DCIT, BANGALORE vs. M/S W.S. ATKINS (INDIA) PVT. LTD.,, BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the revenue and Cross Objection by the assessee are directed

against the order dt.22.03.2016 of Commissioner of Income Tax (Appeals) for

the Assessment Year 2011-12.

2 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 “1. The order of the learned CIT (Appeals) is opposed to law and facts of the case.

expenditure in foreign currency towards travelling from export turnover as well

as total turnover for the purpose of computing deduction under Section 10A of

the Act.

the material on record and the judicial decision cited. On perusal thereof we

find that the issue before us for adjudication i.e. expenditure incurred on travel

in foreign currency abroad is reduced from export turnover an equal amount

should also be reduced from total turnover while computing the deduction

3 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 under section 10A of the Act, is covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra). In this order, the Hon’ble Court held –

“ The Bombay High Court had an occasion to consider the earning of the word ‘total turnover’ in the context of section 10A, in the case of CIT Vs. Gem Plus Jewellery India Ltd. (2011) [330 ITR P. 175 (Bom)] (2010-TIOL-456-HC-MUM-IT). Interpreting sub-section (4) of section 10A, it is held as under : “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 over by the undertaking is applied to the profits of the business of the undertaking in computing 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 formula which is prescribed by sub-section (4) of section 10A is as follows : Profits derived Profits of the Export turnover from export of business of the in respect of the articles or undertaking. articles or things or things or computer computer software. software. 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 export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export

4 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression “export turnover” in Expln.2 to s.10A 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 but 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. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression “total turnover” has not been defined at all by Parliament for the purposes of s.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 Parliament and there is a specific exclusion of freight and insurance, 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 Parliament to make a provision 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 were 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 these 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

5 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided.“ The Special Bench of the Tribunal, in the case of ITO Vs. Sak Soft Ltd. (2009) 313 ITR (AT) 353 (Chennai) (SB) (2009-TIOL- 187-ITAT-MAD-SB) also had an occasion to consider the meaning of the word ‘total turnover’. After referring to the various judgments of the High Court as well as the Supreme Court held as under : “53. For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of section 10-B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded, both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula…..” The formula for computation of the deduction under section 10A would be as under : Profits of the business x export turnover / Total turnover 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. 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 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

6 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 the total business income of the assessee, whereas in section 10A, the export profit is to be derived form 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 turnover in the denominator. The reason being the total turnover includes export turnover 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 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, themeaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the

7 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 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 of the undertaking x Export turn over (Export turnover + domestic turn over) Total Turnover 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the revenue.”

Respectfully following the aforementioned decision of the Hon’ble High Court

of Karnataka in the case of CIT Vs. Tata Elxsi Ltd. (supra), we uphold the order

of the learned CIT (Appeals) in directing the Assessing Officer to reduce the

travel expenses incurred in foreign currency from both export turnover and

total turnover for the purpose of computing the deduction under section 10A

of the Act in the case on hand. Consequently this ground raised by revenue is

dismissed.

“ The learned Assessing Officer erred in disallowing and the learned CIT (Appeals) erred by upholding the disallowance of depreciation of Rs.3,10,698 claimed under Section 32 of the Act @ 60% on the written down value of Rs.5,17,830 being software purchases of Rs.32,36,441 apitalised in Assessment Year 2009-10 by contending that TDS ws not effected in Assessment Year 2009-10 and thereby invoking the provisions

8 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 of section 40(a)(Ia) of the Act to disallow the depreciation claim of Rs.3,10,698 for Assessment Year 2011-12.”

on software purchased capitalised by invoking the provisions of Section

40(a)(ia) of the Act.

Departmental Representative and considered the relevant material on record.

We note that the assessee purchased software and capitalised the same in

Assessment Year 2009-10. The Assessing Officer disallowed the claim of

depreciation for the assessment year 2009-10. The Tribunal has dealt with this

issue and allowed the claim of the assessee vide order reported in (2015) 41 ITR

(Trib) 397 dt.8.5.2015 in paras 13 & 14 as under :

“ 13. We have heard the submissions of the learned Departmental representative, who reiterated the stand of the Revenue as contained in ground No. 5. In our view, the issue raised by the Revenue in the ground of appeal is no longer res integra and has been considered and decided by the Income-tax Appellate Tribunal Delhi Bench in the case of SMS Demag (P.) Ltd. v. Dy. CIT [2010] 38 SOT 496 and Sonic Biochem Extractions (P.) Ltd. v. ITO [2013] 59 SOT 4/35 taxmann.com 463 (Mum). In Sonic Biochem Extractions (P.) Ltd. (supra), identical issue was considered and decided by the Mumbai Tribunal. Following were the relevant observations (headnote): "The assessee purchased software, capitalised the payment to the computers account as the software came along with the hardware of computers and claimed depreciation. On the ground that purchase of software is essentially purchase of copyright which attracts tax deduction at source under section 194J, the Assessing Officer invoked the provisions of section 40(a)(ia) and disallowed the depreciation claimed. The Commissioner (Appeals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal :

9 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of 'royalty'. Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilisation in the day-to-day business." 14. Respectfully following the aforesaid decision of the Tribunal, we uphold the order of the Commissioner of Income-tax (Appeals) and dismiss the ground raised by the Revenue.”

Even otherwise in case, the purchase of software is considered to be royalty.

The claim of depreciation cannot be disallowed by invoking the provisions of

Section 40(a)(ia) of the Act in view of the co-ordinate bench dt.29.11.2016 in

the case of DCIT Vs. Tally Solution Ltd. in IT(TP)A No.1463/Bang/2014 in para

19 as under :

“ 19. As regards the applicability of the provisions of Section 40(a)(ia) of the Act for disallowance of claim of depreciation, we find that when the assessee has capitalised this amount and not claimed as a revenue expenditure then the claim of depreciation cannot be disallowed by invoking the provisions of Section 40(a)(ia) of the Act. This issue has been dealt with by the co-ordinate bench of this Tribunal in the case of SKOL Beverages Ltd. Vs. ACIT (supra) as well as Kawasaki Micro Electronics, Inc. – India Branch Vs. DCIT (supra). In the case of Kawasaki Micro Electronics, Inc. – India Branch Vs. DCIT (supra), the Tribunal has considered an identical issue in paras 6 to 8 as under : “ 6. We have heard the rival submissions as well as considered the material on record. The issue before us is limited only with respect to the disallowance of depreciation by invoking the provisions of section 40(a)(i) of the Act. There is no dispute that the assessee has made the payment in question to a non-resident for purchase of software and the said payment has been capitalized by the assessee in the block of computer asset. Once the assessee capitalized the payment and has not claimed the same as an expenditure against the profits of the business of the assessee, then, the question arises whether the depreciation is a statutory deduction as per the section 32 of the Act can be disallowed by invoking the provisions of section 40(a)(i) of the Act. At the outset, it is to mention that on the same set of facts an identical issue has been dealt

10 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 by the ITAT, Mumbai Bench in the case of SKOL Breweries Ltd. (supra), wherein it was held in paras 16.1 to 16.4 as under :-

“ 16.1 As regards the alternative plea of the ld Sr counsel for the assessee that since the assessee has not claimed the entire amount as revenue expenditure; but has capitalized the same and claimed only depreciation u/s 32(1)(ii); therefore, provisions of sec. 40(a)((i) shall not apply. Section 40(a)(i) contemplates that any interest, royalty, fee for technical services or other sum chargeable under this act, which is payable outside India as it is relevant for the case in hand on which tax is deductible at source under Chapter XVII -B and such tax has not been deducted or, after deduction, has not been paid, the amount of interest, royalty, fee for technical services and other sum shall not be deducted in computing the income chargeable under the head "profits & gains of business or profession". This condition of deductibility has been stipulated u/s 40 notwithstanding anything to the contrary in section 30 to 38 of the Act. Sec. 40 begins with non-obstante clause; therefore, it is an overriding effect t the provisions of sec. 30 to 38 of the I T Act. The question arises is whether any amount paid outside India or to the Non Resident without deduction of tax at source and the assessee has capitalized the same in the fixed assets and claimed only depreciation is subjected to the provisions of sec. 40(a)(i) or not ?. We quote the provisions of sec. 40(a)(i) as under: 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (a) in the case of any assessee—

[(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,— (A) outside India; or

(B) in India to a non-resident, not being a company or to a foreign company,

on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

11 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 Explanation.—For the purposes of this sub-clause,—

(A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub- section (1) of section 9;

(B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; 16.2 It is manifest from the plain reading of provisions of sec. 40(a)(i) that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and subject to TDS under Chapter XVII-B. There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated under sec. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction and after the insertion of Explanation 5 to sec. 32, it is obligatory on the part of the Assessing Officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the purpose of business or profession which means the depreciation is a deduction for an asset owned by the assessee and used for the purpose of business and not for incurring of any expenditure. 16.3 The deduction u/s 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of deprecation. Depreciation is not an outgoing expenditure and therefore, the provisions of sec. 40(a)(i) of the Act are not attracted on such deduction. This view has been fortified by the decision of the Hon'ble Punjab & Haryana High Court in the case of Mark Auto Industries Ltd. (supra) in pars 5 & 6 as under: "5. Adverting to questions (ii) and (iii), the issue which arises for consideration is whether the assessee could be disallowed claim for depreciation under Section 40(a)(i) of the Act on the ground that the payments made for technical know-how which had been capitalized, no tax deduction at source has been made thereon. The Tribunal while accepting the plea of the assessee, in para 3, had noticed as under: "3. Ground no. 4 is against deletion of an addition of Rs. 6,88,1751- made by the AO on account of deduction of depreciation on technical know-how as the assessee failed to

12 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 deduct tax in accordance with the provision contained in section 40(a)(i). The finding of the learned CIT(A) was that the assessee had incurred, expenditure by way of technical know-how, which was capitalized amount as made in the return of income. Since the assessee had not claimed deduction for the amount paid, the provisions contained in section 40(a) (i) were not attracted. The learned DR could not find any fault with this direction of the CIT(A) also although she referred to page 4 of the assessment order, where it was mentioned that the tax deducted in respect of the payment was made over to the Government in the subsequent year and, therefore, depreciation could not be deducted on the capital expenditure incurred by the assessee. In reply, the learned counsel pointed out that the expenditure by way of technical know-how was capitalized and it was not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us. Thus, this ground is also dismissed." 6. Learned counsel for the revenue was unable to substantiate that in the absence of any requirement of law for making deduction of tax out of the expenditure on technical know how which was capitalized and no amount was claimed as revenue expenditure, the deduction could be disallowed under Section 40(a)(i) of the Act. Accordingly, no infirmity could be found in the order passed by the Tribunal which may warrant interference by this Court. Thus, both the questions are answered against the revenue and in favour of the assessee." 16.4 In view of the above discussion as well as following the decision of the Hon'ble Punjab & Haryana High Court, we decide this issue in favour of the assessee and against the revenue.” 7. As mentioned above, the Tribunal has discussed and analysed the provisions of section 40(a)(i) in detail in the context of disallowance of depreciation. The learned D.R. has submitted that once the assessee has violated the provisions of section 195, then, even the expenditure is capitalized by the assessee, the provisions of section 40(a)(i) for disallowance of depreciation of such capitalized expenditure. We do not agree with the contention of the learned D.R. As a remedy for violation of provisions of section 195 is available with the Assessing Officer under Section 201 & 201A of the Act. The provisions of section 40(a) is only an additional measure to enforce the compliance of Chapter 17 – 17B. 8. By disallowing an expenditure which is otherwise allowable under the provisions of the Act. Therefore, the question of disallowance under Section 40(a) raises only when an expenditure is claimed by the assessee without deducting the tax at source as per the provisions of Chapter 17 - 17B. In the case on hand, when the assessee has not claimed, the said payment as an expenditure then the question of disallowance under Section 40(a)(i) does not arise. The only remedy which may be pressed on by the Assessing Officer is the action under Section 201 and 201A of the Act. A similar view

13 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 has been taken by the Delhi Bench of the Tribunal in the case of SMS Demang (P) Ltd. (supra) in para 8 as under :-

Accordingly, by following the earlier decisions of this Tribunal, we decide this issue against the revenue and in favour of the assessee. The order of the CIT (Appeals) for this issue is upheld.”

Accordingly, by following the earlier orders of this Tribunal, we decide this issue

in favour of the assessee and delete the addition made by the Assessing Officer

on account of depreciation.

14 IT(TP)A No.1083/Bang/2016 & C.O. No.77/Bang/2016 8. In the result, the appeal of the revenue is dismissed and C.O. of the assessee is allowed. Order pronounced in the open court on 3rd March, 2017.

Sd/- Sd/- (A.K. GARODIA) (VIJAY PAL RAO) Accountant Member Judicial Member Bangalore, Dt.03.03.2017.

*Reddy gp

Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File.

By Order

Asst. Registrar, ITAT, Bangalore