High Court Of Karnataka
Pr.CIT And Anr. vs. M/S Sasken Communication Technologies Ltd.
Section 10A, 10A(1), 10A(2), 10A(3), 10A(4), 10A(6), 10B, 56, 80HHC, 80HHE, 260-A and Section 2(18) of Customs Act, 1962
Asst. Year 2005-06
Dinesh Maheshwari, CJ. & S.G. Pandit, J.
I.T.A. Nos.44-45 OF 2016
31st October, 2018
Counsel Appeared:
E.I. Sanmathi, Adv. for the Petitioner.: K.K. Chythanya, Adv. for the Respondent.
S.G. PANDIT. J.:
These appeals are by the revenue questioning the order dated 31.07.2015 of the Income Tax Appellate Tribunal ‘B’ Bench, Bangalore, (‘the Tribunal) in proceedings ITA No.1253/Bang/2014 and G O.No.32/Bang/2015 for the assessment year 2005-2006.
Brief facts of the case are that:
The respondent – assessee is in the business of manufactur and export of software, which claimed the benefit under Section 10A of the Income Tax Act, 1961, (for short ‘the Act’). The assessee filed returns, which was processed and subsequently taken up for scrutiny and notices were issued. The respondent – assessee produced necessary books of accounts, when the information was called for by the Assessing Authority. The Assessing Authority disallowed expenditure incurred in the foreign currency as well as from total turnover; disallowed compensation received on termination of export/service contract as it cannot be treated as business income, arising out of export activity and denied the claim of brought forward losses against income claimed as deduction under Section 10A of the Act.
3. Aggrieved by the said order of assessment, the respondent-assessee filed appeals before the Commissioner of Income Tax (Appeals) II, Bangalore. The Appellate Authority by its order dated 28.02.2014 allowed the appeals of the assessee in part. While allowing the appeals, the Appellate Authority held that the compensation received by the assessee on termination of export/service contract is capital in nature. Further the Appellate Authority held that if certain expenses are +o be reduced from the total turnover, deduction is to be calculated under Section 10A of the Act. The Appellate Authority also allowed set off of brought forward loss.
4. Aggrieved by the said order of the Appellate Authority, the revenue filed appeal before the Income Tax Appellate Tribunal, Bangalore Bench ‘B’. The assessee also filed cross-objection insofar as finding on compensation received for termination of export/service contract and also in respect of deemed export on account of sale to another STP unit The Tribunal on consideration of the appeals held that the amount received by the assessee under the contract and particularly, on termination of the export/service contract has a direct nexus with the business activity of the assessee and further held that such compensation is income derived from the business and would be part of profits of business.
With regard to exclusion of expenses incurred in foreign exchange from the export turnover as well as from the total turnover relying upon the decision of this Court in Commissioner of Income Tax and Anr. vs. Tata Elxsi Ltd. : (2012) 349 ITR 98, the Tribunal held that no interference is called for on the order of the Appellate Authority. Insofar as setting off of brought forward losses relying upon the decision of this Court in the case or Commissioner of Income Tax vs. Yokogawa India Ltd. (2017) 391 ITR 274 (SC) held in favour of the assessee. Insofar as disallowance of deduction under Section 10A in respect of deemed export on account of sale to another STP unit, the Tribunal, relying upon the decision of Tata Elxsi Ltd. {supra), held in favour of the assessee. Aggrieved by the order of the Tribunal, the revenue has preferred these appeals urging the following four substantial questions of law:
Whether on the facts and circumstances of the case, the Tribunal was justified in law in confirming the order of Commissioner of income Tax (Appeals), in directing the assessing officer to exclude expenses incurred in foreign currency, both from the Export Turnover and Total Turnover for the purpose of computation of deduction under section 10A, without appreciating the fact that the statute allows exclusion of such expenditure expressly only from the Export Turnover by way of specific definition of export turnover defined in the Act, while there is no specific provision in Section 10A warranting exclusion of the above expenses from the Total Turnover?
Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the order of the Commissioner of Income Tax (Appeals) with regard to allowing setting off brought forward losses by relying upon the decision of this Hon’ble Court in the case of CIT V/s. Yokngowa which has not reached finality?
Whether on the facts and in the circumstances of the case, the Tribunal is right in setting aside the addition of Rs.1.35 crores made by assessing authority when the assessee itself had shown the amount under schedule VIII, being other income, holding that the said income cannot be treated as business income arising out of export activity?
4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in Tribunal erred in direction the assessing authority to include the amount claimed by assessee as part of 10A deduction in the export turnover which relates to the software supply to another STP unit namely, M/s.Anlog Devises India Pvt Ltd., by following the decision of this Hon’ble Court in the case of M/s.Tata Elxsi Ltd., in ITA No.411/2008 dated: 10/10/2014 if it is found that the sale is made to said STP unit even when the ingredients of section 10A are not satisfied to include the said turnover as part of 10A?
These appeals coming up for admission, having heard learned counsel for the parties and having perused the appeal papers, we are of the considered view, that no substantial questions of law would arise for consideration and the appeals do not merit admission.
