Karnataka H.C : While computing deduction under section 10A, if export turnover is arrived at after excluding certain expenses, said expenses should also be excluded from ‘total turnover’

High Court Of Karnataka

CIT vs. Tata Elxsi Ltd.

Assessment Year : 2003-04

Section : 10A

N. Kumar And Ravi Malimath, JJ.

IT Appeal Nos. 70 Of 2009 & Others

August 30, 2011

JUDGMENT

1. In all these appeals, as the question involved is one and the same, which is purely a question of law, they are taken up together and disposed of by this common judgment.

2. For the purpose of clarity, the facts in I.T.A. No. 450/2008 are adopted in order to appreciate the question of law raised in all these appeals.

3. The assessee Company is engaged in the business of specialized after sales services, marketing and distribution of customized high technology computer systems and storage devices, computer consultancy and solutions and software promotion. During the year ended 31st March 2003, the main source of revenue for the assessee has been from trading division, and STP unit engaged in Call Centre operations. The assessee incurred a sum of Rs. 10,44,31,606 in foreign exchange towards communication expenses. The assessee claimed exemption under Section 10-A of the Income Tax Act, 1961 (hereinafter referred to as “the Act” for short) for the profits and gains derived from STP unit. In support of such claim, it has filed Form 56F and Annexure A thereto. In this Annexure, the details of profits derived by the undertaking, export turnover and total turnover of the undertaking are given. They are as under:

Total profits of the undertaking Rs. 22,72,48,503/

Export’s proceeds of the undertaking Rs. 154,58,88,049/-

Total turnover of the undertaking  Rs. 154,58,88,049/-

4. In arriving at the total turnover, the assessee did not include Rs. 10,44,31,606/- incurred by it towards communication expenses. In this context, the assessee was asked to substantiate the non-inclusion of Rs. 10,44,31,606/-, being expenditure incurred in foreign currency for the purpose of computation of exemption of income claimed under Section 10-A of the Act. The assessee justified its action. On consideration of the reply, the assessing authority held, Section 10-A defines only export turnover. The fact that only export turnover is defined and total turnover is not defined clearly manifests the legislature’s intention to give the natural meaning to the term ‘total turnover’. Therefore, it held, no deduction from total turnover is possible. Then, the assessing authority relied on various judgments and held that the communication expenses of Rs. 10,44,31,606/- is to be excluded from the export turnover only. Consequently, the excess claim of Rs. 1,38,16,958/- under Section 10-A was disallowed. Aggrieved by the said order of the assessing authority, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals), Bangalore. He held that where the definition of a word has not been given, it must be construed in its popular sense if it is the word of everyday use. ‘Popular sense’ means, that sense which people conversant with the subject matter with which the statute is dealing with attribute to it. Therefore, as the word ‘total turnover’ was not defined under the said chapter, the interpretation placed by the assessing authority was found to be proper and therefore, the appellate authority confirmed the order passed by the assessing authority and dismissed the appeal. Aggrieved by the said order passed by the Appellate Commissioner, the assessee preferred an appeal to the Tribunal. The Tribunal relied on the judgment of the Supreme Court in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667 / 160 Taxman 404 , and held that the expenditure incurred by the assessee should not form part of total turnover and directed the Assessing Officer to re-compute the relief under Section 10-A of the Act excluding the said communication charges from export turnover as well as from total turnover. Aggrieved by the said order of the Tribunal, the revenue is in appeal.

5. The learned counsel for the Revenue, assailing the impugned order of the Tribunal, contended that the legislature took pains to define the word ‘export turnover’ in Section 10-A and consciously did not define ‘total turnover’, whereas in the case of Section 80 HHC, the legislature defined both the export turnover and total turnover. Therefore, the intention of the legislature is clear. In the light of the same, the interpretation placed by the Apex Court, while working out the formula as stipulated in Section 80HHC has no application while working the formula prescribed under Section 10-A. If the aforesaid argument is to be accepted, there will be no difference between the export turnover and the total turnover and then the said formula looses significance and certainly the legislature did not enact the aforesaid formula without any purpose. He further contended, in the absence of a specific definition of ‘total turnover’, it has to be understood in common parlance. So understood, what is excluded from the definition of export turnover has to be necessarily included while computing the total turnover as it forms part of the total turnover and therefore, he submits, the order passed by the Tribunal is erroneous as the judgments on which reliance is placed have no application while interpreting Section 10-A of the Act.

6. Per contra, the learned senior counsel appearing for the assessee submitted, it is true that the legislature has not defined the word ‘total turnover’ as in the case of Section 80HHC. But the total turnover under Section 10-A includes export turnover. What is expressly excluded from the export turnover has to be excluded while computing the total turnover for the reason that one of the components of total turnover is export turnover, as defined under Section 10-A. If the export turnover does not include what is expressly included under the provision, those excluded items cannot be included in arriving at the total turnover, merely because the legislature has not defined what the total turnover is. Even in common parlance, when the object of this formula is to arrive at the profit from export business, if in arriving at the export turnover certain expenses are excluded, the came also have to be excluded from total turnover. Otherwise, the formula becomes unworkable and absurd. The formula contained in Section 80HHC is para materia with formula contained in Section 10-A. The only difference is in the case of 80HHC, where the .word used is ‘business’, the word used in Section 10-A is ‘undertaking’ But for that difference, the rest of the Section is in para materia and therefore, the judgments rendered by the Supreme Court and various High Courts would hold good even in respect of section 10-A and the Tribunal was justified in adopting the law laid down in the said judgments and granting relief and therefore no case for interference is made out.

7. In the light of the aforesaid facts and rival contentions, the substantial question of law which arises for consideration in all these appeals is as under:

“Whether the Tribunal was correct in holding that when computing relief under Section 10-A of the Act the amount of communication expenses should, he excluded from the total turnover if the same are reduced from export turnover?”

Chapter 3 of the Act deals with incomes, which do not form part of total income. Section 10-A is a Special provision in respect of newly established Undertakings in free trade zone, etc. The said provision is enacted as an incentive to exporters to enable their products to be competitive in the global market and, consequently, earn precious foreign exchange for the country. Therefore, while interpreting these provisions, this aspect has to be borne in mind. Section 10-A(1) provides for a deduction of profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years and the same is excluded from the total income of the assessee. Sub-section (4) is the provision which provides for the manner in which the said profits and gains have to be arrived at. It reads as under:

“For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried en by the undertaking”.

8. The word ‘export turnover’ used in sub-Section (4) is defined in Explanation 2(iv ) at the end of Section 10-A, it reads as under:

“export turnover” 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.”

Therefore, while computing the consideration received from such export turnover, the expenses incurred towards 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 should not be included. However, the word ‘total turnover’ is not defined for the purpose of this Section. It is because of this omission to define ‘total turnover’, the word ‘total turnover’ falls for interpretation by this Court.

9. The expression ‘total turnover’ has been the subject matter of various decisions as defined under the Act under Section 80HHC. However, in the aforesaid provision, the total turnover is defined. The definitions of ‘export turnover’ and ‘total turnover’ as defined in Explanation to Section 80HHC read as under:

(b) “export turnover” means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this Section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962.”

(ba) “total turnover” shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962.”

In the aforesaid definitions, what is to be excluded from both is expressly mentioned. In Section 10-A, not only the word ‘total turnover’ is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the aforesaid provisions of Section 80HHC, the Courts have laid down various principles, which are independent of the statutory provisions. The question is, whether those independent principles can be adopted while defining ‘total turnover’ in the absence of a definition in Section 10-A. The Apex Court, in the case of Lakshmi Machine Works (supra) held at para. 15 as under:

