The Commissioner Of Income Tax, Chennai v. M/S.data Software Research Company P Ltd.,Kasturi Towers

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 23.07.2021 CORAM: THE HON'BLE MR. JUSTICE M.DURAISWAMYAND THE HON'BLE MRS.JUSTICE R.HEMALATHA T.C.A.No.455 of 2016 The Commissioner of Income Tax, Chennai. ...Appellant/Appellant vs. M/s.Data Software Research Company P Ltd.,Kasturi Towers, No.6, Smith Road,Chennai - 600 002.PAN : ...Respondent/Respondent Appeal preferred under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal,Chennai, "B" Bench, dated 17.07.2015 in I.T.A.No.1837/Mds/2014for the Assessment Year 2006-2007. Appeal against the order of the Commissioner of Income Tax(Appeals)-1, 121 M.G. Road, Chennai-34 made in I.T.A.No.761/11-12/A-1 order dated 17.03.2014 PAN No. , Assessmentyear 2006-2007. Appeal against the order of the Assistant Commissioner ofIncome Tax, Company Circle-1(4) Chennai made in PAN No. order dated 30.12.2011 Assessment year 2006-2007. For Respondent : Mr.R.Venkatnarayanan, for Subbaraya Aiyar Padmanaban JUDGMENT (Judgment was delivered by M. DURAISWAMY, J.) Challenging the order passed in I.T.A.No.1837/Mds/2014 inrespect of the Assessment Year 2006-2007 on the file of theIncome Tax Appellate Tribunal, Chennai, "B" Bench, the Revenuehas filed the above appeal. https://hcservices.ecourts.gov.in/hcservices/ 2. The assessee made a claim under section 10B of theIncome Tax Act in the return of income. The assessee contendedthat in an identical circumstances, the Delhi High Court inCommissioner of Income Tax v. Valiant Communications Ltd., inI.T.A.No.438 of 2012, dated 04.01.2013, held that alternativeclaim of the assessee under section 10A of the Act should beallowed. However, the Assessing Officer disallowed the same,hence, the assessee made an alternative claim under section 10Abefore the Commissioner of Income Tax (Appeals). Theappellate authority by following the Judgment of this Courtreported in [2013] 359 ITR 1 [Commissioner of Income Tax v.Heartland KG Information Ltd.] partly allowed the claim of theassessee. Challenging the order passed by the Commissioner ofIncome Tax (Appeals), the Revenue filed an appeal before theIncome Tax Appellate Tribunal and the appellate Tribunalpartly allowed the appeal filed by the Revenue. Aggrieved overthe order passed by the Income Tax Appellate Tribunal , theRevenue has filed the above appeal. 3.The above Tax Case Appeal was admitted on the followingsubstantial questions of law: “(i) Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in holding that thebrought forward losses of the domestic divisionneed not be set off against the profit of the EOU(DTPI Unit) while computing deduction undersection 10B of the Income Tax Act in order toarrive at the net business loss? (ii) Whether the finding of the Tribunal isproper by holding that any expenditure deductedfrom the export turnover should also be deductedfrom the total turnover while arriving at theeligible deduction made under section 10A whichis contrary to the wording in the statute? (iii) Is not the finding of the Tribunal badespecially when as per Explanation (2) (iii) toSection 10B has defined the word Export Turnoverby which freight telecommunication charges whichfreight telecommunication charges etc., are to bespecifically excluded h;wile computing deduction? (iv) Whether on the facts in thecircumstances of the case, the Income TaxAppellate Tribunal was right in directing the AOto disallow only 2% of the dividend income instead of 10% made by the AO without anyrational basis?” (iii) Is not the finding of the Tribunal badespecially when as per Explanation (2) (iii) toSection 10B has defined the word Export Turnoverby which freight telecommunication charges whichfreight telecommunication charges etc., are to bespecifically excluded h;wile computing deduction? (iv) Whether on the facts in thecircumstances of the case, the Income TaxAppellate Tribunal was right in directing the AOto disallow only 2% of the dividend income instead of 10% made by the AO without anyrational basis?” 4. When the Tax Case Appeal is taken up for hearing,Mr.T.Ravi Kumar, learned Senior Standing Counsel appearingfor the appellant-Revenue fairly submitted that thesubstantial questions of law that arise for considerationin this appeal have already been decided against the Revenueand in favour of the Assessee in the Judgment dated06.07.2021 made in T.C.A.No.119 of 2015 [ Commissioner ofIncome Tax, Chennai v. M/s.Allsec Technologies Ltd., Chennai]wherein this Bench held as follows:- " ................. 3. The above Tax Case Appeal was admitted on thefollowing substantial questions of law: “(i)Whether on the facts and circumstancesof the case, the Tribunal was right in directingthe Assessing Officer to recompute the income inthe light of the decision of the Special Bench inthe case of Sak Soft by excluding the freight andinsurance expenses both from the export turnoverand also from the total turnover while computingdeduction under Section 10A of the Income TaxAct? (ii) Is not the finding of the Tribunal bad,especially when explanation 2(iv) to Section 10Adefines the word “Export Turnover” whereby it hadbeen clearly stated that it would not includefreight, telecommunication charges attributableto the delivery of the articles or things orcomputer software outside India or expenses ifany incurred in foreign exchange while computingdeduction under Section 10A of the Income TaxAct? (iii)Whether on the facts and circumstancesof the case, the Tribunal was right in allowingset off of benefit of brought forward losses fromthe total income after allowing deduction underSection 10A when as per the amended provisions ofthe Act in Section 10A(1) deduction has to beallowed only after arriving at the total incomeafter giving effect to brought forwarddepreciation and losses?” 4.When the appeal is taken up for hearing,Mr.T.Ravi Kumar, learned Senior Standing Counselappearing for the appellant–Revenue fairly submittedthe substantial questions of law that arose for consideration in the above appeal have already beendecided against the Revenue and in favour of theassessee in the judgment dated 01.07.2021 made inT.C.A.No.559 of 2015 [The Commissioner of Income TaxVs. M/s.Allsec Technologies Ltd., No.46-B,Velacherry Main Road, Velacherry, Chennai – 600042], wherein this Bench held as follows:“... 4.Challenging the order passed by the Income TaxAppellate Tribunal, the Revenue has filed the aboveappeal. 5.The above appeal was admitted on thefollowing substantial questions of law : “1.Whether on the facts and in the circumstancesof the case, the Tribunal was right in directing theAssessing Officer to recompute the income in thelight of the decision of the Special Bench in thecase of Sak Soft by excluding the freight andinsurance expenses both from the export turnover andalso from the total turnover while computingdeduction under Section 10-A of the Income Tax Act?2.Is not the finding of the Tribunal bad,especially when Explanation II(iv) to Section 10Adefines the word 'export turnover' whereby it hadbeen clearly stated that it would not includefreight, telecommunication charges attributable tothe delivery of the articles or things or computersoftware outside India or expense if any incurred inforeign exchange while computing deduction underSection 10A of the Income Tax Act? and 3.Whether on the facts and circumstances of thecase, the Tribunal was right in allowing set off ofbenefit of brought forward losses from the totalincome after allowing deduction under Section 10Awhen as per the amended provisions of the Act inSection 10A(1) deduction has to be allowed only afterarriving at the total income after giving effect tobrought forward depreciation and losses?” 6.When the Tax Case Appeal was taken up forhearing, Mr.T.Ravi Kumar, learned Senior StandingCounsel appearing for the appellant/Revenue, fairlysubmitted that the questions of law 1 and 2 werealready decided against the Revenue by the Hon'bleSupreme Court of India in the judgment reported in(2018) 404 ITR 0719 (SC) [Commissioner of Income Tax v.HCL Technologies Ltd.], wherein, the Hon'ble SupremeCourt held as follows : “8.The whole controversy revolves around theclaim of certain expenses attributable to thedelivery of software outside India or in providingtechnical services from 'total turnover' by the Respondent under Section 10A of the IT Act. It is anundisputed fact that neither Section 10A nor Section2 of the IT Act define the term 'total turnover'.However, the term 'total turnover' is given in clause(ba) of the Explanation to Section 80 HHC of the ITAct which defines the meaning of total turnover asfollows: "(ba) 'total turnover' shall not includefreight or insurance attributable to the transportof the goods or merchandise beyond the customsstations as defined in the Customs Act, 1962 (52 of1962). Provided that in relation to any assessmentyear commencing on or after the 1st day of April,1991, the expression "total turnover" shall haveeffect as if it also included any sum referred toin 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 the considerationthathasbeenreceivedforexportofarticles/things/computer software. Normally theconsiderationwillincludethefreight/telecommunication charges/insurance which hadbeen incurred to deliver the article/things/computersoftware outside India. However the Explanation 2(iv)specifically seeks to exclude these three categoriesof expenditure incurred for delivering the export ofarticles/things/computer software. It also seeks toexclude expenses for providing technical service,etc. outside India. Therefore, where an Indiantechnician goes abroad and receives fees for service,the foreign client will normally be required toreimburse the expenses as well. Therefore, out of theconsideration received, the portion representingreimbursement of expenditure has 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. Ifthe entire turnover represents export proceeds, thenthe export turnover and the total turnover areidentical. It is clear that any exclusion in theexport turnover in the numerator will automatically imply exclusion in the denominator as well becauseexport turnover is always a component of totalturnover. Export Turnover/Total Turnover/Business: Form 56F prescribes the report under Section 10A forand Annexure-A thereto refers to "export proceeds"and "sale proceeds". Both together form the totalturnover of the undertaking." imply exclusion in the denominator as well becauseexport turnover is always a component of totalturnover. Export Turnover/Total Turnover/Business: Form 56F prescribes the report under Section 10A forand Annexure-A thereto refers to "export proceeds"and "sale proceeds". Both together form the totalturnover of the undertaking." 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 of thesame Act? Section 10A of the IT Act is a specialbeneficial provision and the purpose of deductionunder such Section is to encourage and boost the newbusiness undertakings situated in the free trade zoneof this Nation by providing suitable deductions tosuch business entities. Sometimes, while calculatingthe deduction, disputes arise regarding themethodology of deduction which ought to be followed.Undisputedly, it is a matter of record that theRespondent is engaged in the activity of trading ofgeneric software and providing customized softwaredevelopment services for domestic as well as forforeign clients through its two units situated inSoftware Technology Park, Gurgaon (Now Gurugram)which falls under definition of the Section 10A ofthe IT Act. The contention of the Respondent is thatit incurred expenditure in foreign exchange insending professionals abroad as per the agreementswith the foreign constituents. 11.On an analysis of the Respondent's activitytaken from its website, Assessing Officer arrived ata conclusion that Respondent has been renderingtechnical services outside India and, therefore,expenses incurred on such activity are required to beexcluded from the export turnover while working outthe deduction admissible under Section 10A of the ITAct. The Assessing Officer estimated 60% of thesoftware development charges required to beattributed towards expenses incurred for providingtechnical services outside India. On appeal, learnedCIT (Appeals) again made a detailed analysis of theactivity of the Respondent and arrived at aconclusion that the Assessing Officer failed to bringany evidence which can indicate that Respondent wasproviding technical services outside India and it hasincurred expenses towards salary etc. rendering suchservices. Inspite that, learned CIT (Appeals), estimated 10% of software development charge ascharges incurred for technical services providedoutside India. 12.It is undisputed fact that the Respondent wasengaged in the business of software development forits customers engaged in different activities atsoftware development centres of the Respondent.However, in the process of such customized softwaredevelopment, certain activities were required to becarried out at the sight of customers on site,located outside India for which the employees of thebranches of the Respondent located in the country ofthe customers 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 per requirement,in order to make it fully functional and hassle freefunctioning subsequent to the delivery of softwaresin many cases, there can be requirement of technicalpersonnel to visit the client on site. The AssessingOfficer could not bring any evidence that theRespondent was engaged in providing simply technicalservices independent 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 on FormNo. 56F. The Respondent, while computing thededuction, has taken the same figure of exportturnover as of total turnover. The Respondent citedvarious judicial cases but all these cases pertain todeduction under Section 80HHC. Further, thedefinition of total turnover has been defined inSection 80HHC and 80HHE of the IT Act. As discussedearlier, the definition of total turnover has notbeen 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 sameterm appears. As the term 'total turnover' has been defined in the Explanation to Section 80HHC and80HHE, wherein it has been clearly stated that "forthe purposes of this Section only", it would beapplicable only for the purposes of that Sections andnot for the purpose of Section 10A. If denominatorincludes certain amount of certain type whichnumerator does not include, the formula would renderundesirable results. 15.A Statute is the intention of the legislaturewho enacts it after having regard to various factsand circumstances. It is a cardinal principle of lawthat the interpretation by the Court shall be done insuch a way that the intention of the legislatureshall prevail and no injustice occurred with theparties. The rule of harmonious construction is thethumb rule to interpretation of any statute. Aninterpretation which makes the enactment a consistentwhole, should be the aim of the Courts and aconstruction which avoids inconsistency or repugnancybetween the various sections or parts of the statueshould be adopted. 16.In Commissioner of Income Tax vs. J.H. Gotla,(1985) 23 Taxman 14J (SC) this Court has held asunder: "46.Where the plain literal interpretation ofa statutory provision produces a manifestly unjustresult which could never have been intended by theLegislature, the Court might modify the languageused by the Legislature so as to achieve theintention of the Legislature and produce a rationalconstruction. The task of interpretation ofstatutory provision is an attempt to discover theintention of the Legislature from the languageused.... 47..If the purpose of a particular provisionis easily discernible from the whole scheme of theAct which, in the present case, was to counteract,the effect of the transfer of assets so far ascomputation of income of the Respondent wasconcerned, then bearing that purpose in mind, theintention should be found out from the languageused by the Legislature and if strict literal,construction leads to an absurd result, i.e. resultnot intended to be subserved by the object of thelegislation found out in the manner indicatedabove, then if other construction is possible apartfrom strict literal construction, then thatconstruction should be preferred to the strictliteral construction. Though equity an taxation areoften strangers, attempt should be made that these do not remain so always so and if a constructionresults in equity rather than in injustice thensuch construction should be preferred to theliteral construction. Furthermore, in the instantcase, we are dealing with an artificial liabilitycreated for counteracting the effect only ofattempts by the assessee to reduce tax liability bytransfer.." do not remain so always so and if a constructionresults in equity rather than in injustice thensuch construction should be preferred to theliteral construction. Furthermore, in the instantcase, we are dealing with an artificial liabilitycreated for counteracting the effect only ofattempts by the assessee to reduce tax liability bytransfer.." 17.The similar nature of controversy, akin thiscase, arose before the Karnataka High Court in CITvs. Tata Elxsi Ltd. (2012) 204 Taxman 321/17. Theissue before the Karnataka High Court was whether theTribunal was correct in holding that while computingrelief under Section 10A of the IT Act, the amount ofcommunication expenses should be excluded from thetotal turnover if the same are reduced from theexport turnover? While giving the answer to theissue, the High Court, inter-alia, held that when aparticular word is not defined by the legislature andan ordinary meaning is to be attributed to it, thesaid ordinary meaning is to be in conformity with thecontext in which it is used. Hence, what is excludedfrom 'export turnover' must also be excluded from'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 ofthe deduction under Section 10A of the Act would beas follows: Export Profit = total Profit of the Business XExport turnover as defined in Explanation 2 (IV) ofSection 10A of IT Act / Export turnover as defined inExplanation 2(IV) of Section 10A of the IT Act +domestic sale proceeds. 19.In the instant case, if the deductions onfreight, telecommunication and insurance attributableto the delivery of computer software under Section10A of the IT Act are allowed only in Export Turnoverbut not from the Total Turnover then, it would giverise to inadvertent, unlawful, meaningless andillogical result which would cause grave injustice tothe Respondent which could have never been theintention of the legislature. 20.Even in common parlance, when the object ofthe formula 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 and absurd. Hence, we are satisfied that suchdeduction shall be allowed from the total turnover insame proportion as well. 21.On the issue of expenses on technicalservices provided outside, we have to follow the sameprinciple of interpretation as followed in the caseof expenses of freight, telecommunication etc.,otherwise the formula of calculation would be futile.Hence, in the same way, expenses incurred in foreignexchange for providing the technical services outsideshall be allowed 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,all the connected matters and interlocutoryapplications, if any, are disposed of with no orderas to costs.” 7.Further, the learned Senior Standing Counselsubmitted that the 3 rd question of law was decidedagainst the Revenue by the Division Bench of this Courtin T.C.A.No.375 of 2018 [Commissioner of Income Tax,Chennai v. M/s.Allsec Technologies Ltd., Chennai] dated02.09.2020, wherein, the Division Bench held as follows: “2.This appeal, filed by the Revenue underSection 260A of the Income Tax Act, 1961 (forbrevity, the Act), is directed against the the orderdated 29.3.2017 made in ITA.No.2229/Mds/2016 the fileof the Income Tax Appellate Tribunal, Chennai 'C'Bench (for short, the Tribunal) for the assessmentyear 2005-06. 3.The appeal was admitted on 10.7.2018 on thefollowing substantial question of law : 7.Further, the learned Senior Standing Counselsubmitted that the 3 rd question of law was decidedagainst the Revenue by the Division Bench of this Courtin T.C.A.No.375 of 2018 [Commissioner of Income Tax,Chennai v. M/s.Allsec Technologies Ltd., Chennai] dated02.09.2020, wherein, the Division Bench held as follows: “2.This appeal, filed by the Revenue underSection 260A of the Income Tax Act, 1961 (forbrevity, the Act), is directed against the the orderdated 29.3.2017 made in ITA.No.2229/Mds/2016 the fileof the Income Tax Appellate Tribunal, Chennai 'C'Bench (for short, the Tribunal) for the assessmentyear 2005-06. 3.The appeal was admitted on 10.7.2018 on thefollowing substantial question of law : “?Whether deduction under Section 10A of theIncome Tax Act, 1961 may be allowed withoutreducing the brought forward losses pertaining tothe year subsequent to the assessment year andsetting the same off against gains of business inthe current year ??” 4.The issue raised in this appeal is covered bythe decision of this Court in the case of M/s.ComstarAutomative Technologies Private Ltd., Vs. DCIT[TCA.No.228 of 2011 dated 18.3.2020] in favour of theassessee. Further in the decision of this Court inthe case of CIT Vs. M/s.Comstar AutomotiveTechnologies Pvt. Ltd. [TCA.No.301 of 2019 dated06.7.2020], to which, one of us (TSSJ) was a party,the above mentioned substantial question of law wasdecided against the Revenue following the saiddecision in TCA. No.228 of 2011 dated 18.3.2020, which judgment answered the only substantial questionof law against the Revenue. 5.Following the above decisions, the above taxcase appeal is dismissed and the substantial questionof law is answered against the Revenue. No costs.” 8.The learned Senior Standing Counsel submittedthat, in view of the ratio laid down by the Hon'bleSupreme Court of India and Division Bench of thisCourt, the questions of law may be decided against theRevenue and in favour of the assessee. 9.Mr.R.Venkata Narayanan for M/s.Subbaraya AiyarPadmanabhan,learnedcounselfortherespondent/assessee, submitted that, in view of thejudgment of the Hon'ble Supreme Court and the DivisionBench of this Court cited supra, the appeal may bedismissed. 10.Having regard to the submissions made by thelearned counsel on either side and following the ratiolaid down by the Hon'ble Supreme Court of India, thequestions of law 1 and 2 are decided against theappellant/Revenue. Similarly, following the ratio laiddown by the Division Bench of this Court inT.C.A.No.375 of 2018 dated 02.09.2020, the 3 rdquestion of law is also decided against theappellant/Revenue and in favour in the assessee. Accordingly, this Tax Case Appeal is dismissed. Nocosts.” 5. Mr.R.Venkatnarayanan, learned counsel appearingfor the respondent-assessee submitted that in view ofthe ratio laid down by this Hon'ble Bench in thejudgment dated 01.07.2021 made in T.C.A.No.559 of 2015,the appeal may be dismissed. 6.Having regard to the submissions made by thelearned counsel on either side, following the ratiolaid down in the judgment dated 01.07.2021 made inT.C.A.No.559 of 2015 [The Commissioner of Income TaxVs. M/s.Allsec Technologies Ltd., No.46-B, VelacherryMain Road, Velacherry, Chennai – 600 042], thequestions of law are decided against the Revenue and infavour of the assessee. Accordingly, the Tax CaseAppeal is dismissed. No costs." 5. Mr.R.Venkatnarayanan, learned counsel appearing for therespondent submitted that in view of the ratio laid down bythe Division Bench of this Court in T.C.A.No.109 of 2015[cited supra], the appeal may be dismissed. 6. Having regard to the submissions made by the learnedcounsel on either side, following the ratio laid down in the 5. Mr.R.Venkatnarayanan, learned counsel appearing for therespondent submitted that in view of the ratio laid down bythe Division Bench of this Court in T.C.A.No.109 of 2015[cited supra], the appeal may be dismissed. 6. Having regard to the submissions made by the learnedcounsel on either side, following the ratio laid down in the Judgment dated 06.07.2021 made in T.C.A.No.109 of 2015 [citedsupra], the questions of law are decided against theRevenue and in favour of the assessee. Accordingly, theTax Case Appeal is dismissed. No costs. -s/d- Assistant Registrar(CS-II) True Copy Sub-Assistant Registrar RjTo 1. The Income Tax Appellate Tribunal, Chennai,"B" Bench. 2.The Commissioner of Income TaxAppeals I, ChennaiAppeals I, Chennai 3.The Assistant Commissioner of Income TaxCompany circle 1(4) ChennaiCompany circle 1(4) Chennai +1 Cc to Mr.T. Ravi Kumar, Advocate sr 35172. 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