Bookmark
PDF
Share
CaseIQ

Tech Mahindra Limited , Bangalore v. DCIT, Bangalore

Income Tax Appellate Tribunal

Feb 24, 2011

Judgment

CaseIQ

Smart Summary (Beta)

Factual and Procedural Background

The appeals before the Income Tax Appellate Tribunal (Bangalore Bench A) arise from orders of the CIT(A)-III, Bangalore, in respect of assessment years 2002-03, 2004-05 and 2005-06 (ITA Nos. 748, 749 and 750(Bang)/2010 and CO Nos.1 to 3(Bang)/2011). The assessee is M/s. Tech Mahindra Ltd., engaged in development and export of computer software.

For assessment year 2002-03 the assessee filed its return declaring a total income of Rs. 11,28,600/-. The return was processed under section 143(1) on 18-02-2003. The assessment was reopened under section 147 on 13-07-2007 on the ground that while computing deduction under section 10A the assessee had adopted total turnover without excluding certain expenses (data communication, freight, telecommunication, insurance, per diem/on-site expenses), allegedly resulting in excess deduction to the extent of Rs. 9,69,30,990/-. Notices under sections 148 and 142(1) were issued and assessment proceedings followed.

The Assessing Officer (AO) observed that the assessee had included within export turnover expenses such as telecommunication (Rs. 39,02,121/-), insurance (Rs. 51,90,128/-) and per diem/on-site expenses (Rs.24,57,536/-) and, relying on the proviso to Explanation 2(iv) of section 10A(8) and on the definition of "technical services" in Explanation 2 to clause (vii) of section 9(1), concluded that certain amounts (totaling Rs.1,15,49,785/-) should be reduced from export turnover. The AO computed exempt income accordingly.

The assessee appealed to the CIT(A). The CIT(A) directed the AO to reduce those expenses from total turnover as well for the purposes of computing deduction under section 10A. Both parties aggrieved — the revenue against the CIT(A)'s direction to reduce from total turnover, and the assessee against CIT(A)'s confirmation of disallowance of the expenses from export turnover — filed appeals/cross-objections before this Tribunal. Similar issues arose for assessment years 2004-05 and 2005-06 and were heard together.

Legal Issues Presented

Whether specific expenses included by the assessee within "export turnover" (freight, telecommunication charges, insurance, per diem/on-site expenses) are required to be excluded from export turnover in computing deduction under section 10A of the Income-tax Act.
Whether on-site development of computer software (expenses incurred for employees developing software at client premises abroad) constitutes "rendering of technical services" outside India and therefore should be excluded from export turnover.
Whether expenses in foreign currency attributable to rendering of technical services outside India must be reduced from both export turnover and total turnover for computing deduction under section 10A (as per the Special Bench decision in ITO vs. Sak Soft India Ltd.).
Whether the revenue's appeal for assessment years with low tax effect (specifically AY 2004-05 showing Rs.1,40,557/- tax effect) should be dismissed in view of the CBDT monetary threshold for filing appeals, when the issues are repetitive across years.

Arguments of the Parties

Appellant (Revenue) — summarized submissions

The Assessing Officer's treatment was correct: expenses attributable to delivery of computer software outside India (freight, telecommunication, insurance) and expenses in foreign currency for rendering technical services should be reduced from export turnover in terms of proviso to Explanation 2(iv) of section 10A(8).
The CIT(A) relied upon Tribunal decisions in favour of the assessee in some matters but those decisions (including cases involving Infosys and Mphasis) have been appealed by the Department before the High Court of Karnataka and are pending, which the revenue highlighted.
On the question of dismissal for low tax effect, the revenue relied on a CBDT circular permitting appeals to be filed to keep repetitive issues alive even if tax effect in an individual year is below the monetary threshold.

