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TMI Blog2010 (11) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... 1141/Mds/2007 - - - Dated:- 2-11-2010 - SHRI PRADEEP PARIKH, SHRI N. BARATHVAJA SANKAR AND SHRI HARI OM MARATHA, JJ. Assessee By : Shri V.D. Gopal Revenue By: Shri Tapas Kumar Dutta Intervener: Shri H. Padamchand Khincha For M/s Changepond Technologies ORDER PER N. BARATHVAJA SANKAR, VICE PRESIDENT The Hon'ble President , Income Tax Appellate Tribunal, vide orders dated 13.10.2009 constituted the present Special Bench to dispose of the captioned appeals as well as to adjudicate the following quest ion of law: Whether the expenses incurred in foreign currency on computer software development onsite at the client s place outside India is to be excluded from export turnover? 2 Both the appeals filed by the assessee and the revenue revolve around the above mentioned quest ion of law. 3 The brief facts of the case are that the assessee is a company engaged in the business of development of software both by way of onsite development and offshore development and i t has a branch in USA for which separate accounts were maintained. In its return of income, the assessee being 100% EOU, had claimed deduct ion u/s 10B of IT Act in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of (export turnover ) u/s10B of IT Act just ifies the act ion of the Assessing Officer in excluding the expenses in foreign exchange incurred towards technical services abroad f rom the export turnover u/s 10B of IT Act . 3 The Ld. CIT(A) failed to appreciate that the act ion of the Assessing Officer results in double additions of expenses incur red for the onsite development of computer software. 4 The Ld. CIT(A) failed to appreciate that 70% of the export turnover was separately excluded from the export turnover by the Assessing Officer himself and so the expenses not being excluded would amount to double addition. In addition to the above grounds, the assessee has f i led following additional ground also: The Ld. CIT(A) should have been pleased to hold that the sum of Rs. 3,33,46,592 should not have been excluded from Export turnover as clause ( III) of explanation of Sec 10B(8) is not applicable to the facts of the appellant s case wherein the above amount was incur red as expenditure in foreign exchange for onsite development of software and even if applicable, should have been excluded from total turnover also. 7 On the other hand, the revenue is on appeal before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the purpose of export turn over. The intent ion of legislature is to give the benefi t of exempt ion only to those export earnings which are brought intoIndia. That is why any expenses incur red in foreign currency outsideIndiahas to be excluded from the export turnover. Export turnover has been defined in Sect ion 10B of IT Act as under: Export turnover means the consideration in respect of export by the undertaking of art icle or things or computer software received in, or brought into India, by the assessee in convertible foreign exchange in accordance with Sub-Sec (3), but does not include freight , telecommunication charges or insurance at tributable to the delivery of the article or thing or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India. 10 In view of the above explanation, the Assessing Officer excluded from the export turn over, the expenses of Rs. 3,33,46,592 incur red by the assessee outsideIndiain providing technical services, while computing deduct ion u/s 10B of IT Act . Aggrieved by this order of the Assessing Officer, the assessee moved the matter in appeal before the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld. Thus the Ld. CIT(A) sustained the addition made by the Assessing Officer in a sum of Rs. 3,33,46,592. 13 At the time of hearing, Ld. Counsel for the assessee placed on record three paper books consisting of materials mentioned in the index thereof to the respective paper books. By placing the above paper books, the Ld. Counsel for the assessee Shri V.D. Gopal , Advocate submitted as under: The explanation 2(i i i ) to Sect ion 10B of IT Act reads as under : Export turnover means the consideration in respect of export (by the undertaking) of articles or things or computer software received in, or brought into India, by the assessee in convertible foreign exchange in accordance with Sub-Sec (3), but does not include freight , telecommunication charges or insurance attributable to the delivery of the article or thing or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India. From the above explanation i t can be seen that the expenses if any, incur red in foreign exchange in providing technical services outside India, will not be included in export turnover . The theory of net foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange wi thin six months of the end of the previous year or within such further period as the Chief Commissioner / Commissioner may al low in this regard. Moreover Circular No. 54 of 2002:RB dated 29.6.2002 issued by Reserve Bank ofIndiais also very relevant . The above circular was issued by Reserve Bank ofIndiaon the subject maintenance of foreign currency account abroad by a Company / Firm / Body corporate incorporated inIndia. In the above Circular Para No. 3 reads as under: 3. The authorized dealers may, therefore, al low remittances for the purpose of normal business operations of the office (trading/non-trading) /branch of representative outside India as per the provisions of the Regulat ions in this regard subject to the following terms and conditions: i The overseas office (trading/non trading)/branch/representative should not create any financial liabilities contingent or otherwise for Head Office inIndia. i i The overseas office (trading/nontrading)/ branch/representative should not invest surplus funds abroad without prior approval of Reserve Bank ofIndia. Any funds rendered surplus should be repatriated toIndia. i i i The overseas office/branch of softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces provided outsideIndia, for the development or product ion of computer software, are included for the purpose of the tax incentive. 