Tca/171/2016 Of Commissioner Of Income Tax Ii v. M/S.htc Global Services India

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 09.07.2021 CORAM : THE HON'BLE MR.JUSTICE M. DURAISWAMYANDTHE HON'BLE MRS.JUSTICE R. HEMALATHA Tax Case Appeal Nos.171 to 174 of 2016 Commissioner of Income Tax II (2)No.121, Nungambakkam High Road,Chennai – 600 034. ... Appellantin all appeals M/s.HTC Global Services India Pvt. Ltd.,SDF II, Phase II, MEPZ,Tambaram,Chennai – 600 045. ...Respondent in all appeals Tax Case Appeals in Tax Case Appeal Nos.171 to 174 of 2016filed under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Chennai "B" Bench,dated 02.06.2015, passed in I.T.A.Nos.58/Mds/2014, 362/Mds/2014,1280/Mds/2014 and 2021/Mds/2014 respectively, against the orderof the Commissioner of Income Tax (A)-II, Chennaiin ITA No.514/13-14 dated.30.10.2013 the Assessment year 2008-2009 and in ITA No.1558/13-14 dated 25.02.2014 for theassessment year 2009-10 against the Assessment order of theAssistant Commissioner of Income Tax, Company Circle II(2),Chennai-34 dated.30.12.2011 and the order of the DeputyCommissioner of Income Tax, Company Circle-II(2), Chennai-34,dated.10.12.2012 for the Assessment Year 2008-2009 and 2009-2010. For Appellant : Mr.Karthik Ranganathan Senior Standing Counsel in all appeals For Respondent : Notice served in all appeals C O M M O N J U D G M E N T(Delivered by M. DURAISWAMY, J.) T.C.A.No.171 of 2016 arises against the order passed inI.T.A.No.58/Mds/2014 in respect of the Assessment Year 2008-09,T.C.A.No.172 of 2016 arises against the order passed inI.T.A.No.362/Mds/2014 in respect of the Assessment Year 2008-09,T.C.A.No.173 of 2016 arises against the order passed inI.T.A.No.1280/Mds/2014 in respect of the Assessment Year 2009-10, T.C.A.No.174 of 2016 arises against the order passed inI.T.A.No.2021/Mds/2014 in respect of the Assessment Year 2009-10, on the file of the Income Tax Appellate Tribunal, Madras,“B” Bench. The above appeals are filed by the Revenuechallenging the order passed by the Income Tax AppellateTribunal. 2.The assessee is a company engaged in the business ofproviding customer support, services in the form of e-mailsupport, voice support and chatting. During the Assessment Year2009-10, the assessee filed return of income on 25.09.2009claiming deduction under Section 10-B of the Income Tax Act,1961. The return of income was taken up for scrutiny assessmentand the Assessing Officer found that the assessee company hadearned dividend income of Rs.24,30,229/- and claimed the same asexempt under Section 10(34) of the Act. The assessee has notclaimed any expenditure for earning this dividend income, andtherefore, the Assessing Officer invoked the provisions ofSection 14-A read with Rule 8D Clause (ii) and (iii) asexpenditure attributable to the investments whose income isexempt from tax on the dividend earned. 3.Challenging the order of assessment, the assesseepreferred an appeal before the Commissioner of Income Tax(Appeals) and the Appellate Authority reworked the calculationand confirmed the disallowance under Rule 8D. Aggrieved overthe order passed by the Commissioner of Income Tax (Appeals),the assessee preferred further appeal before the Income TaxAppellate Tribunal, and the Tribunal, by its common order,upheld the order of the Commissioner of Income Tax (Appeals) andconfirmed the disallowance under Rule 8D. 4.Challenging the order passed by the Income Tax AppellateTribunal, the Revenue has filed the above appeals. 5.T.C.A.No.171 of 2016 was admitted on the followingsubstantial questions of law : “1.Whether, on the facts and in thecircumstances of the case, the Appellate Tribunal wasright in law in treating 3% of the exempt income asthe expenditure to be disallowed under section 14A ofthe Income Tax Act for the assessment year 2008-09which is against the statute? 4.Challenging the order passed by the Income Tax AppellateTribunal, the Revenue has filed the above appeals. 5.T.C.A.No.171 of 2016 was admitted on the followingsubstantial questions of law : “1.Whether, on the facts and in thecircumstances of the case, the Appellate Tribunal wasright in law in treating 3% of the exempt income asthe expenditure to be disallowed under section 14A ofthe Income Tax Act for the assessment year 2008-09which is against the statute? 