Amount excluded from export turnover should also be excluded from total turnover for purposes of sections 10A or 10B of IT Act, 1961

Amount excluded from export turnover should also be excluded from total turnover for purposes of sections 10A or 10B of IT Act, 1961
CASE LAW DETAILS

Decided by:. ITAT, SPECIAL BENCH `D’ : CHENNAI
In The case of: ITO v. Sak Soft Ltd.
Appeal No. : ITA Nos. 691 & 1953/Mds/2007
Decided on: March 6, 2009

SUMMARY OF THE CASE LAW

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 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.

RELEVENT PARAGRAPHS

25. We now proceed to examine the contention of the revenue that the principle of parity between export turnover and total turnover was rejected by the Supreme Court in Nair’s case (supra). In this case the narrow dispute which arose for determination was whether the department was right in including the processing charges received by the assessee in the total turnover while arriving at the export profits u/s.80HHC(3) as it stood in relation to the asst year 1993-94. The contention of the assessee before the Supreme Court inter alia was that though such charges were includible in the business profits as per clause (baa) of the Explanation below section 80HHC, they were not includible in the total turnover as they had no nexus with the activity of exports (please see page 232 of the report). On the other hand, the contention of the revenue was that in view of clauses (ba) & (baa) of the Explanation, when the processing charges were includible in the business profits the same were simultaneously includible in the total turnover in the formula (please see page 232 of the report). It will thus be seen that the comparison in Nair’s case was between the profits of the business, which was one of the components of the formula, and the total turnover which was also a component of the formula, whereas in LMW’s case, the comparison was between the export turnover and the total turnover which were respectively the numerator and the denominator in the formula. This aspect which was highlighted before us by the learned representative for the interveners Max Health Scribe Ltd., and Crimson Logic India Pvt. Ltd., is important and has to be borne in mind while understanding the ratio of the judgement in Nair’s case. According to the Supreme Court, the assessee’s contention that the processing charges were includible in the profits of the business but excludible from the total turnover cannot be accepted because the processing charges which were part of the gross total income, were an independent income like rent, commission etc., and, therefore, 90% of the said sum should be reduced from the gross total income to arrive at the business profits and since the processing charges were an important component of business profits, they were to be included in the total turnover in the formula prescribed to arrive at the business profits in terms of clause (baa) of the Explanation. One other contention was raised before the Supreme Court on behalf of the assessee and that was that the processing charges had no nexus with the export business and, therefore, they were not includible in the total turnover (please see page 240 of the report, last para). It was also contended that there was no element of turnover in the receipt of processing charges (page 240 of the report). For these two reasons it was contended that the processing charges were not includible in the total turnover. This argument was rejected by the Supreme Court at pages 241-242 of the report. While rejecting the argument, the Supreme Court explained that u/s.80HHC which was a code by itself for the asst. year 1993-94, receipts constituting independent income having no nexus with exports were required to be reduced from the profits of the business according to clause (baa) of the Explanation, and since even according to the assessee the processing charges had no nexus with the export business and thus constituted independent income, they were to be reduced from the profits of the business. It was further observed that every income may not be attributable to the exports (as in the case of processing charges) and that was the reason “for this court to hold that indirect taxes like excise duty which are recovered by the tax payers for and on behalf of the Government, shall not be included in the total turnover in the above formula (see CIT v. Lakshmi Machine Works (2007) 6 Scale 168).. The court referred to the fact that since even according to the assessee the processing charges had no nexus with the export and constituted independent income similar to rent, commission, brokerage etc., the same had to be reduced to the extent of 90% as per the above Explanation from the profits of the business. However, they were includible in the total turnover in the formula. At page 242 the Supreme Court gave the reason as to why their judgement in Lakshmi Machine Works (supra) can have no application to the case before them. The court reasoned that the nature of every receipt needs to be ascertained in order to find out whether it forms part of or has any attribute of an export turnover. Referring to the earlier judgement in Lakshmi Machine Works’s case, the court observed that an indirect tax like excise duty is collected by the assessee on behalf of the Government and though it may be possible to consider the same as income in a conceptual sense (of something coming in) or income under the Income-tax Act, while applying the formula prescribed by section 80HHC(3), it is necessary to ascertain whether the said receipt has an attribute of export turnover. Since the recovery of excise duty did not have the element of export turnover, it was held not includible in the total turnover in the case of Lakshmi Machine Works (supra). It will be appreciated from these observations of the Supreme Court appearing in pages 241 and 242 of 295 ITR, that the court itself made a distinction between the ratio laid down in the case of Lakshmi Machine Works and that laid down in the case of Ravindranathan Nair. A receipt which does not have an element of turnover cannot find a place in the export turnover or the total turnover for applying the formula prescribed by section 80HHC, even though it may be an income in the general sense. If it is an independent income having no nexus with the export business then such income has to be excluded also from the profits of the business to the extent of 90%. Both the judgements stand independently. Whereas in the case of LMW (supra) the comparison was between export turnover and total turnover, in the case of Ravindranathan Nair the comparison was between profits of the business and total turnover. As rightly pointed out by the learned representative for the interveners Max Health Scribe Ltd., and Crimson Logic India P. Ltd., there is an inter se relationship between profits of the business and total turnover in the sense that the total turnover contributes to the profits. It may be that because of the statutory definition of profits of the business in clause (baa) of the Explanation below section80HHC that income which is independent of the export activity has to be excluded therefrom to the extent of 90%; nevertheless the processing charges received by the assessee would be includible in the total turnover as laid down in Nair’s case (supra). It has to be borne in mind that the present definition of ‘profits of the business’ in clause (baa) of the Explanation was inserted by the Finance (No.2) Act, 1991 (with effect from 1.4.1992). Before this definition was inserted, clauses (a) and (b) of sub-section (3) of section 80HHC stipulated that profits derived from the export of goods shall be the entire profits of the business as computed under the head “profits and gains of business or profession” where the business of the assessee consists entirely of exports; where the business consists partly of exports and partly local sales, even then the profits of the business as computed under the head “profits and gains of business or profession” had to be divided in the same proportion which the export turnover bears to the total turnover of the business. Thus, the export profits were to be computed taking the profits assessed under the head ‘business’ as the basis. This gave room for inclusion of receipts such as brokerage, commission, interest, rent or any other receipt of a similar nature (which did not have any element of turnover but which were included in the profit and loss account), in the profits of the business since such receipts were also assessed as business income. This peculiar position was eliminated by the Finance (No.2) Act, 1991 and in Circular No.621, dt.19.12.1991 (supra) it was explained in paragraphs 32.10 and 32.11 that the amended definition of ‘profits of the business’ in clause (baa) of the Explanation was introduced to clarify that such receipts which do not have an element of turnover will not be included as profits of the business to the extent of 90%, a deduction of 10% being given towards common expenses. But for this definition introduced by the Finance (No.2) Act, 1991, there was no scope for excluding incomes which did not have any nexus with the export activity or which did not have an element of turnover from the profits of the business if such incomes had been assessed under the head “business”. It may be recalled that the asst. year before the Supreme Court in Nair’s case (supra) was 1993-94 for which year clause (baa) of the Explanation was applicable. Since the assessee in that case did not dispute that processing charges received by him had no nexus with the export business and thus constituted independent income, 90% thereof had to be statutorily excluded from the profits of the business which would not have been possible if the earlier definition of the export profits in clauses (a) and (b) of sub-section (3) of section 80HHC had continued. The said sub-section was simultaneously substituted by the Finance (No.2) Act, 1991 w.e.f. 1.4.1992. Therefore, the Supreme Court did not apply the parity principle in Nair’s case between the profits of the business and the total turnover and held that though 90% of the processing charges were to be reduced from the profits of the business, they cannot be excluded from the total turnover. At first reading it would certainly appear, as was contended before us by the department, that in Nair’s case (supra) the Supreme Court has given a go-by to the parity principle earlier recognized in LMW’s case (supra), but on deeper consideration it seems to us that it was because of the statutory definition of the “profits of the business” excluding receipts which do not have an element of turnover or which had no nexus with the export activity that the processing charges had to be excluded from the profits of the business though not from the total turnover. This, coupled with the fact that the Supreme Court itself has brought out the distinction between LMW’s case and Nair’s case at pages 241-242 of 295 ITR, persuades us to hold that in a case where the export turnover is to be compared with the total turnover, it is the former judgement in the case of LMW (supra) that will govern the decision and not the judgement in the case of Ravindranathan Nair.

