ITO, Bangalore V. M/s Maxim India Integrated Circuit Design Pvt. Ltd., Bangalore

ITA 28/BANG/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8555 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-02-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 10-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Question of law
• Section: 80HHC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI ABRAHAM P. GEOGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER IT(TP)A NO.28/BANG/2012 ASSESSMENT YEAR : 2005-06 THE INCOME TAX OFFICER, WARD 12(1), BANGALORE. VS. M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD., NO.132/133, WEST WING II FLOOR, YAMALUR POST, OFF AIRPORT ROAD, BANGALORE 560 037. PAN: AACCM 9437E APPELLANT RESPONDENT APPELLANT BY : DR. P.K. SRIHARI, ADDL. CIT(DR) RESPONDENT BY : NONE DATE OF HEARING : 23.02.2016 DATE OF PRONOUNCEMENT : 31.03.2016 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST TH E ORDER DATED 11.11.2011 OF THE CIT(APPEALS)-IV, BANGALORE FOR TH E ASSESSMENT YEAR 2005-06. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- IT(TP)A NO.28/BANG/2012 PAGE 2 OF 12 1. THE ORDER OF THE LEARNED CIT(A) IN SO FAR AS IT R ELATES TO THE FOLLOWING GROUNDS IS OPPOSED TO LAW AND FACTS O F THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE LEARNED CIT(A) ERRED IN HOLDING THAT THE TPO ERRED IN NOT EXCLUDING COMPARABLES HAVING ANY RELATED PARTY TRAN SACTIONS. 3. THE ID. CIT(A) ERRED IN HOLDING THAT PROFIT ON CO ST OF MORE THAN 50% OF THE COMPARABLE COMPANY(IES) IS ABNORMAL WITHOUT GIVING REASONS HOW FUNCTIONS DISCHARGED, ASSETS DEP LOYED AND RISKS ASSUMED OF SUCH COMPANIES WERE DIFFERENT FROM THAT OF THE APPELLANT COMPANY. 4. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE SI ZE, TURNOVER AND BRAND OF THE COMPANY ARE DECIDING FACTORS FOR T REATING A COMPANY AS A COMPARABLE, AND ACCORDINGLY ERRED IN E XCLUDING M/S INFOSYS TECHNOLOGIES LTD., M/S IGATE GLOBAL SOL UTIONS LTD., FLEXTRONICS SOFTWARE SYSTEM LTD., L & T INFOTECH LT D., SATYAM SOFTWARE SERVICES LTD., AND INFOSYS TECHNOLOGIES LTD., AS COMPARABLES. 5. THE ID. CIT(A) ERRED IN HOLDING THAT EXPENDITUR E OF RS.11,44,740/- TOWARDS TELECOMMUNICATION EXPENSES AND OTHER EXPENSES OF RS.1,31 , 528/- INCURRED IN FOREIGN CURRENCY ARE TO BE EXCLUDED FROM TOTAL TURNOVER AS WELL WHEREAS SUCH E XCLUSION IS PERMITTED TO ARRIVE AT THE EXPORT TURNOVER ONLY AS PER THE DEFINITIONS GIVEN IN SEC.10A OF THE ACT AND TOTAL T URNOVER HAS NOT BEEN DEFINED IN THE SECTION. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT( A) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND TH AT OF THE ASSESSING OFFICER MAY BE RESTORED. 7. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND/OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 3. NONE HAS APPEARED ON BEHALF OF THE ASSESSEE-RES PONDENT WHEN THIS APPEAL WAS CALLED REPEATEDLY FOR HEARING, NOR ANY REQUEST OF IT(TP)A NO.28/BANG/2012 PAGE 3 OF 12 ADJOURNMENT HAS BEEN FILED ON BEHALF OF THE ASSESSE E, THEREFORE, WE PROPOSE TO HEAR AND DISPOSE OF THIS APPEAL EX PARTE . 4. GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT RE QUIRE ANY SPECIFIC ADJUDICATION. 5. GROUND NO.2 IS REGARDING THE DIRECTION OF DRP IN EXCLUDING THE COMPARABLE COMPANIES HAVING RELATED PARTY TRANSACTI ON. 6. WE HAVE HEARD THE LD. DR AND CONSIDERED THE RELE VANT MATERIAL ON RECORD. IT HAS BEEN POINTED OUT BY THE LD. DR THAT THE CIT(APPEALS) HAS DIRECTED THE TPO TO EXCLUDE THE COMPANIES WHICH HAV E RELATED PARTY TRANSACTIONS (RPT) WITHOUT SPECIFYING THE EXACT PER CENTAGE OF RPT TO BE TAKEN AS THRESHOLD LIMIT. WE FIND THAT THE TPO HAS NOT APPLIED ANY FILTER OF RPT FOR SELECTION OF COMPARABLE COMPANIES. THE CIT (APPEALS) WHILE PASSING THE IMPUGNED ORDER HELD THAT THERE IS NO NE ED FOR INCLUSION OF THE COMPANIES WHICH HAVE RPT AND ACCORDINGLY DIRECTED T HE AO TO EXCLUDE THE COMPANIES HAVING RPT FROM THE COMPARABLES. IT IS P ERTINENT TO NOTE THAT IN THE NORMAL CIRCUMSTANCES THE TRIBUNAL HAS CONSIDERE D 15% AS THRESHOLD LIMIT OF RPT, WHEN THERE IS NO DIFFICULTY OF FINDIN G THE COMPARABLE COMPANIES. THEREFORE, IN VIEW OF THE FACT THAT THE CIT(APPEALS) HAS NOT FIXED ANY THRESHOLD LIMIT OF RPT, WE MODIFY THE IMP UGNED ORDER OF THE CIT(A) AND DIRECT THE AO/TPO TO APPLY 15% RPT AS TH RESHOLD LIMIT FOR THE PURPOSE OF SELECTING COMPARABLES. THIS GROUND OF T HE REVENUES APPEAL IS PARTLY ALLOWED. IT(TP)A NO.28/BANG/2012 PAGE 4 OF 12 7. GROUND NO.3 IS THAT THE CIT(APPEALS) HAS DIRECTE D THE AO TO EXCLUDE THE COMPARABLE COMPANIES HAVING ABNORMAL/HI GH PROFIT MARGIN. 8. WE HAVE HEARD THE LD. DR AND CAREFULLY PERUSED T HE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE WAS CONSIDERED BY THE SPECIAL BENCH OF THE MUMBAI TRIBU NAL IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) (P.) LTD. V. ACIT, 14 7 ITD 83 (MUM)(SB) AND THE CONCLUSION OF THE SPECIAL BENCH RECORDED IN PARAS 98 & 99 OF THE SAID ORDER ARE AS UNDER:- 98. AS NOTED BY THE DIVISION BENCHES OF THE TRIBU NAL IN THE CASES DISCUSSED ABOVE, THE OECD GUIDELINES SUGGEST QUARTILE METHOD WHICH EXCLUDES THE COMPANIES THAT FALL IN TH E EXTREME QUARTILES FOR COMPARABILITY AND THERE IS DEVIATION IN THIS RESPECT IN T.P. REGULATIONS IN INDIA WHICH SPECIFY THE ARITHME TIC MEAN FOR DETERMINING THE ALP. NEVERTHELESS, THE OECD TP GUID ELINES HAVE CONSIDERED AND DEALT WITH THE SITUATION OF EXT REME RESULTS IN THE CONTEXT OF COMPARABILITY CONSIDERATION IN SECTI ON A.7.3 OF CHAPTER III AND IT IS SUGGESTED IN PARA 2.63 THAT W HERE ONE OR MORE OF POTENTIAL COMPARABLES HAVE EXTREME RESULTS CONSI STING LOSS OR UNUSUAL HIGH PROFITS, FURTHER EXAMINATION WOULD BE NEEDED TO UNDERSTAND THE REASONS FOR EXTREME RESULTS. AFTER T AKING INTO CONSIDERATION THIS GUIDANCE PROVIDED IN OECD TRANSF ER PRICING GUIDELINES AND ON ANALYZING THE DECISIONS RENDERED BY THE DIVISION BENCHES OF THIS TRIBUNAL ON THIS ISSUE AFT ER TAKING INTO CONSIDERATION INTER ALIA THE