Whether assessee providing HR Services like recruitment of manpower for foreign clients is entitled to Sec 10A benefits - YES: HC

THE issue before the Bench is - Whether assessee providing HR Services like recruitment of manpower for foreign clients is entitled to Sec 10A benefits. And the answer is YES.

Facts of the case

The assessee M/s ML Outsourcing Service P Ltd filed NIL return. During assessment the AO disallowed the claim under Section 10A and held that the net profit of Rs.88,49,972/- should be brought to tax by denying exemption under Section 10A of the Act. One of the reasons given by the Assessing Officer to disallow the claim was that the assessee was rendering services as an

employment agent, like any other employment agency, and merely forwarded list of shortlisted candidate to their overseas clients. There was a minimum use of computers or information technology enabled tools. The assessee was, therefore, not involved in the development of computer software or information technology enabled services as the use of technology was not quintessential for the nature of services rendered and the core activity was that of an employment agent. It was recorded that the investment in computers initially was of a paltry amount of Rs.36,106/- though subsequently computers worth Rs.24,50,000/- were acquired for the Bangalore unit. The assessee had generated a turnover of Rs.62.92 lacs from its Gurgaon office, which had remained in operation till 30th September, 2006. Subsequently, the operations were embarked at Bangalore and invoices for Rs.1,47,28,800/- were raised on 31st March, 2007 after obtaining Software Technology Parks of India (STPI) approval for the said unit at Bangalore.

On appeal, the CIT(A) referred to the notification S.O. 890(E) under which in clause (vii) human resource services were included under clause (b) of item No. 1 of Explanation to Section 10A but observed that the assessee simply identified prospective candidates and forwarded their bio-data to the foreign company and, therefore, the said exercise cannot be called a human resource service. The assessee was merely engaged in business of transmitting data for recruitment of manpower to a company in the USA. The said business activity was not a service or a product similar to customised electronic data and, therefore, not covered under the CBDT notification, including the sub-heading "human resource service". Principle of ejusdem generis would apply to clause (b) of Explanation 2(1) to Section 10A. He relied upon the opinion given by Judicial Member in the case of Income Tax Officer versus Accurum India Private Limited, 2010-TIOL-127-ITAT-MAD-TM and observed that the third member had not agreed with the view expressed by the Judicial Member/ majority decision. The assessee's case was identical to the case of Accurum India Private Limited as they were involved in a similar business activity; i.e. activity of recruitment. Keeping in view the manner in which the same was conducted, it would not fall under "human resource management". The contention that the process was information technology enabled service was rejected. It was observed that the assessee had transmitted data of the eligible candidates for employment in the software industry and that this would not make them eligible for the said exemption.

On appeal, the HC held that,

++ the Board has issued a notification and empowerment under Section 10A and this is not a case of issue of circular under Section 119, which are issued for different purposes and have another purport. Notification is a piece of delegated legislation and to that extent cannot be contrary to the principal enactment nor can it whittle down the effect of the same. Albeit, clause (b) of Explanation 2 to Section 10A has been worded in a manner which enforces the view and the opinion that Legislature, in their wisdom, has left it to the Board to decide which product or services of similar nature would qualify and should be treated as falling under clause (b), in addition to customised data processing. The intention of the Legislature was not to constrain or restrict but to enable the Board to include several services or products of similar nature in the ambit of the provision. This is what precisely the Board has done when it used the expression "information technology enabled products or services" in the notification;

++ the next question, which arises for consideration is whether the assessee was engaged in providing "human resource services" and the nature specified in notification No. 890 (E), i.e. information technology enabled service relating to "human resource". In the impugned order passed by the Tribunal dated 27th May, 2011, it is recorded that the assessee was a hundred per cent export oriented unit registered under STPI and was engaged in hiring overseas information technology consultants for "Mindlance Inc., USA." The services rendered by them to their client included sourcing, screening and interviewing prospective candidates having information technology skills for recruitment for their overseas customers. The assessee had demonstrated various steps which were undertaken before the data of the shortlisted candidates was transmitted to USA. A flow chart exhibiting various steps of processing of data was filed and was also referred to by the Assessing Officer in his order;

++ during the course of hearing, it was pointed out that no local advertisements were issued and in the entire selection process, there was no actual physical contact between the assessee and the prospective candidates who might have been interviewed through audio or video calls or by exchange of e-mails. It is clear from the discussion, that the assessee was not providing recruitment services, as are normally and generally undertaken by the hiring agents. In the instant case, the assessee was using information technology in scanning the data, processing it, conducting online tests for shortlisted candidates, and analysing their results. The assessee would then further process the list, after referring to the activities by tracking prospective candidates from the data sourcing till the date of hiring. The CATS database got regularly updated and revised in the process. In the last stage, there was an outflow of the list of selected candidates. The expression "human resource services" was used in the notification and with reference to the words, "information technology based products or services", the Board was conscious and aware that human resource services can be rendered in India to third party companies, which are stationed abroad. The word, "human” means, "a man or a woman" and the word “resource”, in normal parlance, refers to supply of goods, raw material, etc, which a person can use. When read together, the word, “human resource” would include a large number of services and activities involving humans rendering their services in any business, trade or a profession. It would be incorrect and/or illogical to hold that the process of acquiring and recruiting employees would not be included in the expression, “human resource”. Nascom literature includes recruitment, staffing, education and training, pay rolls services and record management under the head, “human resource services”. Gary Desser in his work "Human Resource Management" has explained the said term as the process of acquiring training, appraising and compensating employees, and attending to their labour relations, health and safety and fairness concerns. Process of acquiring is an integral part of human resource management;

++ in view of the position, we do not find merit in the submissions made by the Revenue that the activities in question were not covered under the Notification S.O. 890(E), i.e. human resource service and, therefore, the assessee was not entitled to benefit under Section 10A of the Act.