Income Tax Appellate Tribunal - Chennai
Newgen Knowledge Works Private ... vs Assessee on 5 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI V. DURGA RAO, JUDICIAL MEMBER
I.T.A. Nos. 1871, 1872& 1873/Mds/2011
(Assessment Years :2005-06, 2006-07& 2007-08)
The Assistant Commissioner M/s New Gen Imaging Systems
of Income Tax, Pvt. Ltd.,
Company Circle IV(4), v. No.268, Royapettah High Road,
Chennai - 600 034 . Chennai - 600 014.
PAN : AAACN2041B
(Appellant) (Respondent)
C.O. Nos. 67, 68 & 69/Mds/2012
(in I.T.A. Nos. 1871, 1872 & 1873/Mds/2011)
Assessment Years :2005-06, 2006-07 & 2007-08
M/s Newgen Knowledge
Works Private Limited The Assistant Commissioner of
(formerlyNewgen Imaging v. Income Tax,
Systems Pvt. Ltd.), Company Circle IV(4),
60/3, Lattice Bridge Road, Chennai - 600 034 .
Chennai - 600 041.
(Cross objector) (Respondent)
Revenue by : ShriShaji P. Jacob, Addl. CIT
Assessee by : ShriSriramSeshadri, CA
Date of Hearing : 05.07.2012
Date of Pronouncement : 19.07.2012
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
These are appeals and cross-objections of the Revenue and assessee for assessment years 2005-06, 2006-07 and 2007-08. 2 I.T.A. Nos.1871 to 1873/Mds/11
C.O. Nos.67 to 69/Mds/12 Cross-objections filed by the assessee are delayed by 117 days. Condonation petitions have been filed albeit for 116 days. No serious objection was raised by the Revenue against condoning the delay. Reasons shown by the assessee are justifiable. Hence we condone the delay and admit the cross-objections.
2. Short facts apropos are that assessee engaged in the business of e-publishing and also undertaking photo typesetting work for foreign publishers in USA and Europe, had filed its return for impugned assessment years, inter alia claiming relief under Section 10B of Income-tax Act, 1961 (in short 'the Act'). Such claims came to `8,33,37,036/- for assessment year 2005-06, ` 11,33,79,687/- for assessment year 2006-07 and ` 6,05,46,684/- for assessment year 2007-08. The A.O., during the course of assessment proceedings, for respective assessment years, noted that the expenditure claimed by the assessee included expenses incurred in foreign currency. Such expenses came to ` 1,36,44,171/- for assessment year 2005- 06, ` 1,93,20,683/- for assessment year 2006-07 and ` 1,52,31,496/- for assessment year 2007-08. The break-up of the expenses filed by the assessee showed that it was incurred for business promotion, foreign travel, job work charges, salary, commission, internet 3 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 charges, training expenses, marketing consultancy expenses and other operating expenses. Assessing Officer was of the opinion that such expenditure had to be excluded from 'export turnover' in view of clause (iii) of Explanation 2 to Section 10B of the Act. As per the A.O., the expenses incurred were for rendering technical services by a marketing agent named Ms. AnithaMadhavan based in UK for her marketing services. Other expenses were for carrying out copy editing, indexing and also rendering job work to clients of the assessee. As per the A.O., business promotion expenses, foreign travel expenses, job work charges, salary, commission were all part of the foreign currency expenses which required exclusion in terms of clause (iii) of Explanation 2 to Section 10B of the Act. He, therefore, recomputed the eligible deduction of assessee under Section 10B by excluding these amounts from export turnover. However, he did not allow assessee's claim that such amounts should also be excluded from total turnover while working out deduction under Section 10B of the Act.
3. Assessee moved in appeals for all the years before CIT(Appeals). Argument of the assessee was that expenditure incurred in foreign exchange, if it were for technical services outside 4 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 India to third parties alone could be excluded from export turnover, in view of the decision of Special Bench of this Tribunal in the case of Zylog Systems Ltd v ITO [2011] 7 ITR (Trib) 348. As per the assessee, technical services may be advice given to third party and in this case, neither was it giving advice to third parties nor it had incurred any expenditure of the like. Argument of the assessee, was that it had not rendered any technical or consultancy services which could be considered as "technical services" as defined in Explanation(2) to under clause (vii) of Section 9(1) of the Act. Assessee also relied on Notification No.S.O.890(E) dated 26th September, 2000 for arguing that assessee's business fell within the definition of "computer software". According to assessee, in the case of Zylog Systems Ltd. (supra), the question raised was whether expenses incurred in foreign currency in computer software development of the clients placed outside India were to be excluded from export turnover or not. This issue was decided in favour of the assessee, since technical services, in that case was not rendered to any third party. As per the assessee here also, it had not rendered any technical services to any third party and hence, such amounts could not be excluded from export turnover, here also. CIT(Appeals) was appreciative of the contentions of the assessee. According to 5 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 him, the expenditure incurred by the assessee did not fall within the category of expenses incurred in connection with any outside work rendered to any third party. In view of the decision of Zylog Systems Ltd. (supra), such amounts could not be excluded from export turnover. He, therefore, directed the Assessing Officer to re-compute the deduction under Section 10B for respective years without excluding expenditure incurred in foreign currency. Though assessee had taken an alternative ground that amounts that were excluded from export turnover were required to be excluded from total turnover also, this was not decided by the CIT(Appeals) since he held in favour of assessee on the primary issue.
4. Now before us, learned D.R., strongly assailing the order of CIT(Appeals), submitted that in assessee's own case for earlier assessment years 2001-02, 2003-04 and 2004-05, this Tribunal in its order dated 8.2.2008 in I.T.A. Nos.1955, 570 & 1956/Mds/2007, had clearly held that services rendered by Ms. AnithaMadhavan was nothing but very much technical in nature. Therefore, according to him, CIT(Appeals) was not justified in directing the Assessing Officer to include the expenses incurred on such technical services in the 6 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 export turnover. As per the Ld. D.R.,, the issue stood covered against the assessee in Tribunal's order for the earlier years.
5. Per contra, learned A.R. strongly supporting the order of CIT(Appeals) for all the years, submitted that subsequent to the decision of this Tribunal in assessee's own case for earlier years, the same issue was the matter of consideration by Special Bench of this Tribunal in the case of Zylog Systems Ltd (supra). According to him, where assessee had not rendered technical services outside India to third parties, the expenses incurred in rendering such services in foreign currency could always be considered as expenses incurred in connection with assessee's own needs. Learned A.R. further submitted that the Tribunal in the case of Zylog Systems Ltd. (supra) had duly considered the definition of "technical services" given in Explanation 2 to Section 9(1)(vii) of the Act. Therefore, as per the learned A.R., the decision of co-ordinate Bench of this Tribunal in the assessee's own case for earlier years paled into insignificance in view of the decision of Special Bench which now was in favour of assessee. According to him, Ms. Anita Madhavan was an agent of the assessee. Learned A.R. further pointed out that the co- ordinate Bench of this Tribunal while ruling against the assessee for 7 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 the earlier years, had relied on a decision of Infosys Technologies Limited v. JCIT (109 TTJ 631). Nevertheless, according to him this decision was also considered by the Special Bench while expressing its view, in the case of Zylog Systems Ltd. (supra). Substance of decision in Zylog Systems Ltd. (supra) was that a person could not render service to himself. Assessee here had not rendered any service to any foreign person. Further, according to him, assessee in the invoices raised to the clients had not made any specific claim for technical service charges nor for reimbursement of any expenses incurred. Reliance was placed on paper-book Volume I pages 21-22 which, according to him, was representative of the invoices raised by the assessee on its clients. Learned A.R. further pointed out that Explanation 2 to Section 10B of the Act in its clause (iii) directed exclusion from export turnover only those types of expenses which were billed on the clients. According to him, there were two legs in such definition of which first related to freight, telecommunication charges, insurance, etc. attributable to delivery of software outside India and the second leg applied to expenses incurred in foreign currency in providing technical services outside India. According to him, assessee had not provided any technical services outside India nor billed any amount on its clients. Rendering of technical services 8 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 was not proved by the Revenue. In any case, according to him, if these amounts were excluded from export turnover, it had to be excluded from total turnover in view of the decision of Special Bench in the case of ITO v. Sak Soft Ltd. (2009) 313 ITR (AT) 353.
6. Ad libitum, learned D.R. submitted that the decision of co- ordinate Bench of this Tribunal in assessee's own case could never be ignored and this Tribunal was bound to follow such decision, when the fact situation remained the same. According to him, there was no dispute that fact situation relating to expenses in foreign currency incurred during the relevant previous year were very similar to such expenses incurred for previous years relevant to assessment years 2001-02, 2003-04 and 2004-05, where this Tribunal had held against assessee. As for the reliance placed on the decision of Zylog Systems Ltd. (supra), learned D.R. submitted that it was clear from para 3 of the order of Special Bench that assessee there was doing onsite development and offshore development through a branch in USA for which separate accounts were maintained. As against this, assessee-company here was not having any branch outside India and therefore, it cannot say that technical services rendered were for its own employees and for its own needs and not for its clients. 9 I.T.A. Nos.1871 to 1873/Mds/11
C.O. Nos.67 to 69/Mds/12
7. We have perused the orders and heard the rival submissions. There are two legs of argument that assessee's counsel has raised in support of CIT(Appeals)'s order. First is that what was rendered by Ms. Anitha Madhavan was not technical services falling within the definition of that term given under Explanation 2 to Section 9(1)(vii) of the Act and therefore, expenses incurred in relation thereto, was not required to be excluded from export turnover, as defined in clause (iii) of Explanation 2 to Section 10B of the Act. Second leg of his argument is that there was no separate billing done for its clients for any technical service, and therefore, exclusion of such expenses from export turnover was not required. According to him, decision of this Tribunal in assessee's own case, for earlier years, could not be followed due to subsequent decision in the case of Zylog Systems Ltd. (supra) by Special Bench. We are unable to accept any of these lines of reasoning. First and foremost is that a clear finding has been given by this Tribunal in assessee's own case for earlier years, relating to foreign currency expenses of similar nature. It was clearly held that what assessee was rendering was only technical services. Relevant para 6 of the order dated 8.2.2008 of this Tribunal is reproduced hereunder:-
10 I.T.A. Nos.1871 to 1873/Mds/11
C.O. Nos.67 to 69/Mds/12 "6. We have heard both the parties and perused the materials on record. The contention of the assessee is that Ms. AneethaMadhavan is rendering only marketing services and is not doing any technical service. We have gone through the facts of the case. The assessee has made payments towards job work to agencies for carrying copy editing and indexing relating to e-publishing. As pointed out by Learned D.R., only a person having technical expertise and knowledge can render these services. A marketing person who does not have any technical knowledge cannot handle these type of services. The type of services rendered by Ms. AneethaMadhavan is not like rendering service for marketing of the product of the assessee company. To do the marketing job for the assessee, the person involved must necessarily possess technical expertise and knowledge of the activity carried on by the assessee. To canvass the customers about the services rendered by the assessee firm, the marketing person first of all should be updated with all technical details relating to the services of the assessee company and only in that event the marketing person would be able to perform the basic job of marketing. In the case of assessee firm, marketing services and technical services go hand in hand and in our opinion and they are like two faces of the same coin. The argument of the assessee that M/s, AneethaMadhavan is MBA (Marketing) only and hence her only knowledge is limited to marketing is devoid of any merit. The contention of the learned counsel for the assessee that technical service is different from marketing services cannot be considered. Assessee's products can be marketed only with technical assistance. Since the assessee is engaged in e-
publishing, photo type etc. to meet the need base of the assessee's customers, marketing cannot be done without technical services. Technical service is part and parcel of marketing. Hence we are of the opinion that Learned Commissioner of Income Tax (Appeals) is not justified in holding that Ms. AneethaMadhavan has not rendered any technical services. Hence we reverse the findings of the Learned Commissioner of Income Tax (Appeals) in all the three asst. years. Further the order of the Bangalore Bench of the 11 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 Tribunal in the case of Infosys cited supra is not relating to Sec.10B but is only relating to Sec.80HHC. Hence we have not considered the same."
8. For earlier assessment years, also expenditure incurred were in relation to the very same marketing agent. Assessing Officer had considered for exclusion only those expenditure incurred in foreign currency and nothing else. Business promotion expenses, foreign travel expenses, job work charges, salary, commission, internet service charges, training expenses and other operating expenses were all incurred in foreign currency. Definition of "export turnover"
as given in clause (iii) of Explanation 2 to Section 10B of the Act, runs as under:-
(iii) " 'export turnover' means the consideration in respect of export [by the undertaking] 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."
9. Expenses of the nature incurred by the assessee clearly fell within the purview of the above explanation, since admittedly these were related to technical services rendered outside India. Only 12 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 question is whether the decision of Special Bench in Zylog Systems Ltd. (supra) would make any difference. As pointed out by the learned D.R., in the case of Zylog Systems Ltd. (supra), the question was whether the expenses incurred in foreign currency on computer software development onsite at the client's place outside India was to be excluded from export turnover. Argument of the assessee in that case was that it was not rendering any technical services outside India to any third party, but the foreign currency expenses incurred were in connection with its own staff in foreign branch in foreign country. Here, on the other hand, assessee admittedly was not having any branch outside India. The clients to which it rendered service in the nature of e-publishing, photo-type setting work were based in USA and Europe. Finding of the Special Bench in the case of Zylog Systems Ltd. (supra) was that assessee could not provide service to self since foreign currency expenditure incurred related to its own staff. Here, on the other hand, admittedly assessee was incurring expenditure on an agent named Ms. AnithaMadhavan and there is a finding given by the co-ordinate Bench of this Tribunal that such services would be considered as technical services. It was not a case where expenditure was incurred in development of software by the employees of the assessee in foreign branch. We are of the 13 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 opinion that the Special Bench's decision in the case of Zylog Systems Ltd. (supra) will not help the assessee in any manner. On the other hand, the co-ordinate Bench decision in assessee's own case for earlier years will be applicable in all four squares.
10. Second leg of the argument by the learned A.R. that there was no separate billing for these items to its clients. We are afraid we are unable to accept this line of reasoning also. When expenses were attributable to the delivery of articles or things or computer software outside India, or expenses were incurred in foreign exchange for technical services outside India, even if the assessee had not invoiced such amounts specifically and separately in its billings raised on its customers abroad, the billing amounts would have definitely been fixed by the assessee, taking into consideration such expenses also. Just because invoices raised did not specifically mention, reimbursement of foreign currency expenses in the nature mentioned in clause (iii) of Explanation 2 to Section 10B of the Act, we cannot say that billed amounts were exclusive of such expenses. Assessee while agreeing for rendering services to its clients would have definitely reckoned such expenses which were to be incurred by it in the delivery of such services outside India. It is not the case of the 14 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 assessee that such expenses were not considered by it for working out its profits. It is also not a case of the assessee that such expenses were not considered by it as a part of its revenue outgo. Once expenses of the nature mentioned in clause (iii) of Explanation 2 to section 10B of the Act are incurred, these will have to be excluded from export turnover, whether or not billings of the assessee specifically mentioned such items. Even if such expenses other than on technical services, are incurred in India, it still has to be excluded from export turnover as held by Special Bench in the case of ITO Vs. Sak Soft Ltd. (2009) 313 ITR (A.T) 353. We are thus of the opinion that CIT(Appeals) fell in error, when he directed the A.O. to exclude foreign currency expenses from the export turnover, while working out the deduction u/s.10B of the Act.
11. In the result, we set aside the orders of CIT(Appeals) and reinstate computation made by the Assessing Officer in working out reduction under Section 10B of the Act, subject to our finding on the cross objections of the assessee.
12. Assessee in its cross-objections has raised the issue of non- exclusion of such amounts from total turnover also. Admittedly, such a ground was raised before the CIT(Appeals) who had not 15 I.T.A. Nos.1871 to 1873/Mds/11 C.O. Nos.67 to 69/Mds/12 adjudicated on this issue. However, sending the issue back to the CIT(Appeals) will be an exercise in futile since Special Bench in the case of Sak Soft Ltd. (supra) has specifically held that the items which were excluded by the Assessing Officer from export turnover by relying on clause (iii) of Explanation 2 to Section 10B of the Act, will have to be excluded from total turnover also for the purpose of computing deduction under Section 10B of the Act. Therefore, we direct the A.O. that while re-working the deduction available to assessee under Section 10B of the Act, those items which are excluded from export turnover to be excluded from total turnover also.
13. To summarise the result, appeals of the Revenue as well as cross-objections of the assessee are allowed.
The order was pronounced in the Court on Thursday, the 19th of July, 2012, at Chennai.
sd/- sd/- (V.DurgaRao) (Abraham P. George) Judicial Member Accountant Member Chennai, Dated the 19th July, 2012. Kri.
Copy to: Assessee/Assessing Officer/CIT(A)-VI, Chennai/ CIT-III, Chennai/D.R./Guard file