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Income Tax Appellate Tribunal, BENGALURU ‘A BENCH BEARING IN
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 9TH DAY OF APRIL, 2021
PRESENT
THE HON'BLE MR. JUSTICE SATISH CHANDRA SHARMA
AND
THE HON'BLE MR. JUSTICE V.SRISHANANDA
ITA NO.727/2017 c/w ITA NOs.725/2017, 726/2017, 728/2017 and 206/2018 AND ITA NOs.11/2014, 12/2014,
ITA NOS.727, 725, 726, 728 OF 2017 AND 206 OF 2018
BETWEEN
M/S. MARMON FOOD AND BEVERAGE TECHNOLOGIES INDIA (P) LIMITED, (FORMERLY KNOWN AS IMI R & D CENTRE INDIA PVT. LTD.,) #49, 3RD PHASE, PEENYA INDUSTRIAL AREA, BENGALURU-560 058, PAN: AABCI 3495 H
(REPRESENTED BY ITS MANAGING DIRECTOR, SHRI. NISHANT KULKARNI, AGED ABOUT 38 YEARS, S/O. SRI. MORESHWAR JAYARAM KULKARNI) ...APPELLANT COMMON (By SRI : CHYTHANYA K K, ADVOCATE)
AND
THE INCOME TAX OFFICER WARD - 11 (2), BMTC BUILDING, 80 FEET ROAD, KORAMANGALA,
NEAR PASSPORT OFFICE, BENGALURU-560 095. ...RESPONDENT COMMON (By SRI : K V ARAVIND, ADVOCATE)
ITA 727/2017 IS FILED UNDER SECTION 260A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DAED 28.4.2017 PASSED IN ITA NO.560/BANG/2013, FOR THE ASSESSMENT YEAR 2008-2009 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE, ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU ‘A BENCH BEARING IN NO.560/BANG/2013 DATED 28.4.2017 FOR THE ASSESSMENT YEAR 2008-09 AND ETC.,
ITA 725/2017 IS FILED UNDER SECTION 260A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DAED 28.4.2017 PASSED IN ITA NO.561/BANG/2013, FOR THE ASSESSMENT YEAR 2009-2010 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE, ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU ‘A BENCH BEARING IN NO.561/BANG/2013 DATED 28.4.2017 FOR THE ASSESSMENT YEAR 2009-10 AND ETC.,
ITA 726/2017 IS FILED UNDER SECTION 260A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DAED 28.4.2017 PASSED IN ITA NO.1749/BANG/2013, FOR THE ASSESSMENT YEAR 2007-2008 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE, ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU ‘A BENCH BEARING IN NO.1749/BANG/2013 DATED 28.4.2017 FOR THE ASSESSMENT YEAR 2007-08 AND ETC.,
ITA 728/2017 IS FILED UNDER SECTION 260A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DAED 28.4.2017 PASSED IN ITA NO.1750/BANG/2013, FOR THE ASSESSMENT YEAR 2010-2011 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE, ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU ‘A BENCH BEARING IN NO.1750/BANG/2013 DATED 28.4.2017 FOR THE ASSESSMENT YEAR 2010-11 AND ETC.,
ITA 206/2018 IS FILED UNDER SECTION 260A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DAED 14.12.2017 PASSED IN ITA NO.1811/BANG/2017, FOR THE ASSESSMENT YEAR 2011-2012 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED ABOVE, ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED
ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU ‘A BENCH BEARING IN NO.1811/BANG/2017 DATED 14.12.2017 FOR THE ASSESSMENT YEAR 2011-12 AND ETC.,
ITA NO.11/2014 & ITA NO.12/2014
BETWEEN
1 . THE COMMISSIONER OF INCOME-TAX C R BUILDING QUEENS ROAD BANGALORE
2 . THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(3) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE ...APPELLANTS COMMON
(By Sri : K V ARAVIND, ADVOCATE )
AND
M/S.GE INDIA TECHNOLOGY CENTER PVT LTD NO.122, EPIP WHITEFIELD ROAD PHASE-II BANGALORE-560066 ...RESPONDENT COMMON (By Sri : PAWAN SHARMA, ADVOCATE )
ITA 11/2014 IS FILED UNDER SECTION 260A OF INCOME TAX ACT ARISING OUT OF ORDER DATED 6.9.2013 PASSED IN ITA NO.950/BANG/2011 FOR THE ASSESSMENT YEAR 2007-2008 PRAYING TO FORUMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND TO ALLOWE THE APPEAL AND TO SET ASIDE THE ORDER PASSED BY THE ITAT IN 950/BANG/2011 DATED 6.9.2013 AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 11(3), BANGALORE.
