Appeal details
Counselvise Citation
163021714 RSA 2007
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 2 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
09-08-2011
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Next Hearing Date
16-06-2011
Assessment Year
2003-2004
Appeal Filed On
08-06-2007
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH B : CHENNAI [BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER] I.T.A NOS. 541/MDS/2006, 1439/MDS/2007, 2091 TO 209 3/MDS/2010 ASSESSMENT YEARS : 2002-03 TO 2006-07 M/S INAUTIX TECHNOLOGIES INDIA PVT. LTD 10 TH FLOOR, TIDEL PARK 4 CANAL BANK ROAD TARAMANI CHENNAI 600 113 VS THE ACIT COMPANY CIRCLE II(3) CHENNAI [PAN AAACI6177K ] (APPELLANT) (RESPONDENT) I.T.A NOS. 1054/MDS/2006, 1630/MDS/2007, 2177 TO 21 79/MDS/2010 ASSESSMENT YEARS : 2002-03 TO 2006-07 THE ACIT/DY. CIT COMPANY CIRCLE II(3) CHENNAI VS M/S INAUTIX TECHNOLOGIES INDIA PVT. LTD CHENNAI 600 113 (APPELLANT) (RESPONDENT) ASSESSEE BY : DR. ANITA SUMANTH, ADVOCTE DEPARTMENT BY : SHRI P.B.SEKARAN, CIT/DR O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THIS IS A BUNCH OF TEN APPEALS - FIVE BY THE A SSESSEE AND FIVE BY THE REVENUE, PERTAINING TO ASSESSMENT YEARS 2002 -03 TO 2006-07. ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 2 -: FOR THE SAKE OF CONVENIENCE AND BREVITY, WE PROCEED TO DECIDE THEM BY A COMMON ORDER. I.T.A.NO. 541/MDS/2006 A.Y 2002-03 BY ASSESSEE 2. THIS APPEAL OF THE ASSESSEE, FOR ASSESSMENT YEAR 2002-03, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 17.1.2006. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT TH E ASSESSEE IS A PRIVATE LIMITED COMPANY, PRIMARILY ENGAGED IN THE B USINESS OF SOFTWARE DEVELOPMENT. FOR THIS YEAR, THE COMPANY FILED ITS RETURN OF INCOME ON 31.10.2002 ADMITTING TOTAL INCOME OF ` 19,69,840/-. THIS RETURN WAS PROCESSED U/S 143(1) ON 12.3.2003 BUT SUBSEQUEN TLY, ASSESSMENT WAS MADE U/S 143(3) DETERMINING TOTAL INCOME AT ` 1,13,46,149/-. BEING AGGRIEVED AGAINST THE ADDITIONS MADE IN THE R ETURNED INCOME, THE ASSESSEE PREFERRED FIRST APPEAL AND FROM THE LD . CIT(A) IT HAS BEEN SUCCESSFUL IN GETTING A PART RELIEF. NOT BEING FU LLY SATISFIED, A SECOND APPEAL HAS BEEN FILED AGAINST THE SUSTAINED ADDITIO N. 4. THE FIRST ISSUE OF THIS APPEAL IS AGAINST EXCLUSION OF CERTAIN EXPENSES, INCURRED FOR TRAVEL, ETC. IN FOREIGN CURR ENCY, FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE A CT AS AGAINST THE ASSESSEE HAVING INCLUDED THE SAME. THE ASSESSEE HA S CLAIMED THAT ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 3 -: THESE EXPENSES SHOULD NOT HAVE BEEN EXCLUDED, BUT IN THE ALTERNATIVE, IT IS PLEADED THAT, IN CASE THESE EXPENSES ARE TO B E EXCLUDED THEN THESE HAVE TO BE EXCLUDED BOTH FROM THE TOTAL TURNO VER AS WELL AS EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING THE DE DUCTION U/S 10A SO THAT CORRECT INTERPRETATION CAN BE GIVEN TO THIS PR OVISION. IT WAS FIRST AND FOREMOST ARGUED BY THE LD.AR THAT THESE EXPENSE S ARE A PART AND PARCEL OF EXPORT TURNOVER AS THE ASSESSEE IS ENGA GED IN SOFTWARE DEVELOPMENT AND NOT IN PROVIDING TECHNICAL SERVIC ES. PER CONTRA, THE CASE OF THE LD. CIT/DR IS THAT THE ASSESSEE IS ONLY PROVIDING TECHNICAL SERVICES AND NOT DOING ANY SOFTWARE DEVELOPMENT, HENCE, THESE EXPENSES HAVE TO BE EXCLUDED FROM EXPORT TURNOVER AND THERE IS NO REASON WHY THESE EXPENSES SHOULD BE EXCLUDED ALSO F ROM THE TOTAL TURNOVER . 5. AFTER HEARING BOTH VERSIONS, IT WAS FOUND THAT SECT ION 10A PRESCRIBES A FORMULA FOR THE ARITHMETIC COMPUTATION OF DEDUCTION WHICH IS AS UNDER: BUSINESS PROFITS X EXPORT TURNOVER TOTAL TURNOVER 6. ACCORDING TO THE FORMULA - BUSINESS PROFITS X EXPO RT TURNOVER TOTAL TURNOVER. SECTION 10A(1) PROVIDES FOR THE DE DUCTION IN RESPECT OF ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 4 -: PROFITS DERIVED BY THE UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. SECTION 10A(4) DEFINES THE P HRASE PROFITS DERIVED FROM EXPORT AS FOLLOWS: FOR THE PURPOSES OF SUB-SECTIONS (1) AND (1A), THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUT ER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PRO FITS OF THE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTIO N AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF TH E BUSINESS. FURTHER THE EXPLANATION TO SECTION 10A HAS DEFINED THE TERM EXPORT TURNOVER. AS PER THE EXPLANATION, EXPO RT TURNOVER REFERS TO AMOUNT OF SALE PROCEEDS RECEIVED IN FOREIGN EXCHANGE. IT ALSO DEFINES WHAT ARE THE ITE MS THAT ARE TO BE EXCLUDED FROM SUCH DEFINITION. IT IS IM PORTANT TO HIGHLIGHT THAT SECTION 10A DOES NOT PROVIDE FOR EXC LUSION OF ANY ITEM, INCLUDING FOREIGN EXCHANGE GAIN FOR THE P URPOSE OF COMPUTING THE ELIGIBLE PROFITS. 7. THE CASE AS PUT FORTH BY DR.ANITA SUMANTH, THE LD. ADVOCATE, IS THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF S OFTWARE DEVELOPMENT AND NOT IN PROVIDING TECHNICAL SERVIC ES AS HAS BEEN ALLEGED BY THE DEPARTMENT. THIS CONTENTION OF THE L D.AR IS FOUND SUPPORTED BY THE STPI APPROVED (FOR ASSESSMENT YEAR 2002-03) ANNEXED AT PAGE 97 OF THE ASSESSEES PAPER BOOK. T HE STATEMENT OF WORK (PAGE 95 OF PAPER BOOK), INVOICE AT PAGE 97 OF THE PAPER BOOK, ETC. ARE SUCH PIECES OF EVIDENCE WHICH SUPPORT HER CONTENTION THAT THE ASSESSEE-COMPANY IS ENGAGED IN THE DEVELOPMENT OF S OFTWARE. TO CROWN THIS FACT, THE EVIDENCE IN THE FORM OF TRANSF ER PRICING ORDER FOR ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 5 -: ASSESSMENT YEAR 2002-03 DATED 14.12.2005, IN WHICH THE ASSESSEE- COMPANY HAS BEEN TREATED AS DOING SOFTWARE DEVELOP