Income Tax Appellate Tribunal - Bangalore
M/S Natsem Indis Designs Pvt. Ltd.,, ... vs Department Of Income Tax on 1 March, 2012
Page 1 of 8 1 ITA No.668/Bang/2011
INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES 'B'
BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND
SHRI GEORGE GEORGE K, JUDICIAL MEMBER
ITA No.668/Bang/2011
(Asst. Year 2006-07)
The Deputy Commissioner M/s Natsem India Designs
of Income Tax, Circle-12(2), Pvt. Ltd., 7/6, Brunton Road,
Bangalore. vs Bangalore-25.
PA No.AAACN4844Q
(Appellant) (Respondent)
Date of Hearing : 01.03.2012
Date of Pronouncement : 01.03.2012
Appellant by : Smt. Susan Thomas Jose, JCIT
Respondent by : Shri Amit Kumar, C.A.
ORDER
PER GEORGE GEORGE K :
This appeal instituted by the revenue is directed against the order of the Ld. CIT(A)-III, Bangalore dated 01.02.2011. The relevant assessment year is 2006-07.
2. The effective ground reads as under:-
i) The learned CIT(A) erred in law and on the facts of the case in directing the Assessing Officer to exclude the communication expenses of Rs.62,73,520/- and expenses incurred in foreign currency on foreign travel and onsite expenses amounting to Rs.1,03,99,520/- from the total turnover for the purpose of computation of deduction under section 10A of the Act.Page 2 of 8 2 ITA No.668/Bang/2011
3. Briefly stated the facts are as follows:-
The assessee is a company. It is engaged in the business of development and export of software. For the concerned assessment year, return of income was filed on 16/11/2006 declaring an income of Rs.3,99,501/-. The assessee had claimed deduction under section 10A of the Act amounting to Rs.3,51,54,059/-. The Assessing Officer re-computed the deduction under section 10A of the Act by reducing from the export turnover the following :-
Original export turnover as per the P&L Rs.29,57,95,664
a) Communication expenses Rs. 62,73,520
b) Foreign currency expenses on foreign travel & onsite expenses Rs.1,03,99,520 Rs. 1,66,73,040 Recomputed export turnover Rs.27,91,22,624 The Assessing Officer, however, did not reduce the same from the total turnover while computing deduction under section 10A of the Act.
4. Aggrieved, the assessee carried the matter in appeal before the first appellate authority.
5. It was argued that the above said expenses ought not to have been reduced from the export turnover while calculating deduction under section 10A of the Act. Alternatively it was argued that if the said expenses are reduced from the export turnover, the same ought to have been reduced from the total turnover also, while calculating deduction under section 10A of the Act.
Page 3 of 8 3 ITA No.668/Bang/2011
6. The first appellate authority accepted the alternative contention of the assessee by following the judgement of the Hon'ble Mumbai High Court in the case of CIT v Gem Plus Jewellery India Ltd. 330 ITR 175 and the order of the Special Bench in the case of ITO v M/s Sak Soft Ltd. 313 ITR 353.
7. The revenue being aggrieved is in appeal before us.
8. At the very outset the learned AR submitted that the issue in question is squarely covered by the judgement of the Hon'ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others (2011-TIOL-684- HC-KAR-II), Hon'ble Mumbai High Court in the case of CIT v Gem Plus Jewellery India Ltd. 330 ITR 175 and the order of the Special Bench in the case of ITO v M/s Sak Soft Ltd. 313 ITR (AT) 353.
8. The learned DR present was duly heard.
9. 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 it is 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.Page 4 of 8 4 ITA No.668/Bang/2011
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 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. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the Page 5 of 8 5 ITA No.668/Bang/2011 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".
9.1 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 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:-
Page 6 of 8 6 ITA No.668/Bang/2011
"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 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 Page 7 of 8 7 ITA No.668/Bang/2011 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 Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on"
9.2 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. 9.3 In light of the above facts, the Special Bench held as under:- Page 8 of 8 8 ITA No.668/Bang/2011
"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".
9.4 In the light of the above judgements of the High Courts and the order of the Special Bench, we are of the view that the CIT(A) is justified in directing the Assessing Officer to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while computing deduction under section 10A of the Act.
10. In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open court on 1st day of March, 2012 Sd/- Sd/-
(N K SAINI) (GEORGE GEORGE K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Copy to:-
1. The Revenue 2. The Assessee 3. The CIT concerned 4. The CIT(A)
concerned 5. The DR 6. GF
MSP/- By Order
Asst. Registrar, ITAT, Bangalore.