DCIT, NEW DELHI vs. M/S. MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD., NEW DELHI

The facts in brief of the case are that the assessee filed return of income declaring income of Rs.3,50,73,287/- on 16/10/2007. In the return of income filed, the assessee claimed deduction under section 10A of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), amounting to Rs.38,34,83,407/-. The assessee claimed that it is an IT enabled company set up in accordance with the Software Technology Parks, the scheme of Government of India and is engaged in rendering IT enabled services being customization of data/data processing/back-office operations acting as a support centre and activities were covered as export of computer software under the STP Scheme. In the assessment completed under section 144C r.w.s. 143(3) of the Act on 03/02/2011, the Assessing Officer disallowed the claim of deduction under section 10A of the Act along with other disallowances/additions. According to the Assessing Officer, the assessee was not engaged in rendering any IT enabled services and not engaged in exporting or transmitting ‘services of similar nature’ within the meaning of explanation-2 to section 10A of the Act and, therefore, it was not eligible for deduction under section 10A of the Act. 2.1 The learned Commissioner of Income-tax (Appeals), however, deleted the disallowance with following findings:

4.3 In the appellant’s own case for AY 2006-07, the Hon’ble ITAT Delhi has upheld the order of the ld CIT(A) that the appellant was eligible for deduction u/s 10A. In AY 2002-03, the Hon’ble Tribunal has also upheld the order of Ld. CIT(A) allowing the deduction u/s 10A. As regards, AY 2004-05 and 2005-06, it has been clarified that relief u/s 10A has been allowed by the AO himself. The fact in the present case for AY 2007-08 is exactly similar to the facts as in AY 2006-07. Respectfully following the aforesaid decision of the Hon’ble ITAT Delhi in the appellant’s own case for AY 2006-07, I am of the view that the appellant is eligible for deduction u/s 10A. Accordingly, the A.O. is directed to allow its claim u/s 10A. These grounds of appeal are allowed.

Before us, the learned Commissioner of Income Tax (Departmental Representative) relied on the findings of the Assessing Officer and submitted that the activities of the assessee were not eligible for deduction under section 10A of the Act and accordingly the disallowance made by the AO might be sustained.

On the other hand, learned Authorized Representative of the assessee, submitted that issue in dispute is covered by the decision of the Tribunal in the case of assessee for assessment year 2002-03 and 2006-07 and the decision of the Hon’ble Delhi High Court in the case of assessee for assessment year 2006-07 and accordingly the order of the learned Commissioner of Income-tax( Appeals) might be upheld.

We have heard the rival submissions and perused the material on record. We find that Hon’ble Delhi High Court in the case of assessee vide order dated 27.03.2015 for assessment year 2006-07 in ITA 217/2014 decided the issue with following observations: “8. A perusal of the above provision and the explanation implies that the two conditions so mentioned must be cumulatively satisfied in order to be eligible for the deduction. While the Assessee claims itself to be covered under the broader definition of ‘Computer Software’ and more particularly under clause (b) of Explanation – 2 under ‘services of similar nature’, the Assessment Order was based on the decisions in S. Gopal Reddy v. State of Andhra Pradesh, K. P. Varghese v. ITO and Indian Hotels Co. Ltd. v. Income Tax Officer and relying upon the purposive approach to interpret the Act reflects that the services are being performed in India and the end product, which is not software within the meaning of Section 10A is being exported outside India and thus not making services of a similar nature as such services can only be rendered on real time basis electronically to qualify for the purpose of Section 10A. Also, the TPO, by his order of 92CA(3) dated 09.10.2009 advised the concerned officer to make an upward adjustment of `Rs.59,09,890/- to the total income declared and the AO allowed the adjustment. Apart from holding that the Assessee company has furnished inaccurate particulars (the report of the auditor considered non est) with a view to evade the tax, the AO also initiated penalty proceedings under section 271(1) (e) of the I.T. Act, 1961 for filing inaccurate particulars and concealment of income. 9. Aggrieved by the Assessment Order, the Assessee appealed against that to the CIT (A) who thereby held that by making the disallowance, the AO erroneously concluded that the appellant is engaged in the business of analysis of financial and business information and not in the business of data processing. CIT (A) in its findings, notes that it is evident that the appellant is customizing data, what is accessed by the appellant in the databases and what is delivered to its parent company are two different products, i.e. data is customized to suit the needs of the requester and thereafter exported out of India.

This Court, while considering the question involved in the applicability of deduction under Section 10A notes that in CIT v. M.L. Outsourcing Services (P) Limited6 the assessee‟s contention of entitlement to claim deduction u/s 10A of the IT Act, 1961 read with Notification No. bearing SO 890 (E) dated 26th September, 2000 was upheld. In the above mentioned case, it was observed that, “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.”

The court relied on the circular issued by the CBDT explaining the provisions of the Finance Act, 2000, and held that the interpretation of the term 'manufacture or produce of an article or thing or computer software' by the tax authorities should be guided by the intention of the legislature (including the pronouncements of the Central Government while notifying the STP scheme) and the CBDT. Furthermore, the deductions on the same grounds were disallowed by the AO and later permitted by the CIT (A) and upheld by the ITAT for the AY 2002-2003 and subsequently examined and allowed in the preceding AYs 2003-04, 2004-05 and 2005- 06 by the AO himself and since there has been no change either in the facts or the circumstances of the case of the appellant accordingly, in view of the foregoing the appellant is eligible to claim the deduction under section 10A of the Act being the sixth year of claim. Therefore, the CIT (A) was of the opinion that the claim of the assessee that all of its business income or profits from business or profession are exempt under section 10A of the Act is correct and the assessee is entitled to exemption and thereby reversed the finding of the AO and directed him to allow the exemption to the whole of assessee‟s profit as computed under the said head 'profit and gains of business.‟ In the present case, the ITAT held that, “There is no dispute on the services provided by Assessee. The modus operandi of Assessee, as noted earlier while considering the submissions made before ld. CIT(A), makes it very clear that the assessee was acting as a back office of its parent company by providing customized electronic data as per request received by it from parent company. It is clear from the modus operandi that what was accessed by the assessee at the STP Unit and what was delivered to Mckinsey (Parent Company) after the conversion took place were two different products/services which is described as customization of data/data processing. The STP Unit undertook the series of operations on the data received from various data bases before it was finally delivered to the customer. Thus, there was value addition made by the STP Unit on the data. We, therefore, are not in agreement with the findings of AO that there was no value of addition on the data obtained from various data base from parent company. The Assessee acted as a back office of the parent company and provided support services to its parent company. Therefore, Id. CIT (A) rightly held that the activities of the assessee squarely fall within the expanded definition of 'computer software.” The ITAT also relied on the principle of consistency – (Ref Assistant Commissioner of income-tax v. NGC Network (India) (P) Ltd., Lenovo (India) P. Ltd v. Assistant Commissioner of Income-tax, Deputy Commissioner of Income-tax v. Cheil Communication. India P. Ltd. etc.) 12. The CBDT circular relied upon by the assessee in the present case, reads as follows: "S.O.890(E) - In exercise of the powers conferred by clause (b) of item (l) of Explanation 2 of section 10A. Clause (b) of item (l) of Explanation 2 to section 10B and clause (b) to 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 :- (l) 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 (Xl) Payroll (xii) Remote Maintenance (xiii) Revenue Accounting (xiv) Support Centres and (xv) Web-site Services.” There is no dispute with respect to the findings arrived at by the lower authorities. The assessee is involved in providing back office support and thereby entitled to the benefit under the definition of the term „computer software‟. Its activities are in the nature of data processing, customization of data, acting as the back office of the parent company and acting as support center to the parent company. Clearly it could not have been deprived of the benefit of Section 10A, as is argued by the revenue. This contention is accordingly rejected as unmerited.”

Since the issue in dispute has already been decided by the Hon’ble High Court, respectfully following the above decision of the Hon’ble High Court, we uphold the impugned order of the learned Commissioner of Income-tax (Appeals) on the issue of allowing the claim of deduction under section 10A of the Act. The ground No. 1 of the appeal is dismissed.

The grounds No. 2 to 4 of the appeal are general in nature and, therefore, not required to be adjudicated upon by us.

In the result, appeal of the Revenue is dismissed. The decision is pronounced in the open court on 28th Sept., 2016.