IMSI (INDIA) PVT. LTD.,DEHRADUN vs. JCIT, DEHRADUN

PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-

These three separate appeals by the assessee are preferred against three separate orders of the ld. CIT(A), Muzaffarnagar dated 06.09.2016 pertaining to A.Ys 2011-12, 2012-13 and 2013-14.

1) The Learned Commissioner of Income Tax (Appeals) Muzaffrnagar ("Ld. CIT (A)") has erred on facts & in law in disallowing the claim of the appellant for deduction u/s 80-IC of the Income Tax Act, 1961 ("The Act") and confirming the addition of income of INR 1,84,28,269/- on account of deduction claimed under section 80IC as made by the Learned Joint Commissioner of Income Tax Range- 2, Dehradun, ("Ld. AO").

2) The Ld. CIT (A) has erred on facts and in law in holding that the appellant is not rendering services in the field of Information and Communication Technology ("ICT") industry required for claiming deduction u/s 80-IC of the Act. 3) The Ld. CIT (A) has erred on facts is not appreciating the business model of the appellant and holding the appellant is engaged in the business of manpower recruitment and supply to entities engaged in ICT industry and the entire business model of the appellant is mere an arrangement so that the entities to whom the appellant is providing its services could be free from statutory obligation attached with an employer and could focus on their core competencies.

The Ld. CIT (A) has erred on facts and in law in holding that 4) business of the appellant is not carried out within the State of Uttarakhand as required for claiming deduction u/s 80-IC of the Act. The Ld. CIT (A) has erred in law and on facts in holding that 5) the appellant has merely undertaken a reconstruction of its existing business and is therefore, not allowed to claim deduction u/s 80-IC.

“27. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the assessee was engaged in supplying personnel possessing computer skills to its clients. The assessee claimed the deduction u/s 80IC of the Act. The provisions contained in the said section read as under:

"80-IC. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section (3).

(2) This section applies to any undertaking or enterprise,--

(a) which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the

Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning—

(i) on the 23rd day of December, 2002 and ending before the 1st day of April, [2007], in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Sikkim; or

(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal Pradesh or the State of Uttaranchal; or

(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or

Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in any of the North-Eastern States;

(b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period beginning--

(i) on the 23 rd day of December, 2002 and ending before the 1 st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or

(ii) on the 7 th day of January, 2003 and ending before the 1 st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or

(iii) on the 24 th day of December, 1997 and ending before the 1 st day of April, 2007, in any of the North-Eastern States.

(3) The deduction referred to in sub-section (1) shall be--

(i) in the case of any undertaking or enterprise referred to in sub-clauses (i) and (iii) of clause (a) or sub-clauses (i) and (iii) of clause (b), of sub- section (2), one hundred per cent of such

profits and gains for ten assessment years commencing with the initial assessment year;

(ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub- clause (ii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains.

(4) This section applies to any undertaking or enterprise which fulfils all the following conditions, namely:--

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation.--The provisions of Explanations 1 and 2 to sub- section (3) of section 80-IA shall apply for the purposes of

clause (ii) of this sub-section as they apply for the purposes of clause (ii) of that sub- section.

(5) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or in section 10A or section 10B, in relation to the profits and gains of the undertaking or enterprise.

(6) Notwithstanding anything contained in this Act, no deduction shall be allowed to any undertaking or enterprise under this section, where the total period of deduction inclusive of the period of deduction under this section, or under the second proviso to sub-section (4) of section 80-IB or under section 10C, as the case may be, exceeds ten assessment years.

(7) The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80-IA shall, so far as may be, apply to the eligible undertaking or enterprise under this section."

