2009 (3) TMI 243 - AT - Income Tax

Deduction u/s 10B - Total Turnover - principle of parity between export turnover and total turnover - exclusion expenses incurred in foreign exchange, freight and clearing expenses incurred in foreign exchange in computing deduction - HELD THAT - In our understanding the ratio laid down by the Supreme Court in the case of LMW 2007 (4) TMI 202 - SUPREME COURT is an affirmation of the principle of parity between the export turnover and the total turnover for the purpose of s. 80HHC . It was also the ratio laid down in that case that any receipt which does not have an element of turnover cannot find a place either in the export turnover or in the total turnover. LMW's case was followed by the Supreme Court in CIT vs. Catapharma (India) (P) Ltd. 2007 (7) TMI 203 - SUPREME COURT , where the assessment year involved was 1997-98. We may refer to some of the orders of the Tribunal on this issue. We have referred to the order of the Bangalore Bench in the case of Tata Elxsi. 2007 (10) TMI 630 - ITAT BANGLORE held as under 10. The term 'total turnover' no doubt is not defined in s. 10A. However, the term 'total turnover' would be an enlargement of the term 'export turnover'. In other words, the sum total export turnover and domestic turnover would constitute 'total turnover'.'' The term 'export turnover' would then be a component or part of the denominator; the other component being the domestic turnover. In other words, to the extent of 'export turnover' there would be a commonality between the numerator and denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the 'export turnover' in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the 'total turnover' in the denominator. Though there is no definition of the term 'total turnover' in s. 10A, there is also nothing in the said section to mandate that what is excluded from the numerator (export turnover) would nevertheless form part of the denominator. One would have to apply consistent standards in understanding and applying a term, particularly when, such term, viz., export turnover has an independent function and at the same time a part of a larger term viz., total turnover. Thus, if some expenses, for any reason are excluded in arriving at the 'export turnover' the same should be reduced from 'total turnover' also. This order is with reference to s. 10A but again as already noticed the provisions of ss. 10A and 10B are identical on all material aspects. More particularly, both the sections define only the 'export turnover' but not 'total turnover', further sub-s. (4) of both the sections prescribe an identical formula for computing the export profits, in which the export turnover is the numerator and the total turnover is the denominator. We are in respectful agreement with the view expressed by the Bangalore Bench in the above order. In California Software Co. Ltd. 2008 (8) TMI 430 - ITAT MADRAS-A held that the objective of the definition of 'export turnover' in s. 10B was to apply the principle of netting by comparing the inflow and outflow of foreign exchange from or into the country. We have already held that this could not have been the objective. The order of the Chennai Bench, to the extent it holds so, with respect, cannot be approved. However, in the same para the Bench has also held that what was never part of the turnover in the first instance cannot be excluded therefrom. We have already held that impliedly at least the Bench seems to have held that the receipts by way of freight, telecom charges or insurance attributable to the delivery of the computer software outside India or expenses incurred in foreign exchange in connection with the provision of the technical services outside India cannot be included in the total turnover. We have also, inter alia, adopted a similar line of reasoning in the sense that mere reimbursement or recovery of such expenses can in no sense be considered to have an element of turnover. To the extent our view accords with the view taken by the Chennai Bench in para 23 of its order, the same is approved. In the case of Dy. CIT vs. S.R.A. Systems Ltd. 2007 (6) TMI 256 - ITAT MADRAS , Tribunal was dealing with s. 10A. A perusal of the order shows that the Bench applied the basis of s. 80HHE, which also gave incentives for exports and which contained a definition of both 'export turnover' and total turnover'. The Bench observed that what was excluded from the export turnover was also excluded from the total turnover and since s. 10A was akin to s. 80HHE, hence the deduction can be properly computed only by deducting expenditure incurred in foreign exchange both from the total turnover and also from the export turnover . We have also adopted inter alia, a similar line of reasoning and have taken sustenance for our view from the definition of 'total turnover' in s. 80HHE. We may add that we have also referred to s. 80HHF which contains a similar definition of 'total turnover'. Therefore, we hold that for the purpose of applying the formula under sub-s. (4) of s. 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the Department are thus dismissed. We make it clear that we have not decided the cases of the interveners and they will be decided by the respective Benches in conformity with our decision. The appeals are dismissed with no order as to costs.

Summary

Issues Involved:
1. Whether expenses incurred in foreign currency attributable to the delivery of computer software outside India should be excluded from both export turnover and total turnover for the purpose of deduction under Section 10B of the IT Act, 1961.

Detailed Analysis:

Issue 1: Exclusion of Expenses from Export Turnover and Total Turnover

Facts of the Case:
The assessee, a company engaged in the export of computer software, claimed a deduction under Section 10B of the IT Act, 1961. The Assessing Officer (AO) excluded certain expenses incurred in foreign currency from the export turnover but did not exclude the same from the total turnover, leading to a dispute.

Legal Framework:
Section 10B of the IT Act provides deductions for newly established 100% Export Oriented Units (EOUs). Sub-section (4) prescribes a formula for computing the deduction, where the export turnover is the numerator and the total turnover is the denominator. Explanation 2(iii) defines export turnover but does not define total turnover.

Assessee's Argument:
The assessee argued for parity between export turnover and total turnover, citing the Supreme Court judgment in CIT vs. Lakshmi Machine Works (LMW), which emphasized the need for parity between the numerator and denominator in similar formulas under Section 80HHC. The assessee contended that excluding expenses from export turnover without excluding them from total turnover would skew the results.

Interveners' Argument:
Interveners adopted a broader argument, extending the exclusion to freight, telecommunication charges, and insurance attributable to delivery outside India. They emphasized that maintaining parity between the numerator and denominator is essential for a fair computation.

Revenue's Argument:
The Revenue opposed the exclusion of expenses from total turnover, arguing that there is no statutory mandate to exclude these from total turnover in Section 10B. They cited the Supreme Court judgment in CIT vs. K. Ravindranathan Nair, which dealt with the inclusion of processing charges in total turnover under Section 80HHC.

Tribunal's Analysis:
1. Rationale for Exclusion: The Tribunal noted that the rationale for excluding certain expenses from export turnover is that they do not represent consideration for the export of goods or services. These expenses are merely reimbursements and do not have an element of turnover.

2. Parity Principle: The Tribunal emphasized the need for parity between export turnover and total turnover, citing judgments from various High Courts and the Supreme Court. The Tribunal referred to the judgments in CIT vs. Sudarshan Chemicals Industries Ltd. and CIT vs. Chloride India Ltd., which supported the exclusion of statutory levies like excise duty and sales tax from total turnover to maintain parity.

3. Interpretation of Total Turnover: The Tribunal held that in the absence of a statutory definition of total turnover in Section 10B, it should be interpreted in light of the definition of export turnover. This interpretation ensures that the formula prescribed by sub-section (4) of Section 10B is applied meaningfully.

4. Reimbursement of Expenses: The Tribunal agreed with the assessee that receipts representing reimbursement of expenses cannot be considered as turnover. This interpretation aligns with the definition of export turnover, which excludes such expenses.

5. Comparative Analysis with Other Sections: The Tribunal compared Section 10B with Sections 80HHC, 80HHE, and 80HHF, noting that these sections also exclude certain expenses from both export turnover and total turnover. The Tribunal concluded that a consistent interpretation should be applied across these sections to achieve the legislative intent of providing incentives for exports.

Conclusion:
For the purpose of applying the formula under sub-section (4) of Section 10B, the Tribunal held that expenses incurred in foreign exchange in providing technical services outside India, as well as freight, telecommunication charges, and insurance attributable to the delivery of articles or software outside India, should be excluded from both export turnover and total turnover. This ensures parity and avoids skewed results in the computation of deductions.

Disposition:
The appeals filed by the Department were dismissed, and the Tribunal emphasized that the cases of the interveners would be decided by the respective Benches in conformity with this decision.