MENT CANNOT BE IGNORED. THEREFORE, THE EXCLUSION OF THESE EXPENSE S FROM EXPORT TURNOVER IS NOT CORRECT. THE DECISION OF ITAT CHEN NAI SPECIAL BENCH IN THE CASE OF ZYLOG SYSTEMS 135 TTJ 129, INTER ALIA, SUPPORTS HER CONTENTION. WE HAVE TO ACCEPT THIS CONTENTION OF THE LD.AR MAINLY BECAUSE WE ARE CONVINCED AFTER RUNNING THROUGH THE VARIOUS PIECES OF EVIDENCE REFERRED TO ABOVE THAT THE ASSESSEE IS ENG AGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT, THEREFORE, WE D ECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 8. THE ALTERNATIVE PLEA ALTHOUGH IS NOW OF ACADEMIC INTEREST, BUT WE WOULD LIKE TO MENTION THAT IF THE EXPENSES ARE EXCLUDED FROM THE EXPORT TURNOVER THESE SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER. THE DECISION OF HON'BLE SUPREME COURT RENDERED IN T HE CASE OF LAKSHMI MACHINE WORKS,290 ITR 667, AND THAT OF MUMB AI HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD, 330 IT R 175 AND THE DECISION OF ITAT SPECIAL BENCH, CHENNAI IN THE CASE OF SAKSOFT , 121 TTJ 865, SUPPORT SUCH A PREMISE. BY FOLLOWING THE RATIO DECIDENDI OF THE ABOVE DECISIONS, WE ARE OF THE OPINION THAT TH ERE HAS TO BE PARITY BETWEEN THE EXPORT TURNOVER AND TOTAL TURNOVER, TO EFFECTIVELY APPLY ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 6 -: THE FORMULA STATED ABOVE. THE DECISIONS RELIED UPO N BY HER (SUPRA), ARE DIRECTLY APPLICABLE TO THE FACTS OF THIS CASE. THEREFORE, WE ALLOW THIS ISSUE IN FAVOUR OF THE ASSESSEE-COMPANY. 9. THE SECOND ISSUE REGARDING CLAIMING SOFTWARE COST, AND THE THIRD ISSUE REGARDING DISALLOWANCE OF ESTIMATED 2% OF DIV IDEND INCOME U/S 14A, WERE NOT PRESSED AT THE TIME OF HEARING. THER EFORE, THESE STAND DISMISSED AS NOT PRESSED. 10. THE LAST ISSUE OF THIS APPEAL IS REGARDING LEVY OF INTEREST U/S 234B OF THE ACT. IT HAS BEEN PLEADED THAT THE DECI SION OF HON'BLE MADRAS HIGH COURT RENDERED IN THE CASE OF CIT VS RE VATHI EQUIPMENT LTD, 298 ITR 67, IS APPLICABLE TO THIS CASE. BUT IT IS TRITE THAT CHARGING OF INTEREST IS MANDATORY, BUT CONSEQUENTIAL RELIEF HAS TO BE ALLOWED. HENCE, WE DIRECT THE ASSESSING OFFICER TO RECALCULA TE THE INTEREST CONSEQUENT UPON THE SUSTAINED ADDITION, IF ANY. TH IS ISSUE IS DECIDED ACCORDINGLY. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR ASSES SMENT YEAR 2002-03 IS PARTLY ALLOWED. ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 7 -: I.T.A.NO. 1054/MDS/2006 A.Y 2002-03 BY REVENUE 12. THIS IS THE CROSS APPEAL OF THE REVENUE FOR A SSESSMENT YEAR 2002-03. THE FIRST ISSUE OF THIS APPEAL RELATES TO INCLUSION OF FOREIGN EXCHANGE GAIN IN THE ELIGIBLE PROFITS FOR THE PURPO SE OF COMPUTING DEDUCTION U/S 10A OF THE ACT. THIS ISSUE HAS BEEN DEALT WITH BY THE ASSESSING OFFICER AT PAGE 3 OF HIS ORDER AND ALSO E XTENSIVELY DEALT BY THE LD. CIT(A) AT PAGES 2 TO 5 OF HIS ORDER. THE A SSESSEE HAS CREDITED EXCHANGE FLUCTUATION GAIN TO THE PROFIT & LOSS ACCO UNT WHICH THE ASSESSING OFFICER HAS NOT FOUND TO HAVE DIRECT NEX US WITH THE BUSINESS OF THE UNDERTAKING AND CONSEQUENTLY, NOT CONSIDERE D AS PART OF PROFITS OF THE UNDERTAKING FOR THE PURPOSE OF SECTION 10A A ND HAS ADDED THE SAME. HOWEVER, THIS ADDITION HAS BEEN DELETED BY T HE LD. CIT(A). THE REVENUE HAS CHALLENGED THIS DELETION. 13. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESS EE HAS ADMITTED FOREIGN EXCHANGE GAIN OF ` 63,73,990/- . IN THE BUSINESS OF EXPORT, THE ASSESSEE-COMPANY RAISES BILLS AGAINST T HE CUSTOMER. THE RATES MENTIONED IN THE BILL, SO RAISED, ARE RECORDE D IN THE BOOKS OF ACCOUNT AND AT THE SAME TIME, THE COMPANY DEBITS TH E ACCOUNT OF THE FOREIGN BUYER WITH EQUAL AMOUNT. AT THE END OF THE YEAR, IF THE SALE PROCEEDS ARE NOT RECEIVED BY THE ASSESSEE-COMPANY, THE FOREIGN BUYER ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 8 -: IS SHOWN AS SUNDRY DEBTOR. IF THE PROCEEDS ARE N OT RECEIVED IN THE SAME FINANCIAL YEAR AND RECEIVED AFTER ONE OR TWO Y EARS, THE FLUCTUATION ARISING AT THAT TIME WILL HAVE ANY RELE VANCE TO THE TURNOVER REPORTED FOR THE PREVIOUS YEAR IN WHICH THE SALE TO OK PLACE OR NOT IS THE PUZZLE OF THIS ISSUE. IN THE OPINION OF THE A SSESSING OFFICER, THE ASSESSEE LOSES ITS RIGHTS OVER THE SOLD ITEMS ON TH E VERY DESPATCH OF THE SAME AND AS PER ACCOUNTING STANDARD PRESCRIBED BY THE ICAI, FOREIGN CURRENCY TRANSACTIONS ARE TO BE RECORDED AT THE DATE OF THE TRANSACTIONS APPLYING THE EXCHANGE RATE BETWEEN THE REPORTING CURRENCY AND THE FOREIGN CURRENCY AS ON SUCH DATE O F TRANSACTION(S). THUS, ACCORDING TO THE REVENUE, THE SALE PROCEEDS S HOULD BE THE VALUE RECORDED IN THE BOOKS AND ANY INCREASE OR DECREASE IN EXCHANGE FLUCTUATION ON THE BILL AMOUNT IS ONLY A SUBSEQUENT EVENT AFTER THE COMPLETION OF THE TRANSACTION; IT IS ONLY AN ACCRET ION TO THE AMOUNT DUE TO BE RECEIVED BY THE ASSESSEE AND NOT AN ACCRETION TO THE SALE PRICE OF ITEMS EXPORTED. IN THIS CONTEXT, IT WAS ARGUED BY THE LD. CIT/DR THAT IT MAY BE A TREASURY INCOME AND ALTHOUGH THIS GAIN ARISES IN THE COURSE OF EXPORT BUSINESS YET IT HAS NO DIRECT NEX US WITH THE BUSINESS OF THE UNDERTAKING AND HENCE, NEEDS TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS OF THE UNDERTAKING FOR THE PURPOSE OF COMPUTING EXEMPTION U/S 10A. AS AGAINST THIS, THE CASE OF TH E LD.AR IS THAT FOREX ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 9 -: GAIN ARISES OUT OF TRADING TRANSACTIONS FOR SUPPLY OF SOFTWARE AND HENCE, HAS A DIRECT NEXUS WITH BUSINESS OF ELIGIBLE UNIT. 14. WE HAVE EXAMINED THE RIVAL STANDS OF THE PART IES. OUR ATTENTION WAS INVITED BY THE LD.AR TO THE OBSERVATI ON MADE BY BOTH THE AUTHORITIES BELOW, THAT THESE TRANSACTIONS ARE ON REVENUE ACCOUNT. WE HAVE ALSO NOTICED THAT BOTH ASSESSING OFFICER AN D THE LD. CIT(A) HAVE ACCEPTED THESE TRANSACTIONS ON REVENUE SIDE. IF IT IS SO, THE DECISIONS RELIED BY THE LD.AR WOULD SUPPORT HER CO NTENTION. THE LD. CIT/DR HAS STATED THAT THE DECISIONS RELIED ON BY T HE LD. CIT(A) IN THE CASE OF M/S COGNIZANT TECHNOLOGY SOLUTIONS INDIA P VT. LTD AND M/S CONVANSYS (INDIA) PVT. LTD HAVE NOT BEEN ACCEPTED B Y THE DEPARTMENT. BUT IN ANY CASE, THIS DECISION HAS GO T A BINDING EFFECT BEING A DECISION OF THE CO-ORDINATE BENCH AND THERE FORE, THIS ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE. THE FOLL OWING DECISIONS ALSO SUPPORT ASSESSEES CONTENTION APART FROM THE DECISI ON OF COGNIZANT TECHNOLOGY SOLUTIONS (SUPRA): (I) PENTASOFT TECHONOLOGIES LTD (2010-TIOL- 525-HIGH COURT-MAD) (II) M/S MYSODET (P) LTD (CIVIL APPEAL NO.5475 OF 2008) S.C. ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 10 - : 15. THEREFORE, IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, WE CANNOT INTERFERE IN THE FINDING OF THE LD. CIT(A ). WE ARE BOUND BY THE ABOVE DECISIONS, THEREFORE, WE CANNOT ALLOW THI S GROUND IN FAVOUR OF THE REVENUE. THIS ISSUE IS DECIDED IN FAVOUR O F THE ASSESSEE BY DISMISSING THE GROUND RAISED BY THE REVENUE. 16. THE NEXT ISSUE OF THIS REVENUES APPEAL IS REGARD ING INCLUSION OF REFUNDS FROM CENTRAL SALES TAX(CST) IN ELIGIBLE PROFITS FOR DEDUCTION U/S 10A OF THE ACT. THE COMPANY HAS RECEIVED DURIN G THE YEAR A SUM OF ` 5 LAKHS IN TOTAL AS A REFUND OF CST PAID EARLIER A ND HAS BEEN TREATED AS A PART OF THE ELIGIBLE PROFITS. THE AS SESSING OFFICER HAS TAKEN A CONTRARY VIEW, BUT THE LD. CIT(A) HAS AGREE D WITH THE ASSESSEE. THE THESIS WHICH HAS BEEN PROPOUNDED BY THE LD. CIT/DR IS THAT THE EXPRESSION PROFITS AND GAINS DERIVED BY THE UNDERTAKING FROM THE EXPORT OF ARTICLES OR THING OR COMPUTER SOFTWAR E HAS TO BE VIEWED FROM A NARROW COMPASS AND AS SUCH CAN NOT INCLUDE REFUND OF CST IN ELIGIBLE PROFIT FOR THE PURPOSE OF COMPUTING DEDUCT ION U/S 10A. TO COUNTER THIS CONTENTION OF LD. CIT/DR, IT WAS ARGUE D BY DR.SUMANTH THAT THE ASSESSEE-COMPANY IS A STPI UNIT AND PROCUR ES CERTAIN GOODS LOCALLY FOR THE BUSINESS OF SOFTWARE DEVELOPMENT, F OR WHICH THE ASSESSEE IS LIABLE TO PAY SALES TAX AND THAT ON S UCH SUPPLIES FROM THE ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 11 - : DOMESTIC OPERATION AREA TO THE STPI UNITS ARE TREAT ED AS DEEMED SALES AS PER FOREIGN TRADE POLICY. IN THIS REGARD , A COPY OF THE FOREIGN TRADE POLICY HAS BEEN FILED. WE HAVE PERU SED IT AND HAVE FOUND THAT THE ASSESSEE IS ENTITLED TO A REFUND OF THE CST FROM THE STPI AUTHORITIES ON THE BASIS OF A PERIODIC STATEM ENT DETAILING THE INDIGENOUS PURCHASES MADE. THUS, SUCH A REFUND SO GENERATED HAS A DIRECT NEXUS AND CONNECTIVITY WITH THE ELIGIBLE UND ERTAKING MAKING IT ENTITLED FOR THE DEDUCTION U/S 10A. IN THIS REGARD , THE DECISION RENDERED IN THE CASE OF DY. CIT VS AARTI INDUSTRIES , 95 TTJ 14 , SUPPORTS OUR ABOVE VIEW. THE LD. CIT(A) HAS ALSO R ELIED ON THIS DECISION IN WHICH IT HAS BEEN HELD THAT THE REFUND OF EXCISE DUTY IS TO BE CONSIDERED AS A PART OF ELIGIBLE PROFITS FOR THE PURPOSE OF DEDUCTION U/S 80HHC . MOREOVER, THE ASSESSING OFFICER HAS NOT SOUGHT TO TREAT THE CST REFUND AS INCOME FROM OTHER SOURCES, THEREF ORE, DERIVING PARALLELS FROM THE ABOVE DECISION, THE ORDER OF THE LD. CIT(A) IS FOUND TO BE CORRECT AND DOES NOT WARRANT ANY INTERFERENCE FROM US. THIS ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE. ACC ORDINGLY, GROUND NO.3 IS DISMISSED. 17. THE NEXT ISSUE OF REVENUES APPEAL RELATES TO LOSS FROM PROVISION OF WORKSTATIONS WHICH THE ASSESSEE HAS TR EATED AS LOSS FROM ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 12 - : OTHER SOURCES. ACTUALLY, THE ASSESSEE HAS LEASED O UT CERTAIN UNUTILIZED FACILITIES LIKE COMPUTER TERMINAL, CHAIRS, TABLES, ETC. AND FROM THIS ACTIVITY, IT HAS INCURRED LOSS. THE ASSESSING OFFI CER HAS CONSIDERED THE RECEIPTS FROM THE LEASING ACTIVITY AS PART OF THE T OTAL TURNOVER. THE CASE OF THE ASSESSEE IS THAT THE LEASING ACTIVITY B EING NOT PART OF ITS CORE BUSINESS, LOSS INCURRED WHICH HAS BEEN SHOWN A S PART OF INCOME FROM OTHER SOURCES, CANNOT BE CONSIDERED FOR THE PU RPOSES OF COMPUTING THE ELIGIBLE PROFITS. THE LD. CIT(A), AF TER SEEKING A REMAND REPORT FROM THE ASSESSING OFFICER, HAS FOUND THAT INCOME FROM LEASING ACTIVITY CANNOT BE CONSIDERED AS PART OF TOTAL TURN OVER BECAUSE THIS ACTIVITY BY ITSELF CANNOT BE CONSIDERED AS PART OF ASSESSEES BUSINESS ACTIVITY IN THE REGULAR COURSE. THEREFORE, NO ADJU STMENT TO THE PROFITS OF ELIGIBLE UNDERTAKING OR TO THE TOTAL TURNOVER IS NECESSITATED FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A. HE HAS DIR ECTED TO ASSESS THE LOSS ON ACCOUNT OF PROVISION OF WORKSTATIONS UN DER THE HEAD INCOME FROM OTHER SOURCES. THE REVENUE HAS RAISE D THIS GROUND WHICH IS DIAGONALLY OPPOSITE TO ITS CONTENTION PUT FORTH IN RELATION TO GROUND NO.3, BY STATING THAT THE LOSS FROM PROVISI ON OF WORKSTATIONS IS ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT. ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 13 - : 18. ON THE VERY FACE OF IT, THE ACTION OF THE ASSESSING OFFICER SEEMS TO BE NOT ONLY PARADOXICAL BUT ALSO NOT IN CONSONAN CE WITH THE PROVISIONS OF THE ACT. THEREFORE, WE CONFIRM THE I MPUGNED FINDING AND DISMISS THE GROUNDS RAISED BY THE REVENUE IN THIS R EGARD. 