Madras High Court
M/S.Cherrytec Interlisolve Ltd vs The Assistant Commissioner Of ... on 5 February, 2021
T.C.A.No.1156 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATE: 05.02.2021
CORAM:
THE HON'BLE MR. JUSTICE M.DURAISWAMY
AND
THE HON'BLE MRS.JUSTICE T.V.THAMILSELVI
T.C.A.No.1156 of 2010
M/s.Cherrytec Interlisolve Ltd.,
(formerly M/s.Cherrtec Solutions Ltd)
4, MAC House, Sardar Patel Road,
Guindy, Chennai – 600 032. ... Appellant
(cause title accepted vide order dated 13.07.2010 made in M.P.No.1 of
2010 in T.C.A(SR).No.22683 of 2009)
Vs.
The Assistant Commissioner of Income Tax,
Company Circle I,
Chennai – 34. ... Respondent
Appeal preferred under Section 260A of the Income Tax Act,
1961, against the order of the Income Tax Appellate Tribunal, Madras,
Bench "A" Chennai, dated 26.09.2008 in I.T.A.No.815/Mds/2007.
For Appellant : Mr.R.Venkatanarayanan
for M/s.Subbaraya Aiyar
For Respondent : Mr.T.Ravikumar,
Senior Standing Counsel
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T.C.A.No.1156 of 2010
JUDGMENT
(Judgment was delivered by M.DURAISWAMY, J.)
Challenging the order passed by the Income Tax Appellate
Tribunal, “A” Bench in I.T.A.No.815/Mds/2007 for the assessment year
2003-04, the assessee has filed the above appeal.
2.It is the case of the appellant that they are engaged in the
business of Software Development and Consultancy. For the assessment
year 2003-04 under appeal, the appellant filed its return of income on
27.11.2003 admitting an income of Rs.18,53,271/-. The case was
selected for scrutiny and notice under Section 143 (2) was issued on
23.11.2004. Scrutiny assessment under Section 143(30 was completed on
28.02.2006 determining the total income at Rs.36,73,824/-. While
completing the assessment, the Assessing Officer, among others,
restricted the claim of deduction under Section 10A by excluding the
expenditure incurred in foreign currency and telecommunication charges
from the export turnover. The expenditure incurred in foreign exchange
for rendering technical services to the extent of Rs.3,38,07,380/- has
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T.C.A.No.1156 of 2010
been excluded from the export turnover. According to the appellant, this
entire expenditure represents salary and allowances paid to the
employees who have been deputed abroad by the appellant as well as
salary paid to the employees of the appellant in their STPI Unit in India
and other administrative expenses incurred abroad and India. The
appellant had deducted tax at source under Section 192 wherever
applicable. The total expenditure represents salary and allowances of
Rs.2,64,90,239/- and other administrative expenses of Rs/67,13,008/-
representing office maintenance expenses, local conveyance,
communication etc., of the Branch at Kuwait and Rs.6,04,133/- as sales
commission paid to non-residents for procurement of orders, thus, the
entire expenditure of Rs.3,38,07,380/- does not represent expenditure
provided for technical services outside India. According to the appellant,
the same cannot be excluded from the export turnover. The Assessing
Officer held that the freight, telecommunication charges or insurance
which are attributable to delivery of goods out of India are to be
considered while reducing from consideration received in convertible
foreign exchange. If such expenses are not attributable to delivery of
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T.C.A.No.1156 of 2010
goods outside India, such expenses are not required to be deducted from
the consideration. Aggrieved over the order of the Assessing Officer, the
appellant preferred an appeal before the CIT (Appeals) and the Appellate
Authority by order dated 09.02.2007 confirmed the order and dismissed
the appeal, as against which, the appellant preferred an appeal before the
Income Tax Appellate Tribunal and the Tribunal, following the decision
in the case of M/s.SIP Technologies Limited in I.T.A.No.2401/Mds/2005
dated 26.09.2008 held that expenditure should be excluded both from the
export turnover and total turnover. Further according to the appellant,
part of the expenditure cannot be excluded from the export turnover.
Aggrieved over the order passed by the Income Tax Appellate Tribunal,
the assessee has filed the above appeal.
3.The above appeal was admitted on the following substantial
questions of law:
“1)Whether on the facts and circumstances of the
case, the Tribunal was right in holding that the expenses
incurred in foreign exchange should be excluded from the
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T.C.A.No.1156 of 2010
export turnover for the purpose of computing deduction u/s
10A of the Act?
2)Whether on the facts and in the circumstances of the
case, the Tribunal was right in holding that the export
turnover consisting exclusively of consideration received in
foreign exchange should be reduced by expenditure incurred
on telecommunication? And
3)Whether on the facts and in the circumstances of the
case, the Appellate Tribunal failed to appreciate that
telecommunication charges are part of expenditure incurred
in respect of development of software/data and hence did not
form part of export turnover?”
4.Heard Mr.R.Venkatanarayanan, learned counsel for the appellant
and Mr.T.Ravikumar, learned senior standing counsel for the respondent.
