2008 (1) TMI 452 - AT - Income Tax

Calculation of export turnover for the purpose of exemption u/s 10A - Expenses on account of Internet Service Provider' (ISP) provider charges and foreign exchange in providing technical services outside India - onsite and offsite services - software development agreement between the client and the assessee - Disallowance of employee s contribution to PF after due date. Delivery of software booked under ISP - Expenses on account of Internet Service Provider' (ISP) - HELD THAT - We find that the said expenditure on Internet Service Provider (ISP) does not come within the scope of Telecommunication charges as provided in clause (iv) of Explanation 2 to section 10A of Income-tax Act because ISP was for transmitting the data, i.e., software developed by the assessee. The ISP expenses incurred is in respect of development of software, i.e., goods. The ISP expenses is not attributable to the delivery of computer software, therefore, such expenses needs not be excluded from consideration in foreign exchange. However, if for the sake of arguments it is presumed that the expenditure incurred is attributable to delivery of goods outside India even though same is not to be excluded. The agreement, invoices and the turnover clearly show that the assessee did not recover any such expenditure. Therefore, there is no scope for any exclusion from the export turnover on account of such expenses. If at all on presumption, it is to be excluded for the purpose of export turnover then on the same assumption, reason and analogy it should be excluded from total turnover . The simple reason is that such expenditure is also included in consolidated consideration which is forming part of total turnover . In order to make the formula for the purpose of export turnover in section 10A workable one has to give a schematic interpretation to the formula. Elimination should be from both the denominator and the numerator. We therefore find that the Assessing Officer was not correct in excluding Rs. 40,93,493 from consideration received in convertible foreign exchange while calculating export turnover for the purpose of section 10A of the Income-tax Act. Expenses incurred in foreign exchange in providing technical services outside India - We find that the expenditure was not in connection with providing technical services. The assessee did not render any independent technical services, it developed software on contract basis as per the agreement and handed over the same to the customer. If the technical services are rendered independently which is being agreed to separately charge in addition to the price of the goods, in such circumstances expenditure incurred could be in the nature of expenditure for the purpose of technical services. In the case under consideration undisputed facts are that expenditure incurred by the assessee is on account of travelling allowances and others for the purpose of development of software at client s site outside India, i.e., in respect of goods. Such expenditure is not in the nature of expenditure for technical services. Since the expenditure is not for technical services, there is no need to exclude these expenditures from consideration received in convertible foreign exchange for the purpose of calculating export turnover as defined in clause (iv) of Explanation 2 of section 10A. Disallowance of employee s contribution to PF after due date - under the head Income from other sources or 'Income from business' - The contention of the learned A.R. is not acceptable in view of the clear provisions of section 2(24)(x), 36(va) and 56(2)(ic) of the Income-tax Act. The unpaid PF contribution of employees cannot be said to be a business receipt. If this receipt is allowed or to be treated as business receipt, then the assessee will be entitled to set-off of all business expenditure against this receipt which is not permissible. The assessee s business is in software and not in dealing with contribution of PF of employees. We are, therefore, inclined to uphold the order of the CIT(A). Accordingly, the order of the CIT(A) on this issue is confirmed. In the result, appeal for the AY 2000-01 is partly allowed and appeal for AY 2001-02 is allowed.

Summary

Issues Involved:
1. Calculation of export turnover for the purpose of section 10A.
2. Deduction of ISP charges and expenses incurred in foreign exchange for providing technical services outside India from export turnover.
3. Disallowance of employee's contribution to provident fund after the due date.

Issue-wise Detailed Analysis:

1. Calculation of Export Turnover for the Purpose of Section 10A:

The appeals pertain to the calculation of export turnover for the purpose of section 10A, specifically whether ISP charges and expenses incurred in foreign exchange for providing technical services outside India should be excluded from export turnover. The assessee contested the reduction of these amounts from the export turnover, arguing that the entire profit was from export business only and that the formula for calculating eligible profits under section 10A(4) should not apply. The assessee maintained that the expenses were not recovered from the customer and thus should not be excluded from the export turnover.

2. Deduction of ISP Charges and Expenses Incurred in Foreign Exchange for Providing Technical Services Outside India from Export Turnover:

The Assessing Officer (AO) had excluded Rs. 40,93,493 (ISP charges) and Rs. 1,16,61,307 (expenses incurred in foreign exchange for providing technical services outside India) from the export turnover. The Commissioner of Income-tax (Appeals) upheld this decision, interpreting that these expenses fell under the non-inclusion clause of the definition of export turnover as per Explanation 2 to section 10A. However, the tribunal found that ISP charges were for transmitting data (software) and not attributable to the delivery of software outside India, thus not to be excluded from the export turnover. Similarly, the tribunal concluded that the expenses of Rs. 1,16,61,307 were not for providing technical services but were related to the development of software, and therefore, should not be excluded from the export turnover.

3. Disallowance of Employee's Contribution to Provident Fund after the Due Date:

For the assessment year 2000-01, an additional issue was the disallowance of Rs. 2,52,340 as employees' contribution to the provident fund, which was not deposited within the due date. The Commissioner of Income-tax (Appeals) confirmed the AO's decision to treat this amount as income from other sources based on sections 2(24)(x), 36(1)(va), and 56(2)(ic) of the Income-tax Act. The tribunal upheld this decision, stating that the unpaid provident fund contribution could not be treated as a business receipt and should be assessed as income from other sources.

Conclusion:

The tribunal concluded that the AO was incorrect in excluding the ISP charges and the expenses incurred in foreign exchange for providing technical services from the export turnover. The tribunal allowed the appeals for the assessment year 2001-02 and partly allowed the appeal for the assessment year 2000-01, confirming the disallowance of the employee's contribution to the provident fund.