“15. It is important to note that tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Under Section 2(24) of the Act the word “income” includes profits and gains. The charge is not on gross receipts but on profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, however, include profits. According to “The Law and Practice of Income Tax” by Kanga and Palkhivala, the word “profits” in section 28 should be understood in normal and proper sense. However, subject to special requirements of the income-tax, profits have got to be assessed provided they are real profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, the income-tax has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the income-tax must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act [see page 455 of “The Law and Practice of Income-tax by Kanga and Palkhivalal. Therefore, schematic interpretation for making the formula in section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the Legislature intended to exclude items like commission and interest from deduction on the ground that, then did not possess any element of “turnover” even though commission and interest emanated from exports. We have to read the words “total turnover” in section 80HHC as part of the formula which sought to segregate the “export profits” from the “business profits”. Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover/total turnover which constitute section 80HHC concession (deduction). Income in the nature of “business profits” was, therefore, apportioned. The above formula fixed a ratio in which “business profits” under section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words “total turnover” but also to the words “export turnover”, “total export turnover” and “business profits”. That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words “total turnover” in. the above formula with reference to the definition of the word “turnover” in other laws like Central Sales tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated, above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the income-tax, profits and gains were required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income-tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC deduction was “business profits” as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the Legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under Excess Profits-tax Act. it existed in the Business Profits-tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of “turnover”, excise duty and sales tax also cannot form part of the “turnover”. Similarly, “interest” emanates from exports and yet “interest” does not involve an element of turnover. The object of the Legislature in enacting section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, “turnover” was the requirement. Commission, rent, interest etc. did not involve any turnover. Therefore, 90 per cent of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in section 80HHC(3) for the simple reason that it did not emanate from the “export, turnover”, much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the “turnover”. Just as interest, commission etc. did not emanate from the “turnover”, so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the “total turnover”. The above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the Assessing Officer See: page No. 24 of the paper book, if so, then excise duty and sales tax also cannot form part of the “total turnover” under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of “turnover” which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of amendments made to section 80HHC from time-to-time.”

The said judgment has been re-affirmed by the Apex Court, in the ease of CIT v. Catapharma (India) (P.) Ltd. [2007] 292 ITR 641/ 162 Taxman 455.

10. The Bombay High Court had an occasion to consider the meaning of the word ‘total turnover’ in the context of Section 10-A, in the case of CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175 [2010] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under:

“Under sub-section (4) the proportion between the export turnover in respect of the articles or things, or, as the case may be, computer software exported, to the total turnover of the business carried over by the under-taking is applied to the profits of the business of the undertaking in computing the profits of the business of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried or by the undertaking. The formula which is prescribed by sub-section (4) of section 10A is as follows:

 Profits derived from export of articles or things or Computer software = 

Profits of the business of the undertaking Ã— Export turnover in respect of the articles or things or computer software

 =  —————————————————————————————————————————————–

Total turnover of the business carried on by the undertaking

The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator inasmuch as the export turnover is a part of the total turnover.

The export turnover, in the numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression “export turnover” in Explanation 2 to section 10A by which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in, or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles things or software outside India. Therefore in computing the export turnover the Legislature has made a specific exclusion of freight and insurance charges.

The submission which has been urged on behalf of the Revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the Revenue, however, misses the point that the expression “total turnover” has not been definded at all by Parliament for the purposes of section 10A. However the expression “export turnover” has been defined. The definition of “export turnover” excludes freight and insurance. Since export turnover has been defined be Parliament and there is a specific exclusion of freight and insurance, the expression “export turnover” cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. “export turnover” would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though it has been specifically excluded from “export turnover” for the purposes of the numerator would be brought in as part of the “export turnover” when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided.”

The special bench of the Tribunal, in the case of ITO v. Sak Soft Ltd. [2009] 313 ITR (AT) 353/ 30 SOT 55 (Chennai) also had an occasion to consider the meaning of the word ‘total turnover’. After referring to the various judgments of the High Court as well as the Supreme Court held as under:

“53. For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of Section 10-B, the freight telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula…..”

The formula for computation of the deduction under Section 10-A would be as under:

Profits of the business ×

export turnover

———————————————————————

Total turnover

From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the ease of Section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in Section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in Section 10-A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under Section 10-A, would be as under:

                                                                  Export turn over

Profits of the business of the undertaking ×    ——————————————————-
                                                                          (Export turnover + domestic turn over)

                                                                     Total Turn Over

11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgments rendered in the context of Section 80HHC in interpreting Section 10-A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the revenue.

12. The other substantial question of law raised for consideration in I.T.A. Nos. 1099/2008, 12/2009, 125/2009, 190/2009, 484/2009, 740/2009, 743/2009, 820/2009, 822/2009 and 823/2009 is as under:

“Whether the Tribunal was correct in holding that unabsorbed. depreciation and brought forward losses should be adjusted and only thereafter deduction under Section 10-A of the Act should be allowed?”

This question is also answered by this Court in I.T.A. No. 78/2011 decided on 9th August 2011. Accordingly, that issue is also answered in favour of the assessee and against the revenue.

[Citation : 349 ITR 98]

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