TaxTMI 
TaxTMI 
2008 (1) TMI 452
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....07 2000-01 9,64,119 87,520 3. The facts leading to the issue are in the assessment year 2001-02, therefore, the facts and figures considered by us are for the assessment year 2001-02. 4. The ground raised in the assessment year 2001-02 is that the Commissioner of Income-tax (Appeals) erred in confirming the deduction of Rs. 40,93,493 in respect of internet service provider (in short hereinafter called "the ISP") charges and Rs. 1,16,61,307 in respect of expenses incurred in foreign exchange for providing technical services outside India from export turnover while computing exempted income under section 10A of the Act. 5. The brief facts of the case are that the assessee-company is engaged in the business of development and export of software. The assessee filed a return of income declaring an income of Rs. 3,72,771 for the assessment year 2001-02 after claiming exemption under section 10A to the tune of Rs. 1,12,93,116. The assessee has also filed Form No. 56F, a report of the chartered accountant under section 10A of the Income-tax Act where the amount of deduction under section 10A was arrived at Rs. 1,12,93,116. During the assessment proceedings, on perusal of the statemen....
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....lude, freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. Total foreign exchange received in India as per the statement filed by the assessee (Rs. 9,36,22,966 (minus) loss on exchange fluctuation debited to the profit and loss account (Rs. 1,57,928) 9,34,65,038 Less : (i) ISP provider charges - as discussed above 40,93,493 (ii) Expenses incurred in foreign exchange in providing technical services outside India 1,16,61,307 1,57,54,800 Export turnover 7,77,10,238 Total turnover of the business 9,34,65,038 Exemption under section 10A= Rs. 1,12,93,116 x 7,77,10,238 = 93,89,508 9,34,65,038 computation of income Income under the head "Business" 1,12,93,116 Less : Exemption under section 10A as above 93,89,508 19,03,608 Income from other sources : As admitted 3,72,771 gross total income 22,7....
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.... software development services were rendered both on site and offshore. On site services were rendered at the customer' s place by the employees of the assessee sent there. The offshore services are rendered at the assessee' s place locally. Remuneration for both types of services was received in U.S. dollars. The learned authorised representative submitted that section 10A(4) read with clause (iv) of Explanation 2 to section 10A is not applicable to the facts of the case of the assessee. He further submitted that the said provisions are applicable to a case where the assessee has export business as well as domestic sales and has maintained composite books of account for both the business and a single trading and profit and loss account. The learned authorised representative further submitted that in the case of composite business the eligible profit for deduction are arrived at under section 10A(4) by applying the following formula : 9. The learned authorised representative submitted that the above formula does not arise in the assessee' s case as the entire profit was on account of export business only. There was no turnover other than export turnover and there were ....
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....e telecