INDUS VALLEY PARTNERS (INDIA) PVT. LTD.,NOIDA vs. DCIT, NEW DELHI

Brief facts of the case are that the assessee is a company incorporated under the Companies Act, 1956 and is an undertaking registered as Software Technology Park (STPI). Principally they are engaged in providing Information Technology Solutions and services to the Alternative Asset Management Industry, besides offering specialized services in the areas of IT Strategic Consulting Services, Business Analysis, Development Services, Application Management and Quality Assurance Services. For the assessment year 2006-07 they have filed their return of income on 26/11/2006 declaring a total income of Rs. 20,22,949/- . Assessment was complete by making addition under section 14A of the Act and also on account of foreign exchange fluctuation loss and donations, by order dated 25/11/2008.

Subsequently by issuing notice under section 148 of the Act on 26/3/2013, learned Assessing Officer reopened the assessment on the ground that on a perusal of record, it was found that during the year under consideration, the assessee had claimed deduction under section 10 A of the Act to the tune of Rs. 6,79,67,756/-, by calculating the export turnover without excluding the expenditure of fright, foreign currency expenditure on travel and foreign currency expenditure on consultancy, from the “export turnover” thereby claiming excess deduction under section 10 A of the act to the tune of Rs. 1, 32, 88, 123/-and concluded the proceedings under section 147/144 of the Act by order dated 26/3/2014 by making such an addition.

Appeal preferred by the assessee was dismissed by the Ld. CIT(A) while concurring with the findings of the Learned Assessing Officer. Hence this appeal is preferred by the assessee on several grounds including the challenge to the reopening proceedings and also to the additions. In all 6 grounds are preferred by the assessee, but at the time of arguments Ld. AR submitted that the assessee is not pressing all the grounds except ground No. 4.1 which challenges the not allowing the exclusion of expenses which were excluded from the export turnover from the total turnover while calculating the deduction under section 10 A of the act.

Ld. AR argued that the total turnover has to be reduced by the amount by which the export turnover was reduced and then only the correct amount of deduction could be reached by applying the formula under section 10 A of the Act. For this purpose, he placed reliance on the decision of the Hon’ble Apex Court in the case of CIT vs. HCL technologies Ltd (2018) 93 taxmann.com 33 (SC) and also the circular No. 4/2018 issued by the CBDT on 14/8/2018.

In this context for proper understanding of the principle, the observations of the Hon’ble Apex Court in the case of HCL technologies Ltd (supra), vide paragraph No. 15 to 20, needs to be extracted and those read that,-

A Statute is the intention of the legislature who enacts it after having regard to various facts and circumstances. It is a cardinal principle of law that the interpretation by the Court shall be done in such a way that the intention of the legislature shall prevail and no injustice occurred with the parties. The rule of harmonious construction is the thumb rule to interpretation of any statute. An interpretation which makes the enactment a consistent whole, should be the aim of the Courts and a construction which avoids inconsistency or repugnancy between the various sections or parts of the statue should be adopted.

In CIT v. J.H. Gotla[1985] 23 Taxman 14J/156 ITR 323 (SC) this Court has held as under: "46. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of statutory provision is an attempt to discover the intention of the Legislature from the language used…. 47 ….If the purpose of a particular provision is easily discernible from the whole scheme of the Act which, in the present case, was to counteract, the effect of the transfer of assets so far as computation of income of the Respondent was concerned, then bearing that purpose in mind, the intention should be found out from the language used by the Legislature and if strict literal, construction leads to an absurd result, i.e. result not intended to be subserved by the object of the legislation found out in the manner indicated above, then if other construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity an taxation are often strangers , attempt should be made that these do not remain so always so and if a construction results in equity rather than in injustice , then such construction should be preferred to the literal construction. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer…."

The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata ElxsiLtd. [2012] 204 Taxman 321/17/taxmann.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from 'export turnover' must also be excluded from 'total turnover', since one of the components of 'total turnover' is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.

Accordingly, the formula for computation of the deduction under Section 10A of the Act would be as follows:

Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.

Pursuant to the above decision of the Hon’ble Apex Court, while referring to the same the CBDT issued circular No. 4/2018 on 14/8/2018 clarifying that fright, telecommunication charges and insurance expenses are to be excluded both from “export turnover” and “total turnover”, while working out deduction admissible under section 10 A of the Act to the extent they are attributable to the delivery of articles or things or computer software outside India; and that similarly the expenses incurred in foreign exchange for providing the technical services outside India are to be excluded from both the “export turnover” and “total turnover” while computing the deduction admissible under section 10 A of the Act. Thus, the CBDT clarified that all charges/expenses specified in explanation 2 (iv) to section 10 A of the act, are liable to be excluded from total turnover also for the purpose of competition of deduction under section 10 A of the Act.

In view of the above legal position, the issue involved in this matter is no longer res integra and ground No. 4.1 has to be answered holding that the expenses which are excluded from the “export turnover” have to be excluded from the “total turnover” while calculating the deduction under section 10 A of the Act. We accordingly direct the learned Assessing Officer to recompute the deduction under section 10 A of the Act in accordance with the settled principle of law. For this purpose, we set aside the impugned order and remand back the issue to the file of the learned Assessing Officer for recomputing the deduction under section 10 A of the act while following the above directions. In the result, appeal of the assessee is allowed for statistical purpose.