2020 (8) TMI 767 - HC - Income Tax

Deductions u/s 10B and Section 10AA computation - excluding expenditure incurred in foreign currency from export turnover under Section 10B and Section 10AA of the IT Act when the Appellant is engaged in software development - HELD THAT - CIT(Appeals) has recorded a categorical finding that assessee is engaged in the development of computer software, which is exported outside India. The aforesaid finding has not been set aside by the Tribunal. Therefore, in view of Explanation 2(iii) to Section 10B of the Act, the expression 'export turnover' does not include any expenses incurred in foreign exchange in providing technical services outside India. The assessee has incurred expenditure in foreign currency from export turnover for software development. Similarly, the telecommunication charges attributable to delivery of computer software outside India could not have been excluded from the export turnover in view of Explanation 1(i) to Section 10AA of the Act. It is also noteworthy that Explanation 2 to Section 10AA provides that profits and gains derived from; on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. In the case of assessee itself, for the Assessment year 2009-10, the expenditure incurred in foreign currency was not reduced from export turnover and total turnover, which is evident from the order dated 31.01.2017 passed by the Assistant Commissioner of Income Tax. A bench of this court in Tata Elxsi Limited 2016 (3) TMI 460 - KARNATAKA HIGH COURT has also taken a view that technical services rendered by the assessee's engineers in connection with export of computer software, cannot be excluded in computing the export turnover as it forms part of export turnover. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 10B and Section 10AA of the Income Tax Act regarding exclusion of certain expenditures from export turnover.
2. Application of Explanation 2(iii) to Section 10B and Explanation 1(i) to Section 10AA in determining export turnover.
3. Adjudication of factual aspects related to the nature of contracts entered into by the assessee.

Analysis:
1. The appeal involved questions concerning the exclusion of specific expenditures from export turnover under Section 10B and Section 10AA of the Income Tax Act for the Assessment year 2008-09. The primary contention was whether expenses incurred in foreign currency for software development and telecommunication charges attributable to the delivery of computer software outside India should be excluded from export turnover. The Commissioner of Income Tax (Appeals) and the Tribunal had failed to appreciate the provisions of Explanation 2(iii) to Section 10B and Explanation 1(i) to Section 10AA, which clarify the exclusion of certain expenses from export turnover.

2. The statutory provisions under Explanation 2(iii) to Section 10B and Explanation 1(i) to Section 10AA were crucial in determining the scope of export turnover. The court noted that the expression "export turnover" does not include expenses incurred in foreign exchange for providing technical services outside India. The findings of the Commissioner of Income Tax (Appeals) that the assessee was engaged in software development and exported computer software outside India remained unchallenged. Therefore, the exclusion of foreign currency expenses and telecommunication charges from export turnover was not justified under the relevant provisions.

3. The factual aspect regarding the nature of contracts entered into by the assessee was raised by the revenue, suggesting the need for remittance for further adjudication. However, the court emphasized that the findings regarding the nature of the assessee's activities were clear, and the exclusion of expenses from export turnover was in line with the statutory provisions and previous judicial precedents. The court referred to previous decisions where similar expenditures were not excluded from export turnover, reinforcing the interpretation of the law in favor of the assessee.

In conclusion, the court ruled in favor of the assessee, quashing the impugned order and allowing the appeal based on the correct interpretation of Section 10B and Section 10AA of the Income Tax Act. The judgment highlighted the importance of adhering to statutory provisions and established legal principles in determining the computation of export turnover for eligible deductions under the Act.