Income Tax Appellate Tribunal - Bangalore
M/S Ge India Technologies Center Pvt. ... vs Assessee on 22 May, 2012
Page 1 of 34 1 ITA No.950/Bang/2011
INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES 'B'
BEFORE SHRI N K SAINI, ACCOUNTANT MEMBER AND
SHRI GEORGE GEORGE K, JUDICIAL MEMBER
ITA No.950/Bang/2011
(Asst. Year 2007-08)
M/s GE India Technology Centre The Deputy
Pvt. Ltd., 122, Export Promotion Commissioner of
Indl. Park, Whitefield Road, vs Income-tax, Circle-
Bangalore-66. 11(3), Bangalore.
PA No. AABCG0559J
(Appellant) (Respondent)
Date of Hearing : 22.05.2012
Date of Pronouncement : 20.06.2012
Appellant by : Shri Pawan Sharma, Advocate
Respondent by : Shri Jayaram Raipura, Addl. CIT
ORDER
PER GEORGE GEORGE K :
The assessee company is engaged in the business of research and development activity in the areas of material science and process technology; providing engineering analysis and related software development science.
2. For the assessment year [AY] under consideration, the assessee company ['the assessee' in short] had international transactions exceeding Rs.15 crores and, accordingly, the learned AO made a reference to the Transfer Pricing Officer (TPO) u/s 92CA of the Act. The learned TPO had passed an order for the adjustment to the extent of Page 2 of 34 2 ITA No.950/Bang/2011 Rs.64,83,64,363/- to be made u/s 92CA of the Act for the detailed reasons recorded therein. Accordingly, in the draft assessment order, adjustment u/ s 92CA of the Act to the tune of Rs.64.83 crores was proposed which was objected to before the Dispute Resolution Panel (DRP) by the assessee. The DRP had, in its directions dated 26.9.2011, more or less ratified the draft assessment order. The AO had, accordingly, concluded the assessment, determining the assessee's income at Rs.131,82,36,262/- which included that of the adjustment u/s 92CA of the Act of Rs.64.83 crores.
3. Aggrieved, the assessee has come up with the present appeal raising the following grounds of appeal:-
i) That on the facts and in law, the Assessing Officer erred in not allowing the appellant's claim of deduction under section 10A of the Act.
ii) That on the facts and in law, the Assessing Officer erred in not allowing the appellant's alternative claim for deduction under section 80-IB(8A) of the Act made without prejudice to its claim under section 10A of the Act.
iii) That on facts and in law, the Assessing Officer erred in adding the transfer pricing adjustment of Rs.64,83,64,363/- proposed by the TPO under section 92CA of the Act and confirmed by DRP.
iv) That on facts and in law, the Assessing Officer erred in not allowing deduction under section 10A of the Act on the addition of Rs.2,06,44,054/- (an amount that was debited in the profit and loss statement of the appellant as provision for doubtful advance) to the business profits of the appellant.
v) That on facts and in law, the Assessing Officer erred in levying interest under section 234B and 234D of the Act.Page 3 of 34 3 ITA No.950/Bang/2011
The learned AR in course of hearing of the appeal did not press/argue the issue relating to ground No. (iii), (iv) and (v). Hence, the surviving issue is regarding deduction under section 10A and in the alternative, whether the assessee is entitled to deduction under section 80IB(8A) of the Act.
4. The issue, in brief, is as under:
The assessee has been one of the subsidiaries of M/s. GE Corp.
USA. The assessee is one of the most prominent scientific technology companies in terms of innovation and the investment made in research and development. During the year in 2000, the assessee had set up its Global Technology Centre at Export Promotion Industrial Park near White Field, Bangalore, in lieu of high cost of manpower and related infrastructure for research and development. While acquiring the land from KIADB and obtaining industrial license from the State Government, it had been claimed that GE Global Technology Centre being set up by the assessee would be a pioneer in Scientific Research and Development Centre in India. After obtaining necessary licenses from various Wings of the State Government, the assessee had set up John F Welow Technology Centre and has undertaken its research and development activities which include electromagnetic analytics, colour technology, additive technology, non-
destructive evaluation, corrosion technology, molecular modeling, power electronics, analysis technologies, computational fluid dynamics and engineering analysis from its Centre established at Bangalore.
4.1. During the assessment year under consideration, the assessee had claimed deduction u/s 10A of the Act, claiming to be a STP involved in Page 4 of 34 4 ITA No.950/Bang/2011 software development. During the course of assessment proceedings, in compliance to various queries raised by the AO, the assessee had furnished lengthy submissions under various heads and also copies of service agreements entered into with various units/divisions of GE Company. After examining the assessee's claims and also its submissions, the AO had, for the detailed reasons recorded in the impugned order under challenge, observed thus:
"29. From the above, it is seen that the investment in Plant and Machinery is three times that of investment in computers. This is excluding investment in buildings, furniture, office belongings, vehicles and the like. These plant and machinery are scientific hardware used for the purpose of making basic and applied scientific research and development. A detailed examination of the breakup of the plant and machinery worth more than Rs.260 crores also reveal the business practice of the assessee. The assessee's operations do not have computer as primary and predominant hardware tool. They make use of the best of the scientific research laboratory tools available and have produced newer and improved methods of various manufacturing. The end products of the assessee should not be belittled by calling it as service similar to export of customized electronic data. The assessee should have taken pride in claiming its production and services to be of scientific research and development in line with its claim of having set up a 'Global Technology Centre' in India.
30. Considering the cumulative reasons and explanations as above, it is held that the services and the products of the assessee are not eligible for deduction u/s 10A of the IT Act...."Page 5 of 34 5 ITA No.950/Bang/2011
4.2. When the assessee's claims for deduction either u/s 10A or 10B of the Act cannot be acceded to as proposed by the AO in his draft assessment order, the assessee came up with an alternative claim that it was, otherwise eligible for deduction u/s 80IB(8A) of the Act. Duly analyzing the provisions of s. 80IB (8A) of the Act, rule 18DA and also examining the assessee's submissions, the Ld AO had made the following observations:
"(On page 46)
3) (a) As per sub-rule (b), the assessee should have had the object of scientific and industrial R&D. However, it is seen that assessee has claimed to be an IT enabled information service provider. The assessee is seen as unwilling to make up its mind on the nature of its business.
(b) As per sub-rule (e), the assessee ought to have been engaged exclusively in scientific R&D leading to development, improvement and transfer of technology by themselves. However, it is noted that the assessee is doing scientific R&D work for its parent company M/s GE Inc. USA. The assessee company is not doing the scientific R&D and transfer of technology by itself. It is not exclusively operating by itself. It claims to be doing all scientific R&D for its parent company.
(c) As per sub-clause (f) assessee company has not filed annual return and annual report within 8 months from the close of 31.3.2007 to the prescribed authority.
(d) It is also not known whether the assessee has a system of monitoring cost of its R&D projects. The assessee bills it parent company on a markup basis.Page 6 of 34 6 ITA No.950/Bang/2011
(e) The asssessee ought to have obtained prior permission of the prescribed authority before selling all its outputs from it laboratories or private plants.
However, it is regretfully noted that assessee company has not obtained prior permission from the prescribed authority before transferring its output from is laboratories to its parent company.
(f) The grant of approval/extension by the prescribed authority cannot be the only eligibility condition u/s 80IA (8A). The said R&D undertaking shall comply with each and all conditions prescribed under rule 18DA by the CBDT. Conditions like the undertaking being engaged 'exclusively' on scientific R&D and similar conditions shall be verified only by the assessing officer. The prescribed authority shall verify the scientific aspects of conditions laid down in rule 18DA. Nothing prevents the assessing officer from verifying other conditions specified in rule 18DA.
(g) In fact, even in the approval letter and extension letters, the following conditions are noted by the prescribed authority:
'The above extension of the approval is subject to the provisions of sec.80IB (8A) read along with the general provisions of section 80IB of the Income-tax Act, 1961 as well as the provisions of rule 8D and Rule 18DA of I.T. Rules, 1962, as amended from time to time.' This also strengthens and restores the power of the assessing officer in making all enquiries to verify whether the assessee has met with all eligibility conditions.
(h) On the one hand, assessee claims to be an exporter of 'article and goods' and on the other hand, it is claiming to be involved in IT enabled services. Assessee has Page 7 of 34 7 ITA No.950/Bang/2011 submitted opinions of Shri A.S. Rao and Shri Dinesh Vyas to prove its contention that it is indeed exporting 'articles or goods' and 'engineering and designs.' The submissions of the assessee are self-contradictory.
(i) Assessee is the scientific R&D Indian arm of GE Inc, USA. It is not an independent entity. It does apply scientific R&D for its parent company. It also does many other services to is parent company. It is not an 'exclusive' R&D Centre as per its own admission. It has also not sold its 'outputs' from its laboratories with prior approval from the prescribed authority. No such evidence has been made available or claimed.
On account of the individual and cumulative reasons as above, it is held that assessee company is not eligible for deduction u/s 80IB (8A) also..............."
4.3. During the course of hearing, the wide-ranging submissions made by the learned A.R are summarized as under:
(i) That s.10A provides a deduction of profits and gains derived by an undertaking from the export of articles or things or computer software. That 'computer software' has been defined in Explanation 2(i) to s.10A which describes that -
"Computer software' means -
(a) any computer programme recoded 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) That the CBDT has, pursuant to Explanation 2(i) to s. 10A vide Notification No. 890E dated 26th September, 2000, Page 8 of 34 8 ITA No.950/Bang/2011 notified certain IT enabled services to be eligible for deduction u/s 10A of the Act which, inter alia includes -
(i) .....................................
(iv) Data Processing;
(v) Engineering and design;
(iii) that the assessee has been engaged in the business of exporting (a) computer programme (within the meaning of Explanation 2(i)(a); (b) customized electronic data (within the meaning of Explanation 2(i)(b); and (c) engineering & design services (within the meaning of CBDT Notification) and the entire output is exported/transmitted electronically outside India.
(iv) that the process by which GEITC [the assessee] provides its services to its overseas clients involves the following four phases:
(a) Phase 1 - client work request - in this phase the assessee receives a specific work request from is overseas clients outlining in detail the scope of work to be done, the manner in which such work is to be processed, the form in which the output is to be delivered and the estimated budget for such assignment along with the raw data and information in the form of designs or technical specifications;
(b) Phase 2 - Processing work Request - In this Phase the assessee's Engineers processes the raw data provided by its clients by conducting repetitive and continuous research, testing and analysis through the use of specialized computer software computers and IT enabled tools and equipments; assessee's process is a continuous loop which involves research, testing and analysis customized to the specifications and instructions of the overseas client at every stage;
(c) Phase 3 - Final Output - Final output customized to the specifications of its overseas clients is generated through use of computers in the form of one or more of the following: detailed reports containing engineering analysis, data sheets containing supporting technical data, supporting designs and diagrams, 2D or Page 9 of 34 9 ITA No.950/Bang/2011 3D designs, supporting design calculation and computer codes electronic data; and
(d) Phase 4 - Export of Final Output - The final output is in electronic format and is transmitted electronically to its overseas clients via email or through uploading of data on the servers of overseas clients
(v) that based on the aforementioned process, the assessee undoubtedly has been in the business of exporting 'customized electronic data' for the following reasons:
(a) Customized nature of projects: each of the client project that the assessee worked on during the relevant AY was entirely customized to the needs and specifications of its overseas client; in fact, as illustrated through the description of the process involved in each of the sample projects filed with this Hon'ble Tribunal, at the start of each project, the client provides the assessee with raw data in electronic form and provides specific instructions regarding scope of the project, the team structure of the project, the manner in which the project was to be processed, the type and form of output; for a number of projects, the client either specifies or provides the specialized computer software that assessee should use to process the data and generate the client specified output; clearly, the client is intimately involved at every stage of the assessee's process - initially at the start of the project providing detailed instructions to assessee regarding the scope of the project, during every interim stage of processing of the project by assessee and finally, at the time of production of the final output of the project;
(b) Electronic Data: the data generated by the assessee in connection with the project was processed and stored in electronic form; and Page 10 of 34 10 ITA No.950/Bang/2011
(c) Output transmitted electronically: the data constituting the output produced by the assessee for each of its project was always transmitted to its overseas client in electronic form via internet;
(vi) that all of the services/output exported by the assessee to its overseas clients were undoubtedly customized to the requirements of its overseas clients and the same has been accepted by the AO that the assessee is in the business of understanding and analzing the requirements of each of its clients, understanding existing systems of the clients and coming out with solutions customized to the requirements of its clients.[para 18 of the asst. order].
Rely on case law:
• ITO v. Accurum India (P) Ltd (2010) 128 TTJ Chennai 249.
Therefore, based on the fact that the entire activity of the assessee is customized to the specific requirements and needs of each of its clients and produced for the specific use of such client, there can be no doubt that the final output produced by the assessee which is always stored and transmitted electronically is 'customized electronic data' which by definition is 'computer software' within the meaning assigned to such term under Explanation 2 of s.10A of the Act.
(vii) That the AO had admitted that [paras 18,21 & 22 of asstt. order] that -
(a) the assessee is in the business of understanding and analyzing the requirements of each of its clients, understanding existing systems of the clients and coming out with solutions customized to the requirements of its clients;Page 11 of 34 11 ITA No.950/Bang/2011
(b) the assessee uses computer and most of the work is done computers;
(c) the assessee makes use of high end computers;
(d) the assessee delivers and exports the outputs through computer and internet; and
(e) the assessee definitely use the services of the computer and internet Taking refuge in the findings of Hon'ble Chennai Tribunal in the case of Accurum India (P) Ltd which has been followed by the Tribunal in the case of M.L Outsourcing Services Pvt. Ltd v. ITO (2011) 140 TTJ 59, it was contended that the assessee is entitled to deduction u/s 10A of the Act;
(viii) that the Delhi Tribunal in Bechtel India Pvt. Ltd v.
ACIT - ITA NO.3316/Del/04 analyzing engineering and design activities and output of Bechtel which were similar to the engineering and design activities and output of the assessee adjudicated on two points that -
(a) the data generated by Bechtel to the minutest details cannot be generated manually with the same level of precision, speed and accuracy as is achieved by use of computers; and
(b) the output produced by Bechtel in from of engineering drawings is undoubtedly customized electronic data within the definition of 'computer software' appearing u/s 80HHE of the Act which definition is identical to the definition of 'computer software' under Explanation 2 of s.10A of the Act;
That when applying the aforementioned analysis to the issue under dispute makes it crystal clear that the entire process of the assessee is IT enabled and what is produced through the process is customized electronic data;
Page 12 of 34 12 ITA No.950/Bang/2011(ix) that even though specific attention of the learned AO and the DRP were drawn to the findings of the Hon'ble Chennai and Delhi Tribunals (supra), they have failed to take cognizance of the same while concluding the respective proceedings;
(x) countering the AO's theory that what the assessee does on computer can also be done manually and, therefore, the services provided by the assessee were merely IT assisted but not IT enabled and, thus, the assessee was denied deduction u/s 10A of the Act, it was claimed that the AO had failed to appreciate that the customized electronic data transmitted to the overseas client cannot be processed or generated without the use of computers and specialized engineering software. It is important to appreciate that the projects given by the overseas client to the assessee were highly technical and demand a high degree of precision and accuracy; that for example, the Aviation Function Group at GEITC (the assessee) receives customized request from its overseas clients that involves engineering analysis and design of aircraft parts and components and similarly, the transportation function group of the assessee receives projects which require engineering analysis and designing of part or components of locomotives such as designing of a locomotive fuel tank, designing of camshaft assembly of a marine engine etc.,
- that each of these projects demands and involves the use and analysis of highly complicated engineering formulas and technical data and requires the processing of such large volume of data with a very high level of precision and accuracy that was not humanly possible to process without computers or IT enabled tools or equipments embedded with specialized technical or engineering software; that it was impossible for the assessee to analyze and produce the customized electronic data in form of engineering designs Page 13 of 34 13 ITA No.950/Bang/2011 that were demanded by its overseas clients without computers of IT enabled tools or equipments.
(xi) That the output which was demanded by the overseas clients was basically of two types -
(a) computer programmes in form of computer codes or algorithms; or
(b) engineering analysis and designs.
- now the question being as to whether the output produced by the assessee was computer programme or engineering analysis and design was purely a question of fact and was clearly identifiable by looking at the content of out puts produced by assessee in form of reports, designs and computer codes and that a computer code developed by the assessee customized to the specifications of the client which was in fact electronically transmitted to the overseas clients for their usage; that the assessee provided its overseas clients with reports and CAD/CAM designs that contained the detailed findings, observations and results of the analysis conducted by the assessee's engineers and scientists to analyze the behaviour of certain parts or components of equipments and products provided by its clients or chemicals used or to be used by the clients in its products or services and/or to develop a design or to redesign certain parts or components of equipments or products provided by its clients as per technical dimensions, parameters or specification provided by such clients for such purposes; and that to render engineering analysis and design to its overseas clients, the assessee has employed a significant number of engineers and scientists who have the expertise and the knowledge that was essential not just for purposes of rendering the services being demanded by its overseas clients but also to understand the engineering and design underlying the clients' products in respect of which they were demanding these services of the assessee. Further, the engineers of the assessee use their expert engineering knowledge and apply their scientific knowledge in analyzing or drawing designs Page 14 of 34 14 ITA No.950/Bang/2011 demanded by its overseas clients. In the absence of any definition of 'engineering and design' in the Act, such practical application of science by the engineers has been defined by Law Lexicon and the Oxford English Dictionary as 'engineering'. Given the technical and complex nature of the services being demanded by its overseas clients, it was argued, in order to render the services with the precision, reliability and accuracy which the clients expect from the assessee, its engineers use computers and IT enabled tools and equipments to provide and produce the final output that was transmitted to its overseas clients. Such IT enabled engineering analysis and designing services has been notified in the Board's Notification No.890E to qualify as 'computer software' within the meaning lf Explanation 2 to s.10A of the Act and, therefore, eligible for deduction as such;
- Thus, the activities of the assessee fall under the category of -
(a) export of computer programme;
(b) export of customized electronic data; and
(c) export of engineering & design services as notified by the Board in the aforesaid Notification;
(xii) that the assessee has been allowing deduction u/s 10A of the Act by the Revenue since the AY 2002-03 [u/s 143(3) of the Act] ; that the Revenue had not pointed out any change in the activities of the assessee in the present AY as compared to the earlier AYs; and that no contrary view has been cited to deny the assessee's entitlement from that of the earlier AYs;
(xiii) that the correct interpretation of s.10A of the Act, the eligibility of a particular undertaking to avail of the benefit of this provision has to be determined in the initial year in which the assessee first sought to avail the benefit under this section; and that there is nothing in the said section which entitles the Revenue to reexamine the issue of the Page 15 of 34 15 ITA No.950/Bang/2011 assessee's entitlement of deduction u/s 10A of the Act in each AY.
Relies on case laws:
• Sami Labs Ltd v. ACIT 334 ITR 157 (Kar); & • Nippon Electronics 181 ITR 518 (Kar)
(xiv) That the Revenue had resorted to reopen the assessments of the assessee for the AYs 2004-05 to 06-07 to disallow the deduction u/s 10A of the Act, however, the same has been stayed by the jurisdictional Hon'ble High Court through interim orders;
(xv) Rebutting the Revenue's stand to deny deduction u/s 10A to the assessee solely on the ground that the assessee has been engaged in 'research and development which, according to the Revenue, cannot be said to be the export of customized electronic data, computer programme or engineering and design services, it was contended that -
(a) the characterization of the assessee's business as research and development was incorrect as it defines the business of the assessee based on merely one of the many activities that the assessee engages in to produce the final output demanded by its overseas client in form of computer programmes, customized electronic data or engineering and designs; that there was no doubt that the assessee has to necessarily engage in the activity of research to gather relevant data to enable it to produce and render the final output demanded by its overseas clients; and that because of the importance of research and development as an activity in the assessee's process for producing the final output, the assessee has interchangeably identified itself with 'research and development' industry and 'engineering and design' industry which is quite commonly done among other participants in similar industry;Page 16 of 34 16 ITA No.950/Bang/2011
(b) neither the Act nor any case law suggests that any undertaking doing 'research and development' as a means to generate the output required by the clients will not be entitled to deduction u/s 10A; and
(c) what is relevant for deduction u/s 10A is whether the assessee is engaging in IT enabled services and whether it is exporting it output electronically and not whether any 'research and development' is conducted in producing the output; and that admittedly, as aforesaid, the services of the assessee are IT enabled and its output is transmitted electronically. Whether the assessee does some 'research and development' in producing the output is wholly irrelevant for the purpose of considering the eligibility for deduction u/s 10A and, thus, the assessee is entitled to deduction u/s 10A of the Act (xvi) Countering the Ld. D R's reliance on Form 3CD, accounting polices, Form 56F and annual report to conclude that the assessee involved in 'research and development' activities and, therefore, ineligible for deduction u/s 10A of the Act etc., it was contended that -
(a) the eligibility to claim deduction u/s 10A of the Act is to be determined based on the actual nature of the activities conducted by, and output produced and export by the assessee;
(b) the assessee has been claiming deduction u/s 10A as it is engaged in the business of actually producing and exporting 'computer software' in the form of computer programmes, customized electronic data or other IT enabled services notified by the CBDT which is evidence from the detailed description of services furnished during the course of assessment proceedings under challenge;
(c) to enable the assessee to produce and export output to its overseas clients in the form of 'computer software' as such term is defined under Explanation Page 17 of 34 17 ITA No.950/Bang/2011 2 to s.10A of the Act, the assessee engages in the activity of research and development to gather relevant data;
(d) because of the importance of research and development, as an activity, in the assessee's process for producing the final output, the assessee has at times, in describing its business, highlighted the activities involved in producing the final output rather than the description of the final output actually produced by the assessee;
(e) in any event, whether the assessee does some 'research and development' in producing the output is wholly irrelevant for the purpose of considering the eligibility for deduction u/s 10A of the Act; &
(f) neither the Act nor any case law suggests that any undertaking doing 'research and development' as a means to generate the output required by the clients is precluded or excluded from being eligible to claim deduction u/s 10A of the Act. Such an exclusion or exemption as suggested by the Revenue is neither specified nor implied s.10A of the Act.
(xvii) Revenue's submission with regard to the assessee's advertisements soliciting prospective employees and description of assessee's business on its website etc., and its conclusion that the assessee was a 'scientific research and development' company and, therefore, was ineligible for deduction u/s 10A of the Act etc., it was claimed that -
(a) that the Revenue had failed to appreciate that the assessee is an exporter of computer programmes, customized electronic data and engineering and design services and, instead, he has wrongly placed reliance on arbitrary and selective evidence (such as advertisements soliciting potential candidates for employment and websites) that is neither relevant nor contextual for purposes of determining the actual business of the assessee;
Page 18 of 34 18 ITA No.950/Bang/2011(b) the purpose of such advertisements and websites is to provide user-friendly information to prospective employees or clients and often involves the companies highlighting certain features or aspects of their products, services or activities and is by no means demonstrative of the entire business of such company; that because of the importance of research and development, as an activity, in the assessee's process for producing the final output in the form of 'computer software' within the meaning of Explanation 2 to s.10A of the Act, the assessee had at times, in describing its business, highlighted the importance of 'research and development' as an activity necessary for producing the final output;
(c) the content for advertisements and websites have not been drafted with the goal of ensuring that the description of the assessee's business matches with the assessee's claims for deduction;
(d) that the Revenue was not only wrong in arbitrarily selecting and relying on employment based advertisements, but, had failed to appreciate that even in the advertisement so selected as an example the assessee's business is accurately described as soliciting engineers, scientists etc., to carry on 'research and development activity' in high impact areas of technology that is an integral and essential part of the final and ultimate service and output that the assessee produces and exports to its clients, namely, computer programmes, customized electronic data and engineering and design services.
(xviii) With regard to the Revenue's contentions of filing of patents by the appellant for its research and development activities carried out at R&D Centre in Bangalore, it was claimed that the Revenue had erroneously placed reliance upon 185 patents filed by the appellant's R&D Centre for its research and development activities in concluding that the Page 19 of 34 19 ITA No.950/Bang/2011 appellant has involved in 'scientific research and development' and, therefore, was not eligible for deduction u/s 10A of the Act etc., and the Revenue had failed to appreciate that -
- that as per Clause 3.5 of the Services agreements entered between the appellant and its overseas client, all of the intellectual property in the output produced and exported by the appellant to its overseas client, including, without limitation, the patents in such output, was owned by the overseas client and the appellant's role was limited to rendering help to the overseas clients with the registration of their trademark, copyright, patent or other intellectual property rights. Accordingly, the decision whether a patent application should be filed for research and development was made by the overseas client and not by the assessee; &
- the appellant was paid for its services irrespective of whether its services produces patentable intellectual property or not.
(xix) in respect of the appellant's fixed assets, plant and machinery, manpower and types of laboratories, it was contended that -
The Revenue had erroneously placed reliance upon the appellant's fixed assets, plant and machinery, manpower and types of laboratories in concluding that the appellant was not engaged in any of the business activities mentioned u/s 10A of the Act and, therefore, was not eligible for deduction u/s 10A of the Act. However, the Revenue had failed to appreciate that -
(a) the list of fixed assets annexed consists of fixed assets purchased and installed by the appellant to operate 545000 sq. ft. of facilities such as air conditioners, heating systems, electrical systems, Page 20 of 34 20 ITA No.950/Bang/2011 elevators etc., as well as IT enabled equipments and tools necessary to operate highly sophisticated laboratories;
(b) all of the laboratories of the appellant were equipped with IT enabled tools and equipments with embedded computer chips and processors;
(c) the manpower employed by the appellant predominantly comprises of engineers who were supported by scientists and others in performing their engineering function;
(d) the appellant's engineers and scientists use such laboratories equipped with IT enabled tools and equipments to collect data that is processed and analyzed through computers;
(e) any 'research and development' was just one of many activities or steps that the appellant engages in its process to produce the final output in the form of computer programmes, customized electronic data and engineering and design services that it exports to its overseas clients;
(f) given the complexity, intricacy, precision and accuracy that was required for the production of the final output by the appellant in form of computer programmes, customized electronic data or engineering and design services, it can neither be imagined nor is it possible to produce such customized output without the use of computers or IT enabled tools or equipments.
4.3.1. In conclusion, it was alternatively claimed that if the Hon'ble Bench, based on the nature of the activities of the assessee determines that the claim u/s 80IB (8A) of the Act be more appropriate, the same may be extended.
Page 21 of 34 21 ITA No.950/Bang/20114.4. On the other hand, the learned D R in his lengthy submission had supported the stand of the learned AO as well as learned DRP; the substance of his submission is extracted as under:
(i) that it has been admitted by the assessee that it is not in the business of development or export of computer software.
The assessee renders in its activities with its own holding company and other group concerns. To this extent, the assessee has claimed that it is in the business of export of the customizing of electronic data;
(ii) it was claimed that the word 'customized' has been defined in the case of Accurum India Pvt. Ltd reported in 128 TTJ 249 as under:
"On the other hand, electronic data referred to any sub-clause (b) has necessarily to be customized. By the word customized is meant that the data is suitable for a specific customer only."
It has thus been defined by the Hon'ble Tribunal the word 'customized' to mean that an electronic data which is processed for a specific customer can only be taken within the definition of 'customized'.
(iii) Taking a leaf out from the Information Technology Act, the definition of word 'data' in electronic data, it was contended that -
It is clear that the electronic data should be prepared in a formalized manner and should be intended to be processed or processed in a computer system. This would also mean that non-formalized information not necessarily intended to be processed in any computer system cannot be claimed as electronic data.
Page 22 of 34 22 ITA No.950/Bang/2011(iv) It was, further, contended that the CBDT had notified certain number of services as IT enabled services. It was, however, claimed that the services should be IT enabled, but, not necessarily be IT assisted.
(v) under the shelter in the finding in the case of M/s. Cybertech Systems and Software Limited reported in 3 SOT 121, it was claimed that the information technology enabled activities should not be incidental to the revenue earning activity for which deduction or exemption is claimed from tax payments. The revenue earning activities should not be IT assisted. They should be IT enabled in the sense of arising on account of being information technology enabled activities which have happened in the last 10 - 15 years or so.
(vi) It was further contended that the CBDT notified IT enabled services in the nature of 'design and engineering' refers to the offshore or India shore activity of CAD-CAM related design and engineering related BPO/KPO activities. These BPOs take the designing activities based on CAD applications and prepare an export the engineering and such designs for their revenue earning activities. For this set of activities, the IT enabling has been at the core of the activity. These activities have come into being on account of the IT enabled environment in terms of IT revolution and connectivity established around the world enabling the creation of this set of business activities.
(vii) that as per the vouchers submitted by the assessee during the course of scrutiny assessments, the assessee had claimed that it had rendered engineering analysis to its principals abroad. The assessee company had not given a break-up of the various deliverables as per the contracts and scope of works that the assessee had prepared the invoices to suit its claims that it has been exporting customized electronic data and IT enabled services. However, all the work done by the assessee company to its principals clearly shows that the assessee is not Page 23 of 34 23 ITA No.950/Bang/2011 at all in the business of providing any engineering analysis to its principals and instead is clearly in the field of inventions. The deliverables as per contract submitted by the assessee clearly indicate that the assessee had invented various products manufacturing processes, compounds, material products and the like. These material inventions cannot be termed as customized electronic data or IT enabled services.
(viii) the process of rendering service to the clients involves detailed study of R & D of the material/process technology over a fairly long period of research duration. During the said R & D, various prototypes of materials/components were developed and tested. These were in physical form as well as in the form of ideations. The assessee uses a host of scientific high end R & D equipments to conduct the study. Phd. scholars in material sciences and process technology work in assessee laboratories and invent a newer product/technology/component. This new invention is further tested. If it is acceptable to the client, the end product in the form of a newer technology, newer product, newer material component or a newer process is delivered to the client.
(ix) To say that the assessee delivers 'customized electronic data' would be grossly incorrect and belittling the service of the assessee. The assessee has neither received 'electronic data' nor 'customized' it. It does not export any customized electronic data in the form of IT enabled 'engineering & design'. The assessee's exports were in the form of ideations, newer material/component, newer manufacturing technologies and newer products. The outputs could as well be in physical material form or in physical prototypes of manufacturing techniques. These outputs were not 'IT enabled'. These have been scientific inventions out of the R & D process. The said R & D is definitely IT assisted as are most of our modern day activities.
(x) that the assessee company had also claimed that its services were customized in its entirety. However, it is seen Page 24 of 34 24 ITA No.950/Bang/2011 that the assessee company has also ventured into various development activities on its own. It had also applied for more than 185 patents and had obtained twelve patents for its inventions. This clearly goes to show that the assessee company cannot be called as rendering customized electronic data in an ITA enabled environment. The scientific R & D labs., of the assessee company do have various high end computers. These computers assist the R & D activities of the assessee. But the R & D activities of the nature admitted by the assesee have been conducted for the last 200 years in scientific laboratories. In fact, M/s. GE India Technology Centre Pvt. Ltd. has been a pioneer in such scientific R & D and invention activities. The Bangalore Centre is an extension of such R & D and invention centres. The advantage of Bangalore is in terms of reduced employment and administrative costs. Bangalore has also been able to attract a large number of high end scientific pool. This does not make the R & D Centre of the assessee to be an IT enabled services.
(xi) that the auditors in their audit report have qualified that the assessee is into R & D in material science and process technology. The auditors have also qualified that the assessee is in two sets of activities, one for R & D in material sciences and process technology and the other for engineering analysis and related software development. However, it had not been able to prove that it was in any software development activity. The auditors have been consistent in the certificate issued by them under various sections of audit requirements. This proves that the assessee is not eligible for deduction u/s 10B of the Act as it is not in the business of any customized electronic data export. The assessee had not adduced any evidence in support of either of the claim u/s 10B of the Act or the alternative claim u/s 80IB (8A) of the Act.
(xii) on the other hand, the learned AO had given the test of eligibility for understanding a particular revenue earning activity to be in the nature of customized electronic data or IT Page 25 of 34 25 ITA No.950/Bang/2011 enabled services in his impugned order. Thus, in all such test of eligibility, the asessee had failed to muster sufficient proof of eligibility.
(xiii) After analyzing the case laws relied upon by the assessee, the learned D R had opined as under:
(a) M/s. Bechtel India Pvt. Ltd. - ITA 3316/Delhi/04 - ITAT Delhi:
"27.1.4.Overruling the objections of the CIT (A) that the activity of the assessee was not included in its Memorandum of Association and that the exports were not made electronically, the Hon'ble ITAT has correctly ruled in favour of the assessee to state that the assessee company is in the business of export of customized electronic data. The facts of this are completely different from the facts of M's GE India Technology Centre Pvt. Ltd."
(b) M/s. M. L. Outsourcing Services Pvt. Ltd. - ITA NO.1204/ Delhi/11:
"27.2.1. The assessee company was transmitting data about potential employees and helping the foreign principal in choosing the right candidates. This has been held to be eligible for deduction u/s 10A by the Hon'ble ITAT. The facts of the assessee's case are completely dissimilar and bear no resemblance to the facts of this case."
(c) M/s. Accurum India Pvt. Ltd - 128 TTJ 249:
"27.3.1. As above, it is seen that the assessee company was a recruiting agent for its foreign principals. In this case also, the facts of the case were completely dissimilar to the facts of the instant case."Page 26 of 34 26 ITA No.950/Bang/2011
(xiv) The learned D R had, however, placed strong reliance on the finding in the case of M/s. Cybertech Systems and Software Ltd [3 SOI 121] wherein, according to Ld. D R, the Tribunal had clearly ruled that the IT activities were incidental to the main activity of recruiting, training and exporting manpower and, thus, disallowed the claim of s.10B of the Act to the assessee.
4.4.1. In conclusion, the learned D R had submitted that based on the detailed analysis of the assessee's submission, case laws and the business practices of the assessee, the learned AO had held that the activities of the assessee were not eligible for deduction u/s 10B of the Act.
4.4.2. With regard to the assessee's alternative claim u/s 80IA (8A) of the Act, it was contended that on account of technical flaws committed by the assessee as pointed by the learned AO in his impugned order, the AO was within his sphere to deny this claim also purely on technical and procedural lines.
5. We have carefully considered the rival submissions and perused the materials available on record and also various documentary evidences produced by the learned A R in the shape of voluminous paper books.
6. The learned AO's reasoning was that the assessee's operations do not have computer as primary and predominant hardware tool. It makes use of the best of the scientific research laboratory tools available and had produced newer and improved methods of various manufacturing.
The end products of the assessee should not be belittled by calling it as service similar to export of customized electronic data. For the Page 27 of 34 27 ITA No.950/Bang/2011 elaborate reasons recorded, the learned AO had neither allowed the claim of deduction u/s 10A of the Act nor the alternative claim for deduction u/s 80IB (8A) of the Act. This stand of the AO has been defended by the learned D R during his submission.
6.1. The learned AR had extensively quoted the provisions of s. 10A of the Act and placed strong emphasis on Explanation 2(i) to s.10A wherein the terms 'computer software' has been defined as:
"(i) 'Computer software' means-
(a) .....................................................................................................
(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;
6.2. At a perusal of the Board's Notification No. SO 890 (E), dated 26.9.2000, it has been observed that -
"The following Information Technology ('IT') enabled products or services are Back Office operations;
(i) Call Centres;
(ii) Content Development or animation;
(iii) Data processing;
(iv) Engineering and design;
(v) Geographic information system services;
(vi) Human Resource Services;
(vii) Insurance claim processing;
(viii) Legal databases;
(ix) Medical transcription;
(x) Payroll;
(xi) Remote maintenance;
(xii) Revenue accounting;
Page 28 of 34 28 ITA No.950/Bang/2011
(xiii) Support centres; &
(xiv) Website services.
6.2.1. It has been pleaded that the assessee has been engaged in the business of exporting (a) computer programme (within the meaning of Explanation 2(i)(a); (b) customized electronic data (within the meaning of Explanation 2(i)(b); and (c) engineering & design services (within the meaning of CBDT Notification) and that the entire output is being exported/transmitted electronically outside India.
6.2.2. To illustrate further, the assessee has submitted that the assessee provides its services to its overseas clients involving the following four phases:
(a) Phase 1 - client work request - in this phase the assessee receives a specific work request from is overseas clients outlining in detail the scope of work to be done, the manner in which such work is to be processed, the form in which the output is to be delivered and the estimated budget for such assignment along with the raw data and information in the form of designs or technical specifications;
(b) Phase 2 - Processing work Request - In this Phase the assessee's Engineers processes the raw data provided by its clients by conducting repetitive and continuous research, testing and analysis through the use of specialized computer software computers and IT enabled tools and equipments;
assessee's process is a continuous loop which involves research, testing and analysis customized to the specifications and instructions of the overseas client at every stage;
(c) Phase 3 - Final Output - Final output customized to the specifications of its overseas clients is generated through use of computers in the form of one or more of the following:
Page 29 of 34 29 ITA No.950/Bang/2011detailed reports containing engineering analysis, data sheets containing supporting technical data, supporting designs and diagrams, 2D or 3D designs, supporting design calculation and computer codes electronic data; and
(d) Phase 4 - Export of Final Output - The final output is in electronic format and is transmitted electronically to its overseas clients via email or through uploading of data on the servers of overseas clients.
6.2.3. On the basis of the process outlined above, it was argued that the assessee has been in the business of exporting 'customized electronic data' the reasons adduced by the learned AR has already been cited supra [Para 4.3. (v)].
6.2.4. To drive home his points, the learned A R had drawn the reference of this Bench to the effect that the AO had admitted that -
(a) the assessee is in the business of understanding and analyzing the requirements of each of its clients, understanding existing systems of the clients and coming out with solutions customized to the requirements of its clients;
(b) the assessee uses computer and most of the work is done computers;
(c) the assessee makes use of high end computers;
(d) the assessee delivers and exports the outputs through computer and internet; and
(e) the assessee definitely use the services of the computer and internet [Courtesy: paras 18,21 & 22 of assessment order] Page 30 of 34 30 ITA No.950/Bang/2011 6.3. At this juncture, we would like to recall the case laws on which the learned A R had placed strong reliance.
