Ita/502/2009 Of Commissioner Of Income Tax v. M/S.extra Weave

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HON'BLE MR. JUSTICE BABU MATHEW P.JOSEPH THURSDAY, THE 23RD DAY OF FEBRUARY 2012/4TH PHALGUNA 1933 ITA.No. 502 of 2009 ( ) -----------------------ITA.492/2008 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 19.12.2008 ASSESSMENTYEAR 2005-2006. APPELLANT(S)/APPELLANT/APPELLANT: -------------------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/RESPONDENT: ------------------------- M/S.EXTRA WEAVE, PB NO.74, SAKTHEESWARAM JUNCTION, VELORVATTOM, CHERTHALA ALAPPUZHA. BY ADV. SRI.T.M.SREEDHARAN BY ADV. SMT.C.K.SHERIN BY ADV. SRI.V.P.NARAYANAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 23-02-2012, ALONG WITH ITA. 503/2009 AND ITA 604/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.No. 502 of 2009 ( ) ANNEXURE RESPONDENT'S ANNEXURE:NIL //TRUE COPY// P.A. TO JUDGE. C.R. C.N.RAMACHANDRAN NAIR & BABU MATHEW P.JOSEPH, JJ. .................................................................... I.T.A.Nos.502, 503 & 604 of 2009 .................................................................... Dated this the 23[rd] day of February, 2012. J U D G M E N T Ramachandran Nair, J. The sole question raised in the connected appeals filed by the Revenue against the very same assessee is whether theTribunal was justified in allowing deduction of canvassingcommission paid in the determination of export turnover forthe purpose of deduction under Section 10B of the Income TaxAct (hereafter referred to as the Act for short). 2.The assessee is a 100% export oriented unitengaged in manufacturing and export of coir products byusing synthetic materials as well. Being a 100% EOU theassessee is entitled to deduction under Section 10B on theprofit earned on export. However, since the assessee has DTAsales, the eligible export profit for deduction has to be workedout in terms of Section 10B(4) of the Act, which provides for I.T.A.Nos.502, 503 & 604/2009 working out proportionate profit on export turnover from thetotal profit. There is no dispute on the total profit or on thetotal turnover and the only dispute is what is export turnoverthat qualifies for deduction. While the case of the assessee isthat it is the sale proceeds received in convertible foreignexchange that is export turnover, the Assessing Officerreduced therefrom the canvassing commission paid by theassessee to foreign agents in convertible foreign exchangeand took only the net export turnover realised for thecomputation of export profit for deduction. The first appellateauthority as well as the Tribunal agreed with the claim of theassessee and therefore the Revenue has filed these appealsagainst the common order of the Tribunal rendered for theassessment years from 2004-05 to 2006-07. 3.We have heard learned Senior Standing CounselShri.P.K.R.Menon appearing for the Revenue and learnedSenior counsel Shri.T.M.Sreedharan appearing for theassessee. I.T.A.Nos.502, 503 & 604/2009 -3- 4.Since the question raised is only on the scope of deduction under Section 10B(4), we extract hereunder the saidSection with the definition clause of “Export Turnover”contained in Clause (iii) of Explanation 2 to Section 10B(9A) ofthe Act. “10B(4) : For the purposes of sub-section (1), theprofits derived from export of articles or things orcomputer software shall be the amount which bearsto the profits of the business of the undertaking,the same proportion as the export turnover inrespect of such articles or things or computersoftware bears to the total turnover of the businesscarried on by the undertaking.” Explanation 2(iii) to Section 10B(9A) :- I.T.A.Nos.502, 503 & 604/2009 -3- 4.Since the question raised is only on the scope of deduction under Section 10B(4), we extract hereunder the saidSection with the definition clause of “Export Turnover”contained in Clause (iii) of Explanation 2 to Section 10B(9A) ofthe Act. “10B(4) : For the purposes of sub-section (1), theprofits derived from export of articles or things orcomputer software shall be the amount which bearsto the profits of the business of the undertaking,the same proportion as the export turnover inrespect of such articles or things or computersoftware bears to the total turnover of the businesscarried on by the undertaking.” Explanation 2(iii) to Section 