2016 (5) TMI 211 - HC - Income Tax

Deduction u/s 10A - ITAT treating expenses incurred in foreign currency to be taken along with total turnover of the assessee - Held that - We have noticed that on appeal by the Revenue before the Appellate Tribunal, the Tribunal following the judgment of an identical case, wrongly mentioned as assessee s case as submitted by both the parties, confirmed the order of the Appellate Commissioner treating expenses incurred in foreign currency to be taken along with total turnover of the assessee. We find that the Tribunal s finding is not based on any examination of available and relevant material to come to a conclusion as to whether the activity related to the computer software as defined under Explanation 2 to section 10A or involving technical services which has to be excluded from the export turnover as per Explanation 4 to section 10A, more particularly, when the assessee had reduced the said expenditure incurred in foreign currency from the export turnover and total turnover at the time of filing the returns and thereafter has shifted to a different stance before the appellate authority, that the said services were integral part of development of computer software. Even in the order of the Appellate Commissioner, we do not see the details of remand reports said to have been submitted by the Assessing Officer and any discussion regarding any material or any agreement copies to establish the factual situation and the activities of the assessee. The Tribunal without examining any commensurate material, placing reliance on the judgment of the Tribunal dated May 30, 2008, allowed the relief claimed by the assessee. Given the circumstances, the said finding of the Tribunal is not based on any relevant material. We are therefore of the opinion that it would be proper to remand the matter to the Tribunal to examine the material on record and to record a finding as to the nature of the activity, keeping in view the settled legal position as per the judgment of this court in Motor Industries Company Limited s case (2015 (7) TMI 876 - KARNATAKA HIGH COURT) and Mphasis Limited s case (2014 (8) TMI 690 - ANDHRA PRADESH HIGH COURT). It is also made clear that what is required to be excluded in the export turnover are only freight, telecommunication 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 which cannot be confused with the services rendered for the development of computer software, an integral part of export turnover of computer software.

Summary

Issues:
Appeal against order confirming deduction under section 10A for assessment year 2002-03 - Exclusion of expenditure in foreign currency from export turnover - Interpretation of technical services in connection with development of computer software - Applicability of settled legal position.

Analysis:
The appeal challenged the order of the Income-tax Appellate Tribunal confirming the deduction under section 10A for the assessment year 2002-03. The primary issue revolved around the exclusion of expenditure in foreign currency from the export turnover. The assessee, engaged in software export business, claimed a deduction under section 10A, which was initially denied by the Assessing Officer. However, the Commissioner of Income-tax (Appeals) allowed the claim, leading to the Revenue's appeal before the Tribunal. The key question was whether the expenditure incurred in foreign currency should be reduced from the export turnover. The Tribunal, following a previous judgment, upheld the Commissioner's decision, prompting the Revenue's appeal before the High Court.

The crux of the matter lay in interpreting the concept of technical services in connection with the development of computer software. The Revenue contended that the services provided by the assessee did not fall under technical services outside India, as per section 10A, emphasizing the need for establishing the nature of activities carried out by the assessee. On the other hand, the assessee argued that the pre-execution and post-execution work of software projects should not be classified as technical services but integral parts of computer software development. This argument was supported by the provisions of Explanation 3 to section 10A, which deems profits from on-site software development as export profits.

The High Court analyzed the legal provisions under section 10A, including the definitions of "computer software" and "export turnover" as per Explanations 2 and 3. It referred to precedents like Motor Industries Company Limited and Mphasis Limited to distinguish between technical services and software development activities. The Court observed that the Tribunal's decision lacked a thorough examination of relevant material and agreements to ascertain the nature of the activities. Consequently, the Court held that a remand to the Tribunal was necessary for a detailed review, emphasizing the distinction between technical services and software development expenses in the export turnover calculation.

In conclusion, the High Court refrained from delving into the raised legal questions and remanded the matter to the Tribunal for a fresh assessment. Both parties were granted the opportunity to present additional evidence, and the Tribunal was instructed to expedite the proceedings after hearing both sides. The judgment underscored the importance of correctly categorizing expenses related to technical services and software development in determining export turnover under section 10A.