ITA 12/2014 IS FILED UNDER SECTION 260A OF INCOME TAX ACT ARISING OUT OF ORDER DATED 6.9.2013 PASSED IN ITA
NO.1459/BANG/2012 FOR THE ASSESSMENT YEAR 2008-2009 PRAYING TO FORUMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND TO ALLOWE THE APPEAL AND TO SET ASIDE THE ORDER PASSED BY THE ITAT IN 1459/BANG/2012 DATED 6.9.2013 AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 11(3), BANGALORE.
THESE APPEALS HAVING BEEN HEARD AND RESERVED ON 5.2.2021, COMING ON FOR ‘PRONOUNCEMENT OF JUDGMENT’ THIS DAY, SATISH CHANDRA SHARMA J., DELIVERED THE FOLLOWING:
JUDGMENT
Regard being had to the similitude in the controversy involved in all these cases, they were heard analogously together and a common judgment is being delivered.
The present appeals are arising out of the orders dated 28.4.2017, 14.12.2017 and 6.9.2013 passed by the Income Tax Appellate Tribunal, in ITA.Nos.560, 561, 1749, 1750/Bang/2013, 1811/Bang/2017, 950/Bang/2011 and 1459/Bang/2012.
The facts of ITA.No.725/2017 are narrated as under:
The facts of the case reveal that the appellant before this Court is a 100% export oriented undertaking engaged in the business of export of customized electronic data according to the requirements of its customers. The requirement is received in
electronic format and it is again delivered in electronic format pertaining to various activities in the field of engineering and design.
Appellant-assessee for the assessment year 2009- 2010 filed its return of income on 26.9.2009 declaring ‘nil’ income after claiming deduction of Rs.1,80,27,563/- under Section 10B of the Income Tax Act, 1961 (hereinafter referred to as IT Act). The case of the appellant was selected by the assessing officer for scrutiny by issuing notices under Sections 141(1) and 143(2) of the IT Act. The Additional Commissioner of Income-tax (Addl. CIT) suo moto selected the case of the appellant-assessee under Section 144A of the IT Act and issued draft directions to the appellant-assessee on 5.8.2011. The assessee in response to the said draft directions filed a detailed reply on 26.8.2011. The Additional CIT issued final directions under Section 144A to the assessing officer on 26.8.2011. The appellant-assessee also filed written submissions before the assessing officer on 19.12.2011 and thereafter, the assessing officer passed an assessment order under Section 143(3), denying the deduction of Rs.1,80,27,563/- claimed by the assessee under Section 10B of the IT Act.
The assessee being aggrieved by the assessment order dated 21.12.2011 preferred an appeal against the assessment order before the Commissioner of Income-tax Appeals-I and the appellate authority has dismissed the appeal by order dated 31.1.2013. The appellant has thereafter, preferred an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal) and the Tribunal has dismissed the appeal filed by the assessee vide order dated 28.4.2017.
The assessee has preferred this appeal before this Court on the following substantial questions of law;- 1. Whether in the facts and in the circumstances of the case, the Tribunal is right in law in denying the deduction under Section 10B when the activity of the Appellant is ‘Engineering & Design’ as notified by CBDT vide notification No.890(E) dated 26.09.2000 read with Explanation 2(i)(b) of section 10B of the IT Act?
Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in denying the deduction under Section 10B when the activity of the Appellant qualifies as export of the “Computer Software” under Explanation 2(i)(a) of the section 10B of the IT Act?
Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in denying the deduction under Section 10B when the Appellant is engaged in manufacture or production of an article or a thing?
Are not the findings of the Tribunal that the Appellant did not furnish any documents in support of claim of deduction under section 10B perverse?
Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in denying the deduction under Section 10B when the activity of the Appellant falls within the scope of “Support Centres” or “Back-office Operations” or “Data Processing” as notified by CBDT vide Notification No.890(E) dated 26.09.2000 read with Explanation 2(i)(b) of section 10B of the IT Act?
Whether, in the facts and in the circumstances of the case, the Tribunal erred in law in failing to follow the decisions of the co-ordinate bench of the same jurisdiction?
Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in upholding the validity of directions by the Additional CIT issued under section 144A without giving opportunity of being heard?
The appeal is admitted on the aforesaid questions of law after hearing the parties at length.
There are four connected appeals involving the same subject matter and a memo has been preferred by the assessee- appellant stating categorically that he is not pressing certain questions of law and permission has been sought to withdraw the same. The details of the appeals and the questions which are not being pressed are reproduced as under;-
“1) In ITA No.725/2017 - Question No.VII 2) In ITA No.726/2017 - Question No.I and VIII 3) In ITA No.727/2017 - Question No.VII 4) In ITA No.728/2017 - Question No.VII 5) In ITA No.206/2018 - Question No.VI”
The facts of the case reveal that the appellant is engaged in the business of exporting of collaborative research customized data largely on Computer Aided Design (CAD)
platform which falls within the ambit of ‘computer software’ as defined in clause (b) of item (i) of Explanation 2 of Section 10B.