Respondent (Assessee) — summarized submissions

The assessee accepted that telecommunication charges attributable to delivery outside India should be excluded from export turnover (and consequently from total turnover), but contested that insurance and certain per diem/on-site expenses related to rendering technical services outside India.
Specifically, the assessee contended that the insurance amount of Rs.51,90,128/- was incurred towards overseas medical insurance for employees visiting client premises in the USA and therefore was not attributable to delivery of computer software outside India and should not be excluded from export turnover.
For per diem/on-site development expenses (Rs.24,57,536/-), the assessee relied on the Explanation to section 10A and on Tribunal precedents (notably various Infosys decisions) to argue that on-site development should be treated as development of computer software (i.e., software export) and not as rendering of technical services outside India.
In the alternative, the assessee submitted that if certain expenses are to be excluded from export turnover, they should also be excluded from total turnover (i.e., reduced from both export and total turnover), relying on the Special Bench decision in ITO vs. Sak Soft India Ltd. (313 ITR (AT) 353).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
ITO vs. Sak Soft India Ltd. (Special Bench) (313 ITR (AT) 353)	Held that expenses attributable to delivery of software outside India and expenses in foreign currency for rendering technical services outside India are to be reduced from export turnover and, per the Special Bench, from total turnover as well.	The Tribunal applied this Special Bench decision to hold that such expenses generally must be reduced from export turnover and (as per Sak Soft) from total turnover; it remanded factual issues (insurance) to the AO for verification before application.
Infosys Technologies Ltd. (multiple decisions cited: ITA Nos.50, 793-795, 742, 732-734/Bang/1998 dated 31-3-2005; ITA No.1922/Bang/2003 dated 7-4-2006; ITA No.140 & 149/Bang/2001; others)	Cited for the proposition that creation of computer programmes/on-site development is development of computer software and not rendering of technical services outside India.	The Tribunal followed the Infosys line of decisions to hold that on-site development cannot be treated as rendering of technical services outside India and therefore such on-site expenses cannot be reduced from export turnover.
M/s. Mphasis Ltd. (Tribunal decisions relied upon by CIT(A) — specific citation not set out in detail)	Referenced by CIT(A) as part of Tribunal precedent relied upon (context: treatment of on-site development/technical services issues).	The Tribunal noted that some Tribunal precedents relied upon by the CIT(A) have been appealed to the High Court; it nevertheless applied relevant Tribunal precedents (including Infosys) in deciding the issue.
i-Gate Global Solutions Ltd. v. ACIT (ITA No.2291/B/2004 dt.11-8-2006) and DCIT vs. i-Gate Global Solutions Ltd. (ITA 391 & 392/B/07 dated 30-11-2007)	Cited by the assessee among authorities supporting the position on nature of on-site activities / export turnover treatment.	The opinion records these citations as relied upon by the assessee; the Tribunal's specific reliance is reflected generally in its acceptance of the line of Tribunal authorities that on-site development is not technical services.
ACIT vs. Hewlett Packard Global Soft Ltd. (dt. 19-9-2008)	Cited in the list of authorities relied upon by the assessee (context: treatment of on-site and related expenses).	Referenced among authorities; the Tribunal considered the body of Tribunal decisions (including Hewlett Packard decision which itself refers to other decisions) in arriving at the conclusion on on-site development.
Relq Software Pvt. Ltd. (ITA No.767/Bang/2007 dt.16-5-2008; Relq Software P. Ltd. vs. ITO (123 TTJ 856))	Cited by the assessee as supporting authorities on the relevant point (nature of on-site development / export turnover).	Included in the list of decisions relied on by the assessee; Tribunal noted these authorities among those that support the assessee's contention on on-site development.
Changepond Technologies P. Ltd. vs. ACIT (2008) 22 SOT 220 (Chennai)	Cited in support of the assessee's position (treatment of on-site activities / technical services).	Listed among authorities relied upon; Tribunal considered the cumulative weight of such authorities in its ruling on on-site development.
Patni Telecom (P) Ltd. vs. ACIT (2008) 22 SOT 26 (Hyd)	Cited by the assessee among supporting decisions (context as above).	Referenced among the authorities; no distinct separate application beyond being part of the body of Tribunal/Special Bench decisions considered.
DCIT vs. Softsil India Ltd. (2008) 22 SOT 271 (Hyd)	Cited in the list of precedents relied upon by the assessee.	Recorded as cited; the Tribunal treated this as part of the precedential support for the assessee's position on on-site development.
Other Infosys-related citations: ACIT vs. Infosys Technologies Ltd. (various ITA Nos. and dates listed)	Cited collectively for the principle that involvement in computer programme creation equates to software development and not the business of rendering technical services.	The Tribunal expressly relied on these Infosys authorities in holding that on-site development is not rendering of technical services outside India.

