Polaris Consulting and Services Limited v. Principal Commissioner of Income-tax-5, Chennai
[Citation -2020-LL-0911-95]

Citation 2020-LL-0911-95
Appellant Name Polaris Consulting and Services Limited
Respondent Name Principal Commissioner of Income-tax-5, Chennai
Court HIGH COURT OF MADRAS
Relevant Act Income-tax
Date of Order 11/09/2020
Assessment Year 2010-11
Judgment View Judgment
Keyword Tags technical services outside india • foreign currency expenditure • export of computer software • telecommunication charges • computation of deduction • development of software • expenditure incurred • computing deduction • export of software • services rendered • transfer pricing • project expenses • business income • dividend income • operating cost • exempt income • cost incurred • export profit
Bot Summary: 12.From the order passed by the CITA, we are able to see that the submissions made by the assessee, in the form of paper book, was forwarded to the Assessing Officer and a report was called for and the the Assessing Officer has also submitted his report, but we do not find any reference to such report in the order of the CITA nor it is clear whether the assessee was favoured with a copy of the report of the Assessing Officer. The finding rendered in the above appeals in favour of the assessee would show that the same was rendered upon appreciating the factual aspect regarding the nature of contract entered into by the assessee. In the draft Assessment Order, the Assessing Officer refers to the show cause notice issued to the assessee, calling upon the assessee to explain as to why the expenditure incurred in foreign exchange be not excluded from the '''Export Turnover''', while computing deduction under Section 10 AA of the Act. The Assessing Officer did not agree with the assessee in referring to the decisions and explanation 1 to Section 10 AA of the Act, though noted that the explanation states that the expenses should be incurred in foreign exchange in rendering of service outside India, without considering whether any services was rendered by the assessee outside India, holding that the said provision is 19/34 T.C.A.No. After steering clear as to what would be ''Export Turnover'' as defined under the Act, the DRP exempted the expenditures incurred by the assessee and held that the expenditures are not in respect to services rendered by the assessee outside India and therefore, it cannot be excluded from the ''Export Turnover'' and the Assessing Officer was directed to delete the exclusion of foreign exchange from the 'Export Turnover' of the business and the deduction under Section 10 AA to be recomputed as follows: 21/34 T.C.A.No. The Tribunal did not decide as to whether it was expenses incurred by the assessee in respect of services rendered by the assessee outside India. Which is a fact finding expert body, the assessee placed all materials and established that the assessee did not render any services outside India and they operate on a cost plus model and the reimbursement constitute a part of the operating cost which was recovered by the assessee from their associated enterprises.


T.C.A.No.292 of 2018 IN HIGH COURT OF JUDICATURE AT MADRAS DATED : 11.09.2020 CORAM HONOURABLE MR.JUSTICE T.S.SIVAGNANAM and HONOURABLE MRS.JUSTICE V.BHAVANI SUBBARAYON T.C.A.No.292 of 2018 M/s.Polaris Consulting and Services Limited Virtusa Polaris Foundation, No.34, IT Express Way, Chennai 603 103. .. Appellant Versus Principal Commissioner of Income Tax-5, 121, Nungambakkam High Road, Nungambakkam, Chennai 600 034. .. Respondent Prayer:- Tax Case Appeal filed under Section 260-A of Income Tax Act, 1961, against order of Income Tax Appellate Tribunal, ''A'' Bench, Chennai dated 29.06.2017 in I.T.A.No.2315/MDS/2016. For Appellant : Mr.N.V.Balaji For Respondent: Ms.R.Hemalatha Senior Standing Counsel 1/34 T.C.A.No.292 of 2018 JUDGMENT [Order of Court was made by T.S.SIVAGNANAM, J.] This appeal, filed by assessee, under Section 260A of Income Tax Act, 1961 ('the Act' for brevity) is directed against order dated 29.06.2017 passed by Income Tax Appellate Tribunal Bench 'A' Chennai ('the Tribunal' for brevity) in I.T.A.No.2315/MDS/2016 for Assessment Year 2010-11. appeal is entertained on following Substantial Questions of Law: 1.Whether under facts and circumstances of case Income Tax Appellate Tribunal was right in upholding order of lower authorities whereby disallowance was made under Section 14A read with Rule 8D of Income Tax Rules? 2.Whether under facts and circumstances of case Income Tax Appellate Tribunal was right in not adjudicating on ground that CIT (A) did not adjudicate ground that appellant was eligible for deduction under Section 10A of Act, which was assessed on account of disallowance made under Section 14A of Act? 2/34 T.C.A.No.292 of 2018 3. Is conclusion of Tribunal that expenditure incurred in foreign currency by Appellate needs to be excluded from 'Export Turnover' for purpose of computation of deduction under Section 10A of Act not perverse and arbitrary, particularly without considering fact that such expenditure were not part of 'Export Turnover'? 