Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 16.09.2020 CORAM HON'BLE DR.JUSTICE VINEET KOTHARI AND HON'BLE MR.JUSTICE KRISHNAN RAMASAMY T.C.A.Nos.134 and 135 of 2012 Commissioner of Income Tax Chennai Appellant in both appeals Vs. M/s.Zylog Systems Limited No.155, Thiruvallurvar Salai Kumaran Nagar, Chennai 600119. Respondent in both appeals Tax Case Appeals filed under Section 260A of Income Tax Act, 1961 against common order of Income Tax Appellate Tribunal 'D' Bench, Chennai dated 30.06.2011 in ITA Nos.59 and 60/Mds/2011. For Appellant : Mr.M.Swaminathan Senior Standing Counsel For Respondent : Mr.S.Gopalakrishnan Page 1 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) JUDGMENT (Judgment of Court was delivered by DR.VINEET KOTHARI,J) These two appeals have been filed by Revenue for Assessment Years 2006-07 and 2007-08 raising following two substantial questions of law arising from order of learned Income Tax Appellate Tribunal 'D' Bench, Chennai dated 30.06.2011. two questions are reproduced below. 1. Whether on facts and circumstances of case, Income- Tax Appellate Tribunal was right in holding that expenditure incurred in foreign exchange for providing technical services outside India could not be excluded from export turnover for purpose of computing deduction u/s 10B without properly applying provisions of Explanation 2(iii) to Section 10B? 2. Whether on facts and circumstances of case, Income Tax Appellate Tribunal was right in restoring issue with regard to amortization of capital expenditure to file of assessing officer for fresh adjudication in light of Special Bench decision in assessee's own case when issue of disallowance of amortised business acquisition expenses has not been dealt in Special Bench decision? Page 2 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) 2. Learned counsel appearing for appellant Revenue Mr.M.Swaminathan fairly submitted that as far as question No.1 is concerned regarding expenditure incurred for providing technical services outside India is concerned, this Court has already held in Assessee's own case itself in T.C.A.Nos.312 and 385 of 2011 (Commissioner of Income Tax -Vs- M/s.Zylog Systems Limited) decided on 20.02.2020 in favour of Assessee and therefore said question may be answered in favour of Assessee and against Revenue. 3. However, Mr.M.Swaminathan submitted that as far as question No.2 quoted above is concerned regarding amortization of capital expenditure incurred by Assessee, Assessee himself has amortized said expenditure over five years and therefore learned Tribunal has erred in unnecessarily remitting said issue also to Assessing Officer to decide issue in terms of decision of Special Bench of Tribunal dated 02.11.2010 in own case of Assessee. Learned counsel also submitted that Special Bench was not concerned with said issue of amortization at all as would be clear from Para 6 of order of learned Tribunal itself. 4. Mr.Gopalakrishnan, learned counsel for respondent Assessee submitted that question No.1 may be decided in favour of Assessee while Page 3 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) question No.2 may be remitted back to learned Tribunal for deciding issue afresh. 5. We have heard both learned counsels. relevant portion of order passed in case of Assessee on question No.1 in T.C.A.Nos.312 and 385 of 2011 dated 20.02.2020 is extracted below for ready reference. 4. learned Tribunal decided in favour of Assessee question that expenditure incurred by Assessee in foreign currency in foreign country where they exported computer software will be included in 'export turnover', on which Assessee is entitled to benefit of deduction under Section 10B of Income Tax Act. relevant portion of order of learned Tribunal is quoted below for ready reference. 6.The next issue raised vide Ground No.IV relates to confirming action of Assessing Officer in excluding Rs.4,43,19,916/- as not forming part of export turnover who has excluded this amount on reasoning that amount represented expenses incurred in foreign exchange in providing technical services outside India. facts of this issue have already been narrated above. 7. After hearing both sides on this issue, we find that in view of Special Bench decision (supra) in assessee's own case, wherein it has been held Page 4 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) that such amount cannot be excluded from export turnover, this addition cannot survive. Consequently, by following Special Bench decision (supra) we order to delete impugned addition. 5. Learned counsel for Revenue fairly submitted that controversy is no longer res integra in view of decision of Hon'ble Supreme Court in case of Commissioner of Income Tax -Vs- Mphasis Ltd reported in [2020] 113 taxmann.com 74 decided on 13.11.2019, has affirmed view taken by Division Bench of Karnataka High Court and Hon'ble Supreme Court has held that such expenditure incurred by Assessee in foreign currency will be includible in definition of 'export turnover' for purpose of computing deduction under Section 10B of Act. 