DCIT, Bangalore V. M/s Network Appliance Systems (India) Pvt. Ltd., Bangalore

ITA 964/BANG/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1545 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 06-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARSHA PRAKASH CITII
• Assessee Lawyers: VIKASH DHARIWAL
• Section: 143(3); 10B; 147

Judgement Text

PAGE 1 OF 8 ITA NOS.963 & 964/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI GEORGE GEORGE K, J.M. AND SHRI A MOHAN ALANKAMONY, A.M ITA NOS.963 & 964/BANG/2010 (ASSESSMENT YEARS 2004-05 & 2005-06) THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE. - APPELLANT VS M/S NETWORK APPLIANCE SYSTEMS (INDIA) PVT. LTD., 3 RD FLOOR, FAIR WINDS BLOCK, EGL SOFTWARE PARK, INTERMEDIARY RING ROAD, BANGALORE-71. - RESPONDENT APPELLANT BY : SHRI HARSHA PRAKASH, CIT-II RESPONDENT BY : SHRI VIKASH DHARIWAL, C.A. ORD ER PER GEORGE GEORGE K : THESE APPEALS INSTITUTED BY THE REVENUE ARE DIREC TED AGAINST TWO SEPARATE ORDERS OF LEARNED CIT(A)-III, BANGALORE BOTH DATED 28/4/2010. THE ASST. YEARS CONCERNED ARE 2004 -05 AND 2005-06. 2. SINCE COMMON ISSUE IS INVOLVED IN BOTH THESE AP PEALS, THEY ARE HEARD TOGETHER AND DISPOSED OFF BY THIS CONS OLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE SOLITARY ISSUE THAT IS RAISED BY THE REVENUE IN THESE APPEALS ARE WHETHER THE CIT(A) IS JUSTIFIED I N DIRECTING THE PAGE 2 OF 8 ITA NOS.963 & 964/BANG/2010 2 AO TO EXCLUDE COMMUNICATION/LEASE LINE CHARGES AND TRAVELLING EXPENSES INCURRED IN FOREIGN CURRENCY FROM TOTAL TUR NOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE I T A CT. 4. BRIEFLY STATED THE FACTS ARE AS FOLLOWS:- THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT, SALES, MARKETING AND OTHER SUPPORTING SERVICES. THE ASSESSEE COMPANY WAS DULY REGISTERED WITH SOFTWARE TECHNOLOGY PARKS OF INDIA A ND WAS ENTITLED TO DEDUCTION U/S 10A OF THE ACT IN RESPECT OF THE PROFITS FROM THE BUSINESS OF DEVELOPMENT AND EXPORT OF COMP UTER SOFTWARE. 4.1 FOR THE ASST. YEAR 2004-05, RETURN OF INCOME WA S FILED ON 31.10.2004 DECLARING A TOTAL INCOME OF RS.63,12, 440/-. IN THE RETURN FILED, THE ASSESSEE HAD CLAIMED DEDUCTION U/ S 10A TO THE EXTENT OF RS.1,23,69,008/-. THE ASSESSMENT WAS COM PLETED U/S 143(3) RWS 147 OF THE ACT. THE AO IN HIS ORDER HA D REDUCED THE FOLLOWING EXPENSES INCURRED BY THE COMPANY FROM THE E XPORT TURNOVER WITHOUT CORRESPONDING REDUCTION FROM THE T OTAL TURNOVER IN COMPUTING DEDUCTION U/S 10A OF THE ACT:- COMMUNICATION/LEASE LINE CHARGES RS.32,13,972 TRAVEL EXPENSES RS.1,30,36,361 4.2 FOR THE ASST. YEAR 2005-06, RETURN OF INCOME WA S FILED ON 31.10.2005 DECLARING A TOTAL INCOME OF RS.51,64, 170/-. SCRUTINY PAGE 3 OF 8 ITA NOS.963 & 964/BANG/2010 3 ASSESSMENT WAS INITIATED BY ISSUANCE OF NOTICE U/S 1 43(2) AND ASSESSMENT WAS COMPLETED VIDE ORDER DATED 28/12/200 7. THE AO IN HIS ORDER HAD REDUCED THE FOLLOWING EXPENSES INC URRED BY THE COMPANY FROM THE EXPORT TURNOVER WITHOUT CORRESPONDI NG REDUCTION FROM THE TOTAL TURNOVER IN COMPUTING DEDUCTION U/S 10A OF THE ACT:- COMMUNICATION/LEASE LINE CHARGES RS.48,19,220 TRAVEL EXPENSES RS.1,65,15,675 5. AGGRIEVED BY THE ABOVE ASSESSMENT ORDERS, THE ASSESSEE COMPANY PREFERRED APPEALS BEFORE THE CIT(A) . 6. THE CIT(A) PASSED SEPARATE ORDERS FOR BOTH THE ASST. YEARS 2004-05 AND 2005-06, WHEREIN HE DIRECTED THE A O TO EXCLUDE THE AFORESAID EXPENSES BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER IN CALCULATING DEDU CTION U/ 10A OF THE ACT. 7. REVENUE, BEING AGGRIEVED, IS IN APPEALS BEFORE US. 8. THE LEARNED DR SUPPORTED THE ORDERS OF THE ASSE SSING OFFICER. 9. THE LEARNED AR SUBMITTED THAT THE ISSUE IN QUES TION IS SQUARELY COVERED BY THE JUDGEMENT OF THE HONBLE MUMB AI HIGH COURT IN THE CASE OF CIT V GEM PLUS JEWELLERY INDIA LTD. 330 ITR 175 AND THE ORDER OF THE SPECIAL BENCH IN THE CASE OF ITO V M/S SAK SOFT LTD. 313 ITR 353. PAGE 4 OF 8 ITA NOS.963 & 964/BANG/2010 4 10. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GEMPLUS JEWELLERY INDIA LTD. (SUPRA), IN IDENTICAL CIRCUMSTANCES, HELD THAT SINCE THE EXPORT TURNOVER FORMS PART OF T HE TOTAL TURNOVER, IF AN ITEM IS EXCLUDED FROM THE EXPORT TU RNOVER, THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER TO M AINTAIN PARITY BETWEEN NUMERATOR AND DENOMINATOR WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HONBL E MUMBAI HIGH COURT READS AS FOLLOWS:- HELD : THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPORT 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 CONSTITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPORT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANING 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 TURNOVER IN EXPLN.2 TO S.10A WHICH THE 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 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 LEGISLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE PAGE 5 OF 8 ITA NOS.963 & 964/BANG/2010 5 CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF 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 PARLIAMENT FOR THE PURPOSES OF S.10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE 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. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH 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 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 TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE 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 TURNOVER AS A DENOMINATOR IN 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 WHICH DOES NOT HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAVE ANY ELEMENT OF TURNOVER. FOR THIS REASON PAGE 6 OF 8 ITA NOS.963 & 964/BANG/2010 6 IN ADDITION, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION 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 (INDIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON 10.1 IN THE CASE OF SAK SOFT LTD. (SUPRA), THE ASS ESSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTW ARE AND CLAIMED DEDUCTION U/S 10B OF THE ACT. IN COMPLETIN G THE ASSESSMENT U/S 143(3) OF THE ACT, THE AO REDUCED TH E EXPENDITURE INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHN ICAL SERVICES OUTSIDE INDIA, FROM THE EXPORT TURNOVER WITHOUT COR RESPONDING REDUCTION FROM TOTAL TURNOVER, THEREBY REDUCING THE DEDUCTION CLAIMED BY THE ASSESSMENT U/S 10B OF THE ACT. 10.2 IN LIGHT OF THE ABOVE FACTS, THE SPECIAL BENC H HELD AS UNDER:- FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PURPOSE OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTION 10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING 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 FORMULA. THE APPEALS FILED BY THE DEPARTMENT ARE THUS DISMISSED. PAGE 7 OF 8 ITA NOS.963 & 964/BANG/2010 7 ALTHOUGH THE ORDER OF SPECIAL BENCH IS IN THE CONTE XT OF SECTION 10B OF THE ACT, THE RATIO LAID DOWN IN THE ABOVE DE CISION APPLIES TO SECTION 10A OF THE ACT AS WELL, AS THE PROVISIONS O F SECTIONS 10A AND 10B ARE IDENTICAL ON ALL MATERIAL ASPECTS. MOR E PARTICULARLY, BOTH THE SECTIONS DEFINE ONLY EXPORT TURNOVER BUT NO T TOTAL TURNOVER AND SUB-SECTION (4) OF BOTH THE SECTIONS P RESCRIBE AN IDENTICAL FORMULA FOR COMPUTING THE EXPORT PROFITS. FURTHER, IN THE CASE OF JAIPURIA SILK MILLS (P) LTD. V ACIT (ITA NO.1112/BANG/2009), THE BANGALORE TRIBUNAL HAD PLAC ED RELIANCE ON 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 T HE ACT. 10.3 IN THE LIGHT OF THE ABOVE REASONING, WE UPHOL D THE ORDERS OF THE CIT(A) AND DIRECT THE AO TO EXCLUDE T HE ABOVE MENTIONED EXPENSES BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. 11. IN THE RESULT, THE APPEALS FILED BY THE REVENUE ARE DISMISSED. THE ORDER PRONOUNCED ON FRIDAY, THE 18 TH DAY OF FEBRUARY, 2011 AT BANGALORE. SD/- SD/- (A MOHAN ALANKAMONY) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER PAGE 8 OF 8 ITA NOS.963 & 964/BANG/2010 8 COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/15/2./17.2. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.