ITO 12(1)(4), MUMBAI vs. CRIMSON INTERACTIVE P.LTD, MUMBAI

Assessee by: Shri Jitendra Jain (AR) Department by: Shri Rajat Mittal (DR) Date of Hearing: 16.04.2018 Date of Pronouncement: 29.06.2018 O R D E R PER AMARJIT SINGH: The revenue has filed the above mentioned appeals against the order dated 29.10.2015 passed by the Commissioner of Income Tax (Appeals)-20, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the assessment years 2010-11 & 2011-12.

“1. "In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of the claim u/s. IOA of the Act in respect of profits arising primarily from the activities/services of independent freelancers without, appreciating chat such activities/services were neither carried out at the eligible Unit nor does it qualify as profit derived from on site services for the development of software. 2. "In the facts and circumstances of the case and in law, the Ld, CIT(A) failed to appreciate that the onus to demonstrate the eligibility of a claim for exemption and specifically the nature of activities critical for establishing such eligibility squarely lies on the assessee making such claim and, in this instant case, the assesse has squarely failed to discharge such onus." 3. "Whether on the facts and in circumstances of the case and in law, the Ld. CIT(A) is justified in allowing the deduction u/s, 10A of the I,T. Act, 1961 in respect 3r profits derived by the activities performed by Third Party/Freelancers Abroad on which the assessee has no control supervision. 4. "The appellant prays that the order of Ld. CJT (A) on the above grounds be set aside and that of the A,O. be restored. 5. "The appellant craves leave to add, amend or alter all or any of the grounds of appeal

.”

4. The brief facts of the case are that the assessee filed its return of income on 02.08.2010 declaring total income to the tune of Rs.10,59,030/- for the A.Y. 2010-11. The return was processed u/s 143(1) of the I.T. Act, 1961 on 31.08.2011. Thereafter, the case was selected for scrutiny, hence, notice u/s 143(2) of the Act dated & 752/M/2016 2010-11 & 2011-12 26.09.2011 was issued and served upon the assessee. Further, notices u/s 142(1) of the Act dated 06.07.2012, 24.07.2012 & 31.08.2012 were issued and served upon the assessee. The assessee company was in the business of Transcription, Summarization, Translation, Editing, Proofreading, Data entry which is an IT enabled served. During the year under consideration, the assessee claimed the deduction of Rs.6,34,42,816/- u/s 10A of the I.T. Act on the profit of IT enabled service activities carried out in its STPI unit. The assessee in its profit and loss account reported total of Rs.14,34,87,754/- which comprises Direct Income of Editing and Translation service of Rs.14,24,21,110/- and other income of Rs.10,66,644/-. The other income represents interest income to the tune of Rs.10,59,024/- and discount of Rs.7,618/-. The expenditure in the P&L Account was claimed to the tune of Rs.7,79,30,162/-. Accordingly, the assessee computed profit before tax at Rs.6,55,57,591/-. The expenditure of Rs.7,79,30,162/- debited to the P&L Account consists of expenses claimed under various cited which is being mentioned below.: -

Direct Rs.4,24,67,055 Personnel Rs.1,88,67,982 Administrative Rs.78,66,179 Selling Rs.48,85,321 Depreciation Rs.12,43,623 Financial Rs.9,19,094 Director’s Remuneration Rs.12,00,000 & 752/M/2016 2010-11 & 2011-12

Auditors Remuneration Rs.4,80,908 Total Rs.7,79,30,162 5. The direct expenses of Rs.4,24,67,055/- comprises freelancer charges of Rs.4,23,53,669/-, domain charges of Rs.74,412/- and hosting charges of Rs.38,973/-. The details of freelancer charges filed during the assessment proceedings reveals that most of the freelancers were operating from foreign countries viz Japan, Philippines, USA, Singapore, Australia, and United Kingdom etc. The assessee explained that the assessee has no personal contact with the freelancers and the freelancers task was independently. The assessee also explained that the freelancers were approached by the assessee through internet and assessee was also receiving the necessary data from internet. The Assessing Officer asked the job work activity or any other activity of freelancers for which expenses were claimed under head direct expenses during the year. The freelancers company was out source expenses which was held to be eligible and the profit of the out-source company was assessed on the basis of ratio mentioned below.: -

Rs. A Profit of the business claimed for decution u/s 10A by 6,34,42,817 the assessee B Expenses on freelancers claimed under the head direct 4,23,53,669 expenses C Total expenses claimed by the assessee in its P&L 7,79,30,162 account & 752/M/2016 2010-11 & 2011-12 D Profits derived out of activities performed by 3,44,80,052 freelancers (AxB)/C 6. Accordingly, the deduction u/s 10A of the Act of Rs.3,44,80,052/- was disallowed and the claim of the assessee u/s 10A of the Act was restricted to the extent of Rs.2,89,62,765/-. The total income of the assessee was assessed to the tune of Rs.3,55,39,080/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who allowed the claim of the assessee, therefore, the revenue has filed the present appeals before us.

ISSUE NOS. 1 & 2:-

“4.1 I have carefully gone through the above submission and paper book submitted by appellant and also considered the impugned assessment order and material available on record. Appellant is claiming deduction u/s. 10A of the Act for J carrying out IT enabled service activities from its STPI unit. The Appellant engages freelancers who are situated outside India to perform part of its activities$. The Learned Assessing Officer has held that profits derived by activities performed by third party/freelancer are not profits derived by the business of the assessee undertaking and therefore such profits were not eligible for deduction u/s, 1OA.

& 752/M/2016 2010-11 & 2011-12

It is noted that the deduction u/s 10A is to be allowed on such profit and gains which are derived from the undertaking and which fulfill? criteria prescribed in this regard. The appellant's unit is a 100% export unit and the profits and gain derived pertain to such exports. In carrying put the exports a pan work done by the appellant is out source and it is claimed than it is not the requirement of the section that the deduction which has been claimed in the case of an assesses is not admissible where a part of its activities has been earned out as by other parties. The Assessing Officer has concluded that if a pun of the work has been done by outside parties, then the profit has not been derived by the appellant from the undertaking L J and is not eligible for deduction under section 10A. It is not in dispute that the entire profit of the unit is earned only out of the export made during the year. It is noted that Section IDA does not bar the outsourcing of the work. In this regard it is noted that Hon'ble I T A T Mumbai, in the case of 1TQ vs M/s Gebbs Infotech Ltd. dated 10" October 2010, has observed that for claim of deduction under Section JOB what is to be seen is whether the appellant a 100% export unit and profits and gains were derived from exports. It is not the requirement of the Section that the deduction which have been claimed in the case of an assesses is in admissible where a part of the program has been carried out as job work by other parties. In the present case the facts are similar to the case of M/s Gebbs Infotech Ltd. as discussed above. It is not the case of the Assessing Officer that the deduction has been claimed by the appellant on (he export of the software which has been manufactured by other independent concerns and entities and that the appellant has included the export proceeds generated out of such software programmes which do not belong to it and on which it claimed exemption under Section 1GB of the Income Tax An. 1961, no evidence has been brought on record by the Assessing Officer in this regard. The fact is that the appellant through its 100% export unit exported computer Software and the profits on which deduction has been claimed is derived front such 100% export under facing. If pan of the work has been done by outside parties it cannot be concluded that the profit has not been derived by the appellant from the 100% export unit/undertaking, It is not in dispute that the entire profit of the appellant is earned form 100% export unit/undertaking. Thus, since there is no restriction in the section, lo outsource activities, the stand of the Assessing Officer cannot be sustained in the appeal and the disallowance made by the Assessing & 752/M/2016 2010-11 & 2011-12

Officer is directed to be deleted Accordingly this ground of appeal are allowed.”

8. On appraisal of the above said finding, we noticed that the CIT(A) has allowed the claim of the assessee on the basis of the decision of the Hon’ble ITAT Mumbai Bench in the case ofITO Vs. M/s. Gebbs Infotech Ltd. dated 10.10.10. The factual situation is not in dispute in which the assessee hired the services of freelancers on internet for the work of Transcription, Summarization, Translation, Editing, Proofreading, Data entry which is much related to the business of the assessee. The assessee out- sourced job works activity from freelancers for its main object of business activities. The object of the assessee company covered the job work services of the out-source company freelancers to its object. At the cost of repetition, the assessee company was engaged in the business of Transcription, Summarization, Translation, Editing, Proofreading, Data entry which is an IT enabled service. If the out- source work is connected to the object of the company then in the said circumstances, the out-source work cannot be said separately to the object of the company and the exemption u/s 10A of the Act is not required to be denied only on this basis. However the income from other source of company such as interest income etc., has been assessed separately which were not claimed u/s 10A of the Act. No doubt this type of income nowhere covered the claim u/s 10A of the Act. The provision of Section 10A of the Act nowhere bar the claim if & 752/M/2016 2010-11 & 2011-12 the work out-sourced. The CIT(A) has placed reliance upon the decision in case of ITO Vs. M/s. Gebbs Infotech Ltd. dated 10.10.10which leads to the same principle. The basic theory which has been seems to be reflected in the order of the CIT(A) is that the out-source service has duly been covered when it connected to the main work/ object of the assessee, therefore, the claim u/s 10A of the Act is not liable to be denied. However, the Ld. Representative of the assessee in support of his contention has also placed reliance upon the law settled by other parties i.e.54 SOT 128 ACIT Vs. Technics Consulting Ltd. (Hyderabad Trib.), 68 SOT 294/166 TTJ 697 Laila Nutraceuticals Vs. ACIT (Visakhapatnam Trib.), (2015) 56 taxmann.com 222 (Delhi) CIT Vs. AAR ESS Exim (P.) Ltd. (Delhi High Court), ITA. No. 1068 of 2008 c/w ITA. No. 108/2010 CIT Vs. Evershine Infotech Pvt. Ltd. (Karnataka High Court) (2015) 62 taxmann.com 165 CIT Vs. Mphasis Software & Service India (P.) Ltd. (Karnataka High Court). In view of the said circumstances, we are of the view that CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, we confirmed the order of the CIT(A) and decide all the issues in favour of the assessee against the revenue. ITA No. 752/M/2016;- & 752/M/2016 2010-11 & 2011-12