4. Whether under facts and circumstances of case Tribunal was right in holding that expenditure incurred by appellate in foreign currency which was not included in 'Export Turnover' is to be excluded from 'Export Turnover'? 2. We have elaborately heard Mr.N.V.Balaji, learned counsel for appellant / assessee assisted by Ms.M.P.Lakshmi, learned counsel and Ms.R.Hemalatha, learned Senior Standing Counsel for Revenue. 3. assessee is Company engaged in business of software development and for assessment year under consideration (AY 2010-11), assessee filed its Return of Income computing total income at 3/34 T.C.A.No.292 of 2018 Rs.52,87,83,933/- under normal computation and Rs.137,13,42,888/- under Book Profit Method. assessee earned Dividend income of Rs.14,76,75,464/- from investment in shares. assessee claimed that he did not incur any expenditure for earning said income. Assessing Officer while completing assessment under Section 143(3) read with Section 92CA(4) by order dated 28.03.2014, disallowed sum of Rs.1,71,68,777/- under Section 14A of Act read with Rule 8D of Income Tax Rules (Rules). Assessing Officer in doing so rejected assessee's contention that no expenditure was incurred for earning exempt income. 4. Assessing Officer also recomputed deduction under Section 10A to Rs.76,83,44,038/- by refusing certain items from 'Export Turnover'. Assessing Officer did not give deduction under Section 10A of Act for disallowance made by him under Section 14A of Act. Aggrieved by such order, assessee preferred Appeal before Commissioner of Income Tax (Appeals)-3, Chennai [CIT(A)]. It upheld order of Assessing Officer in respect of disallowance under Section 4/34 T.C.A.No.292 of 2018 14A of Act and did not allow deduction under Section 10A of Act for disallowance made under Section 14A of Act. With regard to exclusion of foreign currency expenditure from 'Export Turnover' in computing deduction under Section 10A of Act, CIT(A) held that foreign currency expenditure should be excluded from 'Export Turnover' and same also be excluded from 'Total Turnover'. Aggrieved by same, assessee filed appeal before Tribunal. Tribunal upheld order of Assessing Order and CIT(A), with regard to disallowance under Section 14A read with Rule 8D of Act. Tribunal with regard to exclusion of expenditure incurred under foreign currency while computing deduction under Section 10A of Act, held that both 'Export Turnover' and 'Total Turnover' shall be of same factor. Therefore when expenditure incurred in foreign currency is not included in 'Total Turnover' and same cannot also be included in 'Export Turnover'. Accordingly Appeal stood rejected. Challenging same, assessee is before us by way of this Appeal. 5/34 T.C.A.No.292 of 2018 5. With regard to first Substantial Question of Law, Assessing Officer, CIT(A) and Tribunal, concurrently held against assessee. assessee's contention was that no expenditure was incurred by them for earning exempt income. assessee were not able to substantiate that fact before authorities or before Tribunal. Both CIT(A) and Tribunal reappreciating factual matrix and found that investment during year increased from Opening Balance of Rs.3,21,68,40,000/- to Closing Balance of Rs.5,17,93,70,000/-. Further Assessing Officer also found that value of assets also increased substantially to Rs.1,84,18,32,000/- from Rs.1,76,96,30,000/- and therefore applied Rule 8D and made additions under Section 14A of Act and we find no error in order of Assessing Officer as confirmed by CIT(A) and Tribunal. Accordingly Substantial Question of Law No.1 is answered against assessee. 6. Substantial Questions of Law Nos.2 and 3 can be taken together. According to assessee, Tribunal did not adjudicate ground raised by assessee that expenditure amounting to 6/34 T.C.A.No.292 of 2018 Rs.31,11,63,096/- incurred in foreign currency from 'Export Turnover',. While computing deduction under Section 10A of Act, Tribunal held that foreign currency expenditure should not have been included in 'Export Turnover' in first place. According to assessee, point raised by them was never adjudicated by Tribunal. With regard to expenditure incurred in foreign currency is concerned, Tribunal came to conclusion that expenditure incurred in foreign currency towards communication expenses, Project Travel, Software development charges, overseas project expenses were excluded from 'Export Turnover' and same shall also be excluded from 'Total Turnover'. So far as this issue is concerned, this Court has considered identical question in assessee's own case in T.C.A.No.961 & 962 of 2018 dated 23.10.2018 for Assessment Year 2001-02. 