Income Tax Appellate Tribunal - Chandigarh
Vertex Infosoft Solutions Pvt. Ltd.,, vs Assessee on 30 December, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'A' CHANDIGARH
BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND
MS. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No. 1023/CHD/2008
Assessment Year: 2005-06
M/s Vertex Infosoft Solutions Pvt. Ltd. Vs The AC IT,
Mohali Circle 4(1), Chandigarh
PAN No. AABCV 6727H
ITA No. 1008/CHD/2008
Assessment Year: 2005-06
The AC IT, Vs M/s Vertex Infosoft Solutions Pvt. Ltd
Circle 4(1), Chandigarh Chandigarh
ITA No. 652/CHD/2011
Assessment Year: 2007-08
The AC IT, Vs M/s Vertex Infosoft Solutions Pvt. Ltd
Circle 4(1), Chandigarh Chandigarh
&
C.O. 25/Chd/2009
(In ITA No. 1023/CHD/2008)
Assessment Year: 2005-06
M/s Vertex Infosoft Solutions Pvt. Ltd. Vs The AC IT,
Mohali Circle 4(1), Chandigarh
(Appellant) (Respondent)
Date of hearing : 30.12.2013
Date of Pronouncement : 08.01.2014
Appellant By : Shri Sudhir Sehgal
Respondent By : Smt. J yoti Kumari
ORDER
PER T.R.SOOD, A.M.
The appeal filed by the assessee in ITA No. 1023/Chd/2008 and that of Revenue in ITA No. 1008/Chd/2008 and Cross objections raised by the assessee 2 are directed against the common order dated 23.9.3008 of CIT(A) Chandigarh whereas appeal filed by the Revenue in ITA No. 652/Chd/2011 is directed against the order dated 1.3.2011 of Ld. CIT(A), Chandigarh.
2. Since identical issues have been raised in these appeals and Cross objections, therefore, the same are being disposed of by this consolidated order for the sake of convenience. First, we will deal with the main appeal i.e ITA No. 1023/Chd/2008.
3. ITA No. 1023/Chd/2008 In this appeal the assessee has raised the following grounds:-
1. That the Worthy Commissioner of Income Tax (Appeals), Chandigarh has erred in confirming the action of the Assessing Officer that supplying of Computer Software solution to various Shipping Companies is not export income from sale of such softwares, thereby disallowing exemption u/s 10 B on this ground.
2. That the Worthy CIT(A), Chandigarh has not considered properly our submissions along with various judicial pronouncement / circulars etc. cited by us to substantiate our stand.
3. That the Worthy CIT(Appeals), Chandigarh has not considered the fact that the assessee company, who is engaged in developing of Computer Softwares is registered with Software Technology, Park of India, Department of Communication and IT, Govt. of India is 100% export oriented unit under STPI and provisions of exemption u/s 10B has rightly been claimed and which has not properly been interpreted by the CIT(Appeals), Chandigarh.
4. That the Worthy CIT(Appeals), Chandigarh has not considered the fact that sale of Computer Software is mostly 3 restricted to sale of right to use the software or application and it is never absolute transfer of ownership rights.
