Ita/89/2013 Of M/S Mindtree Ltd v. The Asst Commissioner Of Income Tax

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 25 DAY OF AUGUST 20270. PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I1.T.A. NO.89 OF 201 BE!I|WEE M/S. MINDTREE LTD.,|(FORMERLY MINDTREE CONSULTING PVT. LTD.,).GLOBAL VILLAGE, RVCE POSTMYLASANDRA, MYSORE ROADBENGALURU-560059. APPELLANT (BY SRI. CHYTHANYA K.K., ADV.,)_ AND: THE ASST. COMMISSIONER OF INCOME TAXCIRCLE-12(1), LTU|BENGALURU-560085. ... RESPONDENT| (BY SRI. K.V. ARAVIND, ADV.,). THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961ARISING OUT OF ORDER DATED 11.01.2013 PASSED IN ITANO.428/BANG/2012FOR|THE|ASSESSMENT|YEAR|2008-09,PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO:(1) FORMULATE THE SUBSTANTIAL QUESTION OF LAWSTATED THEREIN.. (1) ALLOW THE APPEAL AND SET ASIDE THE ORDER BY THEITAT, BANGALORE ‘B’ BENCH BEARING ITA NO.428/BANG/2012|DATED 11-01-2013, IN THE INTEREST OF JUSTICE AND EQUITY. THISTTA.COMINGON.FORHEARING,THIS.ALOK ARADHE J.,DELIVERED THE FOLLOWING: DAY, JUDGMENT This appeal under Section 260A of the Income Tax.Act, 1961 (hereinafter referred to as the Act for snort)|Nas been preferred by the assessee. The subject matterof the appeal pertains to the Assessment year 2008-09.Tne appeal was admitted by a bench of this Court vide|order dated 09.04.2013 on the following substantialquestions of law: (1)WhetherOf)thefactsandIn|thecircumstances of the case, the HonourableITAT was rignt in upholding the action oftheLearnedResponaentInexcluding|expenditure|ofRs.198,17,58,814/- incurred in foreign currency from exportturnover under Section 10B and Section1OAA of the IT Act when the Appellant tsengaged in software development?circumstances of the case, the HonourableITAT was rignt in upholding the action oftheLearnedResponaentInexcluding|expenditure|ofRs.198,17,58,814/- incurred in foreign currency from exportturnover under Section 10B and Section1OAA of the IT Act when the Appellant tsengaged in software development? (i)WhetherOf)thefactsandIn|thecircumstances of the case, the HonourableITAT was rignt in upholding the action oftheLearnedResponaentInexcluding|circumstances of the case, the HonourableITAT was rignt in upholding the action oftheLearnedResponaentInexcluding| telecommunication chargesof Rs.3,/0,62,460/- from export turnoverunder Section 10B and Section JOAA of the[TActwhentheSafnerepresentedpayment made for standard facility? (ip)Whether|Of)thefactsandIn|thecircumstances of the case, the HonourableITAT was rignt in upholding the action ofthelearned respondentIn|excluding|expenditure|ofRs.198,17,58,814/- incurred in foreign currency from exportturnover under Section 10B and Section1OAA of the IT Act when the appellant is engaged in software development?circumstances of the case, the HonourableITAT was rignt in upholding the action ofthelearned respondentIn|excluding|expenditure|ofRs.198,17,58,814/- incurred in foreign currency from exportturnover under Section 10B and Section1OAA of the IT Act when the appellant is engaged in software development? (iv)Whether|Of)thefactsandIn|thecircumstances of the case, the HonourableITAT was right in upholding the orders oflowerauthoritiesInexcludingtelecommunicationchargesofRs.83,19,013/-fromexportCUFNOVETunder Section 10B and Section JOAA of theIT Act when the same wes not incurred [n-foreign currency?|circumstances of the case, the HonourableITAT was right in upholding the orders oflowerauthoritiesInexcludingtelecommunicationchargesofRs.83,19,013/-fromexportCUFNOVETunder Section 10B and Section JOAA of theIT Act when the same wes not incurred [n-foreign currency?| (iv)Whether|Of)thefactsandIn|thecircumstances of the case, the HonourableITAT was right in upholding the orders oflowerauthoritiesInexcludingtelecommunicationchargesofRs.83,19,013/-fromexportCUFNOVETunder Section 10B and Section JOAA of theIT Act when the same wes not incurred [n-foreign currency?|circumstances of the case, the HonourableITAT was right in upholding the orders oflowerauthoritiesInexcludingtelecommunicationchargesofRs.83,19,013/-fromexportCUFNOVETunder Section 10B and Section JOAA of theIT Act when the same wes not incurred [n-foreign currency?| (v)WhetherOf)thefactsandIn|thecircumstances of the case, the HonourableITAT was rignt in upholding the action ofthelearned respondentIn|excluding|telecommunicationchargesofRs.3,/0,62,460/- from export turnoverunder Section 10B and Section JOAA of the[TActwhentheSafnerepresentedpayment made for standard facility? circumstances of the case, the HonourableITAT was rignt in upholding the action ofthelearned respondentIn|excluding|telecommunicationchargesofRs.3,/0,62,460/- from export turnoverunder Section 10B and Section JOAA of the[TActwhentheSafnerepresentedpayment made for standard facility? 2DTne factual Dackdrop in which the aforesaidquestions arise for consideration in this appeal needsmention. The assessee is a company engaged in softwaredevelopment.ancdfiled|Its return|ofincome|for.Assessment year 2008-09 by declaring a total income ofRs.17,/71,91,200/-. The return was processed underSection 143(1) of the Act and was selected for scrutinyassessment under Section 143(3) of the Act. Tnereupon,a notice under Section 143(2) of the Act was issued. TheAssessing Officer by an order 31.12.2010 inter alia neldthat deductions as claimed by the assessee underSection 10B and Section 10AA are required to be recomputedand|tnereturn ofincome.after72#computation of the deduction was assessed along withinterest and penalty. Being aggrieved, the assessee filedan appeal before the Commissioner of Income Tax(Appeals). The Commissioner of Income Tax (Appeals)by an order dated 03.02.2012 partly allowed the appeal.Being aggrieved, the assessee as well as the revenuefiled appeals before the Income Tax Appellate Tribunal(nereinafter referred to as the Tribunal’, for short). TneTribunal vide order dated 11.01.2013 dismissed theappeal preferred by the assessee. In the aforesaidfactual background, the assessee Nas filed this appeal. 3.|Learned counsel for the parties at the outset.submitted that substantia! question of law Nos. III and Vin substance arise for consideration in this appeal. — 4It is submitted by learned counsel for the.assessee that assessee had incurred expenditure ofRs.198,17,58,814/- in foreign currency from export.turnover when the assessee was engaged in software development and therefore, in view of Explanation 2(iii)to Section 10B of the Act, the term ‘export turnover’does not include any expenses incurred in foreignexchange in providing technical services outside India.However, notwithstanding the fact that having found thatassessee iS engaged in the development of computersoftware, which would qualify for deduction underSection 10B of the Act, the Commissioner of Income Tax(Appeals) and the Tribunal have failed to appreciate theaforesaid aspect of the matter. It is further submittedthat the expression export turnover’ used in Explanation2(iil) to Section 10B of the Act does not include trade,telecommunication charges or insurance attributable todelivery of articles or things or computer softwareoutside India or expenses, if any, incurred in foreignexchange in providing the technical services. It istherefore, submitted that the aforesaid expenses couldnot have been excluded from the export turnover. Insupport of aforesaid submissions, reference has beenmade to order dated 26.12.2011 passed by the Assessing Officer in the case of assessee itself for theAssessment year 2009-10, and the expenditure incurredby the assessee towards telecommunication expenses,|foreign currency expenses was excluded from the exportturnover. The aforesaid order was upheld by the IncomeTax Appellate Tribunal vide order dated 11.05.2016passedInI.T.A.Nos.1328,1347/bang/2011and|1391/bang/2013. Thereafter, an order was passed on31.01.2017 Dy which the order of the TriDunal was giveneffect to. It is further submitted that substantialquestions of law involved in this appeal are no longer resintegra and have been answered Dy a division bencn ofthis court in I.T.A.No.42/2008 vide judgment dated20.10.2014. The aforesaid order was upheld by theSupreme Court vide order dated 22.02.2019. Reliancenaspeen|placedON|decisionsoftniscourt.In|‘COMMISSIONER OF INCOME-TAX, BANGALORE VS.MPHASIS LTD.’, (2016) 74 TAXMANN.COM 274(KARNATAKA)which has been upheld by SupremeCourt|vide|orderdated13.11.7019|passed|In SLP(C)No.766/2015. Reference has also been made todecisions of this court inCOMMISSTONER OF INCOMETAX AND ANR. VS. M/S TATA ELXSI LTD AND ANR.‘’,I,T.A.NO.386,38/7&388/2015DECIDEDON|15,02.2016056‘COMMISSIONER OF INCOME-TAX,|BANGALORE VS. RELQ SOFTWARE (P) LTD.', (2015)|53 TAXMANN.COM 78 (KARNATAKA). 5.|On the other hand, learned counsel for the.revenue submitted that the finding with regard to natureof contracts entered into by the assessee nas not beenreturnedeither.DY|CommissionerofIncomeTax.(Appeals) or by Income Tax Appellate Tribunal andtherefore, the matter deserves to be remitted foradjudication of the aforesaid factual aspect to the|Commissioner of Income Tax (Appeals). It is also urgedthat|the|aforesaidquestionsoffactcannotbe|adjudicated by this court in this appeal and the decisionsrelied upon by the learned counsel for the revenue aredistinguishable as in the aforesaid cases, the findings were recorded with reference to the facts of the case. 6.|We have considered the submissions made by.learned counsel on both the sides and nave perused therecord. Before proceeding further, it is apposite to takenote of the relevant provisions of Section 10B andSection LOAA of tne Act. Explanation 2(ili) to Section 10B “exportturnover’Mnednsthe consideration in respect of export by theundertaking of articles or things or computersoftware received in, or brought into India bythe assessee in convertible foreign exchange inaccordance with Section 10B(3), but|does not0.123*, (a)Freignt, telecommunicationchargesOTInsurance|attributable to the delivery of the articles or things orcomputer software outsidecomputer software outside India. OF| (D)Expenses, if any, incurred inforeign exchange.in providing:thetechnicalservices|foreign exchange.in providing:thetechnicalservices| outside India. J.