7. It is argument of learned Senior Standing Counsel that in instant case what was disallowed was expenditure relating to telecommunication, freight and insurance and in assessee's case for assessment years 2001-02 and 2002-03, it was expenses for technical 7/34 T.C.A.No.292 of 2018 services. Therefore, it is submission that if at all contended that issue has not been considered, then matter has to be remanded to Tribunal for fresh consideration. In this regard, learned counsel referred to Clause 4 Explanation 2 to Section 2(10) of Act. 8. We have perused judgment in case of M/s.Polaris Consulting and Services Ltd., Vs. Deputy Commissioner of Income Tax, (T.C.A.No.961 and 962 of 2008 dated 23.01.2018). First Substantial Question of Law framed in those appeals was Whether Tribunal was right in upholding exclusion of expenditure incurred in foreign currency in export of software from purview of ''Export Turnover'' for purpose of computing deduction under Section 10A of Act? Therefore, question framed for consideration was with regard to exclusion of expenditure incurred in foreign exchange. question was answered in favour of assessee and against Revenue on following terms: 9.We have perused order passed by Tribunal and finding on this issue is in paragraph No.8. Tribunal referred to clause (iv) to Explanation (2) to Section 8/34 T.C.A.No.292 of 2018 10A of Act, which defines ''Export Turnover'' and referred to Explanation (2) to Section 10A of Act, which defines term 'computer software' and held that 'technical services' include development of software, testing of software, domestication of software and since assessee is engaged in developing and providing software to meet need base of their customers, software development cannot be done without technical services and technical services is part and parcel of software development. Tribunal proceeded to add that software is 'goods' and involve technical services and is part and parcel of rendering services; no software development is possible without technical services; software development and technical services are two faces of one coin and there cannot be software without rendering technical services and hence held that finding of Assessing Officer is justified as well as that of CITA. 10.To be noted that assessee, while contesting appeal before CITA as well as before Tribunal, placed entire materials as regards development of computer software. assessee contended that they are engaged in development of computer software programme, which is distinct from rendering of pure technical services, which would comprise of 9/34 T.C.A.No.292 of 2018 advice/consulting in relation to computer programmes. They are registered with STPI and as per Registration Certificate, assessee's activity is developing computer software and they are not considered as exclusive technical service provider, as understood in software industry parlance. assessee proceeded to explain its activities, as per agreement with its clients, for developing software, which consisted of eight steps, they are as follows: "1.Scope-Ascertaining requirement of customer and undertaking indepth study on proposal. 2.Requirements definition Specification of basic concepts and operation design, in relation to final deliverable. 3.Designing-Designing of deliverable, from macro (overall flow of integrated software) and micro perspective (designing of each module of programme). 4.Application development Developing application (i.e. modules and 10/34 T.C.A.No.292 of 2018 related computer programmes and codes) as per requirements of customer. 5.Testing Developer Integration Testing, System Integration testing and User Acceptance Testing; to ensure that software developed works as required. 6.Defect fixing Rectifying errors that have arisen during testing process. 7.Production parallel run-Undertaking dry run of developed software system. 8.Customer user acceptance Final acceptance of Software developed. 11.The assessee's contention was that activity No.7 (supra) is usually undertaken onsite at client's location. Activity Nos.4 to 6 and 8 can happen offshore and/or onsite. need to send personnel of assessee to clients' location arises based on nature of project, its size and complexity and requirements of client. Further they reiterated that all activities are integral part of software development process and what is finally delivered to client is computer software, which is essentially computer programme and deliverable does not comprise of any advice on computer software/programme. assessee 11/34 T.C.A.No.292 of 2018 produced copy of Registration Certificate given by STPI, sample contract for development of computer programme, sample Statement of Work (SOW) in relation to sample contract, copies of filing with STPI and some sample invoices and related SOFTEX filings. Thus, by placing heavy reliance on these materials, assessee contended that it can be inferred that their business does not include rendering of any technical services on 'standalone basis'. Further, any service rendered, such as installation/training etc., is purely incidental to activity of development of computer programme, akin to seller of advanced machinery installing same and training user. assessee placed reliance on decision of Hon'ble Supreme Court in case of TATA Consultancy Services vs. State of Andhra Pradesh [(2004) 271 ITR 401]. By placing reliance on said decision, assessee contended that both branded software and unbranded/customised software have been held to be 'goods' by Hon'ble Supreme Court and computer software would be in nature of 'goods' and hence it will be erroneous to consider them as provider of 'technical services'. Further, by referring to customer contract and related statements of work and invoices, assessee contended that it is engaged only in activity of developing 12/34 T.C.A.No.292 of 2018 computer software and is not technical services provider. assessee also contended that there is distinction in law between development of computer programme and rendering of technical services and in this regard referred to Section 10AA of Act, defining ''Export Turnover''. 12.From order passed by CITA, we are able to see that submissions made by assessee, in form of paper book, was forwarded to Assessing Officer and report was called for and the Assessing Officer has also submitted his report, but we do not find any reference to such report in order of CITA nor it is clear whether assessee was favoured with copy of report of Assessing Officer. 13.Be that as it may. We may point out that CITA did not endeavour to examine scope of agreement. In fact, certain observations made by CITA would enure in favour of assessee. By way of illustration, in paragraph No.10(c) of Order of CITA, he would state that computer software cannot be defined or understood in narrow sense of term to mean only software in form of product/goods as claimed. As assessee is engaged in developing, transmitting and providing software to meet needs and requirements of clients, it encompasses 13/34 T.C.A.No.292 of 2018 providing all relevant technical services necessary and attendant with development and export of computer software. If this was finding of CITA, resultant conclusion should have been that assessee is only engaged in development of computer software and not rendering any technical services on 'standalone basis'. However, we find that conclusion arrived at by CITA stating that assessee is rendering technical services is incorrect conclusion not supported by any reasons. We would add by stating that CITA was required to examine documents produced by assessee to find out as to whether there was any technical services rendered on 'standalone basis'. This is more so because, CITA accepted that 'development of software' encompasses 'providing of technical services'. Therefore, unless and until there was material available in hands of CITA or Assessing Officer to come to conclusion that there is technical services on 'standalone basis' rendered by assessee, Assessing Officer and CITA were not justified in coming to conclusion that technical services were rendered by assessee and amounts paid need to be excluded. 14.Before Tribunal, assessee reiterated submissions raised before CITA and produced 14/34 T.C.A.No.292 of 2018 technical documents as well as scope of work and contract. However, Tribunal, in our considered view, did not make endeavour to examine as to whether interpretation of CITA was just and proper and whether relevant clauses in agreement and other documents were examined or not, but made standalone statement that software development and technical services are two faces of one coin. We fail to understand as to whether above is statement made out of personal knowledge of Tribunal or whether it is statement of law. If it is statement of law, it should have been duly supported by reasons and we find none. 15.Admittedly, decision of Tribunal should revolve on facts of particular case. Tribunal has not been established to give declaratory reliefs sans facts. Therefore, primordial requirement for authorities as well as Tribunal is to examine nature of contract between parties i.e. assessee and foreign entity. 16.On perusal of nature of contract and various steps, which have been enumerated therein, we find that element of 'technical services', have been rendered as integral part of software development 15/34 T.C.A.No.292 of 2018 process. There was no material available before Assessing Officer to split up transaction into two or to bisect transaction to find out element of 'technical services'. As rightly pointed out by assessee, this exercise has been done by Assessing Officer based on notes to accounts in financial statements, which would be impermissible. What is required to be examined is nature of services rendered by assessee to foreign entity. Thus, we are fully satisfied that 'technical services' rendered by assessee is not on 'standalone basis', but it is integral part of software development and up to step No.(8), as mentioned above, assessee is bound to render all assistance to foreign entity. Therefore, artificial split up of transaction by Assessing Officer, that too without any materials on his file, is wholly unsustainable. 17.For above reasons, we are constrained to set aside order passed by Tribunal and answer Substantial Question of Law No.1 in favour of assessee. 9. finding rendered in above appeals in favour of assessee would show that same was rendered upon appreciating factual aspect regarding nature of contract entered into by assessee. 