DCIT, New Delhi V. Granada Services Pvt. Ltd., New Delhi

ITA 5519/DEL/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82100 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 11-11-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 09-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATPAL SINGH
• Keywords: Services rendered outside India

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C , NEW DELHI BEFORE SH. N. K. SAINI , AM AND SH. C. M. GARG , JM ITA NO. 5519 /DEL/2013 : ASSTT. YEAR : 2009 - 10 D CIT, CIRC LE 12 (1), N EW DELHI VS GRANADA SERVICES PVT. LTD., B - 44, MALCHA MARG, CHANKAYA PURI NEW DELHI - 1100 21 (APPELLANT) (RESPONDENT) PAN NO. A AACG0361K A SSESSEE BY : NONE REVENUE BY : SH. SATPAL SINGH, SR. DR DATE OF HEARIN G : 11.11 . 2014 DATE O F P RONOUNCEMENT : 14. 11 .2014 ORDER P ER N. K. SAINI , AM: THIS IS AN APPEAL BY THE DEPAR TMENT AGAINST THE ORDER DATED 31.7.2013 OF CIT(A) - X V , NEW DELHI . 2. THE ONLY EFFECTIVE GROUND RAISED IN THIS APPEAL READS AS UNDER: WHETHER LD. CIT(A) WAS CORRECT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN DELETING THE REDUCTION OF RS. 31,92,504/ - IN RESPECT OF INSURANCE & COMMISSION EXPENSES AND OF RS. 3,74,35,152/ - ON ACCOUNT OF EXPENSES INCURRED IN FOREIGN CURRENCY, BOTH FROM THE EXP ORT TURNOVER , FOR THE PURPOSE OF RECOMPUTING THE DEDUCTION U/S 10A OF THE ACT? 3. AT THE TIME OF HEARING NOBODY WAS PRESENT ON BEHALF OF THE ASSESSEE NEITHER ANY ADJOURNMENT WAS SOUGHT . WE, T HEREFORE, PROCEEDED EX - PARTE QUA THE ASSESSEE AND THE ISSUE IS DECIDED AFTER HEARING THE LD. DR , OF F COURSE ON MERIT. ITA NO. 5519 /DEL/2013 GRANADA SERVICES PVT. LTD. 2 4. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF BUSINESS PROCESS OUTSOURCING (BPO), WHICH PROVIDES BACK OFFICE SERVICES TO ITS OVERSEAS CLIENTS. THE UNIT OF THE ASS ESSEE WAS ELIGIBLE FOR DEDUCTION U/ S 10A OF THE IT ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT). DURING THE COURSE OF T HE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD INCURRED CERTAIN EXPENSES IN FOREIGN EXCHANGE AS UNDER, W HICH WERE NOT EXCLUDED FROM THE EXPORT TURNOVER WITHIN THE MEANING OF EXPLANATI ON 2(IV) TO SEC. 10A OF THE ACT: HEAD AMOUNT (IN RS.) MAINTENANCE CHARGES 1,45005/ - LEGAL & PROFESSIONAL CHARGES 1,21,22,835/ - LEASE LINE AND CONNECTIVITY CHARGES 2,28,99,966 / - TRAVELLING EXPENSES 5,01,604/ - COMMUNICATION COST 20,627/ - OTHERS 17,45,115/ - TOTAL 3,74,35,152/ - 5. THE AO ALSO OBSERVED THAT THE ASSESSEE HAD INCURRED FOLLOWING INSURANCE & COMMUNICATION EXPENSES AS WELL WHICH HAD ALSO NOT BEEN EXCLUDED FROM THE COMPUTATION OF EXPORT TURNOVER: HEAD AMOUNT (IN RS.) INSURANCE 13,65,070/ - COMMUNICATION COST 18,27,434/ - TOTAL 31,92,504/ - 6 . THE CONTENTION OF THE ASSESSEE BEFORE THE AO WAS THAT SINCE THE EXPENSES WERE NOT IN THE NATURE OF TURNOVER , THE SAME WER E NOT INCLUDED UNDER THE EXPORT TURNOVER AND HENCE THERE WAS NO NEED TO EXCLUDE IT FROM ITA NO. 5519 /DEL/2013 GRANADA SERVICES PVT. LTD. 3 EXPORT TURNOVER. THE SAID EXPLANATION WAS NOT ACCEPTED BY THE AO WHO EXCLUDED AN AMOUNT OF RS. 4,05,37,656/ - FROM THE EXPORT TURNOVER AND RECOMPUTED THE DEDUCTION U/S 1 0A AT RS. 29,06,50,133/ - . 7 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED THAT HAVING REDUCED THE EXPENSES FROM THE EXPORT TURNOVER, THE AO OUGHT TO HAVE EXCLUDED THE SAME FROM TOTAL TURNOVER ALSO. THE RELIANCE WAS PLACE D ON THE FOLLOWING CASES: DCIT VS SRA SYSTEM LTD. (2008) 305 ITR (AT) 427 ACIT VS INFOSYS TECHNOLOGIES LTD. 172 TAXMAN 134 (MAD.) CIT VS BHARAT EARTH MOVERS LTD. (2004) 268 ITR 232 8 . THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT THE ACTION OF THE AO WAS NOT JUSTIFIED AND THAT NONE OF THE EXPENSES IDENTIFIED BY THE AO OUGHT TO HAVE BEEN EXCLUDED FROM EXPORT TURNOVER AS THOSE W ERE NOT INCURRED FOR PROVIDING T ECHNICAL SERVICES OUTSIDE INDIA AND THERE WAS NO NEXUS OF COMMUNICATIO N EXPENSES WITH EXPORT OF SERVICES. THE RELEVANT FINDING S HAD BEEN GIVEN BY THE LD. CIT(A) IN THE IMPUGNED ORDER AT PARAS 6 T O 6.5 WHICH READ AS UNDER: 6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE IN THE LIGHT OF THE ABOVE SUBMISSIONS MADE BY THE APPELLANT AND APPLICABLE LAW IN THIS REGA RD. ACCORDINGLY, MY DECISION ON VARIOUS GROUNDS IS AS UNDER: 6.2 THE PROVISIONS OF SECTION 10A DEFINE THE TERM EXPORT TURNOVER AS UNDER: ITA NO. 5519 /DEL/2013 GRANADA SERVICES PVT. LTD. 4 THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED IN EXPLANATION 2 TO SE CTION 10A BY WHICH T HE EXPRESSION IS DEFINED TO MEAN , - THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THUS, WHETHER THE SPECIFIED EXPENSES OUGHT TO BE EXCLUDED FOR COMPUTING THE EXPORT TURNOVER OR NOT COULD B E EXAMINED ONLY IF THESE ARE EMBEDDED IN THE CONSIDERATION IN RESPECT OF EXPORT AND ARE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. IF ON THE FACTS OF THE CASE, IT IS PROVED THAT SUCH EXPENSES WERE NOT TO BE RECOVERED FROM THE CLIENT AND HENCE WERE NOT PART OF THE SALE CONSIDERATION, THERE IS NO GROUND FOR THEIR EXCLUSION FROM THE EXPORT TURNOVER IN TERMS OF THE EXPLANATION 2(IV) TO SECTION 10A. ON CAREFUL CONSIDERATION OF THE AGREEMENTS SIGNED BY APPELLANT SIGNED WIT H OVERSEAS CLIENTS, I FIND THAT NONE OF THESE AGREEMENTS REQUIRE THE APPELLANT TO RECOVER THE COSTS RELATING TO VARIOUS EXPENSES FROM ITS OVERSEAS CLIENTS AS PART OF ITS EXPORT PROCEEDS OVER AND ABOVE THE CONSIDERATION FOR SERVICE (FEES) AT THE AGREED RATE . THUS, IN THE ABSENCE OF THE SAME, SUCH EXPENSES ARE HELD TO BE NOT IN THE NATURE OF TURNOVER PER SE AND HENCE, THESE WERE NOT INCLUDED IN EXPORT TURNOVER . THEREFORE, THERE WAS NO ONUS ON THE APPELLANT TO EXCLUDE THE SAME FROM ETO. 6.3 WITHOUT PREJUD ICE TO THE ABOVE, I FIND THAT THE LD. AO FAILED TO APPRECIATE THAT VARIOUS EXPENSES INCURRED BY THE APPELLANT IN FOREIGN EXCHANGE WERE NOT INCURRED FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. ONLY WHEN THERE IS A PROXIMATE NEXUS BETWEEN THE EXPENSES AN D PROVISIONS OF TECHNICAL SERVICES OUTSIDE INDIA THAT THESE COULD BE CONSIDERED FOR EXCLUSION FROM ETO. SINCE THE APPELLANT PROVIDES BACK OFFICE SERVICES FROM INDIA, IT IS EVIDENT, ON PERUSAL OF INVOICES, THAT NO TECHNICAL ITA NO. 5519 /DEL/2013 GRANADA SERVICES PVT. LTD. 5 SERVICES WERE RENDERED BY THE APP ELLANT OUTSIDE INDIA. HENCE, THE ACTION OF THE LD. AO WAS NOT JUSTIFIED. 6.4 REGARDING THE INSURANCE EXPENSES, I FIND THAT THE SAME WERE NOT RELATED TO EXPORT OF BACK OFFICE SERVICES. SIMILARLY COMMUNICATION EXPENSES (RS. 18,27,434/ - ) ALSO COMPRISE OF VAR IOUS EXPENSES RELATED TO DOMESTIC USAGE, SUCH AS REIMBURSEMENT TO EMPLOYEES (RS. 6,91,196/ - ) FAX & COURIER CHARGES (RS. 4,81,604/ - ) AND EXPENSE RELATED TO SEVERAL MOBILE/LAND LINE PHONES. SINCE THERE IS NO NEXUS OF THE SAME WITH EXPORT OF SERVICES, THE ACT ION OF THE LD. AO WAS NOT BASED ON CORRECT INTERPRETATION OF FACTS AND LAW. 6.5 IN VIEW OF THE ABOVE, I HOLD THAT NONE OF THE EXPENSES IDENTIFIED BY THE LD. AO OUGHT TO HAVE BEEN EXCLUDED FROM EXPORT TURNOVER FOR COMPUTING DEDUCTION U/S 10A. ACCORDINGLY , THE APPEAL IS ALLOWED ON GROUND NO.4.A, 4.B AND 4.C. AS I HAVE ALLOWED APPEAL ON THESE GROUNDS, I AM NOT DECIDING THE APPEAL ON ALTERNATIVE GROUND NO. 4.D. GROUND NO.5 IS PREMATURE, HENCE NO DECISION IS REQUIRED THEREON. THE APPEAL IS ALLOWED IN FAVOUR O F APPELLANT. 9 . NOW THE DEPARTMENT IS IN APPEAL. THE LD. DR STRONGLY SUPPORTED THE ORDER OF THE AO AND REITERATED THE OBSERVATION MADE IN THE ASSESSMENT ORDER DATED 20.10.2011 . 10. A FTER CONSIDERING THE SUBMISSIONS OF THE LD . DR AND THE MATERIAL ON RECO RD, IT IS NOTICED THAT THE ASSESSEE HAD NOT INCURRED VARIOUS EXPENSES IN FOREIGN EXCHANGE FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THAT IS WHY THOSE WERE NOT INCLUDED IN THE EXPORT TURNOVER. IN OUR OPINION WHEN THE EXPENSES WERE NOT INCLUDED IN EXPO RT TURNOVER, T HERE WAS NO QUESTION OF EXCLUSION OF THE SAME FROM THE EXPORT TURNOVER. MOREOVER, THE LD. CIT(A) CATEGORICALLY STATED IN PARA 6.4 OF THE IMPUGNED ORDER THAT THE ITA NO. 5519 /DEL/2013 GRANADA SERVICES PVT. LTD. 6 COMMUNICATION EXPENSES AMOUNTING TO RS. 18,27,434/ - WERE RELATED TO DOMESTIC USAG E AND THERE WAS NO NEXUS OF THE SAME WITH EXPORT OF SERVICES. IT IS ALSO NOTICED THAT EXPLANATION 2(IV) TO SEC. 10A OF THE ACT PROVIDES THAT FREIGHT , TELECOMMUNICATION CHARGES OR I NSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA NOT TO BE INCLUDED IN EXPORT TURNOVER. 11 . ON A SIMILAR ISSUE THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS GEM PLUS JEWELLERY INDIA LTD. 330 ITR 175 (BOM) HELD AS UNDER: UNDER SUB - SECTION (1) OF SECTION 10A OF THE INCOME - TAX ACT, 1961, A DEDUCTION IS ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTI CLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS COMMENCING FROM THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS MANUFACTURE OR PRODUCTION. SUB - SECTION (4) OF SECTION 10A PROVIDES THE MA NNER IN WHICH THE PROFITS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE SHALL BE COMPUTED. UNDER SUB - SECTION (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 TURNOVER OF THE BUSINESS CARRIED OVER BY THE UNDERTAKING IS APPLIED TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING IN COMPUTING THE PROFITS DERIVED FROM EXPORT. IN OTHER WORDS, THE PROFITS OF THE BUSINESS OF THE UNDERTAKING ARE M ULTIPLIED BY THE EXPORT TURNOVER IN RESPECT OF THE ARTICLES, THINGS OR, AS THE CA SE MAY BE, COMPUTER SOFTWARE AND DIVIDED BY THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN DEFINED AT ALL BY PA RLIAMENT FOR THE PURPOSES OF SECTION 10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE ITA NO. 5519 /DEL/2013 GRANADA SERVICES PVT. LTD. 7 DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVER, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHI CH DOES NOT HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER. FREIGHT AND INSURANCE DO NOT HAVE AN ELEMENT OF TURNOVER. FOR THIS REASON IN ADDITION, TH ESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CONTRARY. 12 . SIMILARLY, THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS TATA ELXSI LTD. REPORTED AT 349 ITR 98 (KARN) HELD THAT THE TRIBUNAL WAS CORRECT IN DIRECTING THE EXCLUSION OF COMMUNICATION CHARGES FROM EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER. 13 . WE, THEREFORE, CONSIDERING THE TOTALITY OF THE FACTS AND THE RATIO LAID DOWN BY THE VARIOUS HIGH COURTS AS MEN TIO NED IN THE AFORESAID REFERRED T O ORDERS D O NOT SEE ANY INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(A) AND ACCORDINGLY DO NOT SEE MERIT IN THIS APPEAL OF THE DEPARTMENT. 1 4 . IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS DISMISSED. ( ORDER PRONOU N CED IN T HE OPEN COURT ON 14 /11 / 2014 ) . SD/ - SD/ - ( C. M. GARG ) ( N. K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 14 /11 / 2014 *SUBODH*