Ita/1075/2008 Of The Commr Of Income Tax v. M/S Mphasis Ltd

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.1075/2008C/WITA NO.196/2009 IN ITA NO.1075/2008 BETWEEN 1.THRE COMMISSIONER OF INCOME TAX C.R. BUILDING, QUEENS ROAD BANGALORE| 2.THE ASSISTANT COMMISSIONER OF INCOME TAXCIRCLE 12(1), C.R. BUILDING, QUEENS ROADBANGALORECIRCLE 12(1), C.R. BUILDING, QUEENS ROADBANGALORE .. APPELLANTS| (BY SRI. K V ARAVIND) AND M/S MPHASIS LTD. (FORMERLY KNOWN AS MPHASIS BFL LTD)BAGMANE TECHNOLOGY PART,BYRASANDRA C.R. RAMAN NAGAR. BANGALORE ... RESPONDENT| (BY SRI. T. SURYANARAYANA, ADV. FOR M/S KING &PATRIDGE) ITA FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUTORF ORDER DATED 27-06-2008 PASSED IN IIA NO.884/BNG/2007, FOR THE ASSESSMENT YEAR 2003-04,| PRAYING THAT THIS HON'BLEKE COURT MAY BR PLEASETO:I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|STATED THEREIN,Ill ALLOW THR APPKAL AND SET ASIDB THE ORDERPASSED>BY|‘THKITA TBANGALOREINITA|NO.|884/BNG/2007,DATED2'(-06-2008CONFIRMTHERORDERS OF THR APPELLATKR COMMISSIONBR ANDCONFIRM THR ORDER PASSKHD BY THR ASSISTANTCOMMISSIONER.OF|INCOME|TAX,|CIRCLE-12(1), BANGALORE IN THE INTEREST OF JUSTICE ANDEOUITY. IN ITA NO.196/2009 BETWEEN 1.THR COMMISSIONEBR OF INCOME TAXC R BUILDING,C R BUILDING, QUEENS ROAD, BANGALORE 2.THE ASSISTANT COMMISSIONER OF INCOME TAXCIRCLE 12(1) C.R.BUILDING|CIRCLE 12(1) C.R.BUILDING| QUEENS ROADM, BANGALORE| _.. APPBLLANTS (BY SRI M V SESHACHALA) AND M/S MPHASIS LTD.(FORMERLY KNOWN AS MPHASIS BFL LTD)BAGMANE TECHNOLOGY PART,BYRASANDRA C.R. RAMAN NAGAR.BANGALORE ... RESPONDENT| (BY SRI. T.SURYANARAYANA, ADV. FOR M/S KING &PATRIDGE) ITA FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUTOF|ORDERDATEHD7-11-2008 PASSEDIN-ITA.NO.524/BANG/2008 AND 619/BNG/2008, FOR THE|ASSESSMENT|YHAR.2004-05,PRAYINGTHATTHIS|HON'BLE COURT MAY BBR PLEASED TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW|STATED THEREIN, Ill ALLOW THR APPKAL AND SET ASIDB THE ORDERPASSED.BY|THERITATBANGALORE,INITA|NO.924/BANG/2008 and 619/BNG/2008, DATED /7-112OOS CONFIRMING THRE ORDER OF THR. APPEKELLCOMMISSIONBR AND CONFIRM THR ORDER PASSEKBD BTHE.INCOMETAX|OFFICER,(TDS),WARD-16(2), BANGALORE IN THE INTEREST OF JUSTICE ANDEOUITY. THRSK APPBALS COMING ON FOR HRBRARING THIDAY,N KUMAR J., DELIVERED THE FOLLOWING: JUDGMENT The Revenue has preferred these appeals raising the following two substantial questions of law : 1.Whether the Tribunal was correct 1n/reversing the finding recorded by the)Assessing Officer that the foreign currency|for providing software development services|outside [India should be excluded from theE€XPpoOTUTNOVET|for.thePurposeot|computation of deduction u/s.10B of the)Act, which was confirmed by the Appellate|Commissioner?reversing the finding recorded by the)Assessing Officer that the foreign currency|for providing software development services|outside [India should be excluded from theE€XPpoOTUTNOVET|for.thePurposeot|computation of deduction u/s.10B of the)Act, which was confirmed by the Appellate|Commissioner? 2.Whether the Tribunal was correct inreversing the finding of the Assessing)Officer that the expenditure incurred in)foreignCurrencyOT]accountsot|telecommunication expenses should be)reversing the finding of the Assessing)Officer that the expenditure incurred in)foreignCurrencyOT]accountsot|telecommunication expenses should be) included in the total turnover for thePUTPOSE|ot|computationot|deductionu/s.10B of the Act? 2. The first substantial question of law arose forconsideration before this Court in ITA No./7/76/200disposed of on 13.06.2014, wherein this Court has heldat paras 18 and 19 as under:- 2.Whether the Tribunal was correct inreversing the finding of the Assessing)Officer that the expenditure incurred in)foreignCurrencyOT]accountsot|telecommunication expenses should be)reversing the finding of the Assessing)Officer that the expenditure incurred in)foreignCurrencyOT]accountsot|telecommunication expenses should be) included in the total turnover for thePUTPOSE|ot|computationot|deductionu/s.10B of the Act? 2. The first substantial question of law arose forconsideration before this Court in ITA No./7/76/200disposed of on 13.06.2014, wherein this Court has heldat paras 18 and 19 as under:- 18. From the aforesaid provision it Isclear that the consideration in respect of |computer software received in or brougntinto India by the assessee in convertibleforeign exchange is deducted from theprofits of the said business. In other wordsthe assessee is not liable to pay any incometax on such consideration received from|export of computer software. However theSaid export turnover does not’ includefreight,telecommunication.chargesOT|insurance attributable to the delivery ofcomputersoftwareoutside|IndiaOF|expenses|If|dhhyincurredIn.foreignexcnange in providing tecnnical serviceoutside India. In other words out of the said export turnover the following amounts haveto be deducted; a. freight b, telecommunication charges C,InsuranceattributableCO the delivery of computer software outside India;d. expenses, if any, incurred in foreignexchange in providing tecnnical servicesoutside India; 19. If the assessee is engaged in the|business of providing technical servicesoutside[IndiaIn|connection|with thedevelopment or production of computersoftware then expenses if any incurred inforeign exchange in_ providing’ technicaservices outside India Is liable to be’deducted out of export turnover. The saidprovision has no application in the case ofexport out of India of computer software orits transmission from India to a_ placeoutside India by any means. The law|makes|adistinctionbetween.technical services rendered in connection with exportofcomputersoftwareandexportoftechnicalServicesfortheDUFDOSE OF|development or production of computer software outside India. If the technical|Servicesrendered|Dy theassessee’sEngineers Is in connection with the export ofcomputer software for the purpose oftesting, installationand|monitoringOF|software such a turnover do not fall within|clause (il) of subsection (1) of sectionSOHHE of the Act. Such a turnover falls|within sub-clause (i) of subsection (1) ofSection 8OHHE of the Act, that is export outof India of computer software or itstransmission from India to a place outsideIndia by any means. The expenditureincurred in the form of foreign exchange forsuchServicescannotbe|excluded|In|computing the export turnover as it formspart of the export turnover. In the instantcase as !s clear from the order of the'Assessing Authority, he proceeds on theassumption that the assessee is a companyengaged in rendering technical servicesoutside India in connection with productionof said software. Therefore the expenditureincurred in foreign exchange in _ providinsuch technical services outside I[ndia_ oRs.62.7 lakhs was excluded in computingthe export turnover and total turnover for arriving at deduction under Section 8O0OHHof the Act. The assesee is engaged in thebusiness of export out of India of computersoftware and its transmission to places from.India outside India. Before a computersoftwareIS.exported,theSoftwareEngineers of the assessee would have initialdiscussion with regard to the requirements,specificationsCIC.Thereaftercomputersoftware is manufactured and then jt Is'transmitted from India to a place outsideIndia. The software Engineers deputedabroad who among other things have to dotesting, installationand|monitoringOF|software supplied to the client. Though theSaid services are technical in nature it does|not fall within clause (ii) of subsection (1) ofsection SOHHE of the Act of providingtechnicalServicesoutside|[IndiaIn|connectionwith thedevelopmentOF|production of computer software. It fallsunder sub-clause (1) of sub-section (1) ofSection 80 HHE of the Act. Therefore, the’Said expenditure cannot be excluded incomputing export turn over. In that view ofthe matter we do not see any merit in this”appeal. Accordingly, the said question of law Is answered in favour of the assessee|andagainst therevenue.Orderedaccordingly. 