16/34 T.C.A.No.292 of 2018 Therefore we are of considered view that decision in assessee's own case in T.C.A.No.961 & 962 of 2018 should enure in favour of assessee for assessment year under consideration namely AY 2010-11 also. 10. In case of M/s.Renault Nissan Technology & Business Centre India Private Limited vs. Commissioner of Income Tax 5 in T.C.A.No.212/2018 dated 17.07.2020, this Court has considered Substantial Question of Law as to whether Tribunal erred in holding that expenditure incurred in foreign exchange by assessee therein was to be excluded from 'Export Turnover' for purpose of computing deduction under Section 10AA of Act and question was answered in favour of assessee in following terms: 10. Before we consider such plea, we need to take note of crux of issue which was raised by assessee before Assessing Officer at first instance, reply to show cause notice issued by Assessing Officer, in their application before DRP and their submissions before Tribunal in appeal filed by Revenue. If facts are culled out from all 17/34 T.C.A.No.292 of 2018 proceedings, one should get answer to controversy which would help us to answer Substantial Question of Law framed for consideration. 11. In Accountant's Report in Form No.56F for assessment year under consideration, it has been stated that in respect of reimbursement of IT support, Travel and Technical related expenditure, there is no element of any provision of services and actual cost incurred has been reimbursed. Further these reimbursements constitute part of operating cost base of assessee which has been recovered by assessee from their associated enterprises at their respective arms length markups. Therefore, arms length nature of reimbursement transactions also reviewed, aggregated and analysed under TNMM analysis conducted for segments discussed in report. Report states that reimbursement of IT support and Travel & Technical related expenses appears to be consistent with arm's length standard from Indian transfer pricing perspective. 12. Subsequently, assessee submitted two letters, of which, letter dated 13.02.2013 would be relevant. Among other things, assessee referred to explanation 1 18/34 T.C.A.No.292 of 2018 to Section 10 AA of Act and stated that Company has not incurred any expenditure in foreign exchange on freight, telecommunication charges and insurance and thus, no amount is deductible from '''Export Turnover''' on this count. In draft Assessment Order, Assessing Officer refers to show cause notice issued to assessee, calling upon assessee to explain as to why expenditure incurred in foreign exchange be not excluded from '''Export Turnover''', while computing deduction under Section 10 AA of Act. In response to said show cause notice, assessee once again reiterated definition of '''Export Turnover''' in Explanation 1 to Section 10 AA of Act and submitted that term 'expense' used in above context would be only expenses in nature of freight, telecommunication or insurance and not any other expenses. assessee also relied upon certain decisions of Hon'ble Supreme Court and other High Courts and Tribunals. Assessing Officer did not agree with assessee in referring to decisions and explanation 1 to Section 10 AA of Act, though noted that explanation states that expenses should be incurred in foreign exchange in rendering of service outside India, without considering whether any services was rendered by assessee outside India, holding that said provision is 19/34 T.C.A.No.292 of 2018 patent and clear and expenditures incurred by assessee in foreign exchange should be excluded from ''Export Turnover'' for purpose of computing deduction under Section 10 AA of Act. 13. assessee filed application before DRP, in which, on this specific issue they have stating that assessee operates on cost plus model, 'Total Turnover' comprises of total cost plus arm's length mark up. Further they have specifically stated that they have no element of any provision of services and only actual cost incurred has been reimbursed to assessee; these reimbursements constitute part of operating cost base of assessee which has been recovered from associated enterprises and foreign exchange expenditures are components of 'Total Turnover', as these are reimbursed at arm's length mark up. After referring to decision in case of CIT Vs. Lakshmi Machine Works [(2007) 290 ITR 667], Commissioner of Income Tax Vs. Sudarshan Chemicals Industries Limited (2000 (245) ITR 769), CIT Vs. K.Rajendranathan Nari [(2004) 265 ITR 35 (Kerala)] and decision of Special Bench of Tribunal in case of ITO Vs.. Saksoft Limited [2009 121 TTJ 865 (ITAT) 20/34 T.C.A.No.292 of 2018 Chennai], assessee submitted that it follows cost plus model approach and 'Total Turnover' of Company comprised of Cost plus arm's length mark up and that there is no reimbursement of any expenditures so as to exclude same from ''Export Turnover'' and ''Total Turnover''. While considering said submission, DRP took note of definition of '''Export Turnover''' in explanation 1 to Section 10AA and observed that it necessary that any expenses incurred