Income Tax Appellate Tribunal - Chennai
Inautix Technologies India Private ... vs Assessee on 20 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER
AND SHRI V. DURGA RAO, JUDICIAL MEMBER]
I.T.A.No.1163/Mds/2012
Assessment year : 2007-08
The Asstt. Commissioner of vs M/s iNautix Technologies India P.
Income-tax Ltd.
Company Circle II(3) 10th Floor, Tidal Park, No.4
Chennai Central Bank Road, Taramani
Chennai 600 113
[PAN AAACI 6177 K]
(Appellant) (Respondent)
I.T.A.No.996/Mds/2012
Assessment year : 2007-08
M/s iNautix Technologies vs The Asstt. Commissioner of
India P. Ltd. Income-tax
10th Floor, Tidal Park, No.4 Company Circle II(3)
Central Bank Road, Chennai
Taramani
Chennai 600 113
(Appellant) (Respondent)
Department by : Dr. S.Moharana, CIT/DR
Assessee by : Dr. Anita Sumanth, Advocate
Date of Hearing : 20-03-2013
Date of Pronouncement : 05-04-2013
:- 2 -: I.T.A.No. 1163 & 996/12
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
These are the cross appeals filed by the Revenue and the assessee against the order of the ld. CIT(A)-XII, Chennai, dated 27.2.2012.
2. Ground Nos. 1 & 4 of the Revenue's appeal are general in nature and hence, requires no separate adjudication by us.
3. Similarly, Ground No.13 of the appeal of the assessee is also general in nature and hence, requires no separate adjudication by us.
4. Ground No.2 of the appeal of the Revenue reads as under:
"2.1 The learned CIT(A) has erred in directing the Assessing Officer to exclude the expenditure incurred in foreign currency from the total turnover also for computation of deduction u/s.l0A, as the same has been excluded from the export turnover.
2.2 It is submitted that the expenditure in foreign currency included reimbursement of expenses for deployment of personnel to study the requirement of foreign customers and the reimbursement of expenses from the foreign buyers cannot partake the character of export turnover.
2.3 The learned CIT(A) ought to have appreciated that as per the provision of explanation 2(iii) for the purpose of exemption u/s.10B which reveals that the Export turnover does not include fr2ig:lt, telecommunication charges or insurance attributable to the delivery of the computer software outside India and expenses incurred in foreign currency for providing technical service outside India.
:- 3 -: I.T.A.No. 1163 & 996/12 2.4 It is submitted that the Hon. Jurisdictional ITAT A Chennai Bench, in the case of M/s. iSOFT R & D Pvt. Ltd. Vs ACIT vide its order dated on 12-05-2008, has held that the items excluded as per the definition of Export Turnover should not be removed from the total turnover for computing deduction u/s.10A.
2.5 It is submitted that the decision relied upon by the CIT(A) in the assessee's own case for Asst Year 2005-06 has not become final and an appeal has been filed before the Hon'ble High Court which is pending."
5. Ground Nos. 1,2,3 & 6 of the appeal of the assessee read as under:
"Issue 1 - Exclusion of telecommunication expenditure from export turnover while computing deduction under section 10A without corresponding exclusion from total turnover
1. That the learned Commissioner of Income tax (Appeals) ['CIT(A)'] has erred in confirming the order of the Assessing Officer ('AO') excluding 30 percent of the telecommunication expenditure from export turnover, when the same has not been included in export turnover in the first place
2. Without prejudice to ground 1 above, the learned CIT(A) has erred in confirming the order of the AO excluding telecommunication expenditure from export turnover when the same has been incurred in Indian Rupees and not in foreign currency.
3. Without prejudice to grounds 1 and 2 above, the learned CIT(A), having confirmed the order of the AO in excluding the telecommunication expenditure from export turnover, has erred in not directing the exclusion of such telecommunication expenditure from total turnover for the purpose of computing deduction under section 10A of the Income-tax Act, 1961 ('the Act').
:- 4 -: I.T.A.No. 1163 & 996/12
6. That the learned AO, having excluded the telecommunication expenditure from export turnover, has erred in not excluding the same from total turnover for the purpose of computing the deduction under section 10A."
6. As all these grounds of appeal involve common facts and common issue, they are being disposed of together as under:
7. The brief facts of the case are that the Assessing Officer observed that during the F.Y 2006-07, the assessee has incurred `1,35,42,325/- by way of telecommunication expenses. These expenses are incurred both in India as well as outside the country while delivering the goods/services to the clients. Hence, the Assessing Officer estimated 30% of the telecommunication charges amounting to ` 40,62,697/- as incurred outside the country and excluded the same from the export turnover.
8. Being aggrieved the assessee filed appeal before the ld. CIT(A) and submitted that according to the provisions of Explanation2(iv) of section 10A, items like freight, telecommunication charges or insurance relating to the delivery of computer software outside India or expenses incurred in foreign exchange in providing the technical services outside India, should not be included in the export :- 5 -: I.T.A.No. 1163 & 996/12 turnover of the assessee for the purpose of computing the deduction/exemption u/s 10A of the Act.
9. The ld. CIT(A), after considering the submissions of the assessee, held that in view of the above provisions, the assessee's claim of expenses by way of telecommunications incurred in relation to the delivery of software to the clients outside the country is not includable in the export turnover. Hence, the Assessing Officer reasonably estimated the telecommunication expenses incurred outside the country at 30% of the total expenses and excluded from the export turnover. The action of the Assessing Officer is as per law and the assessee fails in its appeal on this ground.
10. Being aggrieved by the said order of the ld. CIT(A), the assessee is in appeal before us. The assessee is also in appeal before us on the ground that alternatively, if the telecommunication expenditure is excluded from the export turnover then the same should also be excluded from the total turnover for computing deduction u/s 10A of the Act. The assessee submits that this ground of the assessee has not been adjudicated upon by the ld. CIT(A).
11. The Revenue is in appeal on the ground that the ld. CIT(A) erred in directing the Assessing Officer to exclude the expenditure :- 6 -: I.T.A.No. 1163 & 996/12 incurred in foreign currency from the total turnover also for computing the deduction u/s 10A as the same has been excluded from the export turnover.
12. The ld. AR of the assessee, before us, has relied on the decision of the Chennai Bench of the Tribunal in the case of California Software Co. Ltd. vs ACIT, 118 TTJ 842, and submitted that the issue has been decided in favour of the assessee by the Tribunal in para 13 of its order.
13. The ld.CIT/DR, on the other hand, has argued that the expenditure on telecommunication charges incurred in Indian currency by the assessee on the export of software should be reduced from the export turnover even if the same is not incurred in foreign currency.
14. After considering the rival submissions and perusing the materials on record, we find that in the instant case, the Assessing Officer observed that the assessee has incurred ` `1,35,42,325/- by way of telecommunication expenses for delivery of goods/services to the clients. He estimated 30% of the said telecommunication charges amounting to ` 40,62,697/- as incurred outside the country and excluded the same from the export turnover.
:- 7 -: I.T.A.No. 1163 & 996/12
15. On appeal, the ld. CIT(A) confirmed the order of the Assessing Officer.
16. We find that similar issue had come up before the Chennai Special Bench of the Tribunal in the case of ITO vs Sak Soft Ltd., [2009] 30 SOT 55(Chennai)(SB), wherein the Tribunal has held as under:
" 27. At this juncture, it is necessary to refer to one aspect of the matter. It may be an easy task to exclude the freight, telecom charges or insurance attributable to the delivery of computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India from the export turnover and the total turnover if they are separately mentioned in the invoice raised by the assessee. In the course of the arguments addressed on behalf of M/s. Sak Soft Ltd., a question arose as to what would happen if these items are not separately shown in the invoice and are included in the total amount raised by the invoice. It was conceded on behalf of the assessee by its learned representative that in such a case, the Assessing Officer will have the power to go behind the invoice and find out how much of the invoice amount pertains to the recovery of the aforesaid items. We are also of the view that in an appropriate case it would be open to the Assessing Officer to exercise such a power in order to apply the formula in a meaningful manner.
