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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI B.R.BASKARAN (AM) & SHRI RAM LAL NEGI (JM)
This appeal has been filed by the revenue against order dated 28/03/2013 passed by the CIT(Appeals)-III, Bangalore, for the Asst. Year 2004-05, whereby the Ld. CIT(A) partly allowed the appeal filed by the assessee against order dated 30/11/2011 passed by the Assessing Officer u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961 (in short ‘the Act’).
As per the revised authorization memo, the revenue has raised the following effective grounds of appeal:-
The order of the CIT(A) is opposed to law and facts of the case. “On facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the expenditure on freight, telecommunication and insurance relating to delivery of computer software outside India should be reduced from the total turnover for computing deduction u/s 10A.”
“On facts and circumstances of the case and in law, the Ld.CIT(A) erred in holding that the expenditure on travel attributed to providing technical services outside India should be reduced from the total turnover for computing deduction u/s 10A.”
This case was fixed for hearing for today, however, neither the assessee nor his authorized representative appeared when the case was called for hearing. Even the registry did not receive any request for adjournment. From the perusal of the record we are satisfied that the appellant/ assessee has not appeared despite the knowledge that the case has been fixed for 17/10/2016 for hearing. It is clearly mentioned in the order sheet dated 16/6/2016 that both the parties were informed about the next date of hearing. Accordingly, we decide to proceed with the case and dispose of the appeal on merit after hearing the revenue.
Brief facts of the case are that the assessee company engaged in the business of development and export of computer software filed its return of income for the A.Y. 2004-05 declaring the total income of Rs. 54,25,520/-, after claiming deduction of Rs. 15,96,13,810/- u/s 10A of the Act. Accordingly, assessment order u/s 143(3) was passed. Later on the case was reopened u/s 147 and income of assessee was determined at Rs. 2,20,67,520/- by re-computing the deduction u/s 10A, excluding the expenses incurred on freight, telecommunication, insurance etc. from the export turnover. The assessment order was challenged by the A.O before the CIT(A) and Ld. CIT(A) following the decision of Hon’ble High Court of Karnataka in the case of CIT vs. Tata Elxsi Ltd. (349 ITR 98) partly allowed the appeal of the assessee and directed the A.O to reduce the expenditure incurred on foreign currency form both export turnover and total turnover for the purpose of computation of deduction u/s 10A of the Act.
Aggrieved by the impugned order the revenue is in appeal before the Tribunal. Before us the Ld. Departmental Representative (DR) relying on the findings of the A.O submitted that the Ld. CIT has erred in holding that the expenditure on freight, telecommunication and insurance relating to delivery of computer software outside India should be reduced from the total turnover for computing deduction u/s 10A and further the Ld. CIT(A) erred in holding that the expenditure on travel attributed to providing technical services outside India should be reduced from the total turnover for computing deduction u/s 10A.
We have heard the Ld. DR and also perused the material placed on record. We notice that the Ld. CIT(A) has decided the issue in question following the decision of Hon,ble High Court of Karnataka passed in Commissioner of Income Tax vs Tata Elxsi Ltd and others ( 349 ITR 98), holding as under:-
“7.0 However, I also have to note in this connection that the Karnataka High Court has confirmed the ITAT’s views in the case of Tata Elxsi Ltd., in dated 30/08/2011 by observing as under:
The Bombay High Court had an occasion to consider the meaning of the word ‘total turnover’ in the context of Section 10A, in the case of Commissioner of Income Tax vs. Gem Plus Jewellery India Ltd. [2011 330 ITR P. 175(Bom)] = (2010-TIOL-456-HC-MUM-IT). Interpreting subsection(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 under-taking 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 Profits of Export derived the turnover from business of in export of the respect articles or undertaking of the things or articles Computer or software things or computer 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 turnover also forms a constituent element of the denominator inasmuch 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 a constituent element of the total turnover in the denominator. The Legislature has provided a definition of the expression "export turnover" in 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 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 he 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 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 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 to the contrary. However, no such provisions having been made, the principle which has been enunciated earlier must prevail as a matter or correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to he 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 it has 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 would lead to an absurdity must be avoided.
The special bench of the Tribunal, in the case of Income Tax Officer 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 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 expert 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 10-A 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 10-A 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 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 10-A, 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 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. 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 10-A, 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, 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 10-A, would be as under:
Profits of the business of the undertaking X Export turnover (Export turn over +domestic turnover) Total Turn Over 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 10-A 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.
The other substantial question of law raised for consideration in of 2008, 12, 125, 190, 484, 740, 743, 820, 822 and 823 of 2009 is as under:
“Whether the Tribunal was correct in holding that unabsorbed depreciation, and brought forward losses should be adjusted and only thereafter deduction under Section 10-A of the Act should be allowed?”
This question is also answered by this Court in decided on 9th August 2011. Accordingly that issue is also answered in favour of the assessee and against the revenue.
7.1. Respectfully following the above mentioned decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd 349 ITR 98, which has settled the law on the issue, I direct the AO to reduce the expenditure incurred on foreign currency from both export turnover and total turnover for the purpose of computation of deduction under section 10 of the Act. Therefore the ground raised by the appellant is allowed.”
Since the Ld. CIT(A) has decided the issue in question in favour of the assessee in accordance with the law laid down by the Hon’ble Karnataka High Court, we find no infirmity in the impugned order passed by the Ld. CIT(A). We, therefore, uphold the findings of the Ld. CIT(A) and dismissed the grounds of appeal raised by the revenue.
In the result appeal filed by the revenue for A.Y. 2004-05 is dismissed.
Order pronounced in the open court on 26th October, 2016