BANGALORE, JAN 22, 2008 : SEVERAL issues decided in this appeal before the Tribunal.
1. Carry forward export loss and export profit eligible for deduction for the year are to be considered together for the purposes of ascertaining the income included in the gross total income.
In the return of income, the assessee claimed deduction u/s 80HHE before setting off of brought forward business loss and unabsorbed depreciation from the gross total income. Before the Assessing Officer it was contended that section 80HHE is the self-contained section and contains the definition of profits of the business, export turnover, total turnover etc. Section 80AB refers to the nature of income entitled for deduction u/s VIA and include in the gross total income. Section 80HHE does not refer to any income included in the gross total income.
The Assessing Officer was of the view that section 80AB is applicable and the income, which is included in the gross total income, can be considered for the purpose of computing deduction u/s 80HHE. As per section 80AB, brought forward losses and unabsorbed depreciation is to be reduced before ascertaining the income to be included in the gross total income.
The CIT (A) relied on the decision of the Apex Court in the case of IPCA Laboratory wherein it has been held that deduction u/s 80HHC will be covered by the provisions of section 80AB. The Apex Court reversed the decision of the Bombay and Kerala High Courts. Since the provisions of section 80HHE are similar to the provisions of section 80HHC, therefore, the CIT (A) upheld the contention of the Assessing Officer that for computing deduction u/s 80HHE, unabsorbed business loss and unabsorbed depreciation is to be reduced from the profits.
The Tribunal observed,
When one goes through sec.80AB, it is clear that this sec. refers to the word ‘income’ and not profit. It means that deduction u/s 80HHC(1) should not exceed the income from export. Section 80AB refers to the income, while sec.80HHC(3) refers to the word ‘profit’. Income and profit are not synonymous for the purpose of determining the deduction u/s 80HHC(1). The unabsorbed business loss will not be considered to ascertain profit of the business as mentioned in sec.80HHC(3) . Unabsorbed depreciation will have to be treated as part of current depreciation as per sec.32(2) of the I T Act and, therefore, will have to be reduced to ascertain profits of the business as per sec.30 to 43C . Thereafter, sec. 80AB will come into play. Carry forward export loss and export profit eligible for deduction for the year are to be considered together for the purposes of ascertaining the income included in the gross total income. This is the end result. It is included in the gross total income and this end result will have to be treated as nature of income derived from export in view of sec. 80AB. Thus, overall deduction will be restricted to this amount.
2. If there is loss from the branch, then the same is adjusted from the profit of the business in the computation of income and that may not require any further adjustment for the purpose of computing deduction u/s 80HHE.
In the computation of deduction u/s 80HHE, the Assessing Officer noticed that the assessee has added back the losses from its overseas office to the eligible profits. Before the Assessing Officer it was contended that profits of the business as per Explanation to section 80HHE(d) means the profit of the business as reduced by the profit of any branch office warehouse or any other establishment of the assessee situated outside India . It was argued that the word ‘profit’ include the loss. If there is a loss in the branch office then it should be added back for ascertaining the profits of the business as per Explanation to section 80HHE(d). This contention was rejected. According to the Assessing Officer, deduction can be granted only on business income computed and not on an amount, which is greater than business profit forming part of gross total income.
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The Tribunal observed,
Profits of the business have been defined in Explanation (d) to section 80HHE(5). The Allahabad High Court in the case of Lakshminarayan v Aparna Devi observed that the word ‘reduced’ is generally used in two senses – (1) putting some person or thing to an inferior rank or position and (2) changing the form or order of a thing. Thus, the word ‘reduced’ cannot be mean to a further benefit. It only provides for some reduction. The legislature in its wisdom has not mentioned that the losses in the branch office should be increased to the profit and gains for the purpose of computing deduction u/s 80HHE.
The Apex Court in the case of A M Moosa v CIT had an occasion to consider the plea that the word ‘profit’ as mentioned in section 80HHC(1) and 80HHC(3) should have the same meaning. The Apex Court held that such a plea is clearly without substance. It was observed that firstly it is not necessary that the word ‘profit’ must have the same meaning. The meaning of the word ‘profit’ will depend on the context in which it is used. The Apex Court held that the term ‘profit’ in section 80HHC both in sub-section (1) and in sub-section (3) means a positive profit worked out after taking into consideration the losses, if any. If there is loss from the branch, then the same is adjusted from the profit of the business in the computation of income and that may not require any further adjustment for the purpose of computing deduction u/s 80HHE. The gross total income includes the profit after adjustment of a loss from the branch. In order to provide incentive, the legislature only required that profit of the branch is reduced for the purpose of computing profit of the business because that is the profit, which is earned from export. Hence, it is held that the CIT (A) was justified in upholding the action of the Assessing Officer.
3. Daily allowance cannot be reduced from the export turnover for the purpose of computing deduction u/s 80HHE as the same has not been spent for providing technical services.
During the course of assessment proceedings, the Assessing Officer noticed that the annual accounts of the assessee show that a sum of Rs.500.72 lakhs has been spent for foreign travel expenses but this sum was not included in the expenses incurred in foreign exchange, which were reduced from export turnover for the purpose of computing deduction u/s 10A. The assessee was asked to explain as to why the foreign travel expenses of Rs.500.72 lakhs was not deducted from the export turnover for the purpose of section 10. The assessee gave the break-up of foreign travel expenses as
a) Airfare Rs.1,12,21,334/ –
b) Medical Insurance Rs.1,2,924/-
c) Kit allowance Rs.5,33,802/ –
d) For Per diem Rs.3,81,64,086/ –
Total = Rs.5,00,72,146/ –
In respect of per diem allowance, it was submitted that it is the allowance, which is given to the Engineers before they proceed to overseas. There was no dispute between the assessee and the revenue
that air-fare, medical insurance and kit allowance expenses are not to be deducted from export turnover. However, in respect of per diem allowance, it was submitted before the Assessing Officer that the amount has been spent in Indian rupees in India and therefore, is not covered by Explanation- 2(iv) of section 10A. However, the Assessing Officer was of the view that the assessee bought the foreign exchange from the R.B.I. by spending Indian rupees and the engineers are given the amounts in foreign currency. Thus, there is an outgo of foreign currency. The same has been spent by the engineers in overseas. The Assessing Officer therefore treated per diem allowance of Rs.3,81,64,086/ – as expenditure in foreign currency and held that the same is to be deducted from the export turnover for the pu
rpose of computing deduction u/s 10A.
The CIT (A), was of the view that providing of technical services can also be connected to computer software exported by the appellant. It has been admitted by the appellant that the engineers/employees were deputed outside India to modify, adapt or improve the software already developed and supplied in the earlier years. For modifying or improving the software already developed, one has to integrate the work done by the appellant with the work done by another person. Such integration involves providing of technical services. Accordingly, the CIT (A) was of the view that the expenditure incurred is of the nature of providing technical services and the Assessing Officer was justified in deducting from the export turnover for the purpose of computing deduction u/s 10A.
The Tribunal’s view:
It is not the case of the revenue that the export turnover represents any receipts for the services rendered for technical services. It is the contention of the appellant that it is engaged in the creation and development of computer software. The modified software is supplied and the receipts are in respect of supply of such modified software. It has further been contended that the appellant is having only marketing office. Thus, the revenue has not provided any fact to hold that the appellant has rendered any technical services. A similar issue was considered by this Bench in the case of Infosys Technologies Ltd., It was held that expenditure incurred in foreign currency in connection with the computer software development cannot be excluded from the export turnover. By following the above order, it is held that per diem allowance cannot be reduced from the export turnover for the purpose of computing deduction u/s 80HHE as the same has not been spent for providing technical services.
4. Sales from one STP to another is not deemed export for Income Tax deductions.
Sale of software by one STP to another STP within the country would be treated as deemed export only for the purpose of duty draw back and exempt from terminal excise duty. sec. 10A, with relevant proviso, stood during the relevant time itself provides that when domestic sales of STP unit do not exceed 25%, such sale should be deemed to be the profits and gains derived from the export of such articles or things or computer software. Thus the provisions of sec. 10A as it stood specifically provide how much benefit to be given to the assessee if sales to another STP when not exceeded 25% of the total products.
Further, from the perusal of the Exim Policy (chapter 6), it is seen that whatever benefit given should be as per the provisions of sections 10A and 10B of the Income Tax Act. Apart from the benefit conferred, nothing has been indicated in respect of any deemed export when the issue considered under the I T Act. The Exim Policy obviously does not include in respect of benefit to be given under I T Act other than one referred to under Chapter 6.12(a).