THE COMMISSIONER OF INCOME TAX V. MOTOR INDUSTRIES CO LTD

ITA/734/2007

AI Insights

The case involves an appeal by the Revenue against the decision of the ITAT Bangalore, which had favored M/s. Motor Industries Co. Ltd. The primary issues revolved around the inclusion of certain receipts and the interpretation of 'turnover' for the purpose of computing deductions under Sections 80HHC and 80HHE of the Income Tax Act. The Revenue challenged the ITAT's decisions on several grounds, including the treatment of insurance claims, the sale of raw materials and scraps, and the computation of net interest income. The High Court examined these issues in light of precedents set by the Supreme Court and other relevant cases.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 728991 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 01-08-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Vs. Punjab Stainless Steel Industries and Others, Commissioner of Income Tax and Another Vs. Krone Communication Ltd., ACG Associated Capsules Pvt. Ltd. Vs. Commissioner of Income-Tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: PERCY PARDHIWALA
• Assessee Lawyers: K V ARAVIND
• Keywords: Deduction; Income Tax; Insurance Claim; Interest income; Technical Services; Turnover
• Section: 80HHC; 80HHE; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 1ST DAY OF AUGUST 2014 PRESENT THE HON’BLE MR.JUSTICE N KUMAR AND THE HON’BLE MR.JUSTICE B.MANOHAR ITA NO.734/2007 BETWEEN 1.THE COMMISSIONER OF INCOME TAX CENTRAL CIRCLE C R BUILDING QUEENS ROAD BANGALORE 2.THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE-3 C.R.BUILDING QUEENS ROAD BANGALORE ... APPELLANTS (BY SRI K V ARAVIND, ADV.) AND M/S.MOTOR INDUSTRIES CO. LTD NO.26-A/2 SANKEY ROAD BANGALORE ... RESPONDENT (BY SRI PERCY PARDHIWALA, SR. ADV. FOR T.SURYANARAYANA, ADV. FOR M/S KING & PARTRIDGE) THIS ITA IS FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 04-05-2007 PASSED IN ITA NO.2755/BNG/2004, FOR THE ASSESSMENT YEAR 1998-1999, PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, 2 II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT BANGALORE IN ITA NO.2755/BNG/2004,DATED 04-05-2007, AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE- 3,BANGALORE,IN THE INTEREST OF JUSTICE AND EQUITY. THIS APPEAL COMING ON FOR ORDERS THIS DAY, N KUMAR J., DELIVERED THE FOLLOWING: JUDGMENT This appeal is preferred by the Revenue. They have raised the following substantial questions of law for consideration by this Court: 1. Whether the Tribunal was correct in holding that the receipt of Insurance claim cannot be included in the total turnover for the purpose of computation of deduction u/s.80HHC of the Act? 2. Whether the Tribunal was correct in holding that the receipts on sale of raw materials, tools, stores, scraps etc., cannot form part of turnover for the purpose of computation of deduction u/s.80HHC of the Act? 3. Whether the Tribunal was correct in holding that 90% of ‘net interest income’ and not ‘gross interest 3 receipts’ required to be reduced from profits and gains from business or profession despite Explanation (baa) to Section 80HHC of the Act? 4. Whether the Tribunal was correct in holding that 90% of interest of Rs.2,99,10,951/- representing interest received from customers on overdue bills, short term deposits etc., cannot be reduced from the profits for the purpose of computing deduction u/s. 80HHC and 80HHE of the Act by remitting the matter back to the Assessing Officer? 5. Whether the Tribunal was correct in holding that expenses in foreign currency for providing technical services outside India should not be deducted from sales of software exports to arrive at the profits of business for the purpose of computing deduction u/s.80HHE of the Act? 2. Insofar as the first and second substantial questions of law, the Hon’ble Apex Court in the case of Commissioner of Income Tax Vs. Punjab Stainless 4 Steel Industries and Others reported in (2014) 364 ITR 144 (SC) explaining the meaning of ‘turnover’ and what constitutes turnover has held as under: 17. To ascertain whether the turnover would also include sale proceeds from scrap, one has to know the meaning of the term “turnover”. The term “turnover” has neither been defined in the Act nor has been explained by any of the Central Board of Direct Taxes circulars. 18. In the aforestated circumstances, one has to look at the meaning of the term “turnover” in ordinary accounting or commercial parlance. 19. Normally, the term “turnover” would show the sale effected by a business unit. It may happen that in the course of the business, in addition to the normal sales, the business unit may also sell some other things. For example, an assessee who is manufacturing and selling stainless steel utensils, in addition to steel utensils, the assessee might also sell some other things like an old air-conditioner or old furniture or 5 something which has outlived its utility. When such things are disposed of, the question would be whether the sale proceeds of such things would be included in the “turnover”. Similarly, in the process of manufacturing utensils, there would be some scrap of stainless steel material, which cannot be used for manufacturing utensils. Such small pieces of stainless steel would be sold as scrap. Here also, the question is whether sale proceeds of such scrap can be included in the term “sales” when it is to be reflected in the profit and loss account. 20. In ordinary accounting parlance, as approved by all accountants and auditors, the term “sales”, when reflected in the profit and loss account, would indicate sale proceeds from sale of the articles or things in which the business unit is dealing. When some other things like old furniture or a capital asset, in which the business unit is not dealing are sold, the sale proceeds therefrom would not be included in “sales” but it would be shown separately. 21. In simple words, the word “turnover” would mean only the amount of sale proceeds received in respect of the goods in which an assessee is dealing in. For 6 example – If a manufacturer and seller of air- conditioners is asked to declare his “turnover”, the answer given by him would show the sale proceeds of air-conditioners during a particular accounting year. He would not include the amount received, if any, from the sale of scrap of metal pieces or sale proceeds of old or useless things sold during that accounting year. This clearly denotes that ordinarily a businessman by the word “turnover” would mean the sale proceeds of the goods (the things in which he is dealing ) sold by him. 3. In view of the aforesaid declaration of law by the Hon’ble Apex Court, the insurance claim, sale of raw materials, tools, stores, scraps cannot form part of turnover for the purpose of computation of deduction under Section 80HHC of the Act. The said finding of the Tribunal is in accordance with law as laid down by the Hon’ble Supreme Court. Therefore, the first and second substantial questions of law are answered in favour of the assessee and against the Revenue. 4. Insofar the substantial questions of law Nos.3 and 4 are concerned, this Court had an occasion to 7 consider the similar questions in the case of Commissioner of Income Tax and Another Vs. Krone Communication Ltd., reported in (2011) 333 ITR 497, where it was held as under: “In the definition in sub-section (4C) of section 80HHC of the Income-tax Act, 1961, it is specifically mentioned that what is to be reduced in 90 per cent. of any receipts by way of commission “included in such profits”. Therefore, it is clear that is not the receipt of 90 per cent. of the entire commission, it is 90 per cent. receipt of commission included in the profits and gains of business. Ultimately, clause (baa) to the Explanation is itself based on the assumption that 10 per cent. of the income would be an expense. This guidance value is not flowing from clause (baa) but from the scheme of section 80HHC read with the Memorandum to the Finance (No.2) Bill of 1991.” 5. The said view of this Court has been affirmed by the Apex Court in the case of ACG Associated Capsules Pvt. Ltd. Vs. Commissioner of Income-Tax reported in (2012) 343 ITR 89 (SC) as under: 8 “Under clause(1) of Explanation (baa) to section 80HHC of the Act, ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head “Profits and gains of business or profession”. The expression “included any such profits” would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head “Profits and gains of business or profession”. Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under sections 30 to 44D of the Act and is not included in the profits of business as computed under the head “Profits and gains of business or profession”, ninety per cent. of such quantum of receipts cannot be reduced under clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent, of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for 9 determining “profits of the business” of the assessee under Explanation (baa) to section 80HHC.” 6. In that view of the matter, the said substantial questions of law are answered in favour of the assessee and against the Revenue. 7. Insofar fifth substantial question of law is concerned, the said question fell for consideration before this Court in the case of very assessee Company in ITA No.776/2007 disposed of on 13.06.2014 wherein it has been held at paras 18 and 19 as under: 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 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 10 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 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 11 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 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 12 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 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. 8. Therefore, the said substantial question of law is also answered in favour of the assessee and against the Revenue. 13 9. In that view of the matter, we do not see merit in this appeal. Accordingly, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE JT/- "