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T.C.A.No.1156 of 2010
5.The learned counsel appearing for the appellant submitted that
the issue involved in the present appeal is covered by the decision of this
Court made in T.C.A.Nos.961 & 962 of 2008 [M/s.Polaris Consulting
& Services Ltd., (formerly known as M/s.Polaris Software Lab
Limited), No.34, IT Highway, Navalur, Chennai – 603 103 Vs. The
Deputy Commissioner of Income Tax] dated 23.10.2018 wherein the
Hon'ble Division Bench of this Court held as follow:
“...
10.To be noted that the assessee, while contesting the
appeal before the CITA as well as before the Tribunal,
placed the entire materials as regards the development of the
computer software. The assessee contended that they are
engaged in the development of computer software
programme, which is distinct from rendering of pure
technical services, which would comprise of
advice/consulting in relation to computer programmes. They
are registered with STPI and as per the Registration
Certificate, the assessee's activity is developing computer
software and they are not considered as an exclusive
technical service provider, as understood in the software
industry parlance. The assessee proceeded to explain its
activities, as per the agreement with its clients, for
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T.C.A.No.1156 of 2010
developing software, which consisted of eight steps, they are
as follows:
"1.Scope-Ascertaining the requirement of the
customer and undertaking an indepth study on the
proposal. 2.Requirements definition – Specification of
the basic concepts and operation design, in relation to the
final deliverable.
3.Designing-Designing of the deliverable, from a
macro (overall flow of the integrated software) and
micro perspective (designing of each module of the
programme). 4.Application development –
Developing the application (i.e. The modules and the
related computer programmes and codes) as per the
requirements of the customer.
5.Testing – Developer Integration Testing, System
Integration testing and User Acceptance Testing; to
ensure that the software developed works as required.
6.Defect fixing – Rectifying errors that have arisen
during the testing process.
7.Production parallel run-Undertaking a dry run of
the developed software system.
8.Customer user acceptance – Final acceptance of
the Software developed.”
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11.The assessee's contention was that activity No.7
(supra) is usually undertaken onsite at the client's location.
Activity Nos.4 to 6 and 8 can happen offshore and/or onsite.
The need to send the personnel of the assessee to clients'
location arises based on the nature of project, its size and
complexity and the requirements of the client. Further they
reiterated that all the activities are integral part of software
development process and what is finally delivered to the
client is computer software, which is essentially a computer
programme and the deliverable does not comprise of any
advice on the computer software/programme. The assessee
produced copy of the Registration Certificate given by the
STPI, sample contract for development of computer
programme, sample Statement of Work (SOW) in relation to
the sample contract, copies of filing with the STPI and some
sample invoices and related SOFTEX filings. Thus, by
placing heavy reliance on these materials, the 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 the activity
of development of the computer programme, akin to a seller
of an advanced machinery installing the same and training
the user. The assessee placed reliance on the decision of the
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T.C.A.No.1156 of 2010
Hon'ble Supreme Court in the case of TATA Consultancy
Services vs. State of Andhra Pradesh [(2004) 271 ITR
401]. By placing reliance on the said decision, the assessee
contended that both branded software and unbranded/
customised software have been held to be 'goods' by the
Hon'ble Supreme Court and the computer software would be
in the nature of 'goods' and hence it will be erroneous to
consider them as a provider of 'technical services'. Further,
by referring to the customer contract and related statements
of work and invoices, the assessee contended that it is
engaged only in the activity of developing computer
software and is not a technical services provider. The
assessee also contended that there is a distinction in law
between development of computer programme and rendering
of technical services and in this regard referred to Section
10AA of the Act, defining 'export turnover'.”
6.The learned counsel for the appellant as well as the learned
senior standing counsel for the respondent submitted that in view of the
judgment of the Hon'ble Division Bench of this Court, cited supra, the
matter may be remitted back to the Assessing Officer for fresh
consideration.
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T.C.A.No.1156 of 2010
7.In view of the submissions made by the learned counsel on either
side, while leaving the substantial questions of law open, we are
remitting the matter back to the Assessing Officer for fresh
consideration. The Assessing Officer shall decide the matter, on merits
and in accordance with law, after taking into consideration the judgment
made by the Hon'ble Division Bench of this Court date 23.10.2018 in
T.C.A.Nos.961 & 962 of 2008. The assessee is at liberty to produce all
the relevant records to establish their case before the Assessing Officer.
8.With these observations, the Tax Case Appeal is disposed of. No
costs.
[M.D., J.] [T.V.T.S., J.]
Index : Yes/No 05.02.2021
Internet : Yes
va
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T.C.A.No.1156 of 2010
To
1.The Income Tax Appellate Tribunal, Madras, Bench "A"
2.The Assistant Commissioner of Income Tax,
Company Circle I,
Chennai – 34.
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T.C.A.No.1156 of 2010
M.DURAISWAMY, J.
and
T.V.THAMILSELVI, J.
va
T.C.A.No.1156 of 2010
05.02.2021
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