CIT vs. HCL Technologies Ltd. (Supreme Court)
The definition of total turnover given under Sections 80HHC and 80HHE cannot be adopted for the purpose of Section 10A: HCL Technologies case
In CIT vs. HCL Technologies Ltd. [Civil Appeal Nos. 8489-8490 of 2013 and other appeals, decided on 24.04.2018], briefly, the Respondent – HCL Technologies Ltd. being a company registered under the Companies Act, 1956 was engaged in the business of development and export of computer softwares and rendering the technical services. The Respondent showed gross income from business at Rs. 267,01,76,529/- while claiming deductions under Section 10A of the Income Tax Act, 1961 (in short ‘the Act’) to the tune of Rs. 273,45,39,379/- showing a net loss of Rs. 6,43,62,850/-. The Respondent filed its return of income for the A.Y. 2004-05 on 01.11.2004 declaring the undisclosed income at Rs. 91,25,68,114/-. Thereafter, on 31.03.2005, a revised return of income for Rs. 91,16,99,060/- was filed by the Respondent which was selected for scrutiny under Section 143 of the Act.
The Assessing Officer(AO), vide order dated 28.12.2006, held that the software development charges, as claimed by the Respondent, are nothing but in the nature of expenses incurred for technical services provided outside India. Further, in view of 7 the fact that it is not purely technical services and some element of software development is also involved in it and in the absence of such bifurcation, the AO estimated such expense at the rate of 40% and remaining 60% for providing technical services by the Respondent in foreign exchange to its offshore clients and re-assessed the taxable income at Rs. 137,20,34,576/- and penalty to the tune of Rs. 21,81,90,239/-.
The Respondent preferred an appeal before the CIT(A) who vide order dated 09.05.2007, partly allowed the appeal while estimating 10% as software development charge incurred for technical services provided outside India as against 60% estimated by the AO.
Thereafter, the Respondent as well as the Revenue, preferred cross appeals being ITAT Nos. 3199 and 3344/Del/2007 before the Tribunal. The Tribunal, vide order dated 23.01.2009, dismissed the appeal filed by the Revenue while allowing the appeal of the Respondent.
The Revenue preferred an appeal before the High Court. The High Court, vide order dated 15.12.2009, dismissed the appeal of the Revenue.
On appeal to Supreme Court, the only point for consideration was whether in the facts and circumstances of the case, the software development charges are to be excluded while working out the deduction admissible under Section 10A of the Act on the ground that such charges are relatable towards expenses incurred on providing technical services outside India.
The Hon’ble Judges of the Supreme Court opined that the definition of total turnover given under Sections 80HHC and 80HHE of the Act cannot be adopted for the purpose of Section 10A as the technical meaning of total turnover, which does not envisage the reduction of any expenses from the total amount, is to be taken into consideration for computing the deduction under Section 10A. When the meaning is clear, there is no necessity of importing the meaning of total turnover from the other provisions. If a term is defined under Section 2 of the Act, then the definition would be applicable to all the provisions wherein the same term appears. As the term ‘total turnover’ has been defined in the Explanation to Section 80HHC and 80HHE, wherein it has been clearly stated that “for the purposes of this Section only”, it would be applicable only for the purposes of 16 that Sections and not for the purpose of Section 10A. If denominator includes certain amount of certain type which numerator does not include, the formula would render undesirable results.
The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT vs. Tata Elxsi Ltd. (2012) 204 Taxman 321/17. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from ‘export turnover’ must also be excluded from ‘total turnover’, since one of the components of ‘total turnover’ is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.
Accordingly, the formula for computation of the deduction under Section10A of the Act would be as follows:
It was observed that in the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section10A of the Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, the Hon’ble Judges of the Supreme Court held that such deduction shall be allowed from the total turnover in same proportion as well.
On the issue of expenses on technical services provided outside, Supreme Court held to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover.