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TMI Blog2020 (9) TMI 769X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that the CIT (A) did not adjudicate the ground that the appellant was eligible for deduction under Section 10A of the Act, which was assessed on account of the disallowance made under Section 14A of the Act? 3. Is the conclusion of the Tribunal that the expenditure incurred in foreign currency by the Appellate needs to be excluded from the 'Export Turnover' for the purpose of computation of deduction under Section 10A of the Act not perverse and arbitrary, particularly without considering the fact that such expenditure were not part of the 'Export Turnover'? 4. Whether under the facts and circumstances of the case the Tribunal was right in holding that the expenditure incurred by the appellate in foreign currency which was not included in the 'Export Turnover' is to be excluded from the 'Export Turnover'? 2. We have elaborately heard Mr.N.V.Balaji, learned counsel for the appellant / assessee assisted by Ms.M.P.Lakshmi, learned counsel and Ms.R.Hemalatha, learned Senior Standing Counsel for the Revenue. 3. The assessee is a Company engaged in the business of software development and for the assessment year under consideration (AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same, the assessee is before us by way of this Appeal. 5. With regard to the first Substantial Question of Law, the Assessing Officer, CIT(A) and the Tribunal, concurrently held against the assessee. The assessee's contention was that no expenditure was incurred by them for earning the exempt income. The assessee were not able to substantiate that fact before the authorities or before the Tribunal. Both CIT(A) and the Tribunal reappreciating the factual matrix and found that the investment during the year increased from Opening Balance of Rs. 3,21,68,40,000/- to Closing Balance of Rs. 5,17,93,70,000/-. Further the Assessing Officer also found that the value of the assets also increased substantially to Rs. 1,84,18,32,000/- from Rs. 1,76,96,30,000/- and therefore applied Rule 8D and made additions under Section 14A of the Act and we find no error in the order of the Assessing Officer as confirmed by the CIT(A) and the Tribunal. Accordingly the Substantial Question of Law No.1 is answered against the assessee. 6. Substantial Questions of Law Nos.2 and 3 can be taken together. According to the assessee, the Tribunal did not adjudicate the ground raised by the assessee that the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Explanation (2) to Section 10A of the Act, which defines ''Export Turnover'' and referred to Explanation (2) to Section 10A of the Act, which defines the term 'computer software' and held that 'technical services' include development of software, testing of software, domestication of software and since the assessee is engaged in developing and providing software to meet the need base of their customers, the software development cannot be done without technical services and technical services is part and parcel of software development. The Tribunal proceeded to add that software is 'goods' and involve technical services and is part and parcel of rendering services; no software development is possible without technical services; software development and technical services are two faces of one coin and there cannot be software without rendering technical services and hence held that the finding of the Assessing Officer is justified as well as that of the CITA. 10.To be noted that the assessee, while contesting the appeal before the CITA as well as before the Tribunal, placed the entire materials as regards the development of the computer sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... programme, sample Statement of Work (SOW) in relation to the sample contract, copies of filing with the STPI and some sample invoices and related SOFTEX filings. Thus, by placing heavy reliance on these materials, the assessee contended that it can be inferred that their business does not include rendering of any technical services on 'standalone basis'. Further, any service rendered, such as installation/training etc., is purely incidental to the activity of development of the computer programme, akin to a seller of an advanced machinery installing the same and training the user. The assessee placed reliance on the decision of the Hon'ble Supreme Court in the case of TATA Consultancy Services vs. State of Andhra Pradesh [(2004) 271 ITR 401]. By placing reliance on the said decision, the assessee contended that both branded software and unbranded/customised software have been held to be 'goods' by the Hon'ble Supreme Court and the computer software would be in the nature of 'goods' and hence it will be erroneous to consider them as a provider of 'technical services'. Further, by referring to the customer contract and related statements of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a conclusion that there is technical services on 'standalone basis' rendered by the assessee, the Assessing Officer and the CITA were not justified in coming to a conclusion that the technical services were rendered by the assessee and the amounts paid need to be excluded. 