Commisstoner Of Income Tax v. Punjab Stainless

IN THB HIGH COURT OF KARNATAKA AT BANGALOREDATEBD THIS THE DAY OF AUGUST 2014 PRESENT THER HON’BLE MR.JUSTICK N KUMAR| AN ] THR HON’BLE MR.JUSTICE B.MANOHAR| ITA NO.734/2007 1. THE COMMISSIONER OF [INCOME TACHNTRAL CIRCLECR BUILDINGQUEENS ROADBANGALORE 2 THR JOINT COMMISSIONER OFINCOME TAX,SPECIAL RANGE-3SC.R.BUILDINGQUEENS ROADBANGALORE ... APPELLANTS (BY SRI K V ARAVIND, ADV.) AND M/S.MOTOR INDUSTRIES CO. LTD|NO.26-A/2|SANKBY ROADBANGALORE,... RESPONDENT(BY|SRIPBRCYPARDHIWALA,SR.AlLDVFORT.SURYANARAYANA, ADV. FOR M/S KING & PARTRIDGE)THIS ITA IS FILED U/S.260-A OF I.T.ACT, 1961 ARISING|OUTOF.ORDER.DATED04-05-2007PASSED|IN|ITA|NO.2755/BNG/2004, FOR THE ASSESSMENT YEAR 1998-1999,PRAYING THAT THIS HON'BLE COURT MAY BB PLEASED TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATEDTHEREIN, Ill. ALLOW THR APPBAL AND SET ASIDE THR ORDER PASSEDBY THE ITAT BANGALORE IN ITA NO.2755/BNG/2004,DATED|04-05-2007, AND CONFIRM THE ORDER OF THE APPELLATECOMMISSIONBR CONFIRMING THRE ORDEBR PASSBD BY THJOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE-3,BANGALORE,IN THE INTEREST OF JUSTICE AND EQUITY. THIS APPEAL COMING ON FOR ORDERS THIS DAY,NKUMAR J., DELIVERED THE FOLLOWING: JUDGMENT This appeal is preferred by the Revenue. Theyhave raised the following substantial questions of law for consideration by this Court: 1.Whether the Tribunal was correct in.holding that the receipt of Insuranceclaim cannot be included in the totalTUrNOVerYforthePurposeot|computation of deduction u/s.80QHHCof the Act? 2. Whether the Tribunal was correct in.holding that the receipts on sale of.raw materials, tools, stores, scrapsetc., cannot form part of turnover forthe PUTPOSE|oT computationoT deduction u/s.8QOHHC of the Act? 3. Whether the Tribunal was correct inholding that 90% of ‘net interest.income’andNOT“gross”interest receipts’ required to be reduced from. profits and gains from business or.profession despite Explanation (baa).to Section SOHHC of the Act? 4 Whether the Tribunal was correct inholdingthat.QO%oT interestoT Rs.2,99,10,951/-representinginterest received from customers on.overdue bills, short term deposits etc.,cannot be reduced from the profits forthe purpose of computing deductionu/s. 80HHC and 8OHHE of the Act byremitting the matter back to the.Assessing Officer?| 5. Whether the Tribunal was correct inholdingthat|CXpe;»nsein.foreignCurrencyfor.providingtechnicalservices outside [India should not bedeductedfromsalesoT|softwareexports to arrive at the profits ofbusiness for the purpose of computing.deduction u/s.8OHHE of the Act?holdingthat|CXpe;»nsein.foreignCurrencyfor.providingtechnicalservices outside [India should not bedeductedfromsalesoT|softwareexports to arrive at the profits ofbusiness for the purpose of computing.deduction u/s.8OHHE of the Act? 2. Insotar as the first and second substantialquestions of law, the Hon’ble Apex Court in the case of Commisstoner of Income Tax Vs. Punjab Stainless Steel Industries and Others‘reported in (2014) 364ITR 144 (SC)explaining the meaning of ‘turnover’ andwhat constitutes turnover has held as under: 17. To ascertain whether the turnover|would also include sale proceeds from scrap,one has to know the meaning of the term|“turnover. The term “turnover” has neitherbeen defined in the Act nor has_ beenexplained by any of the Central Board of|Direct Taxes circulars. 18. In the aforestated circumstances,one has to look at the meaning of the term|“turnover”|in|ordinaryaccountingOLrcommercial parlance. 19. Normally, the term “turnover”would show the sale effected by a business|unit. It may happen that in the course of the|business, in addition to the normal sales, thebusiness unit may also sell some_ otherthings. For example, an assessee who 1Ss|manufacturing and selling stainless steel|utensils, in addition to steel utensils, theassessee might also sell some other things|like an old air-conditioner or old furniture or| 18. In the aforestated circumstances,one has to look at the meaning of the term|“turnover”|in|ordinaryaccountingOLrcommercial parlance. 19. Normally, the term “turnover”would show the sale effected by a business|unit. It may happen that in the course of the|business, in addition to the normal sales, thebusiness unit may also sell some_ otherthings. For example, an assessee who 1Ss|manufacturing and selling stainless steel|utensils, in addition to steel utensils, theassessee might also sell some other things|like an old air-conditioner or old furniture or| something which has outlived its utility.When such things are disposed of, the|question would be whether the sale proceeds|of such things would be included in the|“turnover . similarly, in the process ofmanufacturing utensils, there would be some|scrap of stainless steel material, whichcannot be used for manufacturing utensils.Such small pieces of stainless steel would be|sold as scrap. Here also, the question is|whether sale proceeds of such scrap can be|included in the term “sales” t,uvhen it 1s to breflected in the profit and loss account. 20. In ordinary accounting parlance, asapproved by all accountants and auditors, the|term “sales”, when reflected in the profit and|loss account, would indicate sale proceeds|from sale of the articles or things in which thebusiness unit is dealing. When some other|things like old furniture or a capital asset, in|which the business unit is not dealing are|sold, the sale proceeds’ therefrom would notbe included in “sales” but it would be shown§separately. QI.In|simplewords,the|word“turnover would mean only the amount of|sale proceeds received in respect of the goodsin which an assessee is dealing in. For| example — If a manufacturer and seller of air-conditioners1S|askedTo declarehis“turnover, the answer given by him would|Show the sale proceeds of air-conditionersduring a particular accounting year. He|would not include the amount received, tfany, from the sale of scrap of metal pieces or sale proceeds of old or useless things soldduring that accounting year. This clearly|denotes that ordinarily a businessman by the|word“turnover|wouldmeanthesaleproceeds of the goods (the things in which he|is dealing ) sold by him. 3. In view of the aforesaid declaration of law by theHon’ble Apex Court, the insurance claim, sale of rawmaterials, tools, stores, scraps cannot form part ofturnover for the purpose of computation of deductionunder Section 8O0OHHC of the Act. The said finding of theTribunal is in accordance with law as laid down by theHon’ble Supreme Court. Therefore, the first and secondsubstantial questions of law are answered in favour ofthe assessee and against the Revenue. 4. Insofar the substantial questions of law Nos.3and 4 are concerned, this Court had an occasion to) consider.thesimilarquestions|IntheCaSE€oT|Commissioner of Income Tax and Another Vs. Krone Communication Ltd.,reported in|(2011) 333 ITR 497>where it was held as under: “In the definition in sub-section (4C) of sectionSOHHC of the Income-tax Act, 1961, it isspecifically mentioned that what is to bereduced in 90 per cent. of any receipts by wayof commission “included in such_ profits”.Therefore, it is clear that is not the receipt of 90per cent. of the entire commission, it is 9O percent. receipt of commission included in theprofits and gains of business. Ultimately,clause (baa) to the Explanation is itself basedon the assumption that 10 per cent. of theincome would be an expense. This guidancevalue is not flowing from clause (baa) but fromthe scheme of section SOHHC read with theMemorandum to the Finance (No.2) Bull of1991.” o. The said view of this Court has been affirmed by the Apex Court in the case of|ACG Associated|Capsules Pvt. Ltd. Vs. Commissioner of Income-Taxreported in|(2012) 343 ITR 89 (SC)as under: o. The said view of this Court has been affirmed by the Apex Court in the case of|ACG Associated|Capsules Pvt. Ltd. Vs. Commissioner of Income-Taxreported in|(2012) 343 ITR 89 (SC)as under: “Under clause(1) of Explanation (baa) to sectionSOHHC of the Act, ninety per cent of any receipts:by way of brokerage, commission, interest, rent,charges or any other receipt of a similar natureincluded in any such profits are to be deductedfrom the profits of the business as computedunder the head “Profits and gains of business orprofession”. The expression “included any suchprofits” would mean only such receipts by way ofbrokerage, commission, interest, rent, charges orany other receipt which are included in the profitsof the business as computed under the head“Profits and gains of business or profession’. —Therefore, if any quantum of the receipts by wayof brokerage, commission, interest, rent, chargesor any other receipt of a similar nature is allowedas expenses under sections 30 to 44D of the Actand is not included in the profits of business ascomputed under the head “Profits and gains ofbusiness or profession’, ninety per cent. of suchquantum of receipts cannot be reduced underclause (1) of Explanation (baa) from the profits ofthe business. In other words, only ninety percent, of the net amount of any receipt of thenature mentioned in clause (1) which is actuallyincluded in the profits of the assessee is to bededucted from the profits of the assessee for determining “profits of the business” of theassessee under Explanation (baa) to sectionSOHHC.” 6. In that view of the matter, the said substantialquestions of law are answered in favour of the assesseeand against the Revenue. 7. Insofar fifth substantial question of law isconcerned, the said question fell for considerationbefore this Court in the case of very assessee Companyin ITA No.776/2007 disposed of on 13.06.2014 whereinit has been held at paras 18 and 19 as under: 18. From the aforesaid provision it 1s|clear that the consideration in respect ofcomputer software received in or brought intoIndia by the assessee in convertible foreignexchange is deducted from the profits of thesqid business. In other words the assessee 1snot liable to pay any income tax on suchconsideration received from export of computersoftware. However the said export turnoverdoes not include freight, telecommunicationcharges or insurance attributable to thedelivery of computer software outside India orexpenses tf any incurred in foreign exchange in providing technical service outside India. Inother words out of the said export turnover thefollowing 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|exchangein.providingtechnicalServices.outside India; 19. If the assessee is engaged in the|businessof|providingtechnicalSeCTVICESoutsideIndia|In|connectionwiththedevelopmentOrproduction of|computersoftware then expenses if any incurred inforeign exchangeIn|providingtechnicalservices outside India is liaghle to be deductedout of export turnover. The said provision hasno application in the case of export out of Indiaof computer software or its transmission fromIndia to a place outside India by any means.The law makes aq distinction betweentechnical services rendered in connection withexport of computer software and export oftechnicalSeTVICES|fortheDUTPOSEof|developmentOrproductionof|computersoftwareoutsideIndia.Ifthe|technical d. expenses, if any, incurred in foreign|exchangein.providingtechnicalServices.outside India; 19. If the assessee is engaged in the|businessof|providingtechnicalSeCTVICESoutsideIndia|In|connectionwiththedevelopmentOrproduction of|computersoftware then expenses if any incurred inforeign exchangeIn|providingtechnicalservices outside India is liaghle to be deductedout of export turnover. The said provision hasno application in the case of export out of Indiaof computer software or its transmission fromIndia to a place outside India by any means.The law makes aq distinction betweentechnical services rendered in connection withexport of computer software and export oftechnicalSeTVICES|fortheDUTPOSEof|developmentOrproductionof|computersoftwareoutsideIndia.Ifthe|technical services rendered by the assessee’s Engineersis in connection with the export of computersoftware for the purpose of testing, installationand monitoring of software such a turnover donot fall within clause (iu) of subsection (1) ofsection SOHHE of the Act. Such a turnoverfallswithin sub-clause (i) of subsection (1) ofsection SOHHE of the Act, that is export out ofIndia of computer software or its transmissionfrom India to a place outside India by anymeans. The expenditure incurred in the form offoreign exchange for such services cannot beexcluded in computing the export turnover as itforms part of the export turnover. In the instantcase as is clear from the order of theAssessing Authority, he proceeds on _ thassumption that the assessee is a companyengagedinrendering|technicalSeCTVICESoutside India in connection with production ofsaid software. Therefore the expenditureincurred in foreign exchange in providing suchtechnical services outside India of Rs.62.7lakhs was excluded in computing the exportturnover and total turnover for arriving atdeduction under Section SOHHE of the Act.The assesee is engaged in the business ofexport out of India of computer software andits transmission to places from India outside India. Before a computer software is exported,the Software Engineers of the assessee wouldhave initial discussion with regard to therequirements, specifications etc. Thereaftercomputer software is manufactured and thenit is transmitted from India to a place outsideIndia. The software Engineers deputed abroadwho among other things have to do testing,installationand.monitoringof|softwaresupplied to the client. Though the said servicesare technical in nature it does not fall withinclause (it) of subsection (1) of section SOHHE ofthe Act of providing technical services outsideIndia in connection with the development orproduction of computer software. Itfalls undersub-clause (1) of sub-section (1) of Section 8OHHE of the _ Act. Therefore,the saidexpenditure cannot be excluded in computingexport turn over. In that view of the matter wedonot.SCCanymerit|In|thisappeal. Accordingly, the said question of law isanswered in favour of the assessee andagainst the revenue. Ordered accordingly.| 8. 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