Income Tax Appellate Tribunal - Mumbai
Direction Software Solutions vs Income Tax Officer on 23 April, 2008
Equivalent citations: (2008)116TTJ(MUM)841
ORDER
Abraham P. George, A.M.
1. This appeal filed by the assessee is directed against the order of CIT(A)-XII, Mumbai and relates to asst. yr. 2001-02.
2. Assessee is aggrieved that the learned CIT(A) sustained denial of exemption under Section 10A in respect of sum of Rs. 10,66,788 stated to have been received for supply, site development and modification of computer software.
3. Short facts relating to the issue are as follows.
3.1 Assessee is stated to be engaged in the business of software exports. During the relevant previous year, assessee had claimed exemption under Section 10A of the Act for a sum of Rs. 62,95,430. AO required clarifications on the party-wise details of software income received and this was furnished by the assessee. From these details, amounts received from one M/s Otto Versand International (in short 'OVT) were taken out by the AO, since according to him these were not software exports. The list of such items relating to M/s OVI not considered by the AO as software exports is verbatim reproduced hereunder:
Sr. Invoice No. Date AMT(Cur) Amount in Description of work
No. Rs.
1. DSS/OV/001 30.03.00 6000 USD 2,60,085 OVISS Maintenance contract
Correction of bugs in OVISS
local reporting in the non OVI-
offices. In case that OVI ains
the right to use the AP
sourcecode, Direction will do
the correction of possible bugs
in AP. Direction will perform
maintenance services on call for
repairing errors or other defects
which occurred during the use of
OVISS Software and/or were found
in the OVISS software documentation
2. DSS/OV/001 22.06.00 6000 USD 2,66,177 -Do-
3. DSS/OV/066 22.09.00 6000 USD 2,63,719 -Do-
4. DSS/OV/013 22.12.00 6000 USD 2,76,807 -Do-
10,66,788
3.2 Assessee had given explanation that it was obliged under contracts with M/s OVI to modify the software called 'OVISS' in order to ensure full and proper functioning of such software, and also had to support M/s OVI in the event of faults and damages due to improper use of the software, handle queries, make master data management and handle monitoring and trouble shooting. According to the assessee, the abovesaid activities would fall within the purview of Section 10A. However, learned AO excluded the above receipts of Rs. 10,66,788 from M/s OVI and allowed exemption under Section 10A to the assessee only for the balance amount of Rs. 52,28,642.
3.3 In its appeal before CIT(A) assessee pointed out to the contracts it had entered with OVI and copies of bills raised by it to substantiate its contention that it had fulfilled all the relevant conditions under Section 10A of the Act and, therefore, entitled for exemption on the amounts received from M/s OVI, as well. Assessee also submitted before the learned CIT(A) that it was registered with relevant Government authorities as eligible for 100 per cent software export. However, the CIT(A) did not appreciate any of these conditions and upheld the disallowance made by the AO. CIT(A) was of the opinion that in respect of the above-mentioned amount received from M/s OVI, assessee had not exported any articles or things relating to the computer software but on the other hand, the said receipts pertained to maintenance, which could not be termed as export of computer software.
4. Before us, the learned Authorised Representative reiterated the contentions made before the C1T(A) by the assessee. He brought to our attention the copy of the contract that the assessee had with M/s OVI filed at paper book page Nos. 53 to 60, in order to drive home his contention that what assessee was doing was nothing but export of software online. He also brought to the attention of the Bench Circular No. 694, dt. 23rd Nov., 1994 1 [(1994) 122 CTR (St) 13], wherein regarding tax holiday under Section 10A or 10B relating to computer software, the following clarification has been made:
Similarly, for the purpose of Section 10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client's site abroad, such unit should not be denied the tax holiday under Section 10A or 10B on the ground that it was prepared onsite, as long as the software is a product of the unit i.e., it is produced by the unit.
5. Therefore, according to him it did not matter whether the programmes relating to software were actually written within the. premises of the unit or not and this would also mean that such programmes written within the premises of the assessee and transmitted to its client outside India, would be nothing but export of software. The learned Authorised Representative also submitted that maintenance programmes were nothing but software since according to him any modification in an existing software would require devising new codes.
6. As against this, the learned Departmental Representative submitted that the assessee was only engaged in maintenance work for M/s OVI and was not independently manufacturing or producing any computer software for M/s OVI in order to be eligible for claiming deduction under Section 10A of the Act in respect of receipts from such party.