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 Page 5 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) 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 computer software and export of technical services for purpose of development or production of computer software outside India. If Page 6 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) 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 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 Page 7 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) 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 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 Page 8 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) 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 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 Page 9 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) 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. Page 10 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) 6. Accordingly, question No.1 quoted above is answered in favour of Assessee and against Revenue. 7. Regarding question No.2, in paragraph 6 of order of learned Tribunal, Tribunal itself has stated that issue stands covered in favour of Assessee by decision of Special Bench dated 02.11.2010 in assessee's own case. relevant portion of order of Tribunal is extracted hereunder for ready reference. " 6. At time of hearing, it was found that his issue also stands covered in favour of assessee by decision of Special Bench dated 2.11.2010 in assessee's own case. In this regard, we reproduce herein below relevant Para Nos.20 & 21 of above order: "20. There is no dispute about fact that assessee is company engaged in business of development of software both by way of on site development and off shore development and also that it has branch in USA for which separate accounts were maintained. There is also no dispute about fact that there is approval of authorized dealer namely Central Bank of India, Chennai for opening overseas branch at New Jersy, USA. 21. Now we are called upon to adjudicate whether Page 11 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) Assessing Officer and learned CIT (A) were right in excluding from "export turnover"Rs.3,33,46,592/- incurred by assessee outside India in foreign exchange in providing technical services, while computing deduction u/s 10B of I.T.Act. For adjudicating this issue first of all we should consider what is "software"and what is "technical services". Explanation (ii) to sub- section 9A of Section 10B defines computer software. Explanation reads as under: Clause (ii) "computer software"means (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or service of similar nature as may be notified by Board, which is transmitted or exported from India to any place outside India by any means; Clause (iii) of Explanation (2) to sub-section 9A of Section 10B defines export turnover as under: "(iii) export turnover means consideration in respect of export (by undertaking) of articles or things or computer software received in, or brought into India by assessee in convertible foreign exchange in accordance with sub-section (3) but does not include freight, telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical Page 12 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) services outside India. combined reading of definition of software as given in Clause(i) of Explanation (2) and export turnover as defined in clause (iii) above would go to show that export turnover of computer software means consideration received in respect of export of computer software but does not include freight, telecommunication charges or insurance to delivery of computer software outside India or expenses incurred in foreign exchange in providing technical services outside India. 7. In view of above, we restore this issue to file of Assessing Officer for deciding afresh following Special Bench decision (supra) and allow this ground for statistical purposes only, in both these years. 8. In result, both appeals are partly allowed for statistical purposes." 8. Since apparently issue involved in question No.2 with regard to amortization of expenditure was not before Special Bench at all, learned Tribunal seems to have committed error in unnecessarily remitting back matter to Assessing Officer with reference to Special Bench as quoted above. Page 13 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) 9. Therefore, we dispose of present appeals and while answering Question No.1 in favour of Assessee, we remit issue of Amortization of capital expenditure under Question No.2 back to learned Tribunal for deciding issue once again on merits and in accordance with law after giving opportunity to both sides. With these observations, present appeals are disposed of. No costs. (V.K.,J.) (K.R.,J.) 16.09.2020 Index : Yes/No Internet : Yes/No KST Page 14 of 15 http://www.judis.nic.in Order in TCA Nos.134 and 135 of 2012 (C.I.T. -Vs- Zylog Systems Ltd) Dr.VINEET KOTHARI, J. and KRISHNAN RAMASAMY, J. KST To Income Tax Appellate Tribunal 'D' Bench, Chennai T.C.A.Nos.134 & 135 of 2012 16.09.2020 Page 15 of 15 http://www.judis.nic.in Commissioner of Income-tax, Chennai v. Zylog Systems Limited