M/s Valu Labs, Hyderabad V. Addl.CIT., Range-8, Hyderabad

ITA 342/HYD/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5590 (ITAT-HYDERABAD)
• Duration Of Justice: 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 19-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: P MURALI MOHAN
• Section: 80HHC; 10B; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.342/HYD/2013 ASSESSMENT YEAR 2007-08 M/S. VALUE LABS HYDERABAD PAN AAEFV 9532G VS. ACIT, RANGE 8 HYDERABAD (APPELLANT) (RESPONDENT) ITA.NO.425/HYD/2013 ASSESSMENT YEAR 2007-08 DCIT, CIRCLE 8(1) HYDERABAD VS. M/S. VALUE LABS HYDERABAD PAN AAEFV 9532G (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. P. MURALI MOHAN FOR REVENUE : MR. SOLGY JOSE T. KOTTARAM DATE OF HEARING : 17.02.2014 DATE OF PRONOUNCEMENT : 19.02.2014 ORDER PER B. RAMAKOTAIAH, A.M. THESE CROSS-APPEALS BY ASSESSEE AND REVENUE ARE ON THE ISSUE OF DEDUCTION UNDER SECTION 10A, RE-CALCULA TED BY THE A.O. BY EXCLUDING CERTAIN AMOUNTS FROM EXPORT TURNOVER. THE APPEALS ARE ARISING OUT OF LEARNED CIT(A)-III ORDER DATED 24.01.2013. 2. WE HAVE HEARD LEARNED COUNSEL FOR THE ASSESSEE AND LEARNED D.R. ITA.NO.342 & 425/HYD/2013 M/S. VALUE LABS, HYDERABAD 3. BRIEFLY STATED, THE ASSESSEE IS A FIRM ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES. IT DECLARE D TOTAL INCOME OF RS.47,89,370/- AFTER CLAIMING DEDUCTION UNDE R SECTION 10A AMOUNTING TO RS.35,89,81,654/-. WHILE CALCULATING DEDUCTION UNDER SECTION 10A, THE A.O. EXC LUDED EXPORT RECEIPTS- NOT RECEIVED WITHIN SIX MONTHS OF RS.70,03,197/-. IN ADDITION INSURANCE CHARGES OF RS.21,54,790/- AND COMMUNICATION CHARGES OF RS.85,04,8 60/- WERE ALSO EXCLUDED. THUS, THE TOTAL AMOUNT EXCLUDED F ROM THE EXPORT TURNOVER WAS RS.1,76,62,847/-. HOWEVER, A.O. DID N OT EXCLUDE THE SAME FROM THE TOTAL TURNOVER THEREBY, RED UCING THE CLAIM OF DEDUCTION UNDER SECTION 10A TO RS.35,46,08,5 90/-. 3.1. THE ASSESSEE CONTENDED THE SAME BEFORE THE LEARNED CIT(A) AND RELIED ON VARIOUS CASES. LEARNED CIT(A ) WHILE ACCEPTING THAT ITAT IN THE CASE OF PATNI TELECOM 3 08 ITR (AT) 414 HAS ACCEPTED THAT IN ORDER TO MAKE THE FORMULA FOR THE PURPOSE OF EXPORT TURNOVER IN SECTION 10A WORKABLE, ONE HAS TO GIVE A SCHEMATIC INTERPRETATION TO THE FORMULA. THEREFORE, ELIMINATION SHOULD BE FROM BOTH THE DENOMINAT OR AND NUMERATOR. FOLLOWING THE ABOVE DECISION, THE LEARNED CIT(A) EXCLUDED THE COMMUNICATION CHARGES AND INSURANC E CHARGES FROM TOTAL TURNOVER AS WELL. HOWEVER, HE WAS OF THE OPINION THAT THE EXPORT PROFITS NOT RECEIVED WITHIN SIX MONT HS DOES NOT HAVE ANY STATUTORY BEARING AND SINCE EXPORT TUR NOVER IS DEFINED IN THE ACT, THE SAME CANNOT BE TREATED AS PART OF EXPORT TURNOVER, WHILE IT WILL CONTINUE TO BE PART OF TOTA L TURNOVER. THE LEARNED CIT(A), ACCORDINGLY, ALLOWED THE ASSESSEES CONTENTIONS PARTLY. ASSESSEE IS IN APPEA L ON THE ISSUE OF EXCLUDING EXPORT PROCEEDS NOT RECEIVED WITHIN SIX MONTHS FROM THE TOTAL TURNOVER WHILE REVENUE IS IN APPE AL ON ITA.NO.342 & 425/HYD/2013 M/S. VALUE LABS, HYDERABAD THE RELIEF GRANTED BY THE LEARNED CIT(A) WHILE EXCLUDIN G THE COMMUNICATION AND INSURANCE CHARGES FROM THE TOTAL TURNOV ER. 4. AT THE OUTSET, BOTH THE COUNSELS AGREED THAT THE ISSUE OF EXCLUDING COMMUNICATION CHARGES AND INSURANCE CHARGES FROM THE TOTAL TURNOVER IS COVERED IN FAVOUR OF THE ASSESSEE BY THE COORDINATE BENCH ORDERS IN VARIOUS CASES INCLUDING THAT OF THE ASSESSEE IN EARLIER YEARS IN ITA .NO.1113 & 1114/HYD/2006 DATED 31 ST DECEMBER, 2007. LEARNED COUNSEL HOWEVER, RELIED ON THE PRINCIPLES LAID DOWN ON THE ABOVE OR DER FOR THE EXCLUSION OF EXPORT PROCEEDS NOT RECEIVED WITHIN SIX MONTHS WHEREAS, LEARNED D.R. OBJECTED TO STATING THAT COMMUNICATION CHARGES AND INSURANCE CHARGES ARE SPECIFIC ALLY EXCLUDED BY THE DEFINITION WHEREAS, TOTAL TURNOVER WAS NOT DEFINED IN THE ACT UNDER THE PROVISIONS OF SECTION 10A. THEREFORE, THE SAME IS NOT APPLICABLE TO THE EXPORT PROCEE DS NOT RECEIVED. 5. IN REPLY, LEARNED COUNSEL RELIED ON THE DECISION OF HONBLE HIGH COURT OF KERALA IN THE CASE OF CIT VS. ABAD FISHARIES 125 TAXMAN 616 GIVEN IN THE CONTEXT OF SECTI ON 80HHC AND ALSO THE DECISION OF HONBLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS. GEM PLUS JEWELLERY INDIA LTD. 194 TAXMAN 192 IN THE CONTEXT OF SECTION 10A THAT EXPORT TURNOVER NUMERATOR MUST HAVE SAME MEANING AS EXPORT TURNOVER WHICH IS CONSTITUTE ELEMENT OF TOTAL TURNOVER IN DENOMINATOR. 6. WE HAVE CONSIDERED THE ISSUE AND RIVAL CONTENTIONS. AS FAR AS EXCLUSION OF COMMUNICATION CHA RGES AND INSURANCE CHARGES, AS DECIDED BY THE LEARNED CIT(A), TH ERE IS NO DISPUTE THAT THIS ISSUE WAS COVERED BY VARIOUS DEC ISIONS AND ALSO THE COORDINATE BENCH DECISION OF THIS TRIBUNAL I N THE ITA.NO.342 & 425/HYD/2013 M/S. VALUE LABS, HYDERABAD CASE OF APPLABS, HYDERABAD VS. DCIT IN ITA.NO.1113 & 1114/HYD/2006 DATED 31 ST DECEMBER, 2007 IN EARLIER YEARS WHICH IS AS UNDER : 5. WE HAVE CONSIDERED RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECOR D. THE ONLY OBJECTION OF THE ASSESSEE IS THAT THE COMP ONENTS WHICH WERE EXCLUDED FROM THE EXPORT TURNOVER FOR TH E PURPOSE OF DEDUCTION UNDER SEC. 10B SHALL ALSO BE EXCLUDED FROM THE TOTAL TURNOVER. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO HAS NO OBJECTION FO R EXCLUSION FROM THE TOTAL TURNOVER IN RESPECT OF THE COMPONENTS WHICH WERE EXCLUDED FROM THE EXPORT TURNOVER. WE HAVE ALSO CAREFULLY GONE THROUGH THE PROVISIONS OF SEC. 10B . SUB-SECTION (4) OF SEC.10B PROVIDES FOR COMPUTATION OF ELIGIBLE PROFIT FOR THE PURPOSE OF DEDUCTION UNDER SEC.10B . AS PER THIS FORMULA, TILE PROFIT SHALL BE AN AMOUNT WHICH BEARS TO THE PROFIT OF THE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THING S OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. 