Court: Special Bench of Income Tax Appellate Tribunal (Tribunal) of Chennai
Citation: [ITA No. 1138 & 1141/Mds/2007] in the case of M/s Zylog Systems Ltd.
Brief: Special Bench (SB) of the Income Tax Appellate Tribunal (Tribunal) of Chennai [ITA on the issue of whether, while computing deduction in respect of export profits of a 100% export oriented undertaking (EOU) under Section 10B (Section) of the Indian Tax Laws (ITL):
(a) Expenses incurred in foreign currency on onsite computer software development at the client’s place outside India should be excluded from export turnover; and
(b) Export proceeds utilized outside India for expenses relating to exports should be excluded from export turnover as a non-qualifying export turnover.
The SB ruled that:
(a) Expenses incurred in foreign currency on onsite computer software development at the client’s place outside India should not be excluded from export turnover; and
(b) Export proceeds utilized outside India for expenses relating to exports in accordance with the guidelines of the Reserve Bank of India (RBI) is deemed to have been received in India and should qualify as export turnover.
Background- The Section provides deduction in respect of profits and gains derived by a 100% EOU from exports of articles or things or computer software, subject to conditions specified therein. Deduction is on account of the export turnover and is available on prorata basis by apportioning profits in the ratio of export turnover to total turnover.
The Section defines the term ‘export turnover’ to mean the export consideration repatriated to India by the taxpayer in convertible foreign exchange within the time stipulated by the RBI guidelines. However, it does not include (i) freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or (ii) expenses, if any, incurred in foreign exchange in providing technical services outside India.
The Section also provides deduction for profits from onsite development of computer software (including services for development of software) outside India by treating it to be profits derived from the export of computer software outside India.
The Taxpayer was a company engaged in the business of development of computer software by way of both onsite and offshore development and had a branch in the US for this purpose. For the tax year 2002-03, it claimed deduction for export profits.
The Tax Authority observed that the Taxpayer had incurred expenses in foreign currency for providing technical services outside India. Relying on the exclusionary clause in the definition of ‘export turnover’, it reduced this amount from the export turnover and, consequently, curtailed the amount of deduction under the Section.
The Tax Authority also observed that, out of the export proceeds, the Taxpayer had utilized some amount outside India for the purpose of meeting certain expenses for carrying on export activities. Since the amount spent had not been received in India in convertible foreign exchange, the Tax Authority reduced this amount from the export turnover as a non- qualifying export turnover.
On appeal, the first appellate authority relied on the Supreme Court’s decision in J. B. Boda [223 ITR 271] and the Central Board of Direct Taxes Circular No. 731 dated 20 December 1995 (CBDT Circular) and allowed the Taxpayer’s claim in respect of utilization of export proceeds outside India for meeting export related expenses. However, it upheld exclusion from export turnover of expenses incurred in foreign exchange in providing technical services outside India.
Aggrieved, both the Taxpayer and the Tax Authority came up in appeal before the SB.
On the issue relating to exclusion from export turnover of expenses incurred in foreign exchange in providing technical services outside India
The Taxpayer contended that it was not involved in the activity of rendering technical services outside India. Onsite activity carried on in foreign country was a part of onsite development of computer software. Hence, expenses incurred in foreign exchange should not be reduced from the export turnover.
There is a distinction between computer software and technical services, as is borne out by another provision of the ITL. Technical services would mean giving advice to a third party and the Taxpayer had not rendered any such service outside India.
Though development of computer software involves technical services, such services, if at all, are rendered to self. So far as the client is concerned, the Taxpayer had provided computer software as a product.
Onsite development of software is recognized in the Section as an eligible activity as part of export of computer software.
Tax Authority’s contentions
Onsite development of computer software cannot be without providing technical services.
Where the words in the Section are clear, strict interpretation should be given to the provision.
Expenses incurred in foreign exchange in providing technical services outside India in connection with onsite development of computer software should not be excluded from export turnover.
Services rendered by the Taxpayer onsite were in connection with development of computer software.
The SB referred to the meaning of ‘fees for technical services’ provided in the ITL and held that there was nothing to show that the Taxpayer was involved in rendering managerial or consultancy services outside India or providing technical services to other personnel or any outside agency.
On the issue of whether utilization of export proceeds retained abroad for meeting export related expenses outside India, without bringing the same into India, would qualify for export turnover.
The export proceeds retained abroad and utilized for the purposes of expenses outside India, in accordance with the RBI’s permission, meet the requirements of export turnover within the meaning of the Section.
The Taxpayer placed reliance on the SC decision and the CBDT Circular in support of the contention that a two-way traffic of foreign exchange was unnecessary for claiming deduction.
Tax Authority’s contentions
To the extent of the amount spent abroad, export proceeds have not been brought into India, violating the requirements of the Section.
The SC decision and the CBDT Circular were in the context of a different provision of the ITL and not applicable to the Section.
The Section has already toned down the requirement of repatriation of export proceeds in convertible foreign exchange into India by allowing these to be credited to a separate account maintained for the purpose by the Taxpayer with any bank outside India with the RBI’s approval. Hence, no further relaxation is permissible.
The Section recognizes the RBI as the competent authority for authorizing extension of time for repatriation of export proceeds into India for claiming deduction. Therefore, circulars of the RBI, allowing retention, utilization or capitalization of export proceeds abroad, cannot be ignored.
Once a taxpayer has received the export proceeds in foreign exchange outside India within the stipulated time and the same are utilized for the purpose of its own business through its branch office abroad in accordance with the RBI guidelines, the export proceeds should be considered as deemed receipts in India qualifying as export turnover within the meaning of the Section.
The SC decision and the CBDT Circular would apply in the context of the Section also.
Export proceeds utilized outside India for meeting export related expenses in accordance with the RBI guidelines could not be reduced from the export turnover.
A Special Bench is generally constituted when there are conflicting decisions of the Tribunals or the matter pending for adjudication is of considerable importance. It is also a well-settled convention to consider the Special Bench decisions as binding on the other benches of the same Tribunal.
The SB has approved the preponderant view generally taken by other benches of the Tribunal that expenses incurred in foreign exchange in providing technical services outside India as part of onsite development of computer software should not be excluded from the export turnover while computing the deduction from export profits.
The SB has also settled the issue of utilization of the export proceeds retained abroad for expenses, in accordance with the RBI guidelines. It has held that such utilization should be looked upon as if the export proceeds have been repatriated to India, for the purpose of claiming deduction.
The SB decision which has decided both the issues in favor of the Taxpayer should bring greater certainty to taxpayers.