|From perusal of aforesaid provision, it is)evident that expression ‘export turnover’ does notinclude any expenses incurred in foreign exchange inproviding tecnnical services outside India. Explanation 1(i) to Section 10AA andExplanation 2 to Section 1O0AA read aUnder: “export turnover” means the consideration inrespect of export by tne undertaking, being|the Unit of articles or things or services|received in, or brought into, India by the|assessee put|does not include — a.Freignt, telecommunication charges or Insurance|attributableCOthedelivery of the articles or thingsoutside India. Or expenses, if any, incurred in_ foreignexchangein rendering of services(including computer software) outsideIndia. Explanation 2 - For the removal of. aqoubts, it is nereby declared that tneprofits and gains derived from on siteaevelopment|of.computer|software(including services for development. ofsoftware) outside India snall be deemedto be the profits and gains derived fromthe export of computer software outside[ndia. “export turnover” means the consideration inrespect of export by tne undertaking, being|the Unit of articles or things or services|received in, or brought into, India by the|assessee put|does not include — a.Freignt, telecommunication charges or Insurance|attributableCOthedelivery of the articles or thingsoutside India. Or expenses, if any, incurred in_ foreignexchangein rendering of services(including computer software) outsideIndia. Explanation 2 - For the removal of. aqoubts, it is nereby declared that tneprofits and gains derived from on siteaevelopment|of.computer|software(including services for development. ofsoftware) outside India snall be deemedto be the profits and gains derived fromthe export of computer software outside[ndia. 8.|In the light of aforementioned statutory.provisions, the facts of the case in nand may beexamined. It is pertinent to note that Commissioner of Income Tax (Appeals) in paragrapn 5.2 of the order hastaken note of the agreements entered into by theassessee and nas reproduced tne relevant extracts of theagreement in the tabular form. Thereafter, in paragrapn5.4, the Commissioner of Income Tax (Appeals) nas heldas follows: "In the instant case, it is true that the|appellantISengageaIn|development.ofcomputer software, which is then exportedoutside India.” ormThus, the Commissioner of Income Tax. (Appeals) has recorded a_ categorical finding thatassessee iS engaged in the development of computersoftware, which is exported outside India. The aforesaidfinding nas not been set aside by the _ Tribunal.Tnerefore, in view of Explanation 2(iii) to Section 10B oftne Act, the expression ‘export turnover’ does not includeany expenses incurred in foreign exchange in providingtechnical services outside India. Tne assessee hasincurred expenditure of Rs.198,17,58,814/- in foreigncurrency from export turnover for software development.Similarly, the telecommunication charges attributable todelivery of computer software outside India could notNave been excluded from the export turnover in view ofExplanation 1(i) to Section LOAA of the Act. It is alsonoteworthy tnat Explanation 2 to Section LOAA providesthat profits and gains derived from; on site developmentof computer software (including services for developmentof software) outside India shall be deemed to be theprofits and gains derived from the export of computersoftware outside India. 10. Itis pertinent to mention here that in the caseof assessee itself, for the Assessment year 2009-10, theexpenditure incurred in foreign currency was not reducedfrom export turnover and total turnover, which is evidentfrom the order dated 31.01.2017 passed by the AssistantCommissioner of Income Tax. A bench of this court InTata Elxsi Limited supra nas also taken a view that|technical services rendered by the assessee’s engineersin connection with export of computer software, cannot|be excluded in computing the export turnover as it formspart of export turnover. The aforesaid order was upheldby the Supreme Court vide order dated 22.02.2019passed in SLP (C) No.19150/2015. A division bench ofthis court in Mpnasis Ltd., supra nas held that foreigncurrency expenditure incurred for providing softwaredevelopment services outside India cannot be excludedfrom export turnover for the purpose of computingdeduction under Section 10B of the Act and the aforesaiddecision has been upheld by the Supreme Court vide order dated 13.11.2019 passed in SLP (C) No. 7/66/2015 In view of preceding analysis, substantial questions.of law No.3 and 5 are answered in favour of the assesseeand against the revenue. In the result, the impugnedorder dated 11.01.2013 to the extent it is prejudicial tothe assessee is nereby quashed. In the result, the appealIS allowecd. SS Sd/-—JUDGESd/-—JUDGE.