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ITA.Nos.36-37/2018
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 11TH DAY OF OCTOBER, 2018
PRESENT
HON’BLE MR.JUSTICE DINESH MAHESHWARI, CHIEF JUSTICE
AND
HON’BLE MR.JUSTICE S.G. PANDIT
ITA Nos.36-37 OF 2018
BETWEEN:
PRINCIPAL COMMISSIONER OF INCOME TAX-4 BMTC COMPLEX KORAMANGALA BENGALURU.
THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE - 4(1)(2) BMTC COMPLEX KORAMANGALA BENGALURU.
... APPELLANTS
(BY SRI. E.I. SANMATHI, ADVOCATE )
AND:
M/S. MCML SYSTEMS PVT. LTD., NO.C-9, KSSIDC INDUSTRIAL ESTATE YELAHANKA BANGALORE-68.
… RESPONDENT
THESE ITAs ARE FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, PRAYING TO SET ASIDE THE APPELLATE ORDER DATED:04/08/2017 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'B' BENCH, BENGALURU, IN APPEAL PROCEEDINGS ITA NO.2089 AND 2094/BANG/2016 FOR THE ASSESSMENT YEAR 2010-11.
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THESE
ITAs COMING ON FOR ADMISSION, S.G. PANDIT, J., DELIVERED THE FOLLOWING:
JUDGMENT
The revenue is in appeal questioning the appellate order dated 04.08.2017 in ITA Nos.2089 and 2094/Bang/2016 for the assessment year 2010-2011 passed by the Income-Tax Appellate Tribunal, ‘B’ Bench, Bengaluru (‘the Tribunal’).
The respondent-assessee, who is in the business/service of railway signaling and train control systems, filed its returns for the assessment year 2010-2011. The Assessing Officer disallowed deductions under Section 10A of the Income Tax Act, 1961 (for brevity ‘the Act’) observing that under Section 10A of the Act, it is mandatory to deduct any expenditure that has been incurred in foreign currency for the purpose of providing technical services outside India or for providing software outside India. Aggrieved by such disallowance, the assessee filed appeal before the Commissioner of Income Tax Appeals, Bengaluru. The Appellate Authority partly allowed the appeal filed by the assessee in respect of deductions made under Section 10A of the Act. The revenue, aggrieved by the said order, filed ITA
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Nos.2089 and 2094/Bang/2016 before the Tribunal. The Tribunal upheld the order of the Appellate Authority and dismissed the appeal of the revenue, which order is impugned in these appeals.
In these appeals, revenue has suggested the following substantial question of law:-
“Whether on the facts and circumstances of the case, the Tribunal is justified in directing the assessing officer to exclude the expenditure in foreign currency both from the export turnover and the total turnover when there is no provision in Section 10A which requires the said expenses to be reduced from the total turnover also ?”
However, learned counsel for the appellants – revenue frankly submits that the question proposed in these appeals stands answered in terms of the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax, Central-III vs. HCL Technologies Ltd. : (2018) 404 ITR 719 (SC) at paragraphs 10, 15 and 17 to 21 of the said decision, the Supreme Court has held as follows:-
“10. The question arises here that when the particular term has not been defined in any particular Section, is it allowed to import the meaning of such term from the other provisions of the same Act? Section 10A of the IT Act is a
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special beneficial provision and the purpose of deduction under such Section is to encourage and boost the new business undertakings situated in the free trade zone of this Nation by providing suitable deductions to such business entities. Sometimes, while calculating the deduction, disputes arise regarding the methodology of deduction which ought to be followed. Undisputedly, it is a matter of record that the Respondent is engaged in the activity of trading of generic software and providing customized software development services for domestic as well as for foreign clients through its two units situated in Software Technology Park, Gurgaon (Now Gurugram) which falls under the definition of the Section 10A of the IT Act. The contention of the Respondent is that it incurred expenditure in foreign exchange in sending professionals abroad as per the agreements with the foreign constituents.
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 statute should be adopted.
The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012]204 Taxman 321/17/taxmann.com100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section 10A of the IT Act,
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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:
Export turnover as defined in Explanation 2(IV) of Section 10A of IT Act Export Profit= total X ____________________________ profit of the Business Export turnover as defined in Explanation 2(IV) of Section 10A of the IT Act + domestic sale proceeds.
In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
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
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formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.
On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover”.
The declaration of law above-quoted directly applies to the present case. In this view of the matter, the question of law urged by the appellants no more survives for consideration. Accordingly, these appeals stand rejected.
Sd/- CHIEF JUSTICE
Sd/- JUDGE
NG* CT: SK