THE COMMISSIONER OF INCOME TAX- 21, MUMBAI vs. M/S INFORMATION ARCHITECTS, MUMBAI

In the companion appeal, save and except for a variation in the amount of the deduction claimed under Section 80HHE and in   the   quantum   of   the   overseas   maintenance   allowance,   the questions of law are the same.

The orders of the Tribunal relate to Assessment Years 1998-99 and 2000-01. 4. The assessee entered into an agreement with an entity by the name of Kindle Banking Systems Ltd. (KBS) for rendering Software Development Services. The agreement contained a recital to the effect that the assessee is a Company which inter alia renders services by employing or retaining software professionals possessing software development skills; and personnel duly competent in design and development of software skills. KBS was Uploaded on - 21/08/2020 a Company based in Dublin, Ireland which required the services of software professionals towards the fulfillment of its ongoing software activities. Under the terms of the agreement, the assessee was to provide through its Consultants software professionals to render services to KBS, in accordance with the scope of the work set out in the contract. For this purpose, the assessee agreed to provide fully trained and qualified Consultants possessing training, skills and expertise necessary to perform work under the contract. The scope of the work under the contract was “to provide analysis, programming and testing skills to Bankmasters Development Projects”. Under the agreement, the work that was envisaged was the design, development and testing of software including code maintenance as required by KBS which would be provided at the commencement of the contract and which was to be updated or, as the case may be, modified or revised during the term of the contract. The agreement stipulated the skills and knowledge required in the following areas of a software development lifecycle and in connection with the Bankmaster product. Those were as follows: “Structured Development Technique COBOL UNIX BANKMASTER Database Structure TPS Operations Standard Chartered Bank operations Requirement and Problem analysis Testing and quality assurance skills.” Uploaded on - 21/08/2020

Under the terms of the contract, the employees of the assessee were deputed to the establishment of KBS at Dublin. The assessee was compensated for the services provided by it, under the contract, on the basis of a payment quantified at US $ 3750 for each employee. In addition, the assessee provided to each of the employees deputed to Ireland, a subsistence allowance of IEP 50 for every calender day of work. Though several agreements were entered into between the assessee and KBS, broadly the terms of these agreements were similar and embodied the salient terms which have been adverted to hereinabove.

The claim of the assessee to a deduction under Section 80HHE was rejected by the Assessing Officer.  During the course of the proceedings for Assessment Year 2000­01, the CIT(A) allowed the benefit of the deduction under Section 80HHE.  The decision of the CIT(A) was carried in appeal by the Revenue to the ITAT.  For Assessment   Year   1998­99,   the   assessment   was   sought   to   be reopened by the Revenue under Section 148. The CIT (A), for Assessment Year 1998-99 held against the assessee against which the assessee carried the matter in appeal before the Tribunal. The ITAT, in respect of Assessment Year 2000-01, dismissed the appeal Uploaded on - 21/08/2020 filed by the Revenue and confirmed the order of the CIT(A), allowing a deduction under Section 80HHE.  In view of the decision for  Assessment Year 2000­01, the Tribunal, for Assessment Year 1998­99 followed its earlier decision on merits.  The validity of the reopening   of   the   assessment,   therefore,   became   a   matter   of subsidiary importance and the  Assessing Officer was directed to allow a deduction under Section 80HHE.

In these appeals, two questions are involved.   The first question   relates   to   whether   the   assessee   was   entitled   to   a deduction under Section 80HHE.   The second question relates to whether the overseas maintenance allowance paid by the assessee to its employees would qualify for deduction.

In order to appreciate the nature of the controversy in the present case, a reference to the  provisions of Section 80HHE would be in order.  Sub­section (1) of Section 80HHE provides, in so far as it is relevant, as follows: “(1) Where an assessee, being an Indian company or a person   (other   than   a   company)   resident   in   India,   is engaged in the business of.­ Uploaded on - 21/08/2020 (i)   export   out   of   India   of   computer   software   or   its transmission from India to a place outside India by any means; (ii)   providing   technical   services   outside   India   in connection   with   the   development   or   production   of computer software, 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 to the extent of the profits, referred to in sub­section (1B), derived by the assessee from such business: ..... Explanation:   For   the   removal   of   doubts,   it   is   hereby declared that the profits and gains derived from on  site development   of  computer  software  (including  services for   development   of   software)   outside   India   shall   be deemed to be the profits and gains derived from the export of computer software outside India.”

Sub­section (1) of Section 80HHE consists of two parts. The first part, which is clause (i) of sub­section (1), deals with a situation where an Indian Company or a person resident in India is engaged   in   the   business   of     export   out   of   India   of   computer software or its transmission from India to a place outside India. The second part, which is clause (ii), deals with a situation where an Indian Company or a person resident in India provides technical services   outside   India   in   connection   with   the   development   or Uploaded on - 21/08/2020 production of computer software.  The explanation to the provision was inserted with effect from 1st April 2001 by the Finance Act of 2001. The explanation evidently is clarificatory in nature  since it is prefaced by the words “for the removal of doubts ...”.   The explanation  was intended to clarify that the profits or gains which may be derived from onsite development of computer software outside India, including services for development of software, shall be deemed to be profits  and gains derived from  the export  of computer software outside India.   The deeming fiction under the explanation, qualifies the scope and ambit of clause (i) which deals with the export out of India of computer software.  Consequently, where   an   assessee   is   engaged   in   the   on­site   development   of computer software outside India,  or in the provision of services for the development of   software, that would be deemed to be the export of computer software for the purposes of the provision.  The fact that the explanation is clarificatory, is elucidated in a circular issued by the Central Board of Direct Taxes on 12th February 2004.1

Clause (ii) of sub­section (1) of Section 80HHE deals 1 Circular No.3 of 2004 Uploaded on - 21/08/2020 with the provision of technical services outside India in connection with the development or production of computer software.    In order to qualify for the deduction under clause (ii), the assessee must   provide   technical   services   and   these   services   must   be provided   in   connection   with     the   development   of   computer software.     The   expression     ‘technical   service’   not   having   been defined,   the   ordinary   and   commercial   understanding   of   the expression must be adopted.  In Continental Construction Ltd. vs. CIT,2 the Supreme Court, while construing the expression ‘technical services’ in the context of Section 80­O held thus: “These services were no doubt technical services as they required specialised knowledge, experience  and skill for their proper execution.” The   test   which   was   applied   by   the   Supreme   Court   of   what constituted   technical   services   is   that   the   service   must   require specialized knowledge, experience and skill for  proper execution. The Supreme Court observed that where an assessee is a company, any  technical   services   rendered   by   it   can   only   be   through   the medium   of   its     employees.     Even   where   a   contractor   is   an individual or firm and not a company, a contract of a significant 2 (1992) 195 ITR 81 Uploaded on - 21/08/2020 magnitude can be executed only through the medium of employees or other personnel engaged by the assessee.  It is in the background of   the   position   of   law,   as   elucidated   in   the   judgment   of   the Supreme   Court,   that   the   facts   of   the   present   case   have   to   be evaluated.

In  the  present   case,   the  assessee   claimed  that  it  had sufficient   knowledge   and   experience   in   the   development   of software systems for banks in India and had been doing such work since 1978 with Standard Chartered Bank (SCB).  According to the assessee, SCB was using a software called Bank Master Software for its   world wide operations and the software did not suit its requirement in India.   The assessee claimed to have assisted the Bank  on this aspect.  The assessee, before taking up the work of KBS, claimed to have developed such systems for SCB, including sub­routines for outward   cheque clearing, security management and treasury systems.  According to the assessee, its work with KBS involved   development of software programmes, trouble shooting and systems support.     The Bank Master Software was stated to have a number of operational modules and a continuous process of Uploaded on - 21/08/2020 monitoring   and   upgradations   was   stated   to   be   required.     The copyright in all programme modules of the software was held by KBS.

The CIT (Appeals), while allowing the deduction, took note  of  the  fact  that  the assessee  was  not  permitted  to  retain specific details  of  several similar tasks undertaken by its technical personnel onsite and that it was not possible to identify each item of   work   and   bill   accordingly.     Consequently,   the   only   feasible option for fair billing was adopting a man­hour basis.  Time sheets maintained by the assessee’s employees were verified and certified by KBS and at the end of each month, KBS would fax these time sheets to the assessee.   Upon verification, the assessee raised its invoices   and   received   remittances.     As   a   matter   of   business expediency   and   to   obviate   any   dispute,   the   contracting   parties agreed that the scope of work, duration and the rate per month be determined.  On this  basis, the agreement in question was drafted and signed by the assessee and KBS.

The Tribunal, on a review of the record held thus:   (i) Uploaded on - 21/08/2020 The personnel deputed by the assessee to Dublin for work onsite with KBS were technically qualified; (ii) The personnel deputed by the assessee were on the rolls of the assessee as its employees and the assessee was not simply loaning the services of the employees; (iii) It was not necessary for the employer, having regard to Section 80HHE, to train employees in the area where such employees were rendering technical services abroad, nor was it necessary for the employer to have developed such technical expertise himself; (iv) The validity of the agreement between the assessee and  KBS was a matter between the contracting parties and would not affect the question of deduction under Section 80HHE; (v) The persons sent abroad being technically qualified, they were rendering technical service   in   connection   with   the   development   or   production   of computer software outside India.  Such persons were also engaged in on site development of computer software; and (vi) The amount paid by the assessee as overseas maintenance allowance for the sustenance of its employees was   an allowable deduction.

In   arriving   at   these   conclusions,   the   Tribunal   has adverted to the evidence in a considerable degree of detail.  The Uploaded on - 21/08/2020 Tribunal has inter alia referred to the information furnished by two of the employees of the assessee who had appeared before the Assessing Officer in response to a notice.  The information supplied by   the   employees   inter   alia   referred   to   their   technical qualifications, the nature of their experience, the work which was rendered in Dublin and the nature of the payment received.    The work permits issued to the employees were as employees of the assessee.   The assessee had furnished Visa­ support letters to its employees.   The persons sent abroad had filed their returns of income   and   had   declared   themselves   to   be   employed   by   the assessee.     One of the employees inter alia stated that he was working as a programmer in the Corporate Service Department for KBS, developing and maintaining software.  The employee stated that he was involved in the design and initial development phase of a particular software.  The Tribunal had due regard to the nature of the work under the terms of the agreement  between the assessee and KBS.  The description of the work in the time sheets was also considered by the Tribunal.  The work described in the time sheets included   coding,   processes,   programming,   BBMIOI,   training, investigation,   survey,   self   study,   MICR   support/delivery, Uploaded on - 21/08/2020 walkthroughs, testing, statements programme   MICR coding etc. The employees examined by the Assessing Officer stated that they were developing new functionalities  into the banking software of KBS   and   maintaining   the   software.           Placing   reliance   on   a publication entitled “Information System Audit Reference Book” of the Institute of Chartered Accountants of India, the Tribunal held that in the context of   software, maintenance was nothing but a process of ongoing development  which would continue until the system is replaced or discontinued.  In this sense, the work which was being done by the employees of the assessee was integral to the ongoing development of  software.

Counsel appearing on behalf of the Revenue submitted that KBS had a software of its own and that consequently, the work which was being rendered cannot be regarded as amounting to the export   of   computer   software   or   for   that   matter,   provision   of technical services.  The submission which has been urged on behalf of the Revenue cannot be accepted. Section 80HHE  contemplates a deduction where an Indian Company or a person resident in India is engaged in the business of export  out of India of computer Uploaded on - 21/08/2020 software or in the provision of technical services outside India in connection   with   the   development   or   production   of   computer software.   On the evidence, as it has emerged from the record of these proceedings, it is abundantly clear that the assessee met the requirement of Section 80HHE.   The assessee had a contract with KBS under which the scope of work involved   the provision of analysis,   programming   and   testing   skills   to   the   Bank   Master Development Project.  The contract envisaged design, development and testing of software.   The assessee was undoubtedly required to depute qualified personnel to Dublin for the purposes of furthering its obligations under the contract.  Each of the personnel has been found to be technically qualified to fulfill the requirements of the contract.       Essentially,   the   assessee   was   engaged   in   onsite development of computer software outside India and the nature of the work involved inter alia, the provision of technical services in the   development   of   software.     The   assessee   fulfilled   the requirement   of   both   clauses   (i)   and   (ii)   for   the   purposes   of qualifying   for a deduction under Section 80HHE in the facts of these cases.  In the circumstances,  the Tribunal was not in error in holding that the assessee was eligible for a deduction under Section Uploaded on - 21/08/2020 80HHE.

In so far as Assessment Year 1998­99 is concerned, as already noted earlier, the issues are similar.   The Revenue in its grounds in the  Memo of Appeal has only urged that the Tribunal had decided the issue in favour of the assessee by following the order pertaining to Assessment Year 2000­01 on an identical issue. The   Revenue   has   stated  that   the   decision   for   Assessment   Year 2000­01 had not been accepted and has been carried in appeal to this Court.   For the reasons already adduced, the decision of the Tribunal for Assessment  Year 2000­01 cannot  be faulted.   The appeal for both the years accordingly would fail on the first issue.

In so far as the second issue is concerned,  it relates to the amounts paid by the assessee to its employees towards overseas maintenance   allowance.     These   amounts   were   paid   towards expenses at the rate of IEP 50 per day per employee.  The Tribunal has   correctly   held   that   these   amounts   constitute   only reimbursement   for the expenses incurred by the employees at a particular amount per day and would not form part of the salary in Uploaded on - 21/08/2020 the hands of the recipients.   Hence the question of applying sub clause (iii) of sub­section (a) of Section 40 would not arise.  The view of the Tribunal is correct and would not raise any substantial question of law.

For all these reasons, we do not find any merit in the appeals.  The appeals are accordingly dismissed. ( Dr.D.Y.Chandrachud, J.) ( J.P.Devadhar, J.) Uploaded on - 21/08/2020 Powered by TCPDF (www.tcpdf.org)