Section 10B of the Income-tax Act, 1961 — Formula under S. 10B(4) — Whether any expenses on freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or any expenses incurred in f

ITO vs. Sak Soft Ltd.

A.Ys. : 2002-2003 and 2003-04.

Date of Order : 6.3.2009

Section 10B of the Income-tax Act, 1961 — Formula under S.
10B(4) — Whether any expenses on freight, telecommunication charges or
insurance attributable to the delivery of articles or things or computer
software outside India or any expenses incurred in foreign exchange in
providing technical services outside India, which are required to be excluded
from export turnover as defined in Explanation 2(iii) below S. 10B, ought also
to be excluded from the figure of total turnover while applying the formula
prescribed by Ss (4) of S. 10B. — Held : Yes.

 

Facts :

The assessee was a company engaged in export of computer
software. In the return of income filed by the assessee it claimed an
exemption of Rs.3,07,77,341 u/s. 10B of the Act. While computing the amount of
deduction u/s. 10B of the Act the assessee had taken export turnover at
Rs.8,33,64,528 and total turnover at Rs.9,26,23,216. In the course of
assessment proceedings, the Assessing Officer (AO) noticed that assessee had
incurred the following expenses in foreign currency.

Employer’s NIC contribution Rs.2,19,672

Salary at London office Rs.20,92,763

Lodging expenses at London Rs.6,263

Travelling expenditure Rs.5,62,896

Professional charges at London office Rs.25,462

Total Rs.29,07,056

The AO held that in terms of clause (iii) of Explanation 2
below S.10B the above expenditure was to be deducted from export turnover. He,
accordingly, reduced the sum of Rs 29,07,056 from export turnover of
Rs.8,33,64,528. The AO thereafter worked the deduction u/s.10B in accordance
with the formula prescribed by S.10B(4). He, however, did not reduce this sum
of Rs.29,07,056 from total turnover in the denominator.

The assessee’s contention was that there should be parity
between the figures of export turnover and total turnover, and the figure of
Rs.29,07,056 should be excluded from both the export turnover and the total
turnover, which are the numerator and denominator, respectively, in the
formula.

The question before the Special Bench (SB) was whether AO
should have taken the total turnover in the formula to be Rs.8,97,16,160
(Rs.9,26,23,216 minus expenditure of Rs.29,07,056).

Held :

(a) As held by the SC in the case of LMW, there has to be
an element of turnover in the receipt if it has to be included in the total
turnover. That element is missing in the case of freight, telecom charges or
insurance attributable to the delivery of the goods outside India and
expenses incurred in foreign exchange in connection with providing of
technical services outside India. These receipts can only be received by the
assessee as reimbursement of such expenses incurred by him. Mere
reimbursement of expenses cannot have an element of turnover. It is in
recognition of this position that in the definition of ‘export turnover’ in
S. 10B the aforesaid two items have been directed to be excluded.

(b) The definition of export turnover contemplates that
the amount received by the assessee in convertible foreign exchange should
represent ‘consideration’ in respect of the export. This can only refer to
the price of the computer software exported out of India. Any reimbursement
of the two items of expenses mentioned in the definition can under no
circumstances be considered to represent ‘consideration’ for the export of
the computer software or articles or things. Thus, there is evidence
inherent in the definition of ‘export turnover’ itself that it should
represent ‘consideration’ for export of the articles or things or computer
software. It follows that the expression ‘total turnover’ which is not
defined in S.10B should also be interpreted in the same manner. Thus, the
two items of expenses referred to in the definition of ‘export turnover’
cannot form part of the total turnover since the receipts by way of recovery
of such expenses cannot be said to represent consideration for the goods
exported.

(c) Ss 10A, 10B, 80HHC, 80HHE and 80HHF provide for
relief from export profits and in that sense they are of the same genre. It
cannot be disputed that the object of these Sections is to promote exports.
If some of the Sections such as S.80HHE and S.80HHF provide for a formula
for calculating the deduction which is identical with the formula prescribed
by S. 10B, it follows that it would be incongruous to interpret Section 10B
in a manner different from these two Sections merely because there is no
definition of ‘total turnover’ in that Section.

(d) Statutorily parity is maintained between export
turnover and total turnover in S.80HHE and S.80HHF. We do not see why such
parity cannot be maintained between export turnover and total turnover in
S.10B just because ‘total turnover’ has not been defined in that Section.

(e) In clause (iii) of Explanation 2 to S. 10B, the
freight, telecom charges and insurance attributable to the delivery of the
goods outside India and expenses incurred in foreign exchange in providing
technical services outside India have been excluded from export turnover.
Therefore, the same have to be excluded also from the total turnover though
that expression has not been defined in the Section.

(f) While explaining the rationale for introduction of
the definition of ‘total turnover’ with retrospective effect in S.80HHC, the
CBDT has in circular no. 621, dated 19.12.1991 by implication at least,
taken the view that parity should be maintained between both the
expressions.

The appeals filed by the Department were dismissed.