Madras High Court
The Commissioner Of Income Tax vs M/S.Covansys (India) Pvt. Ltd on 2 March, 2021
T.C.A.No.795 of 2013
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATE: 02.03.2021
CORAM:
THE HON'BLE MR. JUSTICE M.DURAISWAMY
AND
THE HON'BLE MRS.JUSTICE T.V.THAMILSELVI
T.C.A.No.795 of 2013
The Commissioner of Income Tax,
Chennai. ... Appellant
Vs.
M/s.Covansys (India) Pvt. Ltd.,
(now merged with M/s.Computer Science
Corporation India Pvt Ltd),
Unit 13, Block 2, SDF Building, MEPZ,
Tambaram, Chennai – 600 045. ... Respondent
Appeal preferred under Section 260A of the Income Tax Act,
1961, against the order of the Income Tax Appellate Tribunal, Chennai,
"D" Bench, dated 23.12.2011 in I.T.A.No.1570/Mds/2011.
For Appellant : Mr.T.Ravi Kumar,
Senior Standing Counsel
For Respondent : Mr.R.Venkata Narayanan
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T.C.A.No.795 of 2013
JUDGMENT
(Judgment was delivered by M.DURAISWAMY, J.)
Challenging the order passed in I.T.A.No.1570/Mds/2011 in
respect of the assessment year 2002-03 on the file of the Income Tax
Appellate Tribunal, Chennai “D” Bench, the Revenue has filed the above
appeal.
2.The assessee – Company is engaged in the business of
development of Computer Software and renders training and software
development services in Chennai, Mumbai, Bangalore and also in
Hyderabad. The assessee filed its return of income on 31.12.2002
declaring taxable income of Rs.8,89,04,154/-. After claiming deduction
under Section 80HHE amounting to Rs.31,02,08.097 and also deduction
under Section 10B amounting to Rs.24,22,46,315/- and claimed a refund
of Rs.1,98,46,156/-. An intimation dated 29.03.2003 under Section
143(1)(a) was issued, granting a refund of Rs.2,12,43,455/-, which
included interest amounting to Rs.14,71,067/-. A notice under Section
143(2) was issued on 16.09.2003 and the gain from exchange
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fluctuation/deduction under Section 80HHE was claimed at
Rs.2,87,27,351/- and therefore, the assessee was asked to explain why
the exchange gain of units excluding Chennai should be excluded from
the eligible profit for the purpose of Section 80HHE. The Assessing
Officer found that exchange fluctuation pertains to export of computer
software and followed the assessment order passed for the year 1999-00
and 2001-02 by treating the foreign exchange fluctuation would not be
eligible for calculating 80HHE deduction, instead the gains would be
taxed under the head “income from other sources”.
3.The other issue with regard to the gain from exchange
fluctuation deduction under Section 10B, the Assessing Officer found
that the exchange fluctuation relating to export of computer software and
based on the decision for the assessment year 1999-00 and 2000-01,
which was similar to the present assessment year, followed the same and
held that exchange fluctuation gain was to be taxed separately as it was
not derived from software exports and therefore, the exchange
fluctuation was not to be regarded as eligible profit of the business while
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T.C.A.No.795 of 2013
computing Section 10B and taxed under the same head “income from
other sources”.
4.The issue with regard to loss from Mumbai, Bangalore and
Hyderabad unit and income from Chennai unit alone was to be
considered in computing Section 80HHE. The Assessing Officer
followed the decisions rendered in the assessment year 1999-00 and held
that loss from Mumbai, Bangalore and Hyderabad units was to be
reduced while computing eligible profit of business under Section
80HHE.
5.In respect of the issue with regard to the total turnover for the
purpose of calculating Section 80HHEE, the asssessee has considered
only the total turnover of the Chennai unit and had excluded
turnover of Hyderabad, Bangalore and Mumbai unit while calculating
deductions under Section 80HHE in the return of income filed. The
Assessing Officer held that Hyderabad unit was not engaged in the
business of software development but were providing software training
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T.C.A.No.795 of 2013
and followed the order passed in the assessment year 1999-00 and
excluded the same from the total turnover.
