The Commissioner Of Income Tax,Chennai v. M/S.allsec Technologies Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE MR.JUSTICE M. DURAISWAMYANDTHE HON'BLE MRS.JUSTICE R. HEMALATHA Tax Case Appeal No.559 of 2015 The Commissioner of Income Tax,Chennai....Appellant Vs. M/s.Allsec Technologies Ltd.No.46-B, Velacherry Main Road,Velacherry, Chennai – 600 042. ...Respondent Tax Case Appeal filed under Section 260A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal, Chennai "B" Bench, dated 21.01.2015 passed inI.T.A.No.1710/Mds/2013, Assessment Year 2006-07, against theorder of the Commissioner of Income Tax(A)-VI in ITA No.72/12-13 for the Assessment year 2006-2007 dated 25/04/2013 againstthe Assessment order of the Deputy Commissioner of Income Tax,Company Circle I (1), Chennai dated 28.11.2008 for theassessment year 2006-07. For Respondent : Mr.R.Venkata Narayanan for M/s.Subbaraya Aiyar Padmanabhan (Delivered by M.DURAISWAMY, J.) Challenging the order passed in I.T.A.No.1710/Mds/2013 inrespect of the assessment year 2006-07, on the file of theIncome Tax Appellate Tribunal “B” Bench, the Revenue has filedthe above appeal. 2.The assessee is a domestic company engaged in thebusiness of data and call center operation, filed its returnof income on 30.11.2006, after claiming deduction u/s.10A ofthe Income Tax Act, 1961. Subsequently, the assessee hadrevised its return of income on 28.03.2008. Subsequently, thehttps://hcservices.ecourts.gov.in/hcservices/case was taken up for scrutiny and assessment was made u/s.143(3) of the Act on 28.11.2008 and the Assessing Officerhad set off the brought forward losses and unabsorbeddepreciation from the current year profit of the eligible 10Aunit of the assessee u/s.72 of the Act, and thereafter,granted deduction u/s.10A of the Act for the remaining profit.The Assessing Officer had also excluded the entiretelecommunication expenses incurred outside India in foreignexchange and in Indian currency from the export turnover,however, the same was not excluded from the total turnoverwhile computing eligible deduction u/s.10A of the Act. 3.Challenging the order passed by the Assessing Officer,the assessee preferred an appeal before the Commissioner ofIncome Tax (Appeals) and the Appellate Authority allowed theappeal of the assessee. Aggrieved over the order passed bythe Commissioner of Income Tax (Appeals), the Revenue filed anappeal before the Income Tax Appellate Tribunal, which alsodismissed the appeal. 4.Challenging the order passed by the Income TaxAppellate Tribunal, the Revenue has filed the above appeal. 5.The above appeal was admitted on the followingsubstantial questions of law : “1.Whether on the facts and in thecircumstances of the case, the Tribunal was rightin directing the Assessing Officer to recompute theincome in the light of the decision of the SpecialBench in the case of Sak Soft by excluding thefreight and insurance expenses both from the exportturnover and also from the total turnover whilecomputing deduction under Section 10-A of theIncome 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 incurredin foreign exchange while computing deduction underSection 10A of the Income Tax Act? and 3.Whether on the facts and circumstances ofthe case, the Tribunal was right in allowing setoff of benefit of brought forward losses from thetotal income after allowing deduction under Section10A when as per the amended provisions of the Actin Section 10A(1) deduction has to be allowed onlyafter arriving at the total income after givingeffect to brought forward depreciation and losses?” 3.Whether on the facts and circumstances ofthe case, the Tribunal was right in allowing setoff of benefit of brought forward losses from thetotal income after allowing deduction under Section10A when as per the amended provisions of the Actin Section 10A(1) deduction has to be allowed onlyafter arriving at the total income after givingeffect to brought forward depreciation and losses?” 6.When the Tax Case Appeal was taken up for hearing,Mr.T.Ravi Kumar, learned Senior Standing Counsel appearing forhttps://hcservices.ecourts.gov.in/hcservices/the appellant/Revenue, fairly submitted that the questions of law 1 and 2 were already decided against the Revenue by theHon'ble Supreme Court of India in the judgment reported in(2018) 404 ITR 0719 (SC) [Commissioner of Income Tax v. HCLTechnologies Ltd.], wherein, the Hon'ble Supreme Court held asfollows : “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 theRespondent 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 thetransport of the goods or merchandise beyondthe customs stations as defined in theCustoms Act, 1962 (52 of 1962). Provided that in relation to any assessmentyear commencing on or after the 