Madras High Court
The Commissioner Of Income Tax vs M/S.Allsec Technologies Ltd on 1 July, 2021
Tax Case Appeal No.559 of 2015
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 01.07.2021
CORAM
THE HON'BLE MR.JUSTICE M. DURAISWAMY
AND
THE HON'BLE MRS.JUSTICE R. HEMALATHA
Tax Case Appeal No.559 of 2015
The Commissioner of Income Tax,
Chennai. ... Appellant
Vs.
M/s.Allsec Technologies Ltd.
No.46-B, Velacherry Main Road,
Velacherry, Chennai – 600 042. ... Respondent
Tax Case Appeal filed under Section 260A of the Income Tax Act,
1961 against the order of the Income Tax Appellate Tribunal, Chennai
"B" Bench, dated 21.01.2015 passed in I.T.A.No.1710/Mds/2013,
Assessment Year 2006-07.
For Appellant : Mr.T.Ravi Kumar
Senior Standing Counsel
and Mrs.R.Hemalatha
Standing Counsel
For Respondent : Mr.R.Venkata Narayanan
for M/s.Subbaraya Aiyar Padmanabhan
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Tax Case Appeal No.559 of 2015
JUDGMENT
(Delivered by M.DURAISWAMY, J.)
Challenging the order passed in I.T.A.No.1710/Mds/2013 in
respect of the assessment year 2006-07, on the file of the Income Tax
Appellate Tribunal “B” Bench, the Revenue has filed the above appeal.
2.The assessee is a domestic company engaged in the business of
data and call center operation, filed its return of income on 30.11.2006,
after claiming deduction u/s.10A of the Income Tax Act, 1961.
Subsequently, the assessee had revised its return of income on
28.03.2008. Subsequently, the case was taken up for scrutiny and
assessment was made u/s.143(3) of the Act on 28.11.2008 and the
Assessing Officer had set off the brought forward losses and unabsorbed
depreciation from the current year profit of the eligible 10A unit of the
assessee u/s.72 of the Act, and thereafter, granted deduction u/s.10A of
the Act for the remaining profit. The Assessing Officer had also
excluded the entire telecommunication expenses incurred outside India
in foreign exchange and in Indian currency from the export turnover,
however, the same was not excluded from the total turnover while
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Tax Case Appeal No.559 of 2015
computing eligible deduction u/s.10A of the Act.
3.Challenging the order passed by the Assessing Officer, the
assessee preferred an appeal before the Commissioner of Income Tax
(Appeals) and the Appellate Authority allowed the appeal of the
assessee. Aggrieved over the order passed by the Commissioner of
Income Tax (Appeals), the Revenue filed an appeal before the Income
Tax Appellate Tribunal, which also dismissed the appeal.
4.Challenging the order passed by the Income Tax Appellate
Tribunal, the Revenue has filed the above appeal.
5.The above appeal was admitted on the following substantial
questions of law :
“1.Whether on the facts and in the circumstances of
the case, the Tribunal was right in directing the Assessing
Officer to recompute the income in the light of the decision
of the Special Bench in the case of Sak Soft by excluding
the freight and insurance expenses both from the export
turnover and also from the total turnover while computing
deduction under Section 10-A of the Income Tax Act?
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Tax Case Appeal No.559 of 2015
2.Is not the finding of the Tribunal bad, especially
when Explanation II(iv) to Section 10A defines the word
'export turnover' whereby it had been clearly stated that it
would not include freight, telecommunication charges
attributable to the delivery of the articles or things or
computer software outside India or expense if any
incurred in foreign exchange while computing deduction
under Section 10A of the Income Tax Act? and
3.Whether on the facts and circumstances of the
case, the Tribunal was right in allowing set off of benefit
of brought forward losses from the total income after
allowing deduction under Section 10A when as per the
amended provisions of the Act in Section 10A(1) deduction
has to be allowed only after arriving at the total income
after giving effect to brought forward depreciation and
losses?”
6.When the Tax Case Appeal was taken up for hearing, Mr.T.Ravi
Kumar, learned Senior Standing Counsel appearing for the
appellant/Revenue, fairly submitted that the questions of law 1 and 2
were already decided against the Revenue by the Hon'ble Supreme Court
of India in the judgment reported in (2018) 404 ITR 0719 (SC)
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Tax Case Appeal No.559 of 2015
[Commissioner of Income Tax v. HCL Technologies Ltd.], wherein, the
Hon'ble Supreme Court held as follows :
“8.The whole controversy revolves around the claim
of certain expenses attributable to the delivery of software
outside India or in providing technical services from 'total
turnover' by the Respondent under Section 10A of the IT Act.
It is an undisputed fact that neither Section 10A nor Section
2 of the IT Act define the term 'total turnover'. However, the
term 'total turnover' is given in clause (ba) of the
Explanation to Section 80 HHC of the IT Act which defines
the meaning of total turnover as follows:
"(ba) 'total turnover' shall not include freight or
insurance attributable to the transport of the
goods or merchandise beyond the customs
stations as defined in the Customs Act, 1962 (52 of
1962).
Provided that in relation to any assessment year
commencing on or after the 1st day of April, 1991,
the expression "total turnover" shall have effect as
if it also included any sum referred to in clauses
(iiia), (iiib), (iiic), (iiid) and (iiie) of section 28;"
9.It is also pertinent to mention here the relevant
terminologies which are as under:
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Tax Case Appeal No.559 of 2015
"Export Turnover:
Explanation 2(iv) of Section 10A of the IT Act defines
"export turnover" to mean the consideration that has
been received for export of articles/things/computer
software. Normally the consideration will include the
freight/telecommunication charges/insurance which
had been incurred to deliver the
article/things/computer software outside India.
However the Explanation 2(iv) specifically seeks to
exclude these three categories of expenditure
incurred for delivering the export of
articles/things/computer software. It also seeks to
exclude expenses for providing technical service, etc.
outside India. Therefore, where an Indian technician
goes abroad and receives fees for service, the foreign
client will normally be required to reimburse the
expenses as well. Therefore, out of the consideration
received, the portion representing reimbursement of
expenditure has to be excluded.
Export Turnover and Total turnover:
The "total turnover" has been defined in sections
80HHC and 80HHE only to exclude additional items
given under section 28. But for this additional
exclusion, there was no need to define "total
turnover".
Export turnover is a component of total turnover. If
the entire turnover represents export proceeds, then
the export turnover and the total turnover are
identical. It is clear that any exclusion in the export
turnover in the numerator will automatically imply
exclusion in the denominator as well because export
turnover is always a component of total turnover.
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Export Turnover/Total Turnover/Business:
Form 56F prescribes the report under Section 10A
for and Annexure-A thereto refers to "export
proceeds" and "sale proceeds". Both together form
the total turnover of the undertaking."
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 provision 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 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.
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Tax Case Appeal No.559 of 2015
11.On an analysis of the Respondent's activity taken
from its website, Assessing Officer arrived at a conclusion
that Respondent has been rendering technical services
outside India and, therefore, expenses incurred on such
activity are required to be excluded from the export turnover
while working out the deduction admissible under Section
10A of the IT Act. The Assessing Officer estimated 60% of
the software development charges required to be attributed
towards expenses incurred for providing technical services
outside India. On appeal, learned CIT (Appeals) again made
a detailed analysis of the activity of the Respondent and
arrived at a conclusion that the Assessing Officer failed to
bring any evidence which can indicate that Respondent was
providing technical services outside India and it has
incurred expenses towards salary etc. rendering such
services. Inspite that, learned CIT (Appeals), estimated 10%
of software development charge as charges incurred for
technical services provided outside India.
12.It is undisputed fact that the Respondent was
engaged in the business of software development for its
customers engaged in different activities at software
development centres of the Respondent. However, in the
process of such customized software development, certain
activities were required to be carried out at the sight of
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Tax Case Appeal No.559 of 2015
customers on site, located outside India for which the
employees of the branches of the Respondent located in the
country of the customers are deployed. It is true that it is not
defined that which activity will be termed as providing
technical services outside India. Moreover, after delivery of
such softwares as per requirement, in order to make it fully
functional and hassle free functioning subsequent to the
delivery of softwares in many cases, there can be
requirement of technical personnel to visit the client on site.
The Assessing Officer could not bring any evidence that the
Respondent was engaged in providing simply technical
services independent to software development for the client
for which the expenditures were incurred outside India in
foreign currency.
13.The Respondent company has claimed deduction
under Section 10A as per certificates filed on Form No. 56F.
The Respondent, while computing the deduction, has taken
the same figure of export turnover as of total turnover. The
Respondent cited various judicial cases but all these cases
pertain to deduction under Section 80HHC. Further, the
definition of total turnover has been defined in Section
80HHC and 80HHE of the IT Act. As discussed earlier, the
definition of total turnover has not been defined under
Section 10A of the IT Act.
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14. In the above backdrop, we are of the opinion that
the definition of total turnover given under Sections 80HHC
and 80HHE cannot be adopted for the purpose of Section
10A as the technical meaning of total turnover, which does
not envisage the reduction of any expenses from the total
amount, is to be taken into consideration for computing the
deduction under Section 10A. When the meaning is clear,
there is no necessity of importing the meaning of total
turnover from the other provisions. If a term is defined
under Section 2 of the IT Act, then the definition would be
applicable to all the provisions wherein the same term
appears. As the term 'total turnover' has been defined in the
Explanation to Section 80HHC and 80HHE, wherein it has
been clearly stated that "for the purposes of this Section
only", it would be applicable only for the purposes of that
Sections and not for the purpose of Section 10A. If
denominator includes certain amount of certain type which
numerator does not include, the formula would render
undesirable results.
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
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occurred with the parties. The rule of harmonious
construction is the thumb rule to interpretation of any
statute. 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 statue should be
adopted.
16.In Commissioner of Income Tax vs. J.H. Gotla,
(1985) 23 Taxman 14J (SC) this Court has held as under:
"46.Where the plain literal interpretation of
a statutory provision produces a manifestly unjust
result which could never have been intended by the
Legislature, the Court might modify the language
used by the Legislature so as to achieve the
intention of the Legislature and produce a rational
construction. The task of interpretation of statutory
provision is an attempt to discover the intention of
the Legislature from the language used....