Section 10B which is relevant for adjudication of the present appeal is reproduced as under; '10B. (1) Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee: Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years: Provided further that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software: Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012 and subsequent years: Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section
(1) of section 139.
(2) This section applies to any undertaking which fulfils all the following conditions, namely:—
(i) it manufactures or produces any article or things or computer software; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section: (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section. (3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation 1 - For the purposes of this sub-section, the expression “competent authority” means the Reserve Bank of India or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign exchange. Explanation 2 – The sale proceeds referred to in this sub- section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.
(5) The deduction under sub-section (1) shall not be admissible for any assessment year beginning on or after the 1st day of April 2001, unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub- section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. (6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,— (i) section 32, section 32A, section 33 and clause (ix) of sub- section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years ending before the 1st day of April, 2001 in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction; (ii) no loss referred to in sub-section (1) of section 72 or sub- section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set-off where such loss relates to any of the relevant assessment years ending before the 1st day of April 2001; (iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80IA or section 80-IB in relation to the profits and gains of the undertaking; and (iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction
in respect of depreciation for each of the relevant assessment years. (7) The provisions of sub-section (8) and sub-section (10) of section 80IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. (7A) Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger –
(a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as far as may be, apply to the amalgamated or resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or the demerger had not taken place. (8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment year. (9) omitted (9A) omitted Explanation – 1 omitted Explanation – 2 For the purposes of this section, (i) ‘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 similar nature as may be notified by the Board,
which is transmitted or exported from India to any place outside India by any means;
(ii) ‘convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 (42 of 1999), and any rules made thereunder or any other corresponding law for the time being in force;
(iii) ‘export turnover’ means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;
(iv) “hundred per cent export-oriented undertaking’ means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) act, 1951 (65 of 1951), and the rules made under that Act;
(v) ‘relevant assessment year’ means any assessment years falling within a period of ten consecutive assessment years, referred to in this section.
Explanation 3 – 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.
Explanation 4 – For the purposes of this section, ‘manufacture or produce’ shall include the cutting and polishing of precious and semi-precious stones.”
The activity of the appellant includes computer programming, processing and management of electronic data and
any customized electronic data, engineering and design. Section 10B of the IT Act provides for a tax holiday in respect of 100% Export Oriented Undertaking from the export of articles or things or computer software.
It is not a matter of dispute that the appellant is a 100% Export Oriented Unit (EOU unit) registered with the Special Economic Zone, Cochin. The activities carried out by the assessee are detailed as under; a) Appellant is engaged in the activity of engineering design, redesigns, testing, modifying, prototyping and validation of concept;
b) Appellant is also engaged in the activity of providing manufacturing support and CAD support to its group companies;
c) Input : the products design comes to the Appellant for testing and the same is captured in a customized data both in CAD and other software platforms;
d) Processing of data : Collaborative research and studies are carried out at the Appellant’s research laboratory in India through its engineers which are customized data both in CAD and other software platforms. The products design testing is reported along with recommendations;
e) Output: Appellant captures the resultant research of the activity carried out in a customized data both in CAD and other software platforms which is shipped through electronic media to the countries outside India. The testing report is exchanged through online tools such as ‘windchill’ and ‘Pro-engineer’;
The various orders passed by the authorities right from the Additional CIT, Commissioner of Appeals and Income
Tax Appellate Tribunal in respect of the activities carried out by the appellant are reproduced in a tabular form as under;
Authority Activity carried on by the appellant as noted by lower authorities Page reference Additional Commissioner 17……… The assessee company is in the business of understanding and analyzing the requirement, understanding existing systems and coming out with innovative scientific solutions for improving or replacing the existing process of production. …….. The outputs are new, innovative and not in any predetermined formats.
19.. ……. All research outputs are in the form of understandable designs. All the scientific innovations are explained in mathematical/geometrical designs. …. The output of the assessee is in the form of descriptive research output as well as in the form of applied scientific drawings.
The assessee has also claimed that all its research scientists use computer and most of the work is done on computers. This need not be doubted. …… These outputs are also delivered and exported through Assessment Order – 14 and 15
computer and internet.
Assessee is in the business of industrial research and development …… The services rendered by the assessee are in the nature of research and development…..