19. IN THE RESULT, THE APPEAL OF THE REVENUE, FOR ASSE SSMENT YEAR 2002-03 STANDS DISMISSED. I.T.A.NO. 1439/MDS/2007 A.Y 2003-04 BY ASSESSEE 20. THIS APPEAL OF THE ASSESSEE, FOR ASSESSMENT YEAR 2 003-04 IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 31.1.2007. IN THIS APPEAL, FOLLOWING GROUNDS HAVE BEEN RAISED: THE GROUNDS OF APPEAL LISTED BELOW ARE WITHOUT PRE JUDICE TO EACH OTHER. ISSUE I - SOFTWARE COST 1. T H E C I T(A) H AS E RR E D IN CO N F IRM I N G TH E A O ' S O RD E R TH A T S O FTWA R E EX P E NDITUR E T O TH E EX T E NT OF LNR 4 ,3 97 , 448 I N C URR E D B Y THE APPELL A NT I S CA PITAL IN NATUR E. ISSUE 2 TAX CONSULTANCY FEE 2 THE CI T( A ) H AS ERR E D IN CONFIRMIN G AO ' S ORDER BY DI S ALLOWING EXPENDITURE IN TH E N A TUR E OF TAX CO N S ULT A NC Y FE E IN C URRED B Y TH E APP E LLANT . ISSUE 3 EXPENDITURE INCURRED IN FOREIGN CURRENCY FOR COMPUTING EXPORT TURNOVER. 3. T H E CI T(A) H AS ERR E D IN C O NFIRMIN G TH E ORDER O F THE A O B Y EXC LUDIN G TR AVE L A ND CER T AI N O TH E R EX PEN SES INCU R RED IN F O R E I G N CURREN CY FROM TH E EX PORT TURN OVE R , W H E N S U C H IT E M S WERE N O T INCLUDED IN THE EXPORT TURNOVER IN THE FIRST PLAC E . ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 14 - : 4. W ITH O U T PR EJ UDI CE TO G ROUND 3 A BO VE , THAT THE C IT (A) H AS E RR E D IN CO NFIRMIN G TH E O RD E R OF TH E A O IN TRE A TIN G TR A VEL AND CERT A IN OTH E R E X PENDITURE INCURR E D IN F O R E I G N C URR E NC Y AS EX PENDITUR E I NCURRED FOR PROVIDIN G TE C HNIC A L S E RVICES O UTSID E INDI A W H E N TH E A PP E LL A NT I S E N GAGE D IN TH E BUSINES S OF DE VE LOPM E NT OF C OMPUTER S O F T WA R E . ACCO RDIN G L Y , TH E C I T(A) H AS E R RE D IN CO NFIR M IN G T H E AO ' S O RD ER TH A T S UCH EX P E N SES N EE D T O B E EXC LUD E D FRO M EX P OR T T URN OVER . 5. T H E A PP E LL A NT CR AVES L EAVE T O A DD , AL TER , VA R Y, O MIT , S UBSTITUT E OR A M E ND TH E A B OVE G R O UND S OF A PP E AL , B EFOR E CO MMENC E M E NT OF F DURIN G PR OCEE DIN GS B E F ORE TH E TRIBUN A L . 21. ISSUE NOS. 1 & 2 OF THIS APPEAL WERE NOT PRESSED S O THESE STAND DISMISSED AS NOT PRESSED. 22. THE ONLY ISSUE WHICH SURVIVES FOR ADJUDICATION IS REGARDING EXCLUSION OF EXPENDITURE INCURRED IN FOREIGN CURREN CY FROM EXPORT TURNOVER FOR COMPUTING DEDUCTION U/S 10A OF THE ACT WHICH HAS BEEN DECIDED BY THE LD. CIT(A) AGAINST THE ASSESSEE. 23. THE ASSESSEE HAS INCURRED AN EXPENDITURE OF ` 16,88,635/- ON ACCOUNT OF FOREIGN TRAVEL AND RELATED EXPENDITURE. THE ASSESSEE HAS STATED THAT THE EXPENDITURE HAS BEEN INCURRED IN RE SPECT OF ON-SITE PROJECTS. AFTER EXAMINING THE DEFINITION OF THE TE RM EXPORT TURNOVER, THE ASSESSING OFFICER HAS CONSTRUED THAT THE EXPORT TURNOVER REPORTED BY THE ASSESSEE INDIRECTLY INCLUDED EXPENSES RELATI NG TO SERVICES RENDERED OUTSIDE INDIA. ACCORDING TO HIM, THIS EX PENDITURE IS DEEMED ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 15 - : TO HAVE BEEN REIMBURSED BY THE FOREIGN BUYER AND SO , THIS CANNOT BE TREATED AS A PART OF EXPORT TURNOVER. AS PER THE ASSESSING OFFICER, THE TERM TECHNICAL SERVICES MEANS SERVICES RENDERED OUTSIDE INDIA IN CONNECTION WITH EXPORT OF SOFTWARE AND IT NEED NOT BE AN INDEPENDENT SERVICE. HE HAS OBSERVED THAT THE PERSONNEL DEPLOY ED TO STUDY THE REQUIREMENT OF THE FOREIGN CUSTOMERS ARE SKILLED PE RSONNEL WHO DECIDE THE WORK SPECIFICATION REQUIRED IN RELATION TO SOFT WARE DEVELOPMENT ACTIVITIES CARRIED ON IN INDIA OR ABROAD, THEREFORE , THIS EXPENDITURE CANNOT BE TOWARDS SOFTWARE DEVELOPMENT OR MARKETING AND HENCE, IS ONLY RELATED TO TECHNICAL SERVICES. ACCORDING TO HIM, THE OBJECTIVE OF ALLOWING THIS EXPENDITURE WHICH HAS TO BE COMPUTED ON THE BASIS OF CONVERTIBLE FOREIGN EXCHANGE BROUGHT INTO INDIA, IS AIMED AT GETTING CONVERTIBLE FOREIGN EXCHANGE. BECAUSE IN THIS CASE SALE PROCEEDS INCLUDE THE RECEIPTS RELATING TO SUCH SERVICES REND ERED OUTSIDE INDIA WHICH MAY RELATE TO SOFTWARE DEVELOPMENT OR OTHERWI SE, THE EXPENDITURE RELATABLE TO SUCH RECEIPT IS TO BE EXCL UDED FROM EXPORT TURNOVER BECAUSE THESE ARE EXPENSES REIMBURSED AND NOT A RECEIPT. AS PER THE CLAUSE OF AGREEMENT WITH STPI, A CONDITI ON IS LAID DOWN REGARDING NET EXCHANGE EARNING WHICH IS COMPUTED AF TER DEDUCTING CERTAIN EXPENDITURE INCURRED IN FOREIGN EXCHANGE. THUS, ACCORDING TO HIM, EXPORT TURNOVER IS RESTRICTED TO ACTUAL EXPORT I.E FREIGHT, ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 16 - : COMMUNICATION CHARGES AND INSURANCE ATTRIBUTABLE TO DELIVERY OF SOFTWARE ARE NOT INCLUDED IN THE TURNOVER. ANY EXP ENSE IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE IN DIA IS ALSO TO BE EXCLUDED. THE PROCEEDS FROM ON-SITE DEVELOPMENT AB ROAD BEING THE PROFITS DERIVED FROM EXPORT HAS NOTHING TO DO WIT H THE EXPLANATION OF THE EXPORT TURNOVER WHICH QUANTIFIES THE ALLOWABL E DEDUCTION. HE HAS FURTHER OBSERVED THAT EXCLUSION OF SUCH EXPENDITURE IS TO COMPUTE THE ALLOWABLE DEDUCTION AND IT HAS NOTHING TO DO WITH T HE PROFIT OF THE UNDERTAKING. SO, ACCORDING TO HIM, ALLOWABLE DEDUC TION OF EXPENDITURE IS RESTRICTED TO THE EXTENT OF NET FOREIGN EXCHANGE BROUGHT INTO INDIA. HE HAS ALSO OBSERVED THAT FOR COMPUTATION OF ALLOWA BLE DEDUCTION, THE NOMINATOR AND DENOMINATOR CANNOT BE THE SAME FIGURE , THEREFORE, THE EXPORT TURNOVER (NOMINATOR) IS RESTRICTED TO NET CO NVERTIBLE FOREIGN EXCHANGE RECEIVED IN INDIA. HE HAS NOT ADJUSTED THE TURNOVER TO THE EXTENT OF CONVERTIBLE FOREIGN EXCHANGE RECEIVED IN INDIA AND HAS ALLOWED THE DEDUCTION ON PRO-RATA BASIS. HE HAS R EDUCED THE EXPORT TURNOVER TO THE EXTENT OF ` 16,88,635/-. THE LD. CIT(A) HAS ALSO AGREED WITH THIS ACTION OF THE ASSESSING OFFICER. THE ASSESSEE IS FURTHER AGGRIEVED