4. After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has received a sum of Rs. 17,27,808/- from Vietnam Ocean Shipping Company (here-in-after referred to as VOSCO). From the License Sale Agreement between the assessee and VOSCO it was noticed that VOSCO has agreed to pay onl y license fee for the software owned by the assessee for VOSCO's own use. It was also noticed that agreement further provides that VOSCO shall seize using the software after termination of the Agreement. Similarl y, there was an agreement with M/s Devco Ltd (here-in-after called as DEVCO) from whom the assessee had received Rs.36,04,240/-. In this agreement also, it was clearly mentioned that software is the propert y of the assessee developer and the patent and copyright belongs to the Developer. The assessee was asked to explain that why agreements with VOSCO and DEVCO which were onl y License Sale Agreements and which were granted non-exclusive and non transferable licenses should be treated as sale for the purpose of claiming deduction u/s 10B. The assessee gave detailed replies on various dates. In these replies it was explained that normall y ownership right in the software generall y remains with the Developer e.g. in the case of Tall y Accounting S ystem what a customer gets is onl y right to use and not the ownership right. It was also explained that for example in case of Window M.S. Office, normal customer would have to click 'yes' for acceptance of License Agreement onl y even if the such customer has purchased the software for its use. It was also explained that if the right of ownership with source code was provided to the customer, then assessee cannot sell / develop such software to any other customer because from the source code the customer can create copies of the software and sell the same to further customers. The Assessing Officer after examining the submissions did not find 4 force in these submissions because there was no provision in the Income Tax Act to treat a license to use as mentioned in the Agreement as 'Sale', therefore, the company cannot claim grant of license as sale. In this background the Assessing Officer concluded that assessee is not conducting sales and, therefore, was not entitled to deduction u/s 10B.
5. On appeal, the submissions made before the Assessing Officer were reiterated and it was emphasized that agreement entered into by the assessee for sale of software to the end user and to the distributor were normal agreement prevalent in the case of sale of software. It was further pointed out that software export is Canned software and sold in the CDs or thorough electronic media. In License Sale Agreement words 'buyer' and 'sale' are use to denote the contracting parties. In the consideration clause the 'price' is mentioned in both the agreements. It was pointed out that software was developed in STPI area and invoices were reported to STPI, RBI and Customs Department. Reliance was also placed on the following decisions -
• Judgment of Hon'ble Supreme Court of India in Tata Consultancy Services v. State of Andhra Pradesh [2004] 141 Taxman 132(SC).
• Sonata Information Technology Ltd. v. Additional Commissioner of Income Tax, International Taxation, Range-19, Bangalore [2006] 103 ITD 324 (BANG) • Samsung Electronics Co. Ltd. v. Income Tax Officer (TDS) [2005] 94 ITD 94 ITD 91(BANG).
• Motorola Inc. v. Deput y Commissioner of Income-tax, Non-Resident Circle [2005] 95 ITD 269 (DELHI)(SB) • Deput y Commissioner of Income Tax, Non-Resident Circle, New Delhi v. Metapath Software International Ltd. [2006] 9 SOT 305 (DELHI)
6. The Ld. C IT(A) send these submissions to Assessing Officer for his comments because he has specificall y asked for the hearing. The Assessing Officer in his report dated 6.6.2008 again submitted that assessee was not selling software and it was onl y allowing the use by a license. He further 5 pointed out that even if the same was accepted by RBI being onl y a Regulatory Authorit y cannot adjudicate whether export by sale of goods had taken place or not. It was further pointed out that assessee has put a wrong interpretation on section 10B. With reference to the decision of Hon'ble Supreme Court in the case of Tata Consultancy Services (supra), it was mentioned that assessee did not mention in the agreement that software was exported in Canned version. The Assessing Officer further distinguished other decisions. The Ld. CIT(A) examined the submissions of the assessee as well as comments of the Assessing Officer and ultimately agreed with the observations of the Assessing Officer and decided the issue against the assessee.
7. Before us, Ld. Counsel for the assessee reiterated the submissions made before the Assessing Officer and CIT(A). He further contended that in case of software, the ownership is retained through 'source code' and if the 'source code' is also provided to the customer then such customer can make any number of copies and shall start selling the same to any number of customers i.e why software is always sold through a license. He gave another example of a book i.e. when a book is sold, the reader can read the book, retain the book, use it in any manner and at the same time such reader customer does not get copyright to the book and he cannot copy the book and start selling such books. He gave another example of legal reports which is now available in the form of CDs. Such reports are given to a particular customer and a key number is provided though which the report can be used but it cannot be copied.
8. He then referred to the decision of the Hon'ble Supreme Court in the case of Tata Consultancy Services (supra) wherein the sale of software was held to be 'sale of goods'. He also strongl y relied on another decision of Hon'ble Supreme Court in the case of C IT v B. Suresh 313 ITR 149 (SC) wherein even 6 exploitation of a film rights to export outside India was held to be export and allowable for deduction u/s 80HHC.
