Madras High Court
Commissioner Of Income Tax-I vs M/S.Zylong Systems Ltd on 1 February, 2022
Author: R. Mahadevan
Bench: R. Mahadevan, Mohammed Shaffiq
TCA.399 & 400/2011
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 01.02.2022
CORAM:
THE HONOURABLE MR.JUSTICE R. MAHADEVAN
AND
THE HONOURABLE MR.JUSTICE MOHAMMED SHAFFIQ
Tax Case (Appeal).Nos.399 and 400 of 2011
Commissioner of Income Tax-I
Chennai ..Appellant
in both appeals
Vs
M/s.Zylong Systems Ltd.,
No.155, Thiruvalluvar Salai
Kumaran Nagar
Chennai-600 119 ..Respondent
in both appeals
Prayer: Tax Case Appeals filed against the order of the Income-tax
Appellate Tribunal “A” Bench Chennai dated 25.03.2011 in ITA.Nos.26 and
27 /Mds/2011.
For Appellant : Mrs.V.Pushpa, Junior Standing counsel
For Respondent : Mr.S.Gopalakrishnan, for Official Liquidator.
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https://www.mhc.tn.gov.in/judis
TCA.399 & 400/2011
COMMON JUDGMENT
[Judgment of the Court was delivered by R. MAHADEVAN, J.] These tax case appeals have been filed by the appellant / Revenue, challenging the order dated 05.11.2008 passed by the Income Tax Appellate Tribunal, Chennai -C Bench, in I.TA.Nos.202, 203 and 204/Mds/2008, relating to the assessment years 1999-2000, 2000-01 and 2003-04.
2. By order dated 20.09.2011, this court admitted the aforesaid tax case appeals on the following substantial questions of law:
T.C.(A).No.399 of 2011:-
“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the expenditure of Rs.9,49,75,456/- incurred in foreign exchange for providing technical services outside India by way of onsite development of computer software should not be excluded from the export turnover for the purpose of computing deduction under Section 10B without properly applying the provisions of Explanation 2(iii) to Section 10B?
2/11 https://www.mhc.tn.gov.in/judis TCA.399 & 400/2011 T.C.(A).No.400 of 2011:-
“Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the expenditure of Rs.9,74,33,406/- incurred in foreign exchange for providing technical services outside India by way of onsite development of computer software should not be excluded from the export turnover for the purpose of computing deduction under Section 10B without properly applying the provisions of Explanation 2(iii) to Section 10B?”
3.1 Today, when the matters were taken up for consideration, the learned counsel for the appellant / Revenue as well as the respondent / assessee jointly submitted that the substantial questions of law involved in these appeals has already been considered and decided in favour of the assessee by judgment dated 20.02.2020 passed in TC(A).Nos.312 and 385 of 2011, the relevant passage of which, is usefully extracted hereunder:
“5. Learned counsel for the Revenue fairly submitted that the controversy is no longer res integra in view of the decision of the Hon'ble Supreme Court in the case of ? Commissioner of Income Tax Vs Mphasis Ltd? reported in 3/11 https://www.mhc.tn.gov.in/judis TCA.399 & 400/2011 [2020] 113 taxmann.com 74 decided on 13.11.2019, has affirmed the view taken by the Division Bench of the Karnataka High Court and the Hon'ble Supreme Court has held that such expenditure incurred by the Assessee in foreign currency will be includible in the definition of 'export turnover' for the purpose of computing deduction under Section 10B of the Act.
6. The relevant portion of the judgment of the Division Bench of the Karnataka High Court in ?CIT Vs Mphasis Ltd.,? reported in [2016] 74 taxmann.com 274 (Karnataka) is quoted below for ready reference.
? “2. The first substantial question of law arose for consideration before this Court in ITA No.776/2007 disposed of on 13.06.2014, wherein this Court has held at paras 18 and 19 as under :-
18. From the aforesaid provision it is clear that the consideration in respect of computer software received in or brought into India by the assessee in convertible foreign exchange is deducted from the profits of the said business. In other words the assessee is not liable to pay any income tax on such consideration received from export of computer software. However the said export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of computer software outside India or expenses if any incurred in foreign exchange in providing technical service outside India. In other words out of the said export turnover the following amounts have to be deducted;
a. freight b. telecommunication charges c. insurance attributable to the delivery of computer software outside India;d. expenses, if any, incurred in foreign exchange in providing technical services outside India;
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19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer software outside India. If the technical services rendered by the assessee's Engineers is in connection with the export of computer software for the purpose of testing, installation and monitoring of software such a turnover do not fall within clause (ii) of subsection (1) of section 80HHE of the Act. Such a turnover falls within sub-clause (i) of subsection (1) of Section 80HHE of the Act, that is export out of India of computer software or its transmission from India to a place outside India by any means. The expenditure incurred in the form of foreign exchange for such services cannot be excluded in computing the export turnover as it forms part of the export turnover. In the instant case as is clear from the order of the Assessing Authority, he proceeds on the assumption that the assessee is a company engaged in rendering technical services outside India in connection with production of said software. Therefore the expenditure incurred in foreign exchange in providing such technical services outside India of Rs.62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction under Section 80HHE of the Act. The assesee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted 5/11 https://www.mhc.tn.gov.in/judis TCA.399 & 400/2011 from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (1) of sub-section (1) of Section 80 HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of the assessee and against the revenue. Ordered accordingly.
3. In view of the said judgment, the substantial question of law is answered in favour of the assessee and against the Revenue.
4. Insofar as the second substantial question of law is concerned, the same was considered by this Court in the case of Commissioner of Income Tax And Another Vs. Tata Elxsi Ltd., reported in (2012) 349 ITR 98 (Karn) . It has been held as under :- “From the aforesaid judgments, what emerges is that, 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 10-A 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 6/11 https://www.mhc.tn.gov.in/judis TCA.399 & 400/2011 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 assessee, 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. 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 Section 10-A, 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 7/11 https://www.mhc.tn.gov.in/judis TCA.399 & 400/2011 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 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 Section 10-A, would be as under:
Profits of the business Export turn over x of the undertaking [Export turnover + domestic turn over) Total turn over”
5. Accordingly, the said substantial question of law is answered in favour of the assessee and against the Revenue. ?
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7. The said view was affirmed by the Hon'ble Supreme Court and the relevant portion of the judgment is quoted below for ready reference.
?1.The instant petition is filed by the petitioner-Revenue assailing the judgment dated 01.08.2014 passed by the High Court of Karnataka at Bangalore in I.T.A.No.1075 of 2008.
2. When the petition is taken up for consideration, Mr.Vikramjit Banerjee, learned Additional Solicitor General appearing for the petitioner-Revenue and Mr.Parcy Pardiwala, learned Senior Counsel appearing for the respondent, are in agreement that SLP (C) No.2373/2015 preferred by the Revenue in respect of connected ITA No.196 of 2009 which was disposed of by the very same common order dated 01.08.2014 was dismissed by this Court on 28.01.2019 having taken note similar grounds raised in the special leave petition.
3. Hence taking note of the fact that in respect of common judgment this Court has already dismissed SLP (C) No.2373 of 2015 relating to the Assessment Year 2004-05 and in the present case except that issue relates to Assessment Year 2003-2004 all other aspects are on the very same point, we are not inclined to entertain the instant petition.“ 9/11 https://www.mhc.tn.gov.in/judis TCA.399 & 400/2011 3.2 Following the aforesaid judgment, which applies to the facts of the present case, the questions of law are answered in favour of the assessee and against the Revenue.
4. In the result, the Appeals of the Revenue are dismissed as indicated above. No costs.
[R.M.D., J.] [M.S.Q., J.] 01.02.2022 Index:Yes/No Speaking/Non-speaking order nvsri To
1.The Commissioner of Income-Tax, Chennai.
2.The Income-tax Appellate Tribunal “A” Bench Chennai.
3.The Assistant Commissioner of Income Tax, Company Circle -III(3), Chennai-600 034.
4.The Commissioner of Income-Tax (Appeals) III 121, Mahatma Gandhi Road, Chennai-600 034.
10/11https://www.mhc.tn.gov.in/judis TCA.399 & 400/2011 R. MAHADEVAN, J.
and MOHAMMED SHAFFIQ, J.
nvsri TCA.399 and 400 of 2011 01.02.2022 11/11 https://www.mhc.tn.gov.in/judis