The assessee company has run a design, testing and validation laboratory. ….. In fact, these are in the nature of product design and product simulation testing…… Commissioner (Appeals) 3.10 ….. Whereas, the appellant itself stated that it provides redesign, improvised design, fine tune the existing design, bench mark testing of existing design, manufacturer support and testing, CAD support, design and development, CAD and concept design, design support and CAD support etc. …. Thus there is no original work involved in the above activities. 32 ITAT 7.2 …… it is clear that the assessee was doing collaborative research for its principal……. For which, the input came in the form of specification document, the assessee might have carried out the testing, validation etc and gave its output i.e summarized report with recommendations …… 17
Another point is that the appellant has been characterized by the various authorities under the IT Act including ITAT in the orders passed by them as under;
Authority Characterization Page reference Additional Commissioner 10. ………. The assessee company can be said as being in the business of research and development for their principals abroad. ….
…… It is in the nature of applied scientific research …….
……. The assessee company is involved in original and applied research and makes use of high end computers for the same.
The point to be noted is that the research and development services rendered by the assessee company ……
The mandate and scope of services also reflect the original research and development activities conducted in India.
…. It is indeed a scientific research and development entity. ………..
Assessment Order 10, 14 and 15
Assessee is in the business of industrial research and development ….. The services rendered by the assessee are in the nature of research and development ….. The assessee company has run a design, testing and validation laboratory….. In fact, these are in the nature of product design and product simulation testing …… Commissioner (Appeals) Not engaged in original work, hence cannot be characterized either as ‘computer software’ or as a ‘IT enabled service provider under engineering and design.” 32, 33 and 34 ITAT 7.2 ….. it is clear at best the nature of the assessee’s business can be considered as a Research collaborator rendering technical services …..
….. it is clear that the assessee is merely a (developer) or a collaborator for the Cornelius or its group ….. and hence its business can be considered as a Research Collaborator “rendering technical services” …. 23
The stand of the assessee is that the lower authorities have taken different and conflicting positions with the only meeting point of denying the deduction under Section 10B of IT Act.
It is pertinent to note that under the IT Act a tax holiday was given to certain assessees importing and exporting electronic data and as it was new subject under the Act, the Central Board of Direct Taxes (hereinafter referred to as CBDT) was empowered to notify certain services of customized electronic data or any products or services to mean the ‘computer software’ eligible for deduction. The CBDT in exercise of powers conferred under Explanation 2(i)(b) of Section 10B has notified certain information technology enabled products or services vide notification dated 26.9.2000 and they are reproduced as under; 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.
Engineering and Design finds place in the CBDT notification dated 26.9.2000 and the term Engineering and Design is not defined under the IT Act and on this ground as it is not defined under the IT Act, the assistance was sought by the assessee from various Dictionaries and Information Technology Act to explain what is Engineering and Design actually means.
Section 65 of the Information Technology Act, 2000 reads as under; “Section 65: Tampering with Computer Source Documents:
Whoever knowingly or intentionally conceals, destroys or alters or intentionally or knowingly causes another to conceal, destroy or alter any computer source code used for a computer, computer programme, computer system or computer network, when the computer source code is required to be kept or maintained by law for the time being in force, shall be punishable with imprisonment up to three years, or with fine which may extend up to two lakh rupees, or with both.
Explanation –
For the purposes of this section, “Computer Source Code” means the listing of programmes, Computer Commands, Design and layout and programme analysis of computer resource in any form.”
Explanation to aforesaid Section 65 provides that Designs are considered as ‘Computer Source Code’ for any computer programmes as defined in the explanation.
Learned counsel for the assessee has vehemently argued before this Court that the assessing officer, Commissioner of Income-tax Appeals and ITAT have erred in law and in facts in denying the benefit of deduction under Section 10B of the IT Act and the ITAT has taken altogether a new ground by branding the assessee as Research Collaborator rendering technical services. It has been vehemently argued that the ITAT has assumed the role of an expert in the technical matter without having any expertise in the field.
The core issue before this Court is, whether the activities carried out by the appellant falling within clause (v) i.e., Engineering and Design as notified by CBDT vide notification dated 26.9.2000 are eligible for grant of deduction under Section 10 B of the IT Act or not?
This Court has carefully gone through the arguments canvassed by the assessee as well as the arguments canvassed by the learned counsel for the Income-tax department.
The assesseee is undoubtedly a 100% export oriented undertaking as per the approval issued by the Cochin Special Economic Zone. It is engaged in collaborative and development projects undertaken for its clients and its entire turnover is from
the export of collaborative research programmes. The Additional CIT has observed that the assessee does not pass 9 tests for qualifying to be a manufacturer and exporter of computer software, the assessee’s activity is only descriptive research and not scientific designs and the assessee’s claim of development of computer progamme is different from development of computer software.
Another important aspect of the case is that in respect of the eligibility of claim of deduction under Section 10B, in respect of the same assessee, it has been accepted by the department for the assessment years 2006-2007 to 2008-2009. The predecessors to the present assessing officer have accepted the similar claim of the assessee for deduction under Section 10B in similar facts and circumstances however, in respect of the present and the subsequent assessment years which are subject matter of connected appeals, the department has now taken altogether a different stand.
