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TMI Blog2014 (1) TMI 1177X X X X Extracts X X X X X X X X Extracts X X X X ..... merator 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 - The issue has been restored for fresh adjudication. Foreign travel expenditure – Held that:- The expenses incurred in foreign currency outside India are mainly for the personnel of the assessee deployed abroad for on-site development of the software and not for providing any technical services outside India – Expenses are not to be excluded from the export turnover and also from the total turnover - Decided in favour of assessee. Notional interest on inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uced from the profits of the eligible undertaking before computing relief u/s 10A of the Act; (5) That the CIT (A) was not justified in upholding the addition on account of bad debts recovered as income during the impugned AY when the provision on account of the same was taxed in the year in which such provision was created; (6) That the CIT (A) was not justified in upholding the addition of Rs.10,54,460/- as notional interest on interest free loan given to its subsidiary concern. 3. Briefly stated, the facts of the issues are as under: The assessee is a public limited company, engaged in the business of software development and export of software. For the relevant assessment year, the assessee had furnished its return of income, declaring a total income of Rs.2,58,72,868/- after claiming deduction u/s 10A of the Act amounting to Rs.42,72,82,899/-. However, for the elaborate reasons recorded in the assessment order, the AO had determined the total income of the assessee at Rs.5,89,03,350/-. The Assessing Officer recomputed the deduction u/s 10A of the Act and made various additions/disallowances. Aggrieved, the assessee took up the issues with the CIT (A). After due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of courier charges, internet charges and insurance charges incurred by the assessee towards expenditure in foreign currency for providing technical services outside India and international travel expenses from the export turnover and correspondingly from the total turnover. Set off of domestic unit loss against income from 10A Unit prior to claim of relief: 4.3. In respect of set off of domestic unit loss against income from 10A Unit prior to claim of relief, while concluding the assessment, the AO first adjusted the loss of non-STP business of Rs.5,10,445/- against the profit pertaining to the STP Unit and only thereafter on the balance profits, deduction u/s 10A of the Act was granted. 4.3.1. After taking into account the assessee's contentions as recorded in his findings, the CIT (A) had, extensively quoting the judgments of (i) the Hon'ble jurisdictional High Court in the case of Himatsingike Seide Ltd [286 ITR 255 (Kar)]; (ii) the Hon'ble Supreme Court's ruling in the case of Cambay Electric Supply Industrial Company Ltd v CIT [(1978) 113 ITR 84 (SC)] (iii) the Hon'ble Bombay High Court in the case of Indian Rayon Corporation Ltd v. CIT [(2003) 261 ITR 98 (Bom)] re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny benefit from such loan advanced. Further, the appellant was incurring interest expenses on loans taken from various financial institutions " 5. Aggrieved with the CIT (A)'s treatment on the issues raised before him, the assessee has up before us with the present appeal. During the course of the hearing, the lengthy submissions made by the learned AR under different heads are summarized as under: Exclusion of Rs.9.53 crores from the turnover for relief u/s 10A of the Act: - that the CIT (A) was not justified in not appreciating that the assessee could not have sold its software without the hardware components as the orders of the customers were of package type and that the sale of the said hardware was inextricably linked to the software manufacture and exported by the assessee and, thus, the income on account of such sales could not be reduced from the 'export turnover' for the purpose of computation of deduction u/s 10A of the Act; - that the customer specifies/lists the hardware components which have to be supplied by the assessee along with the software and that the customer also provides for the specification of the hardware component in which the software o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith in the following cases, namely: (i) Union of India v. Delhi Cloth General Mills Co. Ltd. AIR 1963 SC 791; (ii) Aspinwall Co. Ltd v. CVIT (2002) 251 ITR 323 (SC); (iii) Rajasthan Roller Flour Mills Association v. State of Rajasthan (1993) 91 STC 408; (iv) Som Distilleries v. Union of India Ors. 2009 (92) RLT 413 (MP-LB); (v) CIT v. Zainab Trading P; Ltd (2011) 333 ITR 144 (Mad) Thus, the case of loading of the assessee's own software into specified hardware device would transform the hardware as well as the software altogether into a new commodity commercially known as a distinct commodity. A new and different article emerges having a distinctive name, character or use; Case laws on a similar issue, namely: CIT v. Oracle Software India Ltd (2010) 320 ITR 546 (SC); Gramophone Co. of India Ltd v. Collector of Customs (1999) 114 ELT 770 (SC) - Countering the AO's assumption that if the benefit of s. 10A is extended to the value of the hardware device in the present case, it would be similar to extending the benefit to export of bought out computers along with software, it was argued that: (a) computer is a generic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f s. 