Income Tax Appellate Tribunal - Bangalore
Cerner Healthcare Solutions Private ... vs Assessee on 2 December, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'B', BANGALORE
BEFORE SHRI N.K.SAINI, ACCOUNTANT MEMBER
and
SHRI GEORGE GEORGE K, JUDICIAL MEMBER
ITA No.627(Bang)/2011
(Assessment year: 2006-07)
M/s.Cerner Healthcare Solutions Pvt.Ltd.
Level III, Prestige Obelisk,
No.3, Kasturba Road,
Bangalore-560001. ... Appellant
PAN:AACCC3795R
Vs.
Income-tax Officer,
Ward 11(1),
Bangalore. ... Respondent
Appellant by: Shri Chavali Narayan, C.A.
Respondent by : Shri Harsha Prakash, CIT-II
Date of hearing : 02-12-2011
Date of pronouncement : 16-12-2011
O R D E R
Per GEORGE GEORGE, K, JM:
This appeal, instituted by the assessee, is directed against the CIT(A)'s order dated 14-3-2011. The relevant assessment year is 2006-07.
2. The assessee has raised 15 grounds of appeals. During the course of hearing, it was admitted by the assessee's counsel that ground Nos.1 to 5 are general in nature and do not require any adjudication and hence the same are dismissed.
Page 2 of 14 2 ITA 627(Bang)/20113. Ground No.15 is with regard to levy of interest u/s 234B of the Act. Levy of interest u/s 234B is mandatory and consequential and hence this ground is dismissed.
4. Ground Nos.6, 7 and 8 relate to the computation of deduction u/s 10A of the Act. They read as follows:
6) The learned AO has erred in law and inf acts by holding that the telecommunication expenses of Rs.9,52,553/- is attributable to the delivery of computer software outside India, and should be reduced from export turnover while computing the eligible deduction under section 10A of the Act.
7) The learned AO has erred in law and in facts by not considering the alternative plea of the appellant that if the telecommunication expenses are attributable to the delivery of computer software outside India are reduced from 'export turnover', an equal amount should also be reduced from 'total turnover', in computing the eligible deduction under section 10A of the Act.
8) The learned AO has erred in law and in facts in restricting the deduction available under section 10A of the Act, to Rs.40,709,139, as against the deduction claimed by the appellant, amounting to Rs.40,890,550.
5. Brief facts in relation to the above grounds are as follows:
The assessee is a company. It is engaged in the business of software development and testing services in health care solutions. For the concerned assessment year, return of income was filed on 2-11-2006 declaring nil income after claiming deduction of `.4,08,90,550/-. Scrutiny assessment was taken up by issuance of notice u/s 143(2) of the Act and the assessment order was passed u/s 143(3) vide order dated 14- 12-2009. In the assessment completed, the AO recomputed deduction u/s 10A of the Act by reducing telecommunication expenses amounting to `.9,52,553/- as attributable to the delivery of software outside India from export turnover. The Page 3 of 14 3 ITA 627(Bang)/2011 AO, however, did not reduce the aforesaid amount from the total turnover in computing deduction u/s 10A of the Act. After making the above adjustment, deduction u/s 10A was restricted to `.4,07,09,139.
6. Aggrieved by the re-computation of deduction, assessee carried the matter before the first appellate authority. Before the first appellate authority it was submitted that the AO erred in reducing telecommunication expenses amounting to `.9,52,553/- from the export turnover while computing deduction u/s 10A of the Act. Alternatively, it was pleaded that if the above sum is to be reduced from the export turnover the same ought to be reduced also from the total turnover while computing deduction u/s 10A of the Act. In support of assessee's alternative contention, the assessee's counsel relied on the judgment of the Hon'ble Bombay High Court in the case of CIT v Gem Plus Jewellery India Ltd. 330 ITR 175 and the order of the Special Bench of ITAT in the case of Sak Soft 313 ITR (AT) 353.
7. The CIT(A), however, relying on his order in the case of M/s.Jaipuria Silk Mills (P) Ltd., (ITA 101/AC-11(5)/A- I/08-09 dated 10-9-2009, rejected the contention/objections raised by the assessee and held that the above-said expenditure is to be reduced from the export turnover while computing deduction u/s 10A of the Act. He also did not accept the alternative contention raised by the assessee, namely, when expenditure is reduced from export turnover, the same should also be reduced from the total turnover, while computing deduction u/s 10A of the Act.
8. Aggrieved by the rejection of appeal by the CIT(A), the assessee is in appeal before us.
Page 4 of 14 4 ITA 627(Bang)/20119. Learned counsel for the assessee submitted that he is not pressing ground No.6 and 8. It was submitted that the alternative ground, namely ground no. 7, may be allowed. It was submitted that the said issue is squarely covered by the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. M/s Tata Elxsi Ltd. v others (2011-TIOL-684-HC-Kar-II), Hon'ble Mumbai High Court in the case of CIT vs. Gem Plus Jewellery India Ltd. (330 ITR 175) and the order of the Special Bench of ITAT in the case of ITO vs. M/s Sak Soft Ltd. (313 ITR (AT) 353). It was contended that the decision relied on by the first appellate authority namely M/s Jaipuria Silk Mills (P) Ltd., (supra) was reversed by the Tribunal in ITA No.1112/09 vide order dated 12-4-2010. The learned DR relied on the orders of the Income-tax authorities.
10. We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others had held that while computing the exemption u/s 10A, 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 relevant finding of the Hon'ble jurisdictional High Court reads as follows:-
".........Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles Page 5 of 14 5 ITA 627(Bang)/2011 or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define 'total turnover', the word 'total turnover' falls for interpretation by this Court;
........In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover.
However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. 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 which intends to provide incentives to promote 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 assxcessee, 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 business, in other words, export turnover and domestic turnover.Page 6 of 14 6 ITA 627(Bang)/2011
To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. 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 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. When the statute prescribed 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. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same".
10.1. The Hon'ble Mumbai High Court in the case of Gem Plus Jewellery India Ltd. (supra), in identical circumstances, held that since the export turnover forms Page 7 of 14 7 ITA 627(Bang)/2011 part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon'ble Mumbai High Court reads as follows:-
"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 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 Page 8 of 14 8 ITA 627(Bang)/2011 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 turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this 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 - CIT v Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596:
(2000) 245 ITR 769 (Bom) applied; CIT v Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Page 9 of 14 9 ITA 627(Bang)/2011 Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on"
10.2. In the case of Sak Soft Ltd. (supra), the assessee was engaged in the business of exporting computer software and claimed deduction u/s 10B of the Act. In completing the assessment u/s 143(3) of the Act, the AO reduced the expenditure incurred in foreign exchange in providing the technical services outside India, from the export turnover without corresponding reduction from total turnover, thereby reducing the deduction claimed by the assessment u/s 10B of the Act.
10.3. In light of the above facts, the Special Bench held as under:-
"For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of section 10B, 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 appeals filed by the department are thus dismissed".
Although the order of Special Bench is in the context of section 10B of the Act, the ratio laid down in the above decision applies to section 10A of the Act as well, as the provisions of sections 10A and 10B are identical on all material aspects. More particularly, both the sections define only export turnover but not total turnover and sub-
Page 10 of 14 10 ITA 627(Bang)/2011section (4) of both the sections prescribe an identical formula for computing the export profits.
10.4 In the light of the above reasoning, we reverse the order of the CIT(A) and direct the AO to exclude the above mentioned expenditure, both from the export turnover as well as from the total turnover, while calculating deduction u/s 10A of the Act.
10.5 In the result, the alternative ground namely, ground No.7 is allowed.
11. Ground Nos.9 to 13 relate to the issue of disallowance of a sum of `.2,74,59,496 u/s 40(a)(i) of the Act. Brief facts of the case in relation to the above grounds are as follows: During the concerned assessment year, certain employees of M/s Cerner, US were deputed to work for Cerner, India. It is the case of the assessee that during the period of deputation of such employees, they were under the direct control and supervision of M/s Cerner India. However, for administrative convenience, it was submitted that the employees were to be paid in US by M/s Cerner, US. It was submitted that the employees deputed were reporting to M/s Cerner India and worked for Cerner, India. Certain expenses including salary incurred by M/s Cerner US in respect of such employees were charged to M/s Cerner India which M/s Cerner India reimbursed the same to M/s Cerner US. The details of expenses incurred by M/s Cerner US on behalf of M/s Cerner India are as follows:
Sl. No. Nature of expenses Amount (INR)
1. Corporate card payments 7,795,838
2. Medical insurance expenses 268,386
3. Fees paid to consultants for preparing tax 1,356,467 returns of expatriates.
4. Payment made towards relocation 481,864 expenses.
5. Payment made towards salaries. 17,511,362
6. Voice communication expenses and travel 45,580 expenses.
TOTAL 27,459,496 Page 11 of 14 11 ITA 627(Bang)/2011 The AO, however, disallowed the above said expenses u/s 40(a)(i) on the following grounds:
(1) In the instant case, it is the liability of Cerner USA to pay the remuneration and other benefits to its employees and it has no right to seek any reimbursement of such sum paid from any other person. In the instant Case, Cerner USA has incurred expenditur5e towards remuneration and other benefits to its employees. Under the circumstances, the assessee company has no obligation whatsoever to reimburse the sum to Cerner Corporation USA.
(2) Further, the learned AO has observed that whether the payments are in the nature of reimbursement or not, is not an issue relevant for deciding the application of provision of deduction of tax at source. (3) In view of the specific provisions to bring income to taxation in more than one stage, the subsequent recipient cannot claim the income as exempt just because the original recipient has paid tax. It is further clear that the same amount or part thereof can suffer tax repeatedly since it can become income of different stages.
(4) Further, the AO observed that the assessee which is engaged in the business of software development, it requires technical knowledge and skill to carry on its business activities. This requirement was met by Cerner USA by deputing its employees who possesses the requisite technical knowledge and skill. As the technical personnel of the product development team, he puts in all his technical knowledge, experience and skill to use and would essentially guide and supervise their team members, directly and indirectly. The technical personnel would ensure that their performance comes upto the mark and the objectives of product development and product upgradation are met. This otherwise means, technical knowledge was "made available" to the assessee company in consideration of which the assessee has made payments of Cerner USA which is in the nature of "fees for technical services" (FTS).Page 12 of 14 12 ITA 627(Bang)/2011
12. Aggrieved by the disallowance, the assessee carried the matter was in appeal before the first appellate authority.
13. It was contended that payment was towards actual expenses incurred by Cerner US on behalf of assessee and not for any services rendered by Cerner US to the assessee. The assessee relied on the following decisions for the proposition that reimbursement do not constitute income.
• CIT v Tejaji Farasram Kharawalla Ltd. (67 ITR 95) (SC);
• CIT v Industrial Engineering Projects Pvt. Ltd. (202 ITR 1014);
• HNS India VSAT Inc. v DDIT (2995) 95 ITD 157 (Delhi);
• Sedco Forex International Drilling Inc. v Deputy Commissioner of Income Tax;
• ACIT v Modicon Network (P) Ltd. (14 SOT
204); & • DIT (International Taxation) v Krupp Udhe GmbH (2010-TIOL-214-HC-MUM-IT).
It is also submitted before the first appellate authority that reimbursement of expenses have been made on cost only basis and no profits have been made on such reimbursement and therefore there would not be any income chargeable to tax in India in the hands of Cerner Corporation, US. It was further submitted that to the extent the reimbursement of expenses relate to salary costs, it has already discharged taxes u/s 192 of the Act and hence would not be required to further discharge tax u/s 195 of the Act.
14. The first appellate authority rejected the contentions of the assessee and upheld the action of the AO in making disallowance u/s 40(a)(1) of the Act.
15. The assessee, being aggrieved, is in appeal before us. Learned counsel for the assessee submitted that the issue Page 13 of 14 13 ITA 627(Bang)/2011 is squarely covered by the order of the Tribunal in the case of IDS Software Solutions (India) Pvt. Ltd.(122 TTJ 410) which had in turn followed the judgment of the Hon'ble High Court of Uttarakhand in the case of Sedco Forex International Inc (214 CTR 192). Learned Departmental Representative also fairly submitted that the issue is squarely covered by the order of the Tribunal cited supra.
16. We have heard rival submissions and perused the material on record. The CIT(A) at para 16.1 of his impugned order held that payments made by assessee to Cerner, USA are reimbursement of expenses and cannot be "fees for technical services" (FTS). However he held that the reimbursement is taxable under the provision of the Act. The relevant finding of the CIT(A) at para 16.1 reads as follows :-
"In short even if technical services has been provided by the Cerner USA through it's employees, no fees for such work is charged on the appellant and therefore this ground is allowed. Nevertheless since the reimbursement is held to be taxable under the provisions of I T Act and since admittedly no tax has been deducted by the payer appellant from the same, the same deserves to be disallowed u/s 40(a)(i) of I T Act".
Both parties had agreed that the reimbursement payment cannot be liable to tax and the issue is covered by the order of the Tribunal in the case of IDS Software Solutions (India) Pvt. Ltd.(122 TTJ 410). Since the facts being identical, respectfully following the decision of the co-ordinate Bench of the Tribunal, we hold that the AO is not justified in making disallowance of `.2,74,59,496 u/s 40(a)(i) of the Act. Hence, ground nos.9 to 13 are allowed.
Page 14 of 14 14 ITA 627(Bang)/201117. Ground No.14 is only incidental / consequential to the ground Nos.9 to 13. Since ground Nos. 9 to 13 are allowed in favour of the assessee, this ground has become redundant and the same is dismissed as infructuous
18. In the result, the appeal of the assessee is partly allowed as indicated above.
Order pronounced in the open court on 16th December,2011 Sd/- Sd/-
(N.K.Saini) (George George K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Place: Bangalore
Date: 16th December,2011
Eks
Copy to :
1. Appellant
2. Respondent
3. CIT(A) concerned
4. CIT
5. DR, ITAT, Bangalore
6. Guard file
By Order
Assistant Registrar, ITAT, Bangalore