2008 (8) TMI 430 - AT - Income Tax

Tribunal Allows Partial Appeal on Telecom Expenses; Directs AO to Recompute Interest, Grants Hearing Opportunity.

California Software Company Limited. Versus Assistant Commissioner Of Income-Tax.

The appeal was partly allowed. The Tribunal ruled that telecommunication expenses incurred in Indian rupees should not be deducted from export turnover, ... Interpretation Of Statutes - expression 'export turnover' - Exclusion of telecommunication charges - expenses incurred in foreign currency for the payment of technical qualified employees outside India from the export turnover - denial of alternative claim of application of ratio formula - rule of construction - Adjustment in the denominator of 'total turnover' - Disallowance of loss from foreign exchange fluctuation - Payment in lieu of notice period - Levy of interest under Sections 234B and 234C. Telecommunication Charges - HELD THAT:- The rule of construction is 'to intend the legislature to have meant what they have actually expressed'. The object of all interpretation is to discover the intention of Parliament, 'but the intention of Parliament must be deduced from the language used'. One should remember that statutes have some purpose and object to accomplish whose sympathetic and imaginative discovery is the surest guide to their meaning. One cannot make a fortress out of the dictionary - It is manifest from the legislative history of provisions allowing tax relief for export, that the quantum of such relief was based on the 'net foreign exchange realization'. The exporters, by the very nature of their business had to incur certain expenses in foreign exchange and they received sale proceeds in foreign exchange. In other words, there was 'outflow' as well as 'inflow' of foreign exchange and it was the 'net inflow' of the foreign exchange which formed the basis for the quantum of such tax relief. The definitions of the expressions 'net foreign exchange realization' and of 'export turnover' as reproduced above make this point amply clear - The ''five year'' tax holiday was allowed u/s 10A of the Act to industrial undertakings, manufacturing or producing articles or things in a free trade zone subject to certain conditions. This tax holiday was not available to a 100 per cent export-oriented undertaking. Such undertakings were eligible only for deduction out of their export profits u/s 80HHC of the Act. With a view to providing further incentive for earning foreign exchange, a new s. 10B was inserted by the Finance Act, 1988, so that, the income of a 100 per cent export-oriented undertaking will be exempt from tax for a period of five consecutive assessment years falling within the block of eight assessment years. The exemption provided under the new section is similar to the one provided to industrial undertakings operating in free trade zones - If we look at the definition of 'export turnover', it becomes clear that the 'consideration' received by an exporter in 'convertible foreign exchange' has to be reduced by only those expenses which were incurred by the 'exporter' in foreign exchange. If this was the intention of the legislature, as is apparent from the discussion, then it has to be inferred that the condition of 'incurred in foreign exchange' was also applicable to the expenses incurred on freight, telecommunication charges and insurance. And, consequently, the aforesaid conjunction 'or' should be read as 'and' - Therefore, we have to hold that the expenses which were incurred in Indian rupee are not to be deducted. The assessee succeeds on this point - However, we find that the AO and the CIT(A) had no occasion to examine whether the telecommunication expenses were incurred in Indian rupee. Therefore, the matter is remitted back to the file of the AO, with the limited purpose of verifying whether the expenses were incurred in Indian rupee. Expenses incurred in foreign exchange - payment of technical qualified employees outside India - deduction from the 'export turnover' - HELD THAT:- The expression 'technical services outside India', appearing in the definition of 'export turnover', refers to the 'technical services provided outside India' for the development or production of computer software which is eligible for the said tax incentive. Since the expenses incurred in foreign exchange on such 'technical services outside India', resulted in 'outflow' of foreign exchange, therefore, it had to be deducted from the 'consideration', in respect of the 'export', received in, or brought into, India by the assessee exporter, in convertible foreign exchange - In our opinion, there is no ambiguity in the language used in the statute which has been correctly applied by the lower authorities. Therefore, we hold that the expenditure incurred in foreign exchange was rightly deducted for arriving at 'export turnover'. This issue is decided against the assessee. Adjustment in the denominator of 'total turnover' - HELD THAT:- The effect of the judgment of the Supreme Court in the case of K. Ravindranathan Nair [2007 (11) TMI 10 - SUPREME COURT], in context of the facts of the present case, is that what is deducted from the 'export turnover' (the numerator in the formula) need not necessarily be deducted from the 'total turnover' (the denominator in the formula) - We like to explain the above point in the context of the provisions of s. 10B as applicable to the facts of the present case. In the present case, certain expenses incurred in foreign exchange are deducted from the 'export turnover' by virtue of a specific provision in the Act. The objective, apparently, was 'netting' in relation to the foreign exchange 'inflow' and 'outflow' and not because such expenses were part of the 'export turnover'. There can be no logical reason to exclude from 'total turnover' what was never part of it in the first instance. This issue is squarely covered by the decision of the Supreme Court in the case of K. Ravindranathan Nair. We, respectfully, follow the precedent and decide this