'TOTAL TURN OVER' WOULD MEAN THE AMOUNT RECEIVED BY THE ASSESSEE AS SALE PROCEEDS. WHILE CONSIDERING A SIMILAR PROVISION IN S EC. 80HHC OF THE INCOME-TAX ACT, THE APEX COURT, IN THE CA SE OF CIT V. LAKSHMI MACHINE WORKS (2007) 290 ITR 667, FOUND THAT FOR THE PURPOSE OF INCLUSION IN THE PROF IT THE RECEIPT SHOULD HAVE AN ELEMENT OF TURNOVER AND PROF IT. EVEN THOUGH THE APEX COURT CONSIDERED THE INCLUSION O F SOLES LAX AND EXCISE DULY IN THE TOTAL TURNOVER, THE PRINCIPLE LAID DOWN IN THAT CASE WOULD EQUALLY BE APPLICABLE TO THE PRESENT CASE. FURTHERMORE, WHATEVE R IS NOT INCLUDED IN THE EXPORT TURNOVER CANNOT FORM PART OF TOTAL TURNOVER ALSO. THE EXPENDITURE WHICH WAS EXCLUDE D BY THE ASSESSING OFFICER WHILE COMPUTING THE 'EXPORT TURNOVER' DOES NOT HAVE THE ELEMENT OF TURNOVER. THEREFORE, THE SAME CANNOT BE INCLUDED IN THE TOTAL TURNOVER ALSO. THEREFORE, WE DO NOT FIND ANY JUSTIFICA TION FOR INCLUSION OF THE EXPENDITURE WHICH IS EXCLUDED F ROM EXPORT TURNOVER, IN THE TOTAL TURNOVER. ACCORDINGLY, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND DIRECT TH E AO TO COMPUTE THE DEDUCTION UNDER SEC. 10B AFTER EXCLUDING THE EXPENDITURE FROM THE TOTAL TURNOVER, WHIC H WAS ALREADY EXCLUDED FROM THE EXPORT TURNOVER. 7. RESPECTFULLY FOLLOWING THE PRINCIPLES LAID DOWN ABOVE, WE ARE OF THE OPINION THAT EXPORT PROCEEDS NOT RECE IVED ITA.NO.342 & 425/HYD/2013 M/S. VALUE LABS, HYDERABAD WITHIN SIX MONTHS ARE ALSO TO BE EXCLUDED FROM THE TOTAL TURNOVER ON THE SAME PRINCIPLE. THIS ISSUE WAS ANALYSED BY THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. GE M PLUS JEWELLERY INDIA LTD. 194 TAXMAN 192 AS UNDER : 4. UNDER SUB-S. (1) OF S. 10A A DEDUCTION IS ALLOWED F ROM THE TOTAL INCOME OF THE ASSESSEE OF SUCH PROFITS AND GAI NS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CON SECUTIVE ASSESSMENT YEARS COMMENCING FROM THE ASSESSMENT YEA R RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKI NG BEGINS MANUFACTURE OR PRODUCTION. SUB-S. (4) OF S. 10A PROVIDES THE MANNER IN WHICH THE PROFITS DERIVED FR OM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE S HALL BE COMPUTED. SUB-S. (4) PROVIDES AS FOLLOWS : 'FOR THE PURPOSES OF SUB-SS. (1) AND (1A), THE PROFI TS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWAR E SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUS INESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT T URNOVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SO FTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING.' 5. UNDER SUB-S. (4) THE PROPORTION BETWEEN THE EXPORT TURNOVER IN RESPECT OF THE ARTICLES OR THINGS, OR AS THE CASE MAY BE, COMPUTER SOFTWARE EXPORTED, TO THE TOTAL TU RNOVER OF THE BUSINESS CARRIED OVER BY THE UNDERTAKING IS APP LIED TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING IN CO MPUTING THE PROFITS DERIVED FROM EXPORT. IN OTHER WORDS, TH E PROFITS OF THE BUSINESS OF THE UNDERTAKING ARE MULTIPLIED BY TH E EXPORT TURNOVER IN RESPECT OF THE ARTICLES, THINGS OR, AS T HE CASE MAY BE, COMPUTER SOFTWARE AND DIVIDED BY THE TOTAL TURN OVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. THE FORMU LA WHICH IS PRESCRIBED BY SUB-S. (4) OF S. 10A IS AS FOLL OWS : 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 ITA.NO.342 & 425/HYD/2013 M/S. VALUE LABS, HYDERABAD DIVIDED BY TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY TH E UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPOR T AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURNOVER C ONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB-S. ( 4). EXPORT TURNOVER ALSO FORMS A CONSTITUENT ELEMENT OF THE DENO MINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. 6. 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 LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESS ION 'EXPORT TURNOVER' IN EXPLN. 2 TO S. 10A BY WHICH TH E EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES, THINGS OR COMP UTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDIA BY THE AS SESSEE IN CONVERTIBLE FOREIGN EXCHANGE BUT SO AS NOT TO INCLUD E INTER ALIA FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURN OVER THE LEGISLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT A ND INSURANCE CHARGES. 7. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES A RE 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 DE FINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S. 10A. HOWEVE R, THE EXPRESSION 'EXPORT TURNOVER' HAS BEEN DEFINED. THE D EFINITION OF 'EXPORT TURNOVER' EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND T HERE IS A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE, THE E XPRESSION 'EXPORT TURNOVER' CANNOT HAVE A DIFFERENT MEANING WH EN 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 PROVISION TO THE CONTRARY. HOWEVER, NO SUCH PROVISION HAVING BEEN MADE, THE PRINCIPLE WHI CH HAS BEEN ENUNCIATED EARLIER MUST PREVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTHER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE CONTENTION OF THE REVENUE W ERE TO BE ITA.NO.342 & 425/HYD/2013 M/S. VALUE LABS, HYDERABAD 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 TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH IT HAS BEEN SPECIFICALLY EXCLUDED FROM 'EXPORT TURNOVER' FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE ' EXPORT TURNOVER' WHEN IT FORMS AN ELEMENT OF THE TOTAL TURN OVER AS A DENOMINATOR IN THE FORMULA. A CONSTRUCTION OF A STA TUTORY PROVISION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. 8. RESPECTFULLY FOLLOWING THE ABOVE, WE ARE OF THE OPINION THAT WHATEVER IS THE AMOUNT ARRIVED AT AS EXPORT TURNOVER FOR NUMERATOR, THE SAME SHOULD BE INCLUDED IN TH E TOTAL TURNOVER WHICH IS DENOMINATOR IN THE CALCULATION FOR DEDUCTION U/S 10A. THEREFORE, WE ALLOW THE ASSESSEES CONTENTIONS ON THIS ISSUE. 9. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED AND REVENUE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH FEBRUARY, 2014. SD/- SD/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACOUNTANT MEMBER HYDERABAD, DATED 19 TH FEBRUARY, 2014 VBP/- COPY TO : 1. M/S. VALUE LABS, PLOT NO.41, PHASE-II, HITECH CITY, MADHAPUR, HYDERABAD C/O. P. MURALI & CO. CHARTERED ACCOUNTANTS, 6-3-655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD-82. 2. THE ADDL.CIT, RANGE-8, HYDERABAD. 3. CIT(A)-III, HYDERABAD 4. CIT-II, HYDERABAD 5. D.R. ITAT, B BENCH, HYDERABAD.