2.Is not the finding of the Appellate Tribunalbad in law when the statute prescribes for thedisallowance under section 14A is in accordance withRule 8D of the Income Tax Rules with effect fromassessment year 2008-09 onwards?” 6.T.C.A.Nos.172 and 174 of 2016 were admitted on thefollowing substantial questions of law : “1.Whether, on the facts and in thecircumstances of the case, the Appellate Tribunal wascorrect in confirming to reduce the expenses relatingto telecommunication and travel expenses in foreigncurrency from the total turnover for computingdeduction under Section 10B of the Income Tax Act? 2.Whether, on the facts and in the circumstancesof the case, the Appellate Tribunal was right inexcludingthetelecommunicationandtravelexpenditure incurred in foreign currency from thetotal turnover when clause (iv) to Explanation 2 toSection 10B specifically excludes the same only fromthe export turnover?” 7.T.C.A.No.173 of 2016 was admitted on the followingsubstantial question of law : “Whether, on the facts and in the circumstancesof the case, the Appellate Tribunal was right in lawin confirming the order of CIT (A) and confirmed thedisallowance to Rs.12,31,129/- under Rule 8D of theIncome Tax Rules?” 8.Since the issues involved in all these appeals arecommon, Mr.Karthik Ranganathan, learned Senior Standing Counsel,appearing for the appellant/Revenue, submitted that all theappeals may be taken up together and disposed of by a commonorder. https://hcservices.ecourts.gov.in/hcservices/ 9.Further, the learned Senior Standing Counsel fairlysubmitted that the questions of law that arise for considerationin all these appeals were already decided against the Revenueand in favour of the assessee in the following judgments : i. [2018] 93 taxmann.com 33 (SC) [Commissioner of Income-Tax,Central-III v. HCL Technologies Ltd.], wherein, the Hon'bleSupreme Court held as follows : “8.The whole controversy revolves around the claimof certain expenses attributable to the delivery ofsoftware outside India or in providing technicalservices from 'total turnover' by the Respondent underSection 10A of the IT Act. It is an undisputed factthat neither Section 10A nor Section 2 of the IT Actdefine the term 'total turnover'. However, the term'total turnover' is given in clause (ba) of theExplanation to Section 80 HHC of the IT Act whichdefines the meaning of total turnover as follows: "(ba) 'total turnover' shall not includefreight or insurance attributable to thetransport of the goods or merchandise beyondthe customs stations as defined in the CustomsAct, 1962 (52 of 1962). Provided that in relation to any assessmentyear commencing on or after the 1st day ofApril, 1991, the expression "total turnover"shall have effect as if it also included anysum referred to in clauses (iiia), (iiib),(iiic), (iiid) and (iiie) of section 28;" 9.It is also pertinent to mention here therelevant terminologies which are as under: "Export Turnover: Explanation 2(iv) of Section 10A of the IT Actdefines "export turnover" to mean theconsideration that has been received for exportof articles/things/computer software. Normallytheconsiderationwillincludethefreight/telecommunication charges/insurance whichhadbeenincurredtodeliverthearticle/things/computer software outside India. Provided that in relation to any assessmentyear commencing on or after the 1st day ofApril, 1991, the expression "total turnover"shall have effect as if it also included anysum referred to in clauses (iiia), (iiib),(iiic), (iiid) and (iiie) of section 28;" 9.It is also pertinent to mention here therelevant terminologies which are as under: "Export Turnover: Explanation 2(iv) of Section 10A of the IT Actdefines "export turnover" to mean theconsideration that has been received for exportof articles/things/computer software. Normallytheconsiderationwillincludethefreight/telecommunication charges/insurance whichhadbeenincurredtodeliverthearticle/things/computer software outside India. However the Explanation 2(iv) specifically seeksto exclude these three categories of expenditureincurred for delivering the export ofarticles/things/computer software. It also seeksto exclude expenses for providing technicalservice, etc. outside India. Therefore, where anIndian technician goes abroad and receives feesfor service, the foreign client will normally berequired to reimburse the expenses as well.Therefore, out of the consideration received, theportion representing reimbursement of expenditurehas to be excluded. Export Turnover and Total turnover: The "total turnover" has been defined in sections80HHC and 80HHE only to exclude additional itemsgiven under section 28. But for this additionalexclusion, there was no need to define "totalturnover". Export turnover is a component of total turnover.If the entire turnover represents exportproceeds, then the export turnover and the totalturnover are identical. It is clear that anyexclusion in the export turnover in the numeratorwill automatically imply exclusion in thedenominator as well because export turnover isalways a component of total turnover. Export Turnover/Total Turnover/Business: Form 56F prescribes the report under Section 10Afor and Annexure-A thereto refers to "exportproceeds" and "sale proceeds". Both together formthe total turnover of the undertaking." 10.The question arises here that when theparticular term has not been defined in any particularSection, is it allowed to import the meaning of suchterm from the other provisions of the same Act? Section10A of the IT Act is a special beneficial provision andthe purpose of deduction under such Section is toencourage and boost the new business undertakingssituated in the free trade zone of this Nation byproviding suitable deductions to such businessentities. Sometimes, while calculating the deduction, disputes arise regarding the methodology of deductionwhich ought to be followed. Undisputedly, it is amatter of record that the Respondent is engaged in theactivity of trading of generic software and providingcustomized software development services for domesticas well as for foreign clients through its two unitssituated in Software Technology Park, Gurgaon (NowGurugram) which falls under definition of the Section10A of the IT Act. The contention of the Respondent isthat it incurred expenditure in foreign exchange insending professionals abroad as per the agreements withthe foreign constituents. disputes arise regarding the methodology of deductionwhich ought to be followed. Undisputedly, it is amatter of record that the Respondent is engaged in theactivity of trading of generic software and providingcustomized software development services for domesticas well as for foreign clients through its two unitssituated in Software Technology Park, Gurgaon (NowGurugram) which falls under definition of the Section10A of the IT Act. The contention of the Respondent isthat it incurred expenditure in foreign exchange insending professionals abroad as per the agreements withthe foreign constituents. 11.On an analysis of the Respondent's activitytaken from its website, Assessing Officer arrived at aconclusion that Respondent has been rendering technicalservices outside India and, therefore, expensesincurred on such activity are required to be excludedfrom the export turnover while working out thededuction admissible under Section 10A of the IT Act.The Assessing Officer estimated 60% of the softwaredevelopment charges required to be attributed towardsexpenses incurred for providing technical servicesoutside India. On appeal, learned CIT (Appeals) againmade a detailed analysis of the activity of theRespondent and arrived at a conclusion that theAssessing Officer failed to bring any evidence whichcan indicate that Respondent was providing technicalservices outside India and it has incurred expensestowards salary etc. rendering such services. Inspitethat, learned CIT (Appeals), estimated 10% of softwaredevelopment charge as charges incurred for technicalservices provided outside India. 12.It is undisputed fact that the Respondent wasengaged in the business of software development for itscustomers engaged in different activities at softwaredevelopment centres of the Respondent. However, in theprocess of such customized software development,certain activities were required to be carried out atthe sight of customers on site, located outside Indiafor which the employees of the branches of theRespondent located in the country of the customers aredeployed. It is true that it is not defined that whichactivity will be termed as providing technical servicesoutside India. Moreover, after delivery of suchsoftwares as per requirement, in order to make it fullyfunctional and hassle free functioning subsequent to the delivery of softwares in many cases, there can berequirement of technical personnel to visit the clienton site. The Assessing Officer could not bring anyevidence that the Respondent was engaged in providingsimply technical services independent to softwaredevelopment for the client for which the expenditureswere incurred outside India in foreign currency. 13.The Respondent company has claimed deductionunder Section 10A as per certificates filed on Form No.56F. The Respondent, while computing the deduction, hastaken the same figure of export turnover as of totalturnover. The Respondent cited various judicial casesbut all these cases pertain to deduction under Section80HHC. Further, the definition of total turnover hasbeen defined in Section 80HHC and 80HHE of the IT Act.As discussed earlier, the definition of total turnoverhas not been defined under Section 10A of the IT Act. 13.The Respondent company has claimed deductionunder Section 10A as per certificates filed on Form No.56F. The Respondent, while computing the deduction, hastaken the same figure of export turnover as of totalturnover. The Respondent cited various judicial casesbut all these cases pertain to deduction under Section80HHC. Further, the definition of total turnover hasbeen defined in Section 80HHC and 80HHE of the IT Act.As discussed earlier, the definition of total turnoverhas not been defined under Section 10A of the IT Act. 14. In the above backdrop, we are of the opinionthat the definition of total turnover given underSections 80HHC and 80HHE cannot be adopted for thepurpose of Section 10A as the technical meaning oftotal turnover, which does not envisage the reductionof any expenses from the total amount, is to be takeninto consideration for computing the deduction underSection 10A. When the meaning is clear, there is nonecessity of importing the meaning of total turnoverfrom the other provisions. If a term is defined underSection 2 of the IT Act, then the definition would beapplicable to all the provisions wherein the same termappears. As the term 'total turnover' has been definedin the Explanation to Section 80HHC and 80HHE, whereinit has been clearly stated that "for the purposes ofthis Section only", it would be applicable only for thepurposes of that Sections and not for the purpose ofSection 10A. If denominator includes certain amount ofcertain type which numerator does not include, theformula would render undesirable results. 15.A Statute is the intention of the legislaturewho enacts it after having regard to various facts andcircumstances. It is a cardinal principle of law thatthe interpretation by the Court shall be done in such away that the intention of the legislature shall prevailand no injustice occurred with the parties. The rule ofharmonious construction is the thumb rule to interpretation of any statute. An interpretation whichmakes the enactment a consistent whole, should be theaim of the Courts and a construction which avoidsinconsistency or repugnancy between the varioussections or parts of the statue should be adopted. 16.In Commissioner of Income Tax vs. J.H. Gotla,(1985) 23 Taxman 14J (SC)/156 ITR 323 (SC) this Courthas held as under: "46.Where the plain literal interpretationof a statutory provision produces a manifestlyunjust result which could never have beenintended by the Legislature, the Court mightmodify the language used by the Legislature soas to achieve the intention of the Legislatureand produce a rational construction. The taskof interpretation of statutory provision is anattempt to discover the intention of theLegislature from the language used.... 47..If the purpose of a particularprovision is easily discernible from the wholescheme of the Act which, in the present case,was to counteract, the effect of the transferof assets so far as computation of income ofthe Respondent was concerned, then bearing thatpurpose in mind, the intention should be foundout from the language used by the Legislatureand if strict literal, construction leads to anabsurd result, i.e. result not intended to besubserved by the object of the legislationfound out in the manner indicated above, thenif other construction is possible apart fromstrict literal construction, then thatconstruction should be preferred to the strictliteral construction. Though equity an taxationare often strangers, attempt should be madethat these do not remain so always so and if aconstruction results in equity rather than ininjustice then such construction should bepreferred to the literal construction.Furthermore, in the instant case, we aredealing with an artificial liability createdfor counteracting the effect only of attemptsby the assessee to reduce tax liability bytransfer.." 17.The similar nature of controversy, akin thiscase, arose before the Karnataka High Court in CIT vs.Tata Elxsi Ltd. (2012) 204 Taxman 321/17/taxmann.com100/349 ITR 98. The issue before the Karnataka HighCourt was whether the Tribunal was correct in holdingthat while computing relief under Section 10A of the ITAct, the amount of communication expenses should beexcluded from the total turnover if the same arereduced from the export turnover? While giving theanswer to the issue, the High Court, inter-alia, heldthat when a particular word is not defined by thelegislature and an ordinary meaning is to be attributedto it, the said ordinary meaning is to be in conformitywith the context in which it is used. Hence, what isexcluded from 'export turnover' must also be excludedfrom 'total turnover, since one of the components of'total turnover' is export turnover. Any otherinterpretation would run counter to the legislativeintent and would be impermissible. 18.Accordingly, the formula for computation of thededuction under Section 10A of the Act would be asfollows: Export Profit =XExport turnover as defined intotal Profit of theExplanation 2 (IV) of SectionBusiness10A of IT Act / ExportturnoverasdefinedinExplanation 2(IV) of Section10A of the IT Act + domesticsale proceeds 19.In the instant case, if the deductions onfreight, telecommunication and insurance attributableto the delivery of computer software under Section 10Aof the IT Act are allowed only in Export Turnover butnot from the Total Turnover then, it would give rise toinadvertent, unlawful, meaningless and illogical resultwhich would cause grave injustice to the Respondentwhich could have never been the intention of thelegislature. 20.Even in common parlance, when the object of theformula is to arrive at the profit from exportbusiness, expenses excluded from export turnover haveto be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable andabsurd. Hence, we are satisfied that such deductionshall be allowed from the total turnover in sameproportion as well. 21.On the issue of expenses on technical servicesprovided outside, we have to follow the same principleof interpretation as followed in the case of expensesof freight, telecommunication etc., otherwise theformula of calculation would be futile. Hence, in thesame way, expenses incurred in foreign exchange forproviding the technical services outside shall beallowed to exclude from the total turnover. 22.In view of above discussion, we are of theconsidered view that these instant appeals are devoidof merits and deserve to be dismissed. Accordingly, allthe connected matters and interlocutory applications,if any, are disposed of with no order as to costs.” ii. [2021] 123 taxmann.com 378 (Madras) [Principal Commissionerof Income Tax, Corporate Circle-2(1), Chennai v. EnvestorVentures Ltd.], wherein, the Division Bench of this Court heldas follows : 22.In view of above discussion, we are of theconsidered view that these instant appeals are devoidof merits and deserve to be dismissed. Accordingly, allthe connected matters and interlocutory applications,if any, are disposed of with no order as to costs.” ii. [2021] 123 taxmann.com 378 (Madras) [Principal Commissionerof Income Tax, Corporate Circle-2(1), Chennai v. EnvestorVentures Ltd.], wherein, the Division Bench of this Court heldas follows : “21.We cannot approve even the largerdisallowance proposed by the Assessee himself in thecomputation of disallowance under Rule 8D made by him.These facts are akin to the case of Pragati KrishnaGramin Bank (supra) decided by Karnataka High Court.The legal position, as interpreted above by variousjudgments and again reiterated by us in this judgment,remains that the disallowance of expenditure incurredto earn exempted income cannot exceed exempted incomeitself and neither the Assessee nor the Revenue areentitled to take a deviated view of the matter.Because as already noted by us, the negative figure ofdisallowance cannot amount to hypothetical taxableincome in the hands of the Assessee. The disallowanceof expenditure incurred to earn exempted income has tobe a smaller part of such income and should have areasonable proportion to the exempted income earned bythe Assessee in that year, which can be computed asper Rule 8D only after recording the satisfaction bythe Assessing Authority that the apportionment of suchdisallowable expenditure under section 14A made by theAssessee or his claim that no expenditure was incurredis validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed toAssessee and after giving opportunity of hearing tothe Assessee in this regard. 22.We, therefore, dispose of the present appealby answering question of law in favour of the Assesseeand against the Revenue and by holding that thedisallowance under rule 8D of the IT Rules read withSection 14A of the Act can never exceed the exemptedincome earned by the Assesee during the particularassessment year and further, without recording thesatisfaction by the Assessing Authority that theapportionment of such disallowable expenditure made bythe Assessee with respect to the exempted income isnot acceptable for reasons to be assigned theAssessing Authority, he cannot resort to thecomputation method under Rule 8D of the Income-taxRules, 1962.” 10.The ratio laid down by the Hon'ble Supreme Court ofIndia in the judgment reported in [2018] 93 taxmann.com 33 (SC)covers the questions of law that arise for consideration inT.C.A.Nos.173 and 174 of 2016 and the judgment of the DivisionBench of this Court reported in [2021] 123 taxmann.com 378(Madras) covers the questions of law that arise forconsideration in T.C.A.Nos.171 and 172 of 2016. 11.In view of the submissions made by the learned SeniorStanding Counsel appearing for the appellant/Revenue and theratio laid down by the Hon'ble Supreme Court of India in thejudgment reported in [2018] 93 taxmann.com 33 (SC) (cited supra)and by the Division Bench of this Court in the judgment reportedin [2021] 123 taxmann.com 378 (Madras), the questions of law aredecided against the Revenue and in favour of the assessee. 12.Accordingly, the Tax Case Appeals are dismissed. Nocosts. Sd/- Assistant Registrar(CS VII) //True Copy// mkn Sub Assistant Registrar To 1. The Registrar, The Income Tax Appellate Tribunal, Chennai "B" Bench Chennai "B" Bench 2. The Commissioner of Income Tax II (2) No.121, Nungambakkam High Road, Chennai – 600 034. No.121, Nungambakkam High Road, Chennai – 600 034. 3. The Commissioner of Income Tax (Appeals)II, 121 Uttamar Gandhi Salai, Chennai-34 121 Uttamar Gandhi Salai, Chennai-34 4. The Deputy Commissioner of Income Tax, Company Circle II(2) 121 Uttamar Gandhi Salai, Chennai-34 Company Circle II(2) 121 Uttamar Gandhi Salai, Chennai-34 12.Accordingly, the Tax Case Appeals are dismissed. Nocosts. Sd/- Assistant Registrar(CS VII) //True Copy// mkn Sub Assistant Registrar To 1. The Registrar, The Income Tax Appellate Tribunal, Chennai "B" Bench Chennai "B" Bench 2. The Commissioner of Income Tax II (2) No.121, Nungambakkam High Road, Chennai – 600 034. No.121, Nungambakkam High Road, Chennai – 600 034. 3. The Commissioner of Income Tax (Appeals)II, 121 Uttamar Gandhi Salai, Chennai-34 121 Uttamar Gandhi Salai, Chennai-34 4. The Deputy Commissioner of Income Tax, Company Circle II(2) 121 Uttamar Gandhi Salai, Chennai-34 Company Circle II(2) 121 Uttamar Gandhi Salai, Chennai-34 5. The Assistant Commissioner of Income Tax, Company Circle II(2) 121 Uttamar Gandhi Salai, Chennai-34 Company Circle II(2) 121 Uttamar Gandhi Salai, Chennai-34 T.C.A. Nos.171 to 174 of 2016 PPA (CO)K.RK. (02.08.2021)