7 Similarly, for the purpose of sect ion 10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and export them, i t should not matter whether the programme is actual ly written within the premises of the unit . It is, accordingly clarified that , where a unit in the EPZ/EOU/STP develops software surplace, that is, at the client s site abroad, such uni t should not be denied the tax holiday under Sect ion 10A or 10B on the ground that i t was prepared on site, as long as the software is a product of the unit , i .e. , i t is produced by the unit . 15 From the above i t can be seen that the expenditure incur red at client s site abroad is eligible for deduct ion u/s 10A and 10B. The memorandum explaining the provisions of Finance Bi l l , 2001 (248 ITR (St) 35 had well explained Clause 39. It is mentioned as under : It is proposed to insert an Explanation after sub-sec (1) of the said sec so as to clarify that the profits and gains derived from on site development of computer software (including services for devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ator should consist same i tems as held by Special Bench in the case of ITO V. Sak Soft Ltd (2009) 313 ITR (AT) 353 ITAT (Chen) SB. 16 Per contra, Ld. D.R. for the revenue submitted that the basic definition is in sub-sec (4). He posed a quest ion why there is separate sub-sect ions and explanations. Sub-sect ion 4 only talks about profits and gains and export turnover is different . On site development cannot be without technical services. The decision of Madras Bench in the case of Polaris Software says that there is no software development without technical services. There is ambiguity in the definition of export turnover . Accordingly in view of the decision of Hon'ble Supreme Court in the case of IPCA Laborataries if the words are clear strictinterpretat ion is to be given. Each limb sect ion is defined in the Act . He relied on the following decisions: Cali fornia Software Co Ltd V. ACIT, 118 TTJ (Chennai ) 842 ITO Company Ward II I (1) V. Polaris Software Ld. D.R. for the revenue also reiterated the contents of the assessment order as his submissions in addition to the above submissions. 17 In reply Shri V.D. Gopal , Ld. Counsel for the assessee submitted that a pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any place outsideIndiaby any means. Clause (i i i) of Explanation (2) to sub-sect ion 9A of Sect ion 10B defines export turnover as under: (i i i ) Export turnover means the consideration in respect of export (by the undertaking) of articles or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-sec (3) but does not include freight , telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or expenses, if any incur red in foreign exchange in providing technical services outside India. The combined reading of the definition of software as given in clause (i ) of Explanat ion (2) and export turnover as defined in clause (i i i ) above, would go to show that export turnover of computer software means consideration received in respect of export of computer software but does not include freight , telecommunication charges or insurance to the delivery of computer software outside India or expenses incurred in foreign exchange in providing technical services outside India. 22 In this case the assessee pleads that it has not rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to us in favour of the assessee. Thus the appeal of the assessee is al lowed. 25 Now let us turn to revenue s appeal , the grounds of whom had already been extracted elsewhere of this order. Ld. D.R. for the revenue reiterated the grounds of appeal as his submissions. He also relied on the submissions made by him in the assessees appeal which are extracted elsewhere of this order. 26 Ld. Counsel for the assessee supported the order of Ld. CIT(A) and reiterated the contents of the Ld. CIT(A) s order in respect of the issue of inclusion of foreign exchange retained by the assessee abroad while computing deduct ion u/s 10B of IT Act . He also relied on the submissions made in assessee s appeal (extracted elsewhere of this order) . 27 We have heard the rival submissions and considered the facts and materials on record. The Ld. CIT(A) while al lowing the assessees claim in respect of this issue, has observed as under: 2.2 I have careful ly perused the facts and examined al l the submissions of the appellant on this issue. I am of the considered view that one limb of the Government cannot be al lowed to defeat the operations of the other limb. Sect ion 10B of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch of f ice and the utilization of the said proceeds by the appellant abroad for specific expenses related to exports have not been doubted by the Assessing Officer. The appellant is required to fi le periodic reports to the RBI regarding the exports and the utilization of the foreign exchange in accordance with the guidelines issued by the RBI. No specific instance have been brought on record by the Assessing Officer to prove that the said foreign exchange had not been realized by the appellant within the due date abroad from the contracting parties. Once the appellant receives the export proceeds in foreign exchange abroad within due dates and the same are utilized by the appellant for the purpose of its own business through its branch office abroad, the said sale proceeds are required to be considered as deemed receipts in India. I am of the view that the decision of Hon'ble Supreme Court in the case of J.B. Boda Co (supra) and the Board s Circular No. 731 is directly applicable in favour of the appellant . Al though the said decision and circular is with reference to Sec 80-O but the ratio and the reasoning is applicable for the purpose of deciding this issue u/s 10B also. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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