPON BY THE ASSESSEE, THE LEARNED D R HAD OPINED AS UNDER: (A) M/S. BECHTEL INDIA PVT. LTD. ITA 3316/DELHI/04 ITAT DELHI: 27.1.4.OVERRULING THE OBJECTIONS OF THE CIT (A) THA T THE ACTIVITY OF THE ASSESSEE WAS NOT INCLUDED IN ITS MEMORANDUM OF ASSOCIATION AND THAT THE EXPORTS WERE NOT MADE ELECTRONICALLY, THE HONBLE ITAT HAS CORREC TLY RULED IN FAVOUR OF THE ASSESSEE TO STATE THAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF EXPORT OF CUSTOMIZED ELECTRONIC DATA. THE FACTS OF THIS ARE COMPLETELY DIFFERENT FROM THE FACTS OF MS GE INDIA TECHNOLOGY CENTRE PVT. LTD. (B) M/S. M. L. OUTSOURCING SERVICES PVT. LTD. ITA NO.1204/ DELHI/11: 27.2.1. THE ASSESSEE COMPANY WAS TRANSMITTING DATA ABOUT POTENTIAL EMPLOYEES AND HELPING THE FOREIGN PRINCIPAL IN CHOOSING THE RIGHT CANDIDATES. THIS H AS BEEN HELD TO BE ELIGIBLE FOR DEDUCTION U/S 10A BY THE HON BLE ITAT. THE FACTS OF THE ASSESSEES CASE ARE COMPLET ELY DISSIMILAR AND BEAR NO RESEMBLANCE TO THE FACTS OF THIS CASE. (C) M/S. ACCURUM INDIA PVT. LTD 128 TTJ 249: 27.3.1. AS ABOVE, IT IS SEEN THAT THE ASSESSEE COM PANY WAS A RECRUITING AGENT FOR ITS FOREIGN PRINCIPALS. IN THIS CASE ALSO, THE FACTS OF THE CASE WERE COMPLETELY DISSIMILAR TO THE FACTS OF THE INSTANT CASE. PAGE 26 OF 34 ITA NO. 950/BANG/2011 26 (XIV) THE LEARNED D R HAD, HOWEVER, PLACED STRONG RELIANCE ON THE FINDING IN THE CASE OF M/S. CYBERTECH SYSTEMS AND SOFTWARE LTD [3 SOI 121] WHEREIN, ACCORDING TO LD . D R, THE TRIBUNAL HAD CLEARLY RULED THAT THE IT ACTIVITIES WE RE INCIDENTAL TO THE MAIN ACTIVITY OF RECRUITING, TRAINING AND EXP ORTING MANPOWER AND, THUS, DISALLOWED THE CLAIM OF S.10B O F THE ACT TO THE ASSESSEE. 4.4.1. IN CONCLUSION, THE LEARNED D R HAD SUBMITTED THAT BASED ON THE DETAILED ANALYSIS OF THE ASSESSEES SUBMISSION, CASE LAWS AND THE BUSINESS PRACTICES OF THE ASSESSEE, THE LEARNED AO HAD HELD THAT THE ACTIVITIES OF THE ASSESSEE WERE NOT ELIGIBLE FOR DEDUCTION U/S 10 B OF THE ACT. 4.4.2. WITH REGARD TO THE ASSESSEES ALTERNATIVE CL AIM U/S 80IA (8A) OF THE ACT, IT WAS CONTENDED THAT ON ACCOUNT OF TEC HNICAL FLAWS COMMITTED BY THE ASSESSEE AS POINTED BY THE LEARNED A O IN HIS IMPUGNED ORDER, THE AO WAS WITHIN HIS SPHERE TO DENY THIS CLA IM ALSO PURELY ON TECHNICAL AND PROCEDURAL LINES. 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE MATERIALS AVAILABLE ON RECORD AND ALSO VARIOUS DOCUMENTARY EVIDENCES PRODUCED BY THE LEARNED A R IN THE SHAPE OF VOLUMINO US PAPER BOOKS. 6. THE LEARNED AOS REASONING WAS THAT THE A SSESSEES OPERATIONS DO NOT HAVE COMPUTER AS PRIMARY AND PREDOMINANT HARDWAR E TOOL. IT MAKES USE OF THE BEST OF THE SCIENTIFIC RESEARCH LABORATO RY TOOLS AVAILABLE AND HAD PRODUCED NEWER AND IMPROVED METHODS OF VARIOUS MANUFACTURING. THE END PRODUCTS OF THE ASSESSEE SHOULD NOT BE BELI TTLED BY CALLING IT AS SERVICE SIMILAR TO EXPORT OF CUSTOMIZED ELECTRONIC DATA. FOR THE PAGE 27 OF 34 ITA NO. 950/BANG/2011 27 ELABORATE REASONS RECORDED, THE LEARNED AO HAD NEIT HER ALLOWED THE CLAIM OF DEDUCTION U/S 10A OF THE ACT NOR THE ALTER NATIVE CLAIM FOR DEDUCTION U/S 80IB (8A) OF THE ACT. THIS STAND OF THE AO HAS BEEN DEFENDED BY THE LEARNED D R DURING HIS SUBMISSION. 6.1. THE LEARNED AR HAD EXTENSIVELY QUOTED THE PROVI SIONS OF S. 10A OF THE ACT AND PLACED STRONG EMPHASIS ON EXPLANATIO N 2(I) TO S.10A WHEREIN THE TERMS COMPUTER SOFTWARE HAS BEEN DEFINED AS: (I) COMPUTER SOFTWARE MEANS- (A) .. (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; 6.2. AT A PERUSAL OF THE BOARDS NOTIFICATION NO. S O 890 (E), DATED 26.9.2000, IT HAS BEEN OBSERVED THAT - THE FOLLOWING INFORMATION TECHNOLOGY (IT) ENABLED PRODUCTS OR SERVICES ARE BACK OFFICE OPERATIONS; (I) CALL CENTRES; (II) CONTENT DEVELOPMENT OR ANIMATION; (III) DATA PROCESSING; (IV) ENGINEERING AND DESIGN; (V) GEOGRAPHIC INFORMATION SYSTEM SERVICES; (VI) HUMAN RESOURCE SERVICES; (VII) INSURANCE CLAIM PROCESSING; (VIII) LEGAL DATABASES; (IX) MEDICAL TRANSCRIPTION; (X) PAYROLL; (XI) REMOTE MAINTENANCE; (XII) REVENUE ACCOUNTING; PAGE 28 OF 34 ITA NO. 950/BANG/2011 28 (XIII) SUPPORT CENTRES; & (XIV) WEBSITE SERVICES. 6.2.1. IT HAS BEEN PLEADED THAT THE ASSESSEE HAS B EEN ENGAGED IN THE BUSINESS OF EXPORTING (A) COMPUTER PROGRAMME (WITHI N THE MEANING OF EXPLANATION 2(I)(A); (B) CUSTOMIZED ELECTRONIC DATA (WITHIN THE MEANING OF EXPLANATION 2(I)(B); AND (C) ENGINEERING & DESIGN S ERVICES (WITHIN THE MEANING OF CBDT NOTIFICATION) AND THAT THE ENTIRE OUTPUT I S BEING EXPORTED/TRANSMITTED ELECTRONICALLY OUTSIDE INDIA. 6.2.2. TO ILLUSTRATE FURTHER, THE ASSESSEE HA S SUBMITTED THAT THE ASSESSEE PROVIDES ITS SERVICES TO ITS OVERSEAS CLIE NTS INVOLVING THE FOLLOWING FOUR PHASES: (A) PHASE 1 CLIENT WORK REQUEST IN THIS PHASE THE ASSESSEE RECEIVES A SPECIFIC WORK REQUEST FROM IS OVERSEAS C LIENTS OUTLINING IN DETAIL THE SCOPE OF WORK TO BE DONE, T HE MANNER IN WHICH SUCH WORK IS TO BE PROCESSED, THE FORM IN WHI CH THE OUTPUT IS TO BE DELIVERED AND THE ESTIMATED BUDGET FOR SUCH ASSIGNMENT ALONG WITH THE RAW DATA AND INFORMATION IN THE FORM OF DESIGNS OR TECHNICAL SPECIFICATIONS; (B) PHASE 2 PROCESSING WORK REQUEST IN THIS PHASE THE ASSESSEES ENGINEERS PROCESSES THE RAW DATA PROVIDE D BY ITS CLIENTS BY CONDUCTING REPETITIVE AND CONTINUOUS RESE ARCH, TESTING AND ANALYSIS THROUGH THE USE OF SPECIALIZED COMPUTER SOFTWARE COMPUTERS AND IT ENABLED TOOLS AND EQUIPME NTS; ASSESSEES PROCESS IS A CONTINUOUS LOOP WHICH INVOL VES RESEARCH, TESTING AND ANALYSIS CUSTOMIZED TO THE