Income Tax Appellate Tribunal - Bangalore
M/S Manhattan Associates India ... vs Department Of Income Tax on 22 November, 2011
Page 1 of 15 1 ITA Nos.114 & 115 &
84 & 85/Bang/2011
INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES 'B'
BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT
AND SHRI GEORGE GEORGE K, J.M
ITA Nos.114 & 115/Bang/2011
(Asst. Years 2004-05 & 2005-06)
M/s Manhattan Associates (India)
Development Centre Private Limited,
170, 171 & 172, EPIP Zone, Phase II,
Whitefield, Bangalore-560 066. - Appellant
PA No.AADCM0727A
Vs
The Income Tax Officer,
Ward-12(1), Bangalore. - Respondent
ITA Nos.84 & 85/Bang/2011
(Asst. years 2004-05 & 2005-06)
(By Revenue)
Date of hearing : 22/11/2011
Date of pronouncement : 22/11/2011
Appellant by : Shri R Vijaya Raghavan, C.A.
Respondent by : Smt. Susan Thomas Jose, JCIT
ORDER
PER GEORGE GEORGE K :
These appeals instituted by both the assessee and revenue are directed against separate orders of the CIT(A)-III, Bangalore. The relevant asst. years are 2004-05 and 2005-06.Page 2 of 15 2 ITA Nos.114 & 115 &
84 & 85/Bang/2011
2. Since there are certain common issue involved in these appeals and pertain to the same assessee, they are disposed of by this consolidated order for the sake of convenience and brevity.
3. In revenue's appeal, the following effective ground is raised:- ITA No.84/Bang/2011
The CIT(A) erred in directing the AO to exclude telecommunication expenses of Rs.46,22,836/- attributable to delivery of software from total turnover also for purposes of computation of deduction u/s 10A of the I T Act, 1961.ITA No.85/Bang/2011
The CIT(A) erred in directing the AO to exclude telecommunication expenses of Rs.49,40,250/-, travel and onsite expenses amounting to Rs.15,79,925/- which are incurred for delivery of software from total turnover also for purposes of computation of deduction u/s 10A of the I T Act, 1961.
4. Briefly stated the facts in relation to revenue's appeals are as follows:-
For the asst. year 2004-05, the assessee had filed the return of income on 29.10.2004 declaring an income of Rs.2,89,077/-. The assessee had claimed deduction u/s 10A of the Act amounting to Rs.4,83,37,786/-.
During the course of assessment proceedings, the AO noticed that the assessee had incurred telecommunication charges of Rs.46,22,836/-. The AO held that the above said expenses of Rs.46,22,836/- were expenses attributable to the delivery of computer software outside India and therefore, in accordance with clause (iv) of Explanation 2 appearing below Page 3 of 15 3 ITA Nos.114 & 115 & 84 & 85/Bang/2011 sub-section 8 of section 10A of the Act, the AO reduced the said expenses from export turnover in computing deduction u/s 10A of the Act. While reducing the above said expenses from the export turnover, the AO did not reduce the same from the total turnover while calculating deduction u/s 10A of the Act.
4.1 For the asst. year 2005-06, the assessee had filed return of income on 29.10.2005 declaring an income of Rs.2,25,440/-. The assessee had claimed deduction u/s 10A amounting to Rs.10,07,36,379/-. During the course of assessment proceedings the AO noticed that the assessee had incurred telecommunication charges of Rs.49,40,250/-. The AO held that the above said expenditure of Rs.49,40,250/- were expenses attributable to the delivery of computer software outside India and therefore in accordance with clause (iv) of Explanation 2 appearing below sub-section 8 of section 10A of the Act, the AO reduced the said expenses from export turnover in computing deduction u/s 10A of the Act. Further, the AO also held that 50% of the travel expenses incurred in foreign currency amounting to Rs.15,79,925/- are incurred for providing technical services outside India and hence reduced the said travel expenses from the export turnover in computing the eligible deduction u/s 10A of the Act.
4.2 The assessments completed for AYs 2004-05 & 2005-06 were carried in appeals before the first appellate authority.
4.3 Before the first appellate authority it was submitted that the above said telecommunication expenses and travelling expenses should not be reduced from the export turnover while computing eligible deduction u/s Page 4 of 15 4 ITA Nos.114 & 115 & 84 & 85/Bang/2011 10A of the Act. Alternatively, it was urged that if the expenses in question are so excluded from the export turnover, the same should also be reduced from the total turnover in computing the deduction u/s 10A of the Act.
4.4 The CIT(A), relying on the judgement of Hon'ble High Court of Bombay in the case of M/s Gem Plus Jewellery India Ltd. and the Special Bench decision in the case of M/s Sak Soft Ltd., accepted the alternative contention of the assessee and directed the AO to exclude the expenses, which are excluded from export turnover, also from the total turnover in computing deduction u/s 10A of the Act.
4.5 Revenue, being aggrieved, is in appeals before us.
4.6 The learned DR supported the orders of the Assessing Officer.
4.7 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 353.
4.8. 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 Page 5 of 15 5 ITA Nos.114 & 115 & 84 & 85/Bang/2011 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 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 Page 6 of 15 6 ITA Nos.114 & 115 & 84 & 85/Bang/2011 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 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".Page 7 of 15 7 ITA Nos.114 & 115 &
84 & 85/Bang/2011 4.9 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:-
"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, Page 8 of 15 8 ITA Nos.114 & 115 & 84 & 85/Bang/2011 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 Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on"
4.10. 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 Page 9 of 15 9 ITA Nos.114 & 115 & 84 & 85/Bang/2011 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. 4.11. 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-section (4) of both the sections prescribe an identical formula for computing the export profits. 4.12 In the light of the above reasoning, we uphold the orders of the CIT(A) and direct the AO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s 10A of the Act.
4.13 In the result, the appeals filed by the revenue are dismissed. Page 10 of 15 10 ITA Nos.114 & 115
& 84 & 85/Bang/2011
5. In assessee's appeals (ITA Nos.114 & 115/Bang/11), identical grounds are raised which reads as follows:-
2) The CIT(A) erred in confirming that the brought forward business losses and unabsorbed depreciation of the company from the earlier years should be set off against the business profits before computing the deduction u/s 10A of the Act.
3) The CIT(A) ought to have appreciated that the relief u/s 10A is on the profits of the eligible undertaking for the year computed as per under sections 28 to 43 and hence should be computed before setting off of carried forwarded business loss and unabsorbed depreciation u/s 72.
4) The appellant relied on the ratio of decision of the Special Bench, Chennai ITAT in the case of Scientific Atlanta India Technology (P) Ltd. v ACIT - 129 TTJ 273.
5) The CIT(A) erred in law and in fact that the telecommunication expenses attributable to the delivery of computer software outside India should be reduced from export turnover while computing the eligible deduction u/s 10A of the Act.
6) The CIT(A) ought to have appreciated that these expenses which do not form part of the export turnover cannot be excluded therefrom.
7) The appellant relied on the ratio of the decision of the Special Bench, Chennai ITAT in the case of Zylog Systems Limited v ITO - (2011 ITR 7 (Trib) 348 (Chennai) (SB).
5.1 Briefly stated the facts in relation to ground nos.2 to 4 are as follows:-
For the asst. year 2004-05, the assessee company had claimed deduction u/s 10A on the profits of the business of the previous year. The Page 11 of 15 11 ITA Nos.114 & 115 & 84 & 85/Bang/2011 assessee had carried forward loss from earlier years amounting to Rs.1,81,064/- and unabsorbed depreciation amounting to Rs.91,50,706/-.
The AO, while completing assessment, recomputed the deduction u/s 10A after setting off of carried forward loss and unabsorbed depreciation restricting the deduction u/s 10A of the Act.
5.2 On appeal, the CIT(A) dismissed the appeal of the assessee, relying on the order of the Tribunal in the case of Intellinet Technologies India (P) Ltd. v ITO (ITA No.1021/Bang/2009), which in turn relied on the jurisdictional High Court in the case of Himatsingika Seide Ltd. 286 ITR
255. 5.3 The assessee being aggrieved is in appeal before us.
5.4 At the outset, it was pointed out by the assessee that the issue in question is squarely covered by the judgement of the jurisdictional High Court in the case of CIT v M/s Axa Business Services Pvt. Ltd. & Others (2011-TIOL-711-HC-Kar-II).
5.5 We have heard the rival submissions and perused the material on record. The Hon'ble jurisdicational High Court in the case of CIT v M/s Axa Business Services Pvt. Ltd. (supra) categorically held that deduction u/s 10A is allowable without setting off of the brought forward loss and unabsorbed depreciation of other units. The relevant findings of the Hon'ble High Court at paras 19, 29 to 31 reads as follows:-
"19. From the aforesaid discussion it is clear that the income of 10A unit has to be excluded before arriving at Page 12 of 15 12 ITA Nos.114 & 115 & 84 & 85/Bang/2011 the gross total income of the assessee. The income of 10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of section 10A in this context means the global income of the assessee and not the total income as defined in section 2(45). Hence, the income eligible for exemption u/s 10A would not enter into computation as the same has to be deducted at source level.
29. After making all such computation the assessee would be entitled to the benefit of set off or carry forward of loss as provided u/s 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said benefit is available even to undertakings u/s 10B of the Act. The expression "deduction of such profits and gains as derived by an undertaking shall be allowed from the total income of the assessee", has to be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Therefore, it is clear that though the assessee may be having more than one undertaking for the purpose of section 10A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is not to be included in the total income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed.Page 13 of 15 13 ITA Nos.114 & 115
& 84 & 85/Bang/2011
30. The provisions of this sub-section will apply even in the case where an assessee has opted out of section 10A by exercising his option under sub-section (8). As discussed, it is permissible for an assessee to opt in and opt out of section 10A. In the year when the assessee has opted out, the normal provisions of the Act would apply. The profits derived by him from the STP undertaking would suffer tax in the normal course subject to various provisions of the Act including those of Chapter VI-A. If in such a year, the assessee has suffered losses, such losses would be subject to inter source and inter head set off. The balance if any thereafter can be carried forward, for being set off against profits of the subsequent assessment years in the normal course. Unabsorbed depreciation also merits a similar treatment.
31. As the income of 10-A unit has to be excluded at source itself before arriving at the gross total income, the loss of non 10-A unit cannot be set off against the income of 10-A unit u/s 72. The loss incurred by the assessee under the head profits and gains of business or profession has to be set off against the profits and gains if any, of any business or profession carried on by such assessee. Therefore as the profits and gains under section 10-A is not be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current years depreciation u/s 32(2) is to be set off. As deduction u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the Page 14 of 15 14 ITA Nos.114 & 115 & 84 & 85/Bang/2011 aforesaid statutory provisions and the appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to be assessee. Hence, the main substantial question of law is answered in favour of the assessees and against the revenue".
5.6 The facts being identical, respectfully following the dictum laid down by the Hon'ble jurisdictional High Court, we direct the AO to calculate deduction u/s 10A of the Act without setting off of the carried forward business loss and depreciation. It is ordered accordingly. In the result, grounds no.2 to 4 are allowed.
6. Ground Nos.5 to 7 does not require adjudication, since the alternative plea of the assessee was accepted by the CIT(A) and the order of the CIT(A) was affirmed by us in ITA Nos.84 & 85/Bang/2011. Moreover, on the issue whether telecommunication expenses attributable to the delivery of computer software outside India should be reduced from export turnover while computing the eligible deduction u/s 10A of the Act, had not been adjudicated by the first appellate authority. Hence, we feel ground nos. 5 to 7 does not require any adjudication and the same are dismissed.
7. In the result, the appeals filed by the assessee are partly allowed as indicated above.
Order pronounced in the open court on 22nd day of November, 2011 Sd/- Sd/-
(N BARATHVAJA SANKAR) (GEORGE GEORGE K)
VICE PRESIDENT JUDICIAL MEMBER
Page 15 of 15 15 ITA Nos.114 & 115
& 84 & 85/Bang/2011
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.