6.The next issue with regard to the software expenses amounting
to Rs.1,11,69,398/- which related to Chennai Unit-I & II, Bangalore and
the sum of of Rs.1,82,21,841/- was capitalized in the books of accounts
and the assessee had claimed the same as revenue expenditure while
computing the taxable income, the Assessing Officer followed the
assessment order passed in the year 1999-00 and 2000-01 and held that
software expenses of Rs.2,93,98,239/- incurred was not eligible for
deduction as revenue expenditure, but allowed depreciation at the rate of
25% on the same. On various disallowances, the Assessing Officer had
arrived at a total taxable income at Rs.15,74,66,739/-.
7.The Commissioner of Income Tax passed an order under
Section 263 holding that exemption under Section 10B was granted in
respect of the Chennai Unit – II and there was a mistake in computation
of deduction and the higher amount of exemption was granted, which the
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assessee was otherwise not entitled to. The CIT further held that the
Assessing Officer failed to disallow the expenditure under Section 14A
in respect to dividend income amounting to Rs.6,21,80,887/- which was
exempted under Section 10(33), therefore, the assessment made was
erroneous and prejudicial to the interest of the Revenue, after issuing
show cause notice, the CIT directed the Assessing Officer to quantify the
amount of exemption under Section 10B and also to quantify the
exemption for the purpose of Section 14A after providing opportunity to
the assessee. Aggrieved by the same, the assessee filed an appeal before
the Commissioner of Income Tax (Appeals), which was partly allowed.
Aggrieved by the order of the CIT (Appeals), both the assessee and the
Revenue preferred appeals before the Income Tax Appellate Tribunal
and the Tribunal partly allowed the Revenue's appeal and dismissed the
assessee's appeal. Aggrieved by the same, the Revenue has filed the
above appeal.
8.The above appeal has been admitted on the following
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substantial question of law:
“Whether on the facts and in the circumstances of the
case, the Income Tax Appellate Tribunal was right in
directing the Assessing Officer to recompute the deduction
under Section 10B by excluding telecommunication and
other expenses incurred in foreign currency both from export
turnover and total turnover?”
9.When the appeal is taken up for hearing, Mr.R.Venkata
Narayanan, learned counsel appearing for the respondent relied upon the
following judgments:
(i)[2018] 93 taxmann.com 33 (SC) [Commissioner of Income-
tax, Central – III Vs. HCL Technologies Ltd.]
“...
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
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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.
...
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.
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20.Even in the 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.
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.”
(ii)(2019) 417 ITR 0441 (Mad) [M/s.Polaris Consulting &
Services Ltd., (formerly known as M/s.Polaris Software Lab Limited)
Vs. Deputy Commissioner of Income Tax], wherein a Division Bench of
this Court held as follows:
“...
16.On a perusal of the nature of the contract and the
various steps, which been enumerated therein, we find that
the element of 'technical services' have been rendered as
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integral part of the software development process. There
was no material available before the Assessing Officer to
split up the transaction into two or to bisect the transaction
to find out an element of 'technical services'. As rightly
pointed out by the assessee, this exercise has been done by
the Assessing Officer based on the notes to the accounts in
the financial statements, which would be impermissible.
What is required to be examined is the nature of services
rendered by the assessee to the foreign entity. Thus, we are
fully satisfied that the 'technical services' rendered by the
assessee is not on a 'standalone basis', but it is an integral
part of the software development and up to step No.(8), as
mentioned above, the assessee is bound to render all
assistance to the foreign entity. Therefore, the artificial
split up of the transaction by the Assessing Officer, that too
without any materials on his file, is wholly unsustainable.
17.For the above reasons, we are constrained to set
aside the order passed by the Tribunal and answer the
Substantial Question of Law No.1 in favour of the
assessee.”
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(iii)Un-reported judgment of this Bench dated 19.01.2021 dated
T.C.A.Nos.1470 to 1472 of 2010 [Commissioner of Income Tax,
Chennai Vs. M/s.S.R.A. Systems Ltd., No.100, Valluvar Kottam High
Road, Nungambakkam, Chennai], this Bench held as follows:
“...