10A(1) provides for the period of deduction. Thus, the first and the second limbs are distinct and separate from each other. While the first limb grants the deduction, the second limb provides the period of deduction. The production of article etc., is relevant only for determining the commencement of the holiday period covered by the second limb and it does not govern the first limb of s. 10 A(1). Relies on the following case laws: (i) T. Two International (P) Ltd v. ITO (2010) 122 ITD 255 (Mum); (ii) P.R. Prabhakar v. CIT (2006) 284 ITR 548 (SC); Alternate ground: - that the assessee having satisfied all the conditions provided in s. 10A and the said section being beneficial provision, the same has to be interpreted liberally. Beneficial legislation should receive liberal construction with a view to implementing the Legislative intention and cannot be used to deny the benefit available thereto. Relies on the following case laws: (a) Commissioner of Customs (Preventive), Mumbai v. M. Ambalal Co., (SC) decided on 9.12.2010 - MANU/SC/1052/2010; (b) Bajaj Tempo Ltd v. CIT (1992) 196 ITR 188 (SC); (c) P.R. Prabhakar v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt Ltd v. ACIT - 2009-TIOL-18-ITAT-HYD - that even if aforesaid sum was required to be excluded from the export turnover the same has to be excluded from total turnover also. Exclusion of courier, internet charges and insurance from export turnover: - that the AO, while computing deduction u/s 10A, excluded from export turnover the courier charges of Rs.5.91 lakhs, internet charges of Rs.14.18 lakhs and insurance expenses of Rs.14.92 lakhs. - it was contended that the aforesaid expenses were not specifically incurred by the assessee for delivery of software outside India. However, the AO took a view that the said expenditure was incurred not only for inter-office and intraoffice communication but also for delivery of the computer software and, accordingly, deducted that the aforesaid expenditure was spent for export of computer software. Accordingly, while computing deduction u/s 10A, the AO excluded the afore said expenses from export turnover; Referring to Clause (iv) of Expln. 2 to s. 10A of the Act which defines 'export turnover', it was contended by the assessee that the phrase used in the aforesaid Explanation is 'does not include' and not 'to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's own case for the AYs 2002-03 2005-06 had allowed this issue vide ITA Nos.673 674(Bang)/2010 dt.31.1.2011 and, therefore, the international travel expenses are not required to be excluded from the export turnover; Set off of losses from non-STP Unit of Rs.5,10,445/-: - that an identical issue was allowed in the assessee's own case for the AYS 2003-04 04-05 by the earlier Bench of this Tribunal in ITA Nos. 94 95/Bang/08 dated 23.10.2008; Sustaining the addition on account of bad debts recovered as income: - that the assessee had created a provision for doubtful debts for the year 2002-03, but, while computing the total income the same was added back as inadmissible expenses. During the year under dispute, the assessee had recovered Rs.7,37,220/- from its debtors and credited to its P L account under the head 'bad debts recovered'; - that by virtue of Explanation to s.36(1)(vii) of the Act, the provision for doubtful debts was not an allowable expenditure and, accordingly, the same was added by the assessee in the year in which it was credited; - that when the provision on account of the same was taxed in the year in which such a provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is that the assessee should be gains to manufacture or articles of things or computer software in any free trade zone or any electronic hardware park or only special economic zone and that Explanation 2(v)(vii) and (viii) makes abundantly clear that a undertaking referred to in sub-section (1) means an undertaking which begins to manufacture or produce articles or things or computer software in any free trade zone or any electronic hardware park or special economic zone which the Central Government may by Notification in the Official Gazette specify for the purpose of this section. Thus, the Notification of free trade zone, electronic hardware park and specific economic zone by the Central Government is primary condition and after that such under-taking should be engaged in manufacturing or production of any article or thing or computer softer. Thus, it was contended, the mere recognition as undertaking by a competent authority does not enable the assessee to claim exemption u/s 10A unless it satisfies other condition such as, it manufactures or produces any article or thing or computer software. It was, further, contended that it is only when an undertaking manufactures or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses which was claimed as exemption u/s 10A of the Act for the profits and gains derived from STP Unit. While arriving at its total turnover, the communication expense was included. Being queried to substantiate the non-inclusion of the said sum being expenses incurred in foreign currency for the purpose of computation of exemption of income claimed u/s 10A of the Act, the assessee justified its action. The assessing authority had, however, held s. 10A defines only export turnover. The fact that only export turnover is defined and total turnover is not defined clearly manifests the Legislature's intention to give the natural meaning to the term 'total turnover' and, therefore, it was held, no deduction from total turnover was possible. Aggrieved, the assessee took up the issue with the first appellate authority who upheld the AO's stand on the premise that the word 'total turnover' was not defined under the said chapter, the interpretation placed by the AO was found to be proper and, accordingly, dismissed the assessee's appeal. On an appeal, the Tribunal, by relying on the judgment of the Hon'ble Apex Court in the case of CIT v. Lakshmi Machine Works [(2007) 290 ITR 667 (SC)] h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore, though there is no definition of the term 'total turnover' in s. 10A, 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. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the Hon'ble Jurisdictional High Court (supra) and to take appropriate action accordingly. 5.3.7. Since the alternative issue raised by the assessee has since been restored on the file of the CIT (A) for appropriate action (supra), the first ground raised by the assessee, namely, the exclusion of Rs.9.53 crores being the sale of hardware components from the export turnover for the purpose of computing the deduction u/s 10A of the Act has not been adjudicated. 5.4. The second ground is that the CIT (A) was not justified in holding that the courier charges of Rs.5,91,416/-, internet charges of Rs.14,18,339/- and insurance charges of Rs.14,92,475/- should be reduced from the export turnover. 5.4.1. At the out-set, we would like to point out that the CIT (A) has allowed the assessee's alternative ground and directed the Assessing Officer to exclude above mentioned expenditures not only from the export turnover but also from the total turnover while computing deduction u/s 10A of the Act. Therefore, this ground is not adjudicated. It is ordered accordingly. 5.4.2. The alternative ground raised is that the CIT (A) was not justified in failing to appreciate that the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in the case of M/s Sak Soft Ltd reported in 313 ITR 353 (SB) Chennai and decision of the Hon'ble Bombay High Court in the case of Gem Plus Jewellery India Ltd., 2010-TIOL-456-HC-MUM-IT and also the decision of this Tribunal in the assessee's own case for the assessment years 2003-04 and 2004-05 wherein the issue has been decided in favour of the assessee, directing the AO to exclude the same from the total turnover also when it is excluded from the export turnover. As the CIT(A) has followed the precedents on the issue, we do not find any reason to interfere with the same. 4. As regards the second component of deduction u/s 10A relating to expenses incurred in foreign currency for providing technical services outside India and also travel expenses; we find that the CIT (A), following the above decisions directed that the said expenses when excluded from the export turnover be excluded from the total turnover also. But the learned counsel for the assessee submitted that the issue is covered by the decision of this Tribunal in the assessee's own case for the assessment years 2003-03 and 2005-06, wherein it has been held in favour of the assessee that these expenses are not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 ..The appellant's contention cannot be accepted because in the immediately preceding year, subject to verification by the AO, even if the provision for doubtful debt claimed by the appellant included this sum of Rs.7,36,220/- it had to be disallowed in view of Explanation to section 36(1)(vii) of the Act. This Explanation to s. 36(1)(vii), unambiguously prohibits for inclusion of any provision for bad and doubtful debts implying that such provision of bad debts is not allowable. Further in this year, the appellant has received part of the doubtful debt which has to be offered as income of the appellant. Hence, the appellant's plea on this count is treated as dismissed". 5.7.2. During the course of hearing before us, it was submitted by the learned AR that the assessee had created a provision for doubtful debts for the year 2002-03, but, while computing the total income the same was added back as inadmissible expenses. During the year under dispute, the assessee had recovered Rs.7,37,220/- from its debtors and credited to its P L account under the head 'bad debts recovered'. It was, further, argued that by virtue of Explanation to s. 36(1)(vii) of the Act, the provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the subsidiary concern was incorporated only on 28.3.2005; the assessee had extended the loan to its subsidiary towards its working capital as the sisterconcern was not in a position to generate much cash to maintain its day-to-day operations. It was, further, argued that there is no provision in the Income-tax Act for adding notional interest in respect of interest free advance granted to a subsidiary company. In the absence of a statutory legislation, the income-tax authorities cannot resort to levy tax on a notional income. It was submitted that the assessee had borrowed, during the year under dispute, a sum of Rs.1,11,19,920/- which was a hirepurchase loan towards the purchase of cars. Therefore, it was argued, there was no diversion of borrowed funds towards making any interest free advance to the subsidiary. Copies of financials establishing those facts furnished were placed on record. 5.8.3. We have carefully considered the submission of the assessee. It is an undisputed fact that the authorities below have not recorded any relevant reasons for making either addition or sustaining the same. As already pointed out, the reasoning of the AO in adding back the said su ..... 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