DCIT, Bangalore V. M/s Mecreade Software (Asia) Pvr. Ltd., Bangalore

ITA 202/BANG/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51313 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 25-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIII
• Section: 143(3); 10B

Judgement Text

PAGE 1 OF 7 ITA NO.202/BANG/2011 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES A BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.202/BANG/2011 (ASST. YEAR 2006-07) THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(1), BANGALORE. - APPELLANT VS M/S MCCREADE SOFTWARE (ASIA) PVT. LTD., NO.811, 23 RD MAIN, 12 TH A CROSS, 2 ND PHASE, J P NAGAR, BANGALORE-1. - RESPONDENT PA NO.AAACM1978R DATE OF HEARING : 10/10/2011 DATE OF PRONOUNCEMENT : 10/10/2011 APPELLANT BY : SHRI ETWA MUNDA, CIT-III RESPONDENT BY : NONE O R D E R PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE DEPARTMENT IS DIRECT ED AGAINST THE ORDER OF THE CIT(A)-III, BANGALORE DATED 08/11/ 2010.. THE RELEVANT ASST. YEAR IS 2006-07. 2. THE EFFECTIVE GROUND RAISED BY THE REVENUE READS AS FOLLOWS:- I) THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING ASSESSING OFFICER TO EXCLUDE FOREIGN CURR ENCY EXPENSES OF RS.5,71,37,966/- INCURRED ON SUB-CONTRA CT SERVICES AND ON FOREIGN TRAVEL FOR DELIVERY OF SOFTW ARE PAGE 2 OF 7 ITA NO.202/BANG/2011 2 FROM TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE I T ACT, 1961. 3. BRIEFLY STATED THE FACTS ARE AS FOLLOWS:- THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE SOFTWARE DEVELOPMENT AND RENTING OF PROPERTIES. FOR THE CON CERNED ASST. YEAR, RETURN OF INCOME WAS FILED ON 26 TH NOVEMBER, 2006 DECLARING A TOTAL INCOME OF RS.10,17,021/- AFTER CLAIMING DEDUCTION U/S 10A OF THE ACT AMOUNTED TO RS.6,02,87,999/-. SCRUTINY ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT VIDE ORDER DATED 31/12/2008. THE AO RECOMPUTED THE DEDUCTION U/S 10A OF THE ACT. THE ASSESSEE HAD INCURRED EXPENSES IN FOR EIGN EXCHANGE AMOUNTING TO RS.5,56,63,686/- TOWARDS CONSULTANCY CHARGES TO FOREIGN COMPANIES AND RS.14,74,280/- TOWARDS FOREIGN TRAVEL EXPENSES FOR THE PURPOSES OF STPI BUSINESS UNDERTAKING. THE AO PLACING RELIANCE ON S UB-CLAUSE (IV) TO EXPLANATION (2) TO SECTION 10A, EXCLUDED THE ABOVE SAID TWO EXPENSES IN TOTAL AMOUNTING TO RS.5,71,37,966/- FROM THE EXPORT TURNO VER AND RECOMPUTED THE DEDUCTION U/S 10A OF THE ACT. CONSEQUENT TO THE RE -COMPUTATION, 10A CLAIM WAS WORKED OUT TO RS.3,61,00,449/- AS AGAINST THE A SSESSEES CLAIM OF RS.6,02,87,999/-. THE EXCESS DEDUCTION U/S 10A AMO UNTING TO RS.2,41,87,550/- WAS ADDED TO THE INCOME RETURNED A ND BROUGHT TO TAX. 4. AGGRIEVED BY THE RE-COMPUTATION OF DEDUCTION, TH E ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY. 5. BEFORE THE FIRST APPELLATE AUTHORITY IT WAS SUBM ITTED THAT THE ABOVE SAID EXPENSES OUGHT NOT TO HAVE BEEN REDUCED FROM THE EXPORT PAGE 3 OF 7 ITA NO.202/BANG/2011 3 TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE A CT. ALTERNATIVELY IT WAS CONTENDED THAT IF THE ABOVE SAID EXPENSES ARE TO BE REDUCED FROM THE EXPORT TURNOVER, THE SAME OUGHT TO BE REDUCED ALSO FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. 6. THE FIRST APPELLATE AUTHORITY, BY FOLLOWING THE JUDGEMENT OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF CIT V GEM PLUS JEWELLERY INDIA LTD. 330 ITR 175 AND THE DECISION OF THE SPECIAL BE NCH IN THE CASE OF ITO V M/S SAK SOFT LTD. 313 ITR 353, ACCEPTED THE ALTERNA TIVE CONTENTION OF THE ASSESSEE AND DIRECTED THE AO TO EXCLUDE THE EXPENDI TURE INCURRED TOWARDS CONSULTANCY CHARGES OF RS.5,56,63,686/- AND TRAVEL E XPENSES OF RS.14,74,280/- FROM BOTH EXPORT TURNOVER AND THE TO TAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A OF THE ACT. 7. AGGRIEVED BY THE ORDER OF THE CIT(A), THE DEPART MENT IS IN APPEAL BEFORE US. 8. THE LEARNED DR SUPPORTED THE ORDER OF ASSESSMEN T. THE ASSESSEE HAD FILED AN ADJOURNMENT APPLICATION. SIN CE THE ISSUE RAISED IN THIS APPEAL IS A COVERED ISSUE, WE REJECTED THE ADJOURNM ENT APPLICATION AND PROCEEDED TO DISPOSE OFF THE MATTER ON MERITS. 