SPECIFICATION S AND INSTRUCTIONS OF THE OVERSEAS CLIENT AT EVERY STAGE; (C) PHASE 3 FINAL OUTPUT FINAL OUTPUT CUSTOMIZED TO THE SPECIFICATIONS OF ITS OVERSEAS CLIENTS IS GENERATED THROUGH USE OF COMPUTERS IN THE FORM OF ONE OR MORE OF THE FOLL OWING: PAGE 29 OF 34 ITA NO. 950/BANG/2011 29 DETAILED REPORTS CONTAINING ENGINEERING ANALYSIS, DA TA SHEETS CONTAINING SUPPORTING TECHNICAL DATA, SUPPORTING DE SIGNS AND DIAGRAMS, 2D OR 3D DESIGNS, SUPPORTING DESIGN CALCU LATION AND COMPUTER CODES ELECTRONIC DATA; AND (D) PHASE 4 EXPORT OF FINAL OUTPUT THE FINAL OUTPUT IS IN ELECTRONIC FORMAT AND IS TRANSMITTED ELECTRONICALLY TO ITS OVERSEAS CLIENTS VIA EMAIL OR THROUGH UPLOADING OF DATA ON THE SERVERS OF OVERSEAS CLIENTS. 6.2.3. ON THE BASIS OF THE PROCESS OUTLINED ABOVE, IT WAS ARGUED THAT THE ASSESSEE HAS BEEN IN THE BUSINESS OF EXPORTING CUSTOMIZED ELECTRONIC DATA THE REASONS ADDUCED BY THE LEARNED AR HAS ALREADY BE EN CITED SUPRA [PARA 4.3. (V)]. 6.2.4. TO DRIVE HOME HIS POINTS, THE LEARNED A R H AD DRAWN THE REFERENCE OF THIS BENCH TO THE EFFECT THAT THE AO H AD ADMITTED THAT (A) THE ASSESSEE IS IN THE BUSINESS OF UNDERSTANDING A ND ANALYZING THE REQUIREMENTS OF EACH OF ITS CLIENTS, UNDERSTANDING EXISTING SYSTEMS OF THE CLIENTS AND CO MING OUT WITH SOLUTIONS CUSTOMIZED TO THE REQUIREMENTS O F ITS CLIENTS; (B) THE ASSESSEE USES COMPUTER AND MOST OF THE WORK IS DONE COMPUTERS; (C) THE ASSESSEE MAKES USE OF HIGH END COMPUTERS; (D) THE ASSESSEE DELIVERS AND EXPORTS THE OUTPUTS THRO UGH COMPUTER AND INTERNET; AND (E) THE ASSESSEE DEFINITELY USE THE SERVICES OF THE COM PUTER AND INTERNET [COURTESY: PARAS 18,21 & 22 OF ASSESSMENT ORDER] PAGE 30 OF 34 ITA NO. 950/BANG/2011 30 6.3. AT THIS JUNCTURE, WE WOULD LIKE TO RECALL THE CASE LAWS ON WHICH THE LEARNED A R HAD PLACED STRONG RELIANCE. (A) ITO V. ACCURUM INDIA (P) LTD (2010) 128 TTJ 249 (CHENNAI): THE HONBLE THIRD MEMBER CHENNAI A BENCH HAS HELD THUS THE REQUIREMENT OF THE PROVISION IS THAT THERE SHO ULD BE A CUSTOMIZED ELECTRONIC DATA AND SUCH DATA SHOULD B E EXPORTED OUTSIDE INDIA. THE DATA WHICH A CUSTOMER MAY REQUIRE MAY BE GATHERED EITHER BY MANUAL EFFORT OR BY ELECTRONIC MEANS, AS FOR EXAMPLE, THROUGH INTERNET. BY WHATEVER MEANS THE DATA IS COLLECTED, ONCE IT IS ST ORED IN AN ELECTRONIC FORM, IT BECOMES A CUSTOMIZED ELECTRO NIC DATA WHICH CAN BE EXPORTED TO QUALIFY FOR DEDUCTION UNDER S. 10A. THE PROCESS OF ACTUALLY COLLECTING TH E DATA NEED NOT BE IT ENABLED. WHAT ALL IS REQUIRED IS TH AT THE DATA COLLECTED SHOULD BE IN AN ELECTRONIC FORM (B) M.L.OUTSOURCING SERVICES PVT. LTD V. ITO ITA NO.1204/DEL/11 DT:27.5.2011 : THE ISSUE, IN BRIEF, WAS THE DEN IAL OF DEDUCTION U/S 10A OF THE ACT. AFTER DUE CONSIDERATION OF RIVAL