AND HAS ASSAILED THIS FINDING BY SUBMITTING THAT THE IT IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPM ENT AND IS NOT IN THE BUSINESS OF PROVIDING TECHNICAL SERVICES. I T WAS ARGUED THAT SINCE ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 17 - : EXPENSES WERE NOT INCURRED FOR TECHNICAL SERVICES, THESE CANNOT BE EXCLUDED AS PER THE TERMS OF SECTION 10A. TO SUPP ORT HER ARGUMENT, THE LD.AR HAS REFERRED TO THE TRANSFER PRICING REVI EW ORDER OF TRANSFER PRICING OFFICER ANNEXED IN THE PAPER BOOK, IN RESPE CT OF ASSESSMENT YEAR 2003-04, FROM WHICH IT IS PROVED THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND DOES NOT REN DER ANY TECHNICAL SERVICES AS HAS BEEN ALLEGED. ON THE OTHER HAND, THE LD.DR HAS SUPPORTED THE REASONING GIVEN BY THE AUTHORITIES BE LOW. 24. AFTER CONSIDERING THE RIVAL SUBMISSIONS IN THE L IGHT OF EVIDENCE AVAILABLE ON RECORD, WE FIND THAT THE IMPUGNED EXPE NSES HAVE NOT BEEN INCLUDED IN THE INVOICES RAISED FOR DEVELOPMEN T OF SOFTWARE. ACCORDINGLY, THE EXCLUSION EFFECTED BY THE ASSESSIN G OFFICER IS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE STATUTE. TH E DEFINITION OF EXPORT TURNOVER REQUIRES EXPENSES INCLUDED IN EXP ORT TURNOVER TO BE EXCLUDED. WE HAVE GONE THROUGH PAGES 95, 97 AND 10 0-140 OF ASSESSEES PAPER BOOK AND WE ARE SATISFIED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT A ND NOT IN PROVIDING TECHNICAL SERVICES. WE FIND THAT THE D ECISION OF ITAT, SPECIAL BENCH, CHENNAI, IN THE CASE OF ZYLOG SYSTEM S, 135 TTJ 129, A COPY OF WHICH IS ANNEXED IN THE PAPER BOOK FOR OUR PERUSAL, IS DIRECTLY ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 18 - : ON THE ISSUE AND SUPPORTS THE CLAIM OF THE ASSESSEE . THE OTHER DECISIONS NAMELY, IN THE CASE OF PATNI TELECOM (P) LTD, 120 TTJ 967, SOFTSOL INDIA LTD, 22 SOT 271, HEWLETT PACKARD GLOB AL SOFT LTD IN I.T.A.NO. 333/BANG/2008, WILLIS PROCESSING SERVICES INDIA PVT. LTD IN I.T.A.NO. 4329/MUM/2001, CBDT CIRCULAR NO.564 DATED 5.7.1990 ARE ALSO RELEVANT AND THEY ALSO SUPPORT OUR ABOVE CONCL USION. ACCORDINGLY, WE ALLOW THIS GROUND OF APPEAL. 25. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS PA RTLY ALLOWED. I.T.A.NO. 1630/MDS/2007 A.Y 2003-04 BY REVENUE 26. THIS IS CROSS APPEAL OF THE REVENUE FOR ASSESSMEN T YEAR 2003- 04. THE FIRST ISSUE OF THIS APPEAL IS AGAINST DELE TION OF INCOME FROM PROVISION OF WORKSTATIONS TAXED AS INCOME FROM OTHE R SOURCES. DURING THE ACCOUNTING PERIOD ENDED 31.3.2003, THE ASSESSEE -COMPANY HAD LEASED OUT CERTAIN UNUTILIZED FACILITIES AVAILABLE WITH IT INCLUDING COMPUTER TERMINALS, CHAIRS, TABLES ETC. TO SATYAM F OR A CONSIDERATION. THE COMPANY HAD RECEIVED IN ALL A SUM OF ` 174,65,942/- FROM THIS ACTIVITY AND AFTER CLAIMING AN EXPENDITURE OF ` 1,70,17,143/- A NET INCOME OF ` 4,48,799/- HAS BEEN SHOWN AND OFFERED FOR TAX UNDE R THE HEAD INCOME FROM OTHER SOURCES. THE ASSESSING OF FICER HAS INCLUDED ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 19 - : THE ENTIRE SUM OF ` 1,74,65,942/- AS FORMING PART OF BUSINESS INCOME OF THE ASSESSEE AND HAS INCLUDED THIS SUM IN THE TO TAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A. AS WE HAVE ALREADY HELD IN THE EARLIER PART OF THIS ORDER THAT THIS IS AN ACT IVITY WHICH IS ELIGIBLE FOR DEDUCTION U/S 10A THEREFORE, WE CANNOT REVERSE THE FINDING OF THE LD. CIT(A) IN THIS REGARD. 27. THE NEXT ISSUE OF REVENUES APPEAL IS REGARDING F INDING OF LD. CIT(A) THAT EXPENDITURE IN FOREIGN CURRENCY OF ` 16,88,635/- SHOULD BE EXCLUDED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A. AS PER REVENUE, THE LEGISLATURE HAS SPECIFICALLY EXCLUDED EXPENDITURE INCURRED IN FOREIGN EXCHANGE A ND IN THE ABSENCE OF EQUAL DEFINITION TO THE TERM TOTAL TURNOVER, THE NORMAL MEANING OF THE TERM ONLY SHOULD BE APPLIED. WE HAVE ALREADY H ELD ABOVE THAT PARITY HAS TO BE MAINTAINED BETWEEN EXPORT TURNOVER AND TOTAL TURNOVER, THIS ISSUE CANNOT BE ALLOWED IN FAVOUR OF THE ASSESSEE. 28. THE NEXT ISSUE OF REVENUES APPEAL IS REGARDING UNY IELDING OF REVENUE FROM EXPORT TURNOVER. FOR READY REFERENCE, WE EXTRACT GROUND NO.4 [4.1 TO 4.5]AS UNDER: ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 20 - : 4.1 THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO ADOPT THE FIGURES FURNISHED BY THE ASSESSEE AS AGAINST THE FIGURES OF EXPORT/TOTAL TURNOVER ADOPTED BY HIM WITH REGARD TO THE EXCLUSION OF UNYIELD REVENUE FROM TURNOVER. 4.2 THE LEARNED CIT(A) FAILED TO NOTE THAT THE ABSURDITY OF TOTAL TURNOVER BECOMING LESS THAN EXPORT TURNOVER POINTED OUT BY HER HAS ARISEN BECAUSE OF THE STAND TAKEN BY HER THAT WHATEVER IS EXCLUDED FROM EXPORT TURNOVER HAS TO BE REDUCED FROM TOTAL TURNOVER ALSO. THIS IS PURELY HYPOTHETICAL. 4.3 THE LEARNED CITCA) OUGHT TO HAVE SEEN THAT IF WHATEVER IS EXCLUDED FROM THE EXPORT TURNOVER IS ALSO TO BE EXCLUDED FROM THE TOTAL TURNOVER, THEN THE VERY PURPOSE OF HAVING THE FORMULA AS ETO/TTO MAY GET DEFEATED SINCE IT WOULD EQUALISE THE NUMERATOR AND THE DENOMINATOR (AND AT TIMES MORE THAN ONE AS POINTED OUT IN THE CIT(A)'S EXAMPLE) 4.3 IT IS SUBMITTED THAT THE DECISIONS RELIED UPON BY THE THEN CIT(A) ARE RENDERED IN THE CONTEXT OF SECTION 80HHC ONLY AND NOT WITH REFERENCE TO SECTION 10A/10B. 4.4 THE SUPREME COURT IN THE CASE OF LAKSHMI MACHINE WOKS AND OTHERS (290 ITR 667) HAS SPECIFICALLY OBSERVED THAT THEIR DECISION UPHOLDING THE VIEW THAT SALES TAX AND EXCISE DUTY SHOULD BE EXCLUDED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING RELIEF UNDER SECTION 80HHC WOULD BE WITH REFERENCE TO THE FORMULA IN THE SAID SECTION ONLY. 4.5 THE LEARNED CIT(A) FAILED TO NOTE THAT THE SCHEME OF SECTION 80HHC AND SECTIONS 1OA/1OB DO DIFFER IN MANY RESPECTS THOUGH THE DEDUCTION IN BOTH SECTIONS ARE COMPUTED IN THE PROPORTION OF EXPORT TURNOVER AND TOTAL TURNOVER. ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 21 - : 29. THE ASSESSING OFFICER, WHILE RECOMPUTING DEDUCTIO N AT ` 33,59,69,925/- ALLOWABLE U/S 10A, HAS ADOPTED THE FIGURES OF TOTAL TURNOVER AS WELL AS EXPORT TURNOVER AT LOWER RATES THAN WHAT WERE ADOPTED BY THE ASSESSEE. IN PARA 3.1 OF HIS ORDER, THE ASSESSING OFFICER HAS GIVEN A SPECIFIC FINDING THAT FROM THE DETAILS OF INVOICES RAISED AND FURNISHED BY THE ASSESSEE-COMPANY FROM T HE FIGURE AS PER THE PROFIT & LOSS ACCOUNT, FOR THE IMPUGNED ACCOUNT ING YEAR, THEREFORE, HE HAS ADOPTED THE TURNOVER FIGURE AS PE R THE EXPORT INVOICES PRODUCED. THE ASSESSING OFFICER HAS REDUC ED A SUM OF ` 66,51,761/- FROM THE TOTAL TURNOVER. SIMILARLY, HE HAS REDUCED THE FIGURES RELATING TO THE EARLIER ACCOUNTING PERIOD W HILE ADOPTING THE FIGURE OF EXPORT TURNOVER. THE RELEVANT FIGURES AR E SHOWN IN THE TABLE BELOW: TOTAL TURNOVER ` EXPORT TURNOVER ` AS PER APPELLANTS WORKING 85,73,37,819 85,73,37,81 9 AS PER ASSESSING OFFICERS WORKING 85,17,16,058 84,49,93,829 DIFFERENCE 56,21,761 1,23,43,990 30. ACCORDING TO THE ASSESSING OFFICER, THESE FIGURES RELATE TO EARLIER ACCOUNTING PERIOD AND THEREFORE, CANNOT BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF DEDUCTION U/S 10A OF THE ACT OF THE IMPUGNED ACCOUNTING PERIOD. THE STAND TAKEN BY THE ASSESSEE WOULD ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 22 - : BE CLEAR FROM THE SUBMISSIONS OF THE LD.AR MADE BEF ORE THE LD. CIT(A) AS CONTAINED IN PARA 7.2 AT PAGE 26 OF IS ORDER. T HIS IS BEING EXTRACTED VERBATIM FOR READY REFERENCE: ' UNBILLED RE V ENUES FOR THE PERIOD FROM MARCH 24 , 2003 T O M A R C H 31 , 2 003 WERE IN C LUDED AS PART OF REVENUES FOR THE TAX YEA R E ND E D MARCH 31 , 2003. INVOICE F O R THE SAME WAS R A ISED DURIN G AP RIL 200 3 . H OWEVE R, G I VE N TH E S ER V ICE S FOR THE PERIOD M A RCH 24, 20 03 TO MARCH 3 1 , 2 00 3 WE R E RE ND E R E D DU R IN G THE TAX Y E A R E ND E D M AR CH 3 1 , 2003 , TH E SA M E W A S I NC LUD E D AS TURNOVER FOR THE FINANCI A L YEA R 2 00 2 - 03 . THE ASSESSE E H AS BE E N FOLL O WING THE MERCANTILE SYS T E M O F ACCO UNTIN G RIGHT F R O M INCEPTI O N A ND ALSO IN LINE WITH THE A CC O UNTIN G S T ANDARD S PRESC RIB E D BY TH E INSTITUT E OF CH A RTERED ACCOUNT A NT S O F INDI A AND TH E AC C O UNTIN G ST A ND A RD PRESCRIBED U/S 145 . ACCORDIN G L Y, TH E SA M E H A S BEEN I NC LU DE D AS P A RT OF E X PORT TURNO VE R A ND T O T A L TURN OVE R AND CO N SEQ U E N T L Y , D E DU C TION UNDER SEC . 10A HAS BEEN C L A IM E D O N PROF IT S .' . ' THE ASSESSING OFF I CER H A D EX C LUD E D THE UNBILL E D R EVE NU ES A M O U NTIN G TO ` 56,2 1 ,761 / - FRO M T O T A L TU R N OVE R ' W H E R EAS A S UM OF ` 1 ,23,43,990 1 - WAS EXC LUD E D F R OM EX P ORT T URN OVE R B ASE D O N TH E ACTUA L A M O U N T R EA LI ZED P E RT A ININ G T O TH E S UBJ E CT F IN AN CI A L YEA R , AS AGAI N S T AMO U N T INVOICES. ' ' IN THI S R EGA RD , WE W I S H TO SUBMIT THAT THE ASSESSING OFFICE R IS NOT JU S TI F I E D I N CONSI D ER IN G T H E UNB I LLED RE V ENU ES T O FO R M PA RT OF T O T A L TU R N OVER, WHILE NO T CONS ID E RIN G THE SA M E F OR EXPOR T TURNOVER IN CO MPU T I NG TH E P RO FI TS OF THE BUSIN E SS F O R THE S UBJ EC T ASSESSME NT YEA R '. 'WE WI S H T O PL AC E R E LIANC E ON ACC O UNTIN G S T A N DAR D AS 9 I SS UED BY IN S T I TUT E OF C H A RTERED ACCOUNTANTS OF IND I A, I CA I. AS P E R AS 9 I SS U E D B Y ICA I - 'IN C ASE OF A T RA N SAC T I ON IN V OL V ING THE R E ND E RIN G OF SE R V I CES , PERFORMAN CE S H O ULD BE M EAS U RE D EI TH E R UND E R THE C OMPLET E D SE R V IC E CO NTR AC T MET H OD OR UND ER T HE PR O PORTIONATE COMPLETION METHOD, W HI C H EV ER RE L A T ES T H E R EVENU E TO TH E WORK ACCO M P LI S H E D . SUCH P E RFORM A NC E S H O ULD B E R EGARDED A S B E IN G A CHI EVE D W H E N NO SIG NI F I C ANT UNCERTAINT Y EX I S T S R EGAR D I N G T H E AMOUNT O F TH E CO N S ID ERATION THA T W ILL BE DERI V ED FROM REND E RIN G ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 23 - : TH E SE R VICE.' THE COMPANY HAD, IN ACCORDANCE WITH AS 9, RECOGNIZE D THE UNBILLED REVENUES PERTAINING TO THE PERIOD FROM MAR CH 24, 2006 TO MARCH 31, 2006. VARIOUS JUDICIAL PRECEDENTS HAVE ALSO UPHELD THE PRINCIPLE THAT THE ACCEPTED PRINCIPLES O F ACCOUNTING WHICH ARE CONSISTENTLY FOLLOWED WOULD NEED TO BE AC CEPTED BY THE REVENUE 1. CIT VS . GAJAPATHY NAIDU (1964)(53 ITR 114)(S.C) 2. CIT VS. GUTTOFFNUNGASHUTTO STERKARADO (1992) (197 ITR 66 )( OR I) 4. CIT VS. UP STATE INDUSTRIAL CORPORATION(1997)(225 ITR 7 03 )(SC) 5. CIT VS. CONSULTING ENGINEERING SERVICES (INDIA)LTD.(2001 )( 250 I T R 8 49)(DEL . ) 6. CIT VS. INDO NIPPON CHEMICALS CO.LTD. (2003)(261 ITR 275 ) ( SC) 7. DCIT VS. OTIS ELEVATOR CO.(I) LTD. ACCORDINGLY UNBILLED REVENUE RELATING TO FINANCIAL YEAR 2002- 03 HAD BEEN RECOGNIZED IN THE BOOKS OF ACCOUNT. WE HEREBY WISH TO SUBMIT THAT THE UNBILLED REVENUES RELATING TO THE PERIOD SHOULD BE INCLUDED TO FORM PART OF EXPORT TURNOVER AND TOTAL TURNOVER IN COMPUTING THE PROFITS OF THE BUSINESS' 31. AFTER CONSIDERING THIS EXPLANATION, THE LD. CIT(A) HAS FOUND THAT WHEN THE ASSESSING OFFICER HAS EXCLUDED A SUM OF ` 1,23,43,990/- FROM THE EXPORT TURNOVER HE OUGHT TO HAVE EXCLUDED SIMILAR SUM FROM THE TOTAL TURNOVER ALSO. THEREFORE, HE HAS FOUND I NCONSISTENCY IN THE STAND TAKEN BY THE ASSESSING OFFICER. ACCORDING TO THE ASSESSEE, A SUM OF ` 56,21,761/- REPRESENTED UNBILLED REVENUE AND IT RE LATES VERY MUCH TO THE EXPORTS MADE DURING THE IMPUGNED ACCOUN TING PERIOD AND THEREFORE, THE SAME FORM PART OF THE TOTAL TURNOVER . SIMILARLY, A SUM OF ` 1,23,43,919/- WAS NOT REALIZED DURING THE ACCOUNTI NG PERIOD, SO IT ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 24 - : CANNOT BE EXCLUDED FROM THE EXPORT TURNOVER BECAUSE IT FORM PART OF TOTAL TURNOVER FOR THE IMPUGNED ACCOUNTING PERIOD. 