2022 (2) TMI 823 - HC - Income Tax

Computation of deduction u/s 10B - Tribunal held 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 - whether Tribunal was right in holding that even if the expenditure referred to in the preceding question was to be excluded from the export turnover, then the same should be excluded from the total turnover also? - HELD THAT - Issue involved herein has already been decided in favour of the assessee, in view of the decision rendered in the case of Commissioner of Income Tax v. Mphasis Ltd 2014 (8) TMI 690 - KARNATAKA HIGH COURT also confirmed by Supreme court 2019 (11) TMI 1383 - SUPREME COURT held that 'the expenditure incurred by the Assessee in foreign currency will be includible in the definition of 'export turnover' for the purpose of computing deduction under Section 10B. Decided in favour of the assessee.

Summary

Issues:
1. Exclusion of expenditure incurred in foreign exchange for providing technical services from export turnover for deduction u/s.10B.
2. Exclusion of the same expenditure from total turnover.

Issue 1:
The appellant challenged the order of the Income Tax Appellate Tribunal regarding the exclusion of expenditure in foreign exchange for providing technical services from export turnover for deduction u/s.10B. The appellant contended that the Tribunal erred in not properly applying Explanation 2(iii) to Section 10B. However, the appellant conceded that a similar issue was decided in favor of the assessee in the case of Commissioner of Income Tax v. Mphasis Ltd. The Karnataka High Court, affirmed by the Supreme Court, held that expenditure in foreign currency should be included in the definition of 'export turnover' for computing deductions under Section 10B. The judgment emphasized that expenses incurred in foreign exchange for providing technical services outside India should not be excluded from export turnover, as they form part of it. The expenditure is not to be excluded when technical services are rendered in connection with the export of computer software. Therefore, the substantial question of law was answered in favor of the assessee based on the precedent set by the Karnataka High Court and affirmed by the Supreme Court.

Issue 2:
Regarding the exclusion of the same expenditure from total turnover, the judgment referred to the case of Commissioner of Income Tax And Another Vs. Tata Elxsi Ltd. The judgment highlighted the need for uniformity in the components of both the numerator and denominator of the formula to avoid anomalies. It emphasized that the export turnover, which is a part of the total turnover, should have the same treatment in both calculations. The judgment clarified that if certain expenses are excluded from the export turnover, they should also be excluded from the total turnover. The Court stressed that the components of export turnover in the numerator and the denominator cannot differ. Therefore, the judgment answered the substantial question of law in favor of the assessee, aligning with the principle of maintaining consistency in the treatment of export turnover within the formula for computing deductions under Section 10A. The judgment upheld the interpretation that what is excluded from export turnover should also be excluded from total turnover to maintain the legislative intent of promoting exports and providing incentives.