TMI Blog2013 (4) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... iture in foreign currency included reimbursement of expenses for deployment of personnel to study the requirement of foreign customers and the reimbursement of expenses from the foreign buyers cannot partake the character of export turnover. 2.3 The learned CIT(A) ought to have appreciated that as per the provision of explanation 2(iii) for the purpose of exemption u/s.10B which reveals that the Export turnover does not include fr2ig:lt, telecommunication charges or insurance attributable to the delivery of the computer software outside India and expenses incurred in foreign currency for providing technical service outside India. 2.4 It is submitted that the Hon. Jurisdictional ITAT A Chennai Bench, in the case of M/s. iSOFT R D Pvt. Ltd. Vs ACIT vide its order dated on 12-05-2008, has held that the items excluded as per the definition of Export Turnover should not be removed from the total turnover for computing deduction u/s.10A. 2.5 It is submitted that the decision relied upon by the CIT(A) in the assessee's own case for Asst Year 2005-06 has not become final and an appeal has been filed before the Hon'ble High Court which is pending. 5. Ground Nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded in the export turnover of the assessee for the purpose of computing the deduction/exemption u/s 10A of the Act. 9. The ld. CIT(A), after considering the submissions of the assessee, held that in view of the above provisions, the assessee s claim of expenses by way of telecommunications incurred in relation to the delivery of software to the clients outside the country is not includable in the export turnover. Hence, the Assessing Officer reasonably estimated the telecommunication expenses incurred outside the country at 30% of the total expenses and excluded from the export turnover. The action of the Assessing Officer is as per law and the assessee fails in its appeal on this ground. 10. Being aggrieved by the said order of the ld. CIT(A), the assessee is in appeal before us. The assessee is also in appeal before us on the ground that alternatively, if the telecommunication expenditure is excluded from the export turnover then the same should also be excluded from the total turnover for computing deduction u/s 10A of the Act. The assessee submits that this ground of the assessee has not been adjudicated upon by the ld. CIT(A). 11. The Revenue is in appeal on the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oice amount pertains to the recovery of the aforesaid items. We are also of the view that in an appropriate case it would be open to the Assessing Officer to exercise such a power in order to apply the formula in a meaningful manner. 32. The learned representative for Adventnet Development Centre (India), one of the interveners submitted that the definition of export turnover in clause (iii) of Explanation 2 below section 10B was not based on the concept of Net inflow of foreign exchange as sought to be made out in the order of the Chennai Bench of the Tribunal in California Software Co. Ltd. s case (supra) because the condition that the assessee should have used foreign currency is applicable only to the expenses incurred by it in providing the technical services outside India and is not applicable to the expenses incurred in freight, telecom charges or insurance attributable to the delivery of the goods outside India. We have gone through the order especially paragraphs 22.3 and 23. In para 22.3 the Tribunal has observed that the effect of the judgment of the Supreme Court in the case of K. Ravindranathan Nair (supra) is that what is deducted from the export turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have no element of turnover in them and are mere reimbursement of the expenses. 35. In California Software Co. Ltd. s case (supra), the Chennai Bench of the Tribunal, as already noticed, has held that the objective of the definition of export turnover in section 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 paragraph (para 23) 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 expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have carefully considered the issue which is short but interesting. The basic issue to be resolved is whether parity should be maintained between the ingredients of export turnover and total turnover for the purpose of applying the formula prescribed by sub-section (4) of section 10B. The expression export turnover has been defined in clause (iii) of Explanation 2 below the section, whereas there is no definition of the expression total turnover for the purposes of the section. This is precisely the difficulty arising in this case and the question is whether the difficulty can be surmounted and if so by what means. The means suggested on behalf of the assessee and the interveners is that the expression total turnover should also be interpreted in the same manner by excluding therefrom the freight, telecom 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. We see merit in the contention. We have attempted, to the best of our ability, to understand the rationale behind such exclusion in the definition of export turnove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ula prescribed therein. The same is reproduced below : 15.6 For the computation of profits derived from the export of articles or things or computer software, subsection (4) provides that the profits derived from such exports shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of business. The profits of the business in the given context would mean the profits of the business carried on by the undertaking to which the provisions apply. The working formula for arriving at the export profits will be as under : Export profits = Profits of the business Export turnover Total turnover The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100 per cent export oriented undertaking as the case may be and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has been excluded from the export turnover should also be excluded from the total turnover and otherwise it would be an anomaly. By implication at least, the CBDT seems to be of the view that parity should be maintained between both the expressions. Before the insertion of the definition of total turnover by clause (ba) of the Explanation, there was no definition of total turnover in section 80HHC. The expression had to be given a meaning and it was done by the Calcutta Bench of the Tribunal in the case of Chloride (India) Ltd. (supra). There the question was whether the sales-tax and excise duty which are not leviable on export turnover and, therefore, did not form part of the export turnover, should be included in the total turnover as was done by the Assessing Officer in that case. The Calcutta Bench held that there should be parity between the numerator in the formula (export turnover) and the denominator (total turnover) despite the fact that there was no definition of the total turnover in the section as it stood for the assessment year 1986-87 which was the year before the Tribunal. That case was thus decided on first principles, the principle applied being that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra). The Special Bench particularly noticed that the Calcutta High Court, even after referring to the judgment of the Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 held that the definition of turnover in one enactment (sales-tax law) may not hold good under all other enactments. Ultimately the Special Bench came to the conclusion that it could be visualized that it may not always be true that the term turnover included excise duty and it depends upon the provisions of law and the fact that the excise duty did not go into the common till of the assessee and did not become part of circulating capital (para 23 of the order). In para 25, the Tribunal concluded as under: 25. In view of the aforesaid discussion, we are of the opinion that though total turnover may include the receipts of excise duty and sales-tax etc., in its general parlance and under specific statute, because of its wider coverage in the definitions given thereunder, it has to be given a restrictive meaning while computing the export profit for the purposes of section 80HHC namely only that part of the receipt for sale consideration is to be taken as part of the total tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver is the numerator whereas the total turnover is the denominator. There can hardly be any room for scepticism that the said formula had been prescribed to arrive at the profits from exports. It was rightly contended by Dr. Pal that if the denominator was to include octroi, sales tax and excise duty and if the numerator excluded those items the formula would certainly become unworkable. [Emphasis supplied] The Calcutta High Court also agreed with the Bombay High Court judgment (supra) and held that since octroi, excise duty and sales-tax cannot have any element of profit and, therefore, these items cannot be included in the total turnover. Thus both in the Bombay and Calcutta judgments the cases were decided not only on the footing that the sales-tax, octroi and excise duty which were statutory levies did not contain any element of profit and hence were not includible in the total turnover, but they were also decided on the reasoning that parity should be maintained between the ingredients of the export turnover and total turnover which were the numerator and denominator respectively in the statutory formula prescribed by section 80HHC. 23. The above discussion shows th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly excise duty and sales-tax do not involve any such turnover and, therefore, they have to be excluded from the total turnover. These receipts are recovered by the assessee on behalf of the Government, being indirect taxes. The above propositions laid down in the judgment unmistakably show that the principle of parity between export turnover and total turnover was affirmed by the Supreme Court in the case of LMW (supra). The contention of the revenue before us was that the judgment is confined to the facts of the case. Certainly every judgment is rendered on the basis of the facts of the case. But where a ratio is laid down and that is applied to the facts of the case, the ratio is applicable to similar factsituations. In our understanding the ratio laid down by the Supreme Court in the case of LMW (supra ) is an affirmation of the principle of parity between the export turnover and the total turnover for the purpose of section 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 (supra) was followed by the Supreme Court in Catapha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e common, they are being disposed of together as under: 25. The brief facts of the case are that the Assessing Officer observed that the assessee-company has received dividend of ₹ 2,70,72,709/- which was claimed as exempt u/s 10(34) of the Act. He noted that the assessee has not considered any expenditure attributable towards earning of such exempt income. He observed that a reasonable expenditure is necessary to earn the exempt income considering the human resources cost, interest cost of the investment and other relevant cost which should go into earning of the exempt income . Acc by invoking the provisions of section 14A and applying Rule 8D, he computed the disallowance for expenses incurred for earning the exempt income as % of the average value of investment which amounted to ₹ 70,55,114/- and disallowed the same while making the assessment. 26. Being aggrieved, the assessee filed appeal before the ld. CIT(A) and submitted that in view of the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs DCIT, 328 ITR 81 (Bom.), Rule 8D was applicable from assessment year 2008-09 onwards and not retrospectively and therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is allowed and that of the Revenue is dismissed. 33. The assessee has raised the following grounds of appeal: Issue 3 - Grounds of appeal not adjudicated by the learned CIT(A) The learned CIT(A) has erred in not adjudicating on the following grounds of appeal raised by the Appellant: 7. That the learned AO has erred in computing the quantum of deduction under section 10A. 8. That the learned AO has erred in disallowing expenditure as per the provisions of section 14A from profits and gains of business after computing the deduction under section 10A of the Act. 9. Depreciation on cost of computer software incurred during AYs 2002-03,2003-04,2004-05 and 2005-06 has been allowed at 60 percent. However, the learned AO has erred by not allowing depreciation on the written down value of the computer software brought forward from the AYs 2002-03, 2003-04, 2004-05 and 2005-06. 10. Depreciation on electrical installations for the AYs 2004-05 and 2005-06 has been allowed at the rate of 15 percent. However, the learned AO has erred by not allowing depreciation on the written down value of the electrical installations brought forward from Ays 2004 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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