2022 (2) TMI 595 - HC - Income Tax

Deduction u/s 10B - determination of export turnover - whether Tribunal was right in holding that the expenditure incurred in foreign exchange for providing technical services outside India by way of onsite development of computer software should not be excluded from the export turnover for the purpose of computing deduction under Section 10B without properly applying the provisions of Explanation 2(iii) to Section 10B? - HELD THAT - Issue decided in favour of assessee M/S. ZYLOG SYSTEMS LIMITED 2020 (3) TMI 181 - MADRAS HIGH COURT

Summary

Issues:
Challenging order by Income Tax Appellate Tribunal regarding exclusion of expenditure for providing technical services from export turnover for deduction under Section 10B.

Analysis:
The appellant, Revenue, filed tax case appeals challenging the Income Tax Appellate Tribunal's order related to the exclusion of expenditure for providing technical services from export turnover for deduction under Section 10B for assessment years 1999-2000, 2000-01, and 2003-04. The High Court admitted the appeals based on substantial questions of law. The parties jointly submitted that the issues had been previously decided in favor of the assessee in a judgment dated 20.02.2020, citing the decision of the Supreme Court in the case of "Commissioner of Income Tax Vs. Mphasis Ltd." The judgment clarified that expenditure incurred in foreign currency for technical services is includible in the definition of 'export turnover' for computing deductions under Section 10B.

In the first substantial question of law, the High Court referred to the judgment of the Division Bench of the Karnataka High Court in the case of "CIT Vs. Mphasis Ltd." The judgment emphasized that expenses incurred in foreign exchange for providing technical services outside India should not be excluded from export turnover when related to the export of computer software. The court differentiated between technical services connected to the export of software and technical services for the production of software outside India. It concluded that such expenditure should not be excluded from the export turnover.

Regarding the second substantial question of law, the High Court cited the case of "Commissioner of Income Tax And Another Vs. Tata Elxsi Ltd." The judgment highlighted the need for uniformity in the components of the formula for computing export profits under Section 10-A. It emphasized that if certain expenses are excluded from the numerator (export turnover), they should also be excluded from the denominator (total turnover) to maintain consistency and align with legislative intent. The court's interpretation aimed to respect the legislative meaning assigned to export turnover when included in the total turnover.

Following the judgments and legal principles established in previous cases, the High Court answered both substantial questions of law in favor of the assessee and against the Revenue. Consequently, the Appeals of the Revenue were dismissed, and no costs were awarded based on the precedent and interpretation of relevant provisions and case law.