The Commissioner Of Income Tax Chennai v. M/S.zylog Systems Limited

THE HON'BLE DR.JUSTICE VINEET KOTHARI The Commissioner of Income TaxChennai ...Appellant in both appealsVs. M/s.Zylog Systems LimitedNo.155, Thiruvallurvar SalaiKumaran Nagar, Chennai 600 119. ...Respondent in both appeals Tax Case Appeals filed under Section 260A of the Income TaxAct, 1961 against the common order of the Income Tax AppellateTribunal 'D' Bench, Chennai dated 30.06.2011 in ITA Nos.59 and60/Mds/2011 against the order of the Commissioner of Income Tax(Appeals)III dated 29.10.2010 in I.T.A. No. 239/2009-2010/A IIIand I.T.A. No. 378/2008-2009/A-III respectively against theorders of the Assistant Commissioner of Income Tax i) dated10.12.2008 made in GIR/PAN No. and 27.11.2009 andmade in PAN GIR No. respectively. For Appellant : Mr.M.Swaminathan Senior Standing Counsel These two appeals have been filed by the Revenue forAssessment Years 2006-07 and 2007-08 raising the following twosubstantial questions of law arising from the order of thelearned Income Tax Appellate Tribunal 'D' Bench, Chennai dated30.06.2011. The two questions are reproduced below. “1. Whether on the facts and circumstances of thecase, the Income- Tax Appellate Tribunal was right inholding that the expenditure incurred in foreignexchange for providing technical services outsideIndia could not be excluded from the export turnoverfor the purpose of computing deduction u/s 10B without https://hcservices.ecourts.gov.in/hcservices/ properly applying the provisions of Explanation 2(iii)to Section 10B? 2. Whether on the facts and circumstances of the case,the Income Tax Appellate Tribunal was right inrestoring the issue with regard to amortization ofcapital expenditure to the file of the assessingofficer for fresh adjudication in the light of theSpecial Bench decision in the assessee's own case whenthe issue of disallowance of amortised businessacquisition expenses has not been dealt in the SpecialBench decision?” 2. Learned counsel appearing for the appellant RevenueMr.M.Swaminathan fairly submitted that as far as question No.1is concerned regarding the expenditure incurred for providingtechnical services outside India is concerned, this Court hasalready held in the Assessee's own case itself in T.C.A.Nos.312and 385 of 2011 (Commissioner of Income Tax -Vs- M/s.ZylogSystems Limited) decided on 20.02.2020 in favour of the Assesseeand therefore the said question may be answered in favour of theAssessee and against the Revenue. 3. However, Mr.M.Swaminathan submitted that as far asquestion No.2 quoted above is concerned regarding theamortization of capital expenditure incurred by the Assessee,the Assessee himself has amortized the said expenditure overfive years and therefore the learned Tribunal has erred inunnecessarily remitting the said issue also to the AssessingOfficer to decide the issue in terms of the decision of theSpecial Bench of the Tribunal dated 02.11.2010 in the own caseof the Assessee. Learned counsel also submitted that the SpecialBench was not concerned with the said issue of amortization atall as would be clear from Para 6 of the order of the learnedTribunal itself. 4. Mr.Gopalakrishnan, learned counsel for the respondentAssessee submitted that question No.1 may be decided in favourof the Assessee while the question No.2 may be remitted back tothe learned Tribunal for deciding the issue afresh. 4. Mr.Gopalakrishnan, learned counsel for the respondentAssessee submitted that question No.1 may be decided in favourof the Assessee while the question No.2 may be remitted back tothe learned Tribunal for deciding the issue afresh. 5. We have heard both the learned counsels. The relevantportion of the order passed in the case of the Assessee onquestion No.1 in T.C.A.Nos.312 and 385 of 2011 dated 20.02.2020is extracted below for ready reference.“4. The learned Tribunal decided in favour of theAssessee the question that the expenditure incurredby the Assessee in foreign currency in the foreigncountry where they exported computer software willbe included in the 'export turnover', on which theAssessee is entitled to the benefit of deduction https://hcservices.ecourts.gov.in/hcservices/ under Section 10B of the Income Tax Act. Therelevant portion of the order of the learnedTribunal is quoted below for ready reference. “6.The next issue raised vide Ground No.IVrelates to confirming the action of theAssessingOfficerinexcludingRs.4,43,19,916/- as not forming part ofexport turnover who has excluded thisamount on the reasoning that the amountrepresented expenses incurred in foreignexchange in providing technical servicesoutside India. The facts of this issuehave already been narrated above.7. After hearing both sides on thisissue, we find that in view of theSpecial Bench decision (supra) inassessee's own case, wherein it hasbeen held that such amount cannot beexcluded from export turnover, thisadditioncannotsurvive.Consequently, by following theSpecial Bench decision (supra) weorder to delete the impugnedaddition.” 5. Learned counsel for the Revenue fairlysubmitted that the controversy is no longer res integrain view of the decision of the Hon'ble Supreme Court inthe case of “Commissioner of Income Tax -Vs- MphasisLtd” reported in [2020] 113 taxmann.com 74 decided on13.11.2019, has affirmed the view taken by the DivisionBench of the Karnataka High Court and the Hon'bleSupreme Court has held that such expenditure incurredby the Assessee in foreign currency will be includiblein the definition of 'export turnover' for the purposeof computing deduction under Section 10B of the Act. 6. The relevant portion of the judgment of theDivision Bench of the Karnataka High Court in “CIT -Vs-Mphasis Ltd.,” reported in [2016] 74 taxmann.com 274(Karnataka) is quoted below for ready reference. “2. The first substantial question of lawarose for consideration before this Court inITA No.776/2007 disposed of on 13.06.2014,wherein this Court has held at paras 18 and 19as under:- 18. From the aforesaid provision it isclear that the consideration in respect of “2. The first substantial question of lawarose for consideration before this Court inITA No.776/2007 disposed of on 13.06.2014,wherein this Court has held at paras 18 and 19as under:- 18. From the aforesaid provision it isclear that the consideration in respect of computer software received in or broughtinto India by the assessee in convertibleforeign exchange is deducted from theprofits of the said business. In other wordsthe assessee is not liable to pay any incometax on such consideration received fromexport of computer software. However thesaid export turnover does not includefreight, telecommunication charges orinsurance attributable to the delivery ofcomputer software outside India or expensesif any incurred in foreign exchange inproviding technical service outside India.In other words out of the said exportturnover the following amounts have to bededucted; 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 computersoftware then expenses if any incurred inforeign exchange in providing technicalservices outside India is liable to bededucted out of export turnover. The saidprovision has no application in the case ofexport out of India of computer software orits transmission from India to a placeoutside India by any means. The law makes adistinction between technical servicesrendered in connection with export ofcomputer software and export of technicalservices for the purpose of development orproduction of computer software outsideIndia. If the technical services rendered bythe assessee's Engineers is in connectionwith the export of computer software for thepurpose of testing, installation andmonitoring of software such a turnover donot fall within clause (ii) of subsection(1) of section 80HHE of the Act. Such aturnover falls within sub-clause (i) ofsubsection (1) of Section 80HHE of the Act,that is export out of India of computer software or its transmission from India to aplace outside India by any means. Theexpenditure incurred in the form of foreignexchange 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 ofthe Assessing Authority, he proceeds on theassumption that the assessee is a companyengaged in rendering technical servicesoutside India in connection with productionof said software. Therefore the expenditureincurred in foreign exchange in providingsuch technical services outside India ofRs.62.7 lakhs was excluded in computing theexport turnover and total turnover forarriving at deduction under Section 80HHE ofthe Act. The assesee is engaged in thebusiness of export out of India of computersoftware and its transmission to places fromIndia outside India. Before a computersoftware is exported, the Software Engineersof the assessee would have initialdiscussion with regard to the requirements,specifications etc. Thereafter computersoftware is manufactured and then it istransmitted 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 inconnectionwiththedevelopmentorproduction of computer software. It fallsunder sub-clause (1) of sub-section (1) ofSection 80 HHE of the Act. Therefore, thesaid expenditure cannot be excluded incomputing export turn over. In that view ofthe matter we do not see any merit in thisappeal. Accordingly, the said question oflaw is answered in favour of the assesseeandagainsttherevenue.Orderedaccordingly. 