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The Commissioner of Income-Tax, The Asst. Commissioner of Income-Tax, Queens Road, Bangalore Versus M/s KSHEMA TECHNOLOGIES LTD.

2016 (2) TMI 43 - KARNATAKA HIGH COURT

Computation of deduction under section 10A - Tribunal held that expenses incurred in foreign currency for providing software development services outside India should be excluded from the export turnover for the purpose of computation of deduction U/s. 10A - Held that:- An identical issue relating to section 80HHE of the Act was considered by this court in the case of 'THE COMMISSIONER OF INCOME TAX & ANOTHER v. MOTOR INDUSTRIES CO., LTD., [2015 (7) TMI 876 - KARNATAKA HIGH COURT ] and this cour .....

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e expenditure incurred in the development or production of computer software though is in the nature of technical services, is not so, for the purposes of the Act and the said expenditure cannot be excluded in computing export turnover. Thus, we are of the view that the said Judgment is squarely applicable to the facts of the present case. Accordingly, we answer the first question in favour of the assessee and against the revenue.

Exchange fluctuation loss - Tribunal held that exchang .....

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provisions of law as enunciated in the case of Tata Elxsi Limited [2011 (8) TMI 782 - KARNATAKA HIGH COURT ] - Decided in favour of the assessee and against the revenue - ITA No. 703/2009 - Dated:- 8-1-2016 - N. K. Patil And S. Sujatha, JJ. For the Appellant : Sri K.V. Aravind, Adv For the Respondent : Sri. T. Suryanarayana, Adv. and M/s. King and Partridge, Adv JUDGMENT This appeal is directed against the order passed by the ITAT, Bangalore in ITA No.620/Bang/2008 dated 29.05.2009, relating to .....

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rnover while computing deductions under section 10A of the Act. It is further held that the exchange fluctuation loss of ₹ 74,25,340/- should not be considered for reduction from the total turnover for the purpose of computation of deduction under section 10A of the Act. On appeal, the Appellate Commissioner upheld the finding of the Assessing Officer. On further appeal, the Tribunal reversing the orders of the Authorities, held that expenses incurred in foreign currency for providing soft .....

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following substantial questions of law. "[i] Whether the Tribunal was correct in holding that expenses incurred in foreign currency for providing software development services outside India of ₹ 17,80,68,049/- should be excluded from the export turnover for the purpose of computation of deduction U/s. 10A of the Act? [ii] Whether the Tribunal was correct in holding that the exchange fluctuation loss of ₹ 74,25,340/- should be reduced from the total turnover for the purpose of co .....

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0A of the Act, as the services rendered by the assessee relating to the software development has to be construed as technical service, excluded from the export turnover in terms of Explanation (2)(iv) of section 10A of the Act. 6. Secondly, it is contended that the exchange fluctuation loss of ₹ 74,25,340/- should be reduced from the total turnover for the purpose of computation of deduction under section 10A of the Act, placing reliance on sub-section [4] of section 10A of the Act. 7. In .....

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service. It is contended that though the Assessing Officer has arrived at a conclusion that the business of the assessee is to develop the software, however, while considering the question whether the expenses incurred in foreign exchange by the assessee is an integral part of the development of computer software or towards rendering technical services, concluded that the expenditure incurred in the foreign currency is for providing technical services outside India. 9. It is further contended th .....

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allowed the claim of deduction made by the assessee, directed the Assessing Officer not to exclude expenses incurred in foreign currency for providing software development outside India from the export turnover. This Judgment relied on by the Tribunal is confirmed by this court in the case of 'THE COMMISSIONER OF INCOME TAX AND ANOTHER v. M/S. MPHASIS LIMITED' [ITA No.1075/2008 connected with ITA No.196/2009 - DD 1.8.2014]. 10. It is also contended that the second question raised in this .....

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ssment order, the role of the assessee is of developer of software and not a consultant to any project. It is also categorically held by the assessing authority that the purpose of business of the assessee is to develop the software and in such process, expenditure is incurred in foreign currency to provide technical services outside India. Having held so, the assessing authority proceeded to conclude that the nature of expenditure and the nature of business are two different and distinct concep .....

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e Act 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. What is .....

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India. Explanation (3) inserted by Finance Act, 2001 with effect from 1.4.2001 explains that the profits and gains derived from on site development of computer software including services for development of software, outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. Thus, it is clarified by the legislature by inserting explanation (3) to section 10A that the profits and gains derived from on site development of computer software .....

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R v. MOTOR INDUSTRIES CO., LTD., [in ITA No.776/2007 and connected matters DD 13.6.2014] and this court has held that though the services rendered in deputing the software engineers abroad who among other things have to do testing, installation and monitoring of software supplied to the client, appears to be technical in nature, it does not fall within the clause of providing technical service outside India in connection with the development or production of computer software and accordingly suc .....

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venue. This court has held that the expenditure incurred in the development or production of computer software though is in the nature of technical services, is not so, for the purposes of the Act and the said expenditure cannot be excluded in computing export turnover. Thus, we are of the view that the said Judgment is squarely applicable to the facts of the present case. Accordingly, we answer the first question in favour of the assessee and against the revenue. 15. As regards question No.2, S .....

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liance on the Judgment of the Apex Court in the case of Punjab Stainless Steel Industries [supra] to contend that total turnover is the aggregate amount for which sales are effected by the company, referring to the guide to the Company Audit issued by the Institute of Chartered Accountants of India in the year 1980, while discussing sales. The learned counsel contended that the exchange fluctuation loss of ₹ 74,25,340/- should be reduced from the total turnover while computing deduction un .....

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