32. AFTER HEARING BOTH SIDES IN THE LIGHT OF AVAILABLE EVIDENCE ON RECORD, WE FIND THAT THE ASSESSEE HAS BEEN CONSISTE NTLY FOLLOWING ACCOUNTING STANDARD 9 ISSUED BY THE ICAI AND IN CAS E THE ACTION OF THE ASSESSING OFFICER IS ENDORSED THE FIGURE OF TOTAL TURNOVER WILL GET REDUCED TO A FIGURE LOWER THAT THE EXPORT TURNOVER. THEREFORE, WE ARE ALSO OF THE OPINION THAT THE INGREDIENTS THAT GO TO MAKE UP THE EXPORT TURNOVER SHOULD ALSO BE THE SAME FOR THE TOTAL TURN OVER. WE HAVE ALREADY TAKE A VIEW WHILE DECIDING SIMILAR ISSUE I N OTHER ASSESSMENT YEAR ALSO IN THE FORMER PART OF THIS ORDER. CONSEQ UENTLY, WE CONFIRM THE FINDING OF THE LD. CIT(A) AND CANNOT ALLOW THE GROUNDS RAISED BY THE REVENUE IN THIS REGARD. 33. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DISMISSED. I.T.A.NO. 2091/MDS/2010 A.Y 2004-05 BY ASSESSEE 34. THIS APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2 004-05, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 24.9.2010. IN THIS APPEAL, FOLLOWING GROUNDS HAVE BEEN RAISED: ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 25 - : ISSUE 1 DISALLOWANCE UNDER SECTION 14A 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ['CIT(A)'] HAS ERRED IN CONCLUDING THAT 2 PERCENT T HE DIVIDEND INCOME (ON AN ADHOC BASIS) SHOULD BE REGARDED AS EXPENDITURE INCURRED FOR EARNING THE DIVIDEND INCOME AND SHOULD ACCORDINGLY BE DISALLOWE D UNDER SECTION 14A, WHEREAS, NO EXPENDITURE WAS INCURRED BY THE APPELLANT TOWARDS EARNING SUCH INCOME. ISSUE 2 SOFTWARE COST 2 THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ASSESSING OFFICER'S ('AO') ORDER THAT SOFTWARE EXPENDITURE TO THE EXTENT OF ` 21,20,088 INCURRED BY THE APPELLANT IS CAPITAL IN NATURE. ISSUE 3 TRAVEL EXPENDITURE INCURRED IN FOREIGN CURRENCY FOR COMPUTING EXPORT TURNOVER 3 THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ORDER OF THE AO BY EXCLUDING TRAVEL EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOV ER, WHEN SUCH ITEMS WERE NOT INCLUDED IN THE EXPORT TURNOVER IN THE FIRST PLACE. 4. WITHOUT PREJUDICE TO GROUND 3 ABOVE, THE LEA RNED CIT(A) HAS ERRED IN UPHOLDING THE ORDER OF THE AO I N TREATING THE TRAVEL EXPENDITURE INCURRED IN FOREIGN CURRENCY AS EXPENDITURE INCURRED FOR PROVIDING TECH NICAL SERVICES OUTSIDE INDIA WHEN THE APPELLANT IS ENGAGE D IN THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE ACCORDINGLY, THE LEARNED CIT(A) HAS ERRED IN CONFIR MING THE AO'S ORDER THAT SUCH EXPENSES NEED TO BE EXCLUD ED FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDE R SECTION 10A. 5 THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMIT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPE AL, BEFORE COMMENCEMENT OF/DURING PROCEEDINGS BEFORE TRIBUNAL . ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 26 - : 35. THE FIRST ISSUE REGARDING DISALLOWANCE U/S 14A; A ND THE SECOND ISSUE REGARDING SOFTWARE COST, WERE NOT PRESSED AT THE TIME OF HEARING, AND IS ALSO EVIDENT FROM THE SMALL COMPILA TION OF THE ASSESSEE WHERE THE EXPRESSION NOT PRESSED IS WRITTEN. THE REFORE, BOTH THE ISSUES STAND DISMISSED AS NOT PRESSED. 36. THE THIRD ISSUE REGARDING TRAVEL EXPENDITURE INCU RRED IN FOREIGN CURRENCY FOR COMPUTING EXPORT TURNOVER HAS BEEN DEC IDED IN FAVOUR OF THE ASSESSEE BY US IN EARLIER ASSESSMENT YEAR. IN THE SAME WAY AND MANNER WE DECIDE THE ISSUE IN THIS YEAR ALSO, AND T HAT TOO, IN FAVOUR OF THE ASSESSEE-COMPANY. 37. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR ASS ESSMENT YEAR 2004-05 STANDS PARTLY ALLOWED. I.T.A.NO. 2177/MDS/2010 A.Y 2004-05 BY REVENUE 38. THIS IS CROSS APPEAL OF THE REVENUE FOR ASSESSMEN T YEAR 2004- 05. IN THIS APPEAL FOLLOWING GROUNDS HAVE BEEN RAI SED: 1. THE ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. 2.1 THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE EXPENDITURE INCURR ED IN ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 27 - : FOREIGN CURRENCY FROM THE TOTAL TURNOVER ALSO FOR COMPUTATION OF DEDUCTION U/S.10A, AS THE SAME HAS BEEN EXCLUDED FROM THE EXPORT TURNOVER. 2.2 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED TH AT AS PER THE PROVISION OF EXPLANATION 2(III) FOR THE PURPOSE OF EXEMPTION U/S.10B WHICH REVEALS THAT THE EXPORT TURNOVER DOES NOT INCLUDE FREIGHT, TELECOMMUNICATIO N CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY O F THE COMPUTER SOFTWARE OUTSIDE INDIA AND EXPENSES INCURR ED IN FOREIGN CURRENCY FOR PROVIDING TECHNICAL SERVICE OUTSIDE INDIA. 2.3 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT THE DEFINITION OF 'EXPORT TURNOVER', HAS TO BE STRI CTLY FOLLOWED AND THAT THE PARLIAMENT IN THEIR WISDOM DE CIDED NOT TO CREATE ANY ARTIFICIALITY FOR THE PHRASE 'TOT AL TURNOVER' AND LEFT THE PHRASE BE UNDEFINED IN THE A CT. IT IS SUBMITTED THAT THE HON. JURISDICTIONAL ITAT A CH ENNAI BENCH, IN THE CASE OF M/S.ISOFT R&D PVT. LTD. VS AC IT FOR THE AY 2003-04 ORDER DATED ON 12-05-2008, HAS H ELD THAT THE ITEMS EXCLUDED AS PER THE DEFINITION OF EX PORT TURNOVER SHOULD NOT BE REMOVED FROM THE TOTAL TURNO VER FOR COMPUTING DEDUCTION U/S.10A . 