The transfer of computer software by the assessee to its head office constituted export under Section 10A(7) and Section 80-IA(8) of the Income Tax Act, 1961.

S. RAVINDRA BHAT, J.

1. The questions of law framed in ITA No. 1108/2007 are as follows:

(i) Whether the transfer of computer software by the Indian branch to the head office can be said to be ‘sale’ to the head office out of India?

(ii) Whether the assessee is entitled to claim benefit of Section 10A of the Income Tax Act, 1961, as the software is developed by the branch as per the requirement of Head Office and not sold to any third party?

2. The companion appeals i.e. ITA Nos. 1249/2009 and 173/2016 also concern the same questions of law, because the Income Tax Appellate Tribunal (in short ‘ITAT’) followed the decision rendered by it on 05.01.2007, (which is the subject matter of ITA No. 1108/2007).

3. The assessee is engaged in the business of software development and was accorded approval of the Reserve Bank of India (in short ‘RBI’) under the then prevailing Foreign Exchange Regulation Act, 1973 to establish a branch office in India: at Noida and New Delhi, for development of software for export. It received approval for setting up of 100% Export Oriented Unit (EOU) under the Software Technology Park (STP) Scheme of the Central Government on 23.09.1999 for development of computer software; the software so developed by it is electronically transmitted to its head office, located abroad. In terms of the agreement between the assessee and its head office, the latter pays all direct and indirect cost for development of software with the mark up of 15% of such process.

4. The assessee had developed a software known as “Softex Form”, and exported it through data communication links. It received consideration and furnished the relevant clarification which was accepted by the STPI authorities. It also received remittances from the head office towards the export/transmission of such software. It reported a profit of Rs.2,66,95,445/- for AY 2002-03 and filed a return seeking exemption under Section 10A of the Income Tax Act, 1961 (in short ‘Act’).

5. The Assessing Officer (AO) rejected the assessee’s claim holding firstly its statement that it had sold software to its head office, was unacceptable because it and the head office were part of the same entity; and that, secondly, it merely provided services to the head office which reimbursed the costs to the assessee but with a nominal mark up. Importantly, the AO held that transfer of software in the circumstances of the case did not amount to its export.

6. The assessee had contended that its Indian branch constitutes a permanent establishment (PE) of its foreign office and the profits were attributable to its business carried out in India and were taxable under the several provisions of the Act. The assessee had claimed that by virtue of the existing Double Taxation Avoidance Agreement (in short ‘DTAA’), it could seek benefits to the extent that the DTAA’s provisions apply. It also relied upon Article 7(1) of the DTAA. The AO’s reasoning was premised inter alia on the basis that Section 10A was introduced with the objective of encouraging foreign exchange accruals and earnings in India. It was therefore held that what the assessee received was mere remuneration (on man hour basis) for the development of software and not proceeds of the software when sold by the head office. The AO further noted that the assessee remitted back its profits to the head office in foreign currency and that by this reason the objective for introducing Section 10A was defeated. The AO crucially referred to explanation 2 to Section 80HHC which provides that where goods and merchandise are transferred by a unit to a branch office, warehouse or other establishment situated outside India, and thereafter sold, such transfer shall be deemed to be export. The absence of a similar provision in Section 10A was held to be an adverse circumstance which precluded the treatment of the transfer of computer software in this case as export.

7. The Commissioner of Income Tax (Appeals) [CIT(A)], on being approached by t