in foreign exchange by assessee should be in respect of rendering of services outside India. While framing points for determination, DRP observed that question is whether expenditures incurred by assessee in foreign exchange was in respect to services outside India. After steering clear as to what would be ''Export Turnover'' as defined under Act, DRP exempted expenditures incurred by assessee and held that expenditures are not in respect to services rendered by assessee outside India and therefore, it cannot be excluded from ''Export Turnover'' and Assessing Officer was directed to delete exclusion of foreign exchange from 'Export Turnover' of business and deduction under Section 10 AA to be recomputed as follows: 21/34 T.C.A.No.292 of 2018 PARTICULARS AMOUNT (INR ) Travel Expenses 41,199,254 IT&Technical Support 115,521,782 Services Reimbursement to Renault 69,851,671 Global management Reimbursement to Nissan 29,635,976 Motor Company Ltd., 14. Revenue filed appeal before Tribunal. To be noted main ground on which Revenue were on appeal before Tribunal was on direction of DRP to exclude foreign exchange expenditure. Unfortunately, Tribunal did not discuss matter but proceeded on basis that foreign currency expenditures cannot be considered as part of ''Export Turnover'' and at same time, it cannot form part of ''Total Turnover''. Tribunal did not decide as to whether it was expenses incurred by assessee in respect of services rendered by assessee outside India. assessee was faced with this issue at very first instance before Assessing Officer. assessee has explained, nevertheless, Assessing Officer did not take into consideration as to whether there were any services outside 22/34 T.C.A.No.292 of 2018 India and held against assessee and proceeded to make draft assessment. Before DRP, which is fact finding expert body, assessee placed all materials and established that assessee did not render any services outside India and they operate on cost plus model and reimbursement constitute part of operating cost which was recovered by assessee from their associated enterprises. This factual matrix had not been examined by Tribunal. 15. We find that no useful purpose would be served in remanding matter to Tribunal for fresh consideration as submitted by Revenue as alternate submission. principal submission of Revenue is to support order passed by Tribunal and seeking for dismissal of this appeal. Even in grounds of appeal filed by Revenue before Tribunal, cost plus model of functioning by assessee appears to be have not been disputed but their contention was that definition of '''Export Turnover''' in explanation 1 to Section 10 AA does not distinguish or exclude reimbursement or advances. In our considered view, issue is not as to whether reimbursement or advances, but issue is whether these were incurred by assessee in foreign exchange in 23/34 T.C.A.No.292 of 2018 respect of rendering services outside India. If it is established that no services have been rendered outside India and assessee has been reimbursed actual cost only, question of exclusion from ''Export Turnover'' does not arise. 16. submission of Ms.R.Hemalatha, learned standing counsel is that expenses should have direct nexus with interest of industrial undertaking. In support of such contention, reliance is placed on decision of Division Bench of this Court in CIT VS. Menon Impex Private Limited [2003 (128) Taxmann 11 (madras)] which was affirmed by Hon'ble Supreme Court of India in India Comnet International Private Limited Vs. ITO [2012 (26) Taxmann.com 349 (SC)]. 17. In our considered view, decision referred to by Revenue may not be of assistance to their case because, dispute is not with regard to whether there is direct nexus between amount and activity of industrial undertaking. issue in instant case is whether at all expenses were incurred for rendering any of services outside India. On facts, it has been established that no such services have been rendered. Therefore, we are of considered view that Tribunal fell in error in reversing decision of DRP. 24/34 T.C.A.No.292 of 2018 18. For all above reasons, appeal filed by assessee is allowed and order passed by Tribunal is set aside and order passed by DRP is restored and substantial questions of law is answered in favour of assessee. No costs. 11. identical question was considered by Hon'ble Division Bench in case of Commissioner of Income Tax-I, Chennai vs M/s.Zylog Systems Limited in T.C.A.No.312 and 315 of 2011 dated 20.02.2020 and question was answered in favour of assessee in following term: 6. relevant portion of judgment of Division Bench of Karnataka High Court in CIT -Vs- Mphasis Ltd., reported in [2016] 74 taxmann.com 274 (Karnataka) is quoted below for ready reference. 