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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI ABRAHAM P. GEORGE
Per Sunil Kumar Yadav, Judicial Member
This appeal preferred by the assessee on different grounds against the order of CIT(Appeals)-III, Bangalore dated 20.10.2010 was disposed of by the Tribunal vide its order dated 13.11.2013 restoring certain issues to the lower authorities. Against this order of the Tribunal, the assessee filed an appeal before the Hon'ble High Court of Karnataka and the Hon'ble jurisdictional High Court vide its judgment dated 16.9.2014 remanded the matter back to the Tribunal with a direction to adjudicate the questions of law raised before it, besides the Tribunal was also directed to go into such other questions of law which may be raised by the assessee on such remand. The questions of law raised before the Hon'ble High Court of Karnataka are as under:-
“a. Whether the telecommunication expenses, insurance charges, personnel expenses, professional expenses, branch office expenses and other expenses incurred in foreign exchange should not be excluded from the export turnover for the purpose of computing deduction under Section 10B of the Income Tax Act, 1961? b. If the said expenses are to be excluded from the export turnover, then the same should also be excluded from the total turnover for the purpose of computing deduction under Section 10B of the Income Tax Act, 1961?”
In the main appeal, the assessee has also raised ground No.1 in its grounds of appeal that the CIT(Appeals) is not justified in holding the exclusion of an amount of Rs.9.53,10,234 being the sale of hardware components, from the export turnover for the purpose of computing the deduction under Section 10A of the Act. The ld. counsel for the assessee has contended that though this ground was raised before the Tribunal, but the Tribunal did not adjudicate this ground and has considered the alternative contentions of the assessee that if it is excluded from the export turnover, it will also be excluded from the total turnover, following the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd. & Ors. Therefore, the Tribunal is required to adjudicate the following three issues:-
(1) Whether the CIT(Appeals) is justified in upholding the exclusion of an amount of Rs.9,53,10,234 being the sale of hardware components from the export turnover for the purpose of computing deduction u/s. 10A of the Act? (2) Whether the telecommunication expenses, insurance charges, personnel expenses, professional expenses, branch office expenses and other expenses incurred in foreign exchange should not be excluded from the export turnover for the purpose of computing deduction under Section 10B of the Income Tax Act, 1961? (3) If the said expenses are to be excluded from the export turnover, then the same should also be excluded from the total turnover for the purpose of computing deduction under Section 10B/10A of the Income Tax Act, 1961?
Accordingly arguments were heard on all the issues. With regard to ground No.1, the ld. counsel for the assessee has contended that the assessee company is engaged in the business software product, development of software services and telecom solutions. During the impugned financial year, the assessee company has derived income from hardware sales of Rs.7,38,17,250 and Rs.2,14,92,984 attributable to the India and UK operations respectively. This sale of hardware components are inextricably linked to the sale of software. Typically, the sale pertaining to sale of certain software products pertaining to Revenue Maximisation Solutions (“RMS”) provided by the assessee which essentially require certain hardware components, in the absence of which the software does not function. Based on customers requests, as a part of the overall sale of software products, the assessee company procures the required hardware and onward sells them after integrating the software into them as a part of sale of software. The hardware is in the nature of servers that have been procured, as only with these servers, the software products sold by the assessee company operate, and hence it is a composite contract and the assessee was required to supply the said software along with the hardware. The ld. counsel for the assessee has also invited our attention to the write-up submitted before the AO which has been extracted at pages 4 to 6 in the assessment order. The ld. counsel for the assessee further contended that since the hardware is inextricably linked with the software which may not function without the hardware, the sale of hardware is a part of export turnover. In support of his contentions, the ld. counsel for the assessee has placed reliance upon the following judgments:-
(i) Hindustan Shipyard Ltd. v. State of Andhra Pradesh, 119 STC 533 (ii) Wipro Ltd. v. CIT, [2015] 62 taxmann.com 26 (Karnataka) (iii) Galatea Ltd. v. DCIT (IT), [2016] 67 taxmann.com 190 (Mumbai-Trib.) (iv) Tata Elxsi Ltd. v, ACIT, 1074 & 1410/Bang/2012, order dated 20.03.2015. (v) Sultan Brothers (P) Ltd. v. CIT (1964) 51 ITR 353 (SC) (vi) Goodricke Group Ltd. v. CIT, 2011-TIOL-262-HC-KOL-IT (vii) CIT v. Gem Plus Jewellery India Ltd. [2010] 194 Taxman 192 (Bom) 4. The ld. DR, besides placing reliance upon the order of the AO and the CIT(Appeals), has contended that the assessee does not manufacture or produce hardware and the meaning of software cannot be stretched to hardware, however essential it may be for functioning of the computer software. He has also invited our attention to Explanation 2 of section 10A in which the word “computer software” has been defined, according to which, computer software means any computer programme recorded on any disc, tape, perforated media or other information storage device, or any customized electronic data or any product or service of similar nature, as may be notified by the Board. Hardware does not fall within the definition of “computer software”. Therefore, the meaning of software should not be stretched too far as it was not the intention of the Legislature.
