COMMISSIONER OF INCOME TAX vs. M/S.EXTRA WEAVE

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HON'BLE MR. JUSTICE BABU MATHEW P.JOSEPH THURSDAY, THE 23RD DAY OF FEBRUARY 2012/4TH PHALGUNA 1933 ITA.No. 502 of 2009 ( ) ----------------------- ITA.492/2008 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 19.12.2008 ASSESSMENT YEAR 2005-2006. APPELLANT(S)/APPELLANT/APPELLANT: -------------------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/RESPONDENT: ------------------------- M/S.EXTRA WEAVE, PB NO.74, SAKTHEESWARAM JUNCTION, VELORVATTOM, CHERTHALA ALAPPUZHA. BY ADV. SRI.T.M.SREEDHARAN BY ADV. SMT.C.K.SHERIN BY ADV. SRI.V.P.NARAYANAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 23-02-2012, ALONG WITH ITA. 503/2009 AND ITA 604/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: LSN

ITA.No. 502 of 2009 ( ) ANNEXURE PETITIONER'S ANNEXURE: ANNX A: COPY OF THE CIRCULAR NO. 23 OF 1969 DATED 23.07.1969. ANNX B: COPY OF THE DER U/S 143(3) OF THE INCOME TAX ACT 1961 DATED 10.10.2005. ANNX C: CIT (A) ORDER IN ITA NO. 39/ALPY/CIT-IV/06-07 DATED 17.12.2007. ANNX D: COPY OF THE ORDER OF ITAT IN ITA NO. 492/COCH/2008 DATED 19.12.2008. ANNX E: COPY OF INSTRUCTION NO. 5/2008 DATED 15.05.2008 . RESPONDENT'S ANNEXURE: NIL //TRUE COPY// P.A. TO JUDGE. LSN

C.R. C.N.RAMACHANDRAN NAIR & BABU MATHEW P.JOSEPH, JJ. .................................................................... I.T.A.Nos.502, 503 & 604 of 2009 .................................................................... Dated this the 23rd day of February, 2012. J U D G M E N T Ramachandran Nair, J. The sole question raised in the connected appeals filed by the Revenue against the very same assessee is whether the Tribunal was justified in allowing deduction of canvassing commission paid in the determination of export turnover for the purpose of deduction under Section 10B of the Income Tax Act (hereafter referred to as the Act for short). 2. The assessee is a 100% export oriented unit engaged in manufacturing and export of coir products by using synthetic materials as well. Being a 100% EOU the assessee is entitled to deduction under Section 10B on the profit earned on export. However, since the assessee has DTA sales, the eligible export profit for deduction has to be worked out in terms of Section 10B(4) of the Act, which provides for

I.T.A.Nos.502, 503 & 604/2009 -2- working out proportionate profit on export turnover from the total profit. There is no dispute on the total profit or on the total turnover and the only dispute is what is export turnover that qualifies for deduction. While the case of the assessee is that it is the sale proceeds received in convertible foreign exchange that is export turnover, the Assessing Officer reduced therefrom the canvassing commission paid by the assessee to foreign agents in convertible foreign exchange and took only the net export turnover realised for the computation of export profit for deduction. The first appellate authority as well as the Tribunal agreed with the claim of the assessee and therefore the Revenue has filed these appeals against the common order of the Tribunal rendered for the assessment years from 2004-05 to 2006-07. 3. We have heard learned Senior Standing Counsel Shri.P.K.R.Menon appearing for the Revenue and learned Senior counsel Shri.T.M.Sreedharan appearing for the assessee.

I.T.A.Nos.502, 503 & 604/2009 -3- 4. Since the question raised is only on the scope of deduction under Section 10B(4), we extract hereunder the said Section with the definition clause of “Export Turnover” contained in Clause (iii) of Explanation 2 to Section 10B(9A) of the Act. “10B(4) : For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.” Explanation 2(iii) to Section 10B(9A) :- “”export turnover” means the consideration in respect of export (by the undertaking) of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;” 5. Relying on the decision of the Karnataka High Court in Commissioner of Income Tax and another v. Infosys

I.T.A.Nos.502, 503 & 604/2009 -4- Technologies Limited, reported in 246 CTR (KR) 371 and the decision of the Honourable Supreme Court in Continental Construction Ltd. v. CIT, reported in 195 ITR 81, learned Senior Standing Counsel for the Revenue contended that “technical service” has a wide meaning and it includes service rendered by canvassing agents. According to the Revenue's counsel, canvassing orders for export of commodity by the foreign agent abroad from the foreign buyers of the assessee is nothing but technical or professional service. The expenditure incurred by way of payment of commission to such agents should be deducted as provided under Explanation clause 2(iii) of sub Section (9A) of Section 10B while determining export turnover for computation of deduction under sub Section (4) of Section 10B. 6. Learned Senior counsel appearing for the assessee, on the other hand, contended that the commission payment is made only to the agent abroad for canvassing orders and he is not rendering any technical or professional service. According

I.T.A.Nos.502, 503 & 604/2009 -5- to him, the commission paid is only around 5% of export turnover. 7. After hearing both sides and on going through the orders, we notice that the assessee has received the entire sale proceeds in converted foreign exchange which constitute export turnover under the main part of the definition clause above stated. However, exclusion is provided from the amount so received in convertible foreign exchange of so much of the expenditure incurred for technical services outside India. If the assessee incurs any expenditure for technical services and makes payment abroad, certainly deduction is called for from the export turnover and only net turnover could be reckoned for the computation of eligible deduction. 8. The short question therefore to be considered is whether an agent canvassing orders for the assessee is engaged in rendering technical services to the assessee. There is nothing to indicate in the records or in any of the

I.T.A.Nos.502, 503 & 604/2009 -6- orders including the assessment order that the agent, who rendered service and to whom payment is made by the assessee, has rendered any technical or professional service answering the definition of “technical service”. Even though “technical service" as such is not defined under Section 10B, it is given meaning under Explanation 2 to Section 9(vii) of the Act, from which it is clear that it has only literal meaning under the statute. Of course in the decision relied on by the learned Senior Standing Counsel for the Revenue, the Honourable Supreme Court has stated that technical service has a wide meaning and it takes in professional service as well. However, there is nothing to indicate from the records that the canvassing agent has rendered any technical or professional knowledge justifying deduction of the amount paid to them to determine the export turnover, on which the assessee has been granted deduction. Since the finding of the lower authorities are to the effect that payment made to the canvassing agent by the assessee is

I.T.A.Nos.502, 503 & 604/2009 -7- not for any professional or technical service, no deduction is called for in terms of Explanation 2(iii) of sub Section (9A) of Section 10B for the purpose of computation of deduction under sub Section (4) of Section 10B. We, therefore, do not find any merit in the appeals filed by the Revenue. Consequently, these appeals are dismissed as devoid of any merit. (C.N.RAMACHANDRAN NAIR, JUDGE) (BABU MATHEW P.JOSEPH, JUDGE) jg