S. 10A/S. 10B – Deduction u/s.10A/10B cannot be denied to software developer exporting software merely on the ground that it hires IT professionals on man-hour basis whenever it has assignments and does not have many employees on payroll.

The assessee company was having an office located in STP and
was carrying on the business of on-site software development. It had claimed
exemption u/s.10A/10B of the Act. There was no dispute about satisfaction of any
of the conditions prescribed for claiming exemption. The Assessing Officer (AO)
observed that the assessee company hired IT professionals on a man-hour basis;
its Managing Director and other directors were old people and their son was the
only employee on the payroll of the assessee; the assessee did not have
infrastructure facilities in India except four walls in STP. He examined the
agreement entered into by the assessee with M/s. Alpharma, its customer, and
noted that the assessee was to get remuneration on an hourly basis and that the
assessee was referred to in the agreement as ‘supplier’. For all these reasons
he came to the conclusion that the assessee was supplying man-power and was not
engaged in software development. He, denied exemption u/s.10A/10B.

Aggrieved the assessee preferred an appeal to the CIT(A) who
examined the matter in detail and observed that the agreement entered into by
the assessee was for provision of information technology consulting services and
procuring of services of individual consultants was incidental to rendering this
service and was not service in itself; the description on the invoice was ‘technical service’; the remittance advice to the
bank corroborated this fact; since the assessee had only one employee, he held
that it would be improper to conclude that the assessee is engaged in supply of
manpower; the overseas company paid the assessee amount based on invoices raised
from time to time. He also held that since it was an on-site assignment, there
was no need to have infrastructure in India to render such services. He also
noted that the assessee was liable for damages in case of non-performance or
lapses of their employee. The fact that by taking the contract from Alpharma the
assessee had put itself to stake of USD 50,000 in terms of warranted encumbrance
which was independent of earnings from the said company was held to be very
vital to decide the issue since if it was a transaction of merely manpower
supply then taking such a risk was unwarranted. The CIT(A) held that thecontract of the assessee with M/s. Alpharma was not for manpower supply. The CIT(A) allowed the appeal.

Aggrieved the Revenue preferred an appeal to the Tribunal.

The Tribunal did not find any infirmity in the findings of
the CIT(A). It upheld the order of the CIT(A) and dismissed the appeal filed by
the Revenue.