Court's Reasoning and Analysis

The Tribunal proceeded by identifying the legal and factual issues: (a) which items of expenditure included in the assessee's export turnover are attributable to delivery of software outside India or to rendering of technical services outside India, and (b) whether such amounts must be reduced from export turnover and (as per Special Bench authority) from total turnover for computing deduction under section 10A.

The Tribunal applied existing Tribunal and Special Bench precedents as follows:

It accepted the Special Bench decision in ITO vs. Sak Soft India Ltd. as establishing that expenses attributable to delivery of software outside India and expenses in foreign currency for rendering of technical services outside India are to be reduced from export turnover and, per the Special Bench, also from total turnover for the purpose of section 10A.
It also applied the line of Tribunal decisions in the Infosys group of cases, which hold that creation of computer programmes and on-site development amount to development of computer software and not to rendering of technical services outside India; accordingly, on-site development expenses cannot be treated as expenses for rendering technical services and thus should not be excluded from export turnover.

On the specific facts before it the Tribunal made the following determinations:

Telecommunication charges: These were accepted as the type of expense that could be attributable to delivery of software outside India and therefore may be required to be reduced from export turnover (and total turnover where appropriate), consistent with Sak Soft.
Insurance expenses: The assessee contended these were employee overseas medical insurance expenses for visits to client premises and hence not attributable to delivery of software. The Tribunal observed that this assertion had not been verified by either the AO or the CIT(A). Because the factual nexus was not established on the record, the Tribunal remanded the matter to the AO with directions to verify the nature of the insurance expenditure. The Tribunal directed that if the AO finds the insurance to be not relatable to export of computer software but rather to employee medical insurance for onsite visits, it should be treated as part of export turnover (i.e., not reduced). If found otherwise (i.e., relatable to delivery of software or technical services), it should be reduced from both export turnover and total turnover.
Per diem / on-site development expenses: Relying on the Infosys line of decisions, the Tribunal held that on-site development of computer software is not rendering of technical services outside India and therefore such on-site expenses cannot be reduced from export turnover. The AO was directed accordingly.
Repetitive-issue / tax-effect threshold: Regarding AY 2004-05 (tax effect Rs. 1,40,557/-) and other years where tax effect was below CBDT threshold, the Tribunal accepted the revenue's position (and the CBDT circular) that when issues are repetitive across years, appeals may be filed to keep the matter alive. The Tribunal therefore declined to dismiss the revenue's appeals on the ground of low tax effect, noting that in some years the tax effect was higher and that the directions applicable to one assessment year were applicable to the others.

Holding and Implications

Final Ruling: The Tribunal rendered a mixed outcome: the revenue's appeals and the assessee's cross-objections were partly allowed for statistical purposes.

Practical consequences and instructions imposed by the Tribunal:

The Tribunal directed that only those expenses that are found to be attributable to the export/delivery of computer software (or to rendering technical services outside India) are to be reduced from export turnover, and following the Special Bench in Sak Soft, such reductions are to be made from total turnover as well where applicable.
The Tribunal remanded the specific question of the insurance expenditure to the AO for factual verification. If the AO finds the insurance expenditure to be employee medical insurance for on-site visits (i.e., not attributable to delivery of software), it shall remain part of export turnover and not be excluded; if the AO finds it attributable to delivery or to technical services, it shall be reduced from export turnover and total turnover.
The Tribunal held (following prior Tribunal decisions, notably Infosys) that on-site development of computer software is not rendering of technical services outside India; therefore on-site development expenses cannot be excluded from export turnover and the AO was directed accordingly.
The Tribunal declined to dismiss revenue appeals for years showing tax effect below the CBDT-prescribed monetary threshold because the issues are repetitive across years and a CBDT circular permits keeping such issues alive.
No broad new legal principle was announced; the Tribunal applied and reconciled existing Tribunal and Special Bench authorities to the facts and remitted factual matters for verification by the AO.

Order pronounced in open court on 24th February, 2011. The revenue appeals and the assessee's cross-objections were partly allowed for statistical purposes; specific factual verification (insurance) remanded to the AO; direction that on-site development is not technical services upheld in favour of the assessee.

Show all summary ...

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SMT. P.MADHAVI DEVI, JUDICIAL MEMBER SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA Nos.748, 749 and 750(Bang)/2010 (Assessment years: 2002-03, 2004-05 & 2005-06) Deputy Commissioner of Income-tax, Circle 12(4), Bangalore. Appellant M/s.Tech Mahindra Ltd., No.9/7, Hosur Road, Bangalore-29. Respondent C.O. Nos.1, 2 and 3(Bang)/20111 ITA Nos.748, 749 and 750(Bang)/2010 (Assessment years: 2002-03, 2004-05 & 2005-06) (by the assessee) ***** Revenue by : Shri G.V.Gopala Rao. Assessee by : Shri Padamchand Khincha. Per BENCH : The appeals by the revenue and the cross objections by the assessee are directed against the respective orders of the CIT(A)-III, Bangalore, for the assessment years 2002-03, 2004-05 and 2005-06. As the facts and issues involved in all ITA Nos.748 to 750(Bang)/2010 & CO Nos.1 to 3(Bang)/2011 Page 2 of 10 the appeals of the revenue and the cross objections by the assessee are similar, they are heard together and disposed of by this common and consolidated order for the sake of convenience.

2. ITA No.748(Bang)/2010: Brief facts of the case are that the assessee-company is engaged in the business of development and export of computer software. It filed its return of income declaring total income of Rs.11,28,600/-. The return was processed u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as "the Act"] on 18-2-2003. Subsequently, the case was reopened u/s 147 on 13-7-2007 on the ground that the assessee, while computing deduction u/s 10A of the Act, has adopted total turnover and has not excluded data communication expenses which resulted in excess deduction u/s 10A of the Act to the extent of Rs.9,69,30,990/-. Notice u/s 148 was issued and subsequently notice u/s 142(1) was also issued. During the course of assessment proceedings, the AO observed that the assessee has included within export turnover the following expenses:

a) Freight Nil

b) Telecommunication Rs.39,02,121/-

c) Insurance Rs.51,90,128/- Rs.90,92,249/- ========= ITA Nos.748 to 750(Bang)/2010 & CO Nos.1 to 3(Bang)/2011 Page 3 of 10 He observed that in accordance with the proviso to Explanation 2(iv) of section 10A(8) of the Act, the expenses towards freight, telecommunication and insurance attributable to the delivery of computer software outside India is to be reduced from the export turnover. He also observed that the assessee-company has included within the export turnover Per diem expenses of Rs.24,57,536/- in foreign exchange which, according to him, was towards providing technical services outside India which is to be reduced in accordance with proviso to Explanation 2(iv) of sec.10A(8) of the Act. Accordingly, the assessees explanation was called for and the assessee submitted that these expenses were not attributable to providing technical services outside India. However, the AO observed that the term technical services has not been defined within section 10A of the Act. Therefore, recourse can be taken to Explanation 2 to clause (vii) of sub-section (1) of section 9 of the Act, which defines technical service to mean any consideration (including any lump sum consideration) for rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). He, therefore, concluded that providing services relating to computer software development falls within the meaning of technical service as defined above and ITA Nos.748 to 750(Bang)/2010 & CO Nos.1 to 3(Bang)/2011 Page 4 of 10 thus reduced the total amount of Rs.1,15,49,785/- from the export turnover and computed the exempt income accordingly. Aggrieved, the assessee preferred an appeal before the CIT(A) who directed the AO to reduce the same from the total turnover also for computing the deduction u/s 10A. Aggrieved by the order of the CIT(A) in giving relief to the assessee by directing the AO to reduce these expenses from the total turnover also the revenue is in appeal before us while by the order of the CIT(A) confirming the disallowance of these expenses by the AO, the assessee is in appeal before us. 2.1 Shri Padamchand Khincha, the learned counsel for the assessee while reiterating the submissions made by the assessee before the authorities below submitted that the expenditure relating to telecommunication charges to the extent of Rs.39,02,121/- can be attributable to delivery of computer software outside India and therefore it should be reduced from the export turnover and consequently from the total turnover also. However, with regard to the insurance expenses amounting to Rs.51,90,128/- he submitted that this sum was incurred by the assessee during the relevant previous year towards employee overseas medical insurance policies while visit to client premises at USA and are not related to expenditure attributable to delivery of computer ITA Nos.748 to 750(Bang)/2010 & CO Nos.1 to 3(Bang)/2011 Page 5 of 10 software and hence should not be reduced from the export turnover. With regard to disallowance of Rs.27,57,536/- in foreign currency incurred relating to onsite development, the learned counsel for the assessee submitted that Explanation to section 10A itself provides that onsite development needs to be considered as development of computer software in India only and therefore it has to be considered as export of software. According to him, rendering of technical services would mean advisory services which, in the case before us, are not of the same nature. In support of his contention, he placed reliance upon the following decisions:

i) Infosys Technoligies Ltd. ITA No.50, 793 to 795, 742, 732 to 734/Bang/1998 dated 31-3- 2005 ii) Infosys Technoligies Ltd. vs. JCIT, ITA No.1922/Bang/2003 dated 7-4-2006 (109 TTJ 631) iii) Infosys Technoligies Ltd. vs. JCIT, ITA No.140 & 149/Bang/2001 (108 TTJ 282) iv) ACIT vs. Infosys Technoligies Ltd. ITA No.653 & 969/Bang/06 dt.17-10-2007

v) ACIT vs. Infosys Technoligies Ltd. ITA No.635/Bang/06 dt.2-11-2007 vi) Infosys Technologies Ltd. vs DCIT (ITA No.3086/B/95 & 5703/B/96 (decision referred to in the order dated 2-11-2007 vii) Infosys Technoligies Ltd. vs. JCIT (ITA No.627/B/03 (decision referred to in the order ITA Nos.748 to 750(Bang)/2010 & CO Nos.1 to 3(Bang)/2011 Page 6 of 10 dated 2-11-07 viii) i-Gate Global Solutions Ltd. v. ACIT (ITA No.2291/B/2004 dt.11-8-2006) viii) DCIT vs. i-Gate Global Solutions Ltd. (ITA 391 & 392/B/07 dated 30-11-2007) ix) ACIT Vs. Hewlett Packard Global Soft Ltd.dt. 19-9-2008 - (2208)Tax Corp(ITAT)18026

x) M/s.Relq Software Pvt. Ltd. in ITA No.767/Bang/2007 dt.16-5-2008 (decision referred to in Hewlett Packards case) Xi) Changepond Technologies P.Ltd. vs. ACIT (2008) 22 SOT 220(Chennai) xii) Patni Telecom (P) Ltd. vs. ACIT (2008) 22 SOT

26 (Hyd) xiii) DCIT vs. SOftsil India Ltd.(2008) 22 SOT 271(Hyd) xiv) Relq Software P.Ltd. vs. ITO (123 TTJ 856)(Bang) He drew our particular attention to the decision of the Tribunal in the case of Infosys Technologies (ITA Nos.50/Bang/2001,