9 . WE HAVE HEARD THE LEARNED DR AND PERUSED THE MATERI AL ON RECORD. THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. (SUPRA), IN IDENTICAL CIRCUMSTANCES, HEL D THAT SINCE THE EXPORT TURNOVER FORMS PART OF THE TOTAL TURNOVER, IF AN IT EM IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FR OM THE TOTAL TURNOVER TO PAGE 4 OF 7 ITA NO.202/BANG/2011 4 MAINTAIN PARITY BETWEEN NUMERATOR AND DENOMINATOR WH ILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HONBLE MUMBAI HIGH COURT READS AS FOLLOWS:- HELD : THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPO RT AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB-SECTION (4). EXPORT TURNOVER ALSO FORMS A CONS TITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPO RT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANI NG AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TUR NOVER IN EXPLN.2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERT AKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED I N OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FO REIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGH T, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGI SLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURA NCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BE HALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHA RGES ARE LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POINT THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN D EFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOW EVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AN D INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FRE IGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE PAGE 5 OF 7 ITA NO.202/BANG/2011 5 TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PR EVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OT HER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE C ONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRES SION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNO TATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSIO N OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECIFICALLY EXCLU DED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUME RATOR WOULD BE BROUGHT IN AS PART OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMIN ATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISIO N WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVE R, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NO T HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTA L TURNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAV E ANY ELEMENT OF TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURN OVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRI PTION TO THE CONTRARY CIT V SUDARSHAN CHEMICALS INDUSTRIES LTD. (2000) 163 CTR (BOM) 596: (2000) 245 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARMA (IN DIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON 9.1 IN THE CASE OF SAK SOFT LTD. (SUPRA), THE ASSE SSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTWARE AND CLAIMED DEDUCTION U/S 10B OF THE ACT. IN COMPLETING THE ASSESSMENT U/S 1 43(3) OF THE ACT, THE AO REDUCED THE EXPENDITURE INCURRED IN FOREIGN EXCH ANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA, FROM THE EXPORT T URNOVER WITHOUT CORRESPONDING REDUCTION FROM TOTAL TURNOVER, THEREB Y REDUCING THE DEDUCTION CLAIMED BY THE ASSESSMENT U/S 10B OF THE A CT. PAGE 6 OF 7 ITA NO.202/BANG/2011 6 9.2 IN LIGHT OF THE ABOVE FACTS, THE SPECIAL BENCH HELD AS UNDER:- FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PURPOS E OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTIO N 10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS O R COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHN ICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN TH E FORMULA. THE APPEALS FILED BY THE DEPARTMENT ARE TH US DISMISSED. ALTHOUGH THE ORDER OF SPECIAL BENCH IS IN THE CONTE XT OF SECTION 10B OF THE ACT, THE RATIO LAID DOWN IN THE ABOVE DECISION APPL IES TO SECTION 10A OF THE ACT AS WELL, AS THE PROVISIONS OF SECTIONS 10A AND 10B ARE IDENTICAL ON ALL MATERIAL ASPECTS. MORE PARTICULARLY, BOTH THE SECTI ONS DEFINE ONLY EXPORT TURNOVER BUT NOT TOTAL TURNOVER AND SUB-SECTION (4) OF BOTH THE SECTIONS PRESCRIBE AN IDENTICAL FORMULA FOR COMPUTING THE EX PORT PROFITS. 9.3 IN THE LIGHT OF THE ABOVE REASONING, WE UPHOLD THE ORDER OF THE CIT(A) AND DIRECT THE AO TO EXCLUDE THE ABOVE MENTI ONED EXPENSES BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH DAY OF OCTOBER, 2011 SD/- SD/- (N K SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER PAGE 7 OF 7 ITA NO.202/BANG/2011 7 COPY TO:- 1.THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCE RNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.