2016 (2) TMI 43 - HC - Income Tax

Computation of deduction under section 10A - Tribunal held that expenses incurred in foreign currency for providing software development services outside India should be excluded from the export turnover for the purpose of computation of deduction U/s. 10A - Held that - An identical issue relating to section 80HHE of the Act was considered by this court in the case of THE COMMISSIONER OF INCOME TAX & ANOTHER v. MOTOR INDUSTRIES CO., LTD., 2015 (7) TMI 876 - KARNATAKA HIGH COURT and this court has held that though the services rendered in deputing the software engineers abroad who among other things have to do testing, installation and monitoring of software supplied to the client, appears to be technical in nature, it does not fall within the clause of providing technical service outside India in connection with the development or production of computer software and accordingly such expenditure cannot be excluded in computing export turnover. This court has held that the expenditure incurred in the development or production of computer software though is in the nature of technical services, is not so, for the purposes of the Act and the said expenditure cannot be excluded in computing export turnover. Thus, we are of the view that the said Judgment is squarely applicable to the facts of the present case. Accordingly, we answer the first question in favour of the assessee and against the revenue. Exchange fluctuation loss - Tribunal held that exchange fluctuation loss should be reduced from the total turnover for the purpose of computation of deduction U/s. 10A - Held that - section 10A of the Act is a beneficial provision. The purpose of section 10A of the Act is also to bring more foreign exchange and to encourage export and as the Government decides to give some benefit to such undertaking which is helping the nation in bringing foreign exchange, the revenue should encourage such traders by giving more benefits as contemplated under the provisions of law as enunciated in the case of Tata Elxsi Limited 2011 (8) TMI 782 - KARNATAKA HIGH COURT - Decided in favour of the assessee and against the revenue

Summary

Issues:
1. Whether expenses incurred in foreign currency for providing software development services outside India should be excluded from the export turnover for the purpose of computation of deduction under section 10A of the Income Tax Act, 1961?
2. Whether the exchange fluctuation loss should be reduced from the total turnover for the purpose of computation of deduction under section 10A of the Act?

Issue 1:
The primary issue in this case revolves around whether expenses incurred in foreign currency for providing software development services outside India should be excluded from the export turnover for the purpose of computing deductions under section 10A of the Income Tax Act, 1961. The Assessing Officer initially held that such expenses should be excluded, but the Tribunal overturned this decision, stating that these expenses cannot be excluded. The court analyzed the relevant provisions of the Act, particularly the definition of export turnover and the nature of services provided by the assessee. The court referred to previous judgments and ultimately concluded that the expenses in question should not be excluded from the export turnover, ruling in favor of the assessee.

Issue 2:
The second issue concerns whether the exchange fluctuation loss should be reduced from the total turnover for the purpose of computing deductions under section 10A of the Act. The revenue argued that the fluctuation loss should be considered in the calculation, while the court examined the provisions of the Act and relevant case law to determine the correct interpretation. The court referred to a previous judgment and explained the formula for computing deductions under section 10A. Ultimately, the court held that the fluctuation loss should not be reduced from the total turnover, aligning with the beneficial nature of section 10A aimed at encouraging exports and bringing foreign exchange into the country. The court relied on precedent and ruled in favor of the assessee on this issue as well.

In conclusion, the Karnataka High Court, in a detailed analysis, addressed the issues raised regarding the exclusion of expenses incurred in foreign currency for software development services and the treatment of exchange fluctuation loss in the computation of deductions under section 10A of the Income Tax Act, 1961. The court's judgment favored the assessee on both issues, emphasizing the beneficial nature of the provision to encourage exports and foreign exchange inflow. The court's decision was based on a thorough examination of statutory provisions, case law, and the intent behind the legislative framework governing such deductions.