Ita/65/2009 Of The Commissioner Of Income Tax v. M/S. Hewlett Packard Global Soft Ltd

IN THE HIGH COURT OF KARNATAKA ATBENGALURU| DATED THIS THE 6[th]DAY OK JANUARY JZO16 PRESENT THE HON’BLE MR.JUSTICE N K PATIL| AND THE HON’BLE MRS.JUSTICE S SUJATHA ITA NO.65/2009 BETWEEN 1.The Commissioner of Income-tax C R Building Queens Road Bangalore 2 |The Asst. Commissioner ot Income- [ax Circle-11(3). C R Building Queens Road Bangalore | ... Appellant (By Sri K V Aravind, Advocate ) M/s. Hewlett Packard Global Soft Ltd.,(Formerly known as Digital Global Soft)No.24, Salarpuria ArenaHosur Road|Bangalore-560 030....Responden (By Sri T Suryanarayana, Advocate) This Income-tax appeal is filed under Section|2600-A of Income-tax Act, 1961, to set aside the order passedbytheITATBangalore1nITA|No.333/BNG/2008, dated 19.09.2008, confirming|the order of the Appellate Commissioner and confirm|the order passed by the Assistant Commissioner ofIncome-tax, Circle-11(3), Bangalore, in the interest of justice and equity. This appeal having been heard and reserved for|ordersOT)<[th]January2016,|comingOT)forpronouncement of Judgment this day, |Sujatha J.,.delivered the following JUDGMENT This appeal is directed against the order passedby the ITAT, Bangalore in ITA No.333/Bang/2008|dated 19.09.2008 whereby the order passed by the|AppellateCommissioner.is|confirmed for|theAssessment year 2002-03. oD The facts of the case are: - The assessee has been in the business of export ofsoftware and has incurred expenses in foreign|exchange, claimed the same to be included in total|turnover. “The assessee has claimed deduction of.Rs.92,59,70,6072/- under Section 10A of the IncomeTax Act (for short the ‘Act’) and placed reliance on|the decisions of the various High Courts before the| Assessing Oftticer. The Assessing Officer took the|view that those decisions are rendered in the context.of Section 80(HHE) of the Act and declined to allow|the claim of deduction made by the assessee. 3.|On appeal, Commissioner of Income Tax)(A) allowed the claim of the assessee holding thatexpenditure incurred in foreign currency outside|India in execution of soitware project or software|business cannot be excluded from the export’turnover and accordingly, relief under Section 10A ofthe Act was allowed. Aggrieved, the revenuepreierred appeal before the Tribunal. The Tribunal|following the order passed in an identical case,confirmed the order of the Commissioner of IncomeTax (A) granting relief to the assessee treating expenses.incurred in foreign currency to be taken along with total|turnover of the assessee. Being aggrieved by the said)judgment of the Tribunal, the revenue is in appeal beforethis Court. The relevantsubstantial question of law.that arises for our consideration is: “Whether on the facts and in thecircumstances of the case, the appellateauthorities were correct in holding thatexpenditure incurred in foreign currency|is not required to be reduced from ‘export|turnover’ as the same was incurred in|foreign currency outside India in executionofsoftwareproject/developmentof|computer software and not for technicalservices rendered outside India, when theassessee on its own has excluded the'said expenditure from ‘export turnover’while filing return of income and also|before the Assessing Officer and also|when the assessee has not established|that expenditure in foreign currency was|in connection of the development of|computer software which was exportedand recorded a perverse finding?’. 4 |Heard the learned counsel appearing for|the parties. 5.|Learnedcounsel]appearingfor|theappellant /revenue vehemently contended thatthere is no dispute regarding the legal position as observed by this Court in the case of MotorIndustries Company Limited (ITA Nos.776/2007 withconnected cases disposed off on 13.06.2014) andM/s.Mphasis Limited (ITA Nos.1075 c/w 196/2009)that the software engineers deputed abroad by the| 4 |Heard the learned counsel appearing for|the parties. 5.|Learnedcounsel]appearingfor|theappellant /revenue vehemently contended thatthere is no dispute regarding the legal position as observed by this Court in the case of MotorIndustries Company Limited (ITA Nos.776/2007 withconnected cases disposed off on 13.06.2014) andM/s.Mphasis Limited (ITA Nos.1075 c/w 196/2009)that the software engineers deputed abroad by the| assessee company have to do testing, installation|and monitoring of software supplied to the client,|though the said services are technical in nature, it’does not tall within the ambit of technical servicesoutside India in connection with the development or production of computer software and the said)expenditure cannot be excluded in computing export|turnover. It is strongly emphasized by the learned|counsel that the activity carried out by the assesseeis purely one of export of computer software or not,has to be established either in terms of the actual.transaction,|whichhadproducedtheforeignexchange remittance, or production of an agreement|entered into at the relevant point of time with its|customers from whom remittance/payment hadbeen received in foreign exchange. In the original|returns, the assessee has categorically admitted thatthe activities carried on by the assessee was relating|to development and sale of computer software with|services. It is only before the appellate authority,|theaSSe€@SSChaschangeditsstancetaking advantage of the judgment of the Tribunal in the)case of Assistant Commissioner ot Income Tax vsInfosysTechnologiesLtd.Thefirstappellateauthority and the Tribunal without examining the)agreements or any relevant material, has arrived at a'conclusion that the activity carried on by the’assessee was relating to computer software falling|under Section 1OA oft the Act and not the technicalservices. AS such, he seeks for remanding the)matter back to the Assessing Officer placing relianceon the Judgment of this Court in the case ofCOMMISSIONEROFINCOMETAX.VS|INFOSYSTECHNOLOGIBS LIMITEK(ITA No.2973 c/w 2972,|2974 & 3015/2005 disposed of on 13.02.2013). 6.|On the other hand, learned counselappearing for the assessee placing reliance on the)Judgments of this Court in the case of MotorIndustries Company Limited and M/s Mphasis|Limited (Supra) contends that the Commissioner of|Income Tax (A) has elaborately considered thematerial placed by the assessee as well as the) reports furnished by the Assessing Officer and|thereafter, has rightly arrived at the conclusion that|the pre-execution and post execution of software|project could not be regarded as technical services|which is distinguishable from computer software as|these works are integral to the over all work of|computer software and it cannot be bifurcated as/separate components. The learned counsel invited|our attention to Explanation (3) to Section 10A of theAct to contend that the profits and gains derived|from onsite development of computer software|(including services for development of software)|outside India shall be deemed to be the profits and|gains derived from the export of computer software|outside India. The appellate authority and the)Tribunal having extensively considered the scope ofsection 1OA read with Explanation (3) thereof has|allowed the deduction towards the export ofcomputer software as the services for development ofsoftware iS deemed to be the profits and gains| derivedfromonsitedevelopmentOt.computer.sottware. derivedfromonsitedevelopmentOt.computer.sottware. 7. We have considered the rival submisSSsi10Nnsand perused the material on record. Section 10A ofthe Act is a special provision in respect of newly|established undertaking in free trade zone etc. This|provision provides for a deduction of such profits|and gains derived by an undertaking from the exportof articles or things or computer software for aperiodot TenCONSECUTIVEassessment.YCary4beginning with the assessment year relevant to the|previous year in which the undertaking begins to)manufacture or produce such articles or things or computer software, as the case may be, shall be)allowed from the total income. 8. The term ‘Computer Software’ has beendefined in explanation (2)(i) of Section 1OA which is extracted hereunder: EKxplanation-2 (1) |“ Computer software” means-| (a) any computer programme recordedon any disc, tape, perforated media or'other information storage device; or (b) any customized electronic data or anyproduct or service of similar nature, asmay be notified by the Board, Which is transmitted or exported from|India to any place outside India by any|TrTLEAT 9. Explanation 2(iv) of Section 10A defines ‘export turnover’ which is reproduced hereunder:Explanation-2 (tv) “exportturnover”Tneay»theconsideration in respect of export [by theundertaking] tf articles or things orcomputer software received in, or broughtinto, India by the assessee in convertibleforeign exchange in accordance with sub-section(3), but does not include freight,telecommunication charges or insuranceattributable to the delivery of the articlesor things or computer software outsideIndia or expenses, tf any, incurred inforeignexchangein|providingthetechnical services outside India; 10. Explanation 3 to Section 10A reads thus:For the removal of doubts, it is hereby|declared that the profits and gains derived|from on_ site development of computersoftware(including services for developmentof software), outside India shallbe deemed|to be the profits and gains derived from the|export of computer software outside India. The reading of these provisions makes it clear that|the consideration received from export of computer|software is not liable to income tax however, the saidE€XportTULrNOVETdoes|not.includefreight,telecommunication charges or insurance attributableto the delivery of computer soitware outside India or expenses if any, incurred in foreign exchange in'providing the technical services outside India. It is)thus clear that there is a distinction betweentechnical services rendered in connection with export|of computer software and export of technical servicesfor the purpose of development or production ofcomputer software outside India. This Court in the|case of Motor Industries Company Limited (supra)| while considering the similar provision of Section|SOHHE of the Act has held thus: | Jthe assesseeis engaged in thebusiness of export out of India ofcomputer software and its transmission|to places from India outside India. —Before a computer software ts exported,the Software Engineers of the assesseewould have initiaql discussion withregardTotherequirements,Specifications etc. Thereafter computer|Software is manufactured and then it ts|transmitted from India to a _ placoutside India. The software Engineers|deputed abroad)who among other'things have to do testing, installationand monitoring of software supplied to|the client. Though the said services aretechnical in nature it does notfall withinclause (tJn of subsection (1) of section|SOHHE of the Act of providing technicalservices outside I[ndiq in connectionwith the development or production ofcomputer software. It falls under sub-clause(1) of sub-section(1) of Section|SOHHE of the Act. Therefore, the saidexpenditure cannot be excluded incomputing export turnover. In that view| of the matter we do not see any merit in|this appeal”. of the matter we do not see any merit in|this appeal”. 