2011 (4) TMI 936 - AT - Income Tax

Computation of relief u/s 10B - business of export of computer software - Foreign Expenses (Installation, Services Testing etc.) excluded from export turnover while computing relief u/s.10B Held that - When the cost towards installation and testing etc. is borne by the assessee, the export turnover is net of such expenses. If a particular amount is reduced from the amount of export turnover, such amount also needs to be excluded from the figure of total turnover which comprises of the amount of export turnover. Decided in favor of the assessee. Software development expenses as revenue expenses - revenue capitalizing it & providing depreciation on it - Held That - In order to supply customized software the assessee has necessarily to incur certain input cost which go in making the product customized. Thereby, these are allowable as revenue expenses. Decided in favor of the assessee. Reduction of unrealized export proceeds for the purpose of calculating total turnover Held that - The amount of foreign exchange not brought into India within stipulated time was to be excluded from the export turnover but will find its place in the figure of total turnover for computation of relief u/s. 10B. Exclusion of the local turnover from total turnover Held that - Local turnover which does not relate to the eligible undertaking u/s 10B, should be excluded from the total turnover. The Assessing Officer is directed to compute relief u/s. 10B in accordance with the above observations. Appeal partly allowed in favor of assessee for statistical purposes.

Summary

Issues Involved:
1. Exclusion of expenses towards installation, testing, etc., from export turnover.
2. Classification of software development expenses as revenue or capital expenditure.
3. Treatment of unrealized export proceeds for calculating total turnover.
4. Computation of total turnover for the purpose of section 10B deduction.

Detailed Analysis:

Assessment Year 2004-2005:

1. Exclusion of Expenses from Export Turnover:
The primary issue was whether expenses amounting to Rs.41,50,84,960 towards installation, testing, etc., should be excluded from the export turnover. The assessee argued that these expenses were part of the software development cost and should not be excluded. However, the tribunal concluded that such expenses must be excluded from both the export turnover and the total turnover to maintain consistency. The tribunal directed the Assessing Officer to re-compute the deduction accordingly.

2. Classification of Software Development Expenses:
The assessee claimed software development expenses amounting to Rs.16,60,65,953 as revenue expenses. The Assessing Officer treated these as capital expenses, allowing depreciation at 60%. The CIT (A) overturned this, considering the expenses as revenue since they did not provide enduring benefits and were necessary for software customization. The tribunal upheld the CIT (A)'s decision, recognizing the expenses as revenue.

3. Treatment of Unrealized Export Proceeds:
The issue was whether unrealized export proceeds of Rs.8,11,88,085 should be excluded from the total turnover for calculating the section 10B deduction. The CIT (A) directed to exclude this amount from both export turnover and total turnover, but the tribunal disagreed. It clarified that unrealized export proceeds should be excluded from export turnover but included in total turnover unless realized within the extended period allowed by the Reserve Bank of India (RBI). The tribunal remanded the matter to the Assessing Officer to verify if the RBI had extended the realization period.

Assessment Year 2005-2006:

1. Exclusion of Expenses from Export Turnover:
Similar to the previous year, the tribunal directed that expenses towards installation, testing, etc., amounting to Rs.60.87 crores be excluded from both export turnover and total turnover.

2. Classification of Software Development Expenses:
The tribunal upheld the CIT (A)'s decision to treat software development expenses of Rs.17.21 crores as revenue expenses, consistent with the previous year's ruling.

3. Computation of Total Turnover:
The CIT (A) directed to adopt the total turnover of the business carried on by the undertaking at Rs.169.08 crores instead of Rs.174.33 crores, excluding local turnover. The tribunal agreed, emphasizing that total turnover should only include turnover related to the section 10B undertaking and not the entire business of the assessee.

Assessment Year 2006-2007:

1. Exclusion of Expenses from Export Turnover:
The tribunal followed the previous years' rulings, directing that expenses towards installation, testing, etc., amounting to Rs.89.77 crores be excluded from both export turnover and total turnover.

2. Classification of Software Development Expenses:
Consistent with earlier years, the tribunal treated software development expenses of Rs.38.45 crores as revenue expenses.

3. Computation of Total Turnover:
The tribunal reiterated that the relief under section 10B should be computed by considering the profits of the business of the undertaking vis-`a-vis export turnover and total turnover of the business carried on by the undertaking, excluding local turnover.

Conclusion:
In all three assessment years, the tribunal consistently ruled on the exclusion of installation and testing expenses from both export turnover and total turnover, classified software development expenses as revenue, and clarified the computation of total turnover for section 10B deduction. The matter of unrealized export proceeds was remanded for verification of RBI's extended realization period.