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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member) 1. The captioned appeal by assessee for Assessment Year [AY] 2009-10 contest the order of Ld. Commissioner of Income-Tax (Appeals)-4 [CIT(A)], Mumbai, Appeal No.CIT(A)-4/IT-122/DCIT- 2(1)/2013-14 dated 02/03/2016. The assessment for impugned AY was Bristlecone India Limited Assessment Year 2009-10 framed by Ld. Deputy Commissioner of Income Tax, Circle-2(1), Mumbai [AO] u/s 143(3) of the Income Tax Act, 1961 on 14/03/2013. The assessee has raised the following effective grounds of appeal
before us:-
1. On the facts and in the circumstances of the case and in law, whether the Assessing/Appellate authorities have power to decide whether or not assessee appellant has carried out manufacturing and export of software when the specialized authority, The Software Technology Park Authorities have certified both manufacturing of software as well as export of software by the appellant
2. On the facts and in the circumstances of the case and in Law, the learned CIT(A) erred in enhancing the income by Rs.3,39,75,960/- without following procedures as laid down u/s.251.
3. Without prejudice to above ground CIT(A) erred in enhancing the income holding that the appellant had not undertaken any manufacturing and export of software.
4. On the facts and in the circumstances of the case and in Law, the learned CIT(A) erred in stating that the appellant had failed to demonstrate any evidence of manufacturing of computer software or compute programs or computerized electronic data or project or service of similar nature as notified by CBDT and further erred in concluding that the appellant is not entitled for deduction u/s.10A.
5. On the facts and in the circumstances of the case and n Law, the learned CIT(A) erred in finally concluding that appellant is not entitled to deduction u/s.10A on the basis of “new facts” which have emerged in the year in contrast and comparison to earlier years, whereas as a matter of fact there is no change in the facts, circumstances and the nature of the business activity carried out by the appellant.
6. Without prejudice to Ground No.1 to 5 he learned CIT(A) even otherwise erred in enhancing the income by RS.3,39,75,960/- instead of Rs.1,26,17,478/-.
7. On the facts and in the circumstances of the case and in Law, the learned CIT(A) erred in confirming the action of AO in reducing the deduction u/s.10A by Attributing interest expenses of Rs.3,80,575/- towards STPI unit.
8. On the facts and in the circumstances of the case and in Law, the learned CIT(A) erred in not adjudicating the ground in relation to AO’s action of reducing the deduction u/s.10A by attributing excess provision of earlier years of Rs.83,62,000/- towards non STPI unit.
9. On the facts and in the circumstances of the case and in Law, the learned CIT(A) erred in not adjudicating the additional ground in regard to deduction under section 10A on the exchange gain of Rs.9,96,985/- arising on restatement of foreign debtors outstanding as on 31st March 2009 of the STPI unit at Bangalore. 10.On the facts and in the circumstances and in Law, the learned CIT(A) erred in not adjudicating the ground relating to disallowance of the set off of unabsorbed depreciation of Rs.2,55,37,440/- pertaining to Assessment Year 1996-97 to 2000-01 against the income for the year. 11.On the facts and in the Circumstances of the case and in Law, the learned CIT(A) erred in not adjudicating the ground in relation to addition made by AO on account of dividend income of Rs.15,000 without appreciating that appellant had not claimed the said income as exempt.
