KMG Infotech Private Ltd., Bangalore V. ACIT, Bangalore

ITA 70/BANG/2012

• Counselvise Citation: 7021114 RSA 2012
• Duration Of Justice: 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 16-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: FARAHAT HUSSAIN QURESHI CITII
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Capital asset; Depreciation; Question of law; Deemed export; Competent authority; Revenue expenditure; Capital expenditure
• Section: 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.70/BANG/2012 ASSESSMENT YEAR : 2006-07 KMG INFOTECH PVT. LTD., UNIT NO.201/202, VANGUARD RISE NO.163, KONENA AGRAHARA, OFF AIRPORT ROAD, BANGALORE 560 017. PAN : AABCK 2065P VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. APPELLANT RESPONDENT ITA NO.280/BANG/2012 ASSESSMENT YEAR : 2006-07 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. VS. KMG INFOTECH PVT. LTD., UNIT NO.201/202, VANGUARD RISE NO.163, KONENA AGRAHARA, OFF AIRPORT ROAD, BANGALORE 560 017. PAN : AABCK 2065P APPELLANT RESPONDENT ASSESSEE BY : SHRI PADAMCHAND KHINCHA, C.A. REVENUE BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II( DR) DATE OF HEARING : 10.10.2012 DATE OF PRONOUNCEMENT : 31.10.2012 ITA NOS.70 & 280/BANG/12 PAGE 2 OF 14 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA 70/BANG/2012 IS AN APPEAL BY THE ASSESSEE WH ILE ITA 280/BANG/2012 IS AN APPEAL BY THE REVENUE. BOTH TH ESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 28.11.2011 OF THE CIT(APPEALS)-I, BANGALORE RELATING TO ASSESSMENT YEAR 2006-07. ITA 70/BANG/2012 2. GROUND NO.1.1 RAISED BY THE ASSESSEE IN ITS APPE AL READS AS FOLLOWS:- 1.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEA LS)-I, BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN TREATING THE EXPENDITURE INCURRED ON COM PUTER PERIPHERALS AMOUNTING TO RS. 1,89,722/- AS CAPITAL IN NATURE. THE ADDITION MADE TO INCOME RETURNED AMOUNTING TO RS. 7 5,889/- AFTER ALLOWING DEPRECIATION AT THE RATE OF 60% IN RESPECT OF THE IMPUGNED EXPENDITURE IS INCORRECT AND BAD IN LAW. 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF SOFTWARE DEVELOPMENT AND EXPORTING SOFTWARE (100% EOU). THE ASSESSEE HAD DEBITED A SUM OF Q 1,89,722 UNDER THE HEAD COMPUTER PERIPHERALS IN TH E PROFIT & LOSS ACCOUNT. ACCORDING TO THE AO, ON A P ERUSAL OF ALL THE DETAILS, IT WAS SEEN THAT THEY WERE ALL ACQUISITION OF CAPITAL ASSETS AND CANNOT BE ALLOWED AS REVENUE EXPENDITURE. THE AO THEREFORE ALLOWED DEPRECIATION AT 60% AND DISALLOWED THE SUM OF Q 75,889. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) HELD AS FOLLOWS:- ITA NOS.70 & 280/BANG/12 PAGE 3 OF 14 5.1. I HAVE CONSIDERED THE ABOVE. WITH EFFECT FROM 01.04.1999 COMPUTERS, WERE TREATED AS A DIFFERENT CLASS OF ASS ET. IT HAS BEEN INTERPRETED BY TRIBUNALS NOW THAT COMPUTER INCLUDES EVEN THE SWITCHES, UPS AND OTHER PERIPHERALS AS PART OF COMP UTER BECAUSE SUCH ARE NECESSARY FOR THE UPKEEP AND MAINTENANCE O F COMPUTERS VIDE,, DIT VS, DATACRAFT INDIA LTD., (2010) 133 TTJ (MUM D TRIB) 377 THEREFORE NOWADAYS 60% DEPRECIATION IS ALLOWED THER EON INSTEAD OF 25% ALLOWED EARLIER HOLDING IT AS PLANT. THEREFO RE I FIND A.OS ACTION JUSTIFIED. THE DISALLOWANCE OR ADDITION IS F OUND JUSTIFIED. GROUND OF APPEAL IS REJECTED. 4. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DETAILS OF EXPENSES INCURRED ON COMPUTER PERIPHERALS WHICH IS PLACED AT PAGES 35 & 36 OF THE PAPERBOOK. IT WAS SUBMITTED BY HIM THAT NONE OF THE AUTHORITIES HAVE CONSIDERED THE ACTUAL NATURE OF EXPENSES. ACC ORDING TO HIM, THE EXPENSES WERE PURELY CONSUMABLES AND CANNOT BE SAID TO BE CAPITAL EXPENDITURE. 5. THE LD. DR RELIED ON THE ORDER OF THE CIT(APPEAL S). 6. WE ARE OF THE VIEW THAT NONE OF THE AUTHORITIES HAVE DISCUSSED THE ACTUAL NATURE OF EXPENSES AND THEREFORE IT WOULD BE PROPER TO SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO EXAMINE TH E ISSUE AFRESH IN THE LIGHT OF THE DETAILS OF THE EXPENSES AS GIVEN IN PA GES 35 & 36 OF THE ASSESSEES PAPERBOOK. 7. GROUND NO.2.1 RAISED BY THE ASSESSEE READS AS FO LLOWS:- 2.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S)-I, BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN NOT INCLUDING DEEMED EXPORTS OF 13,42,40 6/- IN THE FIGURE OF EXPORT TURNOVER. ITA NOS.70 & 280/BANG/12 PAGE 4 OF 14 8. IT WAS FAIRLY CONCEDED BY THE LD. COUNSEL FOR TH E ASSESSEE THAT IN ASSESSEES OWN CASE FOR THE AYS 2004-05, 2005-06, T HIS TRIBUNAL CONSIDERED AN IDENTICAL ISSUE AND IN PARA 6.5 AND 6 .6 OF ITS ORDER IN ITA NOS.584 TO 586/BANG/2010, HELD THAT THE DEEMED EXPO RT CANNOT BE INCLUDED IN THE EXPORT TURNOVER. IN VIEW OF THE AB OVE, GROUND NO.2.1 RAISED BY THE ASSESSEE IS DISMISSED. 9. GROUND NO.3.1 RAISED BY THE ASSESSEE READS AS FO LLOWS:- 3.1 WITHOUT PREJUDICE, THE LEARNED COMMISSIONER O F INCOME TAX (APPEALS)-I, BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN REDUCING DEEMED EXPORTS OF RS. 13,42,406/- FROM THE FIGURE OF EXPORT TURNOVER WHIC H DID NOT INCLUDE DEEMED EXPORTS. THE EXCLUSION OF DEEMED EXP ORTS FROM THE EXPORT TURNOVER WHICH DID NOT INCLUDE DEEMED EX PORTS IN THE FIRST PLACE, IS INCORRECT AND BAD IN LAW. 10. THIS PLEA OF THE ASSESSEE IS THAT THE DEEMED EX PORT TURNOVER HAD ALREADY BEEN REDUCED FROM THE EXPORT TURNOVER AND T HE AO HAS AGAIN REDUCED THE DEEMED EXPORTS FROM THE EXPORT TURNOVER WHILE ALLOWING DEDUCTION U/S. 10A OF THE ACT. IN OUR VIEW, THIS A SPECT NEEDS VERIFICATION BY THE AO AND IF THE CONTENTION OF THE ASSESSEE IS FOU ND TO BE CORRECT, THEN THE AO IS DIRECTED TO EXCLUDE THE DEEMED EXPORTS FR OM THE EXPORT TURNOVER. 11. GROUND NO.4.1 RAISED BY THE ASSESSEE READS AS F OLLOWS:- 4.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S)-I, BANGALORE HAS ERRED IN DISMISSING GROUND NO. 5 OF T HE APPEAL AFTER CONCLUDING THAT THE (I) ASSESSING OFFICER IS NOT JUSTIFIED IN REDUCING EXPORT PROCEEDS OF RS. 1,94,98,533/- RECEIVED BEYOND 6 MON THS FROM THE END OF THE PREVIOUS YEAR; ITA NOS.70 & 280/BANG/12 PAGE 5 OF 14 (II) EXPORT PROCEEDS RECEIVED IN OR BROUGHT INTO I NDIA IN ACCORDANCE WITH THE RBI GUIDELINES SATISFY THE REQUIREMENTS OF SECTION 10A(3). 12. ON THE ABOVE ISSUE, THE CIT(A) HELD AS FOLLOWS: - IN THIS GROUND THE AR OBJECTS TO REDUCTION OF RS.1 ,94,98,533/- RECEIVED BEYOND THE STIPULATED PERIOD OF 6 MONTHS F ROM THE ET. HE STATES THAT SUCH TIME HAS BEEN EXTENDED TO 12 MO NTHS BY THE RBI WE.F, 01.11.2004 AND THE ABOVE AMOUNT HAS BEEN RECEIVED WITHIN THAT EXTENDED PERIOD. I FIND STRENGTH IN TH E ARGUMENT OF THE A.R. S.10A(3) PROVIDES THAT CFF BROUGHT TO IND IA WITHIN THE TIME EXTENDED BY THE COMPETENT AUTHORITY IS ALSO TO BE TREATED AS EXPORT TURNOVER. HERE THE COMPETENT AUTHORITY I.E. RBI HAS ISSUED A GUIDELINE EXTENDING THE TIME TO 2 YEAR AND WITHIN THAT PERIOD THE CFE OF RS.1,94,961/- HAS BEEN BROUGHT IN TO INDIA HENCE THE ACTION OF AO IS NOT FOUND JUSTIFIED. GRO UNDS OF APPEAL IS DISMISSED. 13. IT IS CLEAR FROM THE ORDER OF THE CIT(APPEALS) THAT HE HAS ACCEPTED THE PLEA OF THE ASSESSEE, BUT BY MISTAKE INSTEAD OF OBSERVING THAT GROUND OF APPEAL IS ALLOWED, HAS OBSERVED THAT THE GROUND OF APPEAL IS DISMISSED. IN VIEW OF THE FACT THAT THERE IS A VALID EXTENSION OF TIME FOR REALIZATION OF THE EXPORT PROFITS BY 12 MONTHS AND IN VIEW OF THE FACT THAT CFF WAS BROUGHT INTO INDIA WITHIN THE EXTENDED PERIOD, THE PLEA OF THE ASSESSEE OF INCLUDING THE EXPORT PROFITS SO RECEIVED AS PART OF THE EXPOR T TURNOVER HAS TO BE ALLOWED. WE HOLD AND DIRECT ACCORDINGLY. GROUND NO .4.1 IS ALLOWED. 14. GROUND NOS.5.1, 5.2 & 6.1 RAISED BY THE ASSESSE E READS AS FOLLOWS:- 5.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEA LS)-I, BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN REDUCING THE TELECOMMUNICATION EXPENSES OF RS. 17,73,692/- FROM EXPORT TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION UNDER SECTION 10A. ITA NOS.70 & 280/BANG/12 PAGE 6 OF 14 5.2 IN ANY CASE AND WITHOUT PREJUDICE, ONLY EXPEND ITURE ATTRIBUTABLE TO DELIVERY OF COMPUTER SOFTWARE OUTSI DE INDIA IS TO BE EXCLUDED FROM THE EXPORT TURNOVER AND NOT THE EN TIRE EXPENDITURE. 6.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S)-I, BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN REDUCING EXPENSES INCURRED IN FOREIGN CU RRENCY AMOUNTING TO RS. 25,15,53,763/- FROM THE FIGURE OF EXPORT TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION UNDER SECTION L0B. 15. THESE GROUNDS CAN BE CONVENIENTLY DECIDED WITH THE EFFECTIVE GROUNDS OF APPEAL RAISED BY THE REVENUE WHICH READ AS UNDER:- 1. THE ORDER OF THE LEARNED CIT(APPEALS), IN SO FA R AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE, IS OPPOSED TO LAW AND THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LEARNED CIT(APPEALS) WAS NOT JUSTIFIED IN DI RECTING THE AO TO RECOMPUTED THE DEDUCTION ALLOWABLE U/S. 1 0B OF THE I.T. ACT, 1961 AFTER REDUCING THE TELECOMMUNICATION EXPENSES OF RS.17,73,692/- AND ONSITE EXPENDITURE SPENT IN FORE IGN CURRENCY AMOUNTING TO RS.25,15,53,763/-, BOTH FROM THE EXPOR T TURNOVER AND THE TOTAL TURNOVER, WITHOUT APPRECIATING THE FA CTS AND CIRCUMSTANCES OF THE CASE. 3. THE LEARNED CIT(APPEALS) HAS ERRED IN NOT APPREC IATING THAT THERE IS NO PROVISION IN SECTION 10B, WHICH RE QUIRES THE ABOVE MENTIONED EXPENSES TO BE REDUCED FROM THE TOT AL TURNOVER. 