Deputing manpower abroad for software development eligible for tax exemption: K’taka HC

PTI, Dec 26, 2023, 6:22 PM IST

The High Court of Karnataka has set aside three reassessment notices of the Income Tax Department against EIT Services India Ltd (formerly Hewlett Packard) for three assessment years issued by the Income Tax Department and ruled that deputing manpower abroad for software development is eligible for tax exemption under Section 10A of the IT Act. The Commissioner of Income Tax (CIT), Bengaluru had ordered for the re-examination of the claim for deduction under Section 10A/80HHE of the Income Tax Act for the assessment years 2005-06, 2006-07 and 2007-08 on the ground that ”part of the petitioner’s profits was related to rendering technical services outside India which was not eligible for deduction.” The company filed three writ petitions challenging the re-assessment notices which was heard by the bench of Justice S Sunil Dutt Yadav. The HC in its judgement on December 19 cited a circular issued by the Ministry of Finance in 2013 which clarified that ”expenditure incurred for services to develop software outside India could be allowed under Section 10A of the IT Act if deputation is for development of software.” The HC in its judgement said, ”It is clear that the clarification stipulates that the benefits under Section 10A deductions can be availed of, if there exists a direct and intimate nexus or connection between the development of software abroad with the eligible units setup in India.” Citing the circular, the HC also noted that deputing technical manpower abroad is not detrimental to benefits of exemption under Section 10A of the IT Act. The HC said that in this present case the clarification issued in the circular was relevant.

”When the present facts are looked into, it is clear that the deductions sought for could fall within the scope of Section 10A of the IT Act, which however is a determination to be made on merits while this court is only considering as to whether the Assessing Officer has applied his mind to the issue of deduction under Section 10A of the IT Act, whether the assessee has made true and full disclosure of relevant primary facts. In order to come to a conclusion regarding the above two aspects, the circular would throw some light and it is in such context that the circular could be referred to,” the HC said.

Setting aside the three reassessment notices, the HC said, ”The conclusion arrived at by the Assessing Officer for the Assessment Years 2005-2006, 2006-2007 and 2007-2008, when examined from the point of view of the circular would strengthen the case of upholding deduction under Section 10A of the IT Act and would indicate that the resort to a review in the guise of reassessment would be a futile exercise.”