9. On the other hand, the Ld. DR strongl y supported the order of Assessing Officer and C IT(A).
10. After considering the rival submissions, we find force in the submissions of the Ld. Counsel for the assessee. The software is generally developed by the Software Company and then the same is sold to various customers. The normal procedure for such sale is through a License agreement by which the customer get to use the software. But the source code is normall y not provided because that will enable the customer to make any number of copies and the developer would loose the premium which it can receive by selling it to various customers. We are of the opinion that example of selling of a book would clarify the situation. Whenever a person buys a book, he gets the right to read but he does not get the copyright to produce the copies or any content of such books which does not mean that the books seller has not sold the books or customers has not purchased the books. Similarl y it can be said about the usage of Law Journals which are being sold or purchased on license basis. The Hon'ble Supreme Court in the case of Tata Consultancy Services v State of Andhra Pradesh (supra), wherein the question arose whether sale of intellectual propert y in case of software through a license would amount to sale of goods or not. In this connection, the Hon'ble Supreme Court observed as under:-
"The term "goods", for the purposes of sales tax, cannot be given a narrow meaning. Properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc., are "goods"
for the purpose of sales tax. The test to ascertain whether a property is "goods" for the purposes of sales tax is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of 7 abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. In the case of software, both canned and uncanned, all of these are possible. Intellectual property when it is put on a media becomes goods. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in the programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas(in the case of painting) or computer discs or cassettes, and marketed would become "goods". There is no difference between sale of a software programme on a CD/floppy disc and sale of music on a cassette/CD or sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing or disc or CD.
A transaction of sale of computer software package off the shelf is clearly a sale of "goods" within the meaning of that term in section 2(n) of the Andhra Pradesh General Sales Tax Act, 1957. The term "all materials, articles and commodities"
in section 2(h) of the Act includes both tangible and intangible / incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed, etc. The software programmes have all these attributes.
From the above it is clear that transfer of right to use the software in media form i.e. in the form of C.D. etc was held to be sale of goods. The Hon'ble Supreme Court in the case of B. Suresh where the issue arose whether exploitation of a film right which were transferred by the assessee in India to 8 abroad would constitute export for the purposes of deduction u/s 80HHC of the Act, it was observed as under;
"Held, affirming the decision of High Court, that the telecasting rights fell in the category of articles of trade and commerce and hence within the category of 'merchandise' and the transfer of the said rights by way of lease fell within the meaning 'Sale' and would attract section 80HHC."
11. From the above it is clear that even the usage of the rights in a product would amount to export, therefore, in our opinion when assessee has developed and sold the software on license basis, the same would amount to sale for the purpose of deduction u/s 10B, accordingly we set aside the order of Ld. CIT(A) and direct the Assessing Officer to allow deduction u/s 10B of the Act.
12. In the result, assessee's appeal is allowed.
13. ITA No. 1008/Chd/2008 In this appeal, the Revenue has raised the following ground:-
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in allowing the benefit of exemption under section 10B of the Act, whereas the company is doing data entry work as per agreement and does not fulfill the condition laid down under section 10B.
14. After hearing both the parties, we find that during assessment proceedings the Assessing Officer also noticed that the assessee is also doing some data entry work. On query, the assessee submitted the following replies:-
"Data Entry"
Sub-section (2) of Section 10B read with clause(i) of the sub-section provides that "this section applies to any undertaking which fulfils all the following conditions, namely:
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(i) It manufactures or produces any articles or things or computer software:"
" since the query relates only on the above said condition, the same has been reproduced hereinabove. The works "articles or things or computer software"
signify themselves that computer software is something different from an article or things".
Explanation (2) to section 10B reads:
"For the purpose of this section,
(i) Computer software means
(a) Any computer program recorded on any disc, tape, perorated 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;"
In view of above it is clear that if the data is simply customized as per requirements of the customer then the requirement of the provision of the section 10B is fulfilled. Therefore, bare reading of .said provisions clears the issue. However we are putting some other supporting documents in support of the claim.
a) Software Export Declaration Form (SOFTEX Form) This form is filled up by the exporter company and three copies of this form along with copy of invoice are sent to STPI within the stipulated time from the date of exports. After completing the relevant formalities. STPI keeps one copy with them, sends another copy to RBI and third copy to Exporter of Software. This SOFTEX form is the basic requirement of RBI and has duly been approved by the Ministry of Finance, Govt. of India.
In this form, RBI has written Code No. 906 regarding data entry services which narrates as given below:
'DATA ENTRY JOBS AND CONVERSION SOFWARE DATA PROCESSING'
b) Software Technology Park of India This body represents the department of information technology, Ministry of Communication & IT, Govt. of India. As defined by said body, data entry jobs do fall under IT enabled services. Photocopy of the same is enclosed for ready reference.
Moreover the term data entry is generally used very liberally and not just for the purpose of the mere data entry. Without prejudice to our earlier submission, if department feels that said services provided by the company do not fall under the head data processing then we fall under the category of Back Office Operations i.e. Business Process Out sourcing which is clearly defined as IT Enabled Services / Products in the Notification No. 890(E) dated 26-9-2000." 10
15. From the above replies and other factors it was concluded by Assessing Officer that assessee is doing onl y data entry work and, therefore, the same was not as per the notification No. 890(E) dated 26.9.2000. The service buyer company was organizing the source data in the form of Excel Sheets or any other electronic form and delivering the source data to the assessee for merel y for data entry purposes and accordingl y this activit y was also not eligible for deduction u/s 10B of the Act.
16. On appeal before the CIT(A), it was submitted that the observation of the Assessing Officer that company is providing onl y data entry services which does not involve any skilled technical software engineers is not correct. In this regard, a reference was made to clause 3.2 of the Services Level Agreement which reads as under;-
"Vertex will provide a project team with skills and experience commensurate with the needs of this service and who are capable of ensuring the successful delivery of this service agreement.................." Moreover, Ld. Assessing Officer has nowhere provided basis of her observation in this regard and there applicability vis-à-vis eligibility of the assessee u/s 10B.
17. It was further pointed out that such activit y would be termed as "back office operations". The Ld. CIT(A) found force in these submissions and allowed the deduction vide para 32, which reads as under:-
"I have considered the submissions of the assessee as well as gone through the order of the Assessing Officer. From the nature of the agreement, it is found that the word written is 'data entry'. It is well known that that the words in the agreement are meticulously written keeping in view the nature of the job. Mere mention of the words data entry would indicate that it is not data processing. On examination of the agreement. I find that the assessee is to simply extract data from various cells of Excel Sheet which 11 is to be provided by MODEC and then to enter the extracted data into related fields of AMOS M&P software. In my opinion, it is merely copying of data from one source to other software. It cannot come within the meaning of data processing. As regards the alternative submissions, that the same should be considered within the ambit of back office operations, the Assessing Officer did not entertain the plea of the assessee on the ground that the assessee cannot take any alternative submissions. In my opinion, the Assessing Officer is not justified in not entertaining the alternative submissions for the reasons that the assessee does not know what would be the view of the Assessing Officer at the time of filing of Income Tax return. If the assessee can satisfy the Assessing Officer that a particular item could be covered under the back office operations, then the Assessing Officer should have considered the alternative plea. In my opinion, the activity of the assessee as mentioned above would be covered under the meaning of back office operations and thus the assessee would be eligible for deduction u/s 10B in respect of payments received from M/s MODEC. Thus, on the basis of the alternative plea taken by the assessee, this ground of appeal of the assessee is allowed.
18. Before us, the Ld. DR strongl y supported the order of Assessing Officer.
19. On the other hand, the Ld. Counsel for the assessee submitted that data entry work was held to be eligible by Chandigarh Bench of the Tribunal for deduction u/s 10B in the case DCIT Vs Bebo Technologies (P) Ltd. v JCIT 139 TTJ (Chd) 428, a copy of the decision is also filed. He submitted that data entry work is also like back office operation, therefore, issue is squarel y covered in favour of the assessee.
20. We have considered the rival submissions carefull y. We find that Chandigarh Bench of the Tribunal in the case of Bebo Technologies (P) Ltd (supra) Ltd has observed as under;-
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"Exemption under s. 10B- Export of computer software - Software development and quality assurance services vis-à- vis back office operations- Assessee company is running a STPI unit and providing consulting services to a US company- It is engaged in programming to render quality and testing assurance services as per the requirements of its clients and the same is transmitted to the clients through internet-Such services rendered by the assessee are in the nature of back office operations and are covered by CBDT Notification No. 890E, dt. 26 t h Sept., 2000 which has notified information technology enabled products or services for the purpose of Expln. 2 to s. 10B-Objection of the AO regarding non-availability of production data has no merit as the assessee is carrying out back office operations for its clients which is a project of service industry for which production data is not required - Further, finding of the AO that there was restructuring of business already in existence as the assessee was found to be operating from three different places and no new computers were purchased by the assessee for carrying on its business is also not correct- Assessee was carrying on its business in two units at Chandigarh while its registered office is located in Mohali where no business activity was carried out- There was no restructuring of business- Assessee has carried out its work on loaned equipments and evidence in this regard has been considered by CIT(A)- There is no merit in the observation of the AO that non-mentioning of the location from where invoices were issued disentitled the assessee to the claim of exemption under s.10B-There is no requirement to furnish the addresses of the individual places fro where services were rendered as against mention of registered office on the invoices - Assessee has furnished the registration under the STPI as a 100 per cent EOU-Therefore, assessee is entitled to deduction under s. 10B.
21. In our opinion, the issue regarding data entry work stand covered by the above decision and, therefore, we confirm the order of Ld. CIT(A).
22. ITA No. 652/Chd/2011 In this appeal the Revenue has raised the following grounds:-
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing appeal of the assessee without appreciating the facts of the case.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made by the A.O. on account of disallowance of deduction u/s 10-B considering that amount received from export of 13 software is a not sale proceeds but is royalty income on account of license to use computer software.
23. After hearing both the parties we find that in this year also the Assessing Officer denied deduction u/s 10B because according to him assessee was not selling the software and it was onl y allowing the use of such software developed by it to the customers on License basis.
24. On appeal, the Ld. CIT(A) allowed relief in view of decision of the Hon'ble Supreme Court it he case of Tata Consultancy Services Vs State of Andhra Pradesh (supra) and C IT v B. Suresh (supra).
25. Before us, both the parties made identical arguments as in the case for assessment year 2005-06 in ITA No. 1023/Chd/2008, which we have adjudicated above.
26. After considering the rival submissions, we find that the issue is identicall y same as in the case of assessee's appeal for assessment year 2005-06 in ITA No. 1023/Chd/2008. This issue has been adjudicated by us in para Nos. 10 & 11 and following the same, we decide this issue against the Revenue.
27. In the result, Revenue's appeal is dismissed.
28. C.O. No. 25/Chd/2009 At the time of hearing, Cross objections were not pressed before us and therefore, the same are dismissed as 'not pressed'.
29. In the result, assessee's Cross objection is dismissed. 14
30. To sum up, assessee's appeal in ITA No. 1023/Chd/2008 is allowed whereas Revenue's appeal in ITA Nos. 1008/Chd/2008 & 652/Chd/2011 are dismissed and Cross objections raised by the assessee is also dismissed.
Order Pronounced in the Open Court on 08.01.2014 Sd/- Sd/-
(SUSHMA CHOWLA) (T.R.SOOD)
JUDICIAL MEMBER ACCOUNTANT MEMER
Dated : 8 t h January, 2014
Rkk
Copy to:
1. The Appellant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR
By order
Assistant Registrar,
ITAT, Chandigarh
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