2007 (10) TMI 630 - AT - Income Tax

Deduction claimed u/s 10A - STP (Software Technology Park) unit - 'export turnover' - reduction of expenditure incurred in foreign currency - HELD THAT - In the present case, there are materials to show that the expenditure in foreign currency is related to technical services rendered outside India by the assessee in connection with development of computer software to the customers outside India. The aforesaid three aspects clearly reveal that the expenditure incurred by the assessee in foreign currency do not relate to any of the export obligation done by the assessee. When once expenditure so incurred in foreign currency is not for purpose of export obligation, there is no substance in the assessee's claim to deduct the same from the export turnover. Considering this aspect we do not find any infirmity in the order of the learned CIT(A) in confirming the action of the AO. It is ordered accordingly. Alternatively, learned counsel for assessee had insisted for reduction of expenditure in foreign currency from the total turnover in case expenditure has to be reduced from export turnover. In our view, the alternative relief sought for by the assessee appears to be sound and proper. Sec. 10A has incorporated in entirety the philosophy of s. 80HHE. The definition of the terms 'computer software' and 'convertible foreign exchange' in s. 10A are the same as in s. 80HHE. However, from out of the three terms relevant for applying the formula, s. 10A defines only one term namely 'export turnover' . The other two terms 'profits of the business' and 'total turnover' are not defined. Since the section proceeds broadly on lines similar to s. 80HHE in the absence of the definition of any term in s. 10A, one could refer to the definition of a similar term in s. 80HHE. Thus, the term 'total turnover' for s. 10A purposes, should be the same as understood for the purposes of s. 80HHE. The term 'total turnover' no doubt is not defined in s. 10A. However, the term 'total turnover' would be an enlargement of the term 'export turnover' . Therefore, we are of the view that the assessee should succeed in the alternative submission made. Accordingly, we direct the AO to exclude the expenditure incurred in foreign currency by the assessee from the total turnover. It is ordered accordingly. Exclusion of a sum from the export turnover - HELD THAT - This amount was excluded by the AO on the ground that foreign exchange in respect of the same was not received in time. At the time of hearing, learned counsel for assessee pointed out that M/s Canara Bank issued a letter by which the banker, being an authorized dealer, was authorized to permit extension as the bills raised during the relevant year by the assessee are less than USD 10000 value. Considering this, we direct the AO to verify and allow the claim of the assessee. It is ordered accordingly. Sales effected to other STP - Deemed export only for the purpose of duty draw back - HELD THAT - A cursory perusal would indicate that sale of such software by one STP to another STP within the country would be treated as deemed export only for the purpose of duty draw back and exempt from terminal excise duty. As rightly contended by the ld DR, s. 10A, with relevant proviso, stood during the relevant time itself provides that when domestic sales of STP unit do not exceed 25 per cent, such sale should be deemed to be the profits and gains derived from the export of such articles or things or computer software. Thus the provisions of s. 10A as it stood specifically provide how much benefit to be given to the assessee if sales to another STP when not exceeded 25 per cent of the total products. From the perusal of the Exim Policy (Chapter 6), it is seen that whatever benefit given should be as per the provisions of ss. 10A and 10B of the IT Act. Apart from the benefit conferred under the aforesaid chapter, nothing has been indicated in respect of any deemed export when the issue is considered under the IT Act. The Exim Policy extracted (Chapter 8.1 and 8.3) obviously does not include in respect of benefit to be given under IT Act other than one referred to under Chapter 6.12(a). When this being consciously omitted in the policy, we do not find any force in the stand taken by the learned counsel for assessee to treat the sales effected to other STP by the assessee as deemed export. This ground fails. In the result, the appeal filed by the assessee is partly allowed to the extent indicated above.

Summary

Issues Involved:
1. Deduction of expenditure incurred in foreign currency from export turnover.
2. Exclusion of foreign exchange not received in time from export turnover.
3. Treatment of sales to another STP unit as deemed export under Section 10A.

Detailed Analysis:

1. Deduction of Expenditure Incurred in Foreign Currency from Export Turnover:

The assessee, engaged in the distribution of computer systems and development of software, claimed benefits under Section 10A of the IT Act. The AO made adjustments to the export turnover, including deducting expenditure incurred in foreign currency. The assessee argued that such expenditure should not be deducted from export turnover as it was not involved in rendering technical services. Alternatively, the assessee contended that if the expenditure was to be deducted from export turnover, it should also be deducted from total turnover.

The Tribunal noted that the assessee had excluded a portion of the foreign currency expenditure from export turnover in its return, under the presumption of providing technical services outside India. The AO confirmed that the assessee was indeed involved in rendering technical services, as evidenced by business profiles, invoices, and agreements. The Tribunal upheld the AO's action, stating that the expenditure incurred in foreign currency was related to technical services rendered outside India and should not be deducted from export turnover.

However, the Tribunal accepted the alternative argument, directing that the expenditure incurred in foreign currency should also be excluded from the total turnover to maintain consistency in the formula used for computing deductions under Section 10A, similar to the provisions under Section 80HHE.

2. Exclusion of Foreign Exchange Not Received in Time from Export Turnover:

The AO excluded a sum of Rs. 1,38,40,813 from the export turnover on the grounds that the foreign exchange was not received within the stipulated time. The assessee presented a letter from Canara Bank, indicating authorization for extension of the time limit for receiving foreign exchange for bills less than USD 10,000.

The Tribunal directed the AO to verify the claim and allow the exclusion if the conditions were met, thus providing relief to the assessee on this ground.

3. Treatment of Sales to Another STP Unit as Deemed Export under Section 10A:

The assessee claimed that sales to M/s Texas Instruments India Ltd., a registered STP unit, should be treated as deemed export under Section 10A. The AO and CIT(A) did not accept this claim. The assessee argued that under the Exim Policy, such sales are considered deemed exports and should be treated similarly for the purpose of Section 10A.

The Tribunal examined the Exim Policy, which defines deemed exports and provides benefits such as duty drawback and exemption from terminal excise duty. However, it noted that Section 10A specifically addresses the treatment of domestic sales by STP units, allowing certain benefits if domestic sales do not exceed 25% of total sales. The Tribunal concluded that the Exim Policy does not extend deemed export benefits under the IT Act beyond what is provided in Section 10A. Therefore, the Tribunal upheld the lower authorities' decision, rejecting the assessee's claim to treat sales to another STP unit as deemed export.

Conclusion:

The appeal was partly allowed. The Tribunal directed the AO to exclude foreign currency expenditure from total turnover and to verify the claim regarding the receipt of foreign exchange in time. However, the claim to treat sales to another STP unit as deemed export was rejected.