Income Tax Appellate Tribunal - Bangalore
Subex Ltd., Bangalore vs Assessee on 31 October, 2013
ITA No.1430 of 2010 Subex Limited Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
Bangalore 'C' Bench, Bangalore
Before Shri N. Barthvajasankar, Vice President and
Shri George George K. Judicial Member
ITA No. 1430/Bang/2010
(Assessment year: 2006-07)
M/s. Subex Limited Vs. Dy. Commissioner of
Adarsh Tech Park, Income Tax, Circle 12(3)
Outer Ring Road, Bangalore
Devarabeesanahalli
Bangalore 560037
PAN: AABCS 9255 R
(Appellant) (Respondent)
Assessee by: Shri Chythanya K.K.
Department by: Smt.Priscilla Singsit, DR
Date of Hearing: 31/10/2013
Date of Pronouncement: 13/11/2013
ORDER
Per George George K. J.M. This appeal of the assessee company is directed against the order of the CIT (A)-III, Bangalore, dated 20.10.2010. The relevant assessment year is 2006-07.
2. The assessee company has, in its concise grounds, raised the following issues, namely:
(1) That the CIT (A) was not justified in confirming the exclusion of Rs.9,53,10,234/- being the sale of hardware components from the export turnover for the purpose of computing the deduction u/s 10A of the Act;Page 1 of 30
ITA No.1430 of 2010 Subex Limited Bangalore
- Alternatively, the CIT (A) was not justified in upholding the action of the AO in not excluding a similar amount from the total turnover for the purpose of computation of deduction u/s 10A of the Act;
(2) That the CIT (A) was not justified in holding that the courier charges of Rs.5,91,416/-, internet charges of Rs.14,18,339/- and insurance charges of Rs.14,92,475/- should be reduced from the export turnover;
- Alternatively, the CIT (A) was not justified in failing to appreciate that the question of deduction of telecommunication charges would arise only if the same has been incurred in forex and if the same has been incurred in Indian rupees, the question of deduction thereof does not arise;
(3) That the CIT (A) was not justified in holding that the foreign travel expenditure should be reduced from the export turnover
- Alternatively, the CIT (A) was not justified in failing to appreciate that the assessee was engaged in development and export of computer software and not in providing technical services;
(4) That the CIT (A) was not justified in holding that the loss from Telecom Division of Rs.5,10,445/- should be reduced from the profits of the eligible under- taking before computing relief u/s 10A of the Act;
(5) That the CIT (A) was not justified in upholding the addition on account of bad debts recovered as income during the impugned AY when the provision on account of the same was taxed in the year in which such provision was created; & (6) That the CIT (A) was not justified in upholding the addition of Rs.10,54,460/- as notional interest on interest free loan given to its subsidiary concern.
3. Briefly stated, the facts of the issues are as under:
Page 2 of 30ITA No.1430 of 2010 Subex Limited Bangalore The assessee is a public limited company, engaged in the business of software development and export of software. For the relevant assessment year, the assessee had furnished its return of income, declaring a total income of Rs.2,58,72,868/- after claiming deduction u/s 10A of the Act amounting to Rs.42,72,82,899/-. However, for the elaborate reasons recorded in the assessment order, the AO had determined the total income of the assessee at Rs.5,89,03,350/-. The Assessing Officer recomputed the deduction u/s 10A of the Act and made various additions/disallowances. Aggrieved, the assessee took up the issues with the CIT (A). After due consideration of the assessee's contentions as detailed in his findings, the CIT (A) had dealt with the issues, under various heads, as under:
Deduction u/s 10A of the Act:
4. The assessee's contention was against the exclusion of sale of hardware components of Rs.7,38,17,250/- and Rs.2,14,92,984/- (attributable to the India and UK operations) from export turnover for the purpose of computing deduction u/s 10A of the Act. Another contention of the assessee was that no corresponding exclusion was made by the AO from the total turnover.
4.1. After due perusal of the AO's stand as well as the assessee's submission, the CIT (A) was of the view that the meaning of software cannot be interpreted to include hardware, however, essential it may be for functioning of computer software. Further, he had pointed out that the assessee doesn't manufacture/produce hardware, but, only engages in the trade thereof and, therefore, the AO was justified in reducing an amount of Rs.9.53,10,234/- on account of hardware sales in Page 3 of 30 ITA No.1430 of 2010 Subex Limited Bangalore India and UK from the export turnover for the purpose of computing relief u/s 10A of the Act.
Courier, internet and insurance charges reduced from the export turnover:
4.2. In respect of courier charges of Rs.5.91 lakhs, internet charges of Rs.14.18 lakhs and insurance charges of Rs.14.92 lakhs reduced from the export turnover, the AO had treated the same as 'expenditure attributable to delivery of software outside India' and had reduced the same from the export turnover. He had, further, relied on the provisions of clause (iv) of Explanation 2 of s. 10A of the Act which provides that the term export turnover was not to include freight, telecommunication charges and insurance attributable to the delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign currency in providing technical services outside India.
