CIT Vs Mphasis Ltd. (Karnataka High Court)
Summary: The Karnataka High Court dismissed the Revenue’s appeals concerning the computation of deduction under Section 10B of the Income-tax Act, 1961. The first question concerned the exclusion of foreign currency expenditure incurred in providing software development services outside India from export turnover. The second concerned the treatment of telecommunication expenditure in total turnover for computing the deduction.
Read SC Judgment in this case: Section 10B: Foreign Currency Software Expenses Not Automatically Excludable from Export Turnover: SC
On the first question, the High Court followed its earlier judgment in ITA No. 776/2007 dated 13 June 2014. The Court distinguished independent technical services rendered outside India from testing, installation and monitoring activities associated with computer software exported from India. Expenditure incurred in foreign currency for such export-related services could not be excluded from export turnover merely because the services were technical in nature.
On the second question, the Court followed the principle laid down in Commissioner of Income-Tax v. Tata Elxsi Ltd., (2012) 349 ITR 98 (Karn). It held that the ingredients of export turnover and total turnover must be consistent when applying the statutory deduction formula. Expenses excluded from export turnover must also be excluded from total turnover. Both substantial questions were answered in favour of the assessee, and the Revenue’s appeals were dismissed.
Cases Discussed
- Earlier Karnataka High Court judgment — ITA No. 776/2007, decided on 13.06.2014 — Followed on foreign currency expenditure relating to software exports.
- Commissioner of Income-Tax And Another Vs. Tata Elxsi Ltd. — (2012) 349 ITR 98 (Karn) — Followed on uniform treatment of export turnover and total turnover.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The Revenue has preferred these appeals raising the following two substantial questions of law:
1. Whether the Tribunal was correct in reversing the finding recorded by the Assessing Officer that the foreign currency for providing software development services outside India should be excluded from the export turnover for the purpose of computation of deduction u/s.10B of the Act, which was confirmed by the Appellate Commissioner?
2. Whether the Tribunal was correct in reversing the finding of the Assessing Officer that the expenditure incurred in foreign currency on account of telecommunication expenses should be included in the total turnover for the purpose of computation of deduction u/s.10B of the Act?
2. The first substantial question of law arose for consideration before this Court in ITA No.776/2007 disposed of on 13.06.2014, wherein this Court has 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 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 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 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.
3. In view of the said judgment, the substantial question of law is answered in favour of the assessee and against the Revenue.
4. Insofar as the second substantial question of law is concerned, the same was considered by this Court in the case of Commissioner of Income-Tax And Another Vs. Tata Elxsi Ltd., reported in (2012) 349 ITR 98 (Karn). It has been held as under
“17. From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of Section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in Section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in Section 10-A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore the formula for computation of the deduction under Section 10-A, would be as under:
5. Accordingly, the said substantial question of law is answered in favour of the assessee and against the Revenue.
6. Therefore, we do not see any merit in both these appeals.
Accordingly, they are dismissed.
