Loading judgment…
No AI summary yet for this case.
Larsen & Toubro Infotech 2 1887/Mum/2012 & 3452/Mum/2013 ORDER PER N.K. PRADHAN, A.M. The captioned appeals filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-5, Mumbai and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off through a consolidated order for the sake of convenience. 2. The 1st ground raised in this appeal is against the order of the Ld. CIT(A) confirming the assessment made by the Assessing Officer (AO) excluding expenditure incurred in foreign currency from ‘export turnover’ for determining deduction u/s 10A of the Act. The 2nd ground is against the order of the Ld. CIT(A) confirming the assessment made by the AO excluding communication expenses from ‘export turnover’ for determining deduction u/s 10A of the Act. For the AY 2006-07, an additional ground of appeal has been filed by the assessee stating that “without prejudice to Ground No. 2, the appellant, on the facts and in the circumstances of the case and in law, prays that out of total communication charges of Rs.8,99,52,279/- communication charges amounting to Rs.1,89,75,330/- were incurred in foreign currency and the same were also included in the total sum of Rs.348,95,79,965/- in expenditure incurred in foreign in Ground No.
1. Accordingly, there will be double adjustment to the extent of Rs.1,89,75,330/- and hence, disallowance of communication charges to be restricted to Rs.7,09,76,949/- [Rs.8,99,52,279/- less Rs.1,89,75,330/-].”
Larsen & Toubro Infotech 3 1887/Mum/2012 & 3452/Mum/2013 The above additional ground raised by the assessee is admitted as the facts are already on record before the AO.
3. Briefly stated, the facts of the case are that the assessee-company is engaged in the business of software development. It also undertakes export of software. The AO noticed that in the computation of exempt profit u/s 10A, the assessee has not excluded (i) interest income from the profit of business undertaking and (ii) communication charges and expenditure in foreign currency from export turnover. The AO referred to clause (iv) of Explanation 2 to section 10A of the Act and excluded communication expenses and expenditure in foreign currency from ‘export turnover’ for determining deduction u/s 10A of the Act.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) followed the order of the ITAT against the order u/s 263 in assessee’s own case which reads as under: “4.1 It has been decided in various judicial decisions that when there is lack of enquiry or no enquiry, the CIT has power to assume jurisdiction u/s 263 of the Act. Since in the instant case, the AO has failed to make proper enquiry and has not applied his mind, therefore, the order becomes erroneous and prejudicial to the interest of the Revenue. Accordingly, the order of the CIT assuming jurisdiction u/s 263 is justified. 4.2 However, we find the CIT while directing the AO to re-compute the deduction u/s 10A has directed the AO to re-compute the deduction u/s 10A by taking into account the export turnover which excludes telecommunication charges and expenses for providing technical services outside India. However, he has failed to direct the AO to exclude the above Larsen & Toubro Infotech 4 1887/Mum/2012 & 3452/Mum/2013 items from the figure of “total turnover” while applying the formula prescribed u/s 10B(4) of the Act as has been decided by the Special Bench of the Tribunal in the case of Sak Soft Ltd. (supra). We, therefore, restore this issue to the file of CIT with a direction of modify his order in the light of the decision of Special Bench of the Tribunal while directing the AO to re- compute the deduction u/s 10A of the Act. We hold and direct accordingly.” 4.1 The Ld. CIT(A) concluded that the ITAT has, thus, held that expenditure in foreign currency and communication expenses should be excluded from the ‘export turnover’ as well as ‘total turnover’ for the purpose of computing deduction u/s 10A. Therefore, he justified the action of the AO in considering exclusion of expenditure in foreign currency and communication expenses for computing deduction u/s 10A.
Before us, the Ld. counsels of the assessee submit that in the case of the assessee, ‘export turnover’ represents development of software as per the agreed terms with the clients. Further, ‘export turnover’ represents Free On Board (F.O.B.) value and aforesaid expenditure in foreign currency does not form part of the ‘export turnover’ as the same has not been separately billed. The customers have charged only for software services. The question of exclusion of aforesaid expenditure can arise only if these expenses are recovered from the customers and formed part of the ‘export turnover’ received in India. If such expenses are not included in the consideration received in convertible foreign exchange, the question of deduction of such expenditure from the consideration does not arise. Further, this expenditure has already been Larsen & Toubro Infotech 5 1887/Mum/2012 & 3452/Mum/2013 deducted before arriving to the profits eligible for deduction u/s 10A of the Act. 5.1 Referring to Explanation 2(iv) to the section 10A, the Ld. counsels submit that exclusion of expenses in foreign currency from the ‘export turnover’ is possible only when the same is for providing technical services outside India and not for development of software. It is stated by them that the assessee did not render any independent technical services. The assessee has developed software on contract basis and handed over the same to the clients. As per general accepted accounting and business practice, if any services are rendered in respect of goods, those expenditure relate to goods and such expenditure cannot be described independent expenses so as to say in the nature of technical services. The Ld. counsels referred to the distinction in respect of consideration received against expenditure incurred for the purpose of goods sold or manufactured and consideration received against independent services rendered. 5.2 Regarding the exclusion of communication expenses from ‘export turnover’ for determining deduction u/s 10A, the Ld. counsels submit that in the case of the assessee, ‘export turnover’ represents development of software as per the agreed terms with the clients. Further, ‘export turnover’ represents F.O.B. value and aforesaid link charges do not form part of the ‘export turnover’ as the same has not been separately billed. Further, this expenditure has already been deducted before arriving at the profits eligible for deduction u/s 10A of the Act. Referring to Explanation 2(iv) to section 10A, it is stated by Larsen & Toubro Infotech 6 1887/Mum/2012 & 3452/Mum/2013 them that exclusion of telecommunication charges from the ‘export turnover’ is possible only when the same has been included in ‘export turnover’. The Ld. counsels further submit that the communication expenses are related to link charges. These communication charges are software development expenses. The basic intention for deduction of telecommunication charges from ‘export turnover’ is that delivery of goods should be F.O.B. Only telecommunication charges attributable to delivery of goods outside India are to be considered while reducing from consideration received in convertible foreign exchange and accordingly, if such expenses are not attributable to delivery of goods outside India, such expenses are not required to be deducted from the consideration. 5.3 The Ld. counsels, in support of their arguments, file a copy of the Tribunal decision in Zylog Systems Ltd. v. ITO (ITA Nos. 1138 and 1141/Mds/2007) (Chennai Special Bench), Patni Telecom (P) Ltd. v. ITO, 308 ITR (A.T.) 0414 (Hyderabad Bench), Willis Processing Services (India) Pvt. Ltd. v. ACIT (ITA No. 4329/Mum/2008) (Mumbai Bench), Capgemini India (P.) Ltd. v. Addl. CIT (2011) 46 SOT 195 (Mumbai-ITAT), Relq Software (P.) Ltd. v. ITO (2010) 125 ITD 101 (Bang), Geometric Software Solutions Co. Ltd. v. ACIT (2009) 32 SOT 428 (Mum). Reliance is also placed by them on the decision of the Bombay High Court in CIT v. M/s 3D PLM Software Solutions Ltd. (ITA No. 46, 110 and 112 of 2014). The Ld. counsels thus submit that the AO be directed to re- compute the deduction u/s 10A after including expenditure in foreign currency and communication expenses.
Larsen & Toubro Infotech 7 1887/Mum/2012 & 3452/Mum/2013 6. Per contra, the Ld. DR relies on the order passed by the Ld. CIT(A) and also the decision of the ITAT ‘A’ Bench Mumbai in assessee’s own case for the AY 2004-05 (ITA No. 2683/Mum/2009).
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below. Let us refer to how export turnover is defined here. The definition of expression “Export turnover” has been given in clause (iv) of Explanation 2 to section 10A so as to mean – - 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 section 10A(3), But not to 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. 7.1 In M/s 3D PLM Software Solutions Ltd. (supra) relied on by the Ld. counsels, the question of law before the Hon’ble Bombay High Court was the following: “(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that telecommunication and insurance expenditure is not to be reduced from the export turnover, ignoring the definition provided in Explanation 2(iv) to Section 10 of the Act that excludes Larsen & Toubro Infotech 8 1887/Mum/2012 & 3452/Mum/2013 telecommunication and insurance charges form the meaning of Export Turnover?” During the course of assessment proceedings before the AO, the assessee had pointed out that expenditures were incurred on account of insurance and telecommunication and were debited to the profit and loss account and these were incurred for software development, not attributable to software exported outside India and therefore, the same could not be deducted from the export turnover claimed by the assessee while seeking benefit u/s 10A. The AO without in any manner discussing the contention of the assessee, reduced the telecommunication and insurance expenditure from the total export turnover claimed except as exempt u/s 10A. The Hon’ble High Court, after discussing the case, held: “We find that the above provision mandates reduction of telecommunication and insurance charges if it is incurred in foreign exchange for providing of software outside India. We find that the Assessing Officer has in the order not given any finding with regard to respondent’s contention that this expenditure had been incurred only in India and not with regard to export of software outside India. The CIT(A) as well as the Tribunal have rendered finding of fact that this telecommunication and insurance expenses have been incurred in local currency in India and not with regard to providing software services outside India. This concurrent finding of fact has not been shown to be perverse in any manner. On the above finding of fact, it is evident that exclusion part of Explanation 2(iv) of Section 10A of the Act will not apply to the present facts. In the above view, the question as framed does not give rise to any substantial question of law.”
Larsen & Toubro Infotech 9 1887/Mum/2012 & 3452/Mum/2013 7.2 At this juncture, we discuss legal aspect of the direction to the Ld. CIT(A) given by the ITAT ‘A’ Bench Mumbai in assessee’s own case for the AY 2004-05 (ITA No. 2683/Mum/2009). In CIT v. Gem Plus Jewellery India Ltd [2010] 194 Taxman 192 (Bom.), the Assessing Officer held that while computing exemption under section 10A, freight and insurance charges should not be excluded from total turnover. The Commissioner (Appeals) affirmed the view of the Assessing Officer. On appeal, the Tribunal held that (i) the expression 'total turnover' has not been defined in section 10A; (ii) profits derived from export have to be computed by taking into consideration both - the export turnover and total turnover of the business carried on by the undertaking; (iii) both - the export turnover and total turnover which constitute the numerator and denominator in the application of the formula under sub-section (4) of section 10A should be comparable; and (iv) freight and insurance have no element of profit and, hence, cannot be included in the total turnover of the business carried on by the industrial undertaking. The Tribunal, accordingly, directed that the deduction under section 10A should be computed after excluding freight and insurance charges from the total turnover. On the revenue's appeal, the Hon’ble High Court held: “Under sub-section (1) of section 10A, a deduction is allowed from the total income of the assessee of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years commencing from the assessment year relevant to the previous year in which the undertaking Larsen & Toubro Infotech 10 1887/Mum/2012 & 3452/Mum/2013 begins manufacture or production. Sub-section (4) of section 10A provides the manner in which the profits derived from the export of articles or things or computer software shall be computed. [Para 4] Under sub-section (4), the proportion between the export turnover in respect of the articles or things, or, as the case may be, computer software exported, to the total turnover of the business carried on by the undertaking is applied to the profits of the business of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried on by the undertaking. The total turnover of the business carried on by the undertaking would consist of the turnover from the export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator inasmuch as the export turnover is a part of the total turnover. [Para 5] The export turnover in the numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator. The Legislature has provided a definition of the expression 'export turnover' in the Explanation (2) to section 10A by which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange, so as not to include, inter alia, freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore, in computing the export turnover the Legislature has made a specific exclusion of freight and insurance charges. [Para 6] The contention of the revenue was that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion Larsen & Toubro Infotech 11 1887/Mum/2012 & 3452/Mum/2013 has not been provided for in regard to total turnover. The submission of the revenue, however, missed the point that the expression 'total turnover' has not been defined at all by the Parliament for the purposes of section 10A. However, the expression 'export turnover' has been defined. The definition of 'export turnover' excludes freight and insurance. Since export turnover has been defined by the Parliament and there is a specific exclusion of freight and insurance charges, the expression 'export turnover' cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to the Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the revenue was to be accepted, the same expression, viz., 'export turnover' would have a different connotation in the application of the same formula. The submission of the revenue would lead to a situation where freight and insurance, though they have been specifically excluded from 'export turnover' for the purposes of the numerator would be brought in as part of the 'export turnover' when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which leads to an absurdity must be avoided. [Para 7] Moreover, a receipt such as freight and insurance charges, which do not have any element of profit, cannot be included in the total turnover. [Para 9] Freight and insurance do not have an element of turnover. For that reason in addition, these two items would have to be excluded from the total turnover, particularly in the absence of a legislative prescription to the contrary. Therefore, the Tribunal was justified in holding that the exemption under section 10A should be computed after excluding freight and insurance charges from the total turnover. [Para 10]”