4. THE LEARNED CIT(APPEALS) ERRED IN ALLOWING THE R ELIEF, RELYING ON THE DECISION OF THE HONBLE HIGH COURT I N ITA NO.349 OF 2010 (CLUBBED IN CONSOLIDATED ORDER IN ITA NO.70 /2009 & OTHERS), WHICH HAS NOT BEEN ACCEPTED BY THE DEPARTM ENT AND SLP HAS BEEN RECOMMENDED TO BE FILED BEFORE THE HONBLE SUPREME COURT U/S. 261 OF THE I T ACT, 1961 AGAINST SUCH OR DER. 16. AS FAR AS THE AFORESAID GROUNDS ARE CONCERNED, THE CIT(A) DIRECTED THE AO TO EXCLUDE THE TELECOMMUNICATION EXPENSES BO TH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER AND ALS O THE EXPENSES OF Q ITA NOS.70 & 280/BANG/12 PAGE 7 OF 14 25,15,53,763 INCURRED IN FOREIGN CURRENCY BOTH FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. THE PLEA OF THE ASSESSEE I S THAT IT SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER AT ALL. THE PLEA OF THE REVENUE, ON THE OTHER HAND, IS THAT IT SHOULD BE EXCLUDED ONLY FROM THE EXPORT TURNOVER AND NOT THE TOTAL TURNOVER. 17. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. FROM THE DETAILS GIVEN, IT IS CLEAR THAT TH E ASSESSEE ITSELF HAD EXCLUDED THE ONSITE EXPENSES FROM BOTH THE EXPORT T URNOVER AS WELL FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION U/S 10B OF THE INCOME TAX ACT, WHICH WAS ALSO CERTIFIED BY THE CHARTERED ACCO UNTANT. THE AO COMPLETED THE ASSESSMENT BY ADDING THE ONSITE EXPEN DITURES TO THE TOTAL TURNOVER. THEREFORE, IT IS ONLY PROPER THAT THE ALT ERNATIVE RELIEF CLAIMED BY THE ASSESSEE DESERVES CONSIDERATION. THE ALTERNATI VE RELIEF RAISED BY THE ASSESSEE, NAMELY, WHEN THE ONSITE EXPENDITURE IS TO BE REDUCED FROM THE EXPORT TURNOVER WHETHER THE SAME SHOULD BE REDUCED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A IS NO MORE RES INTEGRA. 18. THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. (330 ITR 175) , IN IDENTICAL CIRCUMSTANCES, HELD THAT SINCE THE EXPORT TURNOVER FORMS PART OF THE TO TAL TURNOVER, IF AN ITEM IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER TO MAINTAIN PARITY BETWEEN NUMER ATOR AND DENOMINATOR WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HONBLE BOMBAY HIGH COURT READS AS FOLLOWS:- ITA NOS.70 & 280/BANG/12 PAGE 8 OF 14 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 CONS TITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUBSECTION ( 4). EXPORT TURNOVER ALSO FORMS A CONSTITUENT ELEMENT OF THE DE NOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOT AL TURNOVER. THE EXPORT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAM E MEANING AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PR OVIDED A DEFINITION OF THE EXPRESSION EXPORT TURNOVER IN E XPLN.2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDE RATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES, T HINGS 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 IN SURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THING S OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TU RNOVER THE LEGISLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGH T AND INSURANCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BEH ALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES 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 DEFINED AT ALL BY PAR LIAMENT FOR THE PURPOSES OF S.10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVE R EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS B EEN 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 TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PR OVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PREVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTHER INTERPR ETATION WOULD LEAD TO AN ABSURDITY. IF THE CONTENTION OF THE REVE NUE WERE TO BE ACCEPTED, THE SAME EXPRESSION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNOTATION IN THE APPLICATION OF THE S AME FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD TO A SITUA TION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECI FICALLY 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 ITA NOS.70 & 280/BANG/12 PAGE 9 OF 14 IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVI SION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVE R, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NOT HAVE A NY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER. FR EIGHT AND INSURANCE CHARGES DO NOT HAVE ANY ELEMENT OF TURNOV ER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO B E EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CONTRARY CIT V SUDARSHAN CHEM ICALS INDUSTRIES LTD. (2000) 163 CTR (BOM) 596: (2000) 24 5 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 2 10 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARM A (INDIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON. 19. IN THE CASE OF SAK SOFT LTD. (SUPRA), THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTWARE AND CLA IMED DEDUCTION U/S 10B OF THE ACT. IN COMPLETING THE ASSESSMENT U/S 14 3(3) OF THE ACT, THE AO REDUCED THE EXPENDITURE INCURRED IN FOREIGN EXCHANG E 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 ACT. IN L IGHT 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 SECTION 10B, T HE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DE LIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE IND IA 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 APPEALS FILED BY THE DEPARTMENT ARE THUS DISMISSED . 20. FURTHER, IN THE CASE OF JAIPURIA SILK MILLS (P) LTD. V ACIT (ITA NO.1112/BANG/2009) , THE BANGALORE TRIBUNAL HAD PLACED RELIANCE ON ITA NOS.70 & 280/BANG/12 PAGE 10 OF 14 THE DECISION OF CHENNAI SPECIAL BENCH IN THE CASE O F SAK SOFT LTD. (SUPRA) AND HAD CONCLUDED THAT THE FREIGHT AND INSU RANCE EXPENSES ARE TO BE REDUCED BOTH FROM THE EXPORT TURNOVER AND TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT. 21. IN THE LIGHT OF THE ABOVE REASONING, THE ALTERN ATIVE RELIEF SOUGHT TO EXCLUDE THE SUM FROM BOTH TOTAL TURNOVER AND EXPORT TURNOVER IS ACCEPTED. THE GROUND OF THE ASSESSEE/REVENUE ARE DISMISSED. IT IS ALSO NOT IN DISPUTE THAT BEFORE US THAT IN ASSESSEES OWN CASE IN ITA NO.580 TO 586/BANG/2010 FOR THE AYS 2002-03 TO 2004-05 AND 20 05-06, THE ISSUES HAVE BEEN DECIDED AS SET FORTH ABOVE BY THE TRIBUNA L AND THOSE ORDERS HAVE ALSO BEEN CONFIRMED BY THE HONBLE KARNATAKA H IGH COURT IN ITA NO.404 TO 406/BANG/2011, JUDGMENT DATED 23.01.2012 . 22. GROUND NO.7.1 RAISED BY THE ASSESSEE READS AS FOLLOWS:- 7.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S)-I, BANGALORE HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN INCLUDING THE FOLLOWING ITEMS IN TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 1 0A. (A) VARIATION IN WORK IN PROGRESS RS. 1,93,80,943/- (B) EXCHANGE FLUCTUATION RS. 2,22,943/- (C) OTHER INCOME RS. 4,05,080/- 23. THE CIT(A) IN DECIDING THE ABOVE ISSUE HAS OB SERVED AS FOLLOWED:- 18. THESE GROUNDS RELATE TO DETERMINATION OF THE TOTAL TURNOVER WHEREIN THE AO. HAS INCLUDED. (I) VARIATION IN WORK IN PROGRESS 1,93,80,943/- (II) EXCHANGE FLUCTUATION 2,22,943/- (III) OTHER INCOME 4,05,080/- ITA NOS.70 & 280/BANG/12 PAGE 11 OF 14 THE AO IS OF THE OPINION THAT THE ABOVE THREE ITEMS DO NOT FORM PART OF E.T. BECAUSE THEY ARE NOT DERIVED FROM EXPORT BUSINESS OR ACTIVITY, I FIND SUCH JUSTIFIED. VARIAT ION IN WIP OR GAIN BECAUSE OF VARIATION IN FLUCTUATION RATE HAS N O DIRECT NEXUS WITH EXPORT OF SOFTWARE. SO FAR OTHER INCOME IS CON CERNED IT RELATES TO RECEIPT OF NOTICE PAY FROM THE EMPLOYEES SENT TO FOREIGN COUNTRIES FOR ONSITE COMPLETION OF PROJECTS WHO LEA VE THEIR JOB ON SHORT NOTICE BY PAYING A SUM TO THE ASSESSEE AS PER THE AGREEMENT. THUS THE IMMEDIATE CONNECTION IS WITH THE TERMS OF EMPLOYMENT AND JOB SATISFACTION BUT NOT THE EXPORT OF SOFTWARE . HENCE AO IS CORRECT IN NOT INCLUDING THE SAME IN E.T. BUT ONLY INCLUDING IN THE T.T. HENCE THE GROUNDS OF APPEAL ARE DISMISSED. 24. AS FAR AS THE ACTION OF THE REVENUE AUTHORITIES IN INCLUDING EXCHANGE FLUCTUATION AS PART OF TOTAL TURNOVER IS CONCERNED, THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. INFOSYS TECHNOLOGIES LTD. IN ITA NO.1189/2006 DATED 22.11.2011 , IN THE CONTEXT OF DEDUCTION U/S. 80HHE OF THE ACT HELD AS UNDER:- 8. WE HAVE HEARD THE LEARNED COUNSEL APPEARING FOR THE PARTIES AND SCRUTINIZED THE MATERIAL ON RECORD. BO TH THE FIRST APPELLATE AUTHORITY AND THE APPELLATE TRIBUNAL HAVE ANSWERED THE ABOVE SAID SUBSTANTIAL QUESTION OF LAW IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE SAID CONCURRENT FINDI NG ARRIVED AT BY THE AUTHORITIES IS JUSTIFIED AS THE FLUCTUATION IN THE VALUATION OF CURRENCY WHICH HAS TO BE CONVERTED TO FOREIGN CURRE NCY HAS DIRECT NEXUS TO THE EXPORT OF SOFTWARE AND CAN NEVER BE IN CLUDED AS INCOME FROM OTHER SOURCES. WHEREFORE, THE SAID FIN DING DOES NOT SUFFER FROM ANY ERROR OR ILLEGALITY AS TO CALL FOR INTERFERENCE IN THIS APPEAL. ACCORDINGLY, WE ANSWER THE 4 TH SUBSTANTIAL QUESTION OF LAW ALSO AGAINST THE REVENUE AND IN FAVOUR OF THE A SSESSEE. ACCORDINGLY, WE HOLD THAT THE APPEAL IS DEVOID OF M ERITS ... THE SUBSTANTIAL QUESTION OF LAW ON WHICH THE ABOVE DECISION WAS RENDERED IS AS FOLLOWS:- 4) WHETHER THE APPELLATE AUTHORITIES WERE CORRECT IN HOLDING THAT EXCHANGE RATE FLUCTUATION SHOULD BE TAKEN INTO CONSIDERATION ITA NOS.70 & 280/BANG/12 PAGE 12 OF 14 FOR COMPUTING SECTION 80HHE DEDUCTION BY REVERSING THE FINDING OF THE ASSESSING OFFICER THAT AS PER EXPLANATION-C TO SECTION 80HHE OF THE ACT ONLY ACTUAL AMOUNT OF FOREIGN EXCH ANGE RECEIVED IN INDIA CAN BE INCLUDED IN THE EXPORT TUR NOVER FOR COMPUTATION OF DEDUCTION U/S. 80HHE OF THE ACT? IN VIEW OF THE ABOVE, EXCHANGE FLUCTUATION HAS TO B E INCLUDED IN THE EXPORT TURNOVER ALSO. 25. AS FAR AS VARIATION IN THE WORK-IN-PROGRESS IS CONCERNED, THE FACTS ARE AS FOLLOWS. THE ASSESSEE RECOGNIZES REVENUE I N THE BOOKS OF ACCOUNTS IN RESPECT OF CONTRACTS WHICH WERE NOT COM PLETED DURING THE PREVIOUS YEAR. THESE CONTRACTS WERE NOT COMPLETED IN THE SENSE THAT THEY DID NOT REACH THE BILLING STAGE. THE ASSESSEE CONS IDERS THE REVENUE THAT IS LIKELY TO BE REALIZED FROM SUCH UNCOMPLETED CONTRAC TS AS AN UNBILLED REVENUE AND IS SHOWN AS VARIATION IN WORK-IN-PROGR ESS. IT IS THE PLEA OF THE ASSESSEE THAT THE BILLS WERE RAISED IN THE NEXT FINANCIAL YEAR UPON THE WORK REACHING THE BILLING STAGE. IT IS ALSO THE PL EA OF THE ASSESSEE THAT THE UNBILLED REVENUE WAS REALIZED WITHIN 12 MONTHS FROM THE DATE OF EXPORT. THE ASSESSEE DID NOT INCLUDE THE UNBILLED REVENUE E ITHER IN THE EXPORT TURNOVER OR TOTAL TURNOVER. THE AO WHILE PASSING T HE ORDER U/S. 143(3) OF THE ACT INCLUDED THE SAME IN THE TOTAL TURNOVER, BU T DID NOT INCLUDE THE SAME IN THE EXPORT TURNOVER. THE CIT(A) CONFIRMED THE A CTION OF THE AO. 26. BEFORE US, IT WAS BROUGHT TO OUR NOTICE THAT T HE CHENNAI BENCH OF THE ITAT IN THE CASE OF INAUTIX TECHNOLOGIES INDIA PVT. LTD. V. ACIT IN ITA NO.541/MDS/2006 & OTHER APPEALS, ORDER DATED 09.08.2011, HAS CONSIDERED THE ISSUE OF UNBILLED REVENUES AND HELD AS FOLLOWS:- ITA NOS.70 & 280/BANG/12 PAGE 13 OF 14 32. AFTER HEARING BOTH SIDES IN THE LIGHT OF AVAI LABLE EVIDENCE ON RECORD, WE FIND THAT THE ASSESSEE HAS BEEN CONSI STENTLY FOLLOWING ACCOUNTING STANDARD 9 ISSUED BY THE ICAI AND IN CASE THE ACTION OF THE ASSESSING OFFICER IS ENDORSED THE FIGURE OF TOTAL TURNOVER WILL GET REDUCED TO A FIGURE LOWER THAT TH E EXPORT TURNOVER. THEREFORE, WE ARE ALSO OF THE OPINION THA T THE INGREDIENTS THAT GO TO MAKE UP THE EXPORT TURNOVER SHOULD ALSO BE THE SAME FOR THE TOTAL TURNOVER. WE HAVE ALREADY TA KE A VIEW WHILE DECIDING SIMILAR ISSUE IN OTHER ASSESSMENT YE AR ALSO IN THE FORMER PART OF THIS ORDER. CONSEQUENTLY, WE CONFIRM THE FINDING OF THE LD. CIT(A) AND CANNOT ALLOW THE GROUNDS RAIS ED BY THE REVENUE IN THIS REGARD. 27. IN VIEW OF THE ABOVE DECISION OF THE CHENNAI BE NCH OF THE ITAT, WE ARE OF THE VIEW THAT THE AFORESAID SUM SHOULD ALSO BE TAKEN AS PART OF EXPORT TURNOVER. 28. THE NEXT ITEM IS OTHER INCOME. IT IS THE PLEA OF THE ASSESSEE THAT EMPLOYEES WHO LEAVE THE SERVICES OF THE ASSESSEE CO NTRARY TO THE TERMS OF EMPLOYMENT HAVE TO PAY COMPENSATION IN THE FORM OF NOTICE PAY TO THE ASSESSEE. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IT IS NOT IN ANY WAY RELATED TO THE OPERATIONAL INCOME AN D CANNOT BE TREATED AS PART OF THE TURNOVER. WE ARE OF THE VIEW THAT IT W OULD BE JUST AND FAIR TO DIRECT THE AO TO CONSIDER THE OTHER INCOME AS PART OF THE EXPORT TURNOVER ALSO. THUS, THE GRIEVANCE OF THE ASSESSEE WOULD GE T ADDRESSED, THOUGH STRICTLY SPEAKING, THEY CANNOT BE TREATED AS PART O F THE TURNOVER. THUS, GROUND NO.7.1 IS ALLOWED AS INDICATED ABOVE. 29. THE OTHER GROUNDS ARE PURELY CONSEQUENTIAL AND DO NOT CALL FOR ANY SPECIFIC ADJUDICATION. ITA NOS.70 & 280/BANG/12 PAGE 14 OF 14 30. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED, WHILE APPEAL BY THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF OCTOBER, 2012. SD/- SD/- ( JASON P.BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMB ER BANGALORE, DATED, THE 31 ST OCTOBER , 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.