The Commissioner Of Income Tax Chennai v. M/S.cognizant Technology Solutions India Pvt.ltd. Vice President Global Finance

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 20.11.2020 CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE M.S.RAMESH TAX CASE (APPEAL) NOS.83 TO 86 OF 2017 The Commissioner of Income TaxChennai .. Appellant in all TCAsVs. M/s.Cognizant Technology Solutions India Pvt.Ltd.Vice President Global Finance38, Whites Road, 3rd FloorChennai 600 014PAN AAACD3312M .. Respondent in all TCAs Prayer:- Appeals under Section 260A of the Income Tax Act, 1961,against the order of the Income Tax Appellate Tribunal, Madras"C" Bench, Chennai, dated 30.09.2015, passed in ITANos.1771/Mds/2007, 209/Mds/2007, 1784/Mds/2007 & 2536/Mds/2007for the Assessment Years 2002-03, 2003-04, 2002-03 & 2004-05respectively. Against the Order of the Commissioner of Income Tax(Appeals)XII, 121, Mahatma Gandhi Road, Nungambakkam, Chennai-34, in ITA.No.135/05-06, order dated 28.02.2007, inITA.No.709/2005-06, order dated 06.12.2006, ITA.No.135/2005-06,order dated 28.02.2007 in ITA.No.779/2006-07-A-III, order dated25.09.2007, against the order of the Assistant Commissioner ofIncomeTaxCompanyCircle-I(3),ChennaiinPAN/GI.No. /CX4361,PAN/GI.No. /CX2-019,PAN/GI.No. /CX4361, PAN/GI.No. /CX2-019 inAssessment Years 2002-03, 2003-04, 2002-03 & 2004-05. For Appellant : Mr.T.Ravikumar For Respondent : Mr.N.V.Balaji J U D G M E N T (Delivered by Dr.Vineet Kothari,J) The learned counsel appearing for both sides fairlysubmitted that various questions of law arising in the presentTax Appeals by the Revenue are covered by decisions of differentDivision Benches of this Court and therefore, the questionsraised in the present appeals can be answered accordingly, withrespect to Section 10A and 10B of the Income Tax Act. 2. In view of the above submission, the following order ispassed. 3. The summary of the coverage of various questions in theform of a chart prepared by both the counsel jointly, is quotedbelow for ready reference: S.NoIssueSQL and AppealCovered by.No.4Set off of broughtTCA No.86 ofCovered in favourforwardlosses2017 (SQL 3)of the Assesseebefore allowing taxby the order ofholdiay deductionthe Supreme Courtin the case ofYokogawaIndiaLtd.andtheorder of thisHon'bleHighCourtinTCANo.228 of 2011 inthe case of M/s.Comstar and TCANo.115 of 2016 inthe case of M/s.Visual Graphics4. The questions of law raised in all the appeals are quotedbelow:TCA No.83 of 2017 - Assessment Year 2002-03(1) Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatthe deduction under Section 10A in respect ofprovisions written back are to be allowed?(2) Is not the finding of the Tribunal bad sinceprovisions written back included in the claim fordeduction under Section 10A was not derived by anundertaking from the export of article or thing orcomputer software?(3) Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatthe gain on foreign exchange fluctuation is eligiblefor deduction under Section 10A even though the saidgain nothing to do with the realized income from theeligible undertaking and was a result of restatementof outstanding balances on the last date of thefinancial year?TCA No.84 of 2017 - Assessment Year 2003-04(1) Whether on the facts and in the circumstancesof the case, the Tribunal was correct in holding thatthe communication charges are to be excluded both fromthe total turnover and the Export turnover whilecomputing deduction under Section 10A especially whenthe explanation clearly stipulates that in the case ofExport turnover alone it is to be deducted? https://hcservices.ecourts.gov.in/hcservices/ (2) Is not the finding of the Tribunal bad,especially when Section 10A postulate that theexpenditure incurred in foreign exchange in providingtechnical services outside India has to be reducedfrom the export turnover only and not from the totalturnover? https://hcservices.ecourts.gov.in/hcservices/ (2) Is not the finding of the Tribunal bad,especially when Section 10A postulate that theexpenditure incurred in foreign exchange in providingtechnical services outside India has to be reducedfrom the export turnover only and not from the totalturnover? (3) Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatthe deduction under Section 10A in respect ofprovisions written back are to be allowed? (4) Is not the finding of the Tribunal bad sinceprovisions written back included in the claim fordeduction under Section 10A was not derived by anundertaking from the export of article or thing orcomputer software? TCA No.85 of 2017 - Assessment Year 2002-03(1) Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatthe deduction under Section 10A in respect ofprovisions written back are to be allowed?(2) Is not the finding of the Tribunal bad sinceprovisions written back included in the claim fordeduction under Section 10A was not derived by anundertaking from the export of article or thing orcomputer software?(3) Whether on the facts and in the circumstancesof the case, the Tribunal was right in upholding theorder of CIT(A) which remanded back the issue onaccount of annual day expenses is proper especiallywhen the annual day events was celebrated in the year2001 for which expenses were provided in the year2000? TCA No.86 of 2017 - Assessment Year 2004-05 (1) Whether on the facts and in the circumstancesof the case, the Tribunal was correct in holding thatthe communication charges are to be excluded both fromthe total turnover and the Export turnover whilecomputing deduction under Section 10A especially whenthe explanation clearly stipulates that in the case ofExport turnover alone it is to be deducted? (2) Is not the finding of the Tribunal bad,especially when Section 10A postulate that theexpenditure incurred in foreign exchange in providingtechnical services outside India has to be reducedfrom the export turnover only and not from the totalturnover?(3) Whether the Tribunal was right in holdingthat the benefit of deduction under Section 10A could be allowed before setting off of brought forwardlosses? 5. The relevant extract of the judgments by which theaforesaid issues and questions are covered are also quoted belowfor ready reference. 6. As regards substantial questions of law relating todeduction under Section 10A in respect of provisions writtenback towards link charges and annual day expenses and the saidclaim was not derived by an undertaking from the export ofarticle or thing or computer software, the same is covered bythe decision of this Court in M/s. California Software Co. Ltd.v. The Commissioner of Income Tax [(2020) TaxCorp (DT) 82481(HC-Madras), wherein, reliance was placed on the decisions inCamiceria Apparels India Pvt. Ltd. v. ACIT [TCA Nos.1972 & 1973of 2008] and CIT v. Hewlett Packard Global Soft Ltd. [(2017) 87Taxmann.com 182(Kar.)(FB), the relevant portion of which readsas under: "5. In view of the aforesaid two precedents,to which no contrary view has been cited beforeus, we are inclined to take a view that theincome brought to tax under Section 41 of the Actby reversal of the entry with regard to the stockoption given to the employees is also in thenature of 'export income' and therefore, theAssessee is entitled to exemption / deductionunder Section 10-A / 10-B of the Act and the viewtaken by the learned Tribunal is notsustainable." 7. As far as the substantial question of law with regard toForeign Exchange Fluctuation Gain is concerned, the same iscovered by the decision in CIT v. M/s. Pentasoft TechnologiesLtd. [(2010) 347 ITR 578 (Mad.)], the relevant portion of thesame is quoted below: "5. In view of the aforesaid two precedents,to which no contrary view has been cited beforeus, we are inclined to take a view that theincome brought to tax under Section 41 of the Actby reversal of the entry with regard to the stockoption given to the employees is also in thenature of 'export income' and therefore, theAssessee is entitled to exemption / deductionunder Section 10-A / 10-B of the Act and the viewtaken by the learned Tribunal is notsustainable." 7. As far as the substantial question of law with regard toForeign Exchange Fluctuation Gain is concerned, the same iscovered by the decision in CIT v. M/s. Pentasoft TechnologiesLtd. [(2010) 347 ITR 578 (Mad.)], the relevant portion of thesame is quoted below: "4. In order to allow a claim under Section10A of the Act, what all is to be seen is whethersuch benefit earned by the assessee was derivedby virtue of export made by the assessee. Theexchange value based on upward or downward of theRupee value is not in the hands of the assessee.In other words, the assessee does not determinethe exchange value of the Indian Rupee. It has tobe remembered but for the fact that the assesseeis an expot house, there was no question ofearning any foreign exchange. Therefore, when thefluctuation in foreign exchange rate was solelyrelatable to the export business of the assesseeand the higher Rupee value was earned by virtue of such exports carried out by the assessee,there is no reason why the benefit of Section 10(A) should not be allowed to the assessee." 8. The substantial questions of law with regard to ForeignCurrency Expenditure and Communication Charges are concerned,the same are covered by a decision of this Court in CIT v. M/s.Zylog Systems Limited [TCA Nos.312 & 385 of 2011 dated20.02.2020], wherein, it was held that such expenditure incurredby the Assessee in foreign currency will also be includible inthe definition of 'export turnover' for the purpose of computingdeduction under Section 10B of the Act. 9. As far as the substantial question of law with regard toSet off of brought forward losses before allowing tax holidaydeduction is concerned, the same is covered by the decision inCIT v. M/s. Yokogawa India Ltd. [(2016) TaxCorp (DT) 67973(SC)], the relevant portion of the same is quoted below:"15. Sub-section (4) of Section 10A whichprovides for pro rata exemption, necessarilyinvolving deduction of the profits arising out ofdomestic sales, is one instance of deductionprovided by the amendment. Profits of an eligibleunit pertaining to domestic sales would have toenter into the computation under the head“profits and gains from business” in Chapter IVand denied the benefit of deduction. Theprovisions of Sub-section (6) of Section 10A, asamended by the Finance Act of 2003, granting thebenefit of adjustment of losses and unabsorbeddepreciation etc. commencing from the year 2001-02 on completion of the period of tax holidayalso virtually works as a deduction which has tobe worked out at a future point of time, namely,after the expiry of period of tax holiday. Theabsence of any reference to deduction underSection 10A in Chapter VI of the Act can beunderstand by acknowledging that any suchreference or mention would have been a repetitionof what has already been provided in Section 10A.The provisions of Sections 80HHC and 80HHE of theAct providing for somewhat similar deductionswould be wholly irrelevant and redundant ifdeductions under Section 10A were to be made atthe stage of operation of Chapter VI of the Act.The retention of the said provisions of the Acti.e. Section 80HHC and 80HHE, despite theamendment of Section 10A, in our view, indicatesthat some additional benefits to eligible Section10A units, not contemplated by Sections 80HHC and 80HHE, was intended by the legislature. Such abenefit can only be understood by a legislativemandate to understand that the stages for workingout the deductions under Section 10A and 80HHCand 80HHE are substantially different. This isthe next aspect of the case which we would nowlike to turn to. 16. From a reading of the relevant provisionsof Section 10A it is more than clear to us thatthe deductions contemplated therein is qua theeligible undertaking of an assessee standing onits own and without reference to the othereligible or non-eligible units or undertakings ofthe assessee. The benefit of deduction is givenby the Act to the individual undertaking andresultantly flows to the assessee. This is alsomore than clear from the contemporaneous CircularNo. 794 dated 9.8.2000 which states in paragraph15.6 that, “The export turnover and the total turnoverfor the purposes of sections 10A and 10Bshall be of the undertaking located inspecified zones or 100% Export OrientedUndertakings, as the case may be, and thisshall not have any material relationshipwith the other business of the assesseeoutside these zones or units for thepurposes of this provision.” 17. If the specific provisions of the Actprovide [first proviso to Sections 10A(1); 10A(1A) and 10A (4)] that the unit that iscontemplated for grant of benefit of deduction isthe eligible undertaking and that is also how thecontemporaneous Circular of the department(No.794 dated 09.08.2000) understood thesituation, it is only logical and natural thatthe stage of deduction of the profits and gainsof the business of an eligible undertaking has tobe made independently and, therefore, immediatelyafter the stage of determination of its profitsand gains. At that stage the aggregate of theincomes under other heads and the provisions forset off and carry forward contained in Sections70, 72 and 74 of the Act would be premature forapplication. The deductions under Section 10Atherefore would be prior to the commencement ofthe exercise to be undertaken under Chapter VI ofthe Act for arriving at the total income of theassessee from the gross total income. Thesomewhat discordant use of the expression “total income of the assessee” in Section 10A hasalready been dealt with earlier and in theoverall scenario unfolded by the provisions ofSection 10A the aforesaid discord can bereconciled by understanding the expression “totalincome of the assessee” in Section 10A as ‘totalincome of the undertaking’.18. For the aforesaid reasons we answer theappeals and the questions arising therein, asformulated at the outset of this order, byholding that though Section 10A, as amended, is aprovision for deduction, the stage of deductionwould be while computing the gross total incomeof the eligible undertaking under Chapter IV ofthe Act and not at the stage of computation ofthe total income under Chapter VI. All theappeals shall stand disposed of accordingly." 10. Accordingly, all the aforesaid questions are answeredagainst the Revenue, as covered by aforesaid decisions of thisCourt and Supreme Court and in favour of the Assessee in termsof the aforesaid judgments. The Tax Case Appeals are accordinglydisposed of. Sd/- Assistant Registrar //True Copy// kplTo Sub Assistant Registrar 1.The Commissioner of Income Tax,Chennai. 2.The Income Tax Appellate Tribunal, Madras 'C' Bench, Chennai. 3.The Commissioner of Income Tax (Appeals)III, 121, Mahatma Gandhi Road,Nungambakkam, Chennai-34.Nungambakkam, Chennai-34. 4.The Commissioner of Income Tax (Appeals)XII,121, Mahatma Gandhi Road,Nungambakkam, Chennai-34.121, Mahatma Gandhi Road,Nungambakkam, Chennai-34. 5.The Assistant Commissioner of Income Tax,Company Circle I(3), Chennai.Company Circle I(3), Chennai. +1cc to Mr.N.V.Balaji, Advocate, S.R.No.37575 +2cc to Mr.T.Ravikumar, Advocate, S.R.No.37480 TCA.Nos.83 to 86 of 2017 PVS(CO)CS/20/01/2021