SUBMISSIONS, EXTENSIVELY QUOTING THE PROVISIONS OF S.10A OF THE ACT, ANALYZING THE BOARD S CIRCULAR CITED SUPRA AND ALSO EXHAUSTIVELY REPRODUCING THE FINDINGS OF THE TH IRD MEMBER IN THE CASE OF ITO V. ACCURUM INDIA PVT. LTD CITED SUPRA, THE B ENCH HAD COME TO A CONCLUSION THAT 15ON DUE CONSIDERATION OF ALL THE FACTS AN D CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE CASE OF THE ASSESSEE IS DULY COVERED BY THE DECISION OF THE ITAT, CHENNAI AND IT IS ENTITLED FOR DEDUCTION U/S 10A OF THE INCOME TAX ACT. PAGE 31 OF 34 ITA NO. 950/BANG/2011 31 (C) YET ANOTHER FINDING ON A SIMILAR ISSU E, THE HONBLE DELHI TRIBUNAL, IN THE CASE OF BECHTEL INDIA PRIVATE LTD V. ACIT ITA NO.3316/DEL/04, AFTER DULY ANALYZING ENGINEERING AND DESIGN ACTIVITIES AND OUTPUT OF BECHTEL THAT WERE SIMILAR TO THE ENGINEERING AND DESIGN ACTIVITI ES AND OUTPUT OF THE ASSESSEE COHERENTLY ADJUDICATED ON THE FOLLOWING TWI N POINTS, NAMELY [AT THE COST OF REPETITION]: (A) THE DATA GENERATED BY BECHTEL TO THE MINUTEST DETAIL S CANNOT BE GENERATED MANUALLY WITH THE SAME LEVEL OF PRECISION, SPEED AND ACCURACY AS IS ACHIEVED BY USE O F COMPUTERS; AND (B) THE OUTPUT PRODUCED BY BECHTEL IN FROM OF ENGINEERIN G DRAWINGS IS UNDOUBTEDLY CUSTOMIZED ELECTRONIC DATA WITHIN THE DEFINITION OF COMPUTER SOFTWARE APPEAR ING U/S 80HHE OF THE ACT WHICH DEFINITION IS IDENTICAL TO THE DEFINITION OF COMPUTER SOFTWARE UNDER EXPLANA TION 2 OF S.10A OF THE ACT; TO MAKE IT UNAMBIGUOUSLY CLEAR TH AT THE DATA EXPORTED BY BECHTEL WAS CUSTOMIZED ELECTRONIC DATA , THE HONBLE BENCH HAD OBSERVED THUS: IT IS DO DOUBT TRUE, AS MENTIONED BY THE CIT (APPEA LS) AND BY THE LEARNED DR THAT SUCH DESIGNS AND DRAWINGS CAN ALSO BE CARRIED OUT ON A BLACK BOARD HOWEVER, IN S AYING SO, THEY ARE MISSING CERTAIN VITAL POINTS. FIRSTLY, THE DATA WHICH IS GENERATED BY THE ASSESSEE TO THE MINUTEST DETAILS CANNOT BE GENERATED MANUALLY. SECONDLY, THE SAME LEVEL OF ACCURACY AND PRECISION CANNOT BE EXPEC TED IF DONE MANUALLY. LAST AND THE MOST IMPORTANT ASPEC T IS THE SPEED AT WHICH SUCH DATA IS GENERATED BY THE HEL P OF SOFTWARE CANNOT BE GENERATED MANUALLY. WE FAIL TO UNDERSTAND IF THIS IS NOT CUSTOMIZED ELECTRONIC DAT A, THEN WHAT ELSE IT IS. PAGE 32 OF 34 ITA NO. 950/BANG/2011 32 6.3.1. THE LEARNED A R HAD, DURING THE COURSE OF H EARING, STRONGLY URGED THAT THOUGH THE ATTENTION OF THE LEARNED AO A S WELL AS DRP WERE DRAWN TO THE FINDINGS OF THE TRIBUNALS REFERRED SUP RA TO CONSIDER THE SAME WHILE DEALING WITH THE ASSESSEES CASE, THEY HAVE FA ILED TO TAKE INTO CONSIDERATION OF THE SAME. 6.3.2. ON PERUSAL OF THE IMPUGNED ORDERS OF T HE LEARNED AO AS WELL AS THE DIRECTIONS OF THE DRP, IT HAS BEEN OBSERVED BY T HIS BENCH THAT THERE WAS NO TRACE OF HAVING CONSIDERED THE FINDINGS OF T HE ABOVE MENTIONED BENCHES OF THE TRIBUNAL AS URGED BY THE ASSESSEE DUR ING THE COURSE OF RESPECTIVE PROCEEDINGS. 