2018 (11) TMI 269 - HC - Income Tax

Nature of expenditure - cost of the acquisition of the computer software - revenue or capital expenditure - Held that - As appellant fairly submits that substantial question of law No.1, as framed above, cannot be answered in the light of the fact that the assessee has been granted the benefit under Section 10A of the Income Tax Act, 1961 and that the issue has become academic. Recording the said submission, substantial question of law No.1 is left open and not decided. Computation of deduction u/s 10A - expenditure incurred in foreign exchange is liable to be deducted from the export consideration to arrive at the export turnover, the same is not liable to be deducted from the total turnover to arrive at the denominator in the formula - Held that - This issue is squarely covered by the decision in the case of CIT Vs. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT wherein held what is excluded from export turnover must also be excluded from total turnover , since one of the components of total turnover is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.

Summary

Issues:
1. Challenge to the order passed by the Income Tax Appellate Tribunal for the assessment year 2003-04.
2. Whether the cost of acquisition of computer software is capital in nature and not deductible as revenue expenditure.
3. Treatment of expenditure on foreign exchange in relation to export turnover and total turnover calculations.

Analysis:
1. The Revenue challenged the ITAT's order for the assessment year 2003-04. The appeal was admitted based on substantial questions of law regarding the treatment of computer software acquisition costs and foreign exchange expenditures in income computation.

2. The first substantial question of law regarding the capital nature of computer software acquisition costs was not decided due to the assessee's benefit under Section 10A of the Income Tax Act, rendering the issue academic.

3. The third substantial question of law, concerning the treatment of foreign exchange expenditures in export turnover and total turnover calculations, was extensively discussed. The judgment referenced the Supreme Court decision in CIT Vs. HCL Technologies Ltd., emphasizing the need for consistent treatment of expenses in both export and total turnover calculations. It was concluded that deductions on expenses like freight and technical services provided outside should be allowed proportionately from both export and total turnover to ensure a logical and fair computation.

4. Consequently, the third substantial question of law was answered in favor of the assessee and against the Revenue, aligning with the principles established in the HCL Technologies Ltd. case. The second substantial question was left unanswered, and the appeal was partly allowed only with respect to the third substantial question, resulting in no costs being awarded.