M/S AMSOFT INFORMATION SERVICES vs. THE DEPUTY COMMISSIONER OF INCOME TAX,

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ITA/734/2008HC KarnatakaKAHC01027691200804 August 2014Bench: N.KUMAR,RATHNAKALA7 pages
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What did the High Court hold?

The High Court, in light of its previous decision in Commissioner of Income Tax And Another Vs. Tata Elxsi Ltd. reported in [2012] 349 ITR 98 (Karn), answered the substantial questions of law in favour of the assessee and against the revenue. The Court held that there must be uniformity in the ingredients of both the numerator and the denominator of the formula prescribed under Section 10A to avoid anomalies. If export turnover in the numerator is arrived at after excluding certain expenses, the same expenses should also be excluded when computing export turnover as a component of total turnover in the denominator. The Court reasoned that the total turnover includes export turnover, and the components cannot be different. Therefore, if an expense is excluded from export turnover, it should also be excluded from total turnover if it forms part of the export turnover component. The Court directed the assessing authority to pass consequential orders in terms of the Tata Elxsi judgment. However, it noted that the Tata Elxsi judgment was challenged before the Apex Court, and consequential orders could be passed if a contrary view was taken by the Apex Court. Substantial questions of law 1 and 2 were kept open to be adjudicated upon at an appropriate time.

What were the facts?

This is an appeal by M/s Amsoft Information Services (India) Pvt. Ltd. (the assessee) against an order of the Income Tax Appellate Tribunal for the Assessment Year 2002-2003. The appeal was admitted to consider substantial questions of law. The assessee is challenging the Tribunal's confirmation of the first appellate authority's decision regarding the computation of export turnover under Section 10A of the Income Tax Act, 1961. The core dispute revolves around the exclusion of certain expenses from the total turnover for the purpose of calculating the deduction under Section 10A.

What were the issues?

1. Whether the Commissioner of Income Tax Appeals has the power to enhance an issue that does not arise from the proceedings of the order, a power vested in the Commissioner of Income Tax under Section 263 of the Income Tax Act, 1961? (Question of law) 2. Whether the Tribunal was justified in confirming the order of the first appellate authority, holding that the delivery of software must be reduced for the purpose of export turnover in terms of Explanation 2(iv) to Section 10A(8) of the Income Tax Act, 1961? (Question of mixed law and fact) 3. Whether, under Section 10A of the Income Tax Act, the amount of communication expenses relating to the delivery of software should be excluded from the total turnover if it was reduced from the export turnover? (Question of law) Assessee's Contention: The assessee argued that communication expenses related to software delivery, if reduced from export turnover, should also be excluded from total turnover for Section 10A calculations to maintain uniformity. The assessee relied on the principle of consistency in numerator and denominator. Revenue's Contention: The judgment does not record specific arguments from the revenue on these issues.

Which sections of the Income-tax Act were involved?

Section 10A,Section 10A(8),Section 263,Section 260-A

AI-generated summary — verify with the full judgment below

- 1 - IN THE HIGH COURT OF KARNATAKA AT BANGALORE

DATED THIS THE 4TH DAY OF AUGUST, 2014

PRESENT

THE HON’BLE MR.JUSTICE N.KUMAR

AND

THE HON’BLE MRS.JUSTICE RATHNAKALA

INCOME TAX APPEAL NO.734 OF 2008

BETWEEN:

M/S AMSOFT INFORMATION SERVICES (INDIA) PVT LTD. REP. BY M.J. SHANTHA RAM, DIRECTOR, NO.4A, NITESH BROADWAY, M.G.ROAD, BANGALORE - 560 001.

…APPELLANT (BY SRI A SHANKAR & SRI M LAVA, ADVS.)

AND:

THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 11(1), R.P.BUILDING, NRUPATHUNGA ROAD, BANGALORE - 560 001

...RESPONDENT (BY SRI. K V ARAVIND, ADV.)

THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 28-03-2008 PASSED IN ITA NO.602/BANG/2007, FOR THE ASSESSMENT YEAR 2002- 2003, PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO:

- 2 - I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN,

II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, PASSED IN ITA NO.602/BANG/2007, DATED 28-03-2008 AND ORDER OF THE FIRST APPELLATE AUTHORITY IN RELATION TO THE ISSUE OF TELECOMMUNICATION EXPENSES AND ALLOW THE APPEAL OF THE APPELLANT.

THIS APPEAL COMING ON FOR FINAL HEARING THIS DAY, N.KUMAR J., DELIVERED THE FOLLOWING:

J U D G M E N T

This appeal is preferred by the assessee challenging the order passed by the Tribunal.

2.

The appeal was admitted on 10.07.2008, to consider the following substantial questions of law: “1) Whether the power of the Commissioner of Income Tax Appeals to enhance encompasses on an issue which does not arise of the proceedings of the order and which power is in the domain of the Commissioner of Income Tax administration under section 263 of the Income Tax Act, 1961?

2) Whether the Tribunal was justified in confirming the order of the first appellate authority in holding that the delivery of software has to be reduced for the purpose of export

- 3 - turnover in terms of explanation 2(iv) of section 10A (8) of the Income Tax Act, 1961?”

3.

Learned Counsel for the parties submits that one more substantial question of law arise for consideration is as under: “Whether under Section 10A of the Income Tax Act, the amount of communication expenses relating to delivery of software should be excluded from the total turnover if this was reduced from the export turnover?

4.

This Court in the case of Commissioner of Income Tax And Another Vs. Tata Elxsi Ltd. reported in [2012] 349 ITR 98 (Karn), after considering the statutory provisions and various judgments on which reliance was placed, held as under: “17. From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports.

- 4 - In the case of combined business of an assessee, having export business and domestic business, the Legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total

- 5 - turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term “total turnover” in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the Legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, “export turnover” is defined, and when the “total turnover” includes export turnover, the very same meaning given to the export turnover by the Legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the

- 6 - intention of the Legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the Legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under section 10A, would be as under:

Profits of the business Export turnover . Of the undertaking X (Export turnover + domestic turnover)”

5.

In that view of the matter the said substantial questions of law are answered in favour of the assessee and against the revenue. The assessing authority shall pass a consequential orders in terms of the order passed in the case of Commissioner of Income Tax And Another Vs. Tata Elxsi Ltd. reported in [2012] 349 ITR 98 (Karn), under Section 261(A) of the Act. However, it is submitted that the said judgment (Tata Elxsi) is challenged before the Apex Court and if any contrary view is taken up by the Apex

- 7 - Court, consequential order could be passed by the assessing authority.

6.

In the light of the aforesaid order, the substantial question Nos.1 and 2 are not answered and are kept open to be adjudicated upon at appropriate time if necessary. Accordingly, this appeal is disposed of.

Sd/- JUDGE

Sd/- JUDGE

nvj

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