32. The learned representative for Adventnet Development Centre (India), one of the interveners submitted that the definition of 'export turnover' in clause (iii) of Explanation 2 below section 10B was not based on the concept of "Net inflow of foreign exchange" as sought to be made out in the order of the Chennai Bench of the Tribunal in California Software Co. Ltd.'s case (supra) because the condition that the assessee should have used foreign currency is applicable only to the expenses incurred by it in providing the technical services outside India and is not applicable to the expenses incurred in freight, telecom charges or insurance attributable to the delivery of the goods outside India. We have gone through the order especially paragraphs 22.3 and 23. In para 22.3 the Tribunal has observed that the :- 8 -: I.T.A.No. 1163 & 996/12 effect of the judgment of the Supreme Court in the case of K. Ravindranathan Nair (supra) is that "what is deducted from the 'export turnover' (the numerator in the formula) need not necessarily be deducted from the "total turnover" (the denominator in the formula). It appears to us, with respect, that this may not be an accurate description of the controversy before the Supreme Court because in K. Ravindranathan Nair's case (supra) the Supreme Court was concerned with the 'profits of the business' and the 'total turnover' and the argument of the assessee was that the processing charges, which was includible in the profits of the business, should be excluded from the total turnover. The relationship between 'export turnover' and 'total turnover', which are the numerator and the denominator in the formula in section 80HHC was not the subject matter of decision by the Supreme Court. In para 23 the Tribunal observed that certain expenses incurred in foreign exchange are deducted from the export turnover by definition, the object of which "apparently"
was netting in relation to the foreign exchange inflow and outflow and not because such expenses were part of the export turnover. The Bench further observed that there can be no logical reason to exclude from the total turnover what was never part of it in the first instance. The concept of net inflow of foreign exchange, with respect, seems inappropriate to the definition of 'export turnover' in section 10B because, as pointed out on behalf of the intervener, this concept cannot in the very nature of things apply to freight, telecom charges and insurance attributable to the delivery of the goods outside India because these expenses were not required to be incurred in foreign exchange; the assessee could incur them in Indian currency in which case there is no question of net inflow of foreign exchange so far as these expenses are concerned. It cannot possibly be argued that the concept is limited to that part of the definition which requires the expenses to be incurred in foreign exchange. However, the observation of the Bench that there can be no logical reason to exclude from the total turnover what was never part of it in the first instance, with respect, appears to be in favour of the contention canvassed before us on behalf of the assessee and the interveners, whose contention also is that the items excluded from the export turnover should also be excluded from the total turnover because they can never be considered as part of the turnover, for they have no element of turnover in them and are mere reimbursement of the expenses.
:- 9 -: I.T.A.No. 1163 & 996/12
35. In California Software Co. Ltd.'s case (supra), the Chennai Bench of the Tribunal, as already noticed, has held that the objective of the definition of 'export turnover' in section 10B was to apply the principle of netting by comparing the inflow and outflow of foreign exchange from or into the country. We have already held that this could not have been the objective. The order of the Chennai Bench, to the extent it holds so, with respect, cannot be approved. However, in the same paragraph (para 23) the Bench has also held that what was never part of the turnover in the first instance cannot be excluded therefrom. We have already held that impliedly at least the Bench seems to have held that the receipts by way of freight, telecom charges or insurance attributable to the delivery of the computer software outside India or expenses incurred in foreign exchange in connection with the provision of the technical services outside India cannot be included in the total turnover. We have also, inter alia, adopted a similar line of reasoning in the sense that mere reimbursement or recovery of such expenses can in no sense be considered to have an element of turnover. To the extent our view accords with the view taken by the Chennai Bench in paragraph 23 of its order, the same is approved."
17. A reading of the above quoted decision of the Chennai Special Bench of the Tribunal shows that even expenses incurred on telecommunication charges by the assessee for export of goods/services in Indian Rupees have to be excluded from the export turnover of the assessee. Further, we would like to state that the quantum of deduction of telecommunication charges from the export turnover of the assessee by the Assessing Officer is not in dispute before us. Therefore, respectfully following the decision of the Chennai Special Bench of the Tribunal in the case of ITO vs Sak Soft Ltd. (supra), we confirm the orders of the lower authorities in deducting ` 40,62,697/- from the export turnover of the assessee.
:- 10 -: I.T.A.No. 1163 & 996/12 The grounds of appeal raised by the assessee in respect of this issue are dismissed.
18. With regard to Ground No.2 of the appeal of the Revenue that the ld. CIT(A) erred in directing the Assessing Officer to exclude the expenditure incurred in foreign currency from the total turnover also for computation of deduction u/s 10A as the same has been excluded from the export turnover, we find that this issue is covered by the decision of the Hon'ble Supreme Court in the case of CIT vs Lakshmi Machine Works, 290 ITR 667(S.C) where it was held that "we have to read the words "total turnover" in section 80HHC as part of the formula which sought to segregate the "export profits" from the "business profits". Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover/total turnover which constitute 80HHC concession (deduction). Income in the nature of "business profits"
was, therefore, apportioned. The above formula fixed a ratio in which "business profits" under section 28 of the Act had to be apportioned.
Therefore, one has to give weightage not only to the words "total :- 11 -: I.T.A.No. 1163 & 996/12 turnover" but also to the words "export turnover", "total export turnover" and "business profits".