T.P. REGULATIONS IN IN DIA AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE POTENTIAL COMPAR ABLES CANNOT BE EXCLUDED MERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGH. IN OUR OPINION, THE MATTER IN SUCH CASE WOULD REQUIRE FURTHER INVESTIGATION TO ASCERTAIN THE REASONS FOR UNUSUAL HIGH PROFIT AND IN ORDER TO ESTABLISH WHETHER THE ENTITIES WITH SUC H HIGH PROFIT CAN BE TAKEN AS COMPARABLES OR NOT. 99. THE QUESTION NO. 2 REFERRED TO THIS SPECIAL B ENCH IS AS TO WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CASE , COMPANIES EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD BE INC LUDED IN THE IT(TP)A NO.28/BANG/2012 PAGE 5 OF 12 LIST OF COMPARABLE CASES FOR THE PURPOSE OF DETERMI NING ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. AS AL READY OBSERVED, THE ISSUE INVOLVED IN THIS QUESTION HAS BECOME INFR UCTUOUS IN SO FAR AS THE CASE OF THE ASSESSEE BEFORE THE SPECIAL BENCH IS CONCERNED AND THE SAME THEREFORE NO MORE SURVIVES F OR CONSIDERATION IN THE PRESENT CASE. IN GENERALITY, W E ARE OF THE VIEW THAT THE ANSWER TO THIS QUESTION WILL DEPEND O N THE FACTS AND CIRCUMSTANCES OF EACH CASE INASMUCH AS POTENTIAL CO MPARABLE EARNING ABNORMALLY HIGH PROFIT MARGIN SHOULD TRIGGE R FURTHER INVESTIGATION IN ORDER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPARABLE OR NOT. SUCH INVESTIGATION SHOULD BE TO ASCERTAIN AS TO WHETHER EARNING OF HIGH PROFIT REFLECTS A NORMAL BU SINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNOR MAL CONDITIONS PREVAILING IN THE RELEVANT YEAR. THE PROFIT MARGIN EARNED BY SUCH ENTITY IN THE IMMEDIATELY PRECEDING YEAR/S MAY ALSO BE TAKEN INTO CONSIDERATION TO FIND OUT WHETHER THE HIGH PROFIT M ARGIN REPRESENTS THE NORMAL BUSINESS TREND. THE FAR ANALY SIS IN SUCH CASE MAY BE REVIEWED TO ENSURE THAT THE POTENTIAL C OMPARABLE EARNING HIGH PROFIT SATISFIES THE COMPARABILITY CON DITIONS. IF IT IS FOUND ON SUCH INVESTIGATION THAT THE HIGH MARGIN PR OFIT MAKING COMPANY DOES NOT SATISFY THE COMPARABILITY ANALYSIS AND OR THE HIGH PROFIT MARGIN EARNED BY IT DOES NOT REFLECT TH E NORMAL BUSINESS CONDITION, WE ARE OF THE VIEW THAT THE HIG H PROFIT MARGIN MAKING ENTITY SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLE FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE O F AN INTERNATIONAL TRANSACTION. OTHERWISE, THE ENTITY SA TISFYING THE COMPARABILITY ANALYSIS WITH ITS HIGH PROFIT MARGIN REFLECTING NORMAL BUSINESS CONDITION SHOULD NOT BE REJECTED SO LELY ON THE BASIS OF SUCH ABNORMAL HIGH PROFIT MARGIN. QUESTION NO. 2 REFERRED TO THIS SPECIAL BENCH IS ANSWERED ACCORDIN GLY. 9. THUS, IT IS CLEAR THAT MERELY A COMPANY OR ENTIT Y HAVING A HIGH PROFIT MARGIN OR HIGH LOSS CANNOT BE A REASON FOR EXCLUSIO N OR INCLUSION IN THE LIST OF COMPARABLES. HOWEVER, IF THE HIGH PROFIT OR HIG H LOSS IS AS A RESULT OF SOME ABNORMAL EVENT OR CIRCUMSTANCES IN A PARTICULA R COMPARABLE COMPANY, THE SAME IS TO BE INVESTIGATED AND EXAMINE D, AND IF IT IS FOUND THAT DUE TO THE SAID PARTICULAR EXTRA-ORDINARY OR A BNORMAL CIRCUMSTANCES THE IT(TP)A NO.28/BANG/2012 PAGE 6 OF 12 SAID COMPANY CANNOT BE REGARDED AS FUNCTIONALLY COM PARABLE TO THAT OF ASSESSEE, THEN ONLY IT IS TO BE EXCLUDED FROM THE L IST OF COMPARABLES. ACCORDINGLY, WE DIRECT THE AO/TPO TO FURTHER VERIFY AND INVESTIGATE THE ACTUAL REASON OF THE HIGH PROFIT MARGIN OF THE COMP ANY AND THEN DECIDE THE ISSUE IN THE LIGHT OF THE FINDING OF THE SPECIAL BE NCH IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) (P.) LTD. (SUPRA) . 10. GROUND NO.4 IS REGARDING EXCLUSION OF CERTAIN C OMPARABLE COMPANIES BY THE CIT(A) BY APPLYING THE TURNOVER FI LTER. 11. WE HAVE HEARD THE LD. DR AND CAREFULLY CONSIDER ED THE RELEVANT MATERIAL ON RECORD. THE CIT(A) HAS DIRECTED THE AO /TPO TO EXCLUDE 5 COMPARABLE COMPANIES ON THE GROUND THAT THEIR TURNO VER EXCEEDS RS.200 CRORES. THE DETAILS OF THE COMPANIES ARE AS UNDER: - SR NO. NAME OF THE COMPANY TURNOVER (RS. IN CRORES) 1 IGATE SOLUTIONS LTD. 406 2 FLEXTRONICS SOFTWARE SYSTEM LTD. 457.45 3 L&T INFOTECH LTD. 562.45 4 SATYAM COMPUTER SERVICES LTD. 3462.2 5 INFOSYS TECHNOLOGIES LTD. 6859.7 12. IT IS PERTINENT TO NOTE THAT THE CIT(A) HAS APP LIED TURNOVER SLAB OF RS.1 CRORE TO RS.200 CRORES FOR EXCLUDING THESE COM PANIES, WHEREAS THERE IS AN INHERENT DIFFICULTY IN APPLYING SUCH A TURNOV ER SLAB OF RS.1 CRORE TO RS.200 CRORES BECAUSE THE SAID CLASSIFICATION ON TH E BASIS OF SLAB OF THE TURNOVER GIVES UNREALISTIC RESULTS, AS AN ENTITY HA VING RS.1 CRORE TURNOVER CAN BE COMPARED WITH ANY ENTITY HAVING RS.200 CRORE S TURNOVER, BUT AT THE IT(TP)A NO.28/BANG/2012 PAGE 7 OF 12 SAME TIME AN ENTITY HAVING RS.200 CRORES TURNOVER C ANNOT BE COMPARED WITH AN ENTITY HAVING RS.201 CRORES TURNOVER. THUS , AS IT IS CLEAR FROM THE ABOVE ILLUSTRATION THAT IT GIVES AMBIGUOUS RESULT A S TWO ENTITIES HAVING DIFFERENCE OF RS.1 CRORE CANNOT BE CONSIDERED AS CO MPARABLE, WHEREAS ON THE OTHER HAND DIFFERENCE OF RS.199 CRORES CAN BE C ONSIDERED AS COMPARABLE COMPANY. THEREFORE, SUCH CLASSIFICATION OF COMPARABLES ON THE BASIS OF COMPANIES SELECTED ON TURNOVER BASIS I S NOT APPROPRIATE AND ACCEPTABLE. THE TURNOVER, NO DOUBT, IS A RELEVANT FACTOR TO BE TAKEN INTO ACCOUNT, BUT THERE SHOULD BE SOME PROPER AND REASON ABLE PARAMETER TO APPLY THE DIFFERENCE OF TURNOVER BETWEEN THE ASSESS EE AND THE COMPARABLE WHICH MAY BE A MULTIPLE IN THE RANGE OF 2 TIMES, 3 TIMES, X TIMES OR ANY OTHER NUMBER OF TIMES WHICH SHOULD BE APPLIED TO AL L THE COMPARABLE COMPANIES, INSTEAD OF TAKING A SLAB FROM RS.1 CRORE TO RS.200 CRORES. THUS, IF APPROPRIATE MULTIPLE TO SAY 10 TIMES IS AP PLIED, THEN THE ASSESSEE HAVING TURNOVER OF RS.8.15 CRORES CAN BE COMPARED W ITH A COMPANY WHICH IS HAVING A TURNOVER OF RS.81.5 CRORES. ACCORDINGL Y, IN VIEW OF THE ABOVE FACTS OF THE CASE, WE SET ASIDE THIS ISSUE TO THE R ECORD OF THE AO/TPO TO APPLY APPROPRIATE MULTIPLE OR DIFFERENTIAL FACTOR R EGARDING THE TURNOVER OF THE COMPARABLE AND THE ASSESSEE. 13. GROUND NO.5 IS REGARDING EXCLUSION OF TELECOMMU NICATION EXPENSES AND OTHER EXPENSES IN FOREIGN CURRENCY FROM TOTAL T URNOVER AS WELL. IT(TP)A NO.28/BANG/2012 PAGE 8 OF 12 14. WE HAVE HEARD THE LD. DR AND CAREFULLY CONSIDER ED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT T HIS ISSUE IS COVERED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF ACIT V. TATA ELXSI LTD., 349 ITR 49 [KARN] , WHEREIN THE HONBLE HIGH COURT HAS HELD AS UNDER: - 10. THE BOMBAY HIGH COURT HAD AN OCCASION TO CONSIDER THE MEANING OF THE WORD 'TOTAL TURNOVER' IN THE CONTEXT OF SECTION 10-A, IN THE CASE OF CIT V. GEM PLUS JEWELLERY INDIA LTD. [2011] 330 ITR 175 [2010] 194 TAXMAN 192 (BOM.). INTERPRETING SUB-SECTION (4) OF SECTION 10-A, IT IS HELD AS UNDER: 'UNDER SUB-SECTION (4) THE PROPORTION BETWEEN THE E XPORT TURNOVER IN RESPECT OF THE ARTICLES OR THINGS, OR, AS THE CASE MAY BE, COMPUTER SOFTWARE EXPORTED, TO THE TOTAL TURNOV ER OF THE BUSINESS CARRIED OVER BY THE UNDER-TAKING IS APPLIE D TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING IN COMPUTING THE PROFITS OF THE BUSINESS OF THE UNDERTAKING IN COMPUTING THE PROFIT S DERIVED FROM EXPORT. IN OTHER WORDS, THE PROFITS OF THE BUSINESS OF THE UNDERTAKING ARE MULTIPLIED BY THE EXPORT TURNOVER I N RESPECT OF THE ARTICLES, THINGS OR, AS THE CASE MAY BE, COMPUT ER SOFTWARE AND DIVIDED BY THE TOTAL TURNOVER OF THE BUSINESS CARRI ED OR BY THE UNDERTAKING. THE FORMULA WHICH IS PRESCRIBED BY SUB -SECTION (4) OF SECTION 10A IS AS FOLLOWS: THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY TH E UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPORT AND THE T URNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NU MERATOR IN THE FORMULA PRESCRIBED BY SUB-SECTION (4). EXPORT TURNO VER ALSO FORMS A CONSTITUENT ELEMENT OF THE DENOMINATOR INASMUCH A S THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE = PROFITS OF THE BUSINESS OF THE UNDERTAKING X EXPORT TURNOVER IN RESPECT OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING IT(TP)A NO.28/BANG/2012 PAGE 9 OF 12 THE EXPORT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANING AS THE EXPORT TURNOVER WHICH IS A CONSTITUE NT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLAT URE HAS PROVIDED A DEFINITION OF THE EXPRESSION 'EXPORT TUR NOVER' IN EXPLANATION 2 TO SECTION 10A BY WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY T HE UNDERTAKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED I N, OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN E XCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTIC LES THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGISLATURE HAS MADE A SPECIFIC EXCLUS ION OF FREIGHT AND INSURANCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF TH E REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE LIA BLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EX CLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POINT