A Foreign Company can claim benefit u/s 10A of Income Tax Act for the Transfer of Computer Software by its Indian Branch: Delhi HC [Read Judgment]

In a recent ruling, the division bench of the Delhi High Court held that is entitled to claim benefit of Section 10A of the Income Tax Act, 1961 in respect of the software is developed by the branch as per the requirement of Head Office and not sold to any third party. While allowing the exemption to the assessee, the Court observed that the transfer of computer software by the Indian branch to the head office can be said to be ‘sale’.

In the instant case, the assessee, who is engaged in the business of Software Development and have a branch in India, 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.

While filing its income tax return, the assessee claimed exemption u/s 10A which was later rejected by the assessing officer mainly on ground that transfer of software in the circumstances of the case did not amount to its export.

On appeal, the first appellate authority had upheld the assessment order. On second appeal, the ITAT accepted the contentions of the assessee. Therefore, the Revenue approached the High Court impugning the order of ITAT.

The division bench comprising of Justice S. Ravindra Bhat and Justice Najimi Waziri noted that section 80-IA(8) covers transfer of any goods or service “for the purpose of the eligible business” to “any other business carried on by the assessee” subject to a condition that the face value of such transactions was inconclusive and that the AO could determine the market value: for such transactions or sales.

“The incorporation in its entirety without any change in this provision [Section 80-IA(8)] to Section 10A through sub-Section (7) is for the purpose of ensuring that inter-branch transfers involving exports are treated as such as long as the other ingredients for a sale are satisfied.”

“In this case the AO carried out the exercise mandated by Section 10A(7) read with Section 80-IA(8). Consequently the particulars of the price or cost reported by the assessee were not binding or conclusive but rather they attained finality in the assessment proceedings, after due addition. It underwent further inquiry/ scrutiny under Chapter X of the Act.”

“It is undoubtedly aphorism that a legal fiction ought to be taken to its logical conclusion and the mind should not be allowed to boggle. This merely implies that a fiction should logically take a direction; the train of thought however cannot divert elsewhere. The absence of a “deemed export” provision in Section 10A similar to the one in Section 80HHC of the Income Tax Act does not logically undercut the amplitude of the expression “transfer of goods” under Section 80-IA(8) – which is now part of Section 10A of the Income Tax Act. Such an interpretation would defeat Section 10A(7) entirely.”

Read the full text of the Judgment below.