2021 (2) TMI 988 - HC - Income Tax

Computation of the deduction u/s 10-A - Whether tribunal was right in holding that for the purpose of applying the formula under sub-section (4) of section 10A, the freight, telecom charges, or insurance attributable to delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India ought to be excluded both from the export turnover and from total turnover even though the statue has provided for such exclusion only from the export turnover? - HELD THAT - The issue involved in the present appeals is covered by the decision of the Hon'ble Supreme Court of India in M/S MPHASIS LTD. (FORMERLY KNOWN AS MPHASIS BFL LTD. 2019 (11) TMI 1383 - SUPREME COURT wherein in agreement that M/S MPHASIS LTD. (FORMERLY KNOWN AS MPHASIS BFL LTD.) 2019 (2) TMI 122 - SC ORDER preferred by the Revenue in respect of connected which was disposed of by the very same common Order 2014 (8) TMI 690 - KARNATAKA HIGH COURT having taken note similar grounds raised in the special leave petition wherein the decision in Commissioner of Income-Tax And Another Vs. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT relied that if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover - The components of the export turnover in the numerator and the denominator cannot be different - there is no definition of the term 'total turnover' in Section 10-A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator - If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible - If that were the intention of the legislature, they would have expressly stated so - If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover - Decided against Revenue.

Summary

Issues:
1. Interpretation of Section 10A of the Income Tax Act, 1961 regarding deductions for software company.
2. Exclusion of telecommunication charges and foreign currency expenses from total turnover.
3. Dispute over adjustments made by the Assessing Officer.
4. Appeals against the order passed by the Commissioner of Income Tax.
5. Substantial question of law regarding exclusion of certain expenses from export turnover and total turnover under Section 10A.
6. Application of judicial precedents to the present case.

Analysis:
1. The appeals involved a software company claiming deductions under Section 10A of the Income Tax Act for the Assessment Years 2002-2003, 2004-2005, and 2005-2006 related to telecommunication charges and foreign currency expenses. The Assessing Officer made adjustments based on Explanation 2 (iv) of the Act, excluding specific expenses from export turnover. The dispute centered around the interpretation of "total turnover" and whether the same principles applied as in Section 80HHE.

2. The Assessing Officer rejected the company's contentions and computed deductions under Section 10A after making adjustments. The company appealed to the Commissioner of Income Tax, who allowed the appeals. Subsequently, the Revenue filed appeals before the Income Tax Appellate Tribunal, which dismissed them. The Revenue then appealed against this decision, leading to the present case.

3. The substantial question of law revolved around whether certain expenses, like telecommunication charges and foreign exchange costs, should be excluded from both export turnover and total turnover while applying the formula under Section 10A. The issue was analyzed in light of judicial precedents, including decisions by the Hon'ble Supreme Court and the Karnataka High Court, which emphasized the need for uniformity in interpreting the components of the formula to avoid anomalies.

4. The Department's Standing Counsel acknowledged that the issue was settled by the Hon'ble Supreme Court's decision in a related case. The Karnataka High Court's judgment further supported the interpretation that what is excluded from export turnover should also be excluded from total turnover to maintain consistency in calculations. The Division Bench of the High Court also ruled in favor of the assessee, aligning with the Supreme Court's decision.

5. With no contradictory judgments supporting the Revenue's position, and considering the consistent legal interpretations provided by higher courts, the present appeals were dismissed in favor of the assessee. The Court upheld the principle that the meaning assigned to export turnover should guide the interpretation of total turnover when both are components of the formula under Section 10A, ensuring legislative intent is respected.

This detailed analysis of the judgment highlights the key legal issues, interpretations, and precedents considered by the Madras High Court in reaching its decision.