KMG Infotech Private Limited, Bangalore v. ACIT, Bangalore

ITA 586/BANG/2010 | 2005-2006
Pronouncement Date: 01-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 58621114 RSA 2010
Bench Bangalore
Appeal Number ITA 586/BANG/2010
Duration Of Justice 1 year(s) 2 month(s) 5 day(s)
Appellant KMG Infotech Private Limited, Bangalore
Respondent ACIT, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 01-07-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 01-07-2011
Date Of Final Hearing 21-06-2011
Next Hearing Date 21-06-2011
Assessment Year 2005-2006
Appeal Filed On 26-04-2010
Judgment Text
PAGE 1 OF 36 ITA NOS.584 TO 586/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI GEORGE GEORGE K J.M. AND SHRI A MOHAN ALANKAMONY A.M ITA NOS.584 TO 586/BANG/2010 (ASSESSMENT YEARS 2002-03 2004-05 & 2005-06) M/S KMG INFOTECH PRIVATE LIMITED UNIT 201/202 VANGUARD RISE 163 KONENA AGRAHARA OFF AIRPORT ROAD BANGALORE-17. - APPELLANT VS THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-11(3) BANGALORE. - RESPONDENT APPELLANT BY : SHRI PADAM KHINCHA C.A. RESPONDENT BY : SHRI ETWA MUNDA CIT-III ORD ER PER GEORGE GEORGE K : THESE THREE APPEALS PREFERRED BY THE ASSESSEE ARE DIRECTED AGAINST THE SEPARATE ORDERS OF LEARNED CIT (A)-I BANGALORE DATED 31.12.2009 1.1.2010 AND 2.1.2010 R ESPECTIVELY. THE ASST. YEARS CONCERNED ARE 2002-03 2004-05 & 200 5-06. 2. SINCE COMMON ISSUES ARE INVOLVED IN THESE APPEA LS AND THEY PERTAINED TO THE SAME ASSESSEE WE DISPOSE OF T HE SAME BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 3. THE RELIEFS SOUGHT IN THESE APPEALS ARE AS FOLL OWS:- PAGE 2 OF 36 ITA NOS.584 TO 586/BANG/2010 2 ITA NO.584/BANG/2010 (ASST. YEAR 2002-03) (I) FOREIGN CURRENCY EXPENSES INCURRED ONSITE FOR DEVELOPMENT OF COMPUTER SOFTWARE BE CONSIDERED AS FORMING PART OF EXPORT TURNOVER AND THE SAID EXPENDITURE BE NOT REDUCED FROM EXPORT TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION U/S 10B; (II) FOREIGN CURRENCY EXPENSES INCURRED ONSITE FOR DEVELOPMENT OF COMPUTER SOFTWARE BE NOT REGARDED AS EXPENSES INCURRED FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA; (III) IN THE ALTERNATIVE AND WITHOUT PREJUDICE IF FOREIGN CURRENCY EXPENSES INCURRED ONSITE FOR DEVELOPMENT OF COMPUTER SOFTWARE BE REDUCED FROM EXPORT TURNOVER THE SAME BE ALSO REDUCED FROM TOTAL TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION U/S 10B; (IV) INTEREST U/S 234B & 234D BE DELETED. 3.1 ITA NO.585/BANG/2010 (ASST. YEAR 2004-05) (I) DEEMED EXPORTS OF RS.33 70 544/- BE REGARDED AS PART OF EXPORT TURNOVER FOR THE PURPOSES OF SECTION 10B; (II) FOREIGN CURRENCY EXPENSES INCURRED ONSITE FOR DEVELOPMENT OF COMPUTER SOFTWARE BE CONSIDERED AS FORMING PART OF EXPORT TURNOVER AND THE SAID EXPENDITURE BE NOT REDUCED FROM EXPORT TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION U/S 10B; (III) FOREIGN CURRENCY EXPENSES INCURRED ONSITE FOR DEVELOPMENT OF COMPUTER SOFTWARE BE NOT REGARDED AS EXPENDED INCURRED FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA; (IV) IN THE ALTERNATIVE AND WITHOUT PREJUDICE IF FOREIGN CURRENCY EXPENSES INCURRED ONSITE FOR DEVELOPMENT OF COMPUTER SOFTWARE BE PAGE 3 OF 36 ITA NOS.584 TO 586/BANG/2010 3 REDUCED FROM EXPORT TURNOVER THE SAME BE ALSO REDUCED FROM TOTAL TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION U/S 10B; (V) INTEREST U/S 234B BE DELETED. 3.2 ITA NO.586/BANG/2010 (ASST. YEAR 2005-06) (I) SOFTWARE EXPENSES OF RS.2 28 159/0- BE FULLY ALLOWED AS DEDUCTION IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS; (II) DEEMED EXPORTS OF RS.38 29 511/- BE REGARDED AS PART OF EXPORT TURNOVER FOR THE PURPOSES OF SECTION 10B; (III) TELECOMMUNICATION CHARGES OF RS.7 33 288/- BE NOT REDUCED FROM EXPORT TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION U/S 10B; (IV) FOREIGN CURRENCY EXPENSES INCURRED ONSITE FOR DEVELOPMENT OF COMPUTER SOFTWARE BE CONSIDERED AS FORMING PART OF EXPORT TURNOVER AND THE SAID EXPENDITURE BE NOT REDUCED FROM EXPORT TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION U/S 10B; (V) FOREIGN CURRENCY EXPENSES INCURRED ONSITE FOR DEVELOPMENT OF COMPUTER SOFTWARE BE NOT REGARDED AS EXPENSES INCURRED FOR PROVIDING TECHNICAL SERVICES OUTSIDE INDIA; (VI) IN THE ALTERNATIVE AND WITHOUT PREJUDICE IF TELECOMMUNICATION CHARGES OF RS.7 33 288/- AND FOREIGN CURRENCY EXPENSES INCURRED ONSITE FOR DEVELOPMENT OF COMPUTER SOFTWARE BE REDUCED FROM EXPORT TURNOVER THE SAME BE ALSO REDUCED FROM TOTAL TURNOVER IN THE PROCESS OF COMPUTATION OF DEDUCTION U/S 10B; (VII) INTEREST U/S 234B BE DELETED; (VIII) INTEREST U/S 234C BE DELETED. PAGE 4 OF 36 ITA NOS.584 TO 586/BANG/2010 4 4. IN ALL THERE ARE FOUR ISSUES INVOLVED IN THESE APPEALS. SOME OF THE ISSUES ARE COMMON FOR ALL THE ASST. YEAR S. THE LEVY OF INTEREST U/S 234B 234C & 234D ARE ONLY CONSEQUENTI AL AND IN THE COURSE OF HEARING NO ARGUMENTS WERE ADDRESSED BY TH E LEARNED AR WITH REGARD TO LEVY OF INTEREST AND HENCE RELIEF NO .(IV) & (V) FOR AY 2002-03 & 2004-05 AND RELIEF NO.(VII) & (VIII) FOR AY 2005-06 ARE DISMISSED. THE OTHER ISSUES ALONG WITH THE RELEVAN T GROUNDS SHALL BE DISPOSED OF IN THE FOLLOWING MANNER:- 5. 1. FOREIGN CURRENCY EXPENSES INCURRED OUTSID E INDIA FORMS PART OF EXPORT TURNOVER FOR THE PURPO SE OF SECTION 10B. THE ABOVE ISSUE IS COMMON FOR ALL THE CONCERNED ASST. YEARS. BRIEFLY STATED THE FACTS IN RELATION TO THE A BOVE ISSUE ARE AS FOLLOWS:- THE ASSESSEE IS AN INDIAN COMPANY ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF COMPUTER SOFT WARE. THE ASSESSEE HAS SECURED STPI REGISTRATION AND IS ELIGI BLE FOR DEDUCTION U/S 10B OF THE I T ACT 1961. THE SOFTWA RE DEVELOPMENT SERVICES ARE PROVIDED BY THE ASSESSEE TO ITS PARENT COMPANY VIZ. KEY MANAGEMENT GROUP INC. USA (KMG US). THE SOFTWA RE DEVELOPMENT SERVICES ARE PROVIDED FROM STPI UNIT IN INDIA (OFFSHORE EXPORTS) AND AT CLIENTS LOCATION OUTSIDE INDIA (ONSITE EXPORTS). A MEMORANDUM OF UNDERSTANDING HAS BEEN ENTERED INTO BETWEEN KMG US AND THE ASSESSEE (KMGI) IN RESPECT O F SOFTWARE DEVELOPMENT SERVICES AGREED TO BE PROVIDED BY THE AS SESSEE. CLAUSE II(4) OF THE SAID MEMORANDUM STATES AS FOLLOWS:- PAGE 5 OF 36 ITA NOS.584 TO 586/BANG/2010 5 KMGI WILL BEAR ALL COSTS RELATING TO THE PROFESSIONALS WHO ARE DEPUTED TO KMG US FOR ON- SITE PROJECTS. ALL EXPENSES RELATING TO THE PROFESSIONALS ON BEHALF OF KMGI ARE TO BE PAID BY KMG US. SUCH EXPENSES WILL BE ADJUSTED AGAINST OUTSTANDING LAST IN FIRST OUT BASIS. 5.1 IN ACCORDANCE WITH THE ABOVE ARRANGEMENT THE EXPENSES IN RELATION TO ONSITE DEVELOPMENT OF COMPU TER SOFTWARE SUCH AS EMPLOYEE COSTS INSURANCE RENT CONVEYANCE TRAVEL TELECOMMUNICATION EXPENSES ETC. WERE INITIALLY PAID BY KMG US. THE EXPENDITURE SO PAID BY KMG US WERE ADJUSTED AGAI NST THE CONSIDERATION PAYABLE BY KMG US TO THE ASSESSEE. THE ASSESSEE RECEIVED THE EXPORT SALE PROCEEDS REMAINING AFTER S ETTING OFF THE ONSITE EXPENDITURE FOR ALL THE YEARS UNDER APPEAL. 5.2 THE DETAILS OF EXPORTS ONSITE EXPENDITURE PAI D BY KMG US AND THE NET AMOUNT RECEIVED BY THE ASSESSEE F OR ALL THE YEARS UNDER APPEAL ARE AS FOLLOWS:- AY 2002-03 OFFSHORE EXPORTS RS. 62 45 986/- ONSITE EXPORTS RS.4 86 80 309/- TOTAL RS.5 49 26 295/- ONSITE EXPENSES (INCLUDING MARKETING EXPENSES) RS. 3 51 10 647/- RS.1 98 15 648/- LESS: OFFSHORE EXPORTS SALE PROCEEDS NOT BROUGHT INTO INDIA RS. 5 42 657/- NET FOREIGN EXCHANGE BROUGHT INTO INDIA RS.1 92 7 2 991/- AY 2004-05 OFFSHORE EXPORTS RS. 2 29 18 090/- ONSITE EXPORTS RS.16 33 45 329/- TOTAL RS.18 62 63 419/- LESS: ONSITE EXPENSES RS.14 38 28 950/- NET FOREIGN EXCHANGE BROUGHT INTO INDIA RS. 4 24 34 469/- PAGE 6 OF 36 ITA NOS.584 TO 586/BANG/2010 6 BREAK UP OF ONSITE EXPENSES MARKETING EXPENSES RS.4 81 39 550/- ONSITE SOFTWARE DEVELOPMENT EXPENSES RS.9 56 89 4 00/- TOTAL RS.14 38 28 950/ - AY 2005-06 OFFSHORE EXPORTS RS. 6 43 24 326/- ONSITE EXPORTS RS.21 10 01 214/- TOTAL RS.27 53 25 540/- LESS: ONSITE EXPENSES RS.20 54 34 067/- NET FOREIGN EXCHANGE BROUGHT INTO INDIA RS. 6 98 9` 473/- BREAK UP OF ONSITE EXPENSES MARKETING EXPENSES RS.5 22 37 058/- ONSITE SOFTWARE DEVELOPMENT EXPENSES RS.15 31 97 009/- TOTAL RS.20 54 34 067/ - 5.3 THE AO IN ASSESSMENT ORDER PASSED U/S 143(3) F OR THE AY 2002-03 COMPUTED EXPORT TURNOVER FOR THE PURPO SES OF SECTION 10B BY REDUCING ONSITE EXPENSES PAID BY KMG US FROM THE NET FOREIGN EXCHANGE BROUGHT INTO INDIA. THIS WAS DONE ON THE GROUND THAT (I) ONLY AMOUNTS RECEIVED IN OR BROUGHT INTO TH E COUNTRY WOULD CONSTITUTE EXPORT TURNOVER AS DEFINED IN THE SECTIO N (II) TO THE EXTENT FOREIGN EXCHANGE PROCEEDS WERE NOT RECEIVED IN THE COUNTRY THE SAID SALES COULD NOT CONSTITUTE EXPORT TURNOVER. THE ONSITE EXPENSES WHICH WERE ALREADY REDUCED IN COMPUT ING THE FIGURE OF EXPORT TURNOVER WERE AGAIN REDUCED FROM T HE FIGURE OF EXPORT TURNOVER. THE SECOND REDUCTION WAS ON THE PR EMISE THAT THE EXPENDITURE INCURRED OVERSEAS WAS IN THE COURSE OF RENDERING TECHNICAL SERVICE AND THE DEFINITION OF EXPORT TUR NOVER MANDATED PAGE 7 OF 36 ITA NOS.584 TO 586/BANG/2010 7 SUCH REDUCTION. THE AMOUNT AFTER REDUCTION OF ONSI TE EXPENSES FROM NET FOREIGN EXCHANGE BROUGHT INTO INDIA WAS NE GATIVE. ACCORDINGLY DEDUCTION U/S 10B WAS DENIED BY THE AO. 5.4 IN THE ASSESSMENT ORDER PASSED FOR AY 2004-05 AND 2005-06 THE AO INITIALLY LIMITED THE FIGURE OF EXP ORT TURNOVER TO THE EXTENT OF NET FOREIGN EXCHANGE RECEIVED IN OR B ROUGHT INTO INDIA. THE FINAL FIGURE OF EXPORT TURNOVER WAS C OMPUTED AFTER REDUCING DEEMED EXPORTS AND TELECOM CHARGES FROM NE T FOREIGN EXCHANGE BROUGHT INTO INDIA. IN OTHER WORDS THE O NSITE EXPENSES WHICH WERE ALREADY REDUCED IN COMPUTING THE NET FORE IGN EXCHANGE BROUGHT INTO INDIA WERE NOT AGAIN REDUCED IN COMPUT ING EXPORT TURNOVER. DEDUCTION CLAIMED U/S 10B WAS ACCORDINGL Y REDUCED. 5.5 IN ASSESSMENT ORDERS PASSED FOR ALL THE YEARS IT WAS OBSERVED THAT SALE PROCEEDS ACTUALLY RECEIVED IN OR BROUGHT INTO INDIA ALONE QUALIFIES TO BE INCLUDED IN THE FIGURE OF EXPORT TURNOVER. 5.6 THE LEARNED CIT(A) IN APPELLATE ORDER PASSED F OR AY 2002-03 HELD THAT ONSITE EXPENSES INCURRED OUTSIDE INDIA REPRESENTS EXPENDITURE INCURRED FOR PROVIDING TECHN ICAL SERVICES OUTSIDE INDIA. IT WAS THEREFORE HELD THAT ONSITE E XPENSES SHOULD BE REDUCED FROM EXPORT TURNOVER. IT WAS ALSO HELD THAT EXPORT SALE PROCEEDS RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE I N INDIA ALONE FORMS PART OF EXPORT TURNOVER. SINCE THE AO HAD RED UCED ONSITE PAGE 8 OF 36 ITA NOS.584 TO 586/BANG/2010 8 EXPENSES TWICE THE LEARNED CIT(A) DIRECTED THE AO TO ADOPT THE EXPORT TURNOVER AT RS.1 92 72 991/- BEING THE SALE PROCEEDS RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE. THE APPE AL WAS THEREFORE PARTLY ALLOWED. 5.7 THE REASONS GIVEN IN THE APPELLATE ORDER PASSE D FOR AY 2002-03 WERE FOLLOWED IN THE APPELLATE ORDERS PASSE D FOR AY 2004-05 AND AY 2005-06. FOR THESE YEARS THE COMPU TATION OF EXPORT TURNOVER BY THE AO WAS UPHELD. THE APPEALS W ERE THEREFORE DISMISSED. 5.8 AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US . THE ASSESSEE HAS FILED THREE SETS OF PAPER BOOK INTER ALIA CONTAINING THE DETAILS FILED BEFORE THE INCOME TAX AUTHORITIES . THE LEARNED AR HAS FILED ELABORATE WRITTEN SUBMISSIONS. THE GI ST OF WHICH IS REPRODUCED BELOW:- 2.1 EXPORT SALE PROCEEDS RECEIVED IN OR BROUGHT INTO INDIA IN ACCORDANCE WITH SUBSECTION 3 OF SECTION 10B IS THE STARTING POINT IN COMPUTATION OF EXPORT TURNOVER. 2.2 SUBSECTION 3 OF SECTION 10B READS AS UNDER. THIS SECTION APPLIES TO THE UNDERTAKING IF THE SA LE PROCEEDS OF ARTICLES OR THINGS OR COMPUTER SOFTWARE EXPORTED OUT OF INDIA ARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE WITHIN A PERIOD OF SIX MONTHS FROM THE END OF THE PREVIOUS YEAR OR WITHIN SUCH PAGE 9 OF 36 ITA NOS.584 TO 586/BANG/2010 9 FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW IN THIS BEHALF. 2.3 SUBSECTION 3 PROVIDES FOR RECEIVING OR BRINGING EXPORT SALE PROCEEDS INTO INDIA IN CONVERTIBLE FOREIGN EXCHANGE WITHIN 6 MONTHS OR WITHIN SUCH FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW IN THIS BEHALF. THE COMPETENT AUTHORITY MEANS RESERVE BANK OF INDIA (RBI) OR ANY AUTHORITY AUTHORIZED UNDER LAW FOR REGULATING PAYMENTS AND DEALINGS IN FOREIGN EXCHANGE. 2.4 DEDUCTION UNDER SECTION 10B IS CONDITIONAL UPON THE SALE PROCEEDS BEING REALISED IN CONVERTIBLE FOREIGN EXCHANGE. THE TIME FOR REALISING THE SALE PROCEEDS AND THE MANNER OF REALISING THE SAME ARE GOVERNED AND PROVIDED FOR IN THE FOREIGN EXCHANGE MANAGEMENT ACT. SINCE THERE IS A SEPARATE CENTRAL ENACTMENT FOR REGULATING AND DEALING IN FOREIGN EXCHANGE THE INCOME TAX ACT GENERALLY ACCEPTS THE PRIMACY OF SUCH LEGISLATION. THIS IS ACKNOWLEDGED FOR EXAMPLE IN (I) SUBSECTION 3 OF SECTION 10B WHERE THE TIME FOR REALISING THE FOREIGN EXCHANGE IS LEFT TO THE COMPETENT AUTHORITY (II) EXPLANATION 1 TO SECTION 10B(3) WHERE THE COMPETENT AUTHORITY IS DEFINED WITH REFERENCE TO THE FOREIGN EXCHANGE MANAGEMENT ACT. (III) EXPLANATION 2 TO SECTION 10B(3) WHERE OPENING OF A BANK ACCOUNT OUTSIDE INDIA AS PER FEMA IS RECOGNISED AND CREDITING OF THE SALE PROCEEDS TO SUCH ACCOUNT IS HELD PERMISSIBLE. PAGE 10 OF 36 ITA NOS.584 TO 586/BANG/2010 10 2.5 COMPLIANCE WITH FEMA REGULATIONS IN MATTERS OF REALIZATION OF CONVERTIBLE FOREIGN EXCHANGE IS RECOGNIZED TO BE IN ACCORD WITH THE STIPULATIONS OF THE INCOME TAX ACT TO BE ELIGIBLE FOR THE ATTENDANT TAX BENEFITS. 2.6 THE RBI HAS BEEN CONSCIOUS OF THE FACT THAT THE EARNING OF FOREIGN EXCHANGE COULD ENTAIL EXPENSES. THIS HAS BEEN RECOGNIZED BY PERMITTING THE INCURRENCE OF SUCH EXPENDITURE EITHER FROM OUT OF THE OVERSEAS BANK ACCOUNT OPENED FOR THIS PURPOSES OR BY NETTING OFF THE EXPENSES AGAINST THE SALE PROCEEDS. 2.7 RBI VIDE CIRCULARS DATED 29.06.2002 AND 1.7.2006 PROVIDED FOR UTILIZATION UPTO 70% OF ONSITE EXPORT PROCEEDS TOWARDS ONSITE CONTRACT RELATED EXPENSES. THE REMAINING 30% ONSITE EXPORT SALE PROCEEDS ALONE WERE REQUIRED TO BE REPATRIATED TO INDIA AS PER THESE CIRCULARS. THE RELEVANT EXTRACTS OF THESE CIRCULARS ARE AS FOLLOWS . 2.8 THE RETENTION OF ONSITE EXPORT SALE PROCEEDS UPTO 70% WAS IN ADDITION TO AND APART FROM PAYMENT OF AGENCY COMMISSION OUTSIDE INDIA. THE RBI CIRCULARS PERMIT PAYMENT OF AGENCY COMMISSION OUTSIDE INDIA EITHER BY REMITTANCE OR BY DEDUCTION FROM INVOICE VALUE . 2.9 THE PAYMENT OF AGENCY COMMISSION IS DEALT WITH SEPARATELY AND INDEPENDENTLY. THE MASTER CIRCULARS PERMIT THE SAID COMMISSION AS A DEDUCTION FROM THE INVOICE VALUE. IT IS FROM SUCH REDUCED INVOICE VALUE THAT THE REMITTANCE OF 70% OF ONSITE REVENUE IS TO BE RECKONED / CALCULATED. PAGE 11 OF 36 ITA NOS.584 TO 586/BANG/2010 11 2.10 THE REPATRIATION OF 30% OF ONSITE EXPORT SALE PROCEEDS TO INDIA WAS DISPENSED WITH VIDE RBI CIRCULARS DATED 28.2.2007 2.7.2007 AND 1.7.2009. AS PER THE ABOVE CIRCULARS IT IS SUFFICIENT IF THE PROFIT OF ONSITE CONTRACTS ARE REPATRIATED TO INDIA. THE REQUIREMENT OF REPATRIATION OF 30% OF EXPORT SALE PROCEEDS HAS ALSO BEEN DISPENSED WITH A VIEW TO INCREASE THE COMPETITIVENESS IN THE INDIAN IT SECTOR. THESE CIRCULARS ARE DESIGNED TO PROVIDE INCENTIVES RELIE F AND PROMOTE ECONOMIC DEVELOPMENT. THESE CIRCULARS BEING BENEFICIAL ARE TO BE REGARDED AS RETROSPECTIVE IN NATURE. EVEN OTHERWISE THE BENEFICIAL CIRCULARS ARE APPLICABLE TO ALL PENDING PROCEEDINGS. THE DECISIONS OF THE SUPREME COURT IN SUCHITRA COMPONENTS LTD V CCE APPEAL (CIVIL) 3596 OF 2005 DATED 17/01/2007 208 ELT 517 AND CCE V M/S. MYSORE ELECTRICALS INDUSTRIES LTD. REPORTED IN 2007 (204) E.L.T. 517 CONFIRMS THAT A BENEFICIAL CIRCULAR HAS TO BE APPLIED RETROSPECTIVELY WHILE OPPRESSIVE CIRCULAR HAS TO BE APPLIED PROSPECTIVELY. IN BAJAJ AND SONS (B.S.) V. CIT [1996] 222 ITR 418 (P&H) IT WAS HELD THAT BENEVOLENT CIRCULARS PROVIDING ADMINISTRATIVE RELIEF TO THE ASSESSEE EVEN IF THEY ARE ISSUED SUBSEQUENT TO THE DECISION BY AN AUTHORITY UNDER THE ACT HAVE TO BE TAKEN NOTICE OF AND GIVEN EFFECT TO IF FOUND APPLICABLE IN THE GIVEN FACTS. THEREFORE THE RBI CIRCULARS DISPENSING THE REQUIREMENT OF REPATRIATING 30% OF EXPORT SALE PROCEEDS EVEN THOUGH LATER IN TIME WOULD BE APPLICABLE FOR THE YEARS UNDER APPEAL. THE PROFITS OF ONSITE CONTRACTS HAVE BEEN REPATRIATED TO INDIA IN THE PRESENT CASE. THE REQUIREMENT OF RBI CIRCULARS IS THEREFORE SATISFIED. EVEN OTHERWISE THE REQUIREMENT OF BRINGING 30% OF ONSITE EXPORT PROCEEDS INTO INDIA IS SATISFIED. PAGE 12 OF 36 ITA NOS.584 TO 586/BANG/2010 12 THUS THE REQUIREMENT OF RECEIVING OR BRINGING EXPORT SALE PROCEEDS INTO INDIA IN ACCORDANCE WITH SUBSECTION 3 OF SECTION 10B IS SATISFIED. THE ENTIR E ONSITE EXPORT TURNOVER SHOULD THEREFORE BE TREATED AS EXPORT TURNOVER FOR THE PURPOSES OF SECTION 10B WITHOUT REDUCTION OF ONSITE EXPENSES. 3.1 SUBSECTION 3 OF SECTION 10B AND THE DEFINITION OF EXPORT TURNOVER PROVIDES FOR RECEIVING OR BRINGING EXPORT SALE PROCEEDS INTO INDIA IN CONVERTIBLE FOREIGN EXCHANGE. SECTION 80 O WHICH PROVIDED FOR DEDUCTION IN RESPECT OF COMMISSION RECEIVED IN INDIA IN CONVERTIBLE FOREIGN EXCHANGE ALSO INCORPORATED A SIMILAR REQUIREMENT. THE SUPREME COURT IN J B BODA AND CO PVT. LTD V CBDT [1997] 223 ITR 271 RELYING ON CIRCULAR NO.731 HELD THAT WHEN COMMISSION WHICH WAS TO BE RECEIVED IN INDIA IN CONVERTIBLE FOREIGN EXCHANGE I S DEDUCTED OUT OF AMOUNT PAYABLE TO FOREIGN REINSURERS IT AMOUNTED TO RECEIPT OF INCOME IN CONVERTIBLE FOREIGN EXCHANGE. THE SUPREME COURT HELD THAT (I) A TWO WAY TRAFFIC IS UNNECESSARY AND (II) TO INSIST ON A FORMAL REMITTANCE TO FOREIGN REINSURERS AND THEREAFTER TO RECEIVE THE COMMISSION FROM THE FOREIGN REINSURER WILL BE AN EMPTY FORMALITY AND A MEANINGLESS RITUAL. 3.2 THE RATIO OF THE DECISION IN J B BODAS CASE HAS BEEN APPLIED IN THE CONTEXT OF (I) SECTION 80HHE IN 3I INFOTECH LTD V DCIT [2011] 136 TTJ 641 (MUMBAI) AND MCLEOD RUSSEL (INDIA) LTD V DCIT (2001) 73 TTJ 349 (CAL) (II) SECTION 80HHB IN CIT V ESSAR OIL LTD [2008] 2 TAXCORP (DT) 42280 (BOMBAY HC). 3.3 RECENTLY THE CHENNAI SB IN ZYLOG SYSTEMS LTD V ITO [2011] 135 TTJ 129 HAS HELD THAT THE PAGE 13 OF 36 ITA NOS.584 TO 586/BANG/2010 13 RATIO OF THE DECISION IN J B BODAS CASE WOULD APPL Y FOR THE PURPOSES OF SECTION 10B. IT WAS HELD THAT ONSITE EXPENSES INCURRED OUTSIDE INDIA IS DEEMED TO HAVE BEEN RECEIVED IN INDIA FOR THE PURPOSES OF SECTION 10B. 3.4 IN VIEW OF THE ABOVE THE ONSITE EXPENSES INCURRED FOR THE YEARS UNDER APPEAL SHOULD BE REGARDED AS RECEIVED OR BROUGHT INTO INDIA AND ACCORDINGLY SHOULD FORM PART OF EXPORT TURNOVER FOR THE PURPOSES OF SECTION 10B. 3.5 IF FOR ANY REASON THE REQUIREMENT OF BRINGING 30% OF EXPORT SALE PROCEEDS INTO INDIA IS INSISTED UPON AND THERE IS A SHORTFALL REDUCTION FROM EXPORT TURNOVER SHOULD BE MADE ONLY TO THE EXTENT OF SUCH SHORTFALL. 4.0 ONSITE EXPENSES WERE NOT INCURRED TOWARDS PROVIDING TECHNICAL SERVICES OUTSIDE INDIA 4.1 DEDUCTION UNDER SECTION 10B IS AVAILABLE IN RESPECT OF INCOME FROM EXPORT OF COMPUTER SOFTWARE. THE TERM COMPUTER SOFTWARE IS DEFINED IN EXPLANATION 2 TO SECTION 10B. 4.2 A SOFTWARE DEVELOPMENT ACTIVITY PROCEEDS OVER VARIOUS STAGES. IT CAN ASSUME VARIOUS FORMS. THE APPELLANT WAS AT ALL TIMES DURING THE YEAR ENGAGED IN THE CREATION AND DEVELOPMENT OF COMPUTER PROGRAMS. DURING THE YEAR UNDER CONSIDERATION THE APPELLANT DID NOT RENDER ANY TECHNICAL SERVICES OUTSIDE THE COUNTRY. PAGE 14 OF 36 ITA NOS.584 TO 586/BANG/2010 14 4.3 THE APPELLANT AT THE MATERIAL TIME WAS ENGAGED IN SOFTWARE DEVELOPMENT. ALL THE REVENUES WERE FROM PROJECT WORK THAT THE APPELLANT HAD UNDERTAKEN AND IN WHICH THE APPELLANT ASSUMED FULL RESPONSIBILITY FOR THE LIFE OF THE PROJECT TILL THE ULTIMATE DELIVERY THEREOF TO THE CUSTOMER. 4.4 IN THE CURRENT ECONOMIC AND BUSINESS SCENARIO THE CREATION OF COMPUTER PROGRAMS TO ASSIST THE VARIOUS BUSINESS FUNCTIONS IS A COMPLEX PROCESS. THE SOFTWARE TO BE ULTIMATELY CREATED IS BROKEN INTO DIFFERENT DRIVERS OR MODULES. THESE DIFFERENT MODULES (OR EVEN SUB-SEGMENTS THEREOF) ARE NORMALLY DEVELOPED BY DIFFERENT PERSONS BECAUSE THE EXPERTISE AND WHEREWITHAL TO DEVELOP THE SOFTWARE MAY NOT BE AVAILABLE WITH A SINGLE PERSON. FOR EACH MODULE SPECIFICATIONS ARE DEVELOPED. THE PERFORMANCE LEVEL TO BE ACHIEVED INCLUDING THE STRESS LEVELS SECURITY LEVELS PERFORMANCE LEVELS AND RECOVERY LEVELS ARE DEFINED. THE PERSON TO WHOM THE WORK IS GIVEN ASSUMES RESPONSIBILITY FOR THE FULL LIFE OF THE PROJECT TILL THE ULTIMATE DELIVERY OF THE MODULE SO CREATED. THE ROLE IS THUS OF A DEVELOPER OF SOFTWARE AND NOT AS A CONSULTANT TO THE PROJECT. THE APPELLANT DURING THE YEARS UNDER CONSIDERATION DERIVED NO INCOME FROM CONSULTANCY OR ADVISORY SERVICES. ITS INCOME WAS FROM THE ACTIVITY OF DEVELOPING SOFTWARE. 4.5 THE APPELLANT IN THE YEAR UNDER CONSIDERATION DID NOT RENDER ANY TECHNICAL SERVICES OUTSIDE INDIA IN CONNECTION WITH THE DEVELOPMENT OF SOFTWARE. TECHNICAL SERVICES WOULD MEAN MAKING AVAILABLE SPECIALIZED KNOWLEDGE OR INFORMATION TO A THIRD PERSON. THE RECIPIENT OF SUCH KNOWLEDGE OR INFORMATION IS THEN ENABLED TO PAGE 15 OF 36 ITA NOS.584 TO 586/BANG/2010 15 APPLY AND USE SUCH KNOWLEDGE AND INFORMATION FOR THE PURPOSE OF CARRYING OUT ANY WORK. TECHNICAL SERVICES WOULD THEREFORE MEAN AND REFER TO THE USAGE OR DEPLOYMENT OF SPECIALIZED SKILLS IN RENDERING ANY SERVICES OF A CONSULTANCY NATURE. DURING THE YEAR CONSIDERATION THE APPELLANT DID NOT RENDER ANY TECHNICAL SERVICES. THE APPELLANT WAS AT ALL TIMES ENGAGED IN THE CREATION AND DEVELOPMENT OF COMPUTER SOFTWARE. THE EXPORT INCOMES EARNED BY THE APPELLANT WERE ENTIRELY ATTRIBUTABLE TO THE WORK IN SOFTWARE CREATION AND DEVELOPMENT. EXPLANATION 2(I) TO SECTION 10B DEFINES THE TERM COMPUTER SOFTWARE. THE ACTIVITIES OF THE APPELLANT SATISFIED THE REQUIREMENTS OF THIS DEFINITION. 4.6 SECTION 10B GRANTS DEDUCTION FOR AN EXPORT OUT OF INDIA OF COMPUTER SOFTWARE OR ITS TRANSMISSION FROM INDIA TO A PLACE OUTSIDE INDIA. THE APPELLANT DURING THE YEARS EXPORTED THE SOFTWARE THAT IT HAD DEVELOPED. THAT THE APPELLANT HAD EXPORTED SOFTWARE OUTSIDE INDIA IS SUPPORTED BY THE STPI IN ITS GRANTING OF VARIOUS RELIEFS AND CONCESSIONS. THAT THE APPELLANT HAD EXPORTED SOFTWARE HAS BEEN ACCEPTED BY THE ASSESSING OFFICER WHILE AGREEING TO THE CLAIM OF EXEMPTION UNDER SECTION 10B OF THE INCOME TAX ACT. AS THE APPELLANT WAS NOT ENGAGED IN THE RENDERING OF TECHNICAL SERVICES OUTSIDE INDIA THE QUESTION OF EXCLUDING THE EXPENDITURE INCURRED IN FOREIGN EXCHANGE IN THE COURSE OF RENDERING TECHNICAL SERVICE FROM THE FIGURES OF EXPORT TURNOVER AND TOTAL TURNOVER IN ARRIVING AT THE QUANTUM OF DEDUCTION UNDER SECTION 10B SHOULD NOT ARISE AT ALL . 4.7 SECTION 10B SPECIFICALLY WARRANTS THE EXCLUSION OF THE EXPENDITURE INCURRED IN FOREIGN PAGE 16 OF 36 ITA NOS.584 TO 586/BANG/2010 16 CURRENCY FROM THE EXPORT AND TOTAL TURNOVER ONLY IN CASES WHERE TECHNICAL SERVICES ARE RENDERED OUTSIDE THE COUNTRY. SUCH EXCLUSION IS NOT REQUIRED IN CASES WHERE COMPUTER SOFTWARE IS EXPORTED FROM INDIA. 4.8 IN VIEW OF ALL THE ABOVE THE CONCLUSIONS OF THE LEARNED ASSESSING OFFICER IN EXCLUDING THE EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER IS TO BE QUASHED AND THE COMPUTATION OF DEDUCTION AS RETURNED BY THE APPELLANT IS TO BE RESTORED. 4.9 THE BANGALORE TRIBUNAL IN THE CASE OF INFOSYS TECHNOLOGIES LIMITED VS JCIT ITA NO 50 732 TO 734 742 793 TO 795 VIDE ORDER DATED 31-03-2005 HAS HELD THAT DEVELOPMENT OF COMPUTER SOFTWARE SHOULD NOT BE REGARDED AS RENDERING OF TECHNICAL SERVICES AND HENCE NO EXPENDITURE IN FOREIGN CURRENCY IS TO BE REDUCED IN ARRIVING AT THE FIGURE OF EXPORT TURNOVER. THE RATI O OF THE SAID DECISION WOULD BE APPLICABLE TO THE CAS E OF THE APPELLANT ALSO. 4.10 IN THE FOLLOWING DECISIONS IT HAS BEEN HELD THAT DEVELOPMENT OF COMPUTER SOFTWARE DOES NOT AMOUNT TO RENDERING OF TECHNICAL SERVICES AND ACCORDINGLY EXPENSES INCURRED IN FOREIGN CURRENCY SHOULD NOT BE REDUCED FROM EXPORT TURNOVER IN THE PROCESS OF COMPUTING DEDUCTION UNDER SECTION 10B /10B. ZYLOG SYSTEMS LTD V ITO [2011] 7 ITR (TRIB) 348 CHENNAI SB; INFOSYS TECHNOLOGIES LIMITED VS. JCIT ITA NO 50 732 TO 734 742 793 TO 795 ORDER DATED 31- 03-2005 - ITAT BANGALORE; PAGE 17 OF 36 ITA NOS.584 TO 586/BANG/2010 17 INFOSYS TECHNOLOGIES LTD VS. JCIT ITA NO. 140/BANG/2001DT. 05.07.2005 AY 1997-98 REPORTED IN (2007) 108 TTJ 282; INFOSYS TECHNOLOGIES LTD V ACIT ITA NO. 627/BANG/2003 AY 1999-2000 DT. 09.09.2005 INFOSYS TECHNOLOGIES LTD. V JCIT ITA NO.1922/BANG/2003; DATED 07.04.2006 (ASSESSMENT YEAR 1998-99) ITAT BANGALORE BENCH - REPORTED IN 109 TTJ 631 INFOSYS TECHNOLOGIES LTD. V. DCIT (SR) 35 ITA NO. 3086 /B/1995 & 5703/B/1996 AY 1991-92 & 1992-93 - ITAT BANGALORE BENCH DECISION DATED 05.10.2006 ACIT V INFOSYS TECHNOLOGIES LTD ITA NO. 653 & 969 (BANG) 2006 AY 2002-03 & 2003-04 DT. 17.10.2007 REPORTED IN (2008) 172 TAXMAN 0134 (MAG) ACIT V INFOSYS TECHNOLOGIES LTD ITA NO. 635/BANG/2006 AY 2001-02 DT. 02.11.2007 DCIT V INFOSYS TECHNOLOGIES LTD ITA NO. 1202/BANG/2009 AY 2004-05 DT. 08.10.2010 TATA ELXSI LTD V DCIT ITA NO. 56 & 57 / BANG / 05 DECISION DATED 31.12.2007 BANGALORE TRIBUNAL REPORTED IN (2008) TAXCORP (ITAT) 17319 (BANGALORE); ACIT VS HEWLETT PACKARD GLOBAL SOFT LTD (2008) TAXCORP (ITAT) 18026 (BANGALORE) DECISION DATED 19 SEPTEMBER 2008 - ITAT BANGALORE BENCH; RELQ SOFTWARE PVT LTD IN ITA NO. 767/BANG/2007 VIDE ORDER DATED 16TH MAY 2008 - ITAT BANGALORE BENCH [DECISION REFERRED TO IN HEWLETT PACKARDS CASE (SUPRA)]; ACIT VS KSHEMA TECHNOLOGIES LTD (2009) TAXCORP (ITAT) 20901 (BANGALORE); MPHASIS LTD V ACIT 2008-TIOL-366-ITAT- BANG PAGE 18 OF 36 ITA NOS.584 TO 586/BANG/2010 18 I-GATE GLOBAL SOLUTIONS LTD V ACIT ITA NO. 2291/B/2004 AY 2001-02 ORDER DATED 11.08.2006; DCIT V. I-GATE GLOBAL SOLUTIONS LTD ITA NOS. 391 & 392/B/2007 AYS 2002-03 AND 2003-04 ORDER DATED 30/11/2007; DCIT V. I-GATE GLOBAL SOLUTIONS LTD ITA NO.624 & 625/BANG/2009 (ASSESSMENT YEARS 2002-03 AND 2003-04) DECISION DATED 18/12/2009; RELO SOFTWARE (P) LTD. VS ITO (2009) 123 TTJ 0856 (BANGALORE) DCIT V TECH MAHINDRA LTD ITA NOS.748 749 AND 750(BANG)/2010 DT 24.02.2011 CHANGEPOND TECHNOLOGIES P LTD V ACIT [2008] 22 SOT 220 (CHENNAI); PATNI TELECOM (P) LTD. VS ITO (2008) 022 SOT 0026 (HYDERABAD); DCIT V SOFTSIL INDIA LTD (2008) 22 SOT 271 (HYD); 4.11 THE CONCLUSION THAT APPELLANT IS ENGAGED IN RENDERING OF TECHNICAL SERVICES OUTSIDE INDIA IS THEREFORE INCORRECT. AS A RESULT ONSITE EXPENSES SHOULD NOT BE REDUCED FROM EXPORT TURNOVER IN COMPUTING DEDUCTION UNDER SECTION 10B. 4.12 ASSUMING WITHOUT ADMITTING THAT THE APPELLANT WAS RENDERING SERVICES EXPLANATION 3 TO SECTION 10B DEEMS THAT PROFITS FROM SERVICES RENDERED OUTSIDE INDIA (ONSITE) IN CONNECTION WITH THE DEVELOPMENT OF SOFTWARE IS EQUAL TO THE PROFITS EARNED FROM THE EXPORT OF COMPUTER SOFTWARE FROM INDIA. BY VIRTUE OF EXPLANATION 3 PROFITS FROM ONSITE RENDERING OF SERVICES WOULD BE ELIGIBLE FOR THE BENEFIT OF SECTION 10B. ON THIS GROUND ALSO THE APPELLANT IS ENTITLED TO THE BENEF IT OF SECTION 10B AS CLAIMED. THE VARIATION MADE TO PAGE 19 OF 36 ITA NOS.584 TO 586/BANG/2010 19 THE TOTAL INCOME BY THE AO AND AS CONFIRMED BY THE CIT(A) IS TO BE DELETED. 4.13 EVEN OTHERWISE IF FOR ANY REASON ONSITE EXPENSES ARE HELD TO BE REDUCED FROM EXPORT TURNOVER THE SAME SHOULD ALSO BE REDUCED FROM TOTAL TURNOVER IN COMPUTING DEDUCTION UNDER SECTION 10B. THE DECISION OF THE ITAT SPECIAL BENCH CHENNAI IN ITO V SAK SOFT LTD [2009] 313 ITR (AT) 353 CONFIRMS THE ABOVE PROPOSITION. 5.9 THE LEARNED DR SUPPORTED THE ORDERS OF THE INC OME TAX AUTHORITIES AND ALSO FILED WRITTEN SUBMISSIONS WHICH WAS SUBMITTED TO US ON 21.6.2011. 5.10 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIALS ON RECORD. FROM THE DETAILS GIVEN IT IS CLEAR THAT THE ASSESSEE ITSELF HAD EXCLUDED THE ONSITE EXPENSES FR OM BOTH THE EXPORT TURNOVER AS WELL FROM THE TOTAL TURNOVER WHI LE CALCULATING DEDUCTION U/S 10B OF THE INCOME TAX ACT WHICH WAS ALSO CERTIFIED BY THE CHARTERED ACCOUNTANT. NO REVISED CALCULATION HAS BEEN FURNISHED. THE AO COMPLETED THE ASSESSMENT BY ADDIN G THE ONSITE EXPENDITURES TO THE TOTAL TURNOVER. THEREFORE IT IS ONLY PROPER THAT THE ALTERNATIVE RELIEF OF THE ASSESSEE RAISED HEREIN ABOVE NAMELY RELIEF (III) FOR AY 2002-03 RELIEF NO. (IV) FOR AY 2004-05 AND RELIEF NO. (VI) FOR AY 2005-06 IS ADDRESSED TO. THE ALTERNATIVE RELIEF RAISED BY THE ASSESSEE NAMELY WHEN THE ONSIT E EXPENDITURE IS TO BE REDUCED FROM THE EXPORT TURNOVER WHETHER T HE SAME PAGE 20 OF 36 ITA NOS.584 TO 586/BANG/2010 20 SHOULD BE REDUCED FROM THE TOTAL TURNOVER FOR THE P URPOSE OF COMPUTING DEDUCTION U/S 10A IS NO MORE RES INTEGRA. 5.11 THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. (330 ITR 175) IN IDENTICA L CIRCUMSTANCES HELD THAT SINCE THE EXPORT TURNOVER FORMS PART OF T HE TOTAL TURNOVER IF AN ITEM IS EXCLUDED FROM THE EXPORT TU RNOVER THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER TO M AINTAIN PARITY BETWEEN NUMERATOR AND DENOMINATOR WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HONBL E MUMBAI HIGH COURT READS AS FOLLOWS:- HELD : THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPORT AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB- SECTION (4). EXPORT TURNOVER ALSO FORMS A CONSTITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPORT TURNOVER IN THE NUMERATOR MUST HAVE THE SAME MEANING AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TURNOVER IN EXPLN.2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES THINGS OR COMPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGH T TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES THINGS PAGE 21 OF 36 ITA NOS.584 TO 586/BANG/2010 21 OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGISLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE HOWEVER MISSES THE POINT THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOWEVER THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PREVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTHER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE CONTENTION OF THE REVENUE WERE TO BE ACCEPTED THE SAME EXPRESSION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNOTATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE THOUGH THESE HAVE BEEN SPECIFICALLY EXCLUDED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMINATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVER A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NOT HAVE PAGE 22 OF 36 ITA NOS.584 TO 586/BANG/2010 22 ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAVE ANY ELEMENT OF TURNOVER. FOR THIS REASON IN ADDITION THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CONTRARY CIT V SUDARSHAN CHEMICALS INDUSTRIES LTD. (2000) 163 CTR (BOM) 596: (2000) 245 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARMA (INDIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON 5.12 IN THE CASE OF SAK SOFT LTD. (SUPRA) THE ASS ESSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTW ARE AND CLAIMED DEDUCTION U/S 10B OF THE ACT. IN COMPLETIN G THE ASSESSMENT U/S 143(3) OF THE ACT THE AO REDUCED TH E EXPENDITURE INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHN ICAL SERVICES OUTSIDE INDIA FROM THE EXPORT TURNOVER WITHOUT COR RESPONDING REDUCTION FROM TOTAL TURNOVER THEREBY REDUCING THE DEDUCTION CLAIMED BY THE ASSESSMENT U/S 10B OF THE ACT. 5.13 IN LIGHT OF THE ABOVE FACTS THE SPECIAL BENC H HELD AS UNDER:- FOR THE ABOVE REASONS WE HOLD THAT FOR THE PURPOSE OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTION 10B THE FREIGHT TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES PAGE 23 OF 36 ITA NOS.584 TO 586/BANG/2010 23 OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES IF ANY INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE FORMULA. THE APPEALS FILED BY THE DEPARTMENT ARE THUS DISMISSED. FURTHER IN THE CASE OF JAIPURIA SILK MILLS (P) LTD . V ACIT (ITA NO.1112/BANG/2009) THE BANGALORE TRIBUNAL HAD PLAC ED RELIANCE ON THE DECISION OF CHENNAI SPECIAL BENCH IN THE CASE O F SAK SOFT LTD. (SUPRA) AND HAD CONCLUDED THAT THE FREIGHT AND INSU RANCE EXPENSES ARE TO BE REDUCED BOTH FROM THE EXPORT TURNOVER AND TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION U/S 10A OF T HE ACT. 5.14 IN THE LIGHT OF THE ABOVE REASONING RELIEF ( I) AND (II) SOUGHT FOR AY 2002-03 (ITA NO.584/BANG/2010) IS NOT ADDRESSED TO. THE ALTERNATIVE RELIEF NAMELY RELIEF NO.(III) SOUGHT BY THE ASSESSEE IS ALLOWED. 5.15 SIMILARLY FOR THE AY 2004-05 (ITA NO.585/BANG / 2010) RELIEF (II) AND (III) IS NOT ADDRESSED TO WHE REAS (IV) IS ALLOWED IN FAVOUR OF ASSESSEE. PAGE 24 OF 36 ITA NOS.584 TO 586/BANG/2010 24 5.16 FOR THE AY 2005-06 (ITA NO.586/BANG/2010) RE LIEF (IV) AND (V) IS NOT ADDRESSED TO WHEREAS RELIEF (VI ) IS ALLOWED IN FAVOUR OF ASSESSEE. 6. DEEMED EXPORT WHETHER SHOULD FORM PART OF EXPOR T TURNOVER FOR THE PURPOSES OF SECTION 10B OF THE I T ACT. THE ABOVE ISSUE IS RAISED IN TWO ASST. YEARS NAMEL Y AY 2004-05 AND 2005-06. BRIEFLY STATED THE FACTS IN RE LATION TO THE ABOVE ISSUE ARE AS FOLLOWS:- FOR THE ASST. YEAR CONCERNED NAMELY 2004-05 & 2005-06 THE ASSESSEE DEVELOPED AND DELIVERED SOFTW ARE TO IBM INDIA LTD. AND OTHERS. IT IS CLAIMED BY THE ASSESSE E THAT THESE ENTITIES WERE REGISTERED STP UNITS. THE SOFTWARE DELIVERED TO THESE ENTITIES WERE REGARDED BY THE ASSESSEE AS DEEM ED EXPORTS AND THE SAME WAS INCLUDED IN THE EXPORT TURNOVER FO R THE PURPOSES OF COMPUTATION OF DEDUCTION U/S 10B OF THE ACT. TH E AO WHILE COMPLETING THE ASSESSMENT FOR THE ABOVE SAID TWO AS ST. YEARS EXCLUDE FROM THE EXPORT TURNOVER THESE DEEMED EXPOR TS CLAIMED BY THE ASSESSEE. THE RELEVANT FINDING OF THE AO FOR THE ASST. YEAR 2004-05 READS AS FOLLOWS:- IN ASSESSEES COMPUTATION ON EXPORT TURNOVER OF RS.4 58 05 013/- AN AMOUNT OF RS.33 70 544/- WAS INCLUDED UNDER DEEMED EXPORT. THE DETAILS WERE CALLED FOR AND THE EXAMINATION OF SUCH DETAILS IT WAS FOUND THAT THE ABOVE RECEIPTS ARE FROM THE INDIAN CLIENTS AND NOT FROM THE EXPORT OUTSIDE PAGE 25 OF 36 ITA NOS.584 TO 586/BANG/2010 25 INDIA. AS PER THE S.10B THE PROFITS DERIVED FROM EXPORT OUTSIDE INDIA IS ELIGIBLE FOR DEDUCTION AND NOT PROFITS FROM SALE MADE TO DOMESTIC CLIENTS. HENCE THIS SUM OF RS.33 70 544/- DOES NOT QUALIFY TO FORM PART OF THE EXPORT TURNOVER. THUS THE EXPORT TURNOVER WORKS OUT TO RS.4 24 34 469/- (RS.4 58 05 013 RS.33 70 544). 6.1 SIMILARLY FOR THE ASST. YEAR 2005-06 THE DEEM ED EXPORTS WAS NOT INCLUDED AS PART OF EXPORT TURNOVE R BY THE AO BY OBSERVING THUS:- AS SEEN ABOVE THE TOTAL VALUE OF EXPORTS DONE AS STATED BY THE ASSESSEE COMPANY IS RS.27 91 55 051/-. WE NEED TO ARRIVE AT THE EXPORT TURNOVER AS DEFINED IN S.10B. ACCORDINGLY THE FOLLOWING ADJUSTMENTS ARE MADE: I) DEEMED EXPORTS RS.38 29 511/- THESE ARE EXPORTS MADE TO THE DOMESTIC COMPANY AND HENCE DOES NOT QUALIFY FOR INCLUSION IN EXPORT TURNOVER. HENCE THE SAME IS REDUCED FROM EXPORT TURNOVER. 6.2 AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 6.3 THE FIRST APPELLATE AUTHORITY CONFIRMED THE ORD ER OF ASSESSMENT BY FOLLOWING THE ORDERS OF THE TRIBUNAL I N THE CASE OF TATA ELXI LTD. V ACIT 115 TTJ 423 AND IN THE CASE O F TAJ INTERNATIONAL JEWELLERS V ITO 19 SOT 587 (DEL.). PAGE 26 OF 36 ITA NOS.584 TO 586/BANG/2010 26 6.4 THE ASSESSEE BEING AGGRIEVED IS IN SECOND APPE AL BEFORE US. THE ASSESSEE HAS FILED WRITTEN SUBMISSI ONS AND THE SAME IS REPRODUCED BELOW:- 5.3 IT HAS BEEN THE INTENTION OF THE GOVERNMENT TO ENCOURAGE EXPORTS. FOR THIS PURPOSE THE GOVERNMENT HAS FORMULATED THE EXPORT AND IMPORT POLICY AND THE REGIMES OF SOFTWARE TECHNOLOGY PARK SCHEMES EXPORT ORIENTED UNDERTAKINGS ELECTRONIC HARDWARE TECHNOLOGY PARK SCHEME ETC THEREUNDER. TAX PROVISIONS HAVE BEEN INTRODUCED TO GIVE EFFECT TO THE INTENTION SOUGHT TO BE ACHIEVED THROUGH THE EXPORT-IMPORT POLICY. THE PROVISIONS OF THE INCOME-TAX ACT HAVE THEREFORE TO BE READ AND INTERPRETED IN THE LIGHT IN THE EXPORT-IMPORT POLICY AND THE OBJECTIVE SOUGHT TO BE ACHIEVED BY THE GOVERNMENT. 5.4 THE GOVERNMENT OF INDIA NOTIFIED THE SOFTWARE TECHNOLOGY PARK SCHEME VIDE NOTIFICATION NO 33/(RE)/92-97 DATED 22 ND MARCH 1994. IT WAS AMENDED BY NOTIFICATION NO. SO 388(E) DATED 30 TH APRIL 1995 (REPORTED IN 216 ITR ST.2). IT WAS IN PURSUANCE OF THE SOFTWARE TECHNOLOGY PARK SCHEME THAT SECTION 10B WAS AMENDED TO PROVIDE A TAX HOLIDAY TO STPI UNITS. PARA 2.7 OF THE SCHEME STATES THAT SUPPLIES MADE TO OTHER STP UNITS AS WELL AS SUPPLIES EFFECTED IN THE DOMESTIC TARIFF THAT AGAINST PAYMENT IN FOREIGN EXCHANGE SHOULD BE BEEN COUNTED AS IN FULFILLMENT OF THE EXPORT OBLIGATIONS OF THE STP UNITS. IN PARA 2.8 OF THE SCHEME IT IS MENTIONED THAT THE STP UNIT SHALL BE ELIGIBLE FOR TAX HOLIDAY FOR A PERIOD OF 5 YEARS DURING THE FIRST 8 YEARS OF ITS OPERATION. PAGE 27 OF 36 ITA NOS.584 TO 586/BANG/2010 27 5.5 UNDER SECTION 10B (1) A DEDUCTION IS AVAILABLE IN RESPECT OF PROFITS DERIVED BY AN ELIGIBLE UNDERTAKING FROM EXPORT OF COMPUTER SOFTWARE. THE TERM EXPORT IS NOT DEFINED IN THE SAID SECTION. THE SOFTWARE TECHNOLOGY PARK SCHEME IN PURSUANCE OF WHICH SECTION 10B HAS BEEN INCORPORATED IN THE STATUTE DEEMS THE SALE OF GOODS BY ONE STP TO ANOTHER STP AS AN EXPORT. PARA 2.9 OF THE SOFTWARE TECHNOLOGY PARK SCHEME STATES THAT SUPPLIES MADE FROM A DOMESTIC TARIFF AREA TO AN STP UNIT WILL REGARDED AS DEEMED EXPORTS AND WILL BE ELIGIBLE FOR THE BENEFITS SPECIFIED IN PARAGRAPH 106 AND 122 OF THE EXPORT-IMPORT POLICY 1992-1997. (EMPHASIS SUPPLIED) 5.6 THE TERM EXPORT HAVING BEEN DEALT WITH IN THE SOFTWARE TECHNOLOGY PARK SCHEME THE SAME MEANING SHOULD ATTACH THE TERM WHILE INTERPRETING THE PROVISIONS OF SECTION 10B. 5.7 AS ALREADY STATED THE DEDUCTION UNDER SECTION 10B IS AVAILABLE UNDER SECTION 10B FOR THE PROFITS FROM EXPORT OF COMPUTER SOFTWARE. THE FUNDAMENTAL PROVISIONS FOR AVAILING THE BENEFIT OF TAX HOLIDAY UNDER SECTION 10B ARE SUB-SECTION 1 SUB-SECTION 2 SUB-SECTION 4 AND EXPLANATION 2(IV). IN NONE OF THESE SUB-SECTION IS THERE ANY REQUIREMENT OF EXPORT OUT OF INDIA . AS AGAINST THIS DEDUCTION UNDER SECTION 80HHC IS AVAILABLE IN RESPECT OF PROFITS FROM EXPORT OUT OF INDIA OF GOODS AND MERCHANDISE. UNDER SECTION 80HHE A DEDUCTION IS AVAILABLE IN RESPECT OF THE PROFITS FROM THE EXPORT OF COMPUTER SOFTWARE FROM INDIA TO A PLACE OUTSIDE INDIA. THE DEFINITION OF EXPORT TURNOVER IN SECTION 10B REFERS TO THE EXPORT OF COMPUTER SOFTWARE. THE SAME TERM IN SECTION PAGE 28 OF 36 ITA NOS.584 TO 586/BANG/2010 28 80HHC IS DEFINED TO MEAN AND REFER TO EXPORT OUT OF INDIA OF GOODS AND MERCHANDIZE. 5.8 SECTION 10BA IS ANOTHER PROVISIONS IN CHAPTER III EXTENDING INCENTIVES. THE SAME DEALS WITH TAX HOLIDAY TO UNITS INVOLVED IN EXPORT OF HANDICRAFT GOODS. THE TAX HOLIDAY IS AVAILABLE IN RESPECT OF GOODS EXPORTED OUT OF INDIA. 5.9 ONE THEREFORE NOTICES THAT LEGISLATURE HAS USED SPECIFIC AND DISTINCT TERMINOLOGY IN DIFFERENT SECTIONS OF THE INCOME-TAX ACT. THE DIFFERENCE IS WITH A PURPOSE. THE TERMS EXPORT EXPORT OUT OF INDIA AND EXPORT FROM INDIA TO A PLACE OUTSIDE INDIA DO NOT MEAN ONE AND THE SAME THING. THESE TERMS HAVE TO BE INTERPRETED IN THE SETTING IN WHICH IT OCCUR THE POLICY BACKGROUND FOR THEIR INTRODUCTION AS ALSO THE PURPOSE SOUGHT TO BE ACHIEVED. THE TERM EXPORT IN SECTION 10B IS THEREFORE TO BE UNDERSTOOD AS DEFINED AND MEANT IN THE STP SCHEME READ WITH THE EXPORT-IMPORT POLICY. 5.10 THE CONCEPT OF DEEMED EXPORTS IS RECOGNIZED UNDER THE STPI SCHEME. IN OTHER WORDS A FICTION IS CREATED THEREIN THAT A PARTICULAR SALE TO ANOTHER STPI IS TO BE REGARDED AS A DEEMED EXPORT. ONCE A FICTION IS CREATED ITS IMPLICATIONS HAVE TO BE CARRIED TO THE LOGICAL END. 5.11 THE FICTION CREATED WOULD ACHIEVE ITS PURPOSE ONLY IF THE SAME MEANING IS ATTRIBUTED AND CARRIED INTO THE INCOME-TAX ALSO. IN OTHER WORDS THE INCOME TAX ACT HAS TO BE INTERPRETED IN THE BACKGROUND OF THE EXIM POLICY AND THE STPI SCHEME. PAGE 29 OF 36 ITA NOS.584 TO 586/BANG/2010 29 5.12 THE HIGH COURT OF KARNATAKA IN SHAKTHI HILL RESORTS PVT LTD VS. ACCT SALES TAX APPEAL NOS. 19 AND 24/2004 DECIDED ON 18/01/2006 RELIED ON THE TOURISM POLICY OF KARNATAKA STATE TO INTERPRET THE EXEMPTION NOTIFICATION FOR NEW TOURISM UNITS IN RESPECT OF DRINKS SO AS TO EXTEND EVEN TO ALCOHOL IC DRINKS. 5.13 THE SUPREME COURT IN THE CASE OF UNION OF INDIA (UOI) AND ORS. VS. ASIAN FOOD INDUSTRIES 2006 (204) ELT 8 (SC) 2006(12)SCALE105 OBSERVED AS FOLLOWS: IN CONSTRUING SUCH A PROHIBITORY ORDER WHEREAS THE RULE OF STRICT CONSTRUCTION MUST BE FOLLOWED THE INTERPRETATION WHICH SUBSERVES THE INTENTION OF THE CENTRAL GOVERNMENT AS LAID DOWN IN THE POLICY AS WELL AS IN THE PROCEDURE SHOULD BE GIVEN EFFECT TO. 5.14 GRANTING A DEDUCTION UNDER SECTION 10B TO THE APPELLANT WOULD NOT INVOLVE ANY LOSS OF REVENUE TO THE GOVERNMENT. IT WOULD NOT BE A CASE OF TWO ASSESSEES CLAIMING A DEDUCTION TWICE OVER ON THE SAME QUANTUM OF PROFITS. THE AMOUNT PAID BY IBM LTD TO THE APPELLANT WOULD BE AN EXPENDITURE REDUCING ITS ELIGIBLE PROFITS. IF GRANTED A DEDUCTION THE TWO ASSESSEES WOULD BE CLAIMING SO ON THEIR RESPECTIVE PROFITS . 5.15 SECTION 10B AS ALREADY NOTED WAS INTRODUCED TO GIVE EFFECT TO THE MANDATE THE STPI SCHEME. AS PER PARA 2.8.1 OF THE STPI SCHEME TAX HOLIDAY IS AVAILABLE TO A UNIT SETUP IN ACCORDANCE WITH THE SCHEME AND COMPLYING WITH THE CONDITIONS THEREUNDER. THIS STPI SCHEME WAS PAGE 30 OF 36 ITA NOS.584 TO 586/BANG/2010 30 FRAMED IN PURSUANCE OF THE EXIM POLICY OF THE GOVERNMENT OF INDIA MINISTRY OF COMMERCE AND ADMINISTERED BY THE DIRECTOR GENERAL OF FOREIGN TRADE. SECTION 10B IS IS TO BE INTERPRETED IN A MANNER THAT PROMOTES THE OBJECTIVE AND THE INTENTION OF THE GOVERNED EXPRESSED THROUGH THE EXIM POLICY AND STPI SCHEME. 5.16 IN VIEW OF THE ABOVE WHAT IS REGARDED AS EXPORTS UNDER SOFTWARE TECHNOLOGY PARK SCHEME SHOULD ALSO BE HELD AS EXPORTS FOR THE PURPOSE OF SECTION 10B OF THE INCOME-TAX ACT. 5.17 IT HAS BEEN REPEATEDLY AND CONSISTENTLY HELD THAT AN EXEMPTION PROVISION LIKE SECTION 10B TO BE LIBERALLY CONSTRUED AND IN SUCH A MANNER THAT THE OBJECTIVE SOUGHT TO BE ACHIEVED IS PROMOTED AND NOT FRUSTRATED. (BAJAJ TEMPO LTD 196 ITR 188 AND A HOST OF OTHER CASES). 5.18 IN VIEW OF ALL THE ABOVE THE SUPPLY OF SOFTWARE BY THE APPELLANT TO IBM INDIA AND OTHER ENTITIES IS TO BE REGARDED AS EXPORT AND THE PROFITS THEREFROM ARE ENTITLED FOR A DEDUCTION UNDER SECTION 10B. 6.5 HOWEVER THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY SUBMITTED THAT THE ISSUE IN QUESTION IS COVERED AGA INST THE ASSESSEE BY THE ORDER OF THE BANGALORE BENCH TRIBUN AL IN THE CASE OF TATA ELXI LTD. V ACIT 115 TTJ 423 AND GRANITE MA RT LTD. V ITO IN ITA NOS.22 & 763/BANG/2010 VIDE ORDER DATED 17.9 .2010. 6.6 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE BANGALORE BENCH OF THE TRI BUNAL IN THE CASE OF TATA ELXSI LTD. AND IN GRANITE MART LTD. HA D HELD THAT PAGE 31 OF 36 ITA NOS.584 TO 586/BANG/2010 31 DEEMED EXPORTS CANNOT BE REGARDED AS EXPORTS FOR THE PURPOSES OF SECTION 10A AND 10B OF THE ACT. THE LEARNED AR HAS FAIRLY SUBMITTED THAT THE ABOVE TWO ORDERS OF THE TRIBUNAL IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE. WE AR E BOUND BY THE COORDINATE BENCH DECISION OF THE TRIBUNAL AND RESPE CTFULLY FOLLOWING THE SAME WE HOLD THAT THE DEEMED EXPORTS CANNOT BE REGARDED AS EXPORTS FOR THE PURPOSES OF DEDUCTION UNDER SECTION 10B OF THE ACT. IT IS ORDERED ACCORDINGLY. HENCE RELIEF NO. (I) SOUGHT FOR THE AY 2004-05 AND RELIEF NO. (II) SOUGHT FOR THE AY 20 05-06 IS DISMISSED. 7. DISALLOWANCE OF SOFTWARE EXPENSES THE GROUNDS OF APPEAL IN RELATION TO THE ABOVE IS SUE IS ONLY FOR THE ASST. YEAR 2005-06. THE BRIEF FACTS IN RELATION TO THE ABOVE ARE AS FOLLOWS:- DURING THE PREVIOUS YEAR RELEVANT TO AY 2005-06 T HE ASSESSEE DEBITED TO P&L ACCOUNT A SUM OF RS.4 93 52 9/- TOWARDS SOFTWARE EXPENSES. THE DETAILS OF SOFTWARE EXPENSE S ARE AS UNDER:- PURCHASE OF SERVICES FOR AD MANAGER SOFTWARE RS.3 0 0 000 PURCHASE OF ANTIVIRUS SOFTWARE RS.33 000 PURCHASE OF MSDN SOFTWARE RS.1 30 529 AMOUNT PAID FOR WEBSITE SOFTWARE RS.30 000 TOTAL RS.4 93 529 OUT OF TOTAL EXPENDITURE THE AO ALLOWED OF RS.33 000 INCURRED TOWARDS PURCHASE OF ANTIVIRUS SOFTWARE AND REMAINING OF PAGE 32 OF 36 ITA NOS.584 TO 586/BANG/2010 32 RS.4 60 529/- (RS.4 93 529 RS.33 000) WAS DISALLO WED AS ACCORDING TO HIM IT WAS CAPITAL IN NATURE. HOWEV ER DEPRECIATION OF RS.2 28 159 AT THE RATE OF 60% ON RS.4 60 529/- IS ALLOWED. THE CIT(A) HAS UPHELD THE AOS ORDER. 7.1 THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFO RE US. 7.2 THE LEARNED AR MADE THE FOLLOWING WRITTEN SUBMISSIONS:- 6.3 IN THE PRESENT CASE EXPENSES WERE INCURRED FOR THE USE OF SOFTWARE FOR A LIMITED PERIOD. THE APPELLANT DID NOT SECURE THE SOURCE CODE. IT WAS PREVENTED FROM MODIFYING OR DUPLICATING THE SOFTWARE. IT COULD NOT DECOMPILE OR DISASSEMBLE THE SOFTWARE. NO DERIVATIVE WORKS COULD BE CREATED. THE APPELLANT WAS PERMITTED TO USE THE SOFTWARE FOR ITS BUSINESS IN A LIMITED MANNER. NO COPYRIGHT RIGHT WAS SECURED BY THE APPELLANT IN RELATION TO USE OF SOFTWARE. THE IMPUGNED EXPENDITURE DID NOT RESULT IN ACQUISITION OF ANY ASSET BY THE APPELLANT. THE SOFTWARE EXPENSES WERE INCURRED FOR CARRYING DAY TO DAY ACTIVITIES. THE EXPENDITURE DID NOT RESULT IN ENDURING BENEFIT OR ADVANTAGE IN THE CAPITAL FIELD . THE ADVANTAGE / BENEFIT IF ANY RESULTED IN SMOOTH AND EFFICIENT CONDUCT OF THE BUSINESS. IT FACILITATED THE BUSINESS OPERATIONS OF THE APPELLANT. THE ADVANTAGE OR BENEFIT WAS PURELY ON REVENUE ACCOUNT. THERE WAS NO ENDURING BENEFIT ON CAPITAL ACCOUNT. THE ENTIRE SOFTWARE EXPENDITURE IS THEREFORE REVENUE IN NATURE. PAGE 33 OF 36 ITA NOS.584 TO 586/BANG/2010 33 6.4 IN AMWAY INDIA ENTERPRISES VS. DCIT (2008) 111 ITD 0112 (DELHI SPECIAL BENCH) IT HAS BEEN HELD THAT SOFTWARE LICENSE FEES PAID FOR USE OF THE SOFTWARE FOR A LIMITED DURATION OF UPTO 2 YEARS WOULD CONSTITUTE REVENUE EXPENDITURE ALLOWABLE AS DEDUCTION UNDER THE ACT. THE ABOVE DECISION WAS FOLLOWED BY THE JURISDICTIONAL ITAT IN THE CASE OF AD. CIT V TOYOTA KIRLOSKAR MOTORS P LTD ITA NO. 650/B/08 ORDER DT. 14.11.2008 (BANGALORE ITAT) THE DECISION IN TOYOTA KIRLOSKAR MOTORS P LTDS CASE HAS BEEN AFFIRMED BY THE JURISDICTIONAL HIGH COURT VIDE ORDER DATED 23.03.2011. 6.5 WHEN THE PRINCIPLES ENUNCIATED IN ALL THE ABOVE JUDICIAL PRECEDENTS ARE APPLIED TO THE SUBJECT MATTER OF THE DISPUTE THE IRRESISTIBLE CONCLUSION IS THAT THE WHOLE OF THE SOFTWARE EXPENSES CONSTITUTED REVENUE EXPENDITURE AND DID NOT IN ANY WAY PARTAKE THE CHARACTER OF CAPITAL EXPENDITURE. THUS THE SAME IS TO BE ALLOWED AS A DEDUCTION UNDER SECTION 37 OF THE INCOME TAX ACT 1961. 7.3 THE LEARNED DR ON THE OTHER HAND SUBMITTED THA T OUT OF RS.4 60 529/- THE APPELLANT HAS FURNISHED COPY O F INVOICE FOR RS.1 30 529/- FOR PURCHASE OF SOFTWARE MSDN UNIV-WI N 32 (1 PIECE) ON 1.11.2004. NO DETAILS IN RESPECT OF REMA INING HAVE BEEN FURNISHED. THEREFORE THE ORDER OF THE CIT(A) IS T O BE SUSTAINED . 7.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE ASSESSEE HAS NEITHER PROD UCED THE INVOICES FOR NECESSARY VERIFICATION BEFORE THE AUTHORITIES NOR HA S IT PRODUCED THE DETAILS WITH REGARD TO THE PURCHASE OF SOFTWARE LIC ENCE AND FOR THE PAGE 34 OF 36 ITA NOS.584 TO 586/BANG/2010 34 DURATION FOR WHICH IT IS TO BE USED. IN THE INTERE ST OF JUSTICE WE ARE OF THE VIEW THAT THE MATTER NEEDS TO BE RESTORED TO TH E AO FOR FRESH EXAMINATION AND HE SHALL EXAMINE THE DURATION FOR W HICH THE SOFTWARE LICENCE FEES WERE PAID FOR AND DECIDE THE ISSUE KEE PING IN VIEW THE JUDGEMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S TOYOTO KIRLOSKAR MOTORS PVT. LTD. IN ITA NO.174/2009 DATED 23.3.2011. THEREFORE RELIEF NO. (I) SOUGHT FOR AY 2005-06 (IT A NO.586/BANG/2010) IS ALLOWED FOR STATISTICAL PURPOS ES. 8. REDUCTION OF TELECOMMUNICATION CHARGES FROM EXPORT TURNOVER THE ABOVE ISSUE IS RAISED ONLY FOR THE ASST. YEAR 2 005-06. DURING THE PREVIOUS YEAR RELEVANT TO AY 2005-06 THE ASSESSEE INCURRED TELECOMMUNICATION CHARGES AMOUNTING TO RS.7 33 288/ -. THE SAID EXPENDITURE WAS INCURRED TOWARDS PAYMENT OF DOT CHAR GES TO VSNL EMAIL USAGE HOSTING OF THE EMAIL SERVER APPLICATI ON DEVELOPMENT SOFTWARE LOADING OF SOFTWARE DEVELOPED AT CLIENT S ITE ETC. THE AO REDUCED THE ENTIRE TELECOMMUNICATION EXPENSES FROM THE EXPORT TURNOVER IN COMPUTING DEDUCTION U/S 10B OF THE ACT. THE AO HOWEVER DID NOT REDUCE THE SAME FROM THE TOTAL TURNOVER. 8.1 THE CIT(A) CONFIRMED THE ACTION OF THE AO. 8.2 THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFO RE US. PAGE 35 OF 36 ITA NOS.584 TO 586/BANG/2010 35 8.3 IT WAS SUBMITTED BEFORE US THAT THE TELECOMMUN ICATION CHARGES SHOULD NOT BE REDUCED FROM THE EXPORT TURNO VER. ALTERNATIVELY IT WAS CONTENDED THAT IF FOR ANY REASON TELECOMMUNI CATION EXPENSES ARE HELD TO BE REDUCED FROM EXPORT TURNOVER THE EXPEND ITURE REDUCED FROM EXPORT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOT AL TURNOVER. FOR THIS PROPOSITION THE LEARNED AR REFERRED TO THE JU DGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GEM PLUS JE WELLERY INDIA LTD. (330 ITR 175) AND ALSO THE DECISION OF THE SPECIAL BENCH OF CHENNAI ITAT IN ITO V SAK SOFT LTD. 313 ITR 353 (AT). 8.4 THE LEARNED DR ON THE OTHER HAND SUPPORTED T HE ORDER OF THE A.O. 8.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. IN VIEW OF OUR REASONING GIVEN IN PARA 5.10 TO 5.13 MENTIONED ABOVE WE HOLD THAT RELIEF NO. (III) SOUG HT IN ITA NO.584/BANG/2010 (AY 2002-03) IS NOT ADDRESSED TO B UT THE ALTERNATIVE RELIEF NO. (VI) IS ALLOWED. 9. IN THE RESULT THE APPEALS FILED BY THE ASSESSE E ARE PARTLY ALLOWED AS INDICATED ABOVE. THE ORDER PRONOUNCED ON FRIDAY THE 1 ST DAY OF JULY 2011 AT BANGALORE. SD/- SD/- (A MOHAN ALANKAMONY) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER PAGE 36 OF 36 ITA NOS.584 TO 586/BANG/2010 36 COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE C IT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/28/6. BY ORDER ASST. REGISTRAR ITAT BANGALORE.