From the documents on record, it can be safely gathered that the appellant is engaged in the activity of engineering designs, redesigns, testing, modifying, prototyping and validation of concept. The assessee is also engaged in the
activity of providing manufacturing support and CAD support to its group companies. The assessee captures the resultant research of the above activity in a customized data both in CAD and other software platforms and for the purposes of carrying the above activities, the assesseee employs engineers and other technical staff for various research projects undertaken by them. The assessee exports the software data and the activities of the assesseee will certainly fall within the phrase ‘computer software’.
Keeping in view the facts available on record, in order to constitute computer software as defined in Explanation 2(i) of Section 10A, the following conditions are required to be satisfied;
(a) it should be a computer programme;
(b) such computer programme is recorded on any disc, tape, perforated media or other information storage device;
(c) it should be any customized electronic data or any product or service of similar nature, as may be notified by the Board;
(d) The computer programme or any customized electronic data etc., should be transmitted or exported from India to any place outside India by any means.
The processing and management of electronic data qualifies to be regarded as an eligible activity for the purpose of Section 10B [See: ITO vs. E-Infochips ltd., (2009) 124 TTJ (Ahmedabad) 176; Cybertech Systems & Software ltd., vs. ACIT, 2012-TIOL-169-ITAT-MUM/(2006) 7 SOT 230 (MUM) ]
Indian Copyright Act, 1957 also deals with computer programme and as per Section 2 (ffc) ‘computer programme’ means, a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result.
In the considered opinion of this Court, the term ‘computer software’ means;
(a) a set of instructions expressed in words, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result;
(b) a sequence of instructions written to perform a specified task for a computer. The same programme in its human-readable source code form, from which executable programmes are derived, enables a programmer to study and develop its algorithms;
(c) a set of ordered instructions that enable a computer to carry out a specific task;
(d) written programmes or procedures or rules and associated documentation pertaining to the operation of a computer system;
In the present case the appellant/assessee gets the inputs from its customers. Such inputs are received by it in electronic form. The assessee manipulates the inputs in the desired manner and generates output for being sent back to the
customer. The output that goes to the customer is again in the electronic form and therefore, the output generated by the assessee has to be treated as customized electronic data. The activities of the assesseee certainly fall within the meaning of the phrase “processing or management of electronic data” and therefore, the same has to be regarded as computer software keeping in view the ambit of Explanation 2(i)(a) to Section 10B of the IT Act. [See: ITO v. E-Infochips Ltd., (2009) 124 TTJ (Ahmedabad) 176; DCIT vs. Tecnimont ICB (P) Ltd., (2009) 123 TTJ (Mumbai) 680/ (2010) 2 ITR (Trib) 480 (Mumbai); Cybertech Systems & Software Ltd., vs. ACIT (2006) 7 SOT 230 (Mum.) ].
The activities carried out by the assessee like analyzing/duplicating the reported problems, developing and building, testing products, carrying out tests, design and development are to be treated as falling within the scope of Section 10B with or without the aid of Section 10BB of the IT Act. Thus, the assessee is certainly eligible for deduction under Section 10B of the IT Act.
The assessee is engaged in the continuous process of developing software programmes /software designs though they might be used for industrial purposes, but it does not mean that
the assessee is not receiving the requirement through electronic mode and is not delivering the requirement of the person who has placed an order through electronic mode. The programme designed by the assessee though relates to engineering and design, includes various steps, but the end product is certainly of software programme which is forwarded to the customer of the assessee.
This Court really fails to understand that once a clarificatory notification has been issued by the CBDT dated 26.9.2000, by giving an erroneous interpretation to the term ‘engineering and design’ the authorities below have denied the exemption to the assessee. The Act nowhere provides for a definition of ‘engineering and design’ and the requirement for availing the benefit of deduction as reflected from Section 10B r/w notification dated 26.9.2000 is fulfilled when the assessee has finally developed a computer programme only.
Even if it is presumed that the assessee is in the business of industrial research and development for its principal, the industrial research and development ultimately is part of preparing a computer software or customized electronic data, which is exported to its customers. The department on all earlier
years has accepted the contentions raised by the assessee and has given the benefit to the assessee. However, for the present assessment year by holding that the activity of the assessee does not fall within the meaning of engineering and design, the department has taken a somersault. The Tribunal has gone to the extent in holding that the assessee has not produced any document to prove that it has manufactured or produced articles or things or computer software. It has also gone to the extent in stating that the assessee has not produced any certificate from any regulatory authority which verifies and certifies in respect of the articles or things as computer software. The documents produced on record makes it very that the assessee is in fact producing computer software and as per Section 10B, no certificate was required from any regulatory authority as claimed by the Tribunal. As stated in the impugned order of the Tribunal, the assessee has certainly exported a computer software and once the assessee has exported a computer software, keeping in view Section 10B r/w notification dated 26.9.2000, the assessee was certainly entitled for deduction.
Another important aspect of the case is that the tax holiday for which the assessee was entitled and was given to him earlier has been denied mainly on the ground that the R & D
activities were not eligible. The R & D activities are IT (information and technology) enabled services are covered under the term customized electronic data and also in the products and services notified by the CBDT vide notification dated 26.9.2000.
In the Memorandum explaining the provisions of the Finance Bill 2001, the purpose of Section 10BB was explained as follows: “Insertion of provisions of Section 10BB of the Income-tax Act.
Under Section 10B of the Income-tax Act, newly established hundred per cent export oriented undertakings are entitled to a 100% deduction of export profits. Prior to its substitution, section 10B has been operative from 1.4.1989. With a view to enlarging the scope of the tax holiday to hundred per cent EOUs approved by the prescribed authority, an Explanation for the term ‘Produce’ had been inserted in section 10B to include production of computer programmes by the Finance Act, 1994. Doubts have been raised whether companies engaged in the activity of processing and management of electronic data, would be covered by the aforesaid explanation. With a view to clarify the matter beyond doubt and to reflect the policy of the Central Government, a retrospective
amendment is proposed to section 10B, as it stood prior to its amendment by the Finance Act, 2000 by inserting new section 10BB. The amendment proposes to clarify that the term ‘produce’ in section 10B, as it stood prior to its substitution by the Finance Act, 2000 would include ‘processing and management of electronic data’. The proposed amendment will take effect from 1st April, 1994 and will apply in relation to assessment year 1994-95 and subsequent years.”
The Memorandum explaining the provisions of the Finance Bill 2001 clarifies that the scope of ‘processing and management of electronic data’ is substituted by ‘produce’ in the Section 10B. Hence, the scope of Section 10B is widened furthermore. On juxtaposition to Section 10BB and clause i(a) of Explanation 2 of Section 10B the ‘computer software’ means, computer programmes or processing or management of electronic data recorded on any disc, tape, perforated media or other information storage device which is precisely the function carried by the appellant.
The notification issued by the CBDT dated 26.9.2000 is a clarificatory circular and it has been issued in exercise of the powers conferred under Section 2(i)(b) of Section 10B of the IT Act. CBDT has notified certain services of customized electronic data or products or services to mean the computer software eligible for deduction. The intention of notification was not to constrain or restrict, but to enable the Board to include several services or products within the ambit of the provisions of Section 10B and this is what has been done precisely by the Board. [See CIT vs. M.L Outsourcing Services (P) Limited, reported in [2015] 228 Taxman 54 (Delhi)].
The Tribunal by giving an erroneous interpretation and explanation has held that the software of computer programme developed by the assessee does not fall within the meaning of Engineering and Design. The Tribunal is not an expert in the field of computer software or Information Technology as held by the Hon’ble Supreme Court (See Commissioner of Income-tax, Delhi vs. Bharthi Cellular Ltd, reported in [2011] 330 ITR 239 (SC).
In the matter of grant of deduction under Section 10B of the IT Act, there was a debate relating to tax incentives not
available to R & D activities/denial of tax holiday under Section 10A and a Committee was constituted to review Taxation of Development Centres and the IT Sector headed by N.Rangachari, Chairman of CBDT. A report was submitted on 14.9.2012 and the extracts of the report are reproduced as under;
“3.10 Views of the Industry
3.19.1 The stakeholders from industry pointed out that tax holidays, once again, should not be denied mid- course on the ground that R & D activities were not eligible, as it created uncertainty and sent out negative signals. Their argument is that R & D activities are IT enabled services covered under the term ‘customised electronic data’ and also under the products and services notified by the CBDT in Notification No.890(E), dated 26.9.2000.
3.19.2 They requested that it should be clarified that R&D centres set-up as STPs, SEZs or EOUs should be allowed deduction u/s 10A/10AA/10B. Further, wherever additions have been made or cases have been re-opened, all such actions should be withdrawn and relief granted to the taxpayer by means of a circular.
3.20 Views of Revenue
Sections 10A, 10AA and 10B provide tax benefit for export of articles or things or computer software. Scientific R&D does not come within the IT enabled services notified by the CBDT expanding the scope of “customized electronic data or any product or service of similar nature”.
Besides, original research and development is not included as a part of customized electronic data or services of similar nature. If scientific research and development had been notified as a service similar to export of customized electronic data, it would have been a different matter.
3.21 Recommendations of the Committee:
Committee is of the view that the services covered by the Notification, namely, Engineering and Design services, could potentially include R & D activities. However, in order to set at rest any controversy, the Committee recommends that R & D services should be notified as being eligible to claim this deduction and should be deemed to have been notified from the original date of notification i.e., 26.9.2000.
Pursuant to the amendment to the Notification, in cases where deduction has been denied and the taxpayer is before the CIT (A) or DRP, the issue may be allowed to be decided by the CIT(A) or DRP in accordance with the law and the Assessing Officers should be directed to either concede the issue or not contest the same further.
Pursuant to the amendment to the Notification, in cases where the CIT(A) or ITAT or High Court has decided this issue in favour of the taxpayer, no further appeal should be filed by Revenue. Wherever Revenue has already filed further appeal on this issue before the ITAT, High Court or Supreme Court, as the case may be, the relevant ground of appeal may be withdrawn immediately.
3.22 Issue – 6: Deduction under Section 35(2AB) of the Income-tax Act should be extended to computer software.
3.23 Views of the Industry
The industry asserted that since a lot of R & D activity was carried out in the software segment, it may be clarified that beneficial provisions of Section 35 (2AB) allowing a weighted deduction to the eligible entities, should be extended to the IT sector.”
The Committee recommended that the services covered by the Notification dated 26.9.2000, namely Engineering and Design include R & D activities. Based upon the recommendations of Rangachari Committee a Circular was issued
on 17.1.2013 by the CBDT. The CBDT vide clarificatory circular has held that research and development activities pertaining to software development would be covered under the definition of computer software stipulated under Explanation 2 to Section 10A and 10B of the IT Act. Relevant extract of the circular is reproduced as under;
“(iii) Whether Research and development (R & D) Activities pertaining to Software Development would be covered under the Definition of “Computer Software” stipulated under Explanation 2 to sections 10A and 10B.
The definition of ‘computer software’ stipulated under Explanation 2 to sections 10A and 10B includes “any customized electronic data or any product or service of similar nature, as may be notified by the Board, ....” The CBDT had already issued Notification No.890(E), dated 26.9.2000 specifying such items. The notification includes Engineering and Design but does not specifically include Research and Development activities related to software development in respect of which clarification has been sought.
After examining the matter, it is clarified that the services covered by the aforesaid Notification, in particular, the ‘Engineering and Design’ do have the in-built elements of Research and Development activity embedded in the ‘Engineering and Design’ would also be covered under the said Notification for the purpose of Explanation 2 to the above provisions.”
Thus, in short, the circular issued by the CBDT makes it very clear that the R & D activities carried out would fall within the meaning of the term ‘Engineering and Design’ and the
appellant was certainly entitled for deduction under Section 10B of the IT Act.
The Delhi High Court in the case of Commissioner of Income-tax vs. New Delhi Television Ltd, [2017] 398 ITR 452 (Delhi), has held that the assessee engaged in production of news software Television Programme was able to demonstrate that the Television Programme produced by it answered the description of computer software under clause (b) to Explanation to Section 80HHE. It was held that the Television News software produced and exported by the assessee from India to a place outside India was customized electronic data eligible for deduction under Section 80HHE. The Delhi High Court in the aforesaid case, has placed reliance upon a judgment delivered in the case of Commissioner of Income-tax vs. Ms. Kiran Kapoor, [2015] 57 taxmann.com 39 (Delhi).
The Delhi High Court in New Delhi Television Ltd’s case (supra) in paragraph 24 has held as under;
“24. It requires to be noticed that one of the questions that arose in Commissioner of Income Tax v. Kiran Kapoor (supra) was whether the activity of collection, collation, formatting of data and information and its export) fulfils the conditions stipulated in Section 10B (2) of the Act? This Court answered the above question in the affirmative and held as under:
“The expression “computer software” is wide enough to embrace diverse activities. To eliminate any doubt, the reference to “customised electronic data” in the second Explanation to Section 10B (2), Parliament enabled the Board (BCDT) to include (by notification) diverse activities, which involve export of software, etc. The notification relied on in the present case uses the expressions (iii) content development or animation (iv) data processing .... (vii) human resources services and (ix) legal data bases. Here, the very first head “content development or animation” describes the process and is wide enough to cover compilation of material or data and its transformation into a ready to print/ready to publish book. It is also a “legal database.”
In the aforesaid case, the expression ‘computer software’ has been dealt with and it has got a wider meaning than understood by the taxing authorities.
The Bombay High Court in the case of Commissioner of Income-tax vs. Malhar Information Services, reported in [2013] 351 ITR 119 (Bombay) was dealing with the deductions under Section 80HHE and in the aforesaid case, the assessee was engaged in the business of transmitting customized electronic data from various sources to its clients abroad. The Bombay High Court has held that the assessee was entitled to deduction under Section 80HHE of the Act.
The most important aspect of the case is that the taxing authorities have granted exemption to the same assessee
in the earlier years and the benefit of deduction under Section 10B of the IT Act has been denied for the present year as well as subsequent years, which are also subject matter of challenge before this Court. In similar circumstances, the assessee was granted deduction under Section 10B of the IT Act by the Income Tax Appellate Tribunal (See: GE India Technology Center Pvt. Ltd., vs. DCIT, ITA Nos.950/Bang/2011 & 1459/Bang/2012).
The ITAT, Bengaluru Bench in the case of DCIT vs Syngene International Ltd., ITA Nos.1106 &1107/Banga/2012, decided on 16.9.2015 has again held that the activity of preparation of research documentation in the nature of experimental records and laboratory notebooks qualifies for the benefit of the deduction under section 10B of the IT Act.
In the considered opinion of this Court, the Tribunal should have referred the matter to a larger bench in case there was a difference of opinion in respect of the earlier judgment and it is a settled proposition of law that a Coordinate Bench is required to follow the earlier decisions and in case there is a difference of opinion, the matter may be referred to a larger bench. Resultantly, this Court is of the opinion that the assessee
is certainly entitled for deduction in the facts and circumstances of the case.
Learned counsel for the revenue has drawn the attention of this Court towards the Circular dated 1.10.2015 issued by the CBDT in No.F.173/338-2015-ITA-I.
The aforesaid circular was issued in respect of a query raised in the case of M/s G.E. India Technology Center Pvt. Ltd., and in the Circular, it has been held that unless it is established whether the activities undertaken by the assessee has the characteristics of what has been specified under Explanation 2(i)(b), the applicability of the Circular No.1/2013 dated 17.1.2013 would not be a relevant issue. The aforesaid Circular dated 1.10.2015 does not help the revenue in the present case.
The activities undertaken by the assessee do fall within the meaning of Engineering and Design. The assessee is producing customized electronic data. The electronic data is received by the assessee from its clients who are abroad and the same after research and development is sent back as customized electronic data to the assessee’s clients and therefore, in the considered opinion of this Court, the assessee is certainly entitled for the benefit of deductions under Section 10A of the IT Act.
The Delhi High Court in the case of Commissioner of Income-tax-VIII vs. Ms. Kiran Kapoor, reported in [2015] 57 taxman.com 39, while dealing with the Circular dated 26.9.2000, in paragraphs 15 and 16 has held as under;
“15. The second question is whether assessee’s manufacturing activity described earlier results in “computer software”. The main thrust of the revenue’s contention here was that final product or “thing” does not answer that description because it is not software per se, but mere compilation of data. This court is of opinion that this contention is unpersuasive. The expression “computer software” is wide enough to embrace diverse activities. To eliminate any doubt, the reference to “customized electronic data” in the second Explanation to Section 10B (2), Parliament enabled the Board (CBDT) to include (by notification) diverse activities – which involve export of software, etc. The Notification relied on in the present case uses the expressions“(iii) Content Development or animation (iv) Data Processing... (vii) Human Resources Services” and “(ix) Legal Databases”. Here, the very first head “content development or animation ”describes the process and is wide enough to cover compilation of material or data and its transformation into a ready to print/ ready to publish book. It is also a “legal database”. The expression “legal” here cannot be confined to databases that cater to law students or legal practitioners or academics; it is again of wide import to include databases that are legal – as databases. This court also notices that the term “computer software” is defined by the Copyright Act, 1957 by Section 2 (ffc) as follows:
“(ffc)" computer programme" means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result..”
In the present case, the work which ultimately results as the culmination of the assessee’s efforts of compiling, editing, digital designing, etc. “is transmitted or exported
from India to any place outside India by any means". It is, therefore, computer software that are produced or manufactured, to qualify for benefit under Section 10B.
16.For the above reasons, the questions of law framed in this case are answered against the revenue and in favour of the assessee. The appeals are consequently dismissed”
The Delhi High Court in the aforesaid case has held that the expression ‘computer software’ is wide enough to embrace diverse activities and to eliminate any doubt, the notification dated 26.9.2000 was issued by the CBDT to include diverse activities which involved export of software/export of customized electronic data and therefore, in the light of judgment delivered by the Delhi High Court, the assessee is certainly entitled for the relief prayed for.
The net result is that the appeal i.e., ITA.725/2017 is allowed. The questions of law are answered in favour of the assessee and against the revenue.
In light of the order passed in ITA.No.725/2017, the connected ITA.Nos.727, 726, 728 of 2017 and 206 of 2018 filed by the assessee are also allowed. The questions of law are answered in favour of the assessee and against the revenue.
In light of the order passed in ITA.No.725/2017, the connected ITA.Nos.11 and 12 of 2014 filed by the Income-tax
Department are dismissed. The questions of law are answered in favour of the assessee and against the revenue. Pending IAs, if any, stand disposed of.
Sd/- JUDGE
Sd/-
JUDGE