6.4. WE WOULD LIKE TO REITERATE THAT THE LEARNED A R BEGAN HIS ARGUMENT THAT THE ISSUE OF DEDUCTION UNDER SECTION 10A/10B IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE THREE ORDER S OF THE TRIBUNAL, CITED SUPRA. THE LEARNED DR AFTER ANALYZING THE CASE LAWS RELIED UPON BY THE ASSESSEE, CONCEDED THAT THE HONBLE TRIBUNALS HAVE CORRECTLY RULED IN FAVOUR OF THOSE ASSESSEES TO STATE THAT THE ASSESSEE COMPA NIES WERE IN THE BUSINESSES OF EXPORT OF CUSTOMIZED ELECTRONIC DATA. IN THE SAME BREATH, HE HAD POINTED OUT THAT THOSE FACTS WERE COMPLETELY DIF FERENT FROM THE FACTS OF THE PRESENT ASSESSEE. HOWEVER, AS STATED EARLIE R, NEITHER THE LEARNED AO NOR THE LEARNED DRP HAVE TAKEN COGNIZANCE OF THE FI NDINGS OF THE HONBLE TRIBUNALS CITED SUPRA WHILE DECIDING THE ISSUE OF T HE PRESENT ASSESSEE, THOUGH ACCORDING TO THE ASSESSEE, THE ISSUE IN QUES TION IS SQUARELY COVERED BY THE ABOVE ORDERS OF THE TRIBUNAL. THEREFORE, IN THE LIGHT OF THE HONBLE SUPREME COURT JUDGEMENT IN THE CASE OF TIN BOX CO. V CIT, REPORTED IN 249 PAGE 33 OF 34 ITA NO. 950/BANG/2011 33 ITR 216, WE ARE OF THE OPINION THAT THE ASSESSEE WA S NOT GIVEN PROPER OPPORTUNITIES TO PRESENT HIS CASE BEFORE THE ASSESS ING OFFICER AND THE DRP AND HENCE, THE MATTER REQUIRES RE-EXAMINATION BY THE ASSESSING OFFICER. 6.5. TAKING INTO ACCOUNT ALL THE FACTS AND CIRCUMS TANCES OF THE ISSUE AS DISCUSSED IN THE PRECEDING PARAGRAPHS, IN CONFOR MITY WITH THE FINDINGS OF THE HONBLE BENCHES OF THE TRIBUNALS REFERRED ABOVE ON AN IDENTICAL ISSUE TO THAT OF THE PRESENT ISSUE AND, CHIEFLY, THE AUTHORIT IES BELOW HAVE FAILED TO CONSIDER THE CASE LAWS ON WHICH THE ASSESSEE HAD PL ACED ITS RELIANCE, WE ARE OF THE CONSIDERED VIEW THAT IN THE INTERESTS OF PRI NCIPLES OF NATURAL JUSTICE AND EQUITY, THE ISSUE SHOULD BE REMITTED BACK TO THE FILE OF THE LEARNED AO FOR FRESH CONSIDERATION. WHILE CONSIDERING THE ISS UE AFRESH AS DIRECTED, THE LEARNED AO SHALL KEEP IN VIEW THE CASE LAWS ON WHIC H THE ASSESSEE HAS PLACED ITS UNSTINTED CONFIDENCE. THE ASSESSEE SHALL BE AT LIBERTY TO PUT-FORTH ITS VIEWS BEFORE THE LEARNED ASSESSING OFFICER WHILE IT S CASE WILL BE TAKEN UP FOR FRESH CONSIDERATION BY THE LEARNED AO. IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT, THE ASSESSEES APPEAL IS TREATE D AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH DAY OF JUNE, 2012 SD/- SD/- (N K SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER PAGE 34 OF 34 ITA NO. 950/BANG/2011 34 COPY TO:- 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONC ERNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANGALORE.