Whether when assessee claims expenses with respect to software development outsourced to another company and then exports the same, such expenses are eligible for deduction u/s 10B

THE issue before the Bench is - Whether when the assessee claims expenses on account of development of software outsourced to another company and then exports the same, such expenses are eligible for deduction u/s 10B. And the verdict goes in favour of the assessee.

Facts of the case

The

The AO held that the assessee's unit was not eligible for deduction under section 10B as it had not produced or manufactured the software on its own but developed it from M/s IQ Resources. The AO also disallowed the miscelleneous expenses claimed by the assessee company on the ground that it had outsourced the development of software to M/s I.Q.Resources Pvt. Ltd. instead of developing or manufacturing itself.

In appeal, the CIT(A) upheld the disallowance of the miscellaneous income on the ground that these receipts were not part of the profit on account of software development. Also, relying on the CBDT circular, whereby the deduction under section 10B was to be restricted to the profit derived from the export of software after the date of the approval of the undertaking which was January 2006 in this case, the CIT(A) held the assessee to be eligible for deduction under section 10B.

The assessee had claimed the travelling expenses incurred by two persons, Radhika and Mukesh Sehgal, who were close relatives and had travelled to India together, but who were neither the employees of the assessee company nor its directors. According to the assessee, Radhika Sehgal was the owner of the premises in which the assessee was running its STP units, which were formally leased to the assessee with effect from 2007. These expenses were thus incurred in connection with various formalities linked to the premises taken by the assessee company to set up its office. The other person, Mukesh Sehgal, was the director who had come to India to oversee the software business of the assessee, especially in respect of approval to be taken under the Software Technology Park Scheme. The AO disallowed the travelling expenses of persons who were neither employees nor directors of the company as being bogus and a sham.

The CIT(A) disallowed the travelling expenses of Radhika Sehgal holding that the travelling expenses of the landlady on her visit to India did not have to be borne by the assessee, who was the prospective tenant of the property. However, the expenses incurred on the director of the assessee company was allowed as legitimate business expenditure. Thus 50 per cent of the travelling expenses were allowed.

The assessee had also claimed depreciation on the capital expenditure incurred on civil and interior works and furniture in the premises from which the assessee was doing business since January 2006. The building was leased by the assessee but the lease agreement was entered into in August 2007.

The AO disallowed the depreciation on account of renovation expenses by holding that the assessee was neither the owner of the building nor had any tenancy rights up to March 2006.

The CIT(A) allowed the depreciation claimed by the assessee holding that the absence of the lease agreement alone could not be the reason for denying depreciation on the capital work done in the premises with a view to carry out the business of the company, which was actually being carried out in these premises.

The CIT(A) thus directed the AO to verify the computation of the exemption under section 10B, as claimed by the assessee which could not exceed the original claim of the assessee.

In the revenue appeal before the Tribulal, having heard the parties, the Tribunal held that,

+ regarding exemption under section 10B, the assessee had claimed exemption for the profits only from February 2006 to March 2006. All the conditions for availment of exemption under section 10B were complied, whereby there was no reason to interfere with the CIT(A) order;

+ the land lady and the director of the assessee company, being close relatives, it could be said that there was an oral understanding between them for lease of the building to the assessee. Also, the licenses were issued by various authorities with the address of the same property. The assessee’s business had also started from the same premises before March 2006. Therefore there was no reason to interfere with the order of the CIT(A);

+ Mukesh Sehgal, one of the first directors of the company, had travelled to India for completion of various formalities for getting various approvals. As per Memorandum and Articles of Association there were three first directors. While one of the directors was a lady, the other two were made directors including Mr. Mukesh Sehgal. Generally, in a company a minimum of two directors are required for holding Board meetings to consider and arrive at various decisions. Therefore, there was every possibility that traveling expenses were incurred by assessee on the travel of its director to enable him to attend Board meetings and to file various documents before various authorities. Therefore, the traveling expenses incurred by Mr. Mukesh Sehgal were genuine business expenditure of the company. There was no reason to interfere with the CIT(A) order. This ground was decided in favour of the assessee.

assessee company is engaged in the business software development. It was given approval in January 2006 for setting up a 100 per cent EOU unit under STP for the development, manufacture and export of computer software. The STP unit was duly licensed as Private Bonded Warehouse for payment of customs duties. The assessee had entered into an agreement with RSG Systems Inc., USA for supply of software and technology services under an agreement dated May 2007. In consideration for services, the assessee had raised monthly invoices to RSG Systems Inc., USA to meet its export obligations. The computer software exported until January 2006 was developed at M/s I.Q Resources Limited, but after the assessee was registered as STP unit, the software exports were developed and carried out from this unit only. The assessee had filed its return of income in November 2006, declaring income. The case was selected for scrutiny. During the year, the assessee had declared income and claimed it as exempt under section 10B. The assessee had claimed infrastructure expenses on account of development of software outsourced to M/s I.Q.Resources. Accordng to the assessee, these expenses were incurred on four software engineers employed with the assessee for developing software for RSG systems Inc., USA. in the business premises of M/s IQ Resources. Accordingly, a reimbursement was made to the company. The difference between the expenses incurred and the reimbursement was claimed as miscellaneous receipts.