issue in favour of the Department and against the assessee - To conclude, the telecommunication expenses will not be deducted from the 'export turnover' if it is found by the AO that these expenses were incurred in Indian rupee; the expenses incurred in foreign currency will be deducted from the 'export turnover', and, no such adjustment will be made in the 'total turnover'. In the result, the ground No. (2) is partly allowed. Disallowance of loss from foreign exchange fluctuation - HELD THAT:- A similar view was taken in the case of Indian Overseas Bank vs. CIT [1990 (2) TMI 43 - MADRAS HIGH COURT] 'Held, that the amounts in question were only estimated anticipated income arrived at on the basis of the rates of exchange which prevailed, presumably on the last day of the accounting year, without an actual settlement of the forward contracts in foreign currencies having been brought about and, in that sense, the amounts in question represented merely notional profits and could not be subjected to tax.' - the ground is rejected. Payment in lieu of notice period - HELD THAT:- In our opinion the claim of the assessee fails on two accounts. Firstly, the receipt from the employees who left the job and made the payment in lieu of notice period has to be treated as revenue in nature. In the written submission it was stated that it went to reduce the salary bill. It gives the impression that this receipt was already credited in the salary account. Therefore, the AO has to ensure that there is no double taxation on this account. Secondly, the assessee did not revise the return filed before the AO, therefore, the claim was rightly rejected by the CIT(A) in view of the decision of the Supreme Court in the case of Goetze (India) Ltd.[2006 (3) TMI 75 - SUPREME COURT]. The ground is, accordingly, rejected. Levy of interest under Sections 234B and 234C - HELD THAT:- The levy of interest under Sections 234B and 234C is mandatory. However, after giving effect to the above order, the AO will recompute interest under Sections 234B and 234C, as per law, and after giving opportunity of being heard to the assessee. Appeal allowed in part. Issues Involved:1. Exclusion of telecommunication charges and expenses incurred in foreign currency from export turnover.2. Disallowance of loss from foreign exchange fluctuation.3. Payment in lieu of notice period.4. Levy of interest under Sections 234B and 234C.Issue-Wise Detailed Analysis:1. Exclusion of Telecommunication Charges and Expenses Incurred in Foreign Currency from Export Turnover:The assessee claimed exemption under Section 10B of the Act, which was restricted by the AO. The dispute involved three sub-issues:- Telecommunication expenses of Rs. 15,90,132 incurred in Indian rupee should not be deducted from export turnover.- Expenses of Rs. 2,56,36,156 incurred in foreign currency for payment of technical qualified employees outside India should not be deducted from export turnover.- Application of the ratio formula should be correctly applied by making similar adjustments in the total turnover.The Tribunal analyzed the definition of 'export turnover' under Clause (iii) of the Explanation below Sub-section (9) of Section 10B, which excludes freight, telecommunication charges, or insurance attributable to the delivery of articles or things or computer software outside India, or expenses incurred in foreign exchange in providing technical services outside India. It was concluded that expenses incurred in Indian rupee should not be deducted from export turnover. The matter was remitted back to the AO to verify if telecommunication expenses were incurred in Indian rupee.Regarding expenses incurred in foreign currency, the Tribunal held that such expenses should be deducted from export turnover, aligning with the legislative intent of netting foreign exchange inflow and outflow. Therefore, the expenses of Rs. 2,56,36,156 incurred in foreign currency were rightly deducted.For the ratio formula application, the Tribunal followed the Supreme Court judgment in the case of K. Ravindranathan Nair, concluding that what is deducted from export turnover need not be deducted from total turnover. The issue was decided in favor of the Department.2. Disallowance of Loss from Foreign Exchange Fluctuation:The assessee claimed a loss of Rs. 14,96,225 due to foreign exchange fluctuation. The CIT(A) noted that the liability was related to a loan given to a subsidiary abroad, and the loss was due to restatement of current assets and liabilities. The Tribunal referred to the jurisdictional High Court's decision in Indian Overseas Bank v. CIT, which held that such notional profits could not be taxed. Consequently, the ground was rejected.3. Payment in Lieu of Notice Period:The assessee claimed that payment received from employees who resigned in lieu of the notice period was incorrectly included as income from other sources. The CIT(A) rejected this claim, noting that the issue was not raised before the AO and required factual findings. The Tribunal upheld this decision, emphasizing that the assessee did not revise the return, and referred to the Supreme Court decision in Goetze (India) Ltd. v. CIT, which restricted claims for deductions without a revised return. The ground was rejected.4. Levy of Interest under Sections 234B and 234C:The levy of interest under Sections 234B and 234C was mandatory. The Tribunal directed the AO to recompute the interest after giving effect to the order and providing an opportunity for the assessee to be heard. The ground was decided accordingly.Conclusion:The appeal was partly allowed. Telecommunication expenses incurred in Indian rupee would not be deducted from export turnover if verified by the AO. Expenses incurred in foreign currency were rightly deducted from export turnover, and no adjustment was made in total turnover. The disallowance of loss from foreign exchange fluctuation and the claim regarding payment in lieu of notice period were rejected. The AO was directed to recompute interest under Sections 234B and 234C.