State of Uttaranchal. The claim of the assessee is that it was established during the period specified in Sub-Clause (ii) of Clause (a) of Sub-Section (2) to Section 80IC of the Act and it is providing the services specified in Fourteenth Schedule, therefore, it is eligible for deduction u/s 80IC of the Act. Now the controversy to be resolve before us as to whether the assessee was established in the State mentioned in Section 80IC(2)(a)(ii) and started the business in the specified period i.e. from 7 t h Day of January, 2003 to April 2012 and perform the functions as are mentioned in Schedule Thirteenth or Schedule Fourteenth. The function/operation provided in Schedule Thirteenth relates to the manufacturing or production of any article or thing specified in that Schedule but the assessee is not engaged in such activities, so the operation undertaken by the assessee does not fall in Schedule Thirteenth. Now we have to examine as to whether the assessee falls in the definition of industry or it is doing the operation specified in Schedule Fourteenth. The term "industry" is not defined in the Income Tax Act, however, the Hon'ble Supreme Court in the case of National Union of Commercial Employees Vs M. R. Meher, Industrial Tribunal, Bombay (supra) held that the concept of industry covers the production of goods as well as rendering of services, in the said case, it has been held as under:

"It would be realised that the concept of industry postulates partnership between capital and labour or between the employer and his employees. It is under this partnership that the employer contributes his capital and the employees their

labour and the Joint contribution of capital and labour leads directly to the production which the industry has in view. In other words, the cooperation between capital and labour or between the employer and his employees which is treated as a working test in determining whether any activity amounts to an industry, is the co-operation which is directly involved in the production of goods or in the rendering of service. It cannot be suggested that every form or aspect of human activity in which capital and labour co-operate or employer and employees assist each other is an industry. The distinguishing feature of an industry is that for the production of goods or for the rendering of service, co-operation between capital and labour or between the employer and his employees must be direct and must be essential."

[Emphasis Supplied].

....the word "industry" has a wide import and it is (i) systematic activity, (ii) organised by co-operation between employer and employee (the direct and substantial element is chimerical), (iii) for the production and/or distribution of goods and services calculated to satisfy human wants and wishes (not spiritual or religious but inclusive of material things or services geared to celestial bliss, e.g., making on a large scale, prasad or food), prima facie there is an industry" in that enterprise. It was

further observed that the true focus is functional and the decisive test is the nature of the activity with special emphasis on the employer-employee relations."

From the ratio laid down by the Hon'ble Apex Court in the aforesaid referred to cases, it can safely be held that the word " industry" has a wide import and it is a systematic activity organized by co-operation between employer and employee for production and/or distribution of goods and services calculated to satisfy human wants and wishes.

personnels who worked at the sites of the clients were the employees of the assessee, those were accountable to the assessee and not to the clients and the assessee was responsible/accountable for the work done by its employees at the site of the clients who entered into agreements for providing the services with the assessee and not with the personnel deputed by the assessee. The copy of the agreement entered into by the assessee with M/s Tech Mahindra is placed at page nos. 251 to 257 of the assessee's paper book, in the said agreement, it is clearly mentioned at page no. 252 & 253that the assessee will provide the services of technically qualified and experienced personnel to Tech Mahindra Ltd. for working and assigning as may be desired by Tech Mahindra ltd. on time and material basis on offshore as well as onsite assignments and that the assessee shall ensure that personnel engaged under this agreement must have appropriate qualifications & competence and in all respects acceptable to Tech Mahindra Ltd. and that the assessee company shall be responsible for making appropriate deduction in respect of Income Tax and other statutory deductions under laws in which the services are provided, meaning thereby all the payments of salaries, related taxes and other statutory obligation towards employees were the responsibility of the assessee and not that of the clients. Similar, agreement was entered with M/s Nokia India Pvt. Ltd. (copy of which is placed at page nos. 258 to 263 of the assessee's paper book). In the said agreement also, the similar conditions were there. Similarly, there was an agreement with IBM Ltd. and scope of work was also defined which is evident from page no. 266 of the

assessee's paper book wherein the scope of work (SOW) was as has been defined as under:

"Under this SOW, Supplier will provide software support development activities, including but not limited to, software development, software resting, publication development, program maintenance, software development support and/or such other activities as may be defined by the Buyer to the Supplier in the relevant WA. Supplier will also provide to Buyer the Deliverables and Services described in Section 3.0 of this SOW."

From the aforesaid agreements entered between the assessee and its clients, it is clear that assigned work was to be done by the employees of the assessee at the sites of the clients and there was no direct contract between the clients and employees. All the payments in lieu of the work done was the responsibility of the assessee and not of the clients.

PART C FOR THE STATE OF HIMACHAL PRADESH AND THE STATE OF UTTARANCHAL

S. Activity or article 4/6 digit Sub-class ITC(HS) Or thing or excise under NIC classifcation Operation classification classification 4/6 digit On 1998 1. Floriculture - - 0603 or 060120 or 06029020 or 06024000 2. Medicinal herbs and aromatic herbs, etc., processing 3. Honey 0409004 4. Horticulture and agro-based industries such as (a) Sauces, ketchup, etc 21.03 15135 to 15137 and 5139 (b) Fruit juices and fruit pulp 2202.40 (c) Jams, jellies, vegetable juices, 20.01 puree, pickles, etc. (d) Preserved fruits and vegetables (e) Processing of fresh fruits vegetables including packaging (f) Processing, preservation, packaging of mushrooms

commercial sense. From the judgment of the Hon'ble Supreme Court in the said case, it is clear that the principles laid down therein are that the term "industry" has many meanings and the meaning must be given which it receives in ordinary parlance or understood in the sense in which people conversant with the subject matter of the statute or statutory instrument understand it. In the aforesaid referred to case, the Hon'ble Supreme Court held as under:

"The expression 'industry' has many meanings. It means 'skill', 'ingenuity', 'dexterity', 'diligence', 'systematic work or labour', 'habitual employment in the productive arts', 'manufacturing establishment' etc. But while construing a word which occurs in a statute or a statutory instrument in the absence of any definition in that very document it must be given the same meanings which it receives in ordinary parlance or understood in the sense in which people conversant with the subject matter of the statute or statutory instrument understand it. It is hazardous to interpret a word in accordance with its definition in another statute or statutory instrument and more so when such statute or statutory instrument is not dealing with any cognate subject."

present case, nothing is brought on record to substantiate that the services provided to the clients by the assessee company were not through its employees and that the remuneration or other benefits were not provided by the assessee or there was any direct link between the clients and the employees of the assessee. It, therefore, can be safely be held that the assessee provided the services to its clients and the operations undertaken by the assessee falls in the category of Information and Communication Technology Industry which is included in "Clause No. 13" of part C of the "Schedule Fourteenth" to the Income Tax Act, 1961. The assessee is situated at Dehradun which is the part of the State of Uttaranchal to which part C of "Schedule Fourteenth" applies. The SDE Telephones, Dehradun also issued a certificate copy of which is placed at Page No. 216 of the assessee's paper book which states that the assessee had been provided datacom links by them which was being used for transmission of data for development of Software for export purposes since 17 th January 2006. The said certificate is placed at page no. 216 of the assessee's paper book and read as under:

"CERTIFICATE BY DATACOM SERVICE PROVIDER Certified that M/s IMSI (India) Pvt. Ltd. have been provided datacom links by us referred in para "4" of Back-up Form. The link is being used by them for transmission of data for development of Software for export purposes since 17 Jan. 2006." Sd/- Sd/- J.T.O. Telephones S.D.E Telephones Clement Town Clement Town Dehradun Dehradun

"Since computer programmes are not physical goods but are developed as a result of an intellectual analysis of the systems and methods followed by the purchaser of the programme, it is often prepared on-site, with the software personnel going to the client's premises. Doubts have been raised whether units taking up such production of software at the client's premises would be eligible for the tax holiday.

The Government's policy on tax incentive to software exports is reflected in the provisions of section 80HHE introduced in 1991. Under this provision, technical services provided outside India, for the development or production of computer software, are included for the purpose of the tax incentive.

Similarly, for the purpose of section 10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client's site abroad, such unit should not be denied the tax holiday under section 10A or 10B on the ground that it was prepared on-site, as long as the software is a product of the unit, i.e., it is produced by the unit."

i) copy of electricity meter sealing certificate and electricity bill;

ii) certificate from BSNL certifying the date of connection of Broadband;

iii) registration with STPI, Dehradun (the STPI scheme is administered by the Department of Electronics, Govt. of India through Software Technology Parks of India);

iv) registration with the Office of the Commissioner of Provident Fund, Dehradun."

The order is pronounced in the open court on 26.08.2021 in the presence of both the rival representatives.

Sd/- Sd/- [SUCHITRA KAMBLE] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 26th August, 2021

VL/ Copy forwarded to:

Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr.PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order