2. first substantial question of law arose for consideration before this Court in ITA No.776/2007 disposed of on 13.06.2014, wherein this Court has held at paras 18 and 19 as under:- 18. From aforesaid provision it is clear that consideration in respect of computer software received in or brought into India by assessee in convertible 25/34 T.C.A.No.292 of 2018 foreign exchange is deducted from profits of said business. In other words assessee is not liable to pay any income tax on such consideration received from export of computer software. However said 'Export Turnover' does not include freight, telecommunication charges or insurance attributable to delivery of computer software outside India or expenses if any incurred in foreign exchange in providing technical service outside India. In other words out of said 'Export Turnover' following amounts have to be deducted; a. freight b. telecommunication charges c. insurance attributable to delivery of computer software outside India;d. expenses, if any, incurred in foreign exchange in providing technical services outside India; 19. If assessee is engaged in business of providing technical services outside India in connection with development or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of 'Export Turnover'. said provision has no application in case of export out of India of computer software or its transmission from India to place outside India by any means. law makes distinction between technical services rendered in connection with export of 26/34 T.C.A.No.292 of 2018 computer software and export of technical services for purpose of development or production of computer software outside India. If technical services rendered by assessee's Engineers is in connection with export of computer software for purpose of testing, installation and monitoring of software such turnover do not fall within clause (ii) of subsection (1) of section 80HHE of Act. Such turnover falls within sub-clause (i) of subsection (1) of Section 80HHE of Act, that is export out of India of computer software or its transmission from India to place outside India by any means. expenditure incurred in form of foreign exchange for such services cannot be excluded in computing 'Export Turnover' as it forms part of 'Export Turnover'. In instant case as is clear from order of Assessing Authority, he proceeds on assumption that assessee is company engaged in rendering technical services outside India in connection with production of said software. Therefore expenditure incurred in foreign exchange in providing such technical services outside India of Rs.62.7 lakhs was excluded in computing 'Export Turnover' and 'Total Turnover' for arriving at deduction under Section 80HHE of Act. assesee is engaged in business of export out of India of computer software and its transmission to places from India outside India. Before computer software is exported, Software 27/34 T.C.A.No.292 of 2018 Engineers of assessee would have initial discussion with regard to requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to place outside India. software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to client. Though said services are technical in nature it does not fall within clause (ii) of subsection (1) of section 80HHE of Act of providing technical services outside India in connection with development or production of computer software. It falls under sub-clause (1) of sub-section (1) of Section 80 HHE of Act. Therefore, said expenditure cannot be excluded in computing export turn over. In that view of matter we do not see any merit in this appeal. Accordingly, said question of law is answered in favour of assessee and against revenue. Ordered accordingly. 3. In view of said judgment, substantial question of law is answered in favour of assessee and against Revenue. 4. Insofar as second substantial question of law is concerned, same was considered by this Court in case of Commissioner of Income-Tax And Another Vs. Tata Elxsi Ltd., reported in (2012) 349 ITR 98 (Karn) . It has been held as under "17. From aforesaid judgments, what emerges is that, there should be uniformity in ingredients of both 28/34 T.C.A.No.292 of 2018 numerator and denominator of formula, since otherwise it would produce anomalies or absurd results. Section 10-A is beneficial section. It is intended to provide incentives to promote exports. incentive is to exempt profits relatable to exports. In case of combined business of assessee, having export business and domestic business, legislature intended to have formula to ascertain profits from export business by apportioning total profits of business on basis of turnovers. Apportionment of profits on basis of turnover was accepted as method of arriving at export profits. In case of Section 80HHC, export profit is to be derived from total business income of assessee, whereas in Section 10-A, export profit is to be derived from total business of undertaking. Even in case of business of undertaking, it may include export business and domestic business, in other words, 'Export Turnover' and domestic turnover. 