26. We may now refer to section 10B where clause (iii)-Explanation 2 defines ‘export turnover’. There is no definition of ‘total turnover’. If the parity, principle is to be applied, it follows that whatever has been excluded from the export turnover by the definition shall stand excluded from the total turnover also. The position would be somewhat similar to the case before the Calcutta Bench of the Tribunal in the case of Chloride India Ltd., (supra). In clause (iii) of Explanation 2 to section 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. The argument of the department before us is that in the absence of any definition of ‘total turnover’ for the purpose of section 10B, there is no authority to exclude anything from the expression as understood in general parlance. We are unable to give effect to the argument for two reasons. Firstly, as held by the Supreme Court in the case of LMW (supra), 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 the 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 and in this we agree with the learned representative for the assessee before us (Sak Soft Ltd.,). It is only in recognition of this position that in the definition of ‘export turnover’ in section 10B the aforesaid two items have been directed to be excluded. Secondly, as rightly pointed out on behalf of Adventnet Development Centre (India) by its learned representative, 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 section 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. In this behalf, it must be borne in mind that total turnover is nothing but the aggregate of the domestic turnover and the export turnover. The formula prescribed by section 10B(4), differently expressed, will be as follows :

Export profits = profits of the business X export turnover

(Domestic turnover +export turnover)

It will be seen from the above that the figure of export turnover has to be the same both in the numerator and in the denominator of the formula. It follows that the total turnover cannot include the two items of expenses recovered by the assessee and referred to in the definition of ‘export turnover’. This aspect of the matter has been highlighted by the Bangalore Bench of the Tribunal in the case of Tata Elxsi Ltd., v. ACIT (supra) where the provision considered was section 10A which is on the same lines as section 10B.

38. The parties have compiled several orders of the Chennai and Bangalore benches of the Tribunal in which it has been held that whatever is excluded from the export turnover should also be excluded from the total turnover for the purposes of sections 10A or 10B of the Act. We are generally in agreement with the conclusion reached in these orders, which are not being dealt with individually.

39. 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 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. We make it clear that we have not decided the cases of the interveners and they will be decided by the respective benches in conformity with our decision.