47..If the purpose of a particular provision
is easily discernible from the whole scheme of the
Act which, in the present case, was to counteract,
the effect of the transfer of assets so far as
computation of income of the Respondent was
concerned, then bearing that purpose in mind, the
intention should be found out from the language
used by the Legislature and if strict literal,
construction leads to an absurd result, i.e. result
not intended to be subserved by the object of the
legislation found out in the manner indicated
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above, then if other construction is possible apart
from strict literal construction, then that
construction should be preferred to the strict
literal construction. Though equity an taxation are
often strangers, attempt should be made that these
do not remain so always so and if a construction
results in equity rather than in injustice then such
construction should be preferred to the literal
construction. Furthermore, in the instant case, we
are dealing with an artificial liability created for
counteracting the effect only of attempts by the
assessee to reduce tax liability by transfer.."
17.The similar nature of controversy, akin this case,
arose before the Karnataka High Court in CIT vs. Tata Elxsi
Ltd. (2012) 204 Taxman 321/17. 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.
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18.Accordingly, the formula for computation of the
deduction under Section 10A of the Act would be as follows:
Export Profit = total Profit of the Business X
Export turnover as defined in Explanation 2 (IV) of
Section 10A of IT Act / Export turnover as defined
in Explanation 2(IV) of Section 10A of the IT Act +
domestic sale proceeds
19.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 are 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.
20.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.
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21.On the issue of expenses on technical services
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.
22.In view of above discussion, we are of the
considered view that these instant appeals are devoid of
merits and deserve to be dismissed. Accordingly, all the
connected matters and interlocutory applications, if any, are
disposed of with no order as to costs.”
7.Further, the learned Senior Standing Counsel submitted that the
3rd question of law was decided against the Revenue by the Division
Bench of this Court in T.C.A.No.375 of 2018 [Commissioner of Income
Tax, Chennai v. M/s.Allsec Technologies Ltd., Chennai] dated
02.09.2020, wherein, the Division Bench held as follows :
“2.This appeal, filed by the Revenue under Section
260A of the Income Tax Act, 1961 (for brevity, the Act), is
directed against the the order dated 29.3.2017 made in
ITA.No.2229/Mds/2016 the file of the Income Tax
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Tax Case Appeal No.559 of 2015
Appellate Tribunal, Chennai 'C' Bench (for short, the
Tribunal) for the assessment year 2005-06.
3.The appeal was admitted on 10.7.2018 on the
following substantial question of law :
“?Whether deduction under Section 10A of
the Income Tax Act, 1961 may be allowed
without reducing the brought forward losses
pertaining to the year subsequent to the
assessment year and setting the same off
against gains of business in the current
year ??”
4.The issue raised in this appeal is covered by the
decision of this Court in the case of M/s.Comstar
Automative Technologies Private Ltd., Vs. DCIT
[TCA.No.228 of 2011 dated 18.3.2020] in favour of the
assessee. Further in the decision of this Court in the case
of CIT Vs. M/s.Comstar Automotive Technologies Pvt.
Ltd. [TCA.No.301 of 2019 dated 06.7.2020], to which, one
of us (TSSJ) was a party, the above mentioned substantial
question of law was decided against the Revenue
following the said decision in TCA. No.228 of 2011 dated
18.3.2020, which judgment answered the only substantial
question of law against the Revenue.
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5.Following the above decisions, the above tax case
appeal is dismissed and the substantial question of law is
answered against the Revenue. No costs.”
8.The learned Senior Standing Counsel submitted that, in view of
the ratio laid down by the Hon'ble Supreme Court of India and Division
Bench of this Court, the questions of law may be decided against the
Revenue and in favour of the assessee.
9.Mr.R.Venkata Narayanan for M/s.Subbaraya Aiyar
Padmanabhan, learned counsel for the respondent/assessee, submitted
that, in view of the judgment of the Hon'ble Supreme Court and the
Division Bench of this Court cited supra, the appeal may be dismissed.
10.Having regard to the submissions made by the learned counsel
on either side and following the ratio laid down by the Hon'ble Supreme
Court of India, the questions of law 1 and 2 are decided against the
appellant/Revenue. Similarly, following the ratio laid down by the
Division Bench of this Court in T.C.A.No.375 of 2018 dated 02.09.2020,
the 3rd question of law is also decided against the appellant/Revenue and
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in favour in the assessee.
Accordingly, this Tax Case Appeal is dismissed. No costs.
[M.D., J.] [R.H., J.]
01.07.2021
Index : Yes/No
Internet : Yes
mkn
To
1.The Income Tax Appellate Tribunal, Chennai "B" Bench
2.The Commissioner of Income Tax, Chennai.
M. DURAISWAMY, J.
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Tax Case Appeal No.559 of 2015
and
R. HEMALATHA, J.
mkn
Tax Case Appeal No.559 of 2015
01.07.2021
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