10B(9A) :- “”export turnover” means the consideration inrespect of export (by the undertaking) of articles orthings or computer software received in, or broughtinto, India by the assessee in convertible foreignexchange in accordance with sub-section (3), butdoes not include freight, telecommunication chargesor insurance attributable to the delivery of thearticles or things or computer software outside Indiaor expenses, if any, incurred in foreign exchange inproviding the technical services outside India;” 5.Relying on the decision of the Karnataka High Court in Commissioner of Income Tax and anotherv. Infosys I.T.A.Nos.502, 503 & 604/2009 Technologies Limited, reported in 246 CTR (KR) 371 and thedecision of the Honourable Supreme Court in ContinentalConstruction Ltd.v. CIT, reported in 195 ITR 81, learnedSenior Standing Counsel for the Revenue contended that“technical service” has a wide meaning and it includes servicerendered by canvassing agents. According to the Revenue'scounsel, canvassing orders for export of commodity by theforeign agent abroad from the foreign buyers of the assesseeis nothing but technical or professional service. Theexpenditure incurred by way of payment of commission tosuch agents should be deducted as provided underExplanation clause 2(iii) of sub Section (9A) of Section 10Bwhile determining export turnover for computation ofdeduction under sub Section (4) of Section 10B. 6.Learned Senior counsel appearing for the assessee,on the other hand, contended that the commission payment ismade only to the agent abroad for canvassing orders and he isnot rendering any technical or professional service. According to him, the commission paid is only around 5% of exportturnover. 7.After hearing both sides and on going through theorders, we notice that the assessee has received the entire saleproceeds in converted foreign exchange which constituteexport turnover under the main part of the definition clauseabove stated. However, exclusion is provided from theamount so received in convertible foreign exchange of somuch of the expenditure incurred for technical servicesoutside India. If the assessee incurs any expenditure fortechnical services and makes payment abroad, certainlydeduction is called for from the export turnover and only netturnover could be reckoned for the computation of eligiblededuction. 8.The short question therefore to be considered iswhether an agent canvassing orders for the assessee isengaged in rendering technical services to the assessee.There is nothing to indicate in the records or in any of the I.T.A.Nos.502, 503 & 604/2009 8.The short question therefore to be considered iswhether an agent canvassing orders for the assessee isengaged in rendering technical services to the assessee.There is nothing to indicate in the records or in any of the I.T.A.Nos.502, 503 & 604/2009 orders including the assessment order that the agent, whorendered service and to whom payment is made by theassessee, has rendered any technical or professional serviceanswering the definition of “technical service”. Even though“technical service" as such is not defined under Section 10B, itis given meaning under Explanation 2 to Section 9(vii) of theAct, from which it is clear that it has only literal meaningunder the statute. Of course in the decision relied on by thelearned Senior Standing Counsel for the Revenue, theHonourable Supreme Court has stated that technical servicehas a wide meaning and it takes in professional service aswell. However, there is nothing to indicate from the recordsthat the canvassing agent has rendered any technical orprofessional knowledge justifying deduction of the amountpaid to them to determine the export turnover, on which theassessee has been granted deduction. Since the finding of the lower authorities are to the effectthat payment made to the canvassing agent by the assessee is I.T.A.Nos.502, 503 & 604/2009 -7- not for any professional or technical service, no deduction iscalled for in terms of Explanation 2(iii) of sub Section (9A) ofSection 10B for the purpose of computation of deductionunder sub Section (4) of Section 10B. We, therefore, do notfind any merit in the appeals filed by the Revenue.Consequently, these appeals are dismissed as devoid of anymerit. (C.N.RAMACHANDRAN NAIR, JUDGE) (BABU MATHEW P.JOSEPH, JUDGE) jg