3. In view of the said judgment, the substantialquestion of law is answered in favour of theassessee and against the Revenue. https://hcservices.ecourts.gov.in/hcservices/ 3. In view of the said judgment, the substantialquestion of law is answered in favour of theassessee and against the Revenue. https://hcservices.ecourts.gov.in/hcservices/ 4. Insofar as the second substantial question oflaw is concerned, the same was considered by thisCourt in the case of Commissioner of Income-TaxAnd Another Vs. Tata Elxsi Ltd., reported in(2012) 349 ITR 98 (Karn) . It has been held asunder "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 export businessand domestic business, the legislature intendedto have a formula to ascertain the profits fromexport business by apportioning the total profitsof the business on the basis of turnovers.Apportionment of profits on the basis of turnoverwas accepted as a method of arriving at exportprofits. In the case of Section 80HHC, the exportprofit is to be derived from the total businessincome of the assessee, whereas in Section 10-A,the export profit is to be derived from the totalbusiness of the undertaking. Even in the case ofbusiness of an undertaking, it may include exportbusiness and domestic business, in other words,export turnover and domestic turnover. The exportturnover would be a component or part of adenominator, the other component being thedomestic turnover. In other words, to the extentof export turnover, there would be a commonalitybetween the numerator and the denominator of theformula. In view of the commonality, theunderstanding should also be the same. In otherwords, if the export turnover in the numerator isto be arrived at after excluding certainexpenses, the same should also be excluded incomputing the export turnover as a component oftotal turnover in the denominator. The reasonbeing the total turnover includes exportturnover. The components of the export turnoverin the numerator 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 defined by thelegislature and an ordinary meaning is to beattributed to the same, the said ordinary meaningto be attributed to such word is to be inconformity with the context in which it is used.When the statute prescribes a formula and in thesaid formula, 'export turnover' is defined, andwhen the 'total turnover' includes exportturnover, the very same meaning given to theexport turnover by the legislature is to beadopted while understanding the meaning of thetotal turnover, when the total turnover includesexport turnover. If what is excluded in computingthe export turnover is included while arriving atthe total turnover, when the export turnover is acomponentoftotalturnover,suchaninterpretation would run counter to thelegislative intent and impermissible. If thatwere the intention of the legislature, they wouldhave expressly stated so. If they have not chosento expressly 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, while interpretingthe total turnover which is inclusive of theexport turnover. Therefore the formula forcomputation of the deduction under Section 10-A,would be as under: Profits of the business Export turn over x of theundertaking [Export turnover + domestic turnover) Total turn over" 5. Accordingly, the said substantial question oflaw is answered in favour of the assessee andagainst the Revenue. “ 6. Accordingly, question No.1 quoted above is answered infavour of the Assessee and against the Revenue. 7. Regarding question No.2, in paragraph 6 of the order ofthe learned Tribunal, the Tribunal itself has stated that theissue stands covered in favour of the Assessee by the decisionof the Special Bench dated 02.11.2010 in assessee's own case.The relevant portion of the order of the Tribunal is extractedhereunder for ready reference. " 6. At the time of hearing, it was found that hisissue also stands covered in favour of the assessee by the decision of the Special Bench dated 2.11.2010 in https://hcservices.ecourts.gov.in/hcservices/ assessee's own case. In this regard, we reproduceherein below relevant Para Nos.20 & 21 of the aboveorder: "20. There is no dispute about the fact thatthe assessee is a company engaged in businessof development of software both by way of onsite development and off shore developmentand also that it has branch in USA for whichseparate accounts were maintained. There isalso no dispute about the fact that there isapproval of the authorized dealer namelyCentral Bank of India, Chennai for openingthe overseas branch at New Jersy, USA.21. Now we are called upon to adjudicatewhether the Assessing Officer and the learnedCIT (A) were right in excluding from the"export turnover"Rs.3,33,46,592/- incurred bythe assessee outside India in foreignexchange in providing technical services,while computing deduction u/s 10B of theI.T.Act. For adjudicating this issue firstof all we should consider what is"software"and what is "technical services".Explanation (ii) to sub-section 9A of Section10B defines computer software. Explanationreads as under:Clause (ii) "computer software"means (a) any computer programme recorded on anydisc, tape, perforated media or otherinformation storage device; or (b) any customized electronic data or anyproduct or service of similar nature as maybe notified by the Board, which istransmitted or exported from India to anyplace outside India by any means;Clause (iii) of Explanation (2) to sub-section 9A of Section 10B defines exportturnover as under:"(iii)“exportturnover”meanstheconsideration in respect of export (by theundertaking) of articles or things orcomputer software received in, or broughtinto India by the assessee in convertibleforeign exchange in accordance with sub-section (3) but does not include freight,telecommunication charges or insuranceattributable to the delivery of the articles or things or computer software outside Indiaor expenses, if any, incurred in foreignexchange in providing the technical servicesoutside India.” The combined reading of the definition ofsoftware as given in Clause(i) of Explanation(2) and “export turnover” as defined inclause (iii) above would go to show that“export turnover” of computer software meansconsideration received in respect of exportof computer software but does not includefreight,telecommunicationchargesorinsurance to the delivery of computersoftware outside India or expenses incurredin foreign exchange in providing technicalservices outside India.” 7. In view of the above, we restore this issue to thefile of the Assessing Officer for deciding afreshfollowing the Special Bench decision (supra) and allowthis ground for statistical purposes only, in boththese years. 8. In the result, both the appeals are partly allowedfor statistical purposes." 7. In view of the above, we restore this issue to thefile of the Assessing Officer for deciding afreshfollowing the Special Bench decision (supra) and allowthis ground for statistical purposes only, in boththese years. 8. In the result, both the appeals are partly allowedfor statistical purposes." 8. Since apparently the issue involved in question No.2with regard to the amortization of the expenditure was notbefore the Special Bench at all, the learned Tribunal seems tohave committed an error in unnecessarily remitting back thematter to the Assessing Officer with reference to the SpecialBench as quoted above. 9. Therefore, we dispose of the present appeals and whileanswering the Question No.1 in favour of the Assessee, we remitthe issue of Amortization of capital expenditure under QuestionNo.2 back to the learned Tribunal for deciding the issue onceagain on merits and in accordance with law after givingopportunity to both the sides. With these observations, thepresent appeals are disposed of. No costs. -s/d- Assistant Registrar True Copy Sub-Assistant Registrar KST https://hcservices.ecourts.gov.in/hcservices/ To 1.The Deputy/Assistant RegistrarIncome Tax Appellate Tribunal 'D' Bench, Chennai 2. The Commissioner of Income Tax (Appeals)III121, Mahathma Gandhi RoadChennai 600 034. 3. The Additional Commissioner of Income Tax Company Range III, Chennai121, Mahathma Gandhi RoadAayakar BhavanRoom No. 421 New Block, 121 M.G. RoadChennai 600 034. +1 Cc to Mr.M.Swaminathan, Advocate sr 30355. T.C.A.Nos.134 & 135 of 2012 MP(CO)SP(15/12/2020)