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TMI Blog2008 (1) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and October 12, 2004, of the Commissioner of Income-tax (Appeals)-II, Hyderabad for the assessment years 2000-01 and 2001-02. One ground raised in both the appeals is based on identical set of facts, therefore, for the sake of convenience both appeals are decided by this common order. 2. A common ground raised in the grounds of appeal for both the assessment years 2000-01 and 2001-02 pertains to calculation of export turnover for the purpose of section 10A. The amounts involved in both years are as under : Assessment ISP charges Technical service charges Rs. Rs. 2001-02 40,93,493 1,16,61,307 2000-01 9,64,119 87,520 3. The facts leading to the issue are in the assessment year 2001-02, therefore, the facts and figures considered by us are for the assessment year 2001-02. 4. The ground raised in the assessment year 2001-02 is that the Commissioner of Income-tax (Appeals) erred in confirming the deduction of Rs. 40,93,493 in respect of internet service provider (in short hereinafter called "the ISP") charges and Rs. 1,16,61,307 in respect of expenses incurred in foreign exchange for providing technical services outside India from export turnover while computing exempted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter considering the assessee' s submission, the Assessing Officer computed the total income of the assessee as under : Rs. Rs. "In view of the above, the total income is computed as under : Exemption under section 10A is worked out as under : Profits of the business × Export turnover Total turnover of the business. Profits of the business 1,12,93,116 Export turnover. [as defined in (iv) of Explanation 2 to sec. 10A]. Consideration in respect of export of computer software received in convertible foreign exchange but does not include, freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. Total foreign exchange received in India as per the statement filed by the assessee (Rs. 9,36,22,966 (minus) loss on exchange fluctuation debited to the profit and loss account (Rs. 1,57,928) 9,34,65,038 Less : (i) ISP provider charges - as discussed above 40,93,493 (ii) Expenses incurred in foreign exchange in providing technical services outside India 1,16,61,307 1,57,54,800 Export turno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 238 (Rs. 9,34,65,038 less Rs. 1,57,54,800). 8. The learned authorised representative submitted that the assessee is an 100 per cent. export oriented unit registered under STP Scheme for developing and exporting software. Its export business was entirely based on its agreement with a foreign customer namely Arista Soft Corporation, U.S.A. The software development services were rendered both on site and offshore. On site services were rendered at the customer' s place by the employees of the assessee sent there. The offshore services are rendered at the assessee' s place locally. Remuneration for both types of services was received in U.S. dollars. The learned authorised representative submitted that section 10A(4) read with clause (iv) of Explanation 2 to section 10A is not applicable to the facts of the case of the assessee. He further submitted that the said provisions are applicable to a case where the assessee has export business as well as domestic sales and has maintained composite books of account for both the business and a single trading and profit and loss account. The learned authorised representative further submitted that in the case of composite business the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for deduction under section 80HHC in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667. The apex court at page 683 observed while referring to the total turnover, that the freight and insurance attributable to transfer of goods shall be excluded if they were part of turnover. The learned authorised representative submitted that the telecommunication charges for ISP was for transmitting the data, i.e., software developed by the assessee and charges for ISP facility were paid every quarter to VSNL though such expenditure does not come within the meaning of items of expenditure referred to in clause (iv) of Explanation 2. The learned authorised representative further submitted that the expenditure was incurred on travel and allowances to employees who were sent to customers' place for rendering the software development services on site. The expenditure was not in connection with providing technical services. The alternate submission of the learned authorised representative if the formula for computation of eligible profits for deduction provided in section 10A(4) is applied, the amount excluded from the export turnover should also be excluded from the total turnover. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the under taking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub- section only for the unexpired period of the aforesaid ten consecutive assessment years : Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of deduction under section 80HHC which is defined in Explanation (ba) at the end of section 80HHC in the negative term as not including freight or insurance attributable to the transport of the goods or merchandise beyond the customs station and profit on sale of licence, cash assistance, duty draw back etc. Thus the term "export turnover"does not include freight and insurance attributable to transport. Clause (c) of Explanation to section 80HHE is similar to clause (iv) of Explanation 2 to section 10A. 15. On an analysis of definition of "export turnover"as provided in clause (iv) of Explanation 2 to section 10A, we notice that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of articles or things or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e., freight, telecommu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the goods only. Where such expenses are separately charged in the invoices, the consideration received in convertible foreign exchange includes the value of the goods and such expenses. If the consideration received is only against the goods then there is no need to deduct such expenses from the consideration received in convertible foreign exchange. In cases where such expenses are separately charged, the expenses are required to be reduced from the consideration received for the purpose of arriving at the export turnover. The logic and reason behind this have been explained by the Central Board of Direct Taxes vide its Circular No. 564, dated July 5, 1990, quoted above that the delivery of the goods should be Free on Board (FoB). Both the situations can be explained by a simple example. Mr. X exported goods out of India and received consideration of Rs. 1,000 in convertible foreign exchange which is only in respect of goods. Mr. Y in a similar type of transaction charged Rs. 1,000 for goods and Rs. 100 for such expenses. Total convertible foreign exchange received in case of X is Rs. 1,000 and in case of Y is Rs. 1,100. In case of Mr. Y Rs. 100 is required to be deducted fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign 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 words "received"and "but not include"used in clause (iv) of Explanation 2 to section 10A of the Income-tax Act are significant. What is to be excluded is out of what is received. In the case under consideration the assessee received consideration against software, i.e., goods. For this purpose, the assessee has demonstrated by referring invoices (pages 4.1 to 4.4) and agreement (page 2.1) of which photocopies have been placed in the assessee' s paper book. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software exports where technical services are provided outside India for development or production of computer software, i.e., goods. Therefore, in such cases benefits should not be denied. The assessee-company entered into a software development agreement with ARISTSOFT CORPORATION, USA on October 1, 1999. In the said agreement, the assessee is called as "Contractor"and USA party is called as "Developer". The developer desired to have rights developed into a new generation technology for the products and to have various support services performed related to its business. The assessee-contractor has the expertise and facilities to undertake such development work and support services. The nature of business of the assessee pointed out is as under : "Aristasoft International (P.) Ltd. was incorporated under the Companies Act, 1956 with the Registrar of Companies, Hyderabad on 15th May, 1999 vide No. 01- 31633 of 1999. It is a 100 per cent Export Oriented Software Development Unit registered under STP scheme vide letter No. STP PER : 34 (1999)/EOP/31/99, dated June 12, 1999. Aristasoft Intl. Pvt. Ltd. was a subsidiary of Aristasoft Corporation, California, US and was its Global T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e efforts put in exceed 10 per cent of the previously estimated efforts due to no fault of the ' Contractor', then the ' Developer' will be required to pay for additional efforts and it will be negotiated in good faith between the ' Developer' and the ' Contractor' . (b) Off Site (At ' Contractor' premises) Project Cost is derived based on the assumption that the majority of the work will be carried out at the premise of the ' Con tractor' and the ' Developer' has provided computer hardware & peripherals (list enclosed) on loan basis which shall remain the property of the ' Developer.' The project will be billed by the ' Contractor' to the ' Developer' at a flat fee as previously agreed and approved and will be based on estimated efforts spent multiplied by an hourly rate of US $15 for junior programmers, US $20 for senior programmers, US $30 for project leaders and US $40 for center heads. In case the efforts put in exceed 10 per cent of the previously estimated efforts due to no fault of the ' contractor', then the ' developer' will be required to pay for additional efforts and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e form of computer software. The assessee received consideration in convertible foreign exchange for both types of services. The travel and allowance expenses of Rs. 1,16,61,307 was treated by the Assessing Officer as expenditure incurred in foreign exchange for providing technical services outside India and same was reduced from convertible foreign exchange received by the assessee. But 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. There is a software development agreement between the client and the assessee. The expenditure incurred is for development of software. The general accepted accountancy and other prevailing practice in the business are that if any services are rendered in respect of goods either for sale or manufacture, those expenditures relate to goods and such expenditures cannot be described independent expenses so as to say in the nature of technical services. Here distinction is to be noted in respect of consideration received against expenditures incurred for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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