T.c.(A) v. Https://Hcservices.ecourts.gov.in/Hcservices

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 01.02.2022 CORAM: THE HONOURABLE MR.JUSTICE R.MAHADEVANANDTHE HONOURABLE MR.JUSTICE MOHAMMED SHAFFIQ TAX CASE (APPEAL) NOS.399 AND 400 OF 2011 The Commissioner of Income Tax-I,Chennai. ... Appellant inboth appeals M/s.Zylong Systems Ltd.,No.155, Thiruvalluvar Salai,Kumaran Nagar,Chennai - 600 119.... Respondent inboth appeals PRAYER:- Tax Case Appeals filed against the order of the Income-taxAppellate Tribunal, “A” Bench, Chennai, dated 25.03.2011 inITA.Nos.26 and 27/Mds/2011. Against the Common Order of the Commissioner of Income Tax(Appeals) – III, 121, Mahatma Gandhi Road, Chennai–34, dated29/10/2010 made in ITA Nos.378/08-09/A-III (Assessment Year2006-2007) and 239/09-10/A-III (Assessment Year 2007-2008)respectively as against the Order of the Assistant Commissionerof Income Tax, Company Circle-III(3), Chennai–34, dated10/12/2008 in GIR/PAN No. for the Assessment Year2006-2007 and as against the Order of the AdditionalCommissioner of Income Tax, Company Range-III, Chennai–34, dated27/11/2009 in GIR/PAN No. for the Assessment Year2007-2008. For Appellant : Mrs.V.PushpaJunior Standing counselFor Respondent :Mr.G.BaskarMr.S.Gopalakrishnan For Official Liquidator COMMON JUDGMENT [Judgment of the Court was delivered by R. MAHADEVAN, J.] These tax case appeals have been filed by the appellant/Revenue, challenging the order dated 25.03.2011 passed by theIncome Tax Appellate Tribunal, A Bench, Chennai, in I.TA.Nos.26and 27/Mds/2011, relating to the assessment years 2006-07 and2007-08. 2. By order dated 20.09.2011, this court admitted theaforesaid tax case appeals on the following substantial questionof law: T.C.(A).No.399 of 2011:- “Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal wasright in holding that the expenditure ofRs.9,49,75,456/- incurred in foreign exchange forproviding technical services outside India by way ofonsite development of computer software should notbe excluded from the export turnover for the purposeof computing deduction under Section 10B withoutproperly applying the provisions of Explanation 2(iii) to Section 10B? T.C.(A).No.400 of 2011:- “Whether on the facts and circumstances of thecase, the Income Tax Appellate Tribunal was right inholding that the expenditure of Rs.9,74,33,406/-incurred in foreign exchange for providing technicalservices outside India by way of onsite developmentof computer software should not be excluded from theexport turnover for the purpose of computingdeduction under Section 10B without properlyapplying the provisions of Explanation 2(iii) toSection 10B?” 3. Today, when the matters were taken up for consideration,the learned counsel for the appellant/Revenue fairly submittedthat the issue involved herein has already been decided infavour of the assessee, in view of the decision rendered in thecase of Commissioner of Income Tax v. Mphasis Ltd [(2020) 113taxmann.com 74], wherein, the Hon'ble Supreme Court has affirmedthe view taken by the Division Bench of the Karnataka High Courtand held that 'the expenditure incurred by the Assessee inforeign currency will be includible in the definition of 'export turnover' for the purpose of computing deduction under Section10B of the Act'. 4. For better appreciation, the relevant portion of thejudgment of the Division Bench of the Karnataka High Court inCIT v. Mphasis Ltd. [(2016) 74 taxmann.com 274 (Karnataka) isextracted below: “2. The first substantial question of law arosefor consideration before this Court in ITANo.776/2007 disposed of on 13.06.2014, wherein thisCourt has held at paras 18 and 19 as under :- turnover' for the purpose of computing deduction under Section10B of the Act'. 4. For better appreciation, the relevant portion of thejudgment of the Division Bench of the Karnataka High Court inCIT v. Mphasis Ltd. [(2016) 74 taxmann.com 274 (Karnataka) isextracted below: “2. The first substantial question of law arosefor consideration before this Court in ITANo.776/2007 disposed of on 13.06.2014, wherein thisCourt has held at paras 18 and 19 as under :- 18. From the aforesaid provision it isclear that the consideration in respect ofcomputer software received in or brought intoIndia by the assessee in convertible foreignexchange is deducted from the profits of thesaid business. In other words the assessee isnot liable to pay any income tax on suchconsideration received from export of computersoftware. However the said export turnoverdoes not include freight, telecommunicationcharges or insurance attributable to thedelivery of computer software outside India orexpenses if any incurred in foreign exchangein providing technical service outside India.In other words out of the said export turnoverthe following amounts have to be deducted;a. freight b. telecommunication charges c.insurance attributable to the delivery ofcomputer