1st day ofApril, 1991, the expression "total turnover"shall have effect as if it also included anysum referred to in 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 theconsideration that has been received for exportof articles/things/computer software. Normallytheconsiderationwillincludethefreight/telecommunicationcharges/insurancewhich had been incurred to deliver thearticle/things/computer software outside India.However the Explanation 2(iv) specificallyseeks to exclude these three categories ofexpenditure incurred for delivering the exportof articles/things/computer software. It alsoseeks to exclude expenses for providingtechnical service, etc. outside India.Therefore, where an Indian technician goesabroad and receives fees for service, theforeign client will normally be required toreimburse the expenses as well. Therefore, outof the consideration received, the portionrepresenting reimbursement of expenditure hashttps://hcservices.ecourts.gov.in/hcservices/to be excluded. Export Turnover and Total turnover: The "total turnover" has been defined insections 80HHC and 80HHE only to excludeadditional items given under section 28. Butfor this additional exclusion, there was noneed to define "total turnover". Export turnover is a component of totalturnover. If the entire turnover representsexport proceeds, then the export turnover andthe total turnover are identical. It is clearthat any exclusion in the export turnover inthe numerator will automatically implyexclusion in the denominator as well becauseexport turnover is always a component of totalturnover. Export Turnover/Total Turnover/Business: Form 56F prescribes the report under Section10A for and Annexure-A thereto refers to"export proceeds" and "sale proceeds". Bothtogether form the total turnover of theundertaking." Export turnover is a component of totalturnover. If the entire turnover representsexport proceeds, then the export turnover andthe total turnover are identical. It is clearthat any exclusion in the export turnover inthe numerator will automatically implyexclusion in the denominator as well becauseexport turnover is always a component of totalturnover. Export Turnover/Total Turnover/Business: Form 56F prescribes the report under Section10A for and Annexure-A thereto refers to"export proceeds" and "sale proceeds". Bothtogether form the total turnover of theundertaking." 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,https://hcservices.ecourts.gov.in/hcservices/expenses incurred on such activity are required to be excluded 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 opinionhttps://hcservices.ecourts.gov.in/hcservices/that the definition of total turnover given under Sections 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 beendefined 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.Wheretheplainliteralinterpretation of a statutory provisionproduces a manifestly unjust result whichcould never have been intended by theLegislature, the Court might modify thelanguage used by the Legislature so as toachieve the intention of the Legislature andproduce a rational construction. The task ofinterpretation of statutory provision is anattempt to discover the intention of theLegislature from the language used.... 47..If the purpose of a particularprovision is easily discernible from thewhole scheme of the Act which, in the presenthttps://hcservices.ecourts.gov.in/hcservices/case, was to counteract, the effect of the 16.In Commissioner of Income Tax vs. J.H. Gotla,(1985) 23 Taxman 14J (SC) this Court has held asunder: "46.Wheretheplainliteralinterpretation of a statutory provisionproduces a manifestly unjust result whichcould never have been intended by theLegislature, the Court might modify thelanguage used by the Legislature so as toachieve the intention of the Legislature andproduce a rational construction. The task ofinterpretation of statutory provision is anattempt to discover the intention of theLegislature from the language used.... 47..If the purpose of a particularprovision is easily discernible from thewhole scheme of the Act which, in the presenthttps://hcservices.ecourts.gov.in/hcservices/case, was to counteract, the effect of the transfer of assets so far as computation ofincome of the Respondent was concerned, thenbearing that purpose in mind, the intentionshould be found out from the language used bythe Legislature and if strict literal,construction leads to an absurd result, i.e.result not intended to be subserved by theobject of the legislation found out in themanner indicated above, then if otherconstruction is possible apart from strictliteral construction, then that constructionshould be preferred to the strict literalconstruction. Though equity an taxation areoften strangers, attempt should be made thatthese do not remain so always so and if aconstruction results in equity rather than ininjustice then such construction should bepreferred to the literal construction.Furthermore, in the instant case, we aredealing with an artificial liability createdfor counteracting the effect only of attemptsby 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 BusinessX Export turnover as defined in Explanation 2(IV) of Section 10A of IT Act / Exportturnover as defined in Explanation 2(IV) ofSection 10A of the IT Act + domestic salehttps://hcservices.ecourts.gov.in/hcservices/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 unworkableand absurd. Hence, we are satisfied that suchdeduction shall be allowed from the total turnover insame proportion as well. 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 unworkableand 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 Counsel submittedthat the 3[rd] question of law was decided against the Revenueby the Division Bench of this Court in T.C.A.No.375 of 2018[Commissioner of Income Tax, Chennai v. M/s.AllsecTechnologies Ltd., Chennai] dated 02.09.2020, wherein, theDivision 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 theorder dated 29.3.2017 made in ITA.No.2229/Mds/2016the file of the Income Tax Appellate Tribunal,Chennai 'C' Bench (for short, the Tribunal) for theassessment year 2005-06.3.The appeal was admitted on 10.7.2018 on thefollowing substantial question of law : “?Whether deduction under Section 10A ofthe Income Tax Act, 1961 may be allowedwithout reducing the brought forwardhttps://hcservices.ecourts.gov.in/hcservices/losses pertaining to the year subsequent to the assessment year and setting thesame off against gains of business in thecurrent year ??” 4.The issue raised in this appeal is coveredby the decision of this Court in the case ofM/s.Comstar Automative Technologies Private Ltd.,Vs. DCIT [TCA.No.228 of 2011 dated 18.3.2020] infavour of the assessee. Further in the decision ofthis Court in the case of CIT Vs. M/s.ComstarAutomotive Technologies Pvt. Ltd. [TCA.No.301 of2019 dated 06.7.2020], to which, one of us (TSSJ)was a party, the above mentioned substantialquestion of law was decided against the Revenuefollowing the said decision in TCA. No.228 of 2011dated 18.3.2020, which judgment answered the onlysubstantial question of law against the Revenue. 5.Following the above decisions, the above taxcase appeal is dismissed and the substantialquestion of law is answered against the Revenue. Nocosts.” 8.The learned Senior Standing Counsel submitted that, inview of the ratio laid down by the Hon'ble Supreme Court ofIndia and Division Bench of this Court, the questions of lawmay be decided against the Revenue and in favour of theassessee. 9.Mr.R.Venkata Narayanan for M/s.Subbaraya AiyarPadmanabhan, learned counsel for the respondent/assessee,submitted that, in view of the judgment of the Hon'ble SupremeCourt and the Division Bench of this Court cited supra, theappeal may be dismissed. 10.Having regard to the submissions made by the learnedcounsel on either side and following the ratio laid down bythe Hon'ble Supreme Court of India, the questions of law 1 and2 are decided against the appellant/Revenue. Similarly,following the ratio laid down by the Division Bench of thisCourt in T.C.A.No.375 of 2018 dated 02.09.2020, the 3[rd]question of law is also decided against the appellant/Revenueand in favour in the assessee. Accordingly, this Tax Case Appeal is dismissed. Nocosts. Sd/-Assistant Registrar (CS-IX) //True Copy// https://hcservices.ecourts.gov.in/hcservices/ Sub Assistant Registrar To 10.Having regard to the submissions made by the learnedcounsel on either side and following the ratio laid down bythe Hon'ble Supreme Court of India, the questions of law 1 and2 are decided against the appellant/Revenue. Similarly,following the ratio laid down by the Division Bench of thisCourt in T.C.A.No.375 of 2018 dated 02.09.2020, the 3[rd]question of law is also decided against the appellant/Revenueand in favour in the assessee. Accordingly, this Tax Case Appeal is dismissed. Nocosts. Sd/-Assistant Registrar (CS-IX) //True Copy// https://hcservices.ecourts.gov.in/hcservices/ Sub Assistant Registrar To 1.The Registrar, The Income Tax Appellate Tribunal, Chennai "B" Bench The Income Tax Appellate Tribunal, Chennai "B" Bench 2.The Commissioner of Income Tax (A)-VI, Chennai-34. Chennai-34. 3.The Deputy Commissioner of Income Tax, Company Circle I (1), Chennai. Company Circle I (1), Chennai. 4.The Commissioner of Income Tax, Chennai. Chennai. +1cc to Mr.T.Ravikumar, Advocate, S.R.No.30684 +1cc to M/s.Subbaraya Aiyar, Advocate, S.R.No.31292 Tax Case Appeal No.559 of 2015 PPA(CO)RVM(29/07/2021)