2022 (7) TMI 960 - HC - Income Tax

Deduction u/s 10B - exclusion expenses incurred in foreign exchange, freight and clearing expenses incurred in foreign exchange in computing deduction - HELD THAT - As substantial questions of law raised herein have been decided in favour of the assessee, in the decision of the Hon'ble Supreme Court in Commissioner of Income Tax vs. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT held if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover - Decided against revenue.

Summary

Issues:
1. Inclusion of freight and clearing expenses in foreign exchange while computing deduction under Section 10B of the Income Tax Act, 1961.
2. Error in including freight and clearing expenses for computing deduction under Section 10B.
3. Correctness of the decision in the case of ITO vs. Sak Soft Ltd.
4. Applicability of Section 14A of the Income Tax Act with Rule 8D when no dividend income is received.

Analysis:
1. The appellant challenged the order of the Income Tax Appellate Tribunal regarding the inclusion of freight and clearing expenses in foreign exchange while computing deduction under Section 10B of the Income Tax Act, 1961. The High Court referred to a similar case before the Karnataka High Court and held that expenses excluded from export turnover should also be excluded from total turnover to align with legislative intent. The court emphasized that such deductions should be allowed from the total turnover in the same proportion, ensuring a logical and meaningful interpretation of the formula for deduction under Section 10B.

2. The court addressed the error made by the Tribunal in including freight and clearing expenses incurred in foreign exchange for computing the deduction under Section 10B. Citing the principle of interpretation from a previous judgment, the court emphasized that expenses incurred in foreign exchange for providing technical services outside should be allowed to be excluded from the total turnover. The court concluded that the appeal lacked merit based on the established interpretation and dismissed the appeal filed by the Revenue.

3. The correctness of the decision in the case of ITO vs. Sak Soft Ltd. was questioned. The court, following the precedent set by a judgment of the Supreme Court, emphasized the importance of aligning deductions with the legislative intent to avoid inadvertent and illogical results. By applying the principles established in previous cases, the court reaffirmed the necessity of excluding certain expenses from both export turnover and total turnover for a coherent interpretation of the deduction formula.

4. The issue of the applicability of Section 14A of the Income Tax Act with Rule 8D when no dividend income is received was raised. The court, guided by the principles of interpretation and legislative intent, reiterated the importance of ensuring that deductions and exclusions are applied consistently to avoid absurd or unworkable outcomes. Ultimately, the court dismissed the appeal by the Revenue, ruling in favor of the Assessee based on established legal principles and interpretations.