software outside India; d. expenses,if any, incurred in foreign exchange inproviding technical services outside India; 19. If the assessee is engaged in thebusiness of providing technical servicesoutside India in connection with thedevelopment or production of computer softwarethen expenses if any incurred in foreignexchange in providing technical servicesoutside India is liable to be deducted out ofexport turnover. The said provision has noapplication in the case of export out of Indiaof computer software or its transmission fromIndia to a place outside India by any means.The law makes a distinction between technicalservices rendered in connection with export ofcomputer software and export of technicalservices for the purpose of development or 19. If the assessee is engaged in thebusiness of providing technical servicesoutside India in connection with thedevelopment or production of computer softwarethen expenses if any incurred in foreignexchange in providing technical servicesoutside India is liable to be deducted out ofexport turnover. The said provision has noapplication in the case of export out of Indiaof computer software or its transmission fromIndia to a place outside India by any means.The law makes a distinction between technicalservices rendered in connection with export ofcomputer software and export of technicalservices for the purpose of development or production of computer software outside India.If the technical services rendered by theassessee's Engineers is in connection with theexport of computer software for the purpose oftesting, installation and monitoring ofsoftware such a turnover do not fall withinclause (ii) of subsection (1) of section 80HHEof the Act. Such a turnover falls within sub-clause (i) of subsection (1) of Section 80HHEof the Act, that is export out of India ofcomputer software or its transmission fromIndia to a place outside India by any means.The expenditure incurred in the form offoreign exchange for such services cannot beexcluded in computing the export turnover asit forms part of the export turnover. In theinstant case as is clear from the order of theAssessing Authority, he proceeds on theassumption that the assessee is a companyengaged in rendering technical servicesoutside India in connection with production ofsaid software. Therefore the expenditureincurred in foreign exchange in providing suchtechnical services outside India of Rs.62.7lakhs was excluded in computing the exportturnover and total turnover for arriving atdeduction under Section 80HHE of the Act. Theassesee is engaged in the business of exportout of India of computer software and itstransmission to places from India outsideIndia. Before a computer software is exported,the Software Engineers of the assessee wouldhave initial discussion with regard to therequirements, specifications etc. Thereaftercomputer software is manufactured and then itis transmitted from India to a place outsideIndia. The software Engineers deputed abroadwho among other things have to do testing,installation and monitoring of softwaresupplied to the client. Though the saidservices are technical in nature it does notfall within clause (ii) of subsection (1) ofsection 80HHE of the Act of providingtechnical services outside India in connectionwith the development or production of computersoftware. It falls under sub-clause (1) ofsub-section (1) of Section 80 HHE of the Act.Therefore, the said expenditure cannot beexcluded in computing export turn over. Inthat view of the matter we do not see any merit in this appeal. Accordingly, the saidquestion of law is answered in favour of theassessee and against the revenue. 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 of lawis concerned, the same was considered by this Courtin the case of Commissioner of Income Tax And AnotherVs. Tata Elxsi Ltd., reported in (2012) 349 ITR 98(Karn) . It has been held as under :- merit in this appeal. Accordingly, the saidquestion of law is answered in favour of theassessee and against the revenue. 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 of lawis concerned, the same was considered by this Courtin the case of Commissioner of Income Tax And AnotherVs. Tata Elxsi Ltd., reported in (2012) 349 ITR 98(Karn) . It has been held as under :- “17.From the aforesaid judgments, whatemerges is that, there should be uniformity inthe ingredients of both the numerator and thedenominator of the formula, since otherwise itwould produce anomalies or absurd results.Section 10-A is a beneficial section. It isintended to provide incentives to promoteexports. The incentive is to exempt profitsrelatable to exports. In the case of combinedbusiness of an assessee, having exportbusinessanddomesticbusiness,thelegislature intended to have a formula toascertain the profits from export business byapportioning the total profits of the businesson the basis of turnovers. Apportionment ofprofits on the basis of turnover was acceptedas a method of arriving at export profits. Inthe case of Section 80HHC, the export profitis to be derived from the total businessincome of the assessee, whereas in Section 10-A, the export profit is to be derived from thetotal business of the undertaking. Even in thecase of business of an undertaking, it mayinclude export business and domestic business,in other words, export turnover and domesticturnover. The export turnover would be acomponent or part of a denominator, the othercomponent being the domestic turnover. Inother words, to the extent of export turnover,there would be a commonality between thenumerator and the denominator of the formula.In view of the commonality, the understandingshould also be the same. In other words, ifthe export turnover in the numerator is to bearrived at after excluding certain expenses, the same should also be excluded in computingthe export turnover as a component of totalturnover in the denominator. The reason beingthe total turnover includes export turnover.The components 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 excluded fromthe numerator that is export turnover wouldnevertheless form part of the denominator.Though when a particular word is not definedby the legislature and an ordinary meaning isto be attributed to the same, the saidordinary meaning to be attributed to such wordis to be in conformity with the context inwhich it is used. When the statute prescribesa formula and in the said formula, 'exportturnover' is defined, and when the 'totalturnover'; includes export turnover, the verysame meaning given to the export turnover bythe legislature is to be adopted whileunderstanding the meaning of the totalturnover, when the total turnover includesexport turnover. If what is excluded incomputing the export turnover is includedwhile arriving at the total turnover, when theexport turnover is a component of totalturnover, such an interpretation would runcounter to the legislative intent andimpermissible. 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 turnover includesexport turnover, the meaning assigned by thelegislature to the export turnover is to berespected and given effect to, whileinterpreting the total turnover which isinclusive of the export turnover. Thereforethe formula for computation of the deductionunder Section 10-A, would be as under: Profits of the business Export turn over x ofthe undertaking [Export turnover + domesticturn over) Total turn over” 5. Accordingly, the said substantial question of lawis answered in favour of the assessee and against https://hcservices.ecourts.gov.in/hcservices/ the Revenue.” 5.The aforesaid judgment of the Karnataka High Court wasaffirmed by the Hon'ble Supreme Court in CIT v. Mphasis Ltd(supra), the relevant portion of which, is quoted below forready reference. “1.The instant petition is filed by the petitioner-Revenue assailing the judgment dated 01.08.2014passed by the High Court of Karnataka at Bangalorein I.T.A.No.1075 of 2008. 2. When the petition is taken up for consideration,Mr.Vikramjit Banerjee, learned Additional SolicitorGeneral appearing for the petitioner-Revenue andMr.Parcy Pardiwala, learned Senior Counsel appearingfor the respondent, are in agreement that SLP (C)No.2373/2015 preferred by the Revenue in respect ofconnected ITA No.196 of 2009 which was disposed ofby the very same common order dated 01.08.2014 wasdismissed by this Court on 28.01.2019 having takennote similar grounds raised in the special leavepetition. 3. Hence taking note of the fact that in respect ofcommon judgment this Court has already dismissed SLP(C) No.2373 of 2015 relating to the Assessment Year2004-05 and in the present case except that issuerelates to Assessment Year 2003-2004 all otheraspects are on the very same point, we are notinclined to entertain the instant petition. 4. Accordingly, the special leave petition shallstand dismissed. Pending applications, if any, shallalso stand disposed of.” 6. In the light of the aforesaid decision, we are of theview that the substantial question of law raised in theseappeals deserves to be allowed in favour of the assessee.Accordingly, the present tax case appeals filed by the Revenue,stand dismissed. No costs. Sd/- Assistant Registrar(CS VII) //True Copy// nvsri Sub Assistant Registrar https://hcservices.ecourts.gov.in/hcservices/ To1.The Commissioner of Income-Tax, Chennai.2.The Income-tax Appellate Tribunal “A” Bench,Chennai.3.The Assistant Commissioner of Income Tax, Company Circle - III(3), Chennai - 600 034.4.The Commissioner of Income-Tax (Appeals)-III,121, Mahatma Gandhi Road, Chennai - 600 034. 5.The Additional Commissioner of Income Tax,Company Range – III,121, Mahatma Gandhi Road,Aayakar Bhawan,Room No.421, New Block 121,Chennai – 600 034. +1cc to Mr.G.Baskar, Advocate, S.R.No.6634 TCA.NOS.399 AND 400 OF 2011 SPD(CO)PBS/22/02/2022