ACIT vs. M/s. Majmudar & Co (ITAT Mumbai)

DATE: August 19, 2016 (Date of pronouncement)
DATE: September 24, 2016 (Date of publication)
AY: 2009-10
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S. 10B: Export of Legal Services by a law firm to its overseas clients by transfer of customized electronic data constitutes export of "computer software" as per Explanation 2 to s. 10B and is eligible for deduction

The assessee firm claimed deduction u/s 10B of the Act amounting to Rs. 3,41,08,341/- in its return of income on account of rendering of legal service to overseas clients and the money brought in convertible foreign exchange in India. The AO took a view that the assessee firm has wrongly claimed deduction u/s. 10B of the Act and disallowed the claim of the assessee firm regarding deduction claimed u/s. 10B of the Act. This was reversed by the CIT(A). On appeal by the department to the Tribunal HELD dismissing the appeal:

(i) The services provided by the assessee i.e. legal services are recognized by the Government of India for the various benefits under the scheme of EOU as per EXIM Policy 2002-2007. Section 10B of the Act is introduced to give benefit to such EOU under the Income Tax Act, reflecting the intention of law to provide encouragement to the genuine exporters of services to enhance their capacity for provision of services and in turn earn valuable foreign exchange for our country. The assessee has, by use of the legal database compiled by it over a period of more than 60 years (firm is in practice of law since 1943), earned reasonable amount of valuable foreign exchange for our country, thereby fulfilling the most core intention of the law for introduction of EOU Scheme under EXIM Policy and Section 10B of the Act. The assessee has also fulfilled the specific requirements of Section 10B of the Act, by providing Legal Services using Legal database. Legal database being recognized by the Board vide its notification No. S.O.890(E) dated September 26, 2000 as one of the eligible information technology enabled services.

(ii) Explanation 2(i) (b) defines computer software to include inter alia a “Customized Electronic Service as notified by the Board”. As legal database is notified by the Board for this purpose and the assessee has provided services by using such legal database via electronic media i.e. via emails and internet facilities, the claim of the assessee for deduction under section 10B of the Act in the light of Explanation 2(i) (b) is fully justified.

(iii) Section 10B of the Act allows 100% tax exemption on income derived from exports of articles or things or computer software. The benefits are available to any undertaking (i.e., company, partnership firm, etc.) and the provision does not discriminate undertakings on the basis of type of business or services exported. Explanation 2(i)(b) of the IT Act defines computer software to mean any customized electronic data or any product or service of similar nature as may be specified by the CBDT which is transmitted or exported from India to any place outside India by any means. Over and above, CBDT in its Notification no. 890 dated September 26, 2000 notified “the products or services of Legal Database” as an eligible information technology enabled product or service. Hence, the notification applies to both, legal database products and services rendered through the use of Legal Database.

(iv) Any transmission of “customized electronic data” falls within the expression of “computer software” as per the Explanation 2 to section 10B of the IT Act.

(v) Legal services are recognized by the Indian government for the various benefits under the scheme of EOU as per EXIM Policy 2002-2007. Section 10B of the Act has been introduced to give benefit to such EOU under the Act, reflecting the intention of law to provide encouragement to the genuine exporters of service and in turn to earn valuable foreign exchange for our country. We find from the case records that the assessee has attached list of database used as a precedent and which are made on the basis of the relevant applicable laws, Rules, Regulations, Notifications, Contracts and various applicable rulings. This has been submitted to the Assessing Officer and the CIT (A) for all the years under consideration.

(vi) The assessee is a partnership firm carrying on the profession as advocates, solicitors and notary. Its main practice areas – Corporate and business laws, International joint ventures, M&A, Corporate Finance, Competition, Trademark, Copyright, Insurance, Securities, Tax Real Property, etc. Assessee intended to start rendering services to overseas clients and, therefore, leased new premises and made an application to the SEEPZ, SEZ Development Commissioner (“DC”) for grant of EOU status on January 14, 2003 for providing “legal services” which is covered under item IA (a) of Appendix 36 of EXIM Policy 2002-2007. In- principle approval was granted for EOU status on April 16, 2003. Subsequently, approval of EOU status was granted on August 18, 2003. Green card was issued by the DC on October 24, 2003 which was valid up to March 31, 2006. The letter of confirmation was issued by the DC to assessee at its new office address at Free Press House. Accordingly, with the DC‟s approval, assessee claimed deduction under section 10B of the IT Act.

(v) In Diljeet Titus v. Alfred A. Adebare, 130 (DLT 330(2006), the Delhi High Court has considered the definition of “computer database” and defined it as “a collection of information stored on computer media.” The information may be a list of clients and their addresses or it may be the full text of various documents or it may be a set of co-ordinates relating to a three-dimensional building structure. The range of things which may be included in a computer database is enormous. Based on the above, and the case cited below the requirement of the provision is that there should be 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. By whatever means the data is collected, once it is stored in an electronic form it becomes a customized electronic data, which cab be exported to qualify for deduction. The process information technology enabled. Further, case law relied on by the assessee on identical facts in the case of Kiran Kapoor v. ITO, 150 ITD 237 (2014) (Delhi ITAT) which was also approved by Delhi High Court, 372 ITR 321, (2015) (Delhi), it was held that the nature of activity done in the EOU was that of producing designs, drawings, layouts and scanning for the projects of foreign clients on the basis of specifications. The activity was done by taking into consideration the data collected by the assessee itself or from clients. Thus, “ready to print books” exported by the assessee in the form of CDs or e-mails are customized electronic data eligible for claiming deduction under section 10B of the Act.

(vi) In DCIT v. Tecnimont ICB (P) Ltd, 19 ITD 151 (2009) (Mumbai), it was held that services provided by an assessee by use of emails and FTP sites are eligible for deduction as computer programs as defined under Section 10A of the Act. Similarly, Chennai ITAT in the case of ITO v. Accurum India (P) Limited, 34 DTR 301, held that the requirement of the provision is that there should be customized electronic data and such data should be exported outside India to qualify for deduction. What all is required is that the data collected should be in an electronic form. And, further Mumbai Tribunal in the case of Cybertech Systems & Software Limited v. CIT 149 TTJ 17 (Mum), held that the main activity of the company is to train engineers and other professionals in administration of computer software, especially SAP and export them out of India as per the requirements of the client. The definition of computer programme and software as contemplated under section 10BB of the Act, included processing or management of electronic data and to hold that the assessee is not producing any new product, is not justified and against the scheme of the incentive provisions under section 10B of the Act.

(vii) In CIT v. Malhar Information Services (2013) 351 ITR 119 (Bom) it is held that the company had undertaken the activities of transmission of customized data through the internet to its client abroad and that of data entry processing and claimed deduction under section 80HHE of the IT Act. The Court held that “data entry” was covered by the CBDT notification dated September 26, 2000 as being computer software service and, hence, allowed the deduction. Similarly, Delhi Tribunal in the case of M.L. Outsourcing Services Pvt. Ltd. 104 TTJ 59 (Del) has held that the assessee was engaged in hiring overseas IT consultants (sourcing, screening and interviewing employees) for its US client. The Delhi Tribunal held that once the data is collected and stored in an electronic form, it becomes a customized electronic data, which can be exported to qualify for deduction.

(viii) In ACIT v. Nicronn Engg. Pvt. Ltd (ITA Nos. 1439/Mad/1995 and 1992 & 1993/Mad/1998 the Chennai ITAT held that the term “manufacture” will include any processing or assembling or recording of programs on disc, tape, perforated media or other information storage device and, hence, entitled to investment allowance.