'Export Turnover' would be component or part of denominator, other component being domestic turnover. In other words, to extent of 'Export Turnover', there would be commonality between numerator and denominator of formula. In view of commonality, understanding should also be same. In other words, if 'Export Turnover' in numerator is to be arrived at after excluding certain expenses, same should also be excluded in computing 'Export Turnover' as component of 'Total Turnover' in denominator. reason being 'Total Turnover' includes 'Export Turnover'. components of 'Export Turnover' in numerator and denominator cannot be different. Therefore, though there is no definition of term ''Total Turnover'' in Section 10-A, there is nothing in said Section to 29/34 T.C.A.No.292 of 2018 mandate that, what is excluded from numerator that is 'Export Turnover' would nevertheless form part of denominator. Though when particular word is not defined by legislature and ordinary meaning is to be attributed to same, said ordinary meaning to be attributed to such word is to be in conformity with context in which it is used. When statute prescribes formula and in said formula, ''Export Turnover'' is defined, and when ''Total Turnover'' includes 'Export Turnover', very same meaning given to 'Export Turnover' by legislature is to be adopted while understanding meaning of 'Total Turnover', when 'Total Turnover' includes 'Export Turnover'. If what is excluded in computing 'Export Turnover' is included while arriving at 'Total Turnover', when 'Export Turnover' is component of 'Total Turnover', such interpretation would run counter to legislative intent and impermissible. If that were intention of legislature, they would have expressly stated so. If they have not chosen to expressly define what 'Total Turnover' means, then, when 'Total Turnover' includes 'Export Turnover', meaning assigned by legislature to 'Export Turnover' is to be respected and given effect to, while interpreting 'Total Turnover' which is inclusive of 'Export Turnover'. Therefore formula for computation of deduction under Section 10-A, would be as under: Profits of business Export turn over x of undertaking ['Export Turnover' + domestic turn over) Total turn over" 5. Accordingly, said substantial question of law is answered in favour of assessee and against Revenue. 30/34 T.C.A.No.292 of 2018 7. said view was affirmed by Hon'ble Supreme Court and relevant portion of judgment is quoted below for ready reference. 1.The instant petition is filed by petitioner- Revenue assailing judgment dated 01.08.2014 passed by High Court of Karnataka at Bangalore in I.T.A.No.1075 of 2008. 2. When petition is taken up for consideration, Mr.Vikramjit Banerjee, learned Additional Solicitor General appearing for petitioner-Revenue and Mr.Parcy Pardiwala, learned Senior Counsel appearing for respondent, are in agreement that SLP (C) No.2373/2015 preferred by Revenue in respect of connected ITA No.196 of 2009 which was disposed of by very same common order dated 01.08.2014 was dismissed by this Court on 28.01.2019 having taken note similar grounds raised in special leave petition. 3. Hence taking note of fact that in respect of common judgment this Court has already dismissed SLP (C) No.2373 of 2015 relating to Assessment Year 2004-05 and in present case except that issue relates to Assessment Year 2003- 2004 all other aspects are on very same point, we are not inclined to entertain instant petition. 4. Accordingly, special leave petition shall stand dismissed. Pending applications, if any, shall also stand disposed of. 12. In light of above Substantial Question of Law No.2 and 3 are answered in favour of assessee. 31/34 T.C.A.No.292 of 2018 13. With regard to Substantial Question of Law No.4 is concerned, we find that assessee has substantially raised ground in appeal before Tribunal contenting that CIT(A) has failed to consider ground of assessee that Assessing Officer has erred in not providing deduction under Section 10A with respect to exempt income under Section 14A of Act. 14. On perusal of impugned order, we find that Tribunal has not adjudicated said issue and confined its finding only with regard to correctness of disallowance under Section 14A read with Rule 8D of Act. In our considered view this issue needs to be considered by Tribunal to examine as to whether assessee is entitled for relief on that ground, more so because, finding rendered by Tribunal with regard to disallowance under Section 14A read with Rule 8D has been confirmed by us in this judgment. 15. In result, Appeal is Partly Allowed and Substantial Question of Law no.1 is answered against assessee and in favour of 32/34 T.C.A.No.292 of 2018 Revenue. Substantial Questions of Law nos.2 and 3 are answered in favour of assessee and against Revenue. Substantial Question of Law no.4 is remanded to Tribunal for fresh consideration after affording opportunity to assessee. No costs. (T.S.S.,J) (V.B.S.,J) 11.09.2020 sk Index: Yes / No Internet: Yes / No Speaking Order/Non-Speaking Order To Principal Commissioner of Income Tax-5, 121, Nungambakkam High Road, Nungambakkam, Chennai 600 034. 33/34 T.C.A.No.292 of 2018 T.S.SIVAGNANAM. J, AND V.BHAVANI SUBBARAYON, J. sk T.C.A.No.292 of 2018 11.09.2020 34/34 Polaris Consulting and Services Limited v. Principal Commissioner of Income-tax-5, Chennai
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