2019 (1) TMI 1862 - HC - Income Tax

Deduction u/s 10B - Tribunal held that for the purpose of applying the formula under sub-section (4) of Section 10B the freight telecom charges or insurance attributable to delivery of articles or things or computer software outside India or expenses if any incurred in foreign exchange in providing the technical services outside India ought to be excluded both from the export turnover and from total turnover even though the statute has provided for such exclusion only from the export turnover - HELD THAT - This question has been resolved by a recent judgment of the Supreme Court in the case of Commissioner of Income Tax v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT in the instant case if the deductions on freight telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then it would give rise to inadvertent unlawful meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. Even in common parlance when the object of the formula is to arrive at the profit from export business expenses excluded from export turnover have to be excluded from total turnover also. Otherwise any other interpretation makes the formula unworkable and absurd. Hence we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. On the issue of expenses on technical services provided outside we have to follow the same principle of interpretation as followed in the case of expenses of freight telecommunication etc. otherwise the formula of calculation would be futile. Hence in the same way expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover. Decided in favour of the Assessee and against the Revenue.

Summary

Issues:
1. Appeal against the common order of the Income Tax Appellate Tribunal for Assessment Years 2002-2003 and 2003-2004.
2. Interpretation of the exclusion of certain expenses from export turnover and total turnover under Section 10B of the Income Tax Act.

Analysis:
The High Court of Madras addressed the appeals filed by the Revenue against the common order of the Income Tax Appellate Tribunal for the Assessment Years 2002-2003 and 2003-2004. The key issue revolved around the interpretation of the exclusion of expenses such as freight, telecom charges, insurance attributable to delivery of articles or things, and expenses incurred in foreign exchange for providing technical services outside India from both export turnover and total turnover under sub-section (4) of Section 10B of the Income Tax Act. The substantial question of law framed for determination was whether the Tribunal was correct in excluding these expenses from both turnovers, even though the statute explicitly provided for exclusion only from export turnover.

The counsels for both parties referred to a recent judgment of the Supreme Court in the case of Commissioner of Income Tax v. HCL Technologies Ltd., which emphasized the need for a consistent interpretation to avoid illogical and unjust results. The Supreme Court's ruling highlighted that expenses excluded from export turnover should also be excluded from total turnover to ensure the formula's workability and avoid absurd outcomes. The judgment emphasized that deductions on expenses like freight, telecommunication, insurance, and expenses incurred in foreign exchange for providing technical services outside India should be allowed from the total turnover in the same proportion as from the export turnover. This interpretation aimed to prevent inadvertent injustice and align with the legislative intent.

In light of the Supreme Court's ruling and the principles of interpretation applied, the High Court of Madras answered the question of law in favor of the Assessee and against the Revenue. Consequently, the Tax Cases (Appeals) were dismissed, and no costs were awarded. The judgment clarified the application of the exclusion of specific expenses from export turnover and total turnover under Section 10B of the Income Tax Act, ensuring a consistent and logical approach in calculating profits from export business activities.