THAT THE EXP RESSION 'TOTAL TURNOVER' HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF SECTION 10A. HOWEVER THE EXPRESSION 'EX PORT TURNOVER' HAS BEEN DEFINED. THE DEFINITION OF 'EXPO RT TURNOVER' EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOV ER HAS BEEN DEFINED BE PARLIAMENT AND THERE IS A SPECIFIC EXCLU SION OF FREIGHT AND INSURANCE, THE EXPRESSION 'EXPORT TURNOVER' CAN NOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PR OVISION TO THE CONTRARY. HOWEVER, NO SUCH PROVISION HAVING BEE N MADE, THE PRINCIPLE WHICH HAS BEEN ENUNCIATED EARLIER MUST PR EVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTH ER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE CONTENTION OF TH E REVENUE WERE TO BE ACCEPTED, THE SAME EXPRESSION VIZ. 'EXPORT TURNOVER' WOULD HAVE A DIFFERENT CONNOTATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD T O A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH IT HAS BEEN SPE CIFICALLY EXCLUDED FROM 'EXPORT TURNOVER' FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE 'EXPOR T TURNOVER' WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMINATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVI SION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED.' IT(TP)A NO.28/BANG/2012 PAGE 10 OF 12 THE SPECIAL BENCH OF THE TRIBUNAL, IN THE CASE OF ITO V. SAK SOFT LTD. [2009] 313 ITR (AT) 353/ 30 SOT 55 (CHENNAI) ALSO HAD AN OCCASION TO CONSIDER THE MEANING OF THE WORD 'TOTAL TURNOVER '. AFTER REFERRING TO THE VARIOUS JUDGMENTS OF THE HIGH COURT AS WELL AS THE SUPREME COURT HELD AS UNDER: '53. FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PU RPOSE OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTI ON 10-B, THE FREIGHT TELECOM CHARGES OR INSURANCE ATTRIBUTABLE T O THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN P ROVIDING THE TECHNICAL 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 THE F ORMULA.' THE FORMULA FOR COMPUTATION OF THE DEDUCTION UNDER SECTION 10-A WOULD BE AS UNDER: PROFITS OF THE BUSINESS X EXPORT TURNOVER TOTAL TURNOVER 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 WOUL D PRODUCE ANOMALIES OR ABSURD RESULTS. SECTION 10-A IS A BENE FICIAL 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 O F THE BUSINESS ON THE BASIS OF TURNOVERS. APPORTIONMENT OF PROFITS ON THE BASIS OF TURNOVER WAS ACCEPTED AS A METHOD OF ARRIVING AT EX PORT PROFITS. IN THE EASE OF SECTION 80HHC, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS INCOME OF THE ASSESSEE, WHEREAS IN SECTION 10-A, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL B USINESS OF THE UNDERTAKING. EVEN IN THE CASE OF BUSINESS OF AN UND ERTAKING, IT MAY INCLUDE EXPORT BUSINESS AND DOMESTIC BUSINESS, IN O THER WORDS, EXPORT TURNOVER AND DOMESTIC TURNOVER. THE EXPORT T URNOVER WOULD BE A COMPONENT OR PART OF A DENOMINATOR, THE OTHER COMPONENT BEING THE DOMESTIC TURNOVER. IN OTHER WORDS, TO THE EXTEN T OF EXPORT