14.Before the Tribunal, the assessee reiterated the submissions raised before the CITA and produced the technical documents as well as the scope of the work and the contract. However, the Tribunal, in our considered view, did not make an endeavour to examine as to whether the interpretation of CITA was just and proper and whether the relevant clauses in the agreement and the other documents were examined or not, but made a standalone statement that software development and technical services are two faces of one coin. We fail to understand as to whether the above is a statement made out of the personal knowledge of the Tribunal or whether it is a statement of law. If it is the statement of law, it should have been duly supported by reasons and we find none. 15.Admittedly, the decision of the Tribunal should revolve on the facts of a particular case. The Tribunal has not been established to give declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction under Section 10AA of the Act and the question was answered in favour of the assessee in following terms: 10. Before we consider such a plea, we need to take note of the crux of the issue which was raised by the assessee before the Assessing Officer at the first instance, the reply to the show cause notice issued by the Assessing Officer, in their application before the DRP and their submissions before the Tribunal in the appeal filed by the Revenue. If the facts are culled out from all the proceedings, one should get answer to the controversy which would help us to answer the Substantial Question of Law framed for consideration. 11. In the Accountant's Report in Form No.56F for the assessment year under consideration, it has been stated that in respect of reimbursement of IT support, Travel and Technical related expenditure, there is no element of any provision of services and the actual cost incurred has been reimbursed. Further these reimbursements constitute a part of operating cost base of the assessee which has been recovered by the assessee from their associated enterprises at their respective arms length markups. Therefore, the arms length nature of reimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length mark up. Further they have specifically stated that they have no element of any provision of services and only actual cost incurred has been reimbursed to the assessee; these reimbursements constitute a part of the operating cost base of the assessee which has been recovered from the associated enterprises and the foreign exchange expenditures are the components of the 'Total Turnover', as these are reimbursed at arm's length mark up. After referring to the decision in the case of CIT Vs. Lakshmi Machine Works [(2007) 290 ITR 667], Commissioner of Income Tax Vs. Sudarshan Chemicals Industries Limited (2000 (245) ITR 769), CIT Vs. K.Rajendranathan Nari [(2004) 265 ITR 35 (Kerala)] and the decision of the Special Bench of the Tribunal in the case of ITO Vs.. Saksoft Limited [2009 121 TTJ 865 (ITAT) Chennai], the assessee submitted that it follows the cost plus model approach and the 'Total Turnover' of the Company comprised of Cost plus arm's length mark up and that there is no reimbursement of any expenditures so as to exclude the same from the ''Export Turnover'' and the ''Total Turnover''. While considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursement constitute a part of the operating cost which was recovered by the assessee from their associated enterprises. This factual matrix had not been examined by the Tribunal. 15. We find that no useful purpose would be served in remanding the matter to the Tribunal for fresh consideration as submitted by the Revenue as an alternate submission. The principal submission of the Revenue is to support the order passed by the Tribunal and seeking for dismissal of this appeal. Even in the grounds of appeal filed by the Revenue before the Tribunal, a cost plus model of functioning by the assessee appears to be have not been disputed but their contention was that the definition of '''Export Turnover''' in explanation 1 to Section 10 AA does not distinguish or exclude reimbursement or advances. In our considered view, the issue is not as to whether reimbursement or advances, but the issue is whether these were incurred by the assessee in foreign exchange in respect of rendering services outside India. If it is established that no services have been rendered outside India and the assessee has been reimbursed the actual cost only, the question of exclusion f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are. However the said 'Export Turnover' does not include freight, telecommunication charges or insurance attributable to the delivery of computer software outside India or expenses if any incurred in foreign exchange in providing technical service outside India. In other words out of the said 'Export Turnover' the following amounts have to be deducted; a. freight b. telecommunication charges c. insurance attributable to the delivery of computer software outside India;d. expenses, if any, incurred in foreign exchange in providing technical services outside India; 19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of 'Export Turnover'. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the revenue. Ordered accordingly. 3. In view of the said judgment, the substantial question of law is answered in favour of the assessee and against the Revenue. 4. Insofar as the second substantial question of law is concerned, the same was considered by this Court in the case of Commissioner of Income-Tax And Another Vs. Tata Elxsi Ltd., reported in (2012) 349 ITR 98 (Karn) . It has been held as under "17. From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of Section 80HHC, the export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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'. Therefore the formula for computation of the deduction under Section 10-A, would be as under: Profits of the business Export turn over x of the undertaking ['Export Turnover' + domestic turn over) Total turn over" 5. Accordingly, the said substantial question of law is answered in favour of the assessee and against the Revenue. " 7. The said view was affirmed by the Hon'ble Supreme Court and the relevant portion of the judgment is quoted below for ready reference. "1.The instant petition is filed by the petitioner-Revenue assailing the judgment dated 01.08.2014 passed by the High Court of Karnataka at Bangalore in I.T.A.No.1075 of 2008. 2. When the petition is taken up for consideration, Mr.Vikramjit Banerjee, learned Additional Solicitor G ..... X X X X Extracts X X X X X X X X Extracts X X X X
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