Madras High Court
The Commissioner Of Income - Tax vs M/S Pentamedia Graphics Ltd on 11 January, 2022
TCA No.634 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 11.01.2022
CORAM :
THE HONOURABLE MR. JUSTICE R. MAHADEVAN
and
THE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ
Tax Case Appeal No.634 of 2010
and
MP.No.1 of 2010
---
The Commissioner of Income - Tax,
Chennai. ... Appellant
Versus
M/s Pentamedia Graphics Ltd.,
25, I Main Road United India Colony,
Kodambakkam,
Chennai 600 024. ...
Respondent
Appeal preferred under Section 260A of the Income Tax Act, 1961,
against the order of the Income Tax Appellate Tribunal, Madras “B” Bench,
dated 24.03.2008 in I.TA.No.2701/Mds/2005.
For Appellant : Mr.T.Ravikumar
Senior Standing Counsel
For Respondent : Mr.N.Muthukumar
1/8
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TCA No.634 of 2010
JUDGMENT
(Judgment of the Court was delivered by R.MAHADEVAN, J.)
This tax case appeal has been filed by the appellant/Revenue,
challenging the order dated 24.03.2008 passed by the Income Tax Appellate
Tribunal, Madras 'B' Bench, in I.T.A.No.2701/Mds/2005, relating to the
assessment year 2002-03.
2. By order dated 20.07.2010, this court admitted the aforesaid tax
case appeal on the following substantial question of law:
“Whether in the facts and circumstances of the case, the
Tribunal erred in holding that deduction of expenditure in
foreign exchange is allowable from the total turnover while
computing deduction under Section 10A?"
3. Today, when the appeal is taken up for consideration, the learned
counsel for the appellant/Revenue as well as respondent/assessee jointly
submitted that the substantial question of law raised in this appeal has
already been considered and decided by the Supreme Court in favour of the
Assessee in Commissioner of Income Tax v. HCL Technologies Ltd.,
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TCA No.634 of 2010
(2018) 404 ITR 719 (SC), the relevant passage of which, is usefully extracted
hereunder:
“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 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.
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
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TCA No.634 of 2010
bring any evidence which can indicate that Respondent was
providing technical services outside India and it has incurred
expenses towards salary etc. on 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 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
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TCA No.634 of 2010
Section 10A of the IT Act.
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.
...
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 Section10A 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
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TCA No.634 of 2010
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.
18) Accordingly, the formula for computation of the
deduction under Section10A 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 Section10A 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.
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.
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TCA No.634 of 2010
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."
4. Following the aforesaid judgment, which squarely applies to the
facts of the present case, the substantial question of law is answered in favour
of the Assessee and against the Revenue. Accordingly, the Tax Case Appeal
stands dismissed. No costs. Consequently, connected miscellaneous petition
is closed.
(R.M.D., J.) (M.S.Q., J.)
11.01.2022
av
Internet : Yes / No
Index : Yes / No
To
1. The Income Tax Appellate Tribunal,
'B' Bench Chennai,
2. The Commissioner of Income - Tax,
Chennai.
https://www.mhc.tn.gov.in/judis
TCA No.634 of 2010
R. MAHADEVAN, J
and
MOHAMMED SHAFFIQ, J
av
T.C.A.No.634 of 2010
11.01.2022
(½)
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