TMI Blog2008 (8) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... ative discovery is the surest guide to their meaning. One cannot make a fortress out of the dictionary - It is manifest from the legislative history of provisions allowing tax relief for export, that the quantum of such relief was based on the 'net foreign exchange realization'. The exporters, by the very nature of their business had to incur certain expenses in foreign exchange and they received sale proceeds in foreign exchange. In other words, there was 'outflow' as well as 'inflow' of foreign exchange and it was the 'net inflow' of the foreign exchange which formed the basis for the quantum of such tax relief. The definitions of the expressions 'net foreign exchange realization' and of 'export turnover' as reproduced above make this point amply clear - The ''five year'' tax holiday was allowed u/s 10A of the Act to industrial undertakings, manufacturing or producing articles or things in a free trade zone subject to certain conditions. This tax holiday was not available to a 100 per cent export-oriented undertaking. Such undertakings were eligible only for deduction out of their export profits u/s 80HHC of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n correctly applied by the lower authorities. Therefore, we hold that the expenditure incurred in foreign exchange was rightly deducted for arriving at 'export turnover'. This issue is decided against the assessee. Adjustment in the denominator of 'total turnover' - HELD THAT:- The effect of the judgment of the Supreme Court in the case of K. Ravindranathan Nair [ 2007 (11) TMI 10 - SUPREME COURT] , in context of the facts of the present case, is that what is deducted from the 'export turnover' (the numerator in the formula) need not necessarily be deducted from the 'total turnover' (the denominator in the formula) - We like to explain the above point in the context of the provisions of s. 10B as applicable to the facts of the present case. In the present case, certain expenses incurred in foreign exchange are deducted from the 'export turnover' by virtue of a specific provision in the Act. The objective, apparently, was 'netting' in relation to the foreign exchange 'inflow' and 'outflow' and not because such expenses were part of the 'export turnover'. There can be no logical reason to exclude from ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. Appeal allowed in part. - M.K. CHATURVEDI, VICE PRESIDENT AND AHMAD FAREED, A.M. For the Appellant : R. Rajasekaran For the Respondent : Shaji P. Jacob ORDER AHMAD FAREED, A.M. 1. This appeal by the assessee is directed against the order of CIT(A) dt. 17th Nov., 2006 for asst. yr. 2003-04. 2. The assessee was engaged in the business of development and export of software. The return for asst. yr. 2003-04 was filed on 17th Nov., 2003 showing income of Rs. 76,04,450. In the assessment order passed by the AO under Section 143 on 20th March, 2006, the total income was assessed at Rs. 1,01,30,383 as under: Particulars Amount (Rs.) Income as returned 76,04,450 Add : Loss on foreign exchange fluctuation 14,96,225 Total income 91,00,675 Add: Exemption under s. 10B considered separately 25,74,439 1,16,75,114 Less : Exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 88x4,08,43,923 6,80,70,211 17,16,368 90% of 17,16,368 15,44,731 6. In ground No. (2) above the assessee has raised as many as three issues as under: (i) The telecommunication expenses of Rs. 15,90,132, incurred in Indian rupee, should not be deducted from the 'export turnover'. (ii) The expenses of Rs. 2,56,36,156, incurred in foreign currency, for the payment of technical qualified employees outside India, should not be deducted from the 'export turnover'. (iii) Alternatively, the ratio formula should be correctly applied by making similar adjustment in the denominator of total turnover'. 7. We, now, take up the first issue, forming part of the ground No. (2), relating to the telecommunication expenses of Rs. 15,90,132, as at serial No. (i) above. The explanation given by the assessee before the AO, vide its letter dt. 20th Jan., 2006, with regard to this issue, was as under: In our case there is no such income earned in the form of reimb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not in part (a). The Departmental Representative argued that, on a plain reading, the expenses mentioned in (a) have to be deducted even if they are incurred in Indian rupee. He submitted that the condition of 'incurred in foreign exchange' was not there for the expenses on freight, telecommunication charges or insurance. The learned Authorised Representative, on the other hand contended that the condition of 'incurred in foreign exchange' was applicable to all the expenses mentioned in the above definition. 9.2 This is surely a vexed question and needs to be answered having regard to the intention of the legislature. The answer to this question will depend upon, how the conjunction or , appearing between part (a) and part (b) above, is to be read - either as 'disjunctive' or as 'conjunctive'. It is true that in ordinary usage, and is conjunctive and or is disjunctive. But in order to carry out the intention of the legislature, in a particular situation, it may be necessary to read and in place of the conjunction or , and vice versa. 10. It is well settled that every provision in the Act needs to be construed harmoniously with a vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing export market development allowance. Section 35B was omitted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989. It was operative for asst. yrs. 1968-69 to 1983-84. 12.2 The Finance Act, 1982 inserted Section 89A w.e.f. 1st June, 1982 i.e., for and from asst. yr. 1983-84 with a view to give tax relief to exporters. This section was still-born, as it was omitted by the Finance Act, 1983 w.e.f. 1st April, 1983 i.e., for and from asst. yr. 1983-84. 12.3 The provisions of the still-born Section 89A were replaced, in a modified form by the Finance Act, 1983 by enacting Section 80HHC w.e.f. 1st April, 1983 i.e., for and from asst. yr. 1983-84. 12.4 Also, a new Section 80HHB was inserted by the Finance Act, 1982 w.e.f. 1st April, 1983 i.e., for and from 1983-84. It provided for deduction in respect of profits and gains from projects outside India. 12.5 The derivation of export profit was a sine qua non for claiming tax rebate/relief under Sections 35B, 80HHB and 80HHC. 12.6 One of the conditions for allowing deduction under Sections 80HHB and 80HHC was that the consideration/sale proceed was received in, or brought into, India in 'convertible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962); 12.10 It is manifest from the legislative history of provisions allowing tax relief for export, as discussed in the above paras, that the quantum of such relief was based on the 'net foreign exchange realization'. The exporters, by the very nature of their business had to incur certain expenses in foreign exchange and they received sale proceeds in foreign exchange. In other words, there was 'outflow' as well as 'inflow' of foreign exchange and it was the 'net inflow' of the foreign exchange which formed the basis for the quantum of such tax relief. The definitions of the expressions 'net foreign exchange realization' and of 'export turnover' as reproduced above make this point amply clear. 12.11 Now we come to the Section 10B of the Act. The five year tax holiday was allowed under Section 10A of the Act w.e.f. 1st April, 1981 to industrial undertakings, manufacturing or producing articles or things in a free trade zone subject to certain c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 'exporter' in foreign exchange. If this was the intention of the legislature, as is apparent from the above discussion, then it has to be inferred that the condition of 'incurred in foreign exchange' was also applicable to the expenses incurred on freight, telecommunication charges and insurance. And, consequently, the aforesaid conjunction or should be read as and . 13.1 In view of the above discussion, therefore, we have to hold that the expenses which were incurred in Indian rupee are not to be deducted. The assessee succeeds on this point. 13.2 However, we find that the AO and the CIT(A) had no occasion to examine whether the telecommunication expenses of Rs. 15,90,132 were incurred in Indian rupee. Therefore, the matter is remitted back to the file of the AO, with the limited purpose of verifying whether the expenses of Rs. 15,90,132 were incurred in Indian rupee. He will pass a fresh order on this point after giving adequate opportunity of being heard to the assessee. The first issue, forming part of ground No. (2), and relating to telecommunication expenses of Rs. 15,90,132, is decided accordingly. 14. We now, take up the second issue, forming p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce--Final acceptance of the software developed. From the above, activity g is usually undertaken onsite at the client location. Activities d to f and h can offshore and/or onsite. Hence the need to send the personnel of the appellant to the client's location arises based on the nature of the project, its size, complexity and requirement of the client. Thus it is an integral part of the software development process. 16. During the hearing, our attention was drawn to a CBDT Circular No.694 dt. 23rd Nov., 1994, giving certain clarification regarding tax holiday under Sections 10A and 10B for units producing computer software in Export Processing Zones (EPZs), Software Technology Parks (STPs) or 100 per cent export-oriented units (EOUs). It inter alia clarified as under: Since computer programmes are not physical goods but are developed as a result of an intellectual analysis of the systems and methods followed by the purchaser of the programme, it is often prepared onsite, with the software personnel going to the client's premises. Doubts have been raised whether units taking up such production of software at the client's premises would be eligible for the tax liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e., export of computer software/goods, for understanding the term total turnover' in the context of Section 10A, the principles laid down by various decisions in interpreting the term in the context of Sections 80HHC and 80HHE would be relevant. The following principles have been laid out in various judicial precedents in the context of Sections 80HHC and 80HHE: The object of the section would be required to be kept in mind in order to encourage exports. The eligible profits cannot be reduced artificially by including certain sums in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts, which have an element of profit in it. The numerator and the denominator in a particular formula should be of the same category or should comprise of the same ingredients. Otherwise, there will be no uniformity or harmony. If the numerator is apple the denominator should also be apple. If the numerator is apple and the denominator consists of apple and orange then there can be no uniformity or harmony. The term 'total turnover' should be understood and interpreted vis-a-vis the definition of 'export turnover'. The interp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits under Section 80HHC(3), the 'processing charges' are to be included in the total turnover'. It was noted by the Court that its earlier judgment in the case of CIT v. Lakshmi Machine Works (supra) had no application to the present case. 22.2 It needs to be clarified here that the decision of the Supreme Court dt. 25th April, 2007 in the case of Lakshmi Machine Works (supra) was discussed but it was not overruled in their subsequent judgment dt. 13th Nov., 2007 in the case of K. Ravindranathan Nair (supra). The Court observed very clearly that their earlier judgment in the case of Lakshmi Machine Works (supra) had no application to the case of K. Ravindranathan Nair (supra). 22.3 The effect of the judgment of the Supreme Court in the case of K. Ravindranathan Nair (supra), in context of the facts of the present case, is that what is deducted from the 'export turnover' (the numerator in the formula) need not necessarily be deducted from the 'total turnover' (the denominator in the formula). 23. We like to explain the above point in the context of the provisions of Section 10Bas applicable to the facts of the present case. In the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , presumably on the last day of the accounting year, without an actual settlement of the forward contracts in foreign currencies having been brought about and, in that sense, the amounts in question represented merely notional profits and could not be subjected to tax. 26. A similar view was taken by the Madras High Court in the case of Indian Overseas Bank v. CIT (2001) 250 1TR 146 (Mad). We respectfully follow the precedents and reject the ground No. 3. Ground No. 4 4. Payment in lieu of notice period--Rs. 9,90,636. The learned CIT(A) failed to appreciate the appellant's contention although the issue was not raised and considered before the AO on merits and facts of the case. 27. It was claimed by the assessee, for the first time, before the CIT(A) that the payment received from the employees who resigned and left, in lieu of the notice period, was incorrectly included and offered for tax as 'income from other sources'. In the written explanation filed before the CIT(A), it was submitted as under: Payment in lieu of notice period from employees who resigned is Rs. 9,90,636 and this has been incorrectly included as income from other sources in the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the appellant on merits also. This ground of appeal is therefore dismissed. 29. In the case of Goetze (India) Ltd. v. CIT (2006) 204 CTR (SC) 182 : (2006) 284 ITR 323 (SC), the Court held as under: For the asst. yr. 1995-96 the assessee filed its return on 30th Nov., 1995 and on 12th Jan., 1998 sought to claim a deduction by way of letter addressed to the AO. The AO disallowed it on the ground that there was no provision in the IT Act, 1961 allowing an amendment in the return without a revised return. The Tribunal confirmed this, as did the High Court. On appeal to the Supreme Court contending that it was open to the assessee to raise points of law before the Tribunal. The Supreme Court dismissed the appeal, making it clear that the decision was restricted to the power of the assessing authority to entertain a claim for deduction otherwise than by a revised return, and did not impinge on the power of the Tribunal under Section 254 of the IT Act, 1961. 30. In our opinion the claim of the assessee fails on two accounts. Firstly, the receipt from the employees who left the job and made the payment in lieu of notice period has to be treated as revenue in nature. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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