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Income Tax Appellate Tribunal, ‘C’ BENCH: BANGALORE
Before: SMT. P. MADHAVI DEVI & SHRI JASON P.BOAZ
Per Smt. P.MADHAVI DEVI, JM:
All these appeals and the cross-objections are fixed for hearing on account of one of the issues being remanded to the file of the Tribunal for re-consideration.
The Hon’ble High Court of Karnataka vide its judgment dated 16/09/2014 in to 42 of2014 and others had remanded one of the grounds of appeal raised by the assessee for fresh consideration. The ground remanded is as follows:
“Whether the telecommunication expenses, insurance charges, personnel expenses, professional expenses, branch office expenses and other expenses incurred in foreign exchange should not be excluded from the export turnover for the purpose of computing deduction under section 10B of the Income Tax Act,1961?”
In view of the same, these appeals are re-fixed for hearing. It is the case of the assessee that the Assessing Officer(AO) and the CIT(A) had excluded the travelling expenses incurred in foreign exchange from the export turnover while computing deduction u/s 10A of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. The learned counsel for the assessee submitted that the assessee had made an alternative claim before the Tribunal that if such expenditure was to be excluded from the export turnover the same should also be excluded from the total turnover as held by the Hon’ble jurisdictional High Court in the case of Tata Elxsi Ltd. in ITA
ITA Nos.1645,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd. Page 3 of 8 No.142 of 2008 dated 20/10/2014. He submitted that the Tribunal had accepted the alternative plea and has not dealt with the original ground as to whether the travelling expenses incurred in foreign exchange are to be excluded from the export turnover at all. He submitted that this issue had been considered by this Tribunal in the case of Softtek India Pvt. Ltd. vs. ITO in IT(TP)A No.222/Bang/2014 dated 31/10/2014 wherein, after considering the judgment of the Hon’ble High Court in the case of CIT vs. Motor Industries Co. Ltd.in dated 13/06/2014 as well as the decision of the Hon’ble High Court of Karnataka in the case of CIT vs. Elxsi Ltd. in ITA No.660 of 2008 dated 16/9/2014 has held that the assessee is eligible for exemption u/s 10A of the Act if it is in the business of manufacture and export of computer software and the travelling of the employees of the assessee is the integral part of the software development and therefore it cannot be reduced or excluded from the export turnover for computation of deduction u/s 10A of the Act. Copies of the orders of the Hon’ble High Court as well as this Tribunal are filed before us. As seen from the assessment order for the assessment year 2006-07, the AO has examined the details of the expenditure incurred in foreign exchange while computing deduction u/s 10A of the Act and observed that these expenses included salary payment, travelling and stay expenses of deputed employees etc. Before the AO, the assessee submitted that these expenses represent the salary payment outside India in foreign ,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd. Page 4 of 8 currency to the employees on deputation abroad which comes to Rs.34,07,89,280/- while travelling expenses of the employees for being deputed abroad in providing software services comes to Rs.2,49,87,302/-. The AO held that the services rendered by the engineers abroad would squarely fall within ‘technical services’ and therefore they have been specifically directed to be excluded from the definition of the export turnover while computing deduction u/s 10A of the Act. Therefore, it is clear that the assessee, which is in the development of software, has deputed its personnel abroad for providing software services in terms of its development of software and therefore it is part and parcel of the activity of development and export of computer software. The Hon’ble High Court in the case of Motor Industries Co. Ltd. (cited supra), while considering the definition of export turnover u/s 80HHC of the Act, has at para. 19 of its order held as under:
“19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer software outside India. If the technical services rendered by the assessee’s Engineers is in connection with the ,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd. Page 5 of 8 export of computer software for the purpose of testing, installation and monitoring of software such a turnover do not fall within clause (ii) of subsection (1) of section 80HHE of the Act. Such a turnover falls within sub-clause (i) of subsection (1) of section 80HHE of the Act, that is export out of India of computer software or its transmission from India to a place outside India by any means. The expenditure incurred in the form of foreign exchange for such services cannot be excluded in computing the export turnover as it forms part of the export turnover. In the instant case as is clear from the order of the Assessing Authority, he proceeds on the assumption that the assessee is a company engaged in rendering technical services outside India in connection with production of said software. Therefore the expenditure incurred in foreign exchange in providing such technical services outside India of Rs.62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction under section 80HHE of the Act. The assessee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of 80HHE of the Act, of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (i) of sub section (1) section 80HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export
ITA Nos.1645,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd. Page 6 of 8 turnover. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of the assessee and against the revenue. Ordered accordingly.” This decision was further followed by the Hon’ble High Court in the case of Emphasis Ltd. in and 196/9 dated 01/08/2014 wherein the issue was the exclusion of expenditure incurred in foreign currency for providing software development services outside India for computation of deduction u/s 10B of the Act. The Hon’ble High Court has followed the decision of the co- ordinate bench of the Hon’ble High Court in the case of Motor Industries Co. Ltd. (cited supra) and also its own decision in the case of CIT & another vs. Tata Elxsi Ltd. reported in (2012) 349 ITR 98(Kar.) in answering the substantial question of law in favour of the assessee and further holding that if the expenditure is to be excluded from the export turnover then the same has to be excluded from the total turnover as well. Respectfully following the judgment of the jurisdictional High Court in the case of Motor Industries Co. Ltd. (cited supra) as well as the decision of the co- ordinate bench of the Tribunal in the case of Softtek India Pvt. Ltd, to which both of us are signatories, we direct the AO not to exclude the expenditure incurred in foreign currency towards travelling and also salary of the employees of the assessee deployed abroad for development of, testing, installation and monitoring of software outside India, after verification of the exact nature of expenditure while computing deduction u/s 10A of the ,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd. Page 7 of 8 Act. Therefore, the ground of appeal No.2.1 in the assessee’s appeal for assessment year 2006--07 is treated as allowed. Similarly, ground No.2 in the assessee’s cross-objection No.72/Bang/2013 in No.2 in the assessee’s cross objection is allowed.
4. As regards the revenue’s appeal in 2004-05 is concerned, the grounds are only against the direction of the CIT(A) to exclude the expenditure incurred in foreign currency from the export turnover as well as the total turnover for the purpose of computation of deduction u/s 10A of the Act by following the decision of the jurisdictional High Court in the case of Tata Elxsi Ltd.,(cited supra). It is the case of the Revenue that its SLP before the Hon’ble Supreme Court is pending and therefore the CIT(A) direction is erroneous. However, respectfully following the decision of the jurisdictional High Court, we do not see any reason to interfere with the order of the CIT(A). The grounds No.5 and 6 are accordingly rejected.
For the assessment year 2008-09 in the assessee’s ground of appeal
No.2.1 is on the exclusion of the expenditure incurred in foreign currency from the export turnover for computation of deduction u/s 10A of the Act. Following our decision for the assessment years 2004-05 and 2006-07, this ground of appeal of the assessee is also allowed subject to verification of facts by the AO. ,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd. Page 8 of 8
6. In the result, the assessee’s appeals for assessment years 2006-07 and 2008-09 are allowed for statistical purposes and the Revenue’s appeal for assessment year 2004-05 is dismissed; and the cross objection of the assessee for assessment year 2004-05 is allowed for statistical purposes.