2.4 IT IS SUBMITTED THAT THE SAID ORDER OF THE H ON ITAT WHICH READS 'THE LAW ONLY MENTIONS THE ADJUSTMENTS TO BE MADE IN EXPORT TURNOVER. ONE SHOULD STOP THERE. THERE IS NO MANDATE TO REVISE THE COMPUTATION OF TO TAL TURNOVER WHENEVER THE EXPORT TURNOVER IS RECOMPUTED FOR THE PURPOSE OF EXPLANATION 2(IV) TO SECTION 10A. AN ADJUSTMENT IS CALLED IN RESPECT OF EXPORT TURNOVER ONLY', IS SQUARELY APPLICABLE TO THE PRESENT CASE. 2.5 IT IS FURTHER SUBMITTED THAT IF THE ITEMS WHIC H ARE TO BE EXCLUDED FROM THE EXPORT TURNOVER AS PER THE ST ATUTE ARE EXCLUDED FROM THE TOTAL TURNOVER ALSO THEN THE VERY PURPOSE OF EXCLUDING THE SAID ITEMS FROM THE EXPORT TURNOVER WILL GET DEFEATED AS THE EFFECT OF EXCLUSI ON OF THE SAME FROM THE TOTAL TURNOVER (DENOMINATOR) WILL NULLIFY THE EFFECT OF EXCLUSION FROM THE EXPORT TUR NOVER (NUMERATOR). ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 28 - : 39. AFTER HEARING BOTH SIDES, WE FIND THAT A PARITY HAS TO BE MAINTAINED BETWEEN EXPORT TURNOVER AND TOTAL TURNOV ER AS WE HAVE ALREADY DECIDED SIMILAR ISSUE IN OTHER ASSESSMENT Y EARS. THEREFORE, THIS APPEAL ALSO STANDS DISMISSED. 40. IN THE RESULT, THE APPEAL OF THE REVENUE FOR ASSESS MENT YEAR 2004-05 STANDS DISMISSED. I.T.A.NO. 2092/MDS/2010 A.Y 2005-06 BY ASSESSEE 41. THIS APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 200 5-06, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A), DATED 22.9.2010. IN THIS APPEAL FOLLOWING GROUNDS HAVE BEEN RAISED: ISSUE 1 DISALLOWANCE UNDER SECTION 14A 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) ['CIT(A)'] HAS ERRED IN CONFIRMING THE ORDER OF THE ASSESSING OFFICER ('AO) THAT 2 PERCENT OF THE DIVID END INCOME (ON AN AD HOC BASIS) SHOULD BE REGARDED AS EXPENDITURE INCURRED FOR EARNING THE DIVIDEND INCOM E AND SHOULD ACCORDINGLY BE DISALLOWED UNDER SECTION 14A, WHEREAS, NO EXPENDITURE WAS INCURRED BY THE APPELLA NT TOWARDS EARNING SUCH INCOME. ISSUE 2 SOFTWARE COST 2. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE AO'S ORDER THAT SOFTWARE EXPENDITURE TO THE EXTENT OF ` 55,20,827 INCURRED BY THE APPELLANT IS CAPITAL IN N ATURE. ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 29 - : ISSUE 3 TRAVEL EXPENDITURE INCURRED IN FOREIGN CURRENCY FOR COMPUTING EXPORT TURNOVER . 3 THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE OR DER OF THE AO BY EXCLUDING TRAVEL EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER, WHEN SUCH ITEMS WERE NOT INCLUDED IN THE EXPORT TURNOVER IN THE FIRST PL ACE. 4 WITHOUT PREJUDICE TO GROUND 3 ABOVE, THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE ORDER OF THE AO I N TREATING THE TRAVEL EXPENDITURE INCURRED IN FOREIGN CURRENCY AS EXPENDITURE INCURRED FOR PROVIDING TECH NICAL SERVICES OUTSIDE INDIA WHEN THE APPELLANT IS ENGAGE D IN THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE. ACCORDINGLY, THE LEARNED CIT(A) HAS ERRED IN CONFIR MING THE AO'S ORDER THAT SUCH EXPENSES NEED TO BE EXCLUD ED FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDE R SECTION 10A 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMIT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL. BE FORE COMMENCEMENT OF/DURING PROCEEDINGS BEFORE THE TRIBUNAL. 42. ISSUE NOS.1 & 2 WERE NOT PRESSED AT THE TIME OF HEA RING, HENCE THE SAME STAND DISMISSED AS NOT PRESSED. THE THIRD ISSUE IS REGARDING EXCLUSION OF EXPENDITURE INCURRED IN FOREIGN CURREN CY FROM EXPORT TURNOVER FOR COMPUTING DEDUCTION U/S 10A OF THE ACT . THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE IN THE SIMILAR MA NNER AS WAS IN EARLIER YEARS AND THE SAME STANDS ALLOWED. 43. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR ASSES SMENT YEAR 2005-06 STANDS PARTLY ALLOWED. ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 30 - : I.T.A.NO. 2178/MDS/2010 A.Y 2005-06 BY REVENUE 44. THIS IS CROSS APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2005-06 AND ONLY ONE ISSUE REGARDING PARITY BETWEEN EXPORT TURNOVER AND TOTAL TURNOVER IS INVOLVED THEREIN. AS WE HAVE ALREADY HELD THAT THIS ISSUE CANNOT BE DECIDED IN FAVOUR OF THE REVENUE AND THUS , THIS APPEAL OF THE REVENUE STANDS DISMISSED. I.T.A.NO. 2093/MDS/2010 A.Y 2006-07 BY ASSESSEE 45. THIS APPEAL OF THE ASSESSEE, FOR ASSESSMENT YEAR 20 06-07, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 22.9.2010. 46. IN THIS APPEAL FIRST ISSUE RELATES TO TRAVEL EXPEND ITURE INCURRED IN FOREIGN CURRENCY FOR COMPUTING EXPORT TURNOVER. TH IS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE IN SIMILAR MANNER AS WE H AVE DECIDED IN EARLIER ASSESSMENT YEARS. 47. THE SECOND ISSUE REGARDING DISALLOWANCE U/S 14A WAS NOT PRESSED AND HENCE, THE SAME STANDS DISMISSED AS NOT PRESSED. 48. IN THE RESULT, THIS APPEAL OF THE ASSESSEE FOR ASSE SSMENT YEAR 2006-07 STANDS PARTLY ALLOWED. ITA 541 & 1054/06 1439 & 1630/07 2091 TO 2093 & 2177 TO 2179/10 :- 31 - : I.T.A.NO. 2179/MDS/2010 A.Y 2006-07 BY REVENUE 49. THIS IS CROSS APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2006- 07, IN WHICH ONLY ISSUE IS REGARDING PARITY BETWEEN EXPORT TURNOVER AND TOTAL TURNOVER. WE HAVE DECIDED SIMILAR ISSUE IN EARLIER ASSESSMENT YEARS AND THUS, THIS APPEAL OF THE REVEN UE STANDS DISMISSED. 50. TO SUMMARIZE THE RESULT - ALL THE APPEALS OF THE A SSESSEE STAND PARTLY ALLOWED WHEREAS ALL THE APPEALS OF THE REVEN UE STAND DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 0 9-08-2011. SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (HARI OM MARATHA) JUDICIAL MEMBER DATED: 09 TH AUGUST, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR
