DCIT, Bangalore v. M/s Mphasis Limited, Bangalore

ITA 677/BANG/2014 | 2004-2005
Pronouncement Date: 31-07-2015 | Result: Dismissed

Appeal Details

RSA Number 67721114 RSA 2014
Assessee PAN AXACT1961F
Bench Bangalore
Appeal Number ITA 677/BANG/2014
Duration Of Justice 1 year(s) 2 month(s) 11 day(s)
Appellant DCIT, Bangalore
Respondent M/s Mphasis Limited, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 31-07-2015
Appeal Filed By Department
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 31-07-2015
Date Of Final Hearing 22-07-2015
Next Hearing Date 22-07-2015
Assessment Year 2004-2005
Appeal Filed On 19-05-2014
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE ABRAHAM P GEORGE ACCOUNTANT MEMBER AND SHRI VIJAYPAL RAO JUDICIAL MEMBER ITA NO. 677 /BANG/2014 (ASST. YEAR 2004-05) THE DY. COMMISSIONER OF INCOME-TAX CIRCLE - 12(1) BANGALORE. . APPELLANT VS. MPHASIS LTD. ABACUS SQUARE BAGMANE TECH. PARK C.V RAMAN NAGAR BYRASANDRA BANGALORE. . RESPONDENT CO NO.98/BANG/2014) (BY ASSESSEE) REVENUE BY : SHRI SUNIL KUMAR AGARWAL JT . CIT ASSESSEE BY : SHRI PADAM CHAND KHINCHA C.A DATE OF HEARING : 22-7-2015 DATE OF PRONOUNCEMENT : 31 -7-2015 O R D E R PER VIJAYAPAL RAO JUDICIAL MEMBER THIS APPEAL BY THE REVENUE AND CROSS-OBJECTION BY T HE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 28/2/2014 OF COMMISSIONER OF 2 ITA NO.677 & CO NO.98/B/14 INCOME-TAX (APPEALS) III BANGALORE ARISING FROM THE ASSESSMENT COMPLETED U/S 143(3) R.W.S 147 OF THE INCOME-TAX AC T 1961 FOR THE ASSESSMENT YEAR 2004-05. 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS: 1) THE ORDER OF THE LEARNED CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN LAW IN DIRECTING THE AO TO ALLOW THE DEDUCTION U/S 10B (WRONGLY MENTIONED AS 10A) WITH REGARD TO THE INCOME EARNED BY SUB CONTRACTING OF ON SITE PART OF SOFTWARE DEVELOPMENT ACTIVITY THROUGH ASSESSEES ASSOCIATED ENTERPRISE WITHOUT APPRECIATING THE FACT THAT THE DEDUCTION U/S 10B IS TO BE ALLOWED ONLY FOR THE PROFITS EARNED FROM THE ACTIVITY OF AN SITE DEVELOPMENT OF COMPUTER SOFTWARE AND NOT FOR THE PROFITS EARNED FROM THE ASSOCIATED ENTERPRISES OF THE ASSESSEE BY SUBCONTRACTING THE ACTIVITY. 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO COMPUTE DEDUCTION U/S 10B (WRONGLY MENTIONED AS 10A) IN THE ABOVE 3 ITA NO.677 & CO NO.98/B/14 MANNER BY PLACING RELIANCE ON THE DECISION OF HONBLE ITAT IN THE CASE OF M/S MPHASIS SOFTWARE AND SERVICES INDIA PVT. LTD. IN ITA NO.1209/BANG/2012 WHICH HAS NOT BECOME FINAL SINCE THE SAME HAS NOT BEEN ACCEPTED BY THE DEPARTMENT. 4) FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING IT IS PRAYED THAT THE ORDER OF THE CIT(A) IS SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 5) THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND AND/OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 3. THE ONLY ISSUE ARISES IN THE REVENUES APPEAL IS WHETHER THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10B WITH REG ARD TO INCOME EARNED BY THE ASSESSEE FROM THE ON SITE DEVELOPMEN T OF SOFTWARE THROUGH ITS ASSOCIATED ENTERPRISES UNDER SUB CONTRA CT. 4. WE HAVE HEARD THE LEARNED DR AS WELL AS LEARNED AR AND CONSIDERED THE RELEVANT MATERIALS ON RECORD. 4 ITA NO.677 & CO NO.98/B/14 5. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTW ARE DEVELOPMENT. THE ASSESSEE RECEIVED THE WORK ORDER FROM FOREIGN CLIENT FOR SOFTWARE DEVELOPMENT. THE PART OF THE W ORK HAS BEEN CARRIED OUT BY THE ASSESSEE IN INDIA AND SOME PART OF DEVELOPMENT OF COMPUTER SOFTWARE ON SITE OF THE CLIENT HAS BEEN PE RFORMED BY THE ASSOCIATED ENTERPRISES OF THE ASSESSEE UNDER SUB CO NTRACT. THE ASSESSING OFFICER HAS DENIED THE CLAIM OF DEDUCTION U/S 10B ON THE GROUND THAT THE INCOME RECEIVED BY THE ASSESSEE FRO M THE ON SITE DEVELOPMENT OF SOFTWARE THROUGH ITS ASSOCIATED ENTE RPRISES IS NOT ELIGIBLE FOR DEDUCTION AS IT WAS NOT THE WORK OF E XPORT OF SOFTWARE BY THE ASSESSEE. 6. ON APPEAL THE CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF T HIS TRIBUNAL IN THE CASE OF OTHER GROUP COMPANY OF THE ASSESSEE NAMELY MPHASIS SOFTWARE SERVICES INDIA LTD. VS. DCIT IN ITA NO.12 09 OF 2012 DATED 20/12/2013. WE HAVE GONE THROUGH THE AGREEME NTS AS WELL AS THE WORK ORDERS RECEIVED BY THE ASSESSEE FROM THE C LIENTS AND FOUND THAT THE WORK OF SOFTWARE DEVELOPMENT WAS UNDERTAKE N BY THE ASSESSEE AND RISK AND REWARD UNDER THE AGREEMENTS BELONGS T O THE ASSESSEE AND NOT TO THE ASSOCIATED ENTERPRISES OF THE ASSESSEE. THE ASSESSEE HAS 5 ITA NO.677 & CO NO.98/B/14 RECEIVED THE ENTIRE CONSIDERATION OF DEVELOPMENT OF SOFTWARE IN FOREIGN EXCHANGE AND EARNED PROFIT ON THAT PART OF THE JOB EXECUTED BY THE ASSOCIATED ENTERPRISES UNDER SUB-CONTRACT AFTE R REDUCING THE EXPENSES INCURRED BY THE ASSESSEE. WE FIND THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE COORDINATE BENCH OF THIS TRI BUNAL IN THE CASE OF GROUP CONCERN M/S MPHASIS SOFTWARE SERVICES PVT. LTD. (SUPRA) IN PARA 12 TO 14 AS UNDER :- 12. COMING TO THE MAIN ISSUE IN THE ASSESSEES APPE AL I.E REDUCTION/DEDUCTION OF THE CLAIM U/S 10A OF THE INCOME-TAX ACT IN RESPECT OF ONSITE SOFTWARE DEVELOPMENT WORK PERFORMED BY THE ASSOCIATED ENTERPRISES OF THE ASSESSEE OUTSIDE INDIA WE FIND THAT THE ASSESSEE ENTERED INTO A CONTRACT WITH THE END CONSUMERS WHO ARE OUTSIDE INDIA AND TO DISCHARGE IT S LIABILITIES UNDER THE CONTRACT THE ASSESSE SUB- CONTRACTED THE WORK TO ITS AE OUTSIDE INDIA WHO IN FACT DEVELOP THE SOFTWARE TEST AND IMPLEMENT THE SOFTWA RE AT THE PREMISES OR CUSTOMERS PLACE USING ITS OWN PERSONNEL AND INFRASTRUCTURE. THE ASSESSEE RECEIV ED THE PAYMENT FROM THE END USER I.E THE CUSTOMER AND MAKE S THE PAYMENT OF SOFTWARE DEVELOPMENT CHARGES TO THE AE FOR THE SERVICES RENDERED BY IT. THE CONTRACT DEVELOPMENT CHARGES PAID BY THE ASSESSEE TO THE AE 6 ITA NO.677 & CO NO.98/B/14 HAVE BEEN HELD TO BE AT ARMS LENGTH BY THE TPO U/S 92CA OF THE INCOME-TAX ACT. WHAT IS SOUGHT TO BE DISALLOWED IS THE CLAIM OF DEDUCTION U/S 10A OF THE ACT THE INCOME ARISING OUT OF THE ONSITE DEVELOPMENT OF SOFTWARE BY THE AE. ACCORDING TO THE AUTHORITIES B ELOW THE SOFTWARE IS TO BE DEVELOPED BY THE ASSESSEE AND EVEN THE ONSITE IMPLEMENTATION OR ON SITE DEVELOPMENT WO RK TO BE CARRIED OUT AT THE PREMISES OF THE CUSTOMER A RE TO BE PERFORMED BY THE EMPLOYEES OF THE ASSESSEE COMPA NY UNDER ITS DIRECT SUPERVISION AND CONTROL. UNDISPUT EDLY THE ASSESSEE HAS SUB- CONTRACTED THE ENTIRE WORK OF DEVELOPMENT OF SOFTWARE FOR THE CUSTOMER TO ITS AES OUTSIDE INDIA. THE ASSESSEE HAS PLACED RELIANCE UP ON THE CIRCULAR NO.694 DATED 23.11.1994 TO SUBMIT THAT THE DEVELOPMENT OF SOFTWARE NEED NOT BE CARRIED OUT AT THE PREMISES OF THE ASSESSEE COMPANY AND IF THE ASSESSE E PERFORMS THE WORK AT THE SITE OF THE CUSTOMER OUTSI DE INDIA EVEN THEN IT IS ELIGIBLE FOR DEDUCTION U/S 1 0A OF THE INCOME-TAX ACT. THUS IT IS CLEAR THAT THE CBDT CIRCULAR NO. 694 ONLY CLARIFIES THAT THE ENTIRE WOR K OF DEVELOPMENT OR MANUFACTURE OF THE PRODUCT NEED NOT BE CARRIED OUT BY THE ASSESSEE IN ITS OWN PREMISES IN INDIA. THE MOOT QUESTION BEFORE US IS WHETHER THE ASSESSEE CAN SUB CONTRACT PART OR WHOLE OF ITS DEVELOPMENT OF SOFTWARE WORK TO AN AGENCY OUTSIDE INDIA AND CLAIM THE INCOME THERE-FROM AS ITS INCOME ELIGIBLE FOR DEDUCT ION U/S 10A OF THE INCOME-TAX ACT. THE LEARNED COUNSEL FOR THE ASSESSEE HAD PLACED RELIANCE UPON THE DECISIONS OF 7 ITA NO.677 & CO NO.98/B/14 THIS TRIBUNAL AT DELHI AND MUMBAI IN VARIOUS CASES WHICH ARE CITED IN PARA 3 ABOVE. IN THE CASE OF TECHDRIVE INDIA PVT. LTD. (CITED SUPRA) THE TRIBUN AL WAS CONSIDERING WHETHER EXEMPTION U/S 10B IS ALLOWA BLE TO THE ASSESSEE THEREIN WHERE THE PRODUCT WAS PRODUCED BY THE SISTER CONCERN OF THE ASSESSEE. T HE TRIBUNAL AT PARA 17 HAS CULLED OUT THE VARIOUS STEP S INVOLVED IN THE DEVELOPMENT/CREATION OR PRODUCTION OF SOFTWARE AND AT PARA 19 HAS ALSO HELD THAT SEC. 10 B OF THE ACT ONLY PROVIDES FOR CERTAIN NEGATIVE REQUIREM ENTS SUCH AS CLAUSE (III) OF SUB SEC. (2) WHICH SAYS THA T THE UNDERTAKING COULD NOT HAVE BEEN FORMED BY THE TRANS FER TO A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. IT WAS HELD THAT THE SECTION DOES NOT PROVIDE FOR A POSITIVE REQUIREMENT THAT THE ASSESSE E WHO CLAIMS THE EXEMPTION SHOULD OWN PLANT AND MACHINERY . THEREFORE EVEN IF THE MANUFACTURE OR PRODUCTION IS DONE BY AN OUTSIDE AGENCY OR CONTRACTORS UNDER THE SUPERVISION OR CONTROL OF THE ASSESSE THE CLAIM FO R DEDUCTION OR EXEMPTION HAS TO BE ALLOWED. SIMILAR VIEW IS EXPRESSED BY THE OTHER BENCHES OF THE TRIBUNAL O N WHICH THE ASSESSEE HAS PLACED RELIANCE UPON. 13. THEREFORE TO APPLY THE PRINCIPLES LAID DOWN IN THE ABOVE CASES THE NEXT ISSUE TO BE EXAMINED IS TO W HETHER THE DEVELOPMENT OF SOFTWARE BY THE AE IS UNDER THE SUPERVISION AND THE CONTROL OF THE ASSESSEE? 8 ITA NO.677 & CO NO.98/B/14 14. AS SEEN FROM THE MASTER SERVICES AGREEMENT (WHICH IS PLACED AT PAGE 36 OF THE PAPER BOOK) ENTE RED INTO BY THE ASSESSEE WITH ITS AE AT USA THE SCOPE OF THE WORK IS TO PROVIDE ONSITE AND OFFSHORE SERVICES REL ATING TO INFORMATION TECHNOLOGY TO THE ASSESSEE COMPANY WHICH SHALL INCLUDE PRODUCTS DEVELOPED BY THE CONTRACTOR IN ACCORDANCE WITH THE SPECIFICATIONS PROVIDED BY THE ASSESSEE COMPANY AS AGREED FOR TH E PURPOSE AND SET OUT IN THE TASK ORDER. CLAUSE (2) OF THE AGREEMENT PROVIDES FOR TASK ORDER FORM OF THE CONTRACT WHILE CLAUSE (3) SETS OUT THE OBLIGATION OF THE ASSESSEE COMPANY. CLAUSE (4) SETSOUT OBLIGATION OF THE CONTRACTOR AND CLAUSE (7) RELATES TO RIGHT OVER THE INTELLECTUAL PROPERTY. THE AO HAS HELD THAT THE INTELLECTUAL PROPERTY RELATING TO DEVELOPMENT OF PR ODUCTS IS WITH THE CONTRACTOR AND THEREFORE IT CANNOT BE SAID THAT THE WORK IS CARRIED OUT UNDER THE SUPERVISION OF THE ASSESSEE COMPANY. BUT A LITERAL READING OF THE AGREEMENT REVEALS THAT THE RIGHTS AND RESPONSIBILIT IES ATTACHED TO THE DELIVERABLES VESTS WITH THE CONTRA CTOR ONLY TILL THE COMPANY HAS PAID THE COMPENSATION PAY ABLE FOR SUCH PORTION OF THE DELIVERABLES IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT AND THE APPLICABLE TASK ORDER. THEREFORE ONCE THE COMPENSATION IS PAID FO R THE DELIVERABLES IT IS TO BE UNDERSTOOD THAT THE INTEL LECTUAL PROPERTY IS OWNED BY THE ASSESSE COMPANY. THE 9 ITA NO.677 & CO NO.98/B/14 CONTRACTORS ONLY POSSESSES THE INTELLECTUAL PROPER TY RIGHTS WHICH ARE ALREADY OWNED BY IT AND WHERE SUCH INTELLECTUAL PROPERTY RIGHT IS USED FOR THE PRODUCT ION OF THE COMPUTER SOFTWARE IT SHALL GRANT THE ASSESSEE COMPANY A NON-EXCLUSIVE LICENSE TO USE SUCH INTELLE CTUAL PROPERTY ENABLING THE COMPANY TO USE SUCH SOURCE C ODE FOR FORMING PART OF THE DELIVERABLES DEVELOPED FOR THE COMPANY. THE OTHER DOCUMENT TO BE CONSIDERED IS TH E AGREEMENT OF THE ASSESSEE WITH THE CUSTOMER AND IT IS SEEN THEREFROM THAT THOUGH THE ASSESSEE COMPANY IS ENTITLED TO SUB CONTRACT THE WORK IT SHALL ALONE BE RESPONSIBLE FOR THE RISKS AND REWARDS ARISING OUT O F THE SUCH SUB-CONTRACT. CLAUSE (23) OF THE AGREEMENT PROVIDES FOR SUB CONTRACTING OF THE WORK WHEREIN I T IS STATED THAT THE SUPPLIER MAY NOT SUB CONTRACT THE PERFORMANCE OF ANY OF ITS OBLIGATIONS SET OUT THE REIN WITHOUT THE PRIOR WRITTEN CONSENT OF THE CUSTOMERS AND THE APPROVAL OF THE CONTRACTOR OR SUB CONTRACTOR AN D THE CUSTOMER SHALL NOT CONSTITUTE A SUPERSEDING OF EVEN TS OR WAVIER OF ANY RIGHT OF CUSTOMER TO REJECT WORK WHI CH IS NOT IN CONFORMATION WITH THE STANDARD SET FORTH IN THE AGREEMENT AND DOES NOT CONSTITUTE NOR IMPLY AUTHORIZATION OF EXPENSES IN EXCESS OF BUDGET. IT IS ALSO PROVIDED THAT TO THE EXTENT THE SUPPLIER SUBCONTRAC TS TO THIRD PARTIES ANY OF ITS OBLIGATIONS TO BE SET OUT IN THE AGREEMENT THE SUPPLIER SHALL REMAIN FULLY RESPONS IBLE FOR SUCH OBLIGATION AND FOR ALL ACTS OR OMISSIONS OF ITS SUBCONTRACTORS OR AGENTS. FROM THE ABOVE CLAUSES IT IS 10 ITA NO.677 & CO NO.98/B/14 CLEAR THAT THE ASSESSEE IS SOLELY RESPONSIBLE FOR T HE DISCHARGE OF ITS OBLIGATION UNDER THE AGREEMENT TO THE CUSTOMER AND THE SUBCONTRACTOR HAS NO SAY IN THE MATTER. IT IS SEEN FROM THE MASTER SERVICES AGREEM ENT THAT IT IS THE ASSESSEE WHICH IS UNDER AN OBLIGATIO N TO DISCHARGE ITS OBLIGATION OF SATISFYING THE REQUIRE MENT OF THE CUSTOMERS AND IN PURSUANCE THEREOF TO PASS ON T HE SPECIFICATION OF THE PRODUCTS TO THE AE AND ALSO TO RESERVE RIGHT TO REJECT THE PRODUCT IF THE AE DOES NOT PRODUCE THE PRODUCT IN CONFORMITY WITH THE REQUIRE MENT OF PRODUCT AS GIVEN IN THE TASK ORDER. THEREFORE IT CAN BE SAFELY CONCLUDED THAT THE DEVELOPMENT OF THE SOFTWARE BY THE AE IS UNDER THE SUPERVISION AND CON TROL OF THE ASSESSEE COMPANY. IN THE CASE LAWS RELIED U PON BY THE LEARNED COUNSEL FOR THE ASSESSEE ONLY A PAR T OF THE DEVELOPMENT OF SOFTWARE WORK WAS OUTSOURED AND IT WAS HELD THAT THE ASSESSEE WAS ELIGIBLE FOR DEDUCTI ON U/S 10B OF THE INCOME-TAX ACT FOR THE INCOME EARNED OUT OF SUCH JOB WORK DONE. IN THE CASE BEFORE US EVEN THO UGH THE ASSESSEE HAS OUTSOURCED THE ENTIRE WORK OF DEVELOPMENT OF SOFTWARE TO ITS AES IN OUR OPINIO N THE DECISIONS OF THE COORDINATE BENCHES RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE APPLY TO THE CASE ON HAND ALSO. IN VIEW OF THE SAME WE HOLD THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10B OF THE I NCOME- TAX ACT WITH REGARD TO THE INCOME EARNED BY THE ASS ESSEE COMPANY FROM THE ONSITE DEVELOPMENT OF SOFTWARE CARRIED OUT BY THE AE. IT IS ALSO NOTEWORTHY TO M ENTION 11 ITA NO.677 & CO NO.98/B/14 THAT THE PAYMENT MADE BY THE ASSESSEE TO THE AE FOR THE WORK DONE BY THE AE AT THE SITE OF THE CUSTOMER HAS BEEN ACCEPTED BY THE TPO TO BE AT ARMS LENGTH PRICE. THEREFORE THERE CANNOT BE ANY IMPUTATION THAT THE ASSESSEE HAS BEEN TRYING TO SHIFT THE PROFITS OUT O F INDIA BY OUTSOURCING THE WORK TO THE AE. 7. SINCE THE FACTS AND CIRCUMSTANCES IN THE CASE OF THE ASSESSEE ARE IDENTICAL TO THAT OF THE CASE OF EMPHASIS SOFTWARE SERVICES INDIA (SUPRA) THEREFORE FOLLOWING THE ORDER OF THE COO RDINATE BENCH (SUPRA) WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDER OF CIT(A) QUA THIS ISSUE. 8. IN THE CROSS-OBJECTION THE ASSESSEE HAS RAISED THE ISSUE OF VALIDITY OF REOPENING. SINCE THE APPEAL OF THE REV ENUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND THE ISSUE OF DEDUCTION U/S 10B ON MERITS IS DECIDED IN FAVOUR OF THE ASSESSEE THE REFORE WE DO NOT PROPOSE TO GO INTO THE TECHNICAL ISSUE OF VALIDITY OF REOPENING BEING ACADEMIC IN NATURE. ACCORDINGLY THE CROSS-OBJECTI ON OF THE ASSESSEE STANDS DISMISSED BEING INFRUCTUOUS. 12 ITA NO.677 & CO NO.98/B/14 9. IN THE RESULT THE APPEAL FILED BY THE REVENUE A S WELL AS THE CROSS-OBJECTION FILED BY ASSESSEE ARE DISMISSED. 10. ORDER PRONOUNCED IN THE OPEN COURT ON 31 JUL 2015. SD/- SD/- ABRAHAM P GEORGE (VIJAYPAL MEMB ER) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER ) VMS. BANGALORE DATED : 31/7/2015 COPY TO :1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTRAR ITAT BANGALORE.