2014 (8) TMI 690 - HC - Income Tax

Computation of deduction u/s 10B - Foreign currency provided for software development services outside India Held that - The consideration in respect of computer software received in or brought into India by the assessee in convertible foreign exchange is deducted from the profits of the business - the assessee is not liable to pay any income tax on consideration received from export of computer software - the proceeds on the assumption that the assessee is a company engaged in rendering technical services outside India in connection with production of software - the expenditure incurred in foreign exchange in providing technical services outside India of ₹ 62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction u/s 80HHE of the Act - The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client - the expenditure cannot be excluded in computing export turn over Decided against Revenue. Computation of deduction u/s 10B - Expenses in foreign currency of telecommunication expenses Held that - Following the decision in Commissioner of Income-Tax And Another Vs. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT - 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. Exclusion of foreign currency for providing software development services from export turnover for deduction u/s.10B of the Act.
2. Inclusion of expenditure incurred in foreign currency on telecommunication expenses in the total turnover for deduction u/s.10B of the Act.

Analysis:

Issue 1:
The first substantial question of law pertains to the exclusion of foreign currency for providing software development services from export turnover for the purpose of computing deduction u/s.10B of the Act. The Court highlighted that the export turnover does not include certain expenses like freight, telecommunication charges, or insurance related to the delivery of computer software outside India. However, if the assessee is engaged in providing technical services outside India in connection with the development or production of computer software, the expenses incurred in foreign exchange for such services must be deducted from the export turnover. The Court differentiated between technical services rendered in connection with the export of computer software and export of technical services for development or production of computer software outside India. Ultimately, the Court ruled in favor of the assessee, emphasizing that the expenditure incurred in foreign exchange for such services forms part of the export turnover.

Issue 2:
Regarding the second substantial question of law, the Court referred to a previous case to address the inclusion of expenditure incurred in foreign currency on telecommunication expenses in the total turnover for deduction u/s.10B of the Act. The Court emphasized the need for uniformity in the components of the formula used to ascertain export profits, particularly in cases where an assessee has both export and domestic business. It was highlighted that the export turnover should be treated consistently in both the numerator and denominator of the formula to avoid anomalies or absurd results. The Court concluded that if certain expenses are excluded from the export turnover in the numerator, they should also be excluded when calculating the export turnover as part of the total turnover in the denominator. The judgment favored the assessee, emphasizing the importance of maintaining consistency in the interpretation of export turnover components within the formula for computing deductions under Section 10-A.

In conclusion, the Court dismissed both appeals based on the detailed analysis and rulings provided for each substantial question of law raised by the Revenue.