The ld. DR has also invited our attention to the Purchase Order and the Sale Invoices with the submission that in the Purchase Order, the hardware was separately mentioned under the head “Item description” and its cost was also separately mentioned, besides the number of quantities.
Similarly, software and hardware was separately sold by raising invoices on different dates. Copy of the Purchase Orders and Invoices are available at page Nos.1 and 5 to 8 of the compilation of the assessee filed on 24.5.2016. Undisputedly the assessee did not manufacture the hardware and the hardware purchased from outside were also directly sold separately to the buyer. Therefore, the sale proceeds of the hardware cannot be included in the export turnover for the purpose of computing deduction u/s. 10A of the Act.
Having carefully examined the orders of lower authorities in the light of rival submissions and the judgments referred to by the parties, we find that undisputedly the assessee is not a manufacturer of the hardware. The hardware was purchased from the market and was sold to its buyer. The ld. counsel for the assessee has put an emphasis during the course of hearing that the assessee procured the hardware and integrated it with the software and sold as a part of software. It was also contended that the sale pertaining to sale of certain software products pertaining to the Revenue Maximisation Solutions (RMS) provided by the assessee which essentially requires certain hardware components and in its absence, the software does not function. Based on the customers request as a part of overall sale of software products, the assessee procured the required hardware and sold it after integrating the software into them as part of software. But from a careful perusal of the Purchase Order appearing at page 1 of the assessee’s compilation, we find that the assessee was not required to sell one composite software. Even in the Purchase Order, the software and the hardware were mentioned separately along with their respective cost.
Similarly, software and hardware were sold separately through different invoices appearing at pages 5 to 8 of the compilation of the assessee filed on 24.05.2016. From the invoices, it is evident that the software was sold on 25.3.2005 for a value of USD 272,000 and the hardware was sold on 19.9.2005 by separate invoice. For the sake of reference, we extract the Purchase Order as well as Invoice issued by the assessee:-
From the above details, it is abundantly clear that the assessee has got the order of hardware and software separately for different costs and was also sold by raising invoices on different dates. It is also evident that the buyer had placed separate order for the software and hardware. The software known as Ranger Fraud Management System includes fraud detection, subscriber pre-check, pre-paid and credit management modules and its cost was specified at USD 272,000. A separate order was placed for the hardware for USD 132,500. The details of hardware has also been mentioned separately in the order. Further, it is also noticed from the payment terms that different schedule of payment was laid down for software and hardware. The warranty services for the software was valid for a period of six months, whereas no warranty was stipulated for the hardware. Therefore, in the order itself, software and hardware are treated differently. Supply of software and hardware are also different. If the assessee contends that software was sold along with hardware and software cannot be used without the hardware specified in the order, the onus is upon the assessee to establish these facts; whereas from the aforesaid documents the fact appears to be different.
We have carefully perused the judgments of the Hon'ble jurisdictional High Court in the case of Wipro Ltd. v. DCIT (supra) in which the issue in dispute was, whether monitors sold along with computers were a part of the computer? In that case, Their Lordships have held that wherever the monitors are sold separately, they are not part of the computer, but wherever they are sold along with the computers, it would be a part of computer as the computer cannot be used without the monitor. The relevant observations of the Hon'ble jurisdictional High Court in this regard are as under:-
“106. After the aforesaid information was furnished, the assessing authority proceeded with the assessment order holding that the assessee has furnished incomplete details, only value of monitors which have been sold separately are given and details of monitors sold as a component with the computer has not been furnished. Therefore, he took the average value on the basis of the furnished filed in Annexure and did not extend the benefit of Section 80IB in respect of the monitors which were sold as a part of the computer. In the aforesaid tabular column, it is shown that the assessee has sold 25,681 monitors, i.e., they are purchased and sold as monitors and the value of the same is given and the assessee has not claimed benefit under Section 80IB in respect of the said amount. He has also given the particulars of the monitors sold along with the computers. 27,736 monitors were sold as a part of the computer. The assessee has pleaded its inability to give the value of the said monitor because the said monitor was sold as a part of the composite value of the computers and the assessee is claiming benefit under Section 80IB in respect of the total consideration. As set out earlier the assessee is carrying on the manufacturing of computers and sale of computers. He has satisfied all the requirements stipulated in sub-section (2) of Section 80IB and he is eligible for the said exemption. The monitors which he has purchased from outside is used as a spare part in the manufacture of computer and it is sold to the customers as such. In other words, those monitors which are used in the computers are not the traded commodities. Therefore, it is a part of the computer and the total consideration of the computer includes the value of this monitor. The profit derived from the said computer includes the sale of the monitor which is a part of the said computer which falls within the first degree. In view of the aforesaid judgments the profit derived from the said sale of monitor as a part of the computer is also eligible for benefit under Section 80IB. However, it is made clear the assessee is not entitled to the benefit of Section 80IB in respect of monitors which are purchased and sold separately as a traded commodity. In fact, the assessee has not claimed any benefit in respect of those monitors. Therefore, the finding recorded by the authorities that the assessee is not entitled to the benefit of deduction under Section 80IB in respect of the monitors which form part of the computer is hereby set aside. Both the substantial questions are answered in favour of the assessee and against the revenue.”
From a perusal of the judgment of the Hon’ble Supreme Court in the case of Hindustan Shipyard Ltd. (supra), we find that Their Lordships of the Apex Court have examined the word “sale” for the purpose of Sale of Goods Act and Their Lordships have held that where the bulk of material used in construction belongs to manufacturer who sells the end-product for a price, then it is a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not one for work and labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee which have to be weighted. If the major component of the end- product is the material consumed in producing the chattel to be delivered and the skill and labour are employed for converting the main components into the end-products, the skill and labour are only incidentally used and hence the delivery of the end-product by the seller to the buyer would constitute a sale. On the other hand, if the main object of the contract is to avail the skill and labour of the seller though some material or components may be incidentally used during the process of the end-product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work and labour.
Again in the case of Hindustan Aeronautics Ltd. v. State of Karnataka (1984) 55 STC 314 (SC), Their Lordships have observed that it is well settled that the difference between the contract of service and contract of sale of goods is that in the former, the person performing the work or rendering services, no property in the things produced as a whole, notwithstanding that a part or even the whole of materials used by him had been his property. In the case of contract for sale, the thing produced as a whole has individual existence as the sole property of the party who produced it sometime before delivery and the property therein passes only under the contract relating thereto to the other party for a price.
We have also carefully examined the other judgments referred to by the assessee, but they are all on different issues. But from careful perusal of those judgments, it has emerged that wherever software and hardware are inextricably connected or linked and the software cannot be used without hardware, sale of hardware would be a part of sale of software.
In the instant case, the order for software and hardware are placed separately, though in the same order, for different costs. The sale invoice of software and hardware was also raised separately on different dates.
The mode of payment is also different for software and hardware.
Moreover, the order was not placed for supply of particular hardware and software only. The order was placed for the supply of software as well as hardware and nothing has been established on record that the said software cannot be used without hardware. In light of these facts, we are of the considered opinion that sale of hardware cannot be a part of software exported by the assessee. Thus, we have no hesitation in holding that sale of hardware cannot be a part of export turnover.
So far as the other aspect is concerned, we are of the view that the Tribunal has already taken a view in the earlier order that once a sale of particular item is not considered to be part of export turnover, it cannot be considered as part of total turnover in light of the decision of Tata Elxsi Ltd. (supra) and the decision of the Special Bench in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55) in which it has been held that whatever has been excluded from the export turnover had to be excluded from the total turnover also, since total turnover includes export turnover as well. In light of these findings, we uphold the order of the CIT(Appeals) that sale of hardware component would be excluded from the export turnover and for the recomputation of deduction u/s. 10A, the matter is restored to the Assessing Officer in the terms indicated above.
In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on this 12th day of August, 2016.