The Madras High Court stressed upon the legislative intent behind Section 10-A of the Income Tax Act, 1961 and has reiterated that the said Section intends to promote exports by providing for incentives in the form of exemption of profits related to exports.
Background:
The present case pertains to the Tax Case Appeals filed under Section 260A of the Income Tax Act, 1961 against the common order of the Income Tax Appellate Tribunal ‘D’ Bench, Chennai.
In the said appeals, two substantial questions of law were raised for consideration before the High Court of Madras, pertaining to the interpretation of the definition of ‘export revenue’ for the purpose of computing deduction under Section 10B of the Income Tax Act, 1961 and the appreciation of the Special Bench’s decision by the Income Tax Appellate Tribunal (ITAT).
Issues:
- Whether the expenditure incurred in foreign exchange for providing technical services outside India could not be excluded from the export turnover for the purpose of computing deduction u/s 10B without properly applying the provisions of Explanation 2(iii) to Section 10B?
- Whether the Income Tax Appellate Tribunal was right in restoring the issue with regard to amortization of capital expenditure to the file of the assessing officer for fresh adjudication in the light of the Special Bench decision in the Assessee’s own case when the issue of disallowance of amortised business acquisition expenses has not been dealt in the Special Bench decision?
Submissions made by the appellant:
The counsel on behalf of the appellant, in respect of the first issue, conceded that since the Court has, in the case of Commissioner of Income Tax -Vs- M/s.Zylog Systems Limited , already held in favour of the Assessee that the expenditure incurred in foreign exchange for providing technical services outside India could not be excluded from the export turnover, the first issue may be decided in favour of the Assessee.
However, with respect to the second issue regarding the amortization of capital expenditure incurred by the Assessee, the counsel contended that the Assessee himself has amortized the said expenditure over five years and therefore, the learned Tribunal has erred in unnecessarily remitting the said issue to the Assessing Officer to decide it in terms of the decision of the Special Bench of the Tribunal in the case of the Assessee itself. He further submitted that the Special Bench did not adjudicate upon the issue related to the amortization of the capital expenditure.
Submissions on behalf of the respondents:
The counsel on behalf of the respondent prayed that since the first issue is not res integra and accordingly it may be decided in favour of the Assessee and he further contended that the second issue may be remitted back to the learned Tribunal for deciding the issue afresh.
Observations of the Court:
The Court in order to dispose of the 1st issue, substantially relied upon the order of the Income Tax Appellate Tribunal which had decided the question raised in the first issue in favour of the Assessee. The Court reproduced the relevant extracts from the said order to examine the first issue -
“...the Hon’ble Supreme Court in the case of Commissioner of Income Tax -Vs- Mphasis Ltd, affirming the view taken by the Division Bench of the Karnataka High Court, has held that such expenditure incurred by the Assessee in foreign currency will be includible in the definition of ‘export turnover’ for the purpose of computing deduction under Section 10B of the Act.”
The Court reproduced the ratio decidendi of the said judgment of the Supreme Court, as follows-
“The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer software outside India.
(...) The expenditure incurred in the form of foreign exchange for such services cannot be excluded in computing the export turnover as it forms part of the export turnover.
(...) Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of section 80HHE of the Act of providing technical services outside India in connection with the development of production of computer software. It falls under sub-clause (1) of sub-section (1) of Section 80 HHE of the Act.”
Further, the Court relied upon the Supreme Court’s decision in the case of Income-Tax And Another Vs. Tata Elxsi Ltd. to highlight the legislative intent behind the Section 10-A of the Income Tax Act, 1961 and reiterate the concept of ‘export turnover’ for the purpose of computing the deduction under Section 10B of the same Act and accordingly reproduced the following extract from the aforementioned case-
“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. 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.
(...) 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.
(...) 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.”
In view of the same, the Court decided the 1st issue regarding the exclusion of expenditure incurred for providing technical services outside India, in favour the Assessee-respondent.
With regard to the 2nd issue the Court observed that the Tribunal, in stating that the issue stands covered in favour of the Assessee by the decision of the Special Bench in Assessee’s own case and remitting the matter to the Assessing Officer on the basis of the same, committed an error as the concerned issue regarding the amortization of the expenditure was not adjudicated by the said Special Bench at all.
On perusal of the submissions made by the counsels from both the sides and having had regard to the above observations, the Court disposed of the present appeals while deciding the issue 1 in favour of the Assessee-respondent and remitted the question pertaining to amortization of capital expenditure under issue 2 back to the ITAT to adjudicate upon it once again on merits and in accordance with law.
Case Details:
Case Name: The Commissioner of Income Tax Chennai v. M/s.Zylog Systems Limited
Coram: Justice Vineet Kothari and Justice Krishnan Ramasamy
Date: 16/09/2020
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