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

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE R.SURESH KUMAR Tax Case (Appeal) Nos.312 & 385 of 2011 The Commissioner of Income Tax-IChennai... 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 IncomeTax Act, 1961 against the common order of the Income TaxAppellate Tribunal 'D' Bench, Chennai dated 28.02.2011 in ITANo.2297/Mds/2008 and ITA No.283/Mds/2009 against the order ofthe Commissioner of Income Tax Appeals III,chenani inITA.NO.429/2007-2008/ A III dated 22.10.2008 against theorder dated 10.12.2007 passed by the Assistant Commissioner ofIncome Tax,Company Circle III(3),Chennai 34 in GIR NO./PANNO.33004-2/AAAC210864. For Appellant : Mrs.V.Pushpa For Mr.M.Swaminathan Senior Standing Counsel For Respondent : No appearance (Judgment of the Court was delivered by DR.VINEETKOTHARI,J) The Revenue Department is represented by the SeniorStanding Counsel and none appears for the Assessee /Respondent. 2. The Revenue has filed the present appeals underSection 260A of the Income Tax Act, against the common orderof the learned Income Tax Appellate Tribunal 'D' Bench,Chennai dated 28.02.2011. https://hcservices.ecourts.gov.in/hcservices/ 3. A Coordinate Bench of this Court admitted the presentappeal on the following substantial questions of law on23.08.2011. “T.C.No.312 of 2011 Whether on the facts and circumstances of the case,the Income Tax Appellate Tribunal was right inholding that the expenditure incurred in foreignexchange for providing technical services outsideIndia to the tune of Rs.4,83,46,037/- could not beexcluded 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.No.385 of 2011Whether on the facts and circumstances of the case,the Income Tax Appellate Tribunal was right inholding that product development expenses incurredin foreign exchange to the equivalent toRs.8,64,51,871/- incurred by the assessee could notbe reduced from the export turnover for the purposeof computing deduction under Section 10B withoutproperly applying the provisions of Explanation 2(iii) to Section 10B?” 4. The learned Tribunal decided in favour of theAssessee the question that the expenditure incurred by theAssessee in foreign currency in the foreign country wherethey exported computer software will be included in the'export turnover', on which the Assessee is entitled to thebenefit of deduction under Section 10B of the Income Tax Act.The relevant portion of the order of the learned Tribunal isquoted below for ready reference. “6.The next issue raised vide Ground No.IV relatesto confirming the action of the Assessing Officerin excluding Rs.4,43,19,916/- as not forming partof export turnover who has excluded this amount onthe reasoning that the amount represented expensesincurred in foreign exchange in providing technicalservices outside India. The facts of this issuehave already been narrated above.7. After hearing both sides on this issue, we findthat in view of the Special Bench decision (supra)in assessee's own case, wherein it has been heldthat such amount cannot be excluded from exportturnover,thisadditioncannotsurvive.Consequently, by following the Special Benchdecision (supra) we order to delete the impugnedaddition.” “6.The next issue raised vide Ground No.IV relatesto confirming the action of the Assessing Officerin excluding Rs.4,43,19,916/- as not forming partof export turnover who has excluded this amount onthe reasoning that the amount represented expensesincurred in foreign exchange in providing technicalservices outside India. The facts of this issuehave already been narrated above.7. After hearing both sides on this issue, we findthat in view of the Special Bench decision (supra)in assessee's own case, wherein it has been heldthat such amount cannot be excluded from exportturnover,thisadditioncannotsurvive.Consequently, by following the Special Benchdecision (supra) we order to delete the impugnedaddition.” 5. Learned counsel for the Revenue fairly submitted thatthe controversy is no longer res integra in view of thedecision of the Hon'ble Supreme Court in the case of“Commissioner of Income Tax -Vs- Mphasis Ltd” reported in[2020] 113 taxmann.com 74 decided on 13.11.2019, has affirmedthe view taken by the Division Bench of the Karnataka HighCourt and the Hon'ble Supreme Court has held that suchexpenditure incurred by the Assessee in foreign currency willbe includible in the definition of 'export turnover' for thepurpose of computing deduction under Section 10B of the Act. 6. The relevant portion of the judgment of the DivisionBench of the Karnataka High Court in “CIT -Vs- Mphasis Ltd.,”reported in [2016] 74 taxmann.com 274 (Karnataka) is quotedbelow for ready reference. outside 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 caseof export out of India of computersoftware or its transmission from India toa place outside India by any means. Thelaw makes a distinction between technicalservices rendered in connection withexport of computer software and export oftechnical services for the purpose ofdevelopment or production of computersoftware outside India. If the technicalservices rendered by the assessee'sEngineers is in connection with the exportof computer software for the purpose oftesting, installation and monitoring ofsoftware such a turnover do not fallwithin clause (ii) of subsection (1) ofsection 80HHE of the Act. Such a turnoverfalls within sub-clause (i) of subsection(1) of Section 80HHE of the Act, that isexport out of India of computer softwareor its transmission from India to a placeoutside India by any means. Theexpenditure incurred in the form offoreign exchange for such services cannotbe excluded in computing the exportturnover as it forms part of the exportturnover. In the instant case as is clearfrom the order of the Assessing Authority,he proceeds on the assumption that theassessee is a company engaged in renderingtechnical services outside India inconnection with production of saidsoftware. Therefore the expenditureincurred in foreign exchange in providingsuch technical services outside India ofRs.62.7 lakhs was excluded in computingthe export turnover and total turnover forarriving at deduction under Section 80HHEof the Act. The assesee is engaged in thebusiness of export out of India ofcomputer software and its transmission toplaces from India outside India. Before acomputer software is exported, theSoftware Engineers of the assessee would have initial discussion with regard to therequirements,specificationsetc.Thereaftercomputersoftwareismanufactured and then it is transmittedfrom India to a place outside India. Thesoftware Engineers deputed abroad whoamong other things have to do testing,installation and monitoring of softwaresupplied to the client. Though the saidservices are technical in nature it doesnot fall within clause (ii) of subsection(1) of section 80HHE of the Act ofproviding technical services outside Indiain connection with the development orproduction 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 viewof the matter we do not see any merit inthis appeal. Accordingly, the saidquestion of law is answered in favour ofthe assessee and against the revenue.Ordered accordingly. 3. In view of the said judgment, the substantialquestion of law is answered in favour of theassessee and 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 AndAnother Vs. Tata Elxsi Ltd., reported in (2012) 349ITR 98 (Karn) . It has been held as under "17. Fromthe aforesaid judgments, what emerges is that, thereshould be uniformity in the ingredients of both thenumerator and the denominator of the formula, sinceotherwise it would produce anomalies or absurdresults. Section 10-A is a beneficial section. It isintended to provide incentives to promote exports.The incentive is to exempt profits relatable toexports. In the case of combined business of anassessee, having export business and domesticbusiness, the legislature intended to have a formulato ascertain the profits from export business byapportioning the total profits of the business onthe basis of turnovers. Apportionment of profits onthe basis of turnover was accepted as a method ofarriving at export profits. In the case of Section 80HHC, the export profit is to be derived from thetotal business income of the assessee, whereas inSection 10-A, the export profit is to be derivedfrom the total business of the undertaking. Even inthe case of business of an undertaking, it mayinclude export business and domestic business, inother words, export turnover and domestic turnover.The export turnover would be a component or part ofa denominator, the other component being thedomestic turnover. In other words, to the extent ofexport 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 is tobe arrived at after excluding certain expenses, thesame should also be excluded in computing the exportturnover as a component of total turnover in thedenominator. The reason being the total turnoverincludes export turnover. The components of theexport turnover in the numerator and the denominatorcannot be different. Therefore, though there is nodefinition of the term 'total turnover' in Section10-A, there is nothing in the said Section tomandate that, what is excluded from the numeratorthat is export turnover would nevertheless form partof the denominator. Though when a particular word isnot defined by the legislature and an ordinarymeaning is to be attributed to the same, the saidordinary meaning to be attributed to such word is tobe in conformity with the context in which it isused. When the statute prescribes a formula and inthe said formula, 'export turnover' is defined, andwhen the 'total turnover' includes export turnover,the very same meaning given to the export turnoverby the legislature is to be adopted whileunderstanding the meaning of the total turnover,when the total turnover includes export turnover. Ifwhat is excluded in computing the export turnover isincluded while arriving at the total turnover, whenthe export turnover is a component of totalturnover, such an interpretation would run counterto the legislative intent and impermissible. If thatwere the intention of the legislature, they wouldhave expressly stated so. If they have not chosen toexpressly define what the total turnover means,then, when the total turnover includes exportturnover, the meaning assigned by the legislature tothe export turnover is to be respected and giveneffect to, while interpreting the total turnover which is inclusive of the export turnover. Thereforethe formula for computation of the deduction underSection 10-A, would be as under: Profits of the business Export turn over x of theundertaking [Export turnover + domestic turn over)Total turn over" 5. Accordingly, the said substantial question of lawis answered in favour of the assessee and againstthe Revenue. “ 7. The said view was affirmed by the Hon'ble SupremeCourt and the relevant portion of the judgment is quoted belowfor ready reference. “1.The instant petition is filed by thepetitioner-Revenue assailing the judgment dated01.08.2014 passed by the High Court of Karnatakaat Bangalore in I.T.A.No.1075 of 2008. 2. When the petition is taken up forconsideration, Mr.Vikramjit Banerjee, learnedAdditional Solicitor General appearing for thepetitioner-Revenue and Mr.Parcy Pardiwala, learnedSenior Counsel appearing for the respondent, arein agreement that SLP (C) No.2373/2015 preferredby the Revenue in respect of connected ITA No.196of 2009 which was disposed of by the very samecommon order dated 01.08.2014 was dismissed bythis Court on 28.01.2019 having taken note similargrounds raised in the special leave petition. “1.The instant petition is filed by thepetitioner-Revenue assailing the judgment dated01.08.2014 passed by the High Court of Karnatakaat Bangalore in I.T.A.No.1075 of 2008. 2. When the petition is taken up forconsideration, Mr.Vikramjit Banerjee, learnedAdditional Solicitor General appearing for thepetitioner-Revenue and Mr.Parcy Pardiwala, learnedSenior Counsel appearing for the respondent, arein agreement that SLP (C) No.2373/2015 preferredby the Revenue in respect of connected ITA No.196of 2009 which was disposed of by the very samecommon order dated 01.08.2014 was dismissed bythis Court on 28.01.2019 having taken note similargrounds raised in the special leave petition. 3. Hence taking note of the fact that in respectof common judgment this Court has alreadydismissed SLP (C) No.2373 of 2015 relating to theAssessment Year 2004-05 and in the present caseexcept that issue relates to Assessment Year 2003-2004 all other aspects are on the very same point,we are not inclined to entertain the instantpetition. 4. Accordingly, the special leave petition shallstand dismissed. Pending applications, if any,shall also stand disposed of.” 8. In view of the aforesaid settled legal position, it isclear that the present appeals filed by the Revenue deserve tofail and is liable to be dismissed. 9. We accordingly dismiss the appeals and answer thequestions framed above in favour of the Assessee and against https://hcservices.ecourts.gov.in/hcservices/ the Revenue. No costs. A copy of this order may be sent tothe respondent Assessee at the address given. Sd/- Assistant Registrar(CS VI) //True Copy// Sub Assistant Registrar KST To The Income Tax Appellate Tribunal 'D' Bench,Chennai. 2. The Commissioner of Income Tax Appeals III,chenani.3. The Assistant Commissioner of Income Tax,Company Circle III(3),Chennai 34+2ccs to Mr.M.Swaminathan , Advocate SR.No. 15021,15022T.C.(A) Nos.312 & 385 of 2011ss coA.SK(23/03/2020)