TURNOVER, THERE WOULD BE A COMMONALITY BETWEEN THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA. IN VIEW OF THE COMM ONALITY, THE UNDERSTANDING SHOULD ALSO BE THE SAME. IN OTHER WOR DS, IF THE EXPORT IT(TP)A NO.28/BANG/2012 PAGE 11 OF 12 TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPU TING THE EXPORT TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DE NOMINATOR. THE REASON BEING THE TOTAL TURNOVER INCLUDES EXPORT TUR NOVER. 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 I S EXCLUDED FROM THE NUMERATOR THAT IS EXPORT TURNOVER WOULD NEVERTH ELESS FORM PART OF THE DENOMINATOR. THOUGH WHEN A PARTICULAR WORD IS N OT DEFINED BY THE LEGISLATURE AND AN ORDINARY MEANING IS TO BE AT TRIBUTED 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 US ED. WHEN THE STATUTE PRESCRIBES A FORMULA AND IN THE SAID FORMUL A, 'EXPORT TURNOVER' IS DEFINED, AND WHEN THE 'TOTAL TURNOVER' INCLUDES EXPORT TURNOVER, THE VERY SAME MEANING GIVEN TO THE EXPORT TURNOVER BY T HE LEGISLATURE IS TO BE ADOPTED WHILE UNDERSTANDING THE MEANING OF TH E TOTAL TURNOVER, WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER. I F WHAT IS EXCLUDED IN COMPUTING THE EXPORT TURNOVER IS INCLUDED WHILE ARRIVING AT THE TOTAL TURNOVER, WHEN THE EXPORT TURNOVER IS A COMPO NENT OF TOTAL TURNOVER, SUCH AN INTERPRETATION WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND IMPERMISSIBLE. IF THAT WERE THE INTENTIO N OF THE LEGISLATURE, THEY WOULD HAVE EXPRESSLY STATED SO. IF THEY HAVE N OT CHOSEN TO EXPRESSLY DEFINE WHAT THE TOTAL TURNOVER MEANS, THE N, WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE MEANING ASSI GNED BY THE LEGISLATURE TO THE EXPORT TURNOVER IS TO BE RESPECT ED AND GIVEN EFFECT TO, WHILE INTERPRETING THE TOTAL TURNOVER WHICH IS INCLUSIVE OF THE EXPORT TURNOVER. THEREFORE, THE FORMULA FOR COMPUTA TION OF THE DEDUCTION UNDER SECTION 10-A, WOULD BE AS UNDER: PROFITS OF THE BUSINESS OF THE UNDERTAKING X EXPORT TURN OVER (EXPORT TURNOVER + DOMESTIC TURN OVER) TOTAL TURN OVER 11. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY ERROR COMMITTED BY THE TRIBUNAL IN FOLLOWING THE JUDGMENT S RENDERED IN THE CONTEXT OF SECTION 80HHC IN INTERPRETING SECTIO N 10-A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE A ND THE SAME. THEREFORE, WE DO NOT SEE ANY MERIT IN THESE APPEALS . THE SUBSTANTIAL QUESTION OF LAW FRAMED IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. IT(TP)A NO.28/BANG/2012 PAGE 12 OF 12 15. FOLLOWING THE JUDGMENT OF HONBLE JURISDICTIONA L HIGH COURT IN THE CASE OF TATA ELXSI LTD. (SUPRA) , WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDER OF THE CIT(A), QUA DECISION. 16. IN THE RESULT, THE APPEAL BY THE REVENUE IS PAR TLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MARCH, 2016. SD/- SD/- ( ABRAHAM P. GEORGE ) (VIJA Y PAL RAO ) ACCOUNTANT MEMBER J UDICIAL MEMBER BANGALORE, DATED, THE 31 ST MARCH, 2016. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.