2.1 Briefly stated the assessee being resident corporate assessee engaged in rendering software services was assessed at Rs.558.48 Lacs under normal provisions as against returned income of Rs.23.01 Bristlecone India Limited Assessment Year 2009-10 Lacs e-filed by the assessee on 26/09/2009. The returned income was later revised on 29/03/2011 to Rs.141.95 Lacs. 2.2 During assessment proceedings, it was noted that the assessee was national implementation partner for SAP in India and engaged in rendering software services, software development & customization and trading in Software / Hardware. The assessee company was wholly owned subsidiary company of Bristlecone Ltd., Cayman Islands. The Assessee was global provider of customized, scalable enterprises and e-business solutions and operated through development centers at Mumbai, Pune & Bangalore. The assessee was active both in domestic as well as in overseas market. 2.3 The assessee reported turnover of 114.86 crores with Net profit of Rs.11.36 crores. Against the same, it claimed deduction / exemption u/s 10A on account of profit generated by its Software Technology Park Unit [STP] situated at Bangalore. The assessee had two units at Bangalore at 201-2224, 2nd Floor, Tower-B, Diamond District, Kodihally Village Airport Road, Bangalore-560008. The said premises was shared by STP as well as non-STP units. The STP units as well as non-STP units were engaged in rendering software services. The date of commencement of STP unit was 08/07/2004 and this was the fourth year of claiming deduction u/s 10A. 2.4 Before Ld. AO, the main dispute revolved around allocation of common expenditure between STP units and non-STP units. Initially, the assessee claimed deduction u/s 10A for Rs.406.08 Lacs as per Auditor’s certificate in Form 56F which was later revised downward to Rs.287.13 Lacs in the revised return of income on the basis of expense allocation Bristlecone India Limited Assessment Year 2009-10 formulae adopted by Ld. CIT(A) in earlier assessment years. The Ld. AO, while accepting the same, did not concur with allocation of software purchase expenses of Rs.113 Lacs and Interest expenses of Rs.116.63 Lacs between these units and opined that the same was heavily skewed in assessee’s favor. The Ld. AO allocated the same on the basis of proportion of turnover of STP unit vis-à-vis total turnover which came to 18.10%. It was further noted that the assessee claimed deduction u/s 10A against foreign exchange gains and excess provision of earlier years amounting to Rs.82.40 Lacs & Rs.83.62 Lacs, which, in the opinion of Ld. AO, was not allowable to the assessee. These adjustments restricted the deduction u/s 10A to Rs.149.29 Lacs which was further reduced to Rs.126.17 Lacs on the basis of proportion of export turnover vis-à-vis total turnover of the eligible unit entitled to claim deduction u/s 10A. 2.5 The Ld. AO added another income of Rs.15,000/- being interest earned by the assessee from a cooperative bank which was claimed as dividend income being exempt u/s 10(34). The assessee also claimed unabsorbed depreciation of AYs 1996-97 to 2000-2001 aggregating to Rs.2.55 crores which were not allowed in terms of Section 32(2) since eight years had already elapsed. 2.6 Finally the income of the assessee was computed at Rs.558.48 Lacs under normal provisions whereas the Book Profit u/s 115JB was computed as Rs.1215.60 Lacs.
Aggrieved, the assessee contested the same without any success before Ld. CIT(A) vide impugned order dated 02/03/2016 where Ld. CIT(A) noted that the assessee was not manufacturing or producing any Bristlecone India Limited Assessment Year 2009-10 computer software / program etc. but engaged in providing services in the nature of professional services, managed services & system integration services and hence, not entitled to claim any deduction at all u/s 10A. The assessee contended that it was engaged in production of computer software as well as rendering of notified software services to both domestic as well as overseas customers. It was further contended that the assessee rendered four types of notified services i.e. Back Office Operations, Engineering & Design, Remote Maintenance and Support Center Services as per the customer requirements. The attention was drawn to the fact that 206 software technicians were employed in the eligible STP unit out of total employee strength of 1086 employees and the services rendered for STP unit was separately and distinctly earmarked and deduction has been claimed only against revenue generated by STP unit which is duly certified by the auditors. The attention was also drawn to Annual Performance Report for 2008-09 filed by the assessee with appropriate authority under Software Technology Parks of India, Bangalore. It was further contended that the software services were provided to the sister concern of the assessee namely Bristlecone GmbH & Bristlecone Inc. pursuant to agreements and the activities were carried out with respect to work executed for the end customers of Bristlecone GmbH (SAP AG) and Bristlecone Inc. (Nike). The attention was drawn to various clauses of the agreement and CBDT notification No. 890(E) dated 26/09/2000 issued in terms of explanation 2(i) to Section 10A to support the stand that the impugned services was covered within the framework of statutory provisions of Section 10A. However, not convinced, Ld. CIT(A), inter-alia noted that Bristlecone India Limited Assessment Year 2009-10 the assessee failed to demonstrate any evidence of manufacturing of computer software or computer program or customized electronic data or project or services of similar nature as notified by CBDT and the services were mainly of managerial / consulting / customer oriented services rendered on the basis of software produced by its sister concern or parental company or foreign company. In the nutshell, the Ld. CIT(A) opined that the nature of services being rendered were mainly support services related to application of software and not at all manufacturing of computer software. After due consideration of factual matrix, the Ld. CIT(A) concluded that the assessee was not eligible to claim deduction u/s 10A at all and therefore, enhanced the assessment by Rs.339.75 Lacs. Aggrieved, the assessee is in further appeal before us.
The Ld. Authorized Representative for the Assessee [AR] taking us through the documents placed in the paper-book and statutory provisions as contained in Section 10A contended that the activities carried out by the assessee squarely entitled it to claim deduction u/s 10A and more particularly, when on the same set of activities, the deduction has been allowed to the assessee in earlier three assessment years. Per contra, Ld. Departmental Representative [DR] placing reliance on the stand of Ld. CIT(A) contended that the nature of activities carried out by the assessee did not entitle him to claim the said deduction and further, other assessment years have been reopened, wherever possible, by the revenue, to deny the deduction to the assessee and therefore, the stand of Ld. CIT(A) as quite justified.
Bristlecone India Limited Assessment Year 2009-10 5.1 We have carefully heard the rival contentions and perused relevant material on record. Ground No. 1 has not been contested before us. In Ground Nos. 8 to 11, the assessee is aggrieved by non-adjudication of certain quantum additions / claims by Ld. CIT(A). The remaining Grounds from 2 to 7 are inter-connected grounds which are related with deduction u/s 10A and computation thereof. The same are taken up first. 5.2 Upon perusal of orders of lower authorities and documents placed in the paper book, we find that the premises situated at 201-2224, 2nd Floor, Tower-B, Diamond District, Kodihally Village Airport Road, Bangalore was being shared by STP units as well as non-STP units and both units were engaged in providing similar kind of software services. The Ld. AO disputed the computation of profits derived by the assessee whereas Ld. CIT(A) opined that the assessee was not eligible to claim any deduction u/s 10A at all since the nature of services being rendered by the assessee were not covered within the ambit of statutory provisions as contained in Section 10A. 5.3 At the outset, so far as the interpretation of Section 10A read with explanation 2(i) and CBDT Notification No.S.O.890(E), dated 26th September, 2000 is concerned, we would like to reproduce the scope and ambit of these provisions, as succinctly noted by Hon’ble Delhi High Court in CIT Vs. ML Outsourcing Services Private Limited [228 Taxman 54] in the following manner:- 6. The relevant provisions of Section 10A of the Act read as under:- "(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be shall be allowed from the total income of the appellant.
Bristlecone India Limited Assessment Year 2009-10 XXXXXXX XXXXXXX (2)This section applies to any undertaking which fulfills all the following conditions, namely:- (i) It has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year: (a) commencing on or after the 1st day of April, 1981 in any free trade zone; or (b) commencing on or after the 1st day of April, 1994 in any electronic hardware technology park, or as the case may be, software technology park (c) XXXXXXX" Explanation 2 to Section 10A "Computer software means- (a) Any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) Any customized electronic data or any product or service of a similar nature, as may be notified by the Board."
The said provision applies to an undertaking which begins to manufacture or produce such articles or things or computer software for a period of ten consecutive years beginning from the assessment year in which the undertaking begins to manufacture or produce such articles, things or computer software. 'Articles’ or 'things’ necessarily refer to tangible goods. 'Computer software’ some would regard as intangible, but there is a substantial case law which holds that software recorded on any tape, disc or perforated media are goods. The term "computer software" has been defined, for the purpose of the said Section, in Explanation 2 to Section 10A. Clause (a) refers to computer programmes recorded in disc, tape or perforated media or other information storage device. Clause (a) refers to the general or common meaning associated with the term, 'computer software’. However, clause (b) expands the meaning of the term 'computer software’ and broadens it to include any customized electronic data or any product or service of similar nature, as may be notified by the Board. The expression, 'any customized electronic data’ would mean data, which is customized; but it need not be computer software. Processing or customisation, normally would involve assimilation, correction, filtration, etc. of the data. The requirement is that it should be customised. However, clause (b) does not end with 'customized electronic data’ and the legislature wanted to further expand the scope of the term, 'computer software’ and thus the wide and broad expression, "any product or service of similar nature, as may be notified by the Board". The intention and desire of the Legislature, which is palpable and lucid from the words and expression used, is that the term, 'computer software’ specifically includes 'customised electronic data’ and also 'any product or service of similar nature’ notified by the Board (Central Board of Direct Taxes). In other words, the Parliament has left it to the Board to notify the products or services of similar nature, which would be covered under clause (b) and treated as 'customized electronic data’ for the purposes of clause (b) to Explanation 2 to Section 10A.
In exercise of the power conferred under Section 10A, the Board has issued a notification No. S.O. 890 (E), dated 26th September, 2000, and the said notification reads as under:- "S.O.890(E)- In exercise of the powers conferred by clause (B) of item (i) of Explanation 2 of Section 10A, clause (b) of item (i) of Explanation 2 of Section Bristlecone India Limited Assessment Year 2009-10 10A and Clause (b) Explanation to Section 80HHC of the Income Tax Act, 1961 (43 of 1961) the Central Board of Direct Taxes hereby specifies the following Information Technology enabled products or services as the case may be for the purpose of said clauses namely:- (i) Back-Office Operations; (ii) Call Centres; (iii) Content Development or Animation; (iv) Data Processing; (v) Engineering and Design; (vi) Geographic Information System Services; (vii) Human Resources Services; (viii) Insurance Claim Processing; (ix) Legal Databases; (x) Medical Transcription; (xi) Payroll; (xii) Remote Maintenance; (xiii) Revenue Accounting; (xiv) Support Centres; and (xv) Web-site Services." [Notification No. 11512/F.No. 142/49/2000-TPL]"
A perusal of the said notification would indicate that the Board has included several distinct types of services under the expression, "product or service of similar nature, information technology enabled product or services" in the fifteen clauses. The Board, in the Notification, has used the expression, 'information technology enabled product or services’. Thus, the Board has understood that product or services, to be included within clause (b) of Explanation 2 to Section 10A, need not be computer software as understood in the common parlance or even customized electronic data, as generally understood. Any product or service of similar nature would include in its ambit, product and services which were enabled by, i.e. would rely upon, or are driven by information technology. This becomes clear when we refer to the wide ambit of the divergent and varied services covered in the different clauses like, "(ii) call centres ... (vii) human resources services ... (viii) insurance claim processing ... (xii) remote maintenance" and, "(xiv) support centres". These services would not necessarily and primarily involve customised data processing, but nevertheless, these are information technology enabled services. In case of call centres, queries and questions from a customer of a third company are answered by an employee of the assessee based in India. The said task is performed with the aid and help of information technology but it would not be a case of customised electronic data service or export thereof. Similar exercise may be undertaken in case of remote maintenance or support centres, which answer queries and gives suggestions by e-mails or through voice and/or video communications. These services would not normally involve processing or sending customised electronic data abroad, yet these are information technology enabled services and specifically covered under the Notification.
Leaned senior Standing Counsel for the Revenue submitted that the principle of ejusdem generis should apply. The said doctrine has no application in the present case for the simple reason that there is no enumeration of specific words of a particular class or category preceding the words, 'or any other product or service of similar nature’. In clause (b), prior to the said expression, the word used is, 'any customised electronic Bristlecone India Limited Assessment Year 2009-10 data’. Thus, we do not find any genus in the earlier portion of clause (b) of Explanation 2 to Section 10A or the subjects enumerated therein. Principle of noscitur a sociis, though broader in application, again in the facts of the present case would have no application. The said rule of construction, as explained by Lord Macmillan, states that the meaning of a word could be judged by the company it keeps; and, therefore, it is a legitimate rule of construction to make reference to words found in immediate connection with the words to be interpreted. However, the said rule of construction cannot prevail or be applied in cases when the wider words have been deliberately used and the intention of the legislation is to the contrary. In the present case, the intention of the legislation would be to the contrary as it had specified that the product or service of similar nature could be notified by the Board. It was left to the Board to notify any product or service of similar nature. The Board as per the Act is the highest authority in the pyramid as set out in Section 116 of the Act. The Board, while issuing the notification, which it was empowered and authorised to do by way of delegated legislation, has thought it appropriate to use the expression, 'information technology enabled products and services’ without any reference to 'data processing’ or 'customised data processing’. It is, therefore, apparent that the contention of the Revenue is clearly contrary to the notification issued by the Board, and is at cross-purposes with the objective and purpose of and issuance of notification S.O. 890 (E), dated 26th September, 2000. It is obvious that the said notification has been issued to promote outsourcing service industry in India, as it generates employment and helps the country to earn foreign exchange.
Appropriate, in this regard, would be to refer to three decisions of the Supreme Court starting with Rainbow Steels Ltd. Muzaffarnagar & Anr. Vs. C.S.T.; U.P. &Anr. (1981) 2 SCC 141, wherein the court cautioned that the principle of noscitur a sociis, in general should be restricted, but applied the same stating that the word, 'old’ occurring in Entry No. 15 should be given a restricted meaning - a sense analogous to that of less general words clubbed with it. It was specified that the said principle would be applicable where there are two or more words, susceptible of analogous meaning, clubbed together and the intention is that they would be understood to be used in their cognate sense, taking colour from each other, thereby meaning that more general being restricted to that of a less general. Reference was made to two decisions in State of Bombay vs. Hospital Mazdoor Sabha AIR 1960 SC 610 and Corporation of the City of Nagpur v. Employees AIR 1960 SC 675 where the said doctrine had not been applied in construing the definition of 'industry’ because the Legislature had deliberately used wider words and defined the word correspondingly wider. The principle being that only when the intention of the Legislature in associating wider words with words of narrower significance is in doubt, or otherwise not clear, that the rule of construction, noscitur a sociis can be usefully applied. Therefore, the said doctrine applies when the words used are vague, imprecise, and ambiguous, and there is no indication that those have been deliberately used for wider meaning. As noticed above, in the present case, the Explanation 2 has been inserted to give wider meaning and that this was deliberately so enacted by the Legislature. The intention, therefore, is to the contrary for the doctrine of noscitur a sociis to apply.
In Rohit Pulp and Paper Mills Ltd. vs. Collector of Central Excise, Baroda (1990) 3 SCC 447, the said doctrine was considered and remarks of Diplock, C.J. in Letang vs. Cooper (1964) 2 All ER 929, describing the said doctrine as a treacherous one unless Bristlecone India Limited Assessment Year 2009-10 one knows the soceitas to which the socii belongs, were referred to. It was nevertheless observed that the said maxim or precedents are not to be mechanically applied and they are of assistance only in so far as they furnish guidance by compendiously summing up principles by common sense and logic. Object and purpose of the notification or the legislation being construed, have to be taken into account and all parts are to be read harmoniously and not in derogation of that purpose. In the said case, the Supreme Court accepted the assessee’s submission that 'coated paper’ referred only to 'coated paper’ used for industrial purposes and not for printing or writing paper, observing that the items mentioned in the group were totally dissimilar and it was impossible to see any thread running through them. Purpose and object of the Legislation was highlighted.
Lastly, in Municipal Corporation of Greater Bombay vs. Bharat Petroleum Corporation Ltd. (2002) 4 SCC 219, it was observed that the principle underlying noscitur a sociis is that, two or more words which are susceptible of analogous meaning when coupled together, are to be understood as used in their cognate sense, taking as they take their colour from each other. In other words, more general words are to be restricted to a sense analogous to the less general. However, the said doctrine along with principles of ejusdem generis is useful in the matter of construction of the statute or its provisions but the intent of the legislature cannot be altogether ignored and the construction which really subserves the purpose of the enactment, must be adopted rather than one which defeats it. No part of the provision should be rendered surplus or otiose.
The Board has issued a notification as per the mandate and empowerment under Section 10A and this is not a case of issue of circular under Section 119 which are issued for different purposes and have another purport. Notification is a piece of delegated legislation and to that extent cannot be contrary to the principal enactment nor can it whittle down the effect of the same. Albeit, clause (b) of Explanation 2 to Section 10A has been worded in a manner which enforces the view and the opinion that Legislature, in their wisdom, has left it to the Board to decide which product or services of similar nature would qualify and should be treated as falling under clause (b), in addition to customised data processing. The intention of the Legislature was not to constrain or restrict but to enable the Board to include several services or products of similar nature in the ambit of the provision. This is what precisely the Board has done when it used the expression, 'information technology enabled products or services’ in the notification.
Upon perusal of the same, we find that Hon’ble Court while interpreting the language of statutory provisions and cited notification came to conclusion that the principles of ejusdem generis or Principle of noscitur a sociis could not be applied since there was no ambiguity and the intention of the Legislature was not to constrain or restrict the scope of products or services but to enable the Board to include several services Bristlecone India Limited Assessment Year 2009-10 or products of similar nature in the ambit of the stated provisions. We completely agree with the said interpretation of statutory provision as noted by the Hon’ble Court. No other contrary judgment is available on record. Although we are conscious of the fact that SLP against the said judgment of Hon’ble Court has been admitted by Hon’ble Apex Court on 06/03/2017 [2017 79 Taxmann.com 254], however, upon perusal of the same, we find that the operation of said judgment has not been suspended or stayed in any manner by Hon’ble Apex Court and only a Leave has been granted against the same. Therefore, completely agreeing with the aforesaid interpretation, we place reliance on the same. 5.4 In the above back drop, we find that the nature of services being rendered by the assessee during impugned AY has been explained by the assessee while replying to question no. 2 and the same has been extracted on Page Numbers 9 to 11 of the impugned order. The assessee’s prime contention is that it was engaged in the business of production of computer software and also engaged in rendering 4 types of notified IT enabled software services viz. Back Office Operations, Engineering & Design, Remote Maintenance and support centers which are duly covered in the aforesaid notification issued by CBDT. On the other hand, the main thrust of Ld. CIT(A) in rejecting the assessee’s claim is that the assessee failed to demonstrate any evidence of manufacturing of any computer software / program / customized electronic data / project or services of similar nature and further, the services rendered as aforesaid do not reveal production of any computer software or related services of similar nature. The other argument of Ld.
Bristlecone India Limited Assessment Year 2009-10 CIT(A) is that the assessee has only rendered managerial or customer oriented services which were based on software produced / provided by its sister concerns and that too, on sub-contract basis. However, as noted by us as above, manufacture of computer software or program was not an essential condition rather the CBDT notification covered wide spectrum of notified services which were eligible for deduction u/s 10A. We find that Ld. CIT(A) has not appreciated the claim of the assessee vis-à-vis aforesaid CBDT instructions. It is also noted that other years have been reopened by the revenue to deny the said deduction to the assessee. Further, the assessee’s claim as raised in Ground Numbers 8 to 11 have not been adjudicated by Ld. CIT(A). Therefore, keeping in view these multiple factors, we deem it fit to restore the matter back to the file of Ld. CIT(A) for re-appreciation of assessee’s claim and re- adjudicate the same as per law with a direction to assessee to substantiate his claim.
Resultantly, the assessee’s appeal stands partly allowed for statistical purposes in terms of our above order.
Order pronounced in the open court on 04th April, 2018 Sd/- Sd/- (Mahavir Singh) (Manoj Kumar Aggarwal) �ाियक सद� / Judicial Member लेखा सद� / Accountant Member मुंबई Mumbai; िदनांक Dated : 04 .04.2018 Sr.PS:- Thirumalesh Bristlecone India Limited Assessment Year 2009-10 आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��थ� / The Respondent 2. 3. आयकर आयु�(अपील) / The CIT(A) 4. आयकर आयु� / CIT – concerned िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 5. 6. गाड� फाईल / Guard File