793 to 795, 742, 732 to 734/Bang/1998 dated 31-3-2005 wherein the Tribunal has held that if a person is involved in computer programme creation, he should be regarded as being engaged in the development of computer software and not as engaged in the business of rendering technical services outside India. Thus, according to him, both the insurance expenses and the Per Diem expenses are not to be excluded from the export turnover. However, he also reiterated the ITA Nos.748 to 750(Bang)/2010 & CO Nos.1 to 3(Bang)/2011 Page 7 of 10 alternative submission that in case if these expenses are to be reduced from the export turnover then they should also be reduced from the total turnover as held by the Special Bench of the Tribunal in the case of ITO vs. Sak Soft India Ltd.(313 ITR (AT) 353). 2.2 Shri Gopala Rao, the learned Departmental Representative, on the other hand, supported the orders of the AO and submitted that that the CIT(A) has relied upon the decisions of the Tribunal in the cases of M/s.Infosys Ltd and M/s.Mphasis Ltd., while these decisions have been appealed against by the department before the Honble High Court of Karnataka and are still pending for decision. 2.3. Having heard both the parties and having considered the rival contentions, we find that the issue of tele- communication charges and insurance for delivery of software outside India and expenses in foreign currency for rendering technical services outside India are to be reduced from the export turnover as well as the total turnover for computing the deduction u/s 10A of the Act as held by the Special Bench of the Tribunal in the case of Sak Soft Ltd. (cited supra). In the case before us, the learned counsel for the assessee has particularly drawn our attention to the nature of the expenditure to insist that the insurance expenses are not ITA Nos.748 to 750(Bang)/2010 & CO Nos.1 to 3(Bang)/2011 Page 8 of 10 relatable to export of computer software outside India and also that Per Diem expenses are not towards rendering of technical services outside India. We find that these issues are more or less covered by the decisions relied on by the CIT(A). Only those expenses which are relatable to export of computer software are to be reduced from the export turnover and as per the decision of the Special Bench of the Tribunal in the case of Sak Soft Ltd., (cited supra) from the total turnover also. The contention of the assessee that insurance expenditure is not relatable to the export of computer software but that it relates to medical insurance of the employees of the assessee on their visit to the clients premises has not been verified either by the AO or the CIT(A). The veracity of this statement as also the expenditure claimed has to be verified by the AO. In view of the same, we remand this issue to the file of the AO with a direction to verify the same and if it is found to be not relatable to the export of computer software but relatable to medical insurance of the assessees employees on their visit to the clients premises for onsite development, it should be treated as part of export turnover and cannot be reduced there-from. However, if it is found to be otherwise, it has to be reduced both from export turnover as well as total turnover. As regards the issue of the expenditure incurred on ITA Nos.748 to 750(Bang)/2010 & CO Nos.1 to 3(Bang)/2011 Page 9 of 10 the employees for development of computer software on site, we find that this issue is squarely covered by the decision of this Tribunal in various decisions more particularly in the case of M/s.Infosys Ltd. and respectfully following the same, we hold that onsite development of computer software cannot be held to be rendering of technical services outside India and it cannot be reduced from the export turnover. The AO is directed accordingly. In the result, the revenues appeal is partly allowed for statistical purposes and the assessees cross objection is also partly allowed.

3. For assessment years 2004-05 and 2005-06 the issues are similar. However, the learned counsel for the assessee submitted that the tax effect in the year 2004-05 is only Rs.1,40,557/- and therefore the revenues appeal must be dismissed on the ground that its tax effect is less than the prescribed limit by the CBDT. The learned Departmental Representative, however, submitted that the CBDT, while fixing the tax limit for filing an appeal before the Tribunal and the High Court, has clearly directed that where the issues are repetitive, appeal can be filed to keep the matter alive. Copy of the circular has been filed before us.

4. Having heard both the parties, we find that the issue is repetitive and in some years the tax effect is less while in ITA Nos.748 to 750(Bang)/2010 & CO Nos.1 to 3(Bang)/2011 Page 10 of 10 some other years, the tax effect is more. Therefore, we are not inclined to dismiss the revenues appeal on the ground of tax effect. As the issues are common, direction given to the AO for assessment year 2003-04 also is applicable to the assessment years 2004-05 and 2005-06.

5. In the result, the revenues appeals as well as the cross objections of the assessee are partly allowed for statistical purposes. Order pronounced in the open court on 24th February, 2011. Sd/- sd/- (A. Mohan Alankamony) ACCOUNTANT MEMBER (Smt. P.Madhavi Devi) JUDICIAL MEMBER Place : Bangalore Dated: 24th February, 2011. Copy to :

1. Appellant

2. Respondent

3. CIT(A) concerned

4. CIT

5. DR, ITAT, Bangalore

6. Guard file By Order Assistant Registrar, ITAT, Bangalore