11. This Judgment has been followed in the)case of M/s Mphasis Limited (Supra). There is no|cavil regarding this legal position. In the presentcase, we find from the order of the Assessing Officer|that the Assessing Ofticer had no occassion as muchto go into the claim of the assessee that the servicesrendered|arerelatingTOthedevelopment.OTLproduction of computer software since the assessee|on its own had reduced expenses in foreign currency|from export turnover and total turnover. The)Assessing Officer proceeded to make the assessment|on the ground that the expenses incurred towards|maintenance of technical personnel and _ otheexpenses incurred in foreign currency were only in|connection with the rendering of technical services|and accordingly excluded the said amount from|computing the export turnover and total turnover.On appeal, the Appellate Authority considered the|question in detail, as the assessee in his appeal| contended that no part of the amount comprising|export turnover of computer software could have|been excluded in arriving at the export turnover.The Appellate Commissioner on examining the)activities as contended by the assessee and on'perusal of the assessment records, remand reports|etc., arrived at a decision that the pre-execution andpost-execution work of computer soitware project|carried on by the assessee is ‘computer soitware’ as|defined under explanation — 2 to section 10A and/cannot be characterized as technical services whichforms part of the export turnover and thus it does|not disentitle the assessee from claiming deductionsunder section 10A oft the Act. 12. We have noticed that on appeal by the)revenue before the Appellate Tribunal, the Tribunal|following the Judgment of an identical case, wrongly|mentioned as assessee’s case aS submitted by both|the parties, confirmed the order of the Appellate|Commissioner treating expenses incurred in foreign| currency to be taken along with total turnover of theaSS@CSSEC. | 13. We find that the Tribunal’s finding is not|based on any examination of available and relevant|material to come to a conclusion as to whether theactivity related to the computer software as defined|under Explanation — 2 to Section 1OA or involving|technical services which has to be excluded from theexport turnover as per Explanation —- 4 to section10A, more particularly, when the assessee hadreduced the said expenditure incurred in foreign|currency trom the export turnover and total turnoverat the time of filing the returns and thereafter has|shifted to a different stance before the appellate|authority, that the said services were integral part ofdevelopment of computer software. Even in the)order of the Appellate Commissioner, we do not see!the details of remand reports said to have been|submittedbytheAssessingOfficerandanydiscussion regarding any material or any agreement| copies to establish the factual situation and the)activities of the assessee. The tribunal withoutexamining any commensurate material, placing|relianceOf]theJudgementOT|thetribunaldated.30.05.2008 allowed the relief claimed by the|assessee. Given the circumstances, the said finding|of the Tribunal is not based on any relevant!material. 14. We are therefore of the opinion that itwould be proper to remand the matter to the)Tribunal to examine the material on record and torecord a finding as to the nature of the activity,|keeping in view the settled legal position as per the|Judgment of this Court in|Motor IndustriesCompany Limited‘Ss case [Supra] andM/s. MphastsLimited’scase |supra|. It 1s also made clear thatwhat is required to be excluded in the export’turnover are only freight, telecommunication chargesor insurance attributable to the delivery of computer|software outside India or expenses, if any, incurred|in foreign exchange in providing the _ technica services outside India which cannot be contusedwith the services rendered for the development ofcomputer software, an integral part of export’turnover of computer software. 14. We are therefore of the opinion that itwould be proper to remand the matter to the)Tribunal to examine the material on record and torecord a finding as to the nature of the activity,|keeping in view the settled legal position as per the|Judgment of this Court in|Motor IndustriesCompany Limited‘Ss case [Supra] andM/s. MphastsLimited’scase |supra|. It 1s also made clear thatwhat is required to be excluded in the export’turnover are only freight, telecommunication chargesor insurance attributable to the delivery of computer|software outside India or expenses, if any, incurred|in foreign exchange in providing the _ technica services outside India which cannot be contusedwith the services rendered for the development ofcomputer software, an integral part of export’turnover of computer software. 15. For the reasons stated above, without goinginto the questions of law raised, this appeal is|disposed of and the matter is remitted to the)Tribunal for fresh consideration in the light of the|discussions as above. The parties are at liberty to|produce additional evidence, if any. The tribunal|shall pass the orders as expeditiously as possible|after providing an opportunity of hearing to both theparties. brn Sd/-|JUDGE Sd/-|JUDGE