19. Further, the Special Bench of the Chennai Tribunal in the case of ITO vs Sak Soft Ltd. (supra) has held as under:
"19. We have carefully considered the issue which is short but interesting. The basic issue to be resolved is whether parity should be maintained between the ingredients of export turnover and total turnover for the purpose of applying the formula prescribed by sub-section (4) of section 10B. The expression 'export turnover' has been defined in clause (iii) of Explanation 2 below the section, whereas there is no definition of the expression 'total turnover' for the purposes of the section. This is precisely the difficulty arising in this case and the question is whether the difficulty can be surmounted and if so by what means. The means suggested on behalf of the assessee and the interveners is that the expression 'total turnover' should also be interpreted in the same manner by excluding therefrom the freight, telecom 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. We see merit in the contention. We have attempted, to the best of our ability, to understand the rationale behind such exclusion in the definition of 'export turnover'. Section 10B was first inserted by the Finance Act, 1988 with effect from the assessment year 1989-90. In the section as first inserted exemption was given to the entire profits and gains derived by the assessee from a hundred per cent export oriented undertaking. Detailed provisions were made in sub-section (4) as to the manner of computing the total income of the assessee for the purpose of granting the exemption. There was no definition of 'export turnover' or 'total turnover' because the exemption was not linked to any formula in which the export turnover and total turnover were the ingredients. The section was amended by the Finance Act, 1993 with retrospective effect from the assessment year 1991-92. A perusal of this Finance Act shows that the amendment made to the section is not in any way relevant for our purpose. The section was again amended by the Finance Act, 1994. Some amendments took effect from the assessment year 1994-95 and some of them took effect from the assessment year 1995-96. These amendments are also not relevant for our purpose. Thereafter amendments were made to :- 12 -: I.T.A.No. 1163 & 996/12 the section by the Income-tax (Second Amendment) Act, 1998. These amendments are also not relevant for our purpose. The section was then substituted by the Finance Act, 2000 with substantial changes with effect from 1-4-2001, i.e., from the assessment year 2001-02. The Finance Act, 2000 is reported in (2000) 243 ITR (St) p.65. Section 10B was substantially changed by substitution. It is by this amendment that a definition of the term 'export turnover' was inserted in clause (iii) of Explanation 2 below the section. The Circular No. 794, dated 9-8-2000 issued by the CBDT containing Explanatory Notes on the provisions relating to Finance Act, 2000 is reproduced in (2000) 245 ITR (St.) 21. It is to be noted that the provisions of section 10A which made special provisions in respect of newly established undertakings in free-trade zone, etc., were simultaneously amended and the section was substantially modified by the same Finance Act. The circular, in para 15 thereof explained the new provisions substituted for the existing sections 10A and 10B.
Para 15.2 says that the provisions have been substituted with a view to rationalize the concessions and to phase them out by the end of the assessment year 2009-10. Paragraph 15.6 explains sub-section (4) of section 10B and the formula prescribed therein. The same is reproduced below :
"15.6 For the computation of profits derived from the export of articles or things or computer software, sub- section (4) provides that the profits derived from such exports shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of business. The profits of the business in the given context would mean the profits of the business carried on by the undertaking to which the provisions apply. The working formula for arriving at the export profits will be as under :
Profits of the business × Export turnover Export profits = Total turnover The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100 per cent export oriented undertaking as the case may be and this shall not have any material relationship :- 13 -: I.T.A.No. 1163 & 996/12 with the other business of the assessee outside these zones or units for the purposes of this provision."
The circular does not throw any light as to how the total turnover should be ascertained and what should be the ingredients thereof. It is to be noted that both in sections 10A and 10B, only the expression 'export turnover' is defined and there is no definition of the term 'total turnover'.
20. Section 80HHC is also a section which grants deduction in respect of profits retained for export business. Clause (b) of the Explanation below the section defines 'export turnover' as meaning the sale proceeds received in or brought into India by the assessee in convertible foreign exchange of any goods or merchandise which are exported out of India, but does not include freight or insurance attributable to the transport of the goods beyond the customs station as defined in the Customs Act, 1961. Clause (ba) inserted by the Finance (No. 2) Act, 1991 with retrospective effect from 1-4-1987 defined the term 'total turnover' and stated that it shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act. The proviso to this clause, which took effect from 1-4-1991 clarified that total turnover would also exclude the incentives referred to in the various clauses of section 28. In Circular No. 621, dated 19-12- 1991 (supra) the CBDT explained the rationale behind the insertion of the definition of 'total turnover' with retrospective effect. This is contained in paras 32.18, 32.19 and 32.20 of the circular. It would be better to reproduce these paragraphs:
32.18 Whereas the definition of the term 'export turnover' excludes freight and insurance attributable to transport, no such exclusion has been specified in respect of the term 'total turnover'. As a result, in CIF transactions, while the export turnover is taken at FOB value, the total turnover includes the sale proceeds of exports at CIF value.
32.19 With a view to removing this anomaly, it has now been clarified that 'total turnover' will also not include such freight or insurance.
32.20 This amendment takes effect retrospectively from 1-4-
1987, the day from which "total turnover" became relevant for the purpose of computation of deduction under section 80HHC. It will, accordingly, apply in relation to assessment year 1987-88 and subsequent years."
It seems to us that the CBDT was of the opinion that whatever has been excluded from the export turnover should also be :- 14 -: I.T.A.No. 1163 & 996/12 excluded from the total turnover and otherwise it would be an anomaly. By implication at least, the CBDT seems to be of the view that parity should be maintained between both the expressions. Before the insertion of the definition of 'total turnover' by clause (ba) of the Explanation, there was no definition of 'total turnover' in section 80HHC. The expression had to be given a meaning and it was done by the Calcutta Bench of the Tribunal in the case of Chloride (India) Ltd. (supra). There the question was whether the sales-tax and excise duty which are not leviable on export turnover and, therefore, did not form part of the export turnover, should be included in the total turnover as was done by the Assessing Officer in that case. The Calcutta Bench held that there should be parity between the numerator in the formula (export turnover) and the denominator (total turnover) despite the fact that there was no definition of the total turnover in the section as it stood for the assessment year 1986-87 which was the year before the Tribunal. That case was thus decided on first principles, the principle applied being that there should be uniformity in the ingredients of both the numerator and the denominator of the formula since otherwise it would produce anomalous or absurd results. This order was upheld by the Calcutta High Court in Chloride India Ltd.'s case (supra). Subsequently, a Special Bench was constituted in Calcutta in the case of IFB Agro Industries Ltd.(supra), consisting of three Members of the Tribunal since the Assessing Officer took the view in that case that the order of the Tribunal in the case of Chloride India Ltd. (supra) pertained to the assessment year 1986-87 in which year the expression 'total turnover' was not defined in the section whereas from the assessment year 1987-88 clause (ba) has been inserted in the Explanation defining 'total turnover' which excluded only freight or insurance and, therefore, sales-tax or excise duty cannot be excluded from total turnover. The order of the Special Bench in IFB Agro Industries Ltd.'s case (supra). The question before the Special Bench was whether the excise duty and sales- tax should be excluded from the total turnover "for the purpose of bringing parity between the numerator, viz., export, turnover and the denominator 'total turnover' in the said formula, inasmuch as export turnover does not include excise duty and the sales-tax which are not leviable on exportable goods". The contention of the revenue before the Special Bench, which is alluded to in para 8 of the order was that "when particular items alone are excluded, the general meaning excluding only those specified enumerated receipts should be given to the term". The Special Bench proceeded to examine the general meaning of the expression 'total turnover' and apart from several authorities, reference was also made to Circular No. 621 (supra). On an :- 15 -: I.T.A.No. 1163 & 996/12 examination of the relevant authorities, including Supreme Court judgments, the Special Bench held that excise duty and sales-tax constitute part of the turnover and trading receipts of the business and, therefore, the term 'total turnover' should be taken as inclusive of these levies. However, the Special Bench was unable to apply the general meaning of the term to the case before them and decide the matter in favour of the revenue, because of the judgment of the Bombay High Court in the case of Sudarshan Chemical Industries Ltd. (supra), and the judgment of the Calcutta High Court in Chloride India Ltd.'s case (supra). The Special Bench particularly noticed that the Calcutta High Court, even after referring to the judgment of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 held that the definition of 'turnover' in one enactment (sales-tax law) may not hold good under all other enactments. Ultimately the Special Bench came to the conclusion that "it could be visualized that it may not always be true that the term 'turnover' included excise duty and it depends upon the provisions of law and the fact that the excise duty did not go into the common till of the assessee and did not become part of circulating capital"
(para 23 of the order). In para 25, the Tribunal concluded as under:
"25. In view of the aforesaid discussion, we are of the opinion that though 'total turnover' may include the receipts of excise duty and sales-tax etc., in its general parlance and under specific statute, because of its wider coverage in the definitions given thereunder, it has to be given a restrictive meaning while computing the 'export profit' for the purposes of section 80HHC namely only that part of the receipt for sale consideration is to be taken as part of the total turnover which has an element of profit therein and, accordingly, the receipts of excise duty and sales-tax which do not include an element of profit should be excluded from 'total turnover'."
It would be seen that the ultimate decision of the Special Bench rested on the reason that anything which has an element of profit alone can be included in the total turnover. The Special Bench has also recognized that it is possible to restrict the general meaning of turnover considering the particular context of the statute under consideration.
21. A perusal of the judgment of the Bombay High Court in Sudarshan Chemicals Industries Ltd.'s case (supra ) shows that not only did the High Court hold that excise duty and sales tax cannot be included in the total turnover for the purpose of section 80HHC as they do not have any element of profit, but have also held that parity should be maintained between the export turnover and the total turnover which are the numerator and denominator respectively in the formula. This would be clear :- 16 -: I.T.A.No. 1163 & 996/12 from the following observations of the court (at page 773 of the report) :
"Further, the meaning of export turnover in clause (b) of the Explanation to section 80HHC, therefore, clearly shows that export turnover did not include excise duty and sales tax. The export turnover is the numerator in the above formula whereas the total turnover is the denominator. The above formula has been prescribed to arrive at the profits from exports. In the circumstances, the above two items, namely, sales tax and excise duty, cannot form part of the total turnover. In fact, if the denominator was to include the above two items and if the numerator excluded the above two items, then the formula would become unworkable. In the circumstances, we are of the view that in order to ascertain the export profits, the above two items cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which an assessee is entitled to." [Emphasis supplied]
22. We may now look at the judgment of the Calcutta High Court in Chloride India Ltd.'s case (supra). A perusal of the observations of the court at page 629 of the report shows that the parity principle was accepted in that decision also :
"This formula was introduced in section 80HHC(3) of the Act as it stood at the relevant time. In the above formula the export turnover is the numerator whereas the total turnover is the denominator. There can hardly be any room for scepticism that the said formula had been prescribed to arrive at the profits from exports. It was rightly contended by Dr. Pal that if the denominator was to include octroi, sales tax and excise duty and if the numerator excluded those items the formula would certainly become unworkable." [Emphasis supplied] The Calcutta High Court also agreed with the Bombay High Court judgment (supra) and held that since octroi, excise duty and sales-tax cannot have any element of profit and, therefore, these items cannot be included in the total turnover. Thus both in the Bombay and Calcutta judgments the cases were decided not only on the footing that the sales-tax, octroi and excise duty which were statutory levies did not contain any element of profit and hence were not includible in the total turnover, but they were also decided on the reasoning that parity should be maintained between the ingredients of the export turnover and total turnover which were the numerator and denominator respectively in the statutory formula prescribed by section 80HHC.
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23. The above discussion shows that the Special Bench of the Tribunal in the case of IFB Agro Industries Ltd. (supra), the Bombay High Court in the case of Sudarshan Chemicals Industries Ltd. (supra) and the Calcutta High Court in the case of Chloride India Ltd. (supra) were all of the view that parity should be maintained between the export turnover and the total turnover appearing in section 80HHC of the Act.
24. We now proceed to a consideration of the judgment of the Supreme Court in the case of LMW (supra). This case arose with reference to the assessment year 1993-94. The short point which arose for consideration before the Supreme Court was whether excise duty and sales-tax were includible in the total turnover which was the denominator in the formula contained in section 80HHC(3) as it stood at the relevant time. It must be remembered that clause (b) of the Explanation defined 'export turnover' as the sale proceeds received or brought into India in convertible foreign exchange, of any goods or merchandise exported out of India, but excluding freight or insurance attributable to the transport of the goods beyond the customs station. Clause (ba) defined 'total turnover' as not including freight or insurance attributable to the transport of the goods beyond the customs station. In this case the following propositions were laid down by the Supreme Court :
(i) While interpreting the words 'total turnover' in the formula, a schematic or purposeful interpretation to the words has to be given since the section is entirely based on the formula.
(ii) The formula has to be read in entirety.
(iii) The legislative changes made to the section indicate that the Legislature intended to exclude certain items of receipts (like commission and interest) from the deduction as they did not possess any element of turnover, though they may have emanated from the exports.
(iv) The words 'total turnover' in the formula cannot be interpreted with reference to the definition of the word 'turnover' in other laws like the Central Sales Tax Act or as defined in accounting principles.