4.2.1. After taking into account the assessee's contentions that none of the expenses were attributable to the delivery of software outside India or in relation to providing technical services outside India and also taking cognizance of the findings of the jurisdictional ITAT in a number of cases including in the case of the assessee's own case for the AYs 2003-04 and 2004-05 in ITA Nos.94 & 95/Bang/08 and in 220 & 221/Bang/2008 respectively, the CIT (A) directed the AO to exclude the expenses of courier charges, internet charges and insurance charges incurred by the assessee towards expenditure in foreign currency for providing technical services outside India and international travel expenses from the export turnover and correspondingly from the total turnover.Page 4 of 30
ITA No.1430 of 2010 Subex Limited Bangalore Set off of domestic unit loss against income from 10A Unit prior to claim of relief:
4.3. In respect of set off of domestic unit loss against income from 10A Unit prior to claim of relief, while concluding the assessment, the AO first adjusted the loss of non-STP business of Rs.5,10,445/- against the profit pertaining to the STP Unit and only thereafter on the balance profits, deduction u/s 10A of the Act was granted.
4.3.1. After taking into account the assessee's contentions as recorded in his findings, the CIT (A) had, extensively quoting the judgments of (i) the Hon'ble jurisdictional High Court in the case of Himatsingike Seide Ltd [286 ITR 255 (Kar)]; (ii) the Hon'ble Supreme Court's ruling in the case of Cambay Electric Supply Industrial Company Ltd v CIT [(1978) 113 ITR 84 (SC)] &
(iii) the Hon'ble Bombay High Court in the case of Indian Rayon Corporation Ltd v. CIT [(2003) 261 ITR 98 (Bom)] rejected the assessee's contentions for the following reasons:
"5.5. (On page 5) The Bangalore Tribunal in the recent case of Intellinet Technologies India (P) Ltd v ITO (ITA No.1021/Bang/2009) has followed the decision of the High Court in the Himasingike case (cited supra) and held that brought forward loss/unabsorbed depreciation should be set off against profits eligible for deduction u/s 10A.
5.6. Therefore, in such understanding of the above judicial precedents, I hold, in principle that the deduction u/s 10A in the appellant's case on hand - is to be compute don the profits of the eligible undertaking after set off of current and/or brought forward losses of the eligible and/or domestic unit (non-eligible undertaking). Accordingly, the AO's action, disputed in this ground of appeal is upheld in principle. Thus, this ground of appeal is dismissed."
Page 5 of 30ITA No.1430 of 2010 Subex Limited Bangalore Addition on account of bad debts recovered:
4.4. The AO had disallowed Rs.7.36 lakhs without much discussion. The CIT (A) had confirmed the AO's stand on the premise that -
"7.1...........The appellant's contention cannot be accepted because in the immediately preceding year, subject to verification by the AO, even if the provision for doubtful debt claimed by the appellant included this sum of Rs.7,36,220/- it had to be disallowed in view of Explanation to section 36(1)(vii) of the Act. This Explanation to s. 36(1)(vii), unambiguously prohibits for inclusion of any provision for bad and doubtful debts implying that such provision of bad debts is not allowable. Further in this year, the appellant has received part of the doubtful debt which has to be offered as income of the appellant. Hence, the appellant's plea on this count is treated as dismissed".
Notional interest on account of the interest free loan:
4.5. With regard to the addition of Rs.10,54,460/- made by the AO as notional interest on account of the interest free loan given by the assessee to its subsidiary - Subex Technologies Limited, the assessee had contended before the CIT (A) that the loan given to its subsidiary was in the nature of a working capital loan on the premise of commercial expediency. However, the CIT (A) had rejected the assessee's contention on the ground that ''6.1(on page 6)..............the appellant has failed to prove that the loan was granted to the subsidiary on commercial grounds and that it stood to gain any benefit from such loan advanced. Further, the appellant was incurring interest expenses on loans taken from various financial institutions..."Page 6 of 30
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5. Aggrieved with the CIT (A)'s treatment on the issues raised before him, the assessee has up before us with the present appeal. During the course of the hearing, the lengthy submissions made by the learned AR under different heads are summarized as under:
Exclusion of Rs.9.53 crores from the turnover for relief u/s 10A of the Act:
- that the CIT (A) was not justified in not appreciating that the assessee could not have sold its software without the hardware components as the orders of the customers were of package type and that the sale of the said hardware was inextricably linked to the software manufacture and exported by the assessee and, thus, the income on account of such sales could not be reduced from the 'export turnover' for the purpose of computation of deduction u/s 10A of the Act;
- that the customer specifies/lists the hardware components which have to be supplied by the assessee along with the software and that the customer also provides for the specification of the hardware component in which the software of the assessee had to be stored at the time of delivery/installation;
- that the sale of computer software developed by the assessee has an inextricable nexus with the hardware and it was impracticable to bifurcate/split the transaction one for sale of computer software and another for supply of hardware and the essence of the transaction was one for sale of computer software loaded into a specially suited hardware. As the entire contract was inseparable, the entire turnover and the profit from the contract has to be treated as part of computer software operations of the assessee;
