TMI Blog2008 (1) TMI 452X X X X Extracts X X X X X X X X Extracts X X X X ..... s is not attributable to the delivery of computer software, therefore, such expenses needs not be excluded from consideration in foreign exchange. However, if for the sake of arguments it is presumed that the expenditure incurred is attributable to delivery of goods outside India even though same is not to be excluded. The agreement, invoices and the turnover clearly show that the assessee did not recover any such expenditure. Therefore, there is no scope for any exclusion from the export turnover on account of such expenses. If at all on presumption, it is to be excluded for the purpose of export turnover then on the same assumption, reason and analogy it should be excluded from total turnover . The simple reason is that such expenditure is also included in consolidated consideration which is forming part of total turnover . In order to make the formula for the purpose of export turnover in section 10A workable one has to give a schematic interpretation to the formula. Elimination should be from both the denominator and the numerator. We therefore find that the Assessing Officer was not correct in excluding Rs. 40,93,493 from consideration received in convertible foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. These appeals by the assessee are directed against the orders dated March 4, 2006 and October 12, 2004, of the Commissioner of Income-tax (Appeals)-II, Hyderabad for the assessment years 2000-01 and 2001-02. One ground raised in both the appeals is based on identical set of facts, therefore, for the sake of convenience both appeals are decided by this common order. 2. A common ground raised in the grounds of appeal for both the assessment years 2000-01 and 2001-02 pertains to calculation of export turnover for the purpose of section 10A. The amounts involved in both years are as under : Assessment ISP charges Technical service charges Rs. Rs. 2001-02 40,93,493 1,16,61,307 2000-01 9,64,119 87,520 3. The facts leading to the issue are in the assessment year 2001-02, therefore, the facts and figures considered by us are for the assessment year 2001-02. 4. The ground raised in the assessment year 2001-02 is that the Commissioner of Income-tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 40,93,493, Fixed Telecom Aristasoft - Rs. 12,88,632 and Mobile Telecom Aristasoft - Rs. 6,28,984. According to the assessee, the expenses attributable to the delivery of the software are only Rs. 40,93,493 booked under internet service provider, since the asses see got leased ISP line exclusively. 6. After considering the assessee' s submission, the Assessing Officer computed the total income of the assessee as under : Rs. Rs. In view of the above, the total income is computed as under : Exemption under section 10A is worked out as under : Profits of the business Export turnover Total turnover of the business. Profits of the business 1,12,93,116 Export turnover. [as defined in (iv) of Explanation 2 to sec. 10A]. Consideration in respect of export of computer software received in convertible foreign exchange but does not include, freight, telecommunication charges or insu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,508. The Commissioner of Income-tax (Appeals) after considering the definition of the export turnover as provided in clause (iv) below Explanation 2 to section 10A of the Act, noticed that a plain reading of the said provision of the Act makes it clear that expenditure of Rs. 40,93,493 is attributable to freight, telecommunication charges or insurance attributable to delivery of the articles or things or computer software outside India. In respect of ISP provider charges of Rs. 40,93,493, the Commissioner of Income-tax (Appeals) observed that the assessee has admitted before the Assessing Officer, that these expenses were attributable to delivery of the software and therefore squarely falls under non inclusion within the meaning of the export turnover as laid down in clause (iv) of Explanation 2 to section 10A of the Act. As regards the expenditure of Rs. 1,16,61,307 the Commissioner of Income-tax (Appeals) noticed that there is a clear finding of the Assessing Officer that this amount was attributable to the expenditure incurred for providing technical services outside India and therefore, falls for not to be included within the meaning of the definition of the export turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no application at all. The learned authorised representative submitted that where the assessee has maintained separate books of account and trading receipts and profit and loss account for export sales and domestic sales and there was no warrant for disallowing any portion of the export earnings pro rata. The learned authorised representative in support of his contention relied upon the judgments of the Madras High Court in the case of CIT v. Rathore Brothers [2002] 254 ITR 656 and the latest decision in the case of CIT v. Suresh B. Mehta [2007] 291 ITR 462 (Mad). The learned authorised representative further submitted that the Assessing Officer was not justified in making certain deductions from the export turnover while applying the provisions of section 10A(4). He submitted that even assuming that the items of expenditure stated in clause (iv) of Explanation 2 are to be excluded from the export turnover for the purpose of sub-section (4), such exclusion can arise only if those expenses were recovered from the customer and formed part of the export turnover received in India. The invoices raised by the assessee on the foreign customer were with reference to work done on time ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyees who are sent to customers' place for rendering software services on site. The learned authorised representative has also filed details in this regard which has been placed on record. The learned authorised representative submitted that the expenditure incurred was not in connection with providing technical services. The assessee did not render any technical services. The expenditure incurred in respect of the goods sold as the assessee developed software on contract basis, as per the agreement and handed over the same to the customers. There was no question of any technical services involved. The learned authorised representative in support of his contention relied upon a decision of the Income-tax Appellate Tribunal, Bangalore Bench in the case of Infosys Technology Ltd. in I. T. A. No. 50 (Bang.) of 2001, dated March 31, 2005. 10. The learned Departmental representative, on the other hand, relied upon the orders of the Assessing Officer and the Commissioner of Income- tax (Appeals) and submitted that clause (iv) of Explanation 2 to section 10A is very clear and the Assessing Officer has rightly calculated the exemption under section 10A(1) of the Act. He accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 10A. Export turnover has been defined in the said Explanation 2 to section 10A under clause (iv) which reads as under : (iv) ' export turnover' means the consideration in respect of export (by the undertaking) of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; 13. Sub-section (4) of section 10A states about profits of the business relating to export turnover. The said sub-section (4) of section 10A reads as under : (4) For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the under taking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign exchange within six months of the end of the previous year or within such further period as the Chief Commissioner/Commissioner may allow in this regard. 16. On the basis of the above material and discussion, it can be said that only those freight, telecommunication charges or insurance attributable to delivery of goods out of India are to be considered while reducing from consideration received in convertible foreign exchange. Thus if such expenses are not attributable to delivery of goods outside India, such expenses are not required to be deducted from the consideration. One more aspect which is required to be considered here is that the consideration received in convertible foreign exchange is including such expenses. If such expenses are not included in the consideration received in convertible foreign exchange, deduction of such expenditures from the consideration does not arise. Normally in a transaction of purchase and sale there are two types of conditions between the parties. One is where price quoted of goods is inclusive of all expenses or in other words price quoted is only in respect of goods. Another condition where price of goods and charges of expenses a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 10A is required to be interpreted accordingly. 17. The definition of export turnover can be summarized in the following formula : Particulars Amount The consideration in respect of export (by undertaking) of articles or things or computer software received in or brought in to India by the assessee in convertible foreign exchange in accordance with sub-section (3). xxxxxxxxx Less : (1) Following expenses attributable to the delivery of the articles or things or computer software outside India (if same are included in above consideration) (i) freight x (ii) Telecommunication charges x (iii) Insurance or x xx (2) Expenses, if any, incurred in foreign exchange in providing technical services outside India Export turnover xxxxxxxx 18. Now we examine the facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge while calculating export turnover for the purpose of section 10A of the Income-tax Act. 19. Another expenditure Rs. 1,16,61,307 excluded for the purpose of export turnover by the Assessing Officer is on account of expenses incurred in foreign exchange in providing technical services outside India. On reading of clause (iv) of Explanation 2 to section 10A, we notice that all expenses need not be reduced from consideration received in convertible foreign exchange for the purpose of calculation of export turnover under section 10A. Only those expenses incurred in foreign exchange in providing technical services outside India are required to be reduced. Thus expenditure incurred should be for providing technical services. The technical services relevant to clause (iv) of Explanation 2 to section 10A have not been defined in the section. However, technical services are defined in other provisions of the Act, that is in Explanation 2 to section 9(1)(vii) of the Income-tax Act. The said definition reads as under : Explanation 2. For the purposes of this clause, ' fees for technical services' means any consideration (including any lump sum con sideration) for the render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at includes JD Edwards (ERP), Clarify (CRM), Agile (PDM) among others. The business plan was to sub-lenience these applications to its customers. It also had identified standard business processes that can be integrated across the diverse applications and chose web methods as its integration platform to deliver its EAI services. While Aristasoft Corp. was focusing on business vision and marketing activities, its GTC in Hyderabad was executing its vision. The activities involved in gathering the customers' requirements, implementing, customizing the applications, and supporting the customers after they go live. These activities call for a lot of travel to the customer' s place and demand dedicated connectivity to customers' data centers. Supporting the customer' s issues adhering to the service level agreements with them, GTC had implemented technology that would connect it to its US office via voice/data called VOIP. This demands, again, high hand width connectivity between US office and Hyderabad. 21. As per the agreement the assessee was to pay amount as per exhibit A which reads as under : 1. Fixed price projects executed (a) On site (At ' Develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial) basis : The ongoing software operation services projects will be billed by the ' contractor' to the ' developer' on an hourly rate basis at a uniform bill rate of US $ 15 per hour for junior programmers, US $20 per hour for senior programmers, US $30 per hour for project leaders, US $40 per hour for center heads. For the ongoing software operation service projects, the invoices will be categorized and specify the category. These invoices will be produced periodically on the basis of project milestones as determined by the ' contractor' . However, in no case will the ' con tractor' invoice the ' developer' in advance for work not yet performed unless approved by the ' developer' . The invoice produced will carry the name of the individual contributor assigned by the ' contractor' and the total number of hours worked along with the bill rate and the amount that is payable by the ' developer' . (b) On site (At developers premises) The ' contractor' will assume all the administrative and other travel related expenses other than lodging costs. The project will be billed by the ' contractor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is being agreed to separately charge in addition to the price of the goods, in such circumstances expenditure incurred could be in the nature of expenditure for the purpose of technical services. In the case under consideration undisputed facts are that expenditure incurred by the assessee is on account of travelling allowances and others for the purpose of development of software at client' s site outside India, i.e., in respect of goods. Such expenditure is not in the nature of expenditure for technical services. Since the expenditure is not for technical services, there is no need to exclude these expenditures from consideration received in convertible foreign exchange for the purpose of calculating export turnover as defined in clause (iv) of Explanation 2 of section 10A. 23. One more ground in addition to common ground raised in the appeal for the assessment year 2000-01 is in respect of disallowance of employee' s contribution to provident fund after due date. The Assessing Officer assessed Rs. 2,52,340 as employees' contribution to provident fund which was not deposited and credited to the profit and loss account, as income from other sources, considerin ..... 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