(a) ITO v. Accurum India (P) Ltd (2010) 128 TTJ 249 (Chennai):
The Hon'ble Third Member Chennai 'A' Bench has held thus -
"The requirement of the provision is that there should be a customized electronic data and such data should be exported outside India. The data which a customer may require may be gathered either by manual effort or by electronic means, as for example, through internet. By whatever means the data is collected, once it is stored in an electronic form, it becomes a customized electronic data which can be exported to qualify for deduction under s. 10A. The process of actually collecting the data need not be IT enabled. What all is required is that the data collected should be in an electronic form......"
(b) M.L.Outsourcing Services Pvt. Ltd v. ITO -
ITA No.1204/Del/11 dt:27.5.2011:The issue, in brief, was the denial of deduction u/s 10A of the Act. After due consideration of rival submissions, extensively quoting the provisions of s.10A of the Act, analyzing the Board's Circular cited supra and also exhaustively reproducing the findings of the third Member in the case of ITO V. Accurum India Pvt. Ltd cited supra, the Bench had come to a conclusion that -
"15........................On due consideration of all the facts and circumstances, we are of the opinion that the case of the assessee is duly covered by the decision of the ITAT, Chennai and it is entitled for deduction u/s 10A of the Income Tax Act...."Page 31 of 34 31 ITA No.950/Bang/2011
(c) Yet another finding on a similar issue, the Hon'ble Delhi Tribunal, in the case of Bechtel India Private Ltd v. ACIT - ITA No.3316/Del/04, after duly analyzing engineering and design activities and output of Bechtel that were similar to the engineering and design activities and output of the assessee coherently adjudicated on the following twin points, namely [at the cost of repetition]:
(a) the data generated by Bechtel to the minutest details cannot be generated manually with the same level of precision, speed and accuracy as is achieved by use of computers; and
(b) the output produced by Bechtel in from of engineering drawings is undoubtedly customized electronic data within the definition of 'computer software' appearing u/s 80HHE of the Act which definition is identical to the definition of 'computer software' under Explanation 2 of s.10A of the Act;
To make it unambiguously clear that the data exported by Bechtel was 'customized electronic data', the Hon'ble Bench had observed thus:
"it is do doubt true, as mentioned by the CIT (Appeals) and by the learned DR that such designs and drawings can also be carried out on a black board However, in saying so, 'they are missing certain vital points. Firstly, the data which is generated by the assessee to the minutest details cannot be generated manually. Secondly, the same level of accuracy and precision cannot be expected if done manually. Last and the most important aspect is the speed at which such data is generated by the help of software cannot be generated manually. We fail to understand if this is not customized electronic data, then what else it is."Page 32 of 34 32 ITA No.950/Bang/2011
6.3.1. The learned A R had, during the course of hearing, strongly urged that though the attention of the learned AO as well as DRP were drawn to the findings of the Tribunals referred supra to consider the same while dealing with the assessee's case, they have failed to take into consideration of the same.
6.3.2. On perusal of the impugned orders of the learned AO as well as the directions of the DRP, it has been observed by this Bench that there was no trace of having considered the findings of the above mentioned Benches of the Tribunal as urged by the assessee during the course of respective proceedings.
6.4. We would like to reiterate that the learned AR began his argument that the issue of deduction under section 10A/10B is squarely covered in favour of the assessee by the three orders of the Tribunal, cited supra. The learned DR after analyzing the case laws relied upon by the assessee, conceded that the Hon'ble Tribunals have correctly ruled in favour of those assessees to state that the assessee companies were in the businesses of export of customized electronic data. In the same breath, he had pointed out that those facts were completely different from the facts of the present assessee. However, as stated earlier, neither the learned AO nor the learned DRP have taken cognizance of the findings of the Hon'ble Tribunals cited supra while deciding the issue of the present assessee, though according to the assessee, the issue in question is squarely covered by the above orders of the Tribunal. Therefore, in the light of the Hon'ble Supreme Court judgement in the case of Tin Box Co. v CIT, reported in 249 Page 33 of 34 33 ITA No.950/Bang/2011 ITR 216, we are of the opinion that the assessee was not given proper opportunities to present his case before the Assessing Officer and the DRP and hence, the matter requires re-examination by the Assessing Officer.
6.5. Taking into account all the facts and circumstances of the issue as discussed in the preceding paragraphs, in conformity with the findings of the Hon'ble Benches of the Tribunals referred above on an identical issue to that of the present issue and, chiefly, the authorities below have failed to consider the case laws on which the assessee had placed its reliance, we are of the considered view that in the interests of principles of natural justice and equity, the issue should be remitted back to the file of the learned AO for fresh consideration. While considering the issue afresh as directed, the learned AO shall keep in view the case laws on which the assessee has placed its unstinted confidence. The assessee shall be at liberty to put-forth its views before the learned assessing officer while its case will be taken up for fresh consideration by the learned AO. It is ordered accordingly.
7. In the result, the assessee's appeal is treated as allowed for statistical purposes.
Order pronounced in the open court on 20th day of June, 2012 Sd/- Sd/-
(N K SAINI) (GEORGE GEORGE K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Page 34 of 34 34 ITA No.950/Bang/2011
Copy to:-
1. The Revenue 2. The Assessee 3. The CIT concerned 4. The CIT(A)
concerned 5. The DR 6. GF
MSP/- By Order
Senior Private Secretary, ITAT, Bangalore.