- Relied in the case of Sultan Brothers (P) Ltd v. CIT (1964) 51 ITR 353 (SC)
- that right from the beginning i.e., when the customer placed an order on the assessee to load the software into the specified hardware device before the same was delivered/installed, it was agreed between the two to deliver Page 7 of 30 ITA No.1430 of 2010 Subex Limited Bangalore the in-house developed software built into the specified hardware device. Such being the case, the sale of computer software developed by the assessee had an inextricable nexus with the hardware and it was impracticable to bifurcate/split the same into two different transactions;
Relies on the following case laws:
> India Comnet International v. ITO (2008) 304 ITR 322 (Mad);
> M/s. Lucent Technologies Hindustan v. ITO 82 TTJ 163 -
ITAT, Bang;
> Goodricke Group Ltd v. CIT 2011-TIOL-262-HC-KOL-IT
- that the instant case is not a simplicitor case of purchase and sale of hardware. It is a case where the assessee not only develops the software but also installs the software so developed in to the wound specified hardware device as the assessee sells was an indivisible product consisting of self- developed software embedded into specified hardware device;
- that what was delivered to the customer was the distinct product having a separate identity and utility. Such product cannot be identified with either the software or the hardware in isolation as the assessee had manufactured/produced a distinct marketable article or a thing;
- that the term 'manufacture' was of wide import which may include various activities and processes and, thus, it cannot be termed as 'manufacture' in the common parlance. The term 'manufacture' is defined in s.2 (29BA) of the Act;
- that the concept 'manufacture' has been dealt with in the following cases, namely:
(i) Union of India v. Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791; &
(ii) Aspinwall & Co. Ltd v. CVIT (2002) 251 ITR 323 (SC);
(iii) Rajasthan Roller Flour Mills Association v. State of Rajasthan (1993) 91 STC 408;Page 8 of 30
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(iv) Som Distilleries v. Union of India & Ors. 2009 (92) RLT 413 (MP-LB);
(v) CIT v. Zainab Trading P; Ltd (2011) 333 ITR 144 (Mad) Thus, the case of loading of the assessee's own software into specified hardware device would transform the hardware as well as the software altogether into a new commodity commercially known as a distinct commodity. A new and different article emerges having a distinctive name, character or use;
Case laws on a similar issue, namely:
> CIT v. Oracle Software India Ltd (2010) 320 ITR 546 (SC); & > Gramophone Co. of India Ltd v. Collector of Customs (1999) 114 ELT 770 (SC)
- Countering the AO's assumption that if the benefit of s.
10A is extended to the value of the hardware device in the present case, it would be similar to extending the benefit to export of bought out computers along with software, it was argued that:
(a) computer is a generic hardware whereas in the instant case it is a specific hardware device;
(b) the specific hardware device in the instant case cannot be compared with the computer considering that the latter is versatile in nature;
(c) generally, computers can be separated from the software, however, in the present case, the specific hardware device and the software are inseparable;
- that assuming that the activity of the assessee being regarded as 'assembly', it was a not simple process which results in a product which is known differently from the input;
- that the following judiciaries have view that 'assembly' would also amount to manufacture:
(i) Sirpur Paper Mills Ltd v. CCE 1998 (97) E.L.T. 3 (SC);
(ii) Fedders Lloyd Corporation v. CCE., 2007 (221)E.L.T. 3 (SC)
(iii) Triveni Engg. & Industries Ltd v. CCE 2000 (12) E.L.T. 273 (SC);Page 9 of 30
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(iv) Narne Tulaman Manufacturers. P. Ltd v. Collector of Central Excise 1988 (38) E.L.T. 566 (SC);
(v) 3G Wireless Communications Pvt. Ltd v. ACIT 2009- TIOL619-ITAT-BANG
(vi) Saint Gobain Crystals & Detectors India Pvt. Ltd v. DCIT 2009-TIOL-222- ITAT-BANG
- that the phrase 'computer programme' is neither defined in s. 10A of the Act nor anywhere else of I.T Rules and, thus, the meaning of the said phrase will have to be understood by applying the common parlance test;
- that in the case of Tata Consultancy Services v. State of Andhra Pradesh (2004) 271 ITR 401 (SC), it has been observed that 'in cases of software, the programmes are recorded on floppy drives, CDs or hard drives....Though the floppy disc, the CD-ROM and the hard disc are each tangible commodities that could be bought, sold and resold, the software embedded in these media are intangible and fall into a very different category.'
- that the software developed by the assessee loaded on to the hardware (i.e., server) together qualifies to be regarded as 'computer software' for the purpose of s. 10A of the Act;
- that disputing the CIT (A)'s stand in upholding the exclusion of Rs.9.53 crores from the export turnover for the purpose of computing the deduction u/s 10A of the Act, it was contended that s.10A(1) of the Act has two limbs to it, namely, the first limb allows a deduction of profits derived by an undertaking from the export of articles or things or computer software. The second limb of s. 10A(1) provides for the period of deduction. Thus, the first and the second limbs are distinct and separate from each other. While the first limb grants the deduction, the second limb provides the period of deduction. The production of article etc., is relevant only for determining the commencement of the holiday period covered by the second limb and it does not govern the first limb of s. 10 A(1).
Relies on the following case laws:
(i) T. Two International (P) Ltd v. ITO (2010) 122 ITD 255 (Mum);
(ii) P.R. Prabhakar v. CIT (2006) 284 ITR 548 (SC);Page 10 of 30
ITA No.1430 of 2010 Subex Limited Bangalore Alternate ground:
- that the assessee having satisfied all the conditions provided in s. 10A and the said section being beneficial provision, the same has to be interpreted liberally. Beneficial legislation should receive liberal construction with a view to implementing the Legislative intention and cannot be used to deny the benefit available thereto. Relies on the following case laws:
(a) Commissioner of Customs (Preventive), Mumbai v. M. Ambalal & Co., (SC) decided on 9.12.2010 - MANU/SC/1052/2010;
(b) Bajaj Tempo Ltd v. CIT (1992) 196 ITR 188 (SC);
(c) P.R. Prabhakar v. CIT (2006) 284 ITR 548 (SC);
(d) ACCT v. Amara Raja Batteries Ltd (dt: 27.7.2009) 68 KLJ 607 (SC)
- without prejudice, the CIT (A) was not justified in sustaining the stand of the AO in not excluding a similar amount from the total turnover for the purpose of computation of deduction u/s 10A of the Act, it was contended that -
> the term 'export turnover' has been defined in Expln. 2 (iv) as meaning the consideration in respect of export by the under-taking of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub- section (3), but, does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. Upon literal interpretation of the aforesaid provision, it is clear that it is permissible for the AO to remove any items other than specifically provided therein. The consideration received in respect of export of so called specified hardware device along with the software in convertible foreign exchange received in India clearly falls within the meaning of 'export turnover' as defined above. If in the perception of the AO, the export of hardware does not form part of export turnover as defined in the aforesaid Explanation, the same cannot also form part of the export turnover as a component of the total turnover;
Page 11 of 30ITA No.1430 of 2010 Subex Limited Bangalore
- that the total turnover coming in the formula of s. 10A (4) is nothing but the summation of export turnover and the domestic turnover. It is an undisputed fact that the export of hardware device cannot be treated as domestic turnover. The AO was not inclined to treat the same as part of export turnover also which logically means that the turnover will have to remain excluded from both numerator as well as denominator.
Relies on the following case laws:
(i) CIT v. Gem Plus Jewellery India Ltd (2010) 194 Taxman 192 (Bom);
(ii) ITO v. Sak Soft Ltd (2009) 121 TTJ (Chennai)(SB) 865;
(iii) ACIT v. M/s. Khoday India Ltd (dt: 14.9.2008) 2009- TIOL-42-ITAT-BANG;
(iv) iGate Global Solutions Ltd v. ACIT (2007) 112 TTJ 1002 (BNG - ITAT);
(v) Tata Elxsi Ltd v. ACIT (2008) 115 TTJ 423 (Bang); &
(vi) Foursoft Pvt Ltd v. ACIT 2009-TIOL-18-ITAT-HYD
- that even if aforesaid sum was required to be excluded from the export turnover the same has to be excluded from total turnover also.
Exclusion of courier, internet charges and insurance from export turnover:
- that the AO, while computing deduction u/s 10A, excluded from export turnover the courier charges of Rs.5.91 lakhs, internet charges of Rs.14.18 lakhs and insurance expenses of Rs.14.92 lakhs.
- it was contended that the aforesaid expenses were not specifically incurred by the assessee for delivery of software outside India. However, the AO took a view that the said expenditure was incurred not only for inter-office and intra- office communication but also for delivery of the computer software and, accordingly, deducted that the aforesaid expenditure was spent for export of computer software. Accordingly, while computing deduction u/s 10A, the AO excluded the afore said expenses from export turnover;Page 12 of 30
ITA No.1430 of 2010 Subex Limited Bangalore Referring to Clause (iv) of Expln. 2 to s. 10A of the Act which defines 'export turnover', it was contended by the assessee that the phrase used in the aforesaid Explanation is 'does not include' and not 'to be reduced by'. The phrase 'does not include' deals with items which by trade practice or contractual terms or accounting treatment are considered as components of export turnover but by the aforesaid fiction are not to be so considered. The phrase 'to be reduced by' may mean statutory deduction irrespective of the composition of the sale price. Thus, it was argued, the aforesaid condition of 'does not include' stands satisfied without any adjustment. However, in the second case, as freight and insurance form part of sale price, in order to satisfy the aforesaid condition, the same are required to be excluded. In relation to telecommunication charges also, the same principle should apply, therefore, if the telecommunication charges and insurance charges have not formed part of export turnover, the aforesaid condition remains satisfied without calling for any adjustment by way of exclusion of telecommunication charges debited to profit and loss account from the export turnover;
- that the assessee had not charged its customers separately in respect of courier charges, internet expenses or insurance charges incurred by it. Also the assessee had neither included the said charges in the export turnover nor recovered from its customers;
- that for the above proposition, the following case laws are relied on:
(i) R & B Falcon (A) Pvt. Ltd v. CIT (2008) 301 ITR 309 (SC);
(ii) M/s. Mahindra Holdings & Finance Ltd v. DCIT - 2008- TIOL-588-ITAT-MUM-TM;
(iii) M/s Willis Processing Services (India) Ltd v. ACIT - 2010- TIOL-576-ITAT-MUM;
(iv) Patni Telecom P Ltd v. ITO - 120 TTJ (Hyd) 967 Page 13 of 30 ITA No.1430 of 2010 Subex Limited Bangalore
- that without prejudice, the CIT (A) was not justified in not appreciating that the question of deduction of courier and internet expenses and insurance would arise only if the same has been incurred in forex and if the same has been incurred in Indian rupees, the question of deduction thereof does not arise and in the present case, the assessee had incurred Rs.35.02 lakhs towards the aforesaid expenses in Indian rupees, the same need not to be excluded from the export turnover. Relies on the findings of the Hon'ble Chennai Bench of the ITAT in the case of California software Co. Ltd v. ACIT (2008) 118 TTJ (Chennai) 842;
Exclusion of international travel expenses from the export turnover:
- that the jurisdictional Bench of the Tribunal in the assessee's own case for the AYs 2002-03 & 2005-06 had allowed this issue vide ITA Nos.673 & 674(Bang)/2010 dt.31.1.2011 and, therefore, the international travel expenses are not required to be excluded from the export turnover;
Set off of losses from non-STP Unit of Rs.5,10,445/-:
- that an identical issue was allowed in the assessee's own case for the AYS 2003-04 & 04-05 by the earlier Bench of this Tribunal in ITA Nos. 94 & 95/Bang/08 dated 23.10.2008;
Sustaining the addition on account of bad debts recovered as income:
- that the assessee had created a provision for doubtful debts for the year 2002-03, but, while computing the total income the same was added back as inadmissible expenses. During the year under dispute, the assessee had recovered Rs.7,37,220/- from its debtors and credited to its P & L account under the head 'bad debts recovered';
- that by virtue of Explanation to s.36(1)(vii) of the Act, the provision for doubtful debts was not an allowable expenditure and, accordingly, the same was added by the assessee in the year in which it was credited;Page 14 of 30
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- that when the provision on account of the same was taxed in the year in which such a provision was created, the CIT (A) was not justified in confirming the addition of Rs.7,36,200/- on account of bad debts recovered during the year under dispute which amounts to double taxation;
- that as per the provisions of s.41(4) of the Act, if any amount is subsequently recovered, the same shall be deemed to be profit of business and, accordingly, chargeable to tax as the income of the year in which it was recovered only if the deduction has been allowed in respect of a bad debt u/s. 36(1)(vii); and that if no deduction is allowed/claimed u/s 36(1)(vii), recovery of such sum cannot be chargeable to tax. Relies on the judgment of the Rajasthan High Court in CIT v. Hindustan Zinc Ltd (2008) 174 Taxman 436 (Raj).
Adding back of Rs.10.54 lakhs being notional interest on interest fee loans:
- that the assessee had a domestic wholly owned subsidiary called Subex Technologies Limited [STL] which was granted interest fee loan and Rs.1.00 crore was outstanding as on 31.3.2006; and that STL was incorporated only on 28.3.2005, it was funded by the assessee on its initial days towards its day-to-day operations on the premise of commercial expediency;
- that there is no provision in the Income-tax Act for adding notional interest in respect of interest-free advances granted to a subsidiary concern.
- Relies on the following case laws, namely:
(i) S.A. Builders Ltd v. CIT (2007) 288 ITR 1 (SC);
(ii) JCIT v. ITC Ltd (2008) 112 ITD 57 (Kol) (SB);
(iii) CIT v. Prem Heavy Engg. Works (P) Ltd (2006) 150 Taxmann 90(All);
(iii) Metal Fabriks (I)(P) Ltd v. ACIT (2002) 123 Taxman Mag 274; &
(iv) CIT v. Orissa Cements Ltd (2001) 119 Taxman 744.
Page 15 of 30ITA No.1430 of 2010 Subex Limited Bangalore 5.1. In conclusion, it was pleaded that considering the submission of the assessee, the appeal requires to be allowed in toto.
5.1.1. On the other hand, the learned DR, by extensively quoting the enacted special provision u/s 10A of the Act in respect of newly established under-taking in free trade zone and also relying on the findings of the Hon'ble Jodhpur Bench of the Tribunal in the case of DWAL PRO Exports v. ACIT reported in (2007) 109 TTJ 0869 submitted that on going through the relevant portion of s. 10A, it is pertinent the exemption is available only if the conditions specified in this section are fulfilled. It was submitted that the first and the foremost condition is that the assessee should be gains to manufacture or articles of things or computer software in any free trade zone or any electronic hardware park or only special economic zone and that Explanation 2(v)(vii) and (viii) makes abundantly clear that a undertaking referred to in sub-section (1) means an undertaking which begins to manufacture or produce articles or things or computer software in any free trade zone or any electronic hardware park or special economic zone which the Central Government may by Notification in the Official Gazette specify for the purpose of this section. Thus, the Notification of free trade zone, electronic hardware park and specific economic zone by the Central Government is primary condition and after that such under-taking should be engaged in manufacturing or production of any article or thing or computer softer. Thus, it was contended, the mere recognition as undertaking by a competent authority does not enable the assessee to claim exemption u/s 10A unless it satisfies other condition such as, it manufactures or produces any article or thing or computer Page 16 of 30 ITA No.1430 of 2010 Subex Limited Bangalore software. It was, further, contended that it is only when an undertaking manufactures or produces any article or thing or computer software along with the fulfillment of other conditions stipulated in sub-section (2), the benefit of exemption can be sought. Therefore, it was argued that the CIT (A) had rightly dismissed the assessee's contention and upheld the AO's action on the issue.
5.1.2. Distinguishing the various case-laws relied on by the assessee, the learned DR submitted they are contrary to the decision of the Hon'ble ITAT, Jodhpur Bench in the case of Kwal Pro Export v. ACIT (supra) and, hence, those case laws have no assistance to the assessee. In conclusion, it was pleaded that the findings of the CIT (A) require to be sustained 5.2. We have carefully considered the rival submissions, duly perused the relevant materials on record and also the case laws on which either of the party have placed their strong reliance.
5.3. The disputes raised by the assessee are dealt with issue-wise as under:
Exclusion of Rs.9.53 crores from the turnover for relief u/s 10A of the Act:
5.3.1. The first ground raised by the assessee is that the CIT (A) was not justified in upholding the exclusion of Rs.9.53 crores being the sale of hardware components from the export turnover for the purpose of computing the deduction u/s 10A of the Act.Page 17 of 30
ITA No.1430 of 2010 Subex Limited Bangalore 5.3.2. Alternatively, the assessee contended that the CIT (A) was wrong in sustaining the stand of the AO in not excluding a similar amount from the total turnover for the purpose of computation of deduction u/s 10A of the Act.
5.3.3. At this point of time, our attention was drawn to the judgment of the Hon'ble jurisdictional High Court, in an identical issue, in the case of CIT v. M/s. Tata Elxsi Limited and others & also CIT v. M/s. Subex Limited [the present assessee] for the assessment year 2003-04 reported in 2011-TIOL-684-HC- Kar II dated 30.8.2011.
5.3.4. The issue [in the case of Tata Elxsi Ltd] before the Hon'ble Court, in brief, was that the assessee was engaged in the business of specialized after sales services, marketing and distribution of customized high technology computer systems and storage devices, computer consultancy and solutions and software promotion. During the year under consideration, the main source of revenue for the assessee was from trading division and STP Unit engaged in Call Centre Operations. The assessee had incurred a sum of Rs.10.44 crores in forex towards communication expenses which was claimed as exemption u/s 10A of the Act for the profits and gains derived from STP Unit. While arriving at its total turnover, the communication expense was included. Being queried to substantiate the non-inclusion of the said sum being expenses incurred in foreign currency for the purpose of computation of exemption of income claimed u/s 10A of the Act, the assessee justified its action. The assessing authority had, however, held s. 10A defines only export turnover. The fact that only export turnover is defined and total turnover is not defined clearly manifests the Legislature's intention to give Page 18 of 30 ITA No.1430 of 2010 Subex Limited Bangalore the natural meaning to the term 'total turnover' and, therefore, it was held, no deduction from total turnover was possible. Aggrieved, the assessee took up the issue with the first appellate authority who upheld the AO's stand on the premise that the word 'total turnover' was not defined under the said chapter, the interpretation placed by the AO was found to be proper and, accordingly, dismissed the assessee's appeal. On an appeal, the Tribunal, by relying on the judgment of the Hon'ble Apex Court in the case of CIT v. Lakshmi Machine Works [(2007) 290 ITR 667 (SC)] held that the expenditure incurred by the assessee should not form part of total turnover and, accordingly, directed the AO to re-compute the relief u/s 10A of the Act excluding the said communication charges from export turnover as well as from the total turnover. Aggrieved by the findings of the Tribunal, the Revenue had approached the Hon'ble Court for relief.
5.3.5. After duly analyzing the word 'export turnover' used in sub-section (4) as defined in Explanation 2(iv) at the end of s. 10A of the Act, extensively quoting the rulings of the (i) Hon'ble Supreme Court in the case of CIT v. Lakshmi Machine Works (supra), (ii) CIT v. Gem Plus Jewellery India Ltd [(2011) 330 ITR 175 (Bom)]; and (iii) ITO v. Sak Soft Ltd [(2009) 313 ITR (AT) 353 (Chennai) (SB)], the Hon'ble Court had held as under:
"The formula for computation of the deduction under s. 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 Page 19 of 30 ITA No.1430 of 2010 Subex Limited Bangalore the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Sec. 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 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 s. 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in s. 10A, 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. 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 s. 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 Page 20 of 30 ITA No.1430 of 2010 Subex Limited Bangalore 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 s. 10 A, would be as under:
Profits of the business Export turnover
of the undertaking
x (Export turnover +
domestic turnover)
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 s. 80HHC in interpreting s.
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.
12. The other substantial question of law raised for consideration in IT Appeal Nos. 1099 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 he adjusted and only thereafter deduction under s. 10A of the Act should be allowed?"
This question is also answered by this Court in IT Appeal No. 78 of 2011 decided on 9th Aug., 2011.
Page 21 of 30ITA No.1430 of 2010 Subex Limited Bangalore Accordingly, that issue is also answered in favour of the assessee and against the Revenue."
5.3.6. In conformity with the ruling of the Hon'ble jurisdictional High Court (supra), this issue is restored on the file of the CIT (A), especially since the CIT (A) while affirming the AO's action in excluding Rs.9,53,10,234/- from the export turnover has failed to adjudicate the assessee's plea namely that if above sum is excluded from the export turnover, the same should also be reduced from the total turnover while computing deduction u/s 10A of the Act. Therefore, the CIT (A) is directed to look into issue afresh in view of the ruling of the Hon'ble Jurisdictional High Court (supra) and to take appropriate action accordingly.
5.3.7. Since the alternative issue raised by the assessee has since been restored on the file of the CIT (A) for appropriate action (supra), the first ground raised by the assessee, namely, the exclusion of Rs.9.53 crores being the sale of hardware components from the export turnover for the purpose of computing the deduction u/s 10A of the Act has not been adjudicated.
5.4. The second ground is that the CIT (A) was not justified in holding that the courier charges of Rs.5,91,416/-, internet charges of Rs.14,18,339/- and insurance charges of Rs.14,92,475/- should be reduced from the export turnover.
5.4.1. At the out-set, we would like to point out that the CIT (A) has allowed the assessee's alternative ground and directed the Assessing Officer to exclude above mentioned expenditures not only from the export turnover but also from the total turnover while computing deduction u/s 10A of the Act.
Page 22 of 30ITA No.1430 of 2010 Subex Limited Bangalore Therefore, this ground is not adjudicated. It is ordered accordingly.
5.4.2. The alternative ground raised is that the CIT (A) was not justified in failing to appreciate that the question of deduction of telecommunication charges would arise only if the same has been incurred in forex and if the same has been incurred in Indian rupees, the question of deduction thereof does not arise. However, during the course of hearing, the learned AR submitted that this alternative ground is not pressed. Accordingly, the alternative ground is dismissed as 'not pressed'.
5.5. The third ground is that the CIT (A) was not justified in holding that the foreign travel expenditure should be reduced from the export turnover.
5.5.1. Alternatively, it was contended that the CIT (A) was not justified in failing to appreciate that the assessee was engaged in development and export of computer software and not in providing technical services.
5.5.2. It is an undisputed fact that the assessee was engaged in development and export of computer software and not in providing technical services. Therefore, the foreign travel expenses incurred could not have been reduced from the export turnover on the basis that the same was incurred in providing the technical services outside India.
5.5.3. At this juncture, we would like to refer to the findings of the earlier Bench of this Tribunal in an identical issue in the assessee's own case for the AY 2006-07 [in revenue's Page 23 of 30 ITA No.1430 of 2010 Subex Limited Bangalore appeal] in ITA No.89 (Bang)/2011 dated 31.10.2011. The issue before the earlier Bench of this Tribunal was that the Revenue was aggrieved by the order of the CIT (A) in directing the AO to exclude the courier and insurance liability incurred for delivery of software outside India and expenses incurred in foreign currency for providing technical services outside India and travel expenses from the total turnover for the purpose of computation of deduction u/s 10A of the Act.
5.5.4. After due consideration of the rival submissions, also on going through the order of the CIT (A) and material on record, the earlier Bench had recorded its findings as under:
"3.1...........................we find that the issue of computation of deduction u/s 10-A has two components i.e., exclusion of courier charges, internet charges and insurance liability incurred by the assessee as expenditure attributable to delivery of software outside India and the expenditure incurred in foreign currency for technical services rendered outside India and traveling expenses. The CIT (A) has considered the decisions of the special Bench of the Tribunal in the case of M/s Sak Soft Ltd reported in 313 ITR 353 (SB) Chennai and decision of the Hon'ble Bombay High Court in the case of Gem Plus Jewellery India Ltd., 2010-TIOL-456-HC-Mumbai IT and also the decision of this Tribunal in the assessee's own case for the assessment years 2003-04 and 2004-05 wherein the issue has been decided in favour of the assessee, directing the AO to exclude the same from the total turnover also when it is excluded from the export turnover. As the CIT(A) has followed the precedents on the issue, we do not find any reason to interfere with the same.
4. As regards the second component of deduction u/s 10A relating to expenses incurred in foreign currency for providing technical services outside India and also travel expenses; we find that the CIT (A), following the Page 24 of 30 ITA No.1430 of 2010 Subex Limited Bangalore above decisions directed that the said expenses when excluded from the export turnover be excluded from the total turnover also. But the learned counsel for the assessee submitted that the issue is covered by the decision of this Tribunal in the assessee's own case for the assessment years 2003-03 and 2005-06, wherein it has been held in favour of the assessee that these expenses are not to be excluded from the export turnover and also from the total turnover.
5. On-going through the assessment order, we find that these expenses incurred in foreign currency outside India are mainly for the personnel of the assessee deployed abroad for on-site development of the software and not for providing any technical services outside India. This issue has been considered by 'A' Bench of this Tribunal in the assessee's own case for the assessment years 2002- 03 and 2005-06 wherein following the decision of the Special Bench of the Tribunal at Chennai in the case of M/s. Zylog Systems Ltd., in ITA No. 1138(Mds.) 2007 (SB) Tribunal has allowed the assessee's appeal....."
5.5.5. In consonance with the findings of the earlier Bench (supra), this issue is decided in favour of the assessee. It is ordered accordingly.
5.6. The fourth ground is that the CIT (A) was not justified in holding that the loss from Telecom Division of Rs.5,10,445/- should be reduced from the profits of the eligible under-taking before computing relief u/s 10A of the Act.
5.6.1. At the outset, we would like to refer to the judgment of the Hon'ble jurisdictional High Court, in an identical issue, in the case of CIT v. M/s. Tata Elxsi Limited and others & CIT v. M/s. Subex Limited [the present assessee] (supra) wherein, the Hon'ble Court had ruled that -
Page 25 of 30ITA No.1430 of 2010 Subex Limited Bangalore "12. The other substantial question of law raised for consideration in IT Appeal Nos. 1099 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 he adjusted and only thereafter deduction under s. 10A of the Act should be allowed?"
This question is also answered by this Court in IT Appeal No. 78 of 2011 decided on 9th Aug., 2011. Accordingly, that issue is also answered in favour of the assessee and against the Revenue."
5.6.2. In view of the judgment of the Hon'ble jurisdictional High Court in the assessee's own case (supra), this issue goes in favour of the assessee.
5.7. The fifth ground of the assessee is that the CIT (A) was not justified in upholding the addition on account of bad debts recovered as income during the impugned AY when the provision on account of the same was taxed in the year in which such provision was created.
5.7.1. It was the stand of the CIT (A) that "7.1...........The appellant's contention cannot be accepted because in the immediately preceding year, subject to verification by the AO, even if the provision for doubtful debt claimed by the appellant included this sum of Rs.7,36,220/- it had to be disallowed in view of Explanation to section 36(1)(vii) of the Act. This Explanation to s. 36(1)(vii), unambiguously prohibits for inclusion of any provision for bad and doubtful debts implying that such provision of bad debts is not allowable. Further in this year, the appellant has received part of the doubtful debt which has to be offered as income of the appellant. Hence, the appellant's plea on this count is treated as dismissed".
Page 26 of 30ITA No.1430 of 2010 Subex Limited Bangalore 5.7.2. During the course of hearing before us, it was submitted by the learned AR that the assessee had created a provision for doubtful debts for the year 2002-03, but, while computing the total income the same was added back as inadmissible expenses. During the year under dispute, the assessee had recovered Rs.7,37,220/- from its debtors and credited to its P & L account under the head 'bad debts recovered'. It was, further, argued that by virtue of Explanation to s. 36(1)(vii) of the Act, the provision for doubtful debts was not an allowable expenditure and, accordingly, the same was added by the assessee in the year in which it was credited. It was, therefore, contended that when the provision on account of the same was taxed in the year in which such a provision was created, confirming the addition of Rs.7,36,200/- on account of bad debts recovered during the year under dispute amounts to double taxation. Moreover, as per the provisions of s.41(4) of the Act, if any amount is subsequently recovered, the same shall be deemed to be profit of business and, accordingly, chargeable to tax as the income of the year in which it was recovered only if the deduction has been allowed in respect of a bad debt u/s. 36(1)(vii); and that if no deduction is allowed/claimed u/s 36(1)(vii), recovery of such sum cannot be chargeable to tax.
5.7.3. On a careful consideration of the assessee's submission as well as the perusal of the reasoning of the CIT (A), we have observed that the issue has not been properly dealt with by the CIT (A) with reference to the assessee's contentions. To facilitate the CIT (A) to look into the issue afresh and to take appropriate action in accordance with the provisions of sections Page 27 of 30 ITA No.1430 of 2010 Subex Limited Bangalore 36(1)(vii) and 41(4) of the Act, the issue is restored on the file of the CIT (A). It is ordered accordingly.
5.8. The last and sixth ground is that the CIT (A) was not justified in upholding the addition of Rs.10,54,460/- as notional interest on interest free loan given to its subsidiary concern.
5.8.1. The assessing officer had disallowed a sum of Rs.10,54,460/- with a narration that 'Similarly, Rs.10,54,460/- (being 10.25% - PLR rate) on interest free loan given to sister concern will also be added back." On his part, the CIT (A) upheld the action of the AO on the addition of Rs.10,54,460/- with the following reasoning (at the cost of repetition):
"6.1..............The appellant has submitted that the loan given to the subsidiary was in the nature of a working capital loan, on grounds of commercial expediency. However, the appellant has failed to prove that the loan was granted to the subsidiary on commercial grounds and that it stood to gain any benefit from such loan advanced. Further, the appellant was incurring interest expenses on loans taken from various financial institutions..."
5.8.2. However, during the course of hearing before us, the learned AR submitted that the subsidiary concern was incorporated only on 28.3.2005; the assessee had extended the loan to its subsidiary towards its working capital as the sister- concern was not in a position to generate much cash to maintain its day-to-day operations. It was, further, argued that there is no provision in the Income-tax Act for adding notional interest in respect of interest free advance granted to a subsidiary company. In the absence of a statutory legislation, the income-tax Page 28 of 30 ITA No.1430 of 2010 Subex Limited Bangalore authorities cannot resort to levy tax on a notional income. It was submitted that the assessee had borrowed, during the year under dispute, a sum of Rs.1,11,19,920/- which was a hire- purchase loan towards the purchase of cars. Therefore, it was argued, there was no diversion of borrowed funds towards making any interest free advance to the subsidiary. Copies of financials establishing those facts furnished were placed on record.
5.8.3. We have carefully considered the submission of the assessee. It is an undisputed fact that the authorities below have not recorded any relevant reasons for making either addition or sustaining the same. As already pointed out, the reasoning of the AO in adding back the said sum was bald. As a matter of fact, the AO should have recorded his reasons by way of a speaking order, highlighting what constitutes for resorting to such an addition. The Revenue has also failed to prove the nexus between the interest bearing loan availed by the assessee and interest free advance extended to its subsidiary.
5.8.4. Taking into account the above facts and circumstances of the issue, we are of the view that the issue requires to be looked into afresh by the CIT (A) with reference to the financial status of the assessee as detailed in the Schedules to the Balance Sheet of the assessee as on 31.3.2006. To enable the CIT (A) to implement the direction of this Bench (supra), this issue is restored on the file of the CIT (A). It is ordered accordingly.
6. In the result, the assessee's appeal is partly allowed.
Page 29 of 30ITA No.1430 of 2010 Subex Limited Bangalore Order pronounced in the Open Court on 13th November, 2013.
Sd/- Sd/-
(N. Barthvajasankar) (George George K)
Vice President Judicial Member
Bangalore dated 13th November,, 2013.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, ITAT, Bangalore
6. Guard File
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Bangalore Benches, Bangalore
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