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TMI Blog2008 (2) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... on-site expenditure in foreign exchange from total turnover. 2. ......" The assessee, through its elaborate grounds raised in the cross-objection, disputed the action of the CIT(A) in upholding the exclusion of site expenses incurred in foreign exchange from the export turnover. 3. Brief facts of the case are that the assessee, engaged in the business of developing software, is a 100 per cent EOU. In the assessment, the Assessing Officer excluded the on site expenditure spent in foreign exchange from the export turnover as per clause (iv) to Explanation 2 of section 10A of the Income-tax Act. After excluding the same, exemption under section 10A has been determined at Rs. 98,35,106 by the Assessing Officer as against the assessee's claim for exemption of Rs. 2,55,85,772. The CIT(A), after considering the assessee's submission held that the Assessing Officer has correctly excluded the expenditure from the convertible foreign exchange received. However, the CIT(A) accepted the alternative contention of the assessee that since the assessee's turnover consists only of exports and there being no other turnover, while working out the Export Turnover minus Onsite Expenditure, the Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years : Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the 51 undertakings began to manufacture or produce such articles or things or computer software in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yond the custom station and profit on sale of licence, cash assistance, duty drawback etc. Thus the term 'export turnover' does not include freight and insurance attributable to transport. Explanation (c) to section 80HHE is similar to clause (iv) of Explanation 2 of section 10A. 7.2 On an analysis of definition of 'export turnover' as provided in clause (iv) of the Explanation 2 to section 10A, we notice that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure i.e. freight, telecommunication charges, or insurance charges is that delivery of goods should be Free on Board (FOB). The C.B.D.T. vide its Circular No. 564 dated 5-7-1990 [184 ITR (St.) 137] clarified this aspect in respect of deduction under section 80HHC, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration received in convertible foreign exchange. In cases where such expenses are separately charged, the expenses are required to be reduced from the consideration received for the purpose of arriving at the export turnover. The logic and reason behind this have been explained by the CBDT vide its Circular No. 564 dated 5-7-1990 quoted above that the delivery of the goods should be Free on Board (FOB). Both the situations can be explained by a simple example. Mr. X exported goods out of India and received consideration of Rs. 1,000 in convertible foreign exchange which is only in respect of goods. Mr. Y in a similar type of transaction charged Rs. 1,000 for goods and Rs. 100 for such expenses. Total convertible foreign exchange received in case of X is Rs. 1,000 and in case of Y is Rs. 1,100. In case of Mr. Y Rs. 100 is required to be deducted from consideration received as he is getting Rs. 100 attributable to delivery of the goods. In case of X no deduction is required from consideration received in convertible foreign exchange. Thus by reduction of Rs. 100 in case of Y the goods exported is FOB. The goods exported at FOB is important in the sense that deduction under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... significant. What is to be excluded is out of what is received. In the case under consideration the assessee received consideration against software i.e. goods. For this purpose, the assessee has demonstrated by referring invoices (Pages 4.1 to 4.4) and agreement (page 2.1) of which photocopies have been placed in assessee's paper book. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have rights developed into a new generation technology for the products and to have various support services performed related to its business. The assessee contractor has the expertise and facilities to undertake such development work and support services. The nature of business of assessee pointed out is as under : "Aristasoft International (P.) Ltd. was incorporated under the Companies Act, 1956 with Registrar of Companies, Hyderabad on 15-5-1999 vide No. 01-31633 of 1999. It is a 100 per cent Export Oriented Software Development Unit registered under STP scheme vide letter No. STP PER: 34 (1999)/EOP/31/99 dated 12-6-1999. Aristasoft Intl. Pvt. Ltd. was a subsidiary of Aristasoft Corporation, California, US and was its Global Technology Centre (GTC). Aristasoft Corp. was focusing on high tech manufacturing industry and was engaged in providing integrated business process for its customers relying heavily on its GTC. It used the ASP model to serve its customers. Aristasoft Corp. identified business applications that would benefit the high tech industry that include JD Edwards (ERP), Clarify (CRM), Agile (PDM) among others. The business plan was to sub-lenience these applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The project will be billed by the "Contractor" to the "Developer" at a flat fee as previously agreed and approved and will be based on estimated efforts spent multiplied by an hourly rate of US $ 15 for Junior Programmers, US $ 20 for Senior Programmers, US $ 30 for Project Leaders and US $ 40 for Centre Heads. In case the efforts put in exceed 10 per cent of the previously estimated efforts due to no fault of the "Contractor", then the "Developer" will be required to pay for additional efforts and it will be negotiated in good faith between the "Developer" and the "Contractor". 2.Ongoing Software Operation (a )Offsite (At contractor's premises) Services projects executed from the "Contractor" site. Such ongoing projects will be executed on the basis of commonly used T & M (Time and Material) basis : The Ongoing Software Operation Service 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 Centre Heads. For the Ongoing Software Operation Service Projects, the invoices will be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of goods either for sale or manufacture, those expenditures relate to goods and such expenditures cannot be described independent expenses so as to say in the nature of technical services. Here distinction is to be noted in respect of consideration received against expenditures incurred for the purpose of goods sold or manufactured or produced and consideration received against independent services rendered. Up to the point of sale of goods expenditures incurred is related to goods. Such expenses incurred cannot be said to be expenditure for technical services. If the technical services are rendered independently which 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 service ..... X X X X Extracts X X X X X X X X Extracts X X X X
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