The Commissioner Of Income - Tax, Chennai v. M/S Pentamedia Graphics Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MR. JUSTICE R. MAHADEVANand THE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ The Commissioner of Income - Tax, Chennai. ... Appellant/Appellant Versus M/s Pentamedia Graphics Ltd.,25, I Main Road United India Colony,Kodambakkam, Chennai 600 024. Appeal preferred under Section 260A of the Income TaxAct, 1961, against the order of the Income Tax AppellateTribunal, Madras “B” Bench, dated 24.03.2008 inI.TA.No.2701/Mds/2005, against the order of the Commissionerof Income Tax (Appeals)-V, Chennai-600 034, dated 26.08.2005made in ITA No.06/2005-2006 against the order of the DeputyCommissioner of Income Tax, Company Circle-V (2), Chennaidated 28.02.2005 made in PAN/GIR No. for theAssessment year 2002-03. This tax case appeal has been filed by theappellant/Revenue, challenging the order dated 24.03.2008passed by the Income Tax Appellate Tribunal, Madras 'B' Bench,in I.T.A.No.2701/Mds/2005, relating to the assessment year2002-03. 2. By order dated 20.07.2010, this court admitted theaforesaid tax case appeal on the following substantialhttps://hcservices.ecourts.gov.in/hcservices/question of law: “Whether in the facts and circumstances of thecase, the Tribunal erred in holding that deductionof expenditure in foreign exchange is allowable fromthe total turnover while computing deduction underSection 10A?" 3. Today, when the appeal is taken up for consideration,the learned counsel for the appellant/Revenue as well asrespondent/assessee jointly submitted that the substantialquestion of law raised in this appeal has already beenconsidered and decided by the Supreme Court in favour of theAssessee in Commissioner of Income Tax v. HCL TechnologiesLtd., (2018) 404 ITR 719 (SC), the relevant passage of which,is usefully extracted hereunder: “10. The question arises here that when theparticular term has not been defined in anyparticular Section, is it allowed to import themeaning of such term from the other provisions ofthe same Act? Section 10A of the IT Act is aspecial beneficial provision and the purpose ofdeduction under such Section is to encourage andboost the new business undertakings situated inthe free trade zone of this Nation by providingsuitable deductions to such business entities.Sometimes, while calculating the deduction,disputes arise regarding the methodology ofdeduction which ought to be followed.Undisputedly, it is a matter of record that theRespondent is engaged in the activity of tradingof generic software and providing customizedsoftware development services for domestic aswell as for foreign clients through its two unitssituated in Software Technology Park, Gurgaon(Now Gurugram) which falls under the definitionof the Section 10A of the IT Act. The contentionof the Respondent is that it incurred expenditurein foreign exchange in sending professionalsabroad as per the agreements with the foreignconstituents. 11) On an analysis of the Respondent’s activitytaken from its website, Assessing Officer arrivedat a conclusion that Respondent has beenrendering technical services outside India and,therefore, expenses incurred on such activity arerequired to be excluded from the export turnoverwhile working out the deduction admissible underSection 10A of the IT Act. The Assessing Officerestimated 60% of the software development chargesrequired to be attributed towards expensesincurred for providing technical services outsideIndia. On appeal, learned CIT (Appeals) againhttps://hcservices.ecourts.gov.in/hcservices/made a detailed analysis of the activity of the 11) On an analysis of the Respondent’s activitytaken from its website, Assessing Officer arrivedat a conclusion that Respondent has beenrendering technical services outside India and,therefore, expenses incurred on such activity arerequired to be excluded from the export turnoverwhile working out the deduction admissible underSection 10A of the IT Act. The Assessing Officerestimated 60% of the software development chargesrequired to be attributed towards expensesincurred for providing technical services outsideIndia. On appeal, learned CIT (Appeals) againhttps://hcservices.ecourts.gov.in/hcservices/made a detailed analysis of the activity of the Respondent and arrived at a conclusion that theAssessing Officer failed to bring any evidencewhich can indicate that Respondent was providingtechnical services outside India and it hasincurred expenses towards salary etc. onrendering such services. Inspite that, learnedCIT (Appeals), estimated 10% of softwaredevelopment charge as charges incurred fortechnical services provided outside India. 12) It is undisputed fact that the Respondent wasengaged in the business of software developmentfor its customers engaged in different activitiesat software development centres of theRespondent. However, in the process of suchcustomizedsoftwaredevelopment,certainactivities were required to be carried out at thesight of customers on site, located outside Indiafor which the employees of the branches of theRespondent located in the country of thecustomers are deployed. It is true that it is notdefined that which activity will be termed asproviding technical services outside India.Moreover, after delivery of such softwares as perrequirement, in order to make it fully functionaland hassle free functioning subsequent to thedelivery of softwares in many cases, there can berequirement of technical personnel to visit theclient on site. The Assessing Officer could notbring any evidence that the Respondent wasengaged in providing simply technical servicesindependent to software development for theclient for which the expenditures were incurredoutside India in foreign currency. 13) The Respondent company has claimed deductionunder Section 10A as per certificates filed onForm No. 56F. The Respondent, while computing thededuction, has taken the same figure of exportturnover as of total turnover. The Respondentcited various judicial cases but all these casespertain to deduction under Section 80HHC.Further, the definition of total turnover hasbeen defined in Section 80HHC and 80HHE of the ITAct. As discussed earlier, the definition oftotal turnover has not been defined under Section10A 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 forthe purpose of Section 10A as the technicalmeaning of total turnover, which does nothttps://hcservices.ecourts.gov.in/hcservices/envisage the reduction of any expenses from the total amount, is to be taken into considerationfor computing the deduction under Section 10A.When the meaning is clear, there is no necessityof importing the meaning of total turnover fromthe other provisions. If a term is defined underSection 2 of the IT Act, then the definitionwould be applicable to all the provisions whereinthe same term appears. As the term ‘totalturnover’ has been defined in the Explanation toSection 80HHC and 80HHE, wherein it has beenclearly stated that “for the purposes of thisSection only”, it would be applicable only forthe purposes of that Sections and not for thepurpose of Section 10A. If denominator includescertain amount of certain type which numeratordoes not include, the formula would renderundesirable results. ... ... 17) The similar nature of controversy, akin thiscase, arose before the Karnataka High Court inCIT vs. Tata Elxsi Ltd. (2012) 204 Taxman 321/17.The issue before the Karnataka High Court waswhether the Tribunal was correct in holding thatwhile computing relief under Section10A of the ITAct, the amount of communication expenses shouldbe excluded from the total turnover if the sameare reduced from the export turnover? Whilegiving the answer to the issue, the High Court,inter-alia, held that when a particular word isnot defined by the legislature and an ordinarymeaning is to be attributed to it, the saidordinary meaning is to be in conformity with thecontext in which it is used. Hence, what isexcluded from ‘export turnover’ must also beexcluded from ‘total turnover’, since one of thecomponents of ‘total turnover’ is exportturnover. Any other interpretation would runcounter to the legislative intent and would beimpermissible.18) Accordingly, the formula for computation ofthe deduction under Section10A of the Act wouldbe as follows: Export Profit = total Profit of theBusiness X Export turnover as defined inExplanation 2 (IV) of Section 10A of IT Act/ Export turnover as defined in Explanation2(IV) of Section 10A of the IT Act +domestic sale proceeds 19) In the instant case, if the deductions onhttps://hcservices.ecourts.gov.in/hcservices/freight,telecommunicationandinsurance attributable to the delivery of computer softwareunder Section10A of the IT Act are allowed onlyin Export Turnover but not from the TotalTurnover then, it would give rise to inadvertent,unlawful, meaningless and illogical result whichwould cause grave injustice to the Respondentwhich could have never been the intention of thelegislature. 20) Even in common parlance, when the object ofthe formula is to arrive at the profit fromexport business, expenses excluded from exportturnover have to be excluded from total turnoveralso. Otherwise, any other interpretation makesthe formula unworkable and absurd. Hence, we aresatisfied that such deduction shall be allowedfrom the total turnover in same proportion aswell. 21) On the issue of expenses on technicalservices provided outside, we have to follow thesame principle of interpretation as followed inthecaseofexpensesoffreight,telecommunication etc., otherwise the formula ofcalculation would be futile. Hence, in the sameway, 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 aredevoid of merits and deserve to be dismissed.Accordingly, all the connected matters andinterlocutory applications, if any, are disposedof with no order as to costs." 4. Following the aforesaid judgment, which squarelyapplies to the facts of the present case, the substantialquestion of law is answered in favour of the Assessee andagainst the Revenue. Accordingly, the Tax Case Appeal standsdismissed. No costs. Consequently, connected miscellaneouspetition is closed. //True Copy// Sd/- Assistant Registrar Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, 'B' Bench Chennai, 2.The Commissioner of Income - Tax, Chennai. 3.The Commissioner of Income Tax (Appeals)-V, Chennai-34. 4.The Deputy Commissioner of Income Tax, Company Circle-V (2), Chennai. +1cc to Mr.T.Ravikumar, Advocate SR. No.2618+1cc to Mr.G.Baskar, Advocate SR. No.2424 T.C.A.No.634 of 2010 NMI (CO)PR (18/02/2022)