2016 (10) TMI 255 - AT - Income Tax

Telecommunication expenses, insurance charges, personnel expenses, professional expenses, branch office expenses and other expenses incurred in foreign exchange - exclusion from the export turnover for the purpose of computing deduction under Section 10B - Held that - In the instant case, the order for software and hardware are placed separately, though in the same order, for different costs. The sale invoice of software and hardware was also raised separately on different dates. The mode of payment is also different for software and hardware. Moreover, the order was not placed for supply of particular hardware and software only. The order was placed for the supply of software as well as hardware and nothing has been established on record that the said software cannot be used without hardware. In light of these facts, we are of the considered opinion that sale of hardware cannot be a part of software exported by the assessee. Thus, we have no hesitation in holding that sale of hardware cannot be a part of export turnover. So far as the other aspect is concerned, we are of the view that the Tribunal has already taken a view in the earlier order that once a sale of particular item is not considered to be part of export turnover, it cannot be considered as part of total turnover in light of the decision of Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT ) and the decision of the Special Bench in the case of ITO v. Sak Soft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D in which it has been held that whatever has been excluded from the export turnover had to be excluded from the total turnover also, since total turnover includes export turnover as well. In light of these findings, we uphold the order of the CIT(Appeals) that sale of hardware component would be excluded from the export turnover and for the recomputation of deduction u/s. 10A, the matter is restored to the Assessing Officer in the terms indicated above. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Exclusion of hardware sales from export turnover for deduction under Section 10A.
2. Exclusion of telecommunication expenses, insurance charges, personnel expenses, professional expenses, branch office expenses, and other expenses incurred in foreign exchange from export turnover for deduction under Section 10B.
3. Exclusion of said expenses from total turnover if excluded from export turnover for deduction under Section 10B/10A.

Issue-wise Detailed Analysis:

1. Exclusion of Hardware Sales from Export Turnover for Deduction Under Section 10A:

The assessee argued that hardware sales should be included in the export turnover as they are inextricably linked to the software sales. The hardware, such as servers, is essential for the software to function. The assessee provided examples of how the hardware and software were sold together as part of a composite contract. However, the Tribunal found that the hardware and software were ordered and invoiced separately. The hardware was purchased from the market and not manufactured by the assessee. The Tribunal concluded that the sale of hardware cannot be considered part of the export turnover for deduction under Section 10A, as the hardware and software were treated differently in the orders and invoices. The Tribunal relied on the judgment in the case of Wipro Ltd. v. DCIT, where it was held that monitors sold separately are not part of the computer, but those sold with computers are part of the computer.

2. Exclusion of Telecommunication Expenses, Insurance Charges, Personnel Expenses, Professional Expenses, Branch Office Expenses, and Other Expenses Incurred in Foreign Exchange from Export Turnover for Deduction Under Section 10B:

The Tribunal was directed by the High Court to adjudicate whether these expenses should be excluded from the export turnover for the purpose of computing deduction under Section 10B. The Tribunal noted that these expenses, if excluded from the export turnover, should also be excluded from the total turnover. This is in line with the decision in the case of Tata Elxsi Ltd., where it was held that whatever is excluded from the export turnover must also be excluded from the total turnover to ensure consistency in computation.

3. Exclusion of Said Expenses from Total Turnover if Excluded from Export Turnover for Deduction Under Section 10B/10A:

The Tribunal affirmed that if specific expenses are excluded from the export turnover, they must also be excluded from the total turnover. This principle was upheld in the case of Tata Elxsi Ltd. and supported by the Special Bench decision in ITO v. Sak Soft Ltd. The Tribunal emphasized that total turnover includes export turnover, and any exclusion from the latter should reflect in the former to maintain consistency in the computation of deductions under Sections 10A and 10B.

Conclusion:

The Tribunal concluded that the sale of hardware cannot be included in the export turnover for deduction under Section 10A. It upheld the CIT(Appeals) order and restored the matter to the Assessing Officer for recomputation of the deduction. The Tribunal also confirmed that expenses excluded from the export turnover should be excluded from the total turnover, ensuring consistency in the computation of deductions under Sections 10A and 10B. The appeal of the assessee was partly allowed.