Commissioner Of Income Taxchennai v. M/S.maars Software International Ltd.,East Coast Chambers Ii Floor

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 05.12.2018 CORAMTHE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE DR.JUSTICE ANITA SUMANTH Tax Case Appeal No.390 of 2009 Commissioner of Income TaxChennai. .... Appellant/Appellant Vs. M/s.Maars Software International Ltd.,East Coast Chambers II Floor, 92, G.N.Chetty Road, T.Nagar,Chennai – 600 017..... Respondent/ Respondent Tax Case Appeal filed under Section 260A of the Income TaxAct, 1961 against the order of the Income Tax AppellateTribunal, Madras 'B' Bench, Chennai, dated 12.06.2008 made inITA No.196/Mds/2008 for the assessment year 2001-02, against theorder of the Commissioner of Income Tax (Appeals)-V, Chennaidated 24/10/2007 in ITA Nos.94/2006-07 against the assessmentorder, dated 27/03/2006 in AAACM 4725H/MA71 of he AssistantCommissioner of Income Tax, Company Circle IV(1)I/C, Chennai forthe assessment year 2001-02. For Appellant : Mr.Karthik Renganathan Standing Counsel For Respondent : Mr.N.V.Balaji for Mr.Krishna RavindranJ U D G M E N T(Delivered by DR.ANITA SUMANTH,J) The Revenue is in appeal before us challenging an order ofthe Income Tax Appellate Tribunal dated 12.06.2008 in relationto the assessment year 2001-02. https://hcservices.ecourts.gov.in/hcservices/ 2. The assessee/respondent is a Software Technology Parkengaged in the business of manufacture and export of software.The sole issue raised relates to the exclusion of unrealisedsale proceeds from 'total turnover' in the formula forcomputation of relief under section 10A of the Income Tax Act,1961 (in short 'Act'). 3. The assessee filed a return of income returning a lossthat was initially accepted under section 143(1). The assessmentwas taken up for scrutiny and completed under s.143(3) on27.12.2002. A notice for re-assessment was issued thereafteron the ground that income had escaped assessment. The reasonsfor re-assessment were two pronged, both relating to thecomputation of eligible deduction under section 10A. 4. The assessee had included two amounts, Rs.16,50,75,000/-being sales effected to one M/s.AI Yusuff and Rs.2,89,96,894/-being sales proceeds not realised prior to the due date in the'export turnover'. The Assessing Officer was of the view thatthe aforesaid two amounts ought to be reduced from 'exportturnover' but retained as part of the 'total turnover' and thusre-worked the computation for deduction under section 10A. Weare, in this case, only concerned with the second issue, beingthe exclusion of an amount of Rs.2,89,96,894/-, unrealisedexport proceeds, from the ambit of 'total turnover'. Theassessment resulted in a demand of a sum of Rs.84,83,898/-. 5. In first appeal, the issue was allowed by theCommissioner of Income tax (Appeals) following the judgment ofthe Supreme Court in the case of Commissioner of Income Tax V.Lakshmi Machine Works (290 ITR 667) and the decision of theKerala High Court in the case of Commissioner of Income Tax V.Abad Fisheries (258 ITR 641). The rationale of the aforesaiddecisions was that parity ought to be maintained as between thenumerator and denominator in the formula while computing reliefunder section 80HHC and 10A/B of the Act respectively. 6. The order of the Commissioner of Income Tax (Appeals)was confirmed by an order of the Income tax Appellate Tribunaldated 12.06.2008, as against which, the present appeal has beenfiled by the revenue. 7. The following substantial question of law (reframed byus) is raised for resolution: 'Whether on the facts and circumstances of thecase, the Tribunal was right in holding thatunrealised sale proceeds in foreign exchange withinthe prescribed period amounting to Rs.2,89,96,894/-had to be included in the total turnover whilecomputing the deduction under Section 10A of the https://hcservices.ecourts.gov.in/hcservices/ I.T. Act?' 6. The order of the Commissioner of Income Tax (Appeals)was confirmed by an order of the Income tax Appellate Tribunaldated 12.06.2008, as against which, the present appeal has beenfiled by the revenue. 7. The following substantial question of law (reframed byus) is raised for resolution: 'Whether on the facts and circumstances of thecase, the Tribunal was right in holding thatunrealised sale proceeds in foreign exchange withinthe prescribed period amounting to Rs.2,89,96,894/-had to be included in the total turnover whilecomputing the deduction under Section 10A of the https://hcservices.ecourts.gov.in/hcservices/ I.T. Act?' 8. Section 10A of the Act is a special provision enacted toprovide for a deduction in respect of income derived by anundertaking from the export of articles or things or computersoftware for a period of ten consecutive assessment yearsbeginning with the assessment year relevant to the previous yearin which the undertaking begins the eligible activity. 9. In the present case, the eligibility of the assessee tothis relief is not disputed. The mode of computation of therelief is set out in terms of sub-section (4) of section 10A byway of a formula. 10.Sub-section (4) is extracted below: (4) For the purposes of sub-sections (1) and(1A), the profits derived from export of articles orthings or computer software shall be the amount whichbears to the profits of the business of theundertaking, the same proportion as the exportturnover in respect of such articles or things orcomputer software bears to the total turnover of thebusiness carried on by the undertaking.The resultant formula is thus: export profits X exportturnover total turnover. 11. Sub-section (3) stipulates that the foreign exchangederived from eligible activity be brought into the countrywithin a specified period, i.e., six (6) months from the end ofthe previous year or within such period as the competentauthority may allow in this behalf. In the present case,admittedly, foreign exchange to the extent of Rs.2,89,96,894/-has not been received in India within the stipulated statutoryperiod. 12. Mr.Karthik Ranganathan, learned Standing Counselappearing for the Revenue would thus contend that the amount ofRs.2,89,96,894/-, admittedly not brought into the country withinthe prescribed time limit would automatically have to standexcluded from the numerator, i.e. export turnover. However,according to him, the amount constitutes turnover of theassessee and should be included in the denominator, 'totalturnover'. He would argue that this treatment was in keepingwith the scheme of the section that is intended to provide abenefit only for those engaged in the activity of export andgaining foreign exchange. 13. He points out that the very object of the section is toimprove foreign exchange inflows into the Country and thus in asituation where an assessee is unable to bring into the Country foreign exchange by way of export turnover, such non-realisationshould not only stand excluded from the numerator, but also bedeemed to be part of turnover and included in the denominator,i.e. total turnover of the company. 14. He relies on two decisions of this Court in the case ofGalaxy Granites (P) Ltd. V. Commissioner of Income-tax ((2012)27 taxmann.com) 31 (Mad) which relates to computation ofdeduction under Section 80 HHC of the Act and PentasoftTechnologies Ltd. V. The Deputy Commissioner of Income Tax (T.C.(A)Nos.1135 and 1196 of 2008 dated 25.11.2013). 15. In the case of Galaxy Granites (supra) the Benchconsiders the following question: 'Whether the Appellate Tribunal is right in lawin holding that unrealised export turnover should beincluded in the “Total Turnover” while it is nottreated as “Export Turnover” for purposes of computing the allowable deduction under Section 80HHC?' 15. In the case of Galaxy Granites (supra) the Benchconsiders the following question: 'Whether the Appellate Tribunal is right in lawin holding that unrealised export turnover should beincluded in the “Total Turnover” while it is nottreated as “Export Turnover” for purposes of computing the allowable deduction under Section 80HHC?' 16. In answering the question, the Division Bench took intoaccount the definitions of 'export turnover' as well as 'totalturnover' under section 80 HHC of the Act. The definition of'export turnover' in Section 80HHC was amended by Finance Act1990 to provide that what would be included within its ambitwould only be sale proceeds 'received' as against sales proceeds'receivable' till the date of amendment. Thus, with effect from01.04.1991, only sales proceeds actually 'received' would standincluded in the ambit of 'export turnover'. However, thecorresponding amendment was not made in the definition of 'totalturnover'. In the aforesaid circumstances, the intention of theLegislature was clear to the effect that it would be only saleproceeds actually 'received' that would be included within theambit of 'export turnover' in the numerator whereas, in additionto actual receipts, what was 'receivable' or 'not actuallyreceived' would also stand included within the ambit ofdenominator i.e, 'total turnover'. 17. This position hinges on the scheme of deduction undersection 80HHC, which is specific to the provisions set outtherein. The provisions of section 10B do not contain adefinition of 'total turnover' and therefore the interpretationof the Court in the context of section 80HHC would not advancethe case of the Revenue as far as the scheme of section 10A or10B is concerned. 18. In the case of Pentasoft (supra), the Bench decided theclaim for exclusion of unrealised sales proceeds against theassessee since no such claim had been made at the time ofassessment, and the assessee therein had raised the claim onlyby way of additional ground at the stage of first appeal. Sincethere was no challenge to the exclusion of unrealised saleproceeds from 'export turnover' but inclusion of the same in 'total turnover' at the time of assessment, the Bench held thatit was not open to the assessee to question the interpretationof the formula at a later stage. 19. The assessee therein had also raised alternate groundsby way of a claim towards bad debt/business loss that werenegatived by the Division Bench. The facts in that case aredistinguishable from the one on hand. Moreover, the claim inthe present case has been made at the time of assessment itselfand thus the decision in the case of Pentasoft (supra) is of noassistance to the revenue. 20. While the scheme of Section 10A does not provide for adefinition of the term 'total turnover', Explanation 2(iv)defines 'export turnover' in the following terms: '(iv) "export turnover" means the considerationin respect of export by the undertaking of articlesor things or computer software received in, orbrought into, India by the assessee in convertibleforeign exchange in accordance with sub-section (3),but does not include freight, telecommunicationcharges or insurance attributable to the delivery ofthe articles or things or computer software outsideIndia or expenses, if any, incurred in foreignexchange in providing the technical services outsideIndia; 20. While the scheme of Section 10A does not provide for adefinition of the term 'total turnover', Explanation 2(iv)defines 'export turnover' in the following terms: '(iv) "export turnover" means the considerationin respect of export by the undertaking of articlesor things or computer software received in, orbrought into, India by the assessee in convertibleforeign exchange in accordance with sub-section (3),but does not include freight, telecommunicationcharges or insurance attributable to the delivery ofthe articles or things or computer software outsideIndia or expenses, if any, incurred in foreignexchange in providing the technical services outsideIndia; 21. The issue of whether the items reduced from 'exportturnover', such as freight, telecommunication charges orinsurance as provided for in the definition would also standreduced from 'total turnover' was the subject matter ofconsideration by the Supreme Court in the case of CIT V. HCLTechnologies [2018] (404 ITR 719) and the issue was held infavour of the assessee. The conclusion of the Bench was to theeffect that items excluded/reduced from the numerator wouldstand excluded/reduced from the denominator as well. Paragraphs18 to 21 of the judgement are relevant and are extracted below: '18) Accordingly, the formula for computation ofthe deduction under Section10A of the Act would be asfollows: Export turnover as defined inExplanation 2 (IV) ofSection 10A of IT Act ExportProfit=totalProfit_____________________________________ of the Business X Exportturnover as defined in Explanation 2(IV) of Section 10A of the IT Act + domestic sale proceeds 19) In the instant case, if the deductions onfreight, telecommunication and insurance attributable to the delivery of computer software under Section10A ofthe IT Act are allowed only in Export Turnover but notfrom the Total Turnover then, it would give rise toinadvertent, unlawful, meaningless and illogical resultwhich would cause grave injustice to the 19 Respondentwhich could have never been the intention of thelegislature. 20) Even in common parlance, when the object of theformula is to arrive at the profit from export business,expenses excluded from export turnover have to beexcluded from total turnover also. Otherwise, any otherinterpretation makes the formula unworkable and absurd.Hence, we are satisfied that such deduction shall beallowed from the total turnover in same proportion aswell. 21) On the issue of expenses on technical servicesprovided outside, we have to follow the same principleof interpretation as followed in the case of expenses offreight, telecommunication etc., otherwise the formulaof calculation would be futile. Hence, in the same way,expenses incurred in foreign exchange for providing thetechnical services outside shall be allowed to excludefrom the total turnover.' 22. Learned Counsel for the Revenue seeks to distinguishthe above judgment stating that the rationale thereof would beapplicable only to the items of exclusion at issue before theSupreme Court and cannot be extended to the question ofunrealised sale proceeds, which is the issue in the presentcase. 23. We see no valid distinction as sought to be pointed outbefore us. The components of the total turnover/denominator inthe formula would be the quantum of export turnover/numeratorplus proceeds from domestic sales. Thus what is 'exportturnover' for the purpose of the numerator would have to be the'export turnover' for the purpose of denominator as well and'export turnover' cannot assume two different characteristicsfor two parts of the same formula. 22. Learned Counsel for the Revenue seeks to distinguishthe above judgment stating that the rationale thereof would beapplicable only to the items of exclusion at issue before theSupreme Court and cannot be extended to the question ofunrealised sale proceeds, which is the issue in the presentcase. 23. We see no valid distinction as sought to be pointed outbefore us. The components of the total turnover/denominator inthe formula would be the quantum of export turnover/numeratorplus proceeds from domestic sales. Thus what is 'exportturnover' for the purpose of the numerator would have to be the'export turnover' for the purpose of denominator as well and'export turnover' cannot assume two different characteristicsfor two parts of the same formula. 24. In the present case, the quantum of 'export turnover'has been taken to be the actual remittances of foreign exchangeafter excluding the unrealised foreign exchange. This thenwould be the same figure to be adopted so far as the denominatoris concerned as well. In fine, 'total turnover' for purposes ofthe formula would be the actual sale receipts excludingunrealised foreign exchange as adopted for 'export turnover'.This conclusion is also supported by the reasoning that theprovisions of Section 10A/10B are beneficial in nature and seekto encourage an assesse engaging in a prescribed activity. 25. In the light of the discussion as above, we answer thequestion of law in the negative, in favour of the assessee andagainst the Revenue. The Tax Case (Appeal) is dismissed. Nocosts. Sd/-Assistant Registrar(CS-VI) //True copy//Sub Assistant RegistrarslTo1.The Income Tax Appellate Tribunal, Madras 'B' Bench, Chennai.2. The Commissioner of Income Tax (Appeals)-V, 121, M.G.Road, Chennai – 600 034.3. The Assistant Commissioner 06 Income Tax, Company Circle,IV(1)(I/C), Chennai-34+1cc to Mr.Krishna Ravindran, Advocate SR.No.83953+1cc to Mr.Krishna Ravindran , Advocate SR.No.84148TCA No.390 of 2009 GP(CO)GMY(11/01/2019)