The question of law (1) above is with regard to exclusion of expenses incurred in foreign currency, both from the export turnover and total turnover for the purpose of computation of deduction under Section 10A of the Act. The Tribunal, while dealing with the said aspect, elied upon the decision of Tata Elxsi Ltd. (supra) and held the issue in favour of the assessee confirming the order of the Appellate Authority. The learned counsel for the respondent assessee further relying upon the decision in Commissioner of Income Tax, Central-III vs. HCL Technologies Ltd. : (2018) 404 ITR 719 (SC), would submit that the question raised by the revenue is answered by the Hon’ble Supreme Court. The Hon’ble Supreme Court in the said decision has taken note of the decision of this Court in Tata Elxsi Ltd. (supra) and held that what is excluded from export turnover must also be excluded from total turnover, since one of ‘he components of total turnover is export turnover, in the decision of HCL Technologies Ltd. (supra) at paragraphs 10, 15 and 17 to 21 it is held as follows
“10. The question arises here that when the particular term has not been defined in any particular Section, is it allowed to import the meaning of such term from the other provisions of the same Act? Section 10A of the IT Act is a special beneficial prevision and the purpose of deduction under such Section is to encourage and boost the new business undertakings situated in the free trade zone of this Nation by providing suitable deductions to such business entities. Sometimes, while calculating the deduction, disputes arise regarding the methodology of deduction which ought to be followed. Undisputedly, it is a matter of record that the Respondent is engaged in the activity of trading of generic software and providing customized software development services for domestic as well as for foreign clients through its two units situated in Software Technology Park, Gurgaon (now Gurugram) which falls under the definition of the Section 10A of the IT Act. The contention of the Respondent is that it incurred expenditure in foreign exchange in sending professionals abroad as per the agreements with the foreign constituents.
15. A Statute is the intention of the legislature who enacts it after having regard to various facts and circumstances. It is a cardinal principle of law that the interpretation by the Court shall be done in such a way that the intention of the legislature shall prevail and no injustice occurred with parties. The rule of harmonious construction is the thumb rule to interpretation of any statue. An interpretation which makes the enactment a consistent whole, should be the aim of the Courts and a construction which avoids inconsistency or repugnancy between the various sections or parts of the statute should be adopted.
17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd.[2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from ‘export turnover’ must also be excluded from ‘total turnover’, since one of the components of ‘total turnover’ is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.
Accordingly, the formula for computation of the deduction under Section 10A of he Act would be as follows:
In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act arc allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.
On the issue of expenses on technical ser ices provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover”.
Therefore, question of law (1) would not survive for consideration.
7. The next question of law suggested by the revenue is in respect of allowing setting off of brought forward losses. While considering this aspect, the Tribunal relied upon the decision in Yokogawa India Ltd. (supra) and held in favour of the assessee. The Hon’ble Supreme Court at paragraphs 13 to 16 has held as follows :
“13. The retention of Section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive and not determinative of what is provided by the Section as amended, in contrast to what was provided by the unamended Section. The true and correct purport and effect of the amended Section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III. The introduction of the word ‘deduction’ in Section 10A by the amendment, in the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A as already discussed, it has to be understood that the Section embodies a clear enunciation of the legislative decision to alter its nature from one providing for exemption to one providing for deductions.
The difference between the two expressions ‘exemption’ and ‘deduction’, though broadly may appear to be the same i.e. immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Act would be wholly different. The above implications cannot be more obvious than from the case of Civil Appeal Nos. 8563/2013, 8564/2013 and civil appeal arising out of SLP(C) No. 18157/2015, which have been filed by loss making eligible units and/or by non-eligible assesses seeking the benefit of adjustment of losses against profits made by eligible units.
Sub-section 4 of Section 10A which provides for pro rata exemption, necessarily involving deduction of the profits arising out of domestic sales, is one instance of deduction provided by the amendment. Profits of an eligible unit pertaining to domestic sales would have to enter into the computation under the head “profits and gains from business” in Chapter IV and denied the benefit of deduction. The provisions of Subsection 6 of Section 10A, as amended by the Finance Act of 2003, granting the benefit of adjustment of losses and unabsorbed depreciation etc. commencing from the year 200102 on completion of the period of tax holiday also virtually works as a deduction which has to be worked out at a future point of time, namely, after the expiry of period of tax holiday. The absence of any reference to deduction under Section 10A in Chapter VI of the Act can be understand by acknowledging that any such reference or mention would have been a repetition of what has already been provided in Section 10A. The provisions of Sections 80HHC and 80HHE of the Act providing for somewhat similar deductions would be wholly irrelevant and redundant if deductions under Section 10A were to be made at the stage of operation of Chapter VI of the Act. The retention of the said provisions of the Act i.e. Section 80HHC and 80HHE, despite the amendment of Section 10A, in our view, indicates that some additional benefits to eligible Section 10A units, not contemplated by Sections 80HHC and 80HHE was intended by the legislature. Such a benefit can only be understood by a legislative mandate to understand that the stages for working out the deductions under Section 10A and 80HHC and 80HHE are substantially different. This is the next aspect of the case which we would now like to turn to.
From a reading of the relevant provisions of Section 10A it is more than dear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee This is also more than clear from the contemporaneous Circular No.794 dated 9.8.2000 which states in paragraph 15.6 that,
“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% Export Oriented Undertakings, 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. “
In view of the above decision, the substantial question of law (2) would no more arise for consideration.
8. The third question of law urged by the revenue is with regard to the compensation amount of Rs.1.35 crores received by the assessee on account of termination of export/service contract and as to whether that income could be treated as business income arising out of export item.
The assessee contends that it received a sum of Rs.1.35 crores from a customer towards compensation for the termination of export/service contract and it is the submission of learned counsel for the assessee that the amount received, particularly on termination of export/service contract has nexus with the business activities of the assessee, in fact, he submits that the assessee had entered into an agreement of export, which was terminated by the other party, for no fault of the assessee. Hence, the said compensation amount is to be treated as income derived from out of export business. Section 10A(1) and 10(A)(4) of the Income Tax Act, 1961, which are relevant reads as follows
“10A. Special provision in respect of newly established undertakings in free trade zone, etc.
(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles of things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.
(4) 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 on by the undertaking. “
To get benefit of deduction under the above provisions, the income derived from export of articles or things or computer software qualifies for deduction. The question is whether compensation received for termination of export/service contract is an income derived from the export of articles or things or computer software? It is not in dispute that the assessee had entered into agreement for export of software and the assessee ‘S 100% export oriented unit. But, for the cancellation or termination of contract, the assessee would have supplied or exported the software. For no fault of the assessee, the contract was terminated and the compensation for such termination was received by the assessee, which income is to be treated as income derived from out of the export. Flence the compensation/damages received by the assessee on account of termination of service/export contract is to be treated as profits of business.
The learned counsel for the respondent – assessee relies upon a Full Bench decision of his Court in Commissioner of Income Tax vs. Hewlett Packard Global Soft Ltd. : (2018) 403 ITR 453 (KARNATAKA), wherein this Court held that incidental income of export EOU unit, by way of interest on Bank deposits o staff loans would be entitled to 100% exemption. This Court at para 37 after considering the various decisions held as follows
“37. On the above legal position discussed by us, we are of the pinion that the Respondent assessee was entitled to
100% exemption or deduction under Section 10 A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as Income from other sources’ under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the banks or advancing of staff loans by such special category of assesses covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Se tion 56 of the Act. “
11. Thus, this Court has held that the interest income derived by the assessee would be eligible for deduction under Section 10A of the Act. Like wise, in the case on hand, the compensation/damages received by the assessee on termination of export contract would be in the course of his export business and is to be treated as income derived from out of the business, which qualifies for deduction under Section 10A of the Act.
12. The last question suggested by the revenue is with regard to deduction of amount from the export turnover which relates to software supplied to another STP unit. The Tribunal while answering the said question held that it is a deemed export, as the export is done through STP unit and foreign exchange is earned. This Court in M/s. Tata Elxsi Ltd. vs. Assistant Commissioner of Income Tax : ITA No.411/2008, has held at paragraphs 13 to 18 and 20 as follows:
Sub-Section (3) of Section 10A makes it clear that Section 10A applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Therefore, the intention of the legislature is manifest that the encouragement is given for establishment of export oriented industries with the object of receiving convertible foreign exchange.
Explanation 2 (iv) to Section 10A defines ‘export turnover’ for the purpose of this Section as ‘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(o)’. Further, it makes it clear that ‘export turnover’ 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.
Sub-Section (2) of Section 10A makes this provision applicable to undertakings which have begun or begin to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year commencing on or after the 1st day of April, 1981, in any free trade zone; or commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology parks; commencing on or after the 1st day of April, 2001, in any special economic zone.
The ‘software technology park’ as well as ‘free trade zone’ are defined for the purpose of this Section in Explanation 2 to Sub-Section (9) of Section 10A.
The word ‘export’ has been defined under Section 2(18) of the Customs Act, 1962. As per the said definition, ‘export’ with its grammatical variations and cognate expressions, means taking out of India to a place outside India.
As Section 10A was introduced to give effect to the Exim Policy of the Central Government, we have to take into consideration the provisions the Exim Policy.
20. From the aforesaid provisions, it is clear that if an assessee wants to claim the benefit of Section 10A, firstly he must export articles or things or computer software. Secondly, the export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such an export should yield foreign exchange which should be brought into the country. If all these three conditions are fulfilled, then the object of enacting Section 10A is fulfilled, and the assessee would be entitled to the benefit of exemption from payment of Income Tax Act on the profits and gains derived by the Undertaking from the export.
In view of the above decision, question (4) urged would not remain for consideration any further.
13. For the reasons aforementioned, these appeals are dismissed at the stage of admission.
[Citation : 412 ITR 468]
