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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 'Export Turnover' - HELD THAT:- In the case of M/s.Renault Nissan Technology Business Centre India Private Limited [ 2020 (8) TMI 19 - MADRAS HIGH COURT ] this Court has considered the Substantial Question of Law as to whether the Tribunal erred in holding that the expenditure incurred in foreign exchange by the assessee therein was to be excluded from the 'Export Turnover' for the purpose of computing deduction under Section 10AA of the Act and the question was answered in favour of the assessee - Mr. Justice T.S. Sivagnanam And Mrs. Justice V. Bhavani Subbarayon For the Appellant : Mr.N.V.Balaji For the Respondent : Ms.R.Hemalatha Senior Standing Counsel JUDGMENT T.S.SIVAGNANAM , J. This appeal, filed by the assessee, under Section 260A of the Income Tax Act, 1961 ('the Act' for brevity) is directed against the order dated 29.06.2017 passed by the Income Tax Appellate Tribunal Bench 'A' Chennai ('the Tribunal' for brevity) in I.T.A.No.2315/MDS/2016 for the Assessment Year 2010-11. The appeal is entertained on the following Substantial Questions of Law: 1.Whether under facts and circumstances of the case the Income Tax Appellate Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deduction under Section 10A of the Act for disallowance made by him under Section 14A of the Act. Aggrieved by such order, the assessee preferred Appeal before the Commissioner of Income Tax (Appeals)-3, Chennai [CIT(A)]. It upheld the order of the Assessing Officer in respect of the disallowance under Section 14A of the Act and did not allow deduction under Section 10A of the Act for the disallowance made under Section 14A of the Act. With regard to the exclusion of foreign currency expenditure from the 'Export Turnover' in computing the deduction under Section 10A of the Act, the CIT(A) held that the foreign currency expenditure should be excluded from the 'Export Turnover' and the same also be excluded from the 'Total Turnover'. Aggrieved by the same, the assessee filed an appeal before the Tribunal. The Tribunal upheld the order of the Assessing Order and the CIT(A), with regard to the disallowance under Section 14A read with Rule 8D of the Act. The Tribunal with regard to the exclusion of the expenditure incurred under the foreign currency while computing deduction under Section 10A of the Act, held that both the 'Export Turnover' and the ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 961 962 of 2018 dated 23.10.2018 for the Assessment Year 2001-02. 7. It is the argument of learned Senior Standing Counsel that in the instant case what was disallowed was expenditure relating to telecommunication, freight and insurance and in the assessee's case for the assessment years 2001-02 and 2002-03, it was expenses for technical services. Therefore, it is the submission that if at all contended that the issue has not been considered, then the matter has to be remanded to the Tribunal for fresh consideration. In this regard, the learned counsel referred to Clause 4 Explanation 2 to Section 2(10) of the Act. 8. We have perused the judgment in the case of M/s.Polaris Consulting and Services Ltd., Vs. the Deputy Commissioner of Income Tax, ( T.C.A.No.961 and 962 of 2008 dated 23.01.2018). The First Substantial Question of Law framed in those appeals was Whether the Tribunal was right in upholding the exclusion of expenditure incurred in foreign currency in export of software from the purview of ''Export Turnover'' for the purpose of computing deduction under Section 10A of the Act? Therefore, the question framed for consideration was with regard to the excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deliverable, from a macro (overall flow of the integrated software) and micro perspective (designing of each module of the programme). 4.Application development Developing the application (i.e. The modules and the related computer programmes and codes) as per the requirements of the customer. 5.Testing Developer Integration Testing, System Integration testing and User Acceptance Testing; to ensure that the software developed works as required. 6.Defect fixing Rectifying errors that have arisen during the testing process. 7.Production parallel run-Undertaking a dry run of the developed software system. 8.Customer user acceptance Final acceptance of the Software developed. 11.The assessee's contention was that activity No.7 (supra) is usually undertaken onsite at the client's location. Activity Nos.4 to 6 and 8 can happen offshore and/or onsite. The need to send the personnel of the assessee to clients' location arises based on the nature of project, its size and complexity and the requirements of the client. Further they reiterated that all the activities are integral part of software development process and what is finally delivered to the client is computer softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , certain observations made by the CITA would enure in favour of the assessee. By way of illustration, in paragraph No.10(c) of the Order of the CITA, he would state that computer software cannot be defined or understood in a narrow sense of the term to mean only software in the form of product/goods as claimed. As the assessee is engaged in developing, transmitting and providing software to meet the needs and requirements of the clients, it encompasses providing all the relevant technical services necessary and attendant with the development and export of computer software. If this was the finding of the CITA, the resultant conclusion should have been that the assessee is only engaged in the development of the computer software and not rendering any technical services on 'standalone basis'. However, we find that the conclusion arrived at by the CITA stating that the assessee is rendering technical services is an incorrect conclusion not supported by any reasons. We would add by stating that the CITA was required to examine the documents produced by the assessee to find out as to whether there was any technical services rendered on 'standalone basis'. This is more s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'technical services' rendered by the assessee is not on a 'standalone basis', but it is an integral part of the software development and up to step No.(8), as mentioned above, the assessee is bound to render all assistance to the foreign entity. Therefore, the artificial split up of the transaction by the Assessing Officer, that too without any materials on his file, is wholly unsustainable. 17.For the above reasons, we are constrained to set aside the order passed by the Tribunal and answer the Substantial Question of Law No.1 in favour of the assessee. 9. The finding rendered in the above appeals in favour of the assessee would show that the same was rendered upon appreciating the factual aspect regarding the nature of contract entered into by the assessee. Therefore we are of the considered view that the decision in the assessee's own case in T.C.A.No.961 962 of 2018 should enure in favour of the assessee for the assessment year under consideration namely AY 2010-11 also. 10. In the case of M/s.Renault Nissan Technology Business Centre India Private Limited vs. Commissioner of Income Tax 5 in T.C.A.No.212/2018 dated 17.07.2020, this Court has considered the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the '''Export Turnover''', while computing deduction under Section 10 AA of the Act. In response to the said show cause notice, the assessee once again reiterated the definition of '''Export Turnover''' in Explanation 1 to Section 10 AA of the Act and submitted that a term 'expense' used in the above context would be only expenses in the nature of freight, telecommunication or insurance and not any other expenses. The assessee also relied upon certain decisions of the Hon'ble Supreme Court and other High Courts and Tribunals. The Assessing Officer did not agree with the assessee in referring to the decisions and explanation 1 to Section 10 AA of the Act, though noted that the explanation states that the expenses should be incurred in foreign exchange in rendering of service outside India, without considering whether any services was rendered by the assessee outside India, holding that the said provision is patent and clear and the expenditures incurred by the assessee in foreign exchange should be excluded from the ''Export Turnover'' for the purpose of computing deduction under Section 10 AA of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under Section 10 AA to be recomputed as follows: PARTICULARS AMOUNT (INR ) Travel Expenses 41,199,254 IT Technical Support Services 115,521,782 Reimbursement to Renault Global management 69,851,671 Reimbursement to Nissan Motor Company Ltd., 29,635,976 14. The Revenue filed an appeal before the Tribunal. To be noted the main ground on which the Revenue were on appeal before the Tribunal was on the direction of the DRP to exclude the foreign exchange expenditure. Unfortunately, the Tribunal did not discuss the matter but proceeded on the basis that foreign currency expenditures cannot be considered as part of ''Export Turnover'' and at the same time, it cannot form part of ''Total Turnover''. The Tribunal did not decide as to whether it was expenses incurred by the assessee in respect of services rendered by the assessee outside India. The assessee was faced with this issue at the very first instance before the Assessing Officer. The assessee has explained, nevertheless, the Assessing Officer did not take into consideration as to whether there were any services outside India and held against the assessee and proceeded to make a draft assessment. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are of the considered view that the Tribunal fell in error in reversing the decision of the DRP. 18. For all the above reasons, appeal filed by the assessee is allowed and the order passed by the Tribunal is set aside and the order passed by the DRP is restored and the substantial questions of law is answered in favour of the assessee. No costs. 11. The identical question was considered by the Hon'ble Division Bench in the case of The Commissioner of Income Tax-I, Chennai vs M/s.Zylog Systems Limited in T.C.A.No.312 and 315 of 2011 dated 20.02.2020 and the question was answered in favour of the assessee in the following term: 6. The relevant portion of the judgment of the Division Bench of the Karnataka High Court in CIT -Vs- Mphasis Ltd., reported in [2016] 74 taxmann.com 274 (Karnataka) is quoted below for ready reference. 2. The first substantial question of law arose for consideration before this Court in ITA No.776/2007 disposed of on 13.06.2014, wherein this Court has held at paras 18 and 19 as under:- 18. From the aforesaid provision it is clear that the consideration in respect of computer software received in or brought into India by the assessee in convertible forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore the expenditure incurred in foreign exchange in providing such technical services outside India of ₹ 62.7 lakhs was excluded in computing the 'Export Turnover' and 'Total Turnover' for arriving at deduction under Section 80HHE of the Act. The assesee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (1) of sub-section (1) of Section 80 HHE of the Act. Therefore, the said expenditure cannot be exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;. 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 Section 10-A, 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 is excluded in computing the 'Export Turnover' is included while arriving at the 'Total Turnover', when the 'Export T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Law No.4 is concerned, we find that the assessee has substantially raised a ground in the appeal before the Tribunal contenting that the CIT(A) has failed to consider the ground of the assessee that the Assessing Officer has erred in not providing deduction under Section 10A with respect to the exempt income under Section 14A of the Act. 14. On a perusal of the impugned order, we find that the Tribunal has not adjudicated the said issue and confined its finding only with regard to the correctness of the disallowance under Section 14A read with Rule 8D of the Act. In our considered view this issue needs to be considered by the Tribunal to examine as to whether the assessee is entitled for a relief on that ground, more so because, the finding rendered by the Tribunal with regard to the disallowance under Section 14A read with Rule 8D has been confirmed by us in this judgment. 15. In the result, the Appeal is Partly Allowed and the Substantial Question of Law no.1 is answered against the assessee and in favour of the Revenue. Substantial Questions of Law nos.2 and 3 are answered in favour of the assessee and against the Revenue. Substantial Question of Law no.4 is remanded to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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