2018 (11) TMI 1553 - HC - Income Tax

Computation of deduction under Section 10A - exclusion of expenditure incurred in foreign currency in export of software, from the purview of 'Export Turnover' - Held that - Element of 'technical services', have been rendered as integral part of the software development process. There was no material available before the Assessing Officer to split up the transaction into two or to bisect the transaction to find out an element of 'technical services'. As rightly pointed out by the assessee, this exercise has been done by the Assessing Officer based on the notes to the accounts in the financial statements, which would be impermissible. What is required to be examined is the nature of services rendered by the assessee to the foreign entity. Thus, we are fully satisfied that the 'technical services' rendered by the assessee is not on a 'standalone basis', but it is an integral part of the software development and up to step No.(8), as mentioned above, the assessee is bound to render all assistance to the foreign entity. Therefore, the artificial split up of the transaction by the Assessing Officer, that too without any materials on his file, is wholly unsustainable. - decided in favour of assessee Inclusion of the component of unrealised sale proceeds in total turnover while directing the exclusion of the same from export turnover - Held that - These questions have been answered by the Hon'ble Supreme Court in the decision of the Commissioner of Income Tax, Central-III vs. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT as held as the term 'total turnover' has been defined in the Explanation to Section 80HHC and 80HHE, wherein it has been clearly stated that ''for the purposes of this Section only'', it would be applicable only for the purpose of that Sections and not for the purpose of Section 10A. If denominator includes certain amount of certain type which numerator does not include, the formula would render undesirable results. Setting aside the issue of deduction of expenditure in connection with the earning of dividend income by tribunal - Held that - Assessee contended that Section 14A(2) could not have been invoked, as during the relevant assessment year there is no power vested with the AO on account of the fact that Section 14A(2) was inserted by Finance Act, 2006, with effect from 01.04.2007. Therefore, as submitted this provision cannot be made applicable to the assessment years prior to the said date. Such a ground was never canvassed either before the Assessing Officer or before the CIT-A or before the Tribunal - while confirming the order passed by the Tribunal in remanding the matter for fresh consideration to the Assessing Officer, we direct the assessee to raise the contention which was raised before us with regard to the jurisdiction of the Assessing Officer to invoke Section 14A(2) of the Act and the same shall also be considered by the Assessing Officer along with other points in accordance with law - order of remand passed by the Tribunal is confirmed

Issues Involved:
1. Exclusion of expenditure incurred in foreign currency from 'Export Turnover' for deduction under Section 10A of the Income Tax Act.
2. Inclusion of unrealized sale proceeds in total turnover while excluding the same from export turnover.
3. Parity in simultaneous exclusion or inclusion of sale proceeds in both export and total turnover.
4. Deduction of expenditure in connection with earning dividend income.
5. Applicability of Section 14A amendment regarding the power to estimate expenditure incurred with earning non-taxable income.

Detailed Analysis:

1. Exclusion of Expenditure Incurred in Foreign Currency from 'Export Turnover':
The primary issue here was whether the Tribunal was correct in upholding the exclusion of expenditure incurred in foreign currency from the 'Export Turnover' for the purpose of computing deductions under Section 10A of the Income Tax Act. The assessee argued that such expenditure was related to onsite software development projects and should not be excluded. The Assessing Officer and the Commissioner of Income Tax (Appeals) considered these expenses as 'technical services' and excluded them from 'Export Turnover'. The Tribunal upheld this decision.

However, the High Court found that the Tribunal and lower authorities failed to properly examine the nature of the services rendered. The Court emphasized that the technical services were integral to the software development process and not rendered on a 'standalone basis'. Therefore, the exclusion of these expenses was deemed incorrect. The High Court concluded that the Tribunal erred in its judgment and ruled in favor of the assessee, setting aside the Tribunal's decision.

2. Inclusion of Unrealized Sale Proceeds in Total Turnover:
The Tribunal's decision to include unrealized sale proceeds in the total turnover while excluding the same from export turnover was challenged. The High Court referred to the Supreme Court's ruling in Commissioner of Income Tax, Central-III vs. HCL Technologies Ltd., which clarified that the definition of 'total turnover' under Sections 80HCC and 80HHE could not be imported into Section 10A. The Supreme Court had held that the term 'total turnover' should not reduce any expenses from the total amount for Section 10A computations. Consequently, the High Court answered this issue in favor of the assessee, aligning with the Supreme Court's interpretation.

3. Parity in Exclusion or Inclusion of Sale Proceeds:
The issue was whether the Tribunal was right in not directing the simultaneous exclusion or inclusion of sale proceeds in both export and total turnover, maintaining the principles of parity. The High Court, following the Supreme Court's decision in HCL Technologies Ltd., ruled in favor of the assessee, ensuring that the same treatment must be applied to both export and total turnover for consistency and fairness.

4. Deduction of Expenditure in Connection with Earning Dividend Income:
The Tribunal had remanded the issue of deduction of expenditure related to earning dividend income back to the Assessing Officer for fresh examination. The assessee argued against an ad-hoc estimation of such expenses. The High Court found no error in the Tribunal's remand order but noted that the assessee should be allowed to raise the jurisdictional issue regarding the applicability of Section 14A(2) of the Act, which was introduced by the Finance Act, 2006, effective from 01.04.2007. The High Court directed the Assessing Officer to reconsider the matter, including the jurisdictional challenge raised by the assessee.

5. Applicability of Section 14A Amendment:
The final issue concerned whether the amendment to Section 14A, which granted the Assessing Officer the power to estimate expenditure incurred with earning non-taxable income, was applicable to assessment years prior to its introduction. The High Court noted that this jurisdictional issue was not raised before the lower authorities but allowed the assessee to present this argument upon remand. The Tribunal's remand order was confirmed, and the Assessing Officer was instructed to consider this jurisdictional issue along with other points.

Conclusion:
1. Substantial Question of Law (1) was answered in favor of the assessee, ruling that the Tribunal was incorrect in excluding foreign currency expenditure from 'Export Turnover'.
2. Substantial Questions of Law (2) and (3) were answered in favor of the assessee, consistent with the Supreme Court's decision in HCL Technologies Ltd.
3. Substantial Questions of Law (4) and (5) were left open, with the matter remanded to the Assessing Officer for fresh consideration, including the jurisdictional issue regarding Section 14A(2).

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