(v) Anything which does not involve "turnover" cannot be included in the expression 'total turnover'. That is why receipts such as commission, rent, interest etc., are excluded from the profits of the export. These receipts did not emanate from the export turnover, much less any turnover.
:- 18 -: I.T.A.No. 1163 & 996/12
(vi) Similarly excise duty and sales-tax do not involve any such turnover and, therefore, they have to be excluded from the total turnover. These receipts are recovered by the assessee on behalf of the Government, being indirect taxes.
The above propositions laid down in the judgment unmistakably show that the principle of parity between export turnover and total turnover was affirmed by the Supreme Court in the case of LMW (supra). The contention of the revenue before us was that the judgment is confined to the facts of the case. Certainly every judgment is rendered on the basis of the facts of the case. But where a ratio is laid down and that is applied to the facts of the case, the ratio is applicable to similar fact- situations. In our understanding the ratio laid down by the Supreme Court in the case of LMW (supra ) is an affirmation of the principle of parity between the export turnover and the total turnover for the purpose of section 80HHC. It was also the ratio laid down in that case that any receipt which does not have an element of turnover cannot find a place either in the export turnover or in the total turnover. LMW's case (supra) was followed by the Supreme Court in Catapharma (India) (P.) Ltd.'s case (supra), where the assessment year involved was 1997-98."
22. Therefore, in view of the above decision, the alternate contention raised in Ground No.6 of the appeal of the assessee is allowed.
23. In view of the above decisions of the Hon'ble Supreme Court and the Special Bench of the Tribunal, Ground No.2 of the appeal of the Revenue is dismissed.
24. Ground No.3 of the Revenue's appeal reads as under:
"3. The learned CIT(A) has erred in restricting the disallowance made u/s.14A read with Rule 8D to RS.13.53 lakhs as against RS.70.55 lakhs :- 19 -: I.T.A.No. 1163 & 996/12 3.1 It is submitted that the decision of the Hon'ble ITAT, Mumbai in the case of ITO v Daga Capital Management P Ltd. - 119 ITJ 289 (117 ITD 169) supports the case of the Assessing Officer wherein it was held that the provisions of Rule 8D are procedural in nature and applicable from the date of insertion in the Act.
3.2 It is further submitted that the decision in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DCIT (328 ITR 81) has not become fir.al and SLP has been filed by the revenue and pending before the Hon'bie Supreme Court.
3.3 It is further submitted that the decisions relied upon by the CIT(A) on the identical issue that provisions of Rule 8D are applicable from Asst Year 2008-09 onwards in the case of Maxopp Investments Ltd Vs. CIT (ITA No.687/2009), M/s. Eicher Goodearth Ltd. Vs. CIT(ITA No.112/2010) and M/s. Mohair Investments & Trading Co. P Ltd.((ITA 263/2010) have not become final and appeals are pending before the higher appellate forums."
25. Ground No.4 & 5 of the assessee's appeal read as under:
" Issue 2 - Disallowance under section 14A of the Act
4. The learned CIT(A) has erred in upholding and concluding that 5 percent of the dividend income (on an ad-hoc basis) should be regarded as expenditure incurred for earning the dividend income and should accordingly be disallowed as per section 14A. whereas, no expenditure was incurred by the Appellant towards earning such income.
5. Without prejudice to ground 4 above, the learned CIT(A) has erred by not following his predecessor's order for earlier Assessment Years in the Appellant's own case wherein 2 percent of the dividend income was estimated as expenditure attributable to earning dividend income. "
26. As the facts and issue involved in these grounds are common, they are being disposed of together as under:
:- 20 -: I.T.A.No. 1163 & 996/12
27. The brief facts of the case are that the Assessing Officer observed that the assessee-company has received dividend of `2,70,72,709/- which was claimed as exempt u/s 10(34) of the Act. He noted that the assessee has not considered any expenditure attributable towards earning of such exempt income. He observed that a reasonable expenditure is necessary to earn the exempt income considering the human resources cost, interest cost of the investment and other relevant cost which should go into earning of the exempt income . Acc by invoking the provisions of section 14A and applying Rule 8D, he computed the disallowance for expenses incurred for earning the exempt income as ½% of the average value of investment which amounted to ` 70,55,114/- and disallowed the same while making the assessment.
28. Being aggrieved, the assessee filed appeal before the ld. CIT(A) and submitted that in view of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs DCIT, 328 ITR 81 (Bom.), Rule 8D was applicable from assessment year 2008-09 onwards and not retrospectively and therefore, the addition made by the Assessing Officer was liable to be deleted.
:- 21 -: I.T.A.No. 1163 & 996/12
29. The ld. CIT(A) observed that the provisions of Rule 8D are not applicable in the present year of appeal. Since the provisions of section 14A are introduced by the Finance Act, 2001 with retrospect effect from 1.4.1962, the same are applicable for the year under consideration. Accordingly, he estimated the disallowance of expenditure relating to the exempt dividend income at 5% of the dividend income of ` `2,70,72,709/- and restricted the disallowance to ` 13,53,635/- in place of ` 70,55,114/- made by the Assessing Officer.
30. Being aggrieved, the assessee is in appeal against the disallowance sustained by the ld. CIT(A) and the Revenue is in appeal against the disallowance reduced by the ld. CIT(A).
31. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. The undisputed facts of the case are that the Assessing Officer made addition of ` ` 70,55,114/- being ½ % of the average investment made by the assessee on account of expenditure attributable to the earning of exempt dividend income of ` `2,70,72,709/- by invoking the provisions of Rule 8D.
32. The ld. CIT(A) held that Rule 8D was applicable from assessment year 2008-09 and onwards and not retrospectively. He, :- 22 -: I.T.A.No. 1163 & 996/12 therefore, held that as section 14A was introduced by the Finance Act 2001 with retrospective effect from 1.4.1962, the same was applicable and estimated the expenditure incurred by the assessee for earning exempt income at 5% of the dividend income of `2,70,72,709/- and restricted the disallowance to ` 13,53,635/-.
33. Being aggrieved, both the parties are in appeal before us.
34. We find that the Hon'ble Madras High Court in the case of M/s Simpson and Co. Ltd vs DCIT, in Tax Case (Appeal) No.2621 of 2006, order dated 15.10.2012 passed in assessment year 2001-02, has held that estimation made of expenditure attributable to dividend income at 2% of the exempt income was justified and hence, dismissed the appeal of the assessee. Respectfully following the above decision of the Hon'ble Madras High Court, we modify the order of the ld. CIT(A) and restrict the disallowance of expenditure incurred to earn dividend income at 2% of the gross dividend income of the assessee. Thus, the ground of appeal of the assessee is allowed and that of the Revenue is dismissed.
35. The assessee has raised the following grounds of appeal:
"Issue 3 - Grounds of appeal not adjudicated by the learned CIT(A) The learned CIT(A) has erred in not adjudicating on the following :- 23 -: I.T.A.No. 1163 & 996/12 grounds of appeal raised by the Appellant:
7. That the learned AO has erred in computing the quantum of deduction under section 10A.
8. That the learned AO has erred in disallowing expenditure as per the provisions of section 14A from profits and gains of business after computing the deduction under section 10A of the Act.
9. Depreciation on cost of computer software incurred during AYs 2002-03,2003-04,2004-05 and 2005-06 has been allowed at 60 percent. However, the learned AO has erred by not allowing depreciation on the written down value of the computer software brought forward from the AYs 2002-03, 2003-04, 2004-05 and 2005-06.
10. Depreciation on electrical installations for the AYs 2004-05 and 2005-06 has been allowed at the rate of 15 percent. However, the learned AO has erred by not allowing depreciation on the written down value of the electrical installations brought forward from Ays 2004-05 and 2005-06.
11. That the learned AO has erred by computing the quantum of education cess at the rate of 3 percent instead of 2 percent.
12. Consequently, the levy and computation of interest under section 234B of the Act is erroneous and bad in law."
36. The ld. AR of the assessee submitted that these grounds of appeal were raised at the time of filing of appeal before the ld. CIT(A) which have not been adjudicated by the ld. CIT(A). It was submitted that these grounds may be restored back to the file of the ld. CIT(A) for adjudicating the same.
:- 24 -: I.T.A.No. 1163 & 996/12
37. The ld.CIT/DR had no objection to the above submission of the ld. AR of the assessee.
38. We, therefore, restore the above grounds being Ground Nos.7 to 12 of the appeal of the assessee, to the file of the ld. CIT(A) for adjudicating the same afresh as per law, after allowing reasonable opportunity of hearing to both the parties.
39. In the result, the appeal of the assessee is partly allowed and that of the Revenue is dismissed.
Order pronounced on Friday, the 05th of April, 2013, at Chennai.
Sd/- Sd/- (V. DURGA RAO) (N.S.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 05th April, 2013, RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR