When Income Tax Act has not defined term 'Total Turnover' in statute, same cannot be liberally imported from other Sections such as 80HHC & 80HHE for purpose of Sec 10A: Supreme Court
By TIOL News Service
NEW DELHI, MAY 02, 2018: THE ISSUE BEFORE THE APEX COURT IS - Whether when the I-T Act has not defined the term 'total turnover' in the statute, the same can be liberally imported from other Sections such as 80HHC and 80HHE for the purpose of Sec 10A - NO: SC
The assessee company is engaged in the business of development and export of computer softwares and rendering technical services. The assessee returned gross income at Rs. 267,01,76,529/- while claiming deductions under Section 10A to the tune of Rs. 273,45,39,379/- showing a net loss of Rs. 6,43,62,850/-. The assessee for the AY 2004-05 also declared the undisclosed income at Rs. 91,25,68,114/-. Thereafter, on 31.03.2005, a revised return of income for Rs. 91,16,99,060/- was filed which was selected for scrutiny. And the AO held that the software development charges were nothing but in the nature of expenses incurred for technical services provided outside India.
Further, in view of the fact that it was not purely technical services and some elements of software development were also involved in it and in the absence of such bifurcation, the Assessing Officer estimated such expense at the rate of 40% and remaining 60% for providing technical services in foreign exchange to its offshore clients and re-assessed the taxable income at Rs. 137,20,34,576/- and penalty to the tune of Rs. 21,81,90,239/-.
The CIT(A) partly allowed the appeal while estimating 10% as software development charge incurred for technical services provided outside India as against 60% estimated by the Assessing Officer. Both appealed to the Tribunal which rejected the Revenue's appeal and allowed the assessee's appeal. And the HC also rejected Revenue's appeal.
On the appeal, the Apex Court held that,
++ the controversy revolves around the claim of certain expenses attributable to the delivery of software outside India or in providing technical services from ‘total turnover’ under Section 10A of the IT Act. It is an undisputed fact that neither Section 10A nor Section 2 of the IT Act defines the term ‘total turnover’. However, the term ‘total turnover’ is given in clause (ba) of the Explanation to Section 80HHC of the IT Act;
++ 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 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 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 assessee 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 assessee is that it incurred expenditure in foreign exchange in sending professionals abroad as per the agreements with the foreign constituents;
++ the assessee was engaged in the business of software development for its customers engaged in different activities at software development centres. In the process of such customized software development, certain activities were required to be carried out on the customers' site, located outside India for which the employees of the branches of the assessee 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 assessee 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;
++ the assessee has claimed deduction under Section 10A as per certificates filed on Form No. 56F. The assessee, while computing the deduction, has taken the same figure of export turnover as of total turnover. 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;
++ 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 |
++ 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 assessee which could have never been the intention of the legislature;
++ 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;
++ 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.
(See 2018-TIOL-167-SC-IT)
