THE COMMISSIONER OF INCOME TAX V. MOTOR INDUSTRIES CO LTD

ITA/776/2007

AI Insights

The case involves multiple appeals by the revenue against the orders of the Income Tax Appellate Tribunal, Bangalore, which had granted various benefits to Motor Industries Co. Ltd. The appeals primarily challenged the Tribunal's decisions on the deductibility of warranty provisions, the inclusion of sales tax and excise duty in total turnover for computing deductions under Section 80HHC, and the treatment of income and expenses related to exports and technical services under Sections 80HHC and 80HHE. The High Court examined each substantial question of law in the context of the relevant provisions of the Income Tax Act and applicable judicial precedents.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 744408 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 13-06-2014
• Assessment Year: misc
• Other Referred Cases: Rotork Controls India (P) Ltd. Vs. Commissioner of Income Tax, Commissioner of Income Tax Vs. Lakshmi Machine Works, ACG Associated Capsules Pvt. Ltd., Vs. Commissioner of Income Tax, Commissioner of Income Tax Vs. Motor Industries Co. Ltd., Commissioner of Income Tax Vs. Punjab Stainless Steel Industries
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: PERCY PARDIWALLA
• Assessee Lawyers: K V ARAVIND
• Keywords: Deduction; Export of Software; Income Tax; Technical Services; Warranty Provision
• Section: 80HHC; 260A; 80HHE

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 13TH DAY OF JUNE, 2014 PRESENT THE HON’BLE Mr. JUSTICE N. KUMAR AND THE HON’BLE Mr. JUSTICE B. MANOHAR I.T.A. NO. 776/2007 C/w. I.T.A. Nos.1172/2006, 1171/2006, 744/2007 AND 1155/2006 ITA NO 776 OF 2007 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX C.R.BUILDING QUEESN ROAD BANGALORE. 2. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 12(1) NOW ACIT CIRCLE 12(1) BANGALORE … APPELLANTS (BY Sri. K V ARAVIND, ADV.) AND: MOTOR INDUSTRIES CO LTD HOSUR ROAD ADUGODI BANGALORE 30. ... RESPONDENT (BY Sri. PERCY PARDIWALLA, Sr. ADV., FOR M/S. KING AND PARTRIDGE, ADVS.) 2 THIS I.T.A FILED U/S. 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 04-5-2007 PASSED IN ITA NO. 2754/BANG/2004 FOR THE ASSESSMENT YEAR 1994-95, PRAYING TO.FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.2754/BANG/2004 DT: 04-5-2007 AND CONFIRM THE ORDER PASSED BY THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX,(ASSESSMENTS), RANGE-6. BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY. ITA NO 1172 OF 2006 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX C R BUILDING QUEENS ROAD BANGALORE. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, ASSESSMENT SPECIAL RANGE-6 C.R. BUILDING, QUEENS ROAD BANGALORE. .. APPELLANTS (By Sri. K.V. ARAVIND, ADV.) AND : M/S MOTOR INDUSTRIES COMPANY LTD ADUGODI, HOSUR ROAD BANGALORE. ... RESPONDENT (BY Sri. PERCY PARDIWALLA, Sr. ADV., FOR M/S. KING AND PARTRIDGE, ADVS.) THIS I.T.A. IS FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 29-03-2006 PASSED IN ITA 3 NO. 940/BANG/1998, FOR THE ASSESSMENT YEAR 1995- 1996, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO. 940/BANG/1998 DATED 29-03- 2006 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER & CONFIRM THE ORDER PASSED BY THE DY., COMMISSIONER OF INCOME TAX, ASSESSMENTS, SPECIAL RANGE-6, BANGALORE, IN THE INTEREST OF JUSTICE. ITA NO 1171 OF 2006 BETWEEN : 1. THE COMMISSIONER OF INCOME TAX C R BUILDING QUEENS ROAD BANGALORE 2. THE JOINT COMMISSIONER OF INCOME TAX(A) SPECIAL RANGE-3 C R BUILDING QUEENS ROAD BANGALORE. ... APPELLANTS (By Sri. K V ARAVIND, ADV.) AND : M/S MOTOR INDUSTRIES COMPANY LTD ADUGODI, HOSUR ROAD BANGALORE. ... RESPONDENT (BY Sri. PERCY PARDIWALLA, Sr. ADV., FOR M/S. KING AND PARTRIDGE, ADVS.) 4 THIS I.T.A. IS FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 29-03-2006 PASSED IN ITA NO. 292/BANG/2001, FOR THE ASSESSMENT YEAR 1997- 1998, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND . ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO. 292/BANG/2001 DATED 29-03- 2006 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE JOINT COMMISSIONER OF INCOME TAX, ASSESSMENTS, SPECIAL RANGE-3, BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY. ITA NO 744 OF 2007 BETWEEN : 1. THE COMMISSIONER OF INCOME TAX C.R.BUILDING QUEENS ROAD BANGALORE. 2. THE DEPUTY COMMISSIONER OF INCOME TAX (ASSESSMENTS) CIRCLE 6 C.R.BUILDING QUEENS ROAD BANGALORE. ... APPELLANTS (By Sri. K V ARAVIND, ADV.) AND : MOTOR INDUSTRIES LTD HOSUR ROAD ADUGODI BANGALORE 30. ... RESPONDENT (BY Sri. PERCY PARDIWALLA, Sr. ADV., FOR M/S. KING AND PARTRIDGE, ADVS.) 5 THIS I.T.A. IS FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 04-05-2007 PASSED IN ITANO.2753/BANG/2004 FOR THE ASSESSMENT YEAR 1993-94, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY ITAT BANGALORE, IN ITANO.2753/BANG/2004 DATED 04-05- 2007 & CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DY.,COMMISSIONEER OF INCOME TAX, (ASSEMENTS), SPECIAL RANGE-6, BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY. ITA NO 1155 OF 2006 BETWEEN : 1. THE COMMISSIONER OF INCOME TAX CENTRAL CIRCLE C R BUILDING QUEENS ROAD BANGALORE. 2. THE JOINT COMMISSIONER OF INCOME TAX, SR-6 C R BUILDING QUEENS ROAD BANGALORE. …APPELLANTS (By Sri. K V ARAVIND, ADV.) AND : MOTOR INDUSTRIES LTD HOSUR ROAD ADUGODI BANGALORE 30. ... RESPONDENT (BY Sri. PERCY PARDIWALLA, Sr. ADV., FOR M/S. KING AND PARTRIDGE, ADVS.) 6 THIS I.T.A. IS FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 29-03-2006 PASSED IN ITA NO. 653/BANG/1999, FOR THE ASSESSMENT YEAR 1996- 97, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO. 653/BANG/1999 DATED 29-03-2006 & CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE JOINT COMMISSIONER OF INCOME TAX, SR-6, BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY. THESE APPEALS COMING ON FOR HEARING, THIS DAY, N. KUMAR, J., DELIVERED THE FOLLOWING: J U D G M E N T These five appeals are preferred by the revenue challenging the orders passed by the Tribunal granting various benefits to the assesses. 2. In ITA.No.1155/2006, the revenue has raised seven substantial questions of law. The answers to the same would dispose of all these appeals. 3. The substantial questions of law which are raised by the revenue in ITA.No.1155/2006 are as under: 1. Whether the Tribunal was correct in holding that the provision made by the 7 assessee towards anticipated warranty claims by proposed customers is an allowable deduction despite the fact that the claim would arise only on the happening of a contingency and not on actual claim? 2. Whether the Tribunal was correct in holding that a provision for warranty claim made by the assessee for any claims made by the assessee’s customers in future in respect of defect on repairs towards goods sold should be allowed as an expenditure during the current assessment year itself? 3. Whether the Tribunal is correct in holding that the assessee is entitled to deduction under Section 80HHC of the Act without including the sales tax and excise duty collected during the assessment year by the assessee when computing the total turnover before computing the deduction? 4. Whether the Tribunal was correct in holding that the assessee which manufactures motor spares, has also interest income which cannot be excluded to an extent of 90% while computing the profits of the business as 8 per explanation (baa) to Section 80HHC of the Act and Section 80HHE of the Act? 5. Whether the Tribunal was correct in holding that 90% of fee refund of Rs.2,70,18,366/- from Robert Bosch cannot be treated as business income of the assessee but should be treated as other income and consequently deduction as per section 80HHC was not allowable? 6. Whether the Tribunal was correct in holding that the assessing officer cannot exclude expenditure of Rs.3,80,55,766/- incurred in foreign exchange for providing technical services in working out the export turnover as well as total turnover for the purpose of deduction under section 80HHE of the Act? 7. Whether the Tribunal was correct in holding that Scrap Sales Turnover cannot be included in the total turnover for the purpose of computation of deduction under Section 80HHC and 80HHE of the Act? 9 On Substantial question Nos. 1 and 2 4. The Tribunal for the three assessment years held that the provision for warranty is an allowable expenditure as it is an ascertainable liability. However, the basis of ascertaining such provision has not been provided. Therefore, it directed the Assessing Officer to verify the basis for provision and in case the basis for provision is the same as in the last year, then the provision to that extent has to be allowed as the assessee has been allowed deduction as per the provision for warranty in the immediately preceding year. In para 28a of the impugned order, the provision of warranty for the period 1989-90 and 1995-96 is stated. In para 28 of the order, the Tribunal held that the Tribunal while deciding the case in favour of the assessee for the assessment year 1989-90 has observed that the assessee has placed the details and methodology of making the provision. The assessee takes into consideration past historical costs, cost escalation, length of warranty with regard to the equipments and spares, increase in volumes over last few years etc. Therefore, the direction was issued to 10 ascertain the warranty in the manner it was done in the assessment year 1989-90. It is not in dispute that after the order of remand the Assessing Authority, in terms of the directions issued, taking into consideration how the warranty was ascertained in the year 1989-90 has passed the orders. The grievance of the revenue is that even though warranty is allowable expenditure, before such a claim is put forth, the claim should be based on scientific basis. In support of their case they relied on a judgment of the Apex Court in the case of Rotork Controls India (P) Ltd. Vs. Commissioner of Income Tax, (2009) 314 ITR 62, where the Apex Court held that the claim for warranty is allowable provided the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus the decision on the warranty provisions should be based on past experience of the Company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if so remained unutilized at the end of 11 the period prescribed in the warranty. Therefore the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need re-assessment every year and therefore he submitted that this exercise should be done before the warranty claim is accepted. In reply learned Senior counsel appearing for the assessee pointed out from the order passed in the assessee’s case for the assessment year 1989-90 in I.T.A. No. 2473/1991 that the Tribunal has observed that with regard to the basis of estimation the assessee has placed before them at pages 193 to 194 of the paper books the details of methodology of making impugned provisions. It is discernable that the assessee takes into consideration the past historical cost, cost escalation, length of warranty with regard to the equipment and spares, increase in volumes over such period etc. It is also clear that the actual expenses incurred on warranty are debited to 12 provisional account and not to the Profit and Loss Account. On consideration of the entire facts and circumstances the provisions made reflect accrual of liability that the impugned provisions is computed on scientific and reasonable basis and hence they declined to interfere with the conclusions drawn by the first Appellate Authority which had granted the relief. This is the basis on which the assessee was expected to put forth his claim for warranty by virtue of the impugned orders where an order of remand was passed. The said order is in conformity with the law declared by the Apex Court and therefore once a claim of warranty is made after undertaking the aforesaid exercise before putting forth a claim, we are satisfied from the material on record that the claim made by the assessee is in accordance with law and in accordance with the judgment of the Supreme Court and therefore no case for interference with the said order is made out much less for remanding the case to the Assessing Authority. In that view of the matter, the substantial questions of law are answered in favour of the assessee and against the revenue. 13 On Substantial question No. 3 5. The question whether the Tribunal is correct in holding that the assessee is entitled to deduction under Section 80-HHC of the Act without including the sales tax and excise duty collected during the assessment year by the assessee while computing the total turnover before computing deduction is concerned, the Apex Court in the case of Commissioner of Income Tax Vs. Lakshmi Machine Works (2007) 290 ITR 667 (SC) held that the excise duty and sales tax cannot form part of turnover in the formula contained in Section 80HHC of the Act and therefore the order passed by the Tribunal is in accordance with law and no case for interference is made out. Accordingly this question of law is answered in favour of the assessee and against the revenue. On question No. 4 6. This question was also the subject mater of a judgment of the Apex Court in the case of ACG Associated Capsules Pvt. Ltd., Vs. Commissioner of 14 Income Tax (2012) 343 ITR 89 (SC) wherein the Apex Court held as under: “Explanation (baa) has to be construed on its own language and as per the plain natural meaning of the words used in it, the words “receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits” will not only refer to the nature of receipts but also the quantum of receipts included in the profits of the business as computed under the head “Profits and gains of business or profession” referred to in the first part of Explanation (baa). Accordingly, if any quantum of any receipt of the nature mentioned in clause (1) of Explanation (baa) has not been included in the profits of business of an assessee as computed under the head “profits and gains of business or profession”, ninety percent of such quantum of the receipt cannot be deducted under Explanation (baa) to section 80HHC. Held accordingly, that ninety per cent of neither the gross rent nor gross interest but only the net interest or net rent, which had been included in the profits of business of the assessee as computed under the head “profits and gains of business or profession”, was to be 15 deducted under clause (1) of Explanation (baa) to section 80 HHC for determining the profits of the business. 7. In the light of the aforesaid judgment of the Apex Court there is no merit in the appeal and the said substantial question of law is answered in favour of the assessee and against the revenue. On substantial question No. 5 8. In the assessee’s case itself this Court in the case of Commissioner of Income Tax Vs. Motor Industries Co. Ltd., (2011) 331 ITR 79 (Karn) held as under: “… … … that admittedly that the assessee was in the business of export of goods and merchandise. The assessee was earning foreign exchange out of that export business. The disputed income was earned by the assessee for its fees towards developmental work from the foreign enterprise. The developmental work was intimately connected with the business of manufacture and sale of goods by the assessee. There was immediate nexus between the activity of export and the developmental work. The 16 consideration received for developmental work was not liable to be deducted under clause (baa) in computing the profits of the business.” 9. In view of the aforesaid legal position we do not find any merit in this ground also and therefore the said substantial question of law in answered in favour of the assessee and against the revenue. On questions No. 7 10. The Apex Court in the case of Commissioner of Income Tax Vs. Punjab Stainless Steel Industries (2014) 364 ITR 144 (SC) held as under: “The aforestated meaning given by the ICAI clearly denotes that in normal accounting parlance the word “turnover” would mean “total sales” as explained hereinabove. The said sales would definitely not include the scrap material which is either to be deducted from the cost of raw material or is to be shown separately under a different head. We do not see any reason for not accepting the meaning of the term “turnover” given by a body of 17 accountants, which is having a statutory recognition. If all accountants, auditors, businessmen, manufacturers, etc., are normally interpreting the term “turnover” as sale proceeds of the commodity in which the business unit is dealing we see no reason to take a different view than the view normally taken by the persons who are concerned with the said term. In addition to that above factors, which we have considered for understanding the meaning of the term “turnover”, we should not miss the purpose with which the said term has been incorporated in section 80HHC of the Act. The intention behind the enactment of section 80HHC of the Act was to encourage export so as to earn more foreign exchange. For the said purpose, the Government wanted to encourage businessmen, traders and manufacturers to increase the export so as to bring more foreign exchange in our country. If the purpose is to bring more foreign exchange and to encourage export, we are of the view that the Legislature would surely like to give more benefit to persons who are making an effort to help our nation in the process of bringing more foreign exchange. If a trader or a manufacturer is trying his best to increase his 18 exports, even at the cost of his business in a local market, we are sure that the Government would like to encourage such a person. In our opinion, once the Government decides to give some benefit to someone who is helping the nation in bringing foreign exchange, the Revenue should also make all possible efforts to encourage such traders or manufacturers by giving such business units more benefits as contemplated under the provisions of law. For the aforesaid reasons, we are of the view that the view expressed by the High Court is in conformity with the normal accounting practice followed by the traders, including the respondent – assessee and it was justified in coming to a conclusion that the proceeds generated from the sale of scrap would not be included in the “total turnover”.” 11. In the instant case the assessee is in the business of export of computer software. For the purpose of Section 80HHC of the Act the income generated from the sale of scrap cannot be included in the total turnover and that is precisely what the Tribunal had held. We do not see any error in the said finding. In view of the law 19 declared by the Apex Court in the aforesaid judgment, the said question of law is answered in favour of the assessee and against the revenue. On question No. 6 12. This question is involved in all cases except for the assessment year 1995-96. For the assessment year 1993-94 the assessee claimed a sum of Rs.1,29,02,817/- as the total export turnover. It included a sum of Rs.62,70,232/- incurred in foreign exchange in providing the technical service outside India. The assessee claimed benefit under Section 80HHE of the Act in respect of the total export turnover of Rs.1,29,02,817/-. The case of the revenue is that out of Rs.1,29,02,817/- admittedly a sum of Rs.62,700,232/- is the expenditure in foreign exchange in providing technical services outside India and therefore in computing the total export turnover the said amount is to be deducted. In fact the Assessing Authority refused to grant relief to the assessee. In appeal, the order was confirmed. In the second appeal before the Tribunal, the matter was remanded back to the 20 Appellate Authority. The Appellate Authority remanded the matter back to the Assessing Authority with the following direction: “If the case of the appellant is that it has exported computer software or transmitted it aboard from India, and the receipts are towards that there is no case for any exclusion of expenses incurred in foreign exchange in the computation of total turnover and export turnover. However, the assessee would have to explain what is the necessity for incurring huge amounts abroad wholly and exclusively in connection with such export or transmission, to get deduction from the expenditure in computation of the profits of the business itself. If on the other hand, the case is that the assessee has been sending man power abroad for development of software there, that is not export of man power as the personnel are bound to return nor of software, as no software generated outside can be stated to have been generated in India and exported from India. In such a situation, the receipt, if any, abroad on account of service by personnel sent from India cannot be stated to be fro export out of India of computer software, but for technical services mentioned in 80HHE(1)(ii) and there would be 21 case for exclusion of expenses incurred in foreign exchange for rendering such services through its personnel.” 13. After remand the Assessing Authority passed the following order: “The CIT (Appeal) remanded the issue of exclusion of expenses incurred in foreign exchange from export turnover and total turnover in the calculation of deduction u/s. 80 HHE with a direction to examine whether the assessee is exporting software or rendering technical services outside India in connection with development software. In this connection the assessee submitted the details of expenses, purpose and nature, incurred in foreign exchange. Further, a copy of software projects agreement entered into with M/s. Bosch was submitted. On perusal of the agreement and other details submitted, it is clear that the project is a combination of export of software and rendering technical services outside India in connection with the production of the said software. The software engineers who were deputed abroad, among other things did a testing, installation and monitoring of software supplied to M/s. Bosch. They had initial 22 discussions with regard to requirements of specifications etc. these services are obviously technical services outside India in connection with the production of software. Therefore the expenditure incurred in foreign exchange in providing such technical services of outside India of Rs.62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction u/s. 80 HHE.” 14. The asessee preferred an appeal to the Commissioner of Income Tax (Appeals) against the said order. The Appellate Authority confirmed the said order. It is against the said two orders that the assessee preferred appeal to the Tribunal. The Tribunal, by following the judgment of the Tribunal in the case of assessee for the assessment year 1996-97 set aside the order of both the authorities and directed the Assessing Officer to recompute relief under Section 80HHE of the Act without excluding the expenses incurred by the assessee. The revenue has preferred not only appeal against this order but also against the order of assessment passed for the year 1996-97 which is the 23 subject matter of I.T.A. No. 1155/2006. The reason given by the Tribunal in coming to the conclusion that these expenses had to be excluded in calculating total export turnover is that there are two activities on which deduction under Section 80HHE of the Act is admissible and they are in respect of export of computer software or providing technical service in development of production of computer software. After referring to the definition of `export turnover’ it was held that when one is required to consider the export turnover in respect of computer software then one has to exclude freight, telecommunication charges or insurance attributable to delivery of computer software outside India. When one has to ascertain export turnover in respect of providing technical services, then one has to exclude the expenses, if any, incurred in foreign exchange in providing technical service outside India. Thus expenses incurred in foreign exchange are to be excluded in case the assessee has claimed deduction under Section 80HHE of the Act on receipt of technical fees. In the instant case the assessee is engaged in export of computer software. Hence, in the 24 case of assessee only freight, telecommunication charges and insurance charges attributable to the delivery of computer software outside India is to be excluded for the purpose of determining export turnover and therefore the Tribunal set aside the order passed by the Appellate Commissioner as well as the Assessing Authority and held that the assessee need not exclude the expenditure in foreign exchange from computer software exports for the purpose of computing deduction under Section 80HHE of the Act. 15. The learned counsel for the revenue assailing the impugned order contends that as is clear from the finding of fact recorded by the Assessing Authority the Software Engineers of the assessee who are deputed abroad have rendered technical services outside India. Therefore the expenditure incurred in foreign exchange in respect of such services is to be excluded from the total export turnover. Therefore he submits that the Tribunal was not justified in holding that such expenses are not required to be excluded from the export turnover. Per 25 contra learned counsel for the assessee contended that the assessee is in the business of export out of India computer software. It is not in the business of providing technical services outside India. However in connection with the business of export of computer software their Engineers visit the customer outside the country, have interaction, then come back and manufacture the computer software according to the client’s specifications. Thereby when the software is exported out of India they undertake the responsibility of installing, testing and monitoring the said software. All that is done as a part of export of computer software and does not render technical service and therefore the expenditure incurred in foreign exchange in connection with the remuneration paid to the Engineers is not to be excluded from the export turnover and therefore he submits that no case for interference with the order passed by the Tribunal is made out. 16. Section 80HHE of the Act deals with deductions in respect of profits from export of computer software etc. 26 It was inserted by Finance Act No. 2 of 1991 with effect from 01.04.1991 and it reads as under: Deductions in respect of profits from export of computer software, etc. 80-HHE. (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of,— (i) export out of India of computer software or its transmission from India to a place outside India by any means; (ii) providing technical services outside India in connection with the development or production of computer software, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, [a deduction to the extent of the profits, referred to in sub-section (1B),] derived by the assessee from such business : 13[***] 14[Provided that if the assessee, being a company, engaged in the export out of India of computer software, issues a certificate referred 27 to in clause (b) of sub-section (4A), that in respect of the amount of the export specified therein, the deduction under this sub-section is to be allowed to a supporting software developer, then the amount of deduction in the case of an assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export, the same proportion as the amount of the export turnover specified in such certificate bears to the total export turnover of the assessee. 15[Explanation.—For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.] (1A) Where the assessee, being a supporting software developer, has during the previous year, developed and sold computer software to an exporting company in respect of which the said company has issued a certificate under the proviso to sub-section (1), there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee a deduction of the profits 28 derived by the assessee from the developing and selling of computer software to the exporting company in respect of which the certificate has been issued by the said company 16[to such extent and for such years as specified in sub- section (1B)].] 16[(1B) For the purposes of sub-sections (1) and (1A), the extent of deduction of profits shall be an amount equal to— (i) eighty per cent of such profits for an assessment year beginning on the 1st day of April, 2001; 17[(ii) seventy per cent thereof for an assessment year beginning on the 1st day of April, 2002; (iii) fifty per cent thereof for an assessment year beginning on the 1st day of April, 2003; (iv) thirty per cent thereof for an assessment year beginning on the 1st day of April, 2004,] and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year.] (2) The deduction specified in sub-section (1) shall be allowed only if the consideration in respect of the computer software referred to in that sub-section is received in, or brought into, 29 India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, 18[within such further period as the competent authority may allow in this behalf]. Explanation 19[1].—The said consideration shall be deemed to have been received in India where it is credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. 19[Explanation 2.—For the purposes of this sub- section, the expression “competent authority” means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.] (3) For the purposes of sub-section (1), profits derived from the business referred to in that sub-section shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. 30 20[(3A) For the purposes of sub-section (1A), profits derived by a supporting software developer shall be,— (i) in a case where the business carried on by the supporting software developer consists exclusively of developing and selling of computer software to one or more exporting companies solely engaged in exports, the profits of such business; (ii) in a case where the business carried on by a supporting software developer does not consist exclusively of developing and selling of computer software to one or more exporting companies, the amount which bears to the profits of the business, the same proportion as the turnover in respect of sale to the respective exporting company bears to the total turnover of the business carried on by the assessee.] (4) The deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form21, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. 31 22[(4A) The deduction under sub-section (1A) shall not be admissible unless the supporting software developer furnishes in the prescribed form along with his return of income,— *(i) the report of an accountant23, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed on the basis of the profits of the supporting software developer in respect of sale of computer software to the exporting company; and †(ii) a certificate24 from the exporting company containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the exporting company has not claimed deduction under this section : Provided that the certificate specified in clause (b) shall be duly certified by the auditor auditing the accounts of the exporting assessee under the provisions of this Act or under any other law.] (5) Where a deduction under this section is claimed and allowed in respect of profits of the business referred to in sub-section (1) for any 32 assessment year, no deduction shall be allowed in relation to such profits under any other provision of this Act for the same or any other assessment year. Explanation.—For the purposes of this section,— (a) “convertible foreign exchange” shall have the meaning assigned to it in clause (a) of the Explanation to section 80HHC; 25[(b) “computer software” means,— (i) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (ii) any customised electronic data or any product or service of similar nature as may be notified26 by the Board, which is transmitted or exported from India to a place outside India by any means;] (c) “export turnover” means the consideration in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (2), but does not include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if 33 any, incurred in foreign exchange in providing the technical services outside India; 27[(ca) “exporting company” means a company referred to in sub-section (1) making actual export of computer software;] (d) “profits of the business” means the profits of the business as computed under the head “Profits and gains of business or profession” as reduced by— (1) ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India; (e) “total turnover” shall not include— (i) any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28; (ii) any freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India; and (iii) expenses, if any, incurred in foreign exchange in providing the technical services outside India;] 34 27[(ea) “supporting software developer” means an Indian company or a person (other than a company) resident in India, developing and selling computer software to an exporting company for the purposes of export.] 17. For the purpose of this Section export turnover has been defined in Explanation (c) to the section and it reads as under: (c) “export turnover” means the consideration in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (2), but does not include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; 18. From the aforesaid provision it is clear that the consideration in respect of computer software received in or brought into India by the assessee in convertible foreign exchange is deducted from the profits of the said 35 business. In other words the assessee is not liable to pay any income tax on such consideration received from export of computer software. However the said export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of computer software outside India or expenses if any incurred in foreign exchange in providing technical service outside India. In other words out of the said export turnover the following amounts have to be deducted; a. freight b. telecommunication charges c. insurance attributable to the delivery of computer software outside India; d. expenses, if any, incurred in foreign exchange in providing technical services outside India; 19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in foreign exchange in 36 providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer software outside India. If the technical services rendered by the assessee’s Engineers is in connection with the export of computer software for the purpose of testing, installation and monitoring of software such a turnover do not fall within clause (ii) of subsection (1) of section 80HHE of the Act. Such a turnover falls within sub-clause (i) of subsection (1) of Section 80HHE of the Act, that is export out of India of computer software or its transmission from India to a place outside India by any means. The expenditure incurred in the form of foreign exchange for such services cannot be excluded in computing the export turnover as it forms part of the export turnover. In the instant case as is clear from the 37 order of the Assessing Authority, he proceeds on the assumption that the assessee is a company engaged in rendering technical services outside India in connection with production of said software. Therefore the expenditure incurred in foreign exchange in providing such technical services outside India of Rs.62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction under Section 80HHE of the Act. The assesee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of section 80HHE of the Act of providing technical services outside 38 India in connection with the development or production of computer software. It falls under sub-clause (1) of sub- section (1) of Section 80 HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of the assessee and against the revenue. Ordered accordingly. Sd/- JUDGE. Sd/- JUDGE. RS/LRS. "