5.As the issue of allowability of deduction under
Section 10A is common to all the three Assessment Years,
all the three Tax Appeals are taken up together and disposed
of by this common judgment. For the Assessment Year
2000-01, the assessee had filed its return of income on
29.11.2000. The assessee claimed that it was eligible for
deduction under Section 10B. The return was processed on
28.03.2002. Subsequently, the Assessing Officer had reason
to believe that income chargeable to tax had escaped
assessment on account of the assessee Company being
ineligible for deduction under Section 10A. Subsequently, a
notice dated 22.03.2007 was issued under Section 148 and
after giving an opportunity of hearing, the scrutiny
assessment order was passed on 17.12.2007, disallowing the
entire claim of deduction under Section 10B. Further, the
expenditure incurred for the renovation and repairs of the
rented premises of the assessee Company was disallowed by
the Assessing Officer on the ground that such expenses were
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in the nature of capital expenditure. The Assessing Officer
in his re-assessment order noted that in terms of Section
10B(ii) an undertaking in order to be eligible for deduction
under Section 10B must not be formed by splitting up or
reconstruction of a business already in existence. Further,
the Assessing Officer held that deduction under Section 10B
was not available to the assessee Company in view of the
provisions of Section 10B(iii) which stipulate that eligible
business is not formed by transfer to a new business of plant
and machinery previously used for any purpose. The
Assessing Officer found that the assessee had not complied
with both these conditions, hence, it was not entitled to any
deduction under Section 10B.
6.For the Assessment Year 2002-03, in the case of the
assessee Company itself, the Income Tax Appellate Tribunal
“C” Bench, Chennai had dealt with the applicability of
Clauses (ii) and (iii) of Section 10A(2) in its order dated
16.05.2008 in I.T.A.No.2255/Mds/06. The Tribunal, after
taking into consideration the decision of Apex Court
reported in 107 ITR 195 [Textile Machinery Corporation
Limited Vs. CIT] held as follows:
“... this is not a case of setting up of a new
business, but only transfer of business place of existing
business to a new place located in STPI area and
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thereafter, getting the approval from the authorities, the
assessee become entitled to deduction under Section
10A. Merely because by shifting the business from one
place to another and keeping some of the plant and
machinery as those are bearing charge of financial
institution, does not violate Clause (ii) and (iii) of Sub
Clause (2) to Section 10A of the Income Tax Act.”
7.The order passed by the Income Tax Appellate
Tribunal was challenged by the Department in
T.C.A.No.1916 of 2008 and the Hon'ble Division Bench of
this Court by its judgment dated 26.10.2018 confirmed the
order of the Income Tax Appellate Tribunal dated
16.05.2008 made in I.T.A.No.2255/Mds/06 for the
Assessment Year 2002-03 and dismissed the appeal. In view
of the judgment of the Hon'ble Division Bench of this Court,
it is clear that the applicability of Clauses (ii) and (iii) of Sub
Clause (2) to Section 10B of the Act, the impugned order
passed by the Income Tax Appellate Tribunal is proper. In
view of the order passed by the Income Tax Appellate
Tribunal dated 16.05.2008 in I.T.A.No.2255/Mds/06 and the
judgment passed by the Hon'ble Division Bench of this
Court on 26.10.2018 in Tax Case Appeal No.1916 of 2008,
the assessee Company would be entitled to deduction under
Section 10A and disallowance made by the Assessing
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Officer was not correct. Since the order passed under
Section 263 itself has been set aside, the cause of action for
re-assessment does not survive.”
10.Mr.T.Ravi Kumar, learned Senior Standing Counsel appearing
for the appellant fairly submitted that the issues involved in the present
appeal are covered by the decision relied upon by the learned counsel for
the respondent.
11.In view of the submissions made by the learned counsel on
either side, we are convinced that the Question of Law involved in the
present appeal is covered by the decisions relied upon by the learned
counsel for the respondent, cited supra. Following the decisions of the
Hon'ble Supreme Court and the decisions of this Court, the Question of
Law is decided against the Revenue and in favour of the assessee. The
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appeal is liable to be dismissed. Accordingly, the Tax Case Appeal is
dismissed. No costs.
[M.D., J.] [T.V.T.S., J.]
Index : Yes/No 02.03.2021
Internet : Yes
va
To
The Income Tax Appellate Tribunal, Chennai, "D" Bench
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T.C.A.No.795 of 2013
M.DURAISWAMY, J.
and
T.V.THAMILSELVI, J.
va
T.C.A.No.795 of 2013
02.03.2021
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