7. We have perused the orders of the authorities mentioned the submissions made and the copies of records filed.
7.1 The undisputed facts that emerge are as follows. Assessee had claimed exemption under Section 10A for total amount of Rs. 62,95,430 of which except for Rs. 10,66,788 received from M/s OVI the AO allowed the claim. Assessee was doing work relating to all its clients from its unit in India and transmitting the same to its clients abroad for which consideration was received by it from the clients as per respective contracts. AO has no case, whatsoever that such transmission of software to clients outside India, would not be export of computer software. The only dispute was with regard to the type of work rendered by the assessee for M/s OVI. The AO has stressed that the work rendered by the assessee for M/s OVI were activities which would not fall under purview of Section 10A. This was sustained by CIT(A) since according to him the work done by assessee for M/s OVI would not be production of software. So, the issue narrows down to the position that if the work done by assessee as per contract with M/s OVI was manufacture or production of computer software, it could not be denied deduction under Section 10A of the Act. Assessee was having a contract with M/s OVI, copy of which has been filed by it, vide paper book pp. 53 to 62. It can be seen from this particular contract named "software maintenance service contract" what was the work the assessee had to do mentioned therein. First one was new client software to be developed by the assessee for M/s OVI, second one was on the application software developed by a third party called Compu Tact Software Services for M/s OVI, and third one was another software called OVISS again developed by that third party for M/s OVI. As per this agreement, the obligation of the assessee was to ensure that the new software called OVISS used by the M/s OVI in its various offices spread all over the world properly functioned and the tasks of the assessee included maintenance of the OVISS software, which included correction of flaws in OVISS, adaptation to new version of OVISS, and make correction in software documentation. Assessee was also required to give support installation and development work for replacement of the OVISS software and devising necessary interfaces between such OVISS software and replacement software and also development of one time software required to solve specific problems in data structures etc. As per para 3.5.1 of this agreement assessee is also obliged to do modification and enhancement of OVISS software and also make changes therein. The moot question is whether the above work could be called as manufacture or development of software. It is clear from the wordings of the agreement that assessee was mainly doing the work on a software called OVISS developed by one M/s Compu Tact Software Services for assessee's client M/s OVI. Assessee's obligations were to maintain these softwares and also to devise programmes for repairing its bugs, prepare for its replacement with another software programming for necessary interfaces and also effecting modification/ enhancement to the said software, and most importantly, to write softwares required to solve specific problems in data or data structures. It is clear from the above that the OVISS software on which the assessee was working was a legacy system developed for M/s OVI by M/s Compu Tact Software Services. It is also clear that said client of the assessee was not confident about this OVISS software for its use worldwide and hence contracted with the assessee for making modifications therein.
7.2 In the software development life cycle, maintenance is known as last phase of development and, therefore, it is inherent part of such development. It is necessary to distinguish 'software maintenance' from 'maintenance' as understood in common parlance, i.e. maintenance of a tangible asset like plant and machinery. ICAI in its publication 'Information System Audit Reference Book' Modules 4 to 7 which describe the recommended steps for systems development methodology, defines, 'system maintenance', as the last part of the system development life cycle, which is preceded by feasibility study, requirement definition, software acquisition, programming, testing and implementation. It is clearly stated herein that 'maintenance' is nothing but ongoing development which continues till the system is replaced or discontinued. While the term 'maintenance' in relation to a tangible asset would mean those activities which are required to keep it useful, 'maintenance' of a software is a part of its development for enhancing its capabilities and correcting errors. In Chapter XXII of the same reference book, which discusses alternative systems development methodologies like data oriented system development, object oriented system development, prototyping, rapid application development, re-engineering, reverse engineering and structured analysis, it is stated that a system is never static and system maintenance is a part of ongoing development. Information Systems Audit and Control Association of USA, which is considered the topmost professionally recognized body, prescribing standards for systems audit and audit of business application software development, has in its 2004 CISA review manual, in Charter 6 under the heading 'System change procedure and program migration process" given as follows : "Following the implementation and stabilization of a system, it enters into the ongoing development or maintenance stage." Thus ongoing development of a software system is nothing but its 'maintenance'. Or in other words, in the world of computer systems and software, maintenance is a part of ongoing development. Maintenance of software, especially when it involves ERP modules, or bought out softwares would require routines and sub-programs for interfacing it with other legacy systems and also for migration from other legacy systems to new system and building in new functionalities, which could vary from user to another user.
7.3 Thus, every maintenance or modification or bug repairing would require independent code and each such independent code/procedure including codes written of interfacing and specific problem solving relating to legacy programme would still be softwares and nothing else. This being the case and taking the totality of the services rendered by the assessee, as can be made out from the description of work given in the agreement, which inter alia mentioned corrections of bugs in OVISS, customizing programmes developed, code change in OVISS would all be nothing but manufacture/production of computer software. This being the case, we are of the opinion, that for the export thereof, assessee would be very much eligible for deduction under Section 10A.
7.4. We also find from Expln. 2 to Section 10A that computer software means any computer programme recorded on any disc, tape, perforated media or other information storage device which is transmitted or exported from India by any means. There is no dispute that whatsoever the software, the software which were in nature of bug repairing, interpreting, and code maintenance programmes, could have been transmitted by the assessee to its client abroad only if it was recorded initially in some information storage device, which could be either the hard disc memory or any other memory devices temporarily or permanently used for the purpose of storing the programme codes. In taking this view, we are also fortified by the decision of the Tribunal in ISBC Consultancy Services Ltd. v. Dy. CIT , wherein it was held that even customization of software involves intellectual process, and it meets the criteria propounded by classical connotation of the term 'manufacture'. Thus, the AO as well as CIT(A) fell in error in denying the assessee deduction under Section 10A for the work done by it on behalf of OVI and in considering the receipts therefrom as not from production or manufacture of computer software. Therefore, we set aside the orders of CIT(A) and AO in this regard and direct that assessee be allowed deduction under Section 10A of the Act for Rs. 10,66,788 received by it from M/s OVI as well. In the result, appeal of the assessee is allowed.