3. In view of the said judgment, the substantialquestion of law is answered in favour of the assesseeand against the Revenue. 4. Insofar as the second substantial question oflaw is concerned, the same was considered by this Court in the case ot|Commissioner of Income-Tax And Another Vs. Tata Elxsi Ltd.,reported in|(2012) 349°ITR 98 (Karn)! It has been held as under| “17. From the aforesaid Judgments,| what emerges is that, there should beuniformity in the ingredients of both thenumerator and the denominetor of theformula, since otherwise it would produceanomelies or absurd results. Section 10-AIS a beneficial section. It is intended toprovide incentives to promote exports. Theincentive is to exempt profits relatable toexports. In the case of combined businessof an assessee, having export business anddomestic business, the legislature intended to have a formula to ascertain the profitsfrom export business by apportioning thetotal profits of the business on the basis ofturnovers. Apportionment of profits on thebasis of turnover was accepted as amethod of arriving at export profits. In thecase of Section 80HHC, the export profit Isto be derived from the total businessincome of the assessee, whereas in Section10-A, the export profit is to be derivedfrom the total business of the undertaking. —Even in the case of business of anundertaking, it may include export businessand domestic business, in other words,export turnover and domestic. turnover.The export turnover would be a componentor part of a denominator, the othercomponent being the domestic turnover. Inother words, to the extent of exportturnover, there would be a commonalitybetween|thenumeratorandthedenominator of the formula. In view of thecommonality, the understanding shouldalso be the same. In other words, if theexport turnover in the numerator is to bearrived at after excluding certain expenses,the same should also be excluded In computingtheeEXPpoOturnover|dSacomponent.oftotalTurnover|In|thedenominator. The reason being the totalturnover includes export turnover. Thecomponents of the export turnover in thenumerator and the denominator cannot bedifferent. Therefore, though there is nodefinition of the term ‘total turnover’ InSection 10-A, there is nothing in the saidSection to mandate that, what Is excludedfrom the numerator that is export turnoverwouldnevertheless formpart.ofthedenominator. Though when a particularword is not defined by the legislature andan ordinary meaning is to be attributed tothe same, the said ordinary meaning to beattributed to such word is to be Inconformity with the context in which it Isused. When the statute prescribes aformula and in the said formula, ‘exportturnover’ is defined, and when the ‘totalturnover’ includes export turnover, the verySame meaning given to the export turnoverby the legislature is to be adopted whileunderstanding the meaning of the totalturnover, when the total turnover includesexport turnover. If what Is excluded in computing the export turnover is includedwhile arriving at the total turnover, whenthe export turnover is a component of totalturnover, such an interpretation would runCOUNTECTCO thelegislative.intent.and|impermissible. If that were the intention ofthe legislature, they would have expresslyStated so. If they have not chosen toexpressly define what the total turnovermeans, then, when the total turnoverincludes export turnover, the meaningassigned by the legislature to the exportturnover is to be respected and given effectto, while interpreting the total turnoverwhich is inclusive of the export turnover.Therefore the formula for computation ofthe deduction under Section 10-A, wouldbe as under: Profits of the business|of the undertaking Export turn overX[Export turnover + domestic turn over)Total turn over” o. Accordingly, the said substantial question oflaw is answered in favour of the assessee and againstthe Revenue. &���23839>83��?3�1>�0>:�633�/0C�D38<:�<0�@>:2�:2363� /773/;6�� �BB>81<0=;C��:23C�/83�1<6D<6631�����������������������������������������������������#'