(ix) The assessee maintained two separates books of account for these two offices. There was also substantial increase in the export turnover from the financial year 2004-05 to 2009-10. Assessment year Exports turnover (in Rs. Crore) 2004-05 2.37 2005-06 2.67 2006-07 4.52 2007-08 3.41 2008-09 10.8 2009-10 15.98 But, it is a fact that no assets of the business carried out at Ismail Building were transferred substantially to the Free Press House unit. The Ismail Building Unit and the Free Press House Unit were separate and independent units in the sense that the services rendered could be carried on separately by each unit as is evident from the separate books of accounts that is maintained by assessee. The Free Press House Unit had a separate EOU approval and a Green Card issued by the STPI authorities.

(x) The Hon’ble Himachal Pradesh High Court in CIT v. Yash International Inc (HP) in Appeal No 4002/2013, dated 2-10-2014, held that the tax officer ignored the quantum of fresh capital, investment in plant and machinery, new building, new registration number, PAN number. The new unit cannot be presumed as reconstruction of the old existing business, much less the formation of the undertaking. The shifting of the employees would not affect the construction of the new firm to avail the benefit under Section 80IC of the IT Act. The ratio of the judgment rendered by SC in the case of Textile case (1977) 107 ITR 195 (SC) not followed. Supreme Court in the case of Textile Machinery Corp. Ltd. v. CIT (1977) 107 ITR 195 (SC) held that the principal object is to encourage setting up of new industrial undertakings by offering a tax incentive within a stipulated period. There is no formation of any industrial undertaking out of the existing business since that can take place only when the asset of the old business are transferred substantially to the new undertaking. There is so such transfer of assets. Once the new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are commercially tangible products and the undertakings can be carried on separately without losing their identity in the old business, they are not to be treated as being formed by reconstruction of the old business. About splitting of business and consequently disallowance of deduction, Hon’ble Delhi High Court in the case of CIT v. Gedore Tools India Pvt. Ltd. (1980) 126 ITR 673 (Del), held that applying the principles of the Supreme Court in the Textile Machinery case, to the present case, it is clear that the new unit has not been formed by the splitting up or reconstruction of the existing business. The second unit has not derived anything from the old unit either by way of equipment or by way of factory buildings. No assets of the old unit have been transferred to the new unit nor has the identity of the first unit been impaired in any way. The mere fact that the second unit manufactures some of the items which were manufactured by the first unit does not make it an integral part of the first unit. It would survive independently of the first unit. 19. In view of the above proposition, the facts of the present case are that on February 28, 2006, as per the EOU procedure, the assessee submitted the green card and the LOP agreement with the DC for renewal. At this stage, the DC by a letter dated March 10, 2006 informed the assessee to submit the Customs certified date of commencement of production. The assessee in response stated that as the EOU did not import any capital goods or seek any sales tax/VAT benefits, it was not require getting it registered with the customs authority. The DC shared a clarification letter dated June 7, 2006 from the Ministry of Commerce that the customs bonding was necessary for the exporters even if they do not import capital good or raw materials. The Ministry of Commerce issued this letter against a query asked by the DC by its letter dated February 28, 2006. The DC also instructed the assessee to reverse all benefits enjoyed as an exporter under the Customs Act and direct tax laws. It was explained by the assessee before us that in any event, customs bonding is not at all required and for this he relied on the decision of the Delhi ITAT in the case of DCIT v. Arts Beauty Exports (ITA No. 2955 and 2956/Del/10 and held that customs bonding is necessary only in cases if the exporter intends to import any capital goods or raw materials without payment of duty. Further, it is to be noted that the above Delhi Tribunal order has been affirmed by the Delhi High Court (CIT v. Arts Beauty Exports, 357 ITR 276 (2013) (Delhi) for the assessment years 2006-2007 and 2007-2008, wherein it is held that “We do not see any purpose being served by insisting on the custom-bonding of the EOU. A reasonable way of constructing the condition imposed by the Development Commissioner would be to understand the same as necessary only when imports are contemplated. We, therefore, do not see much merit in the objection.” In view of the above, we are of the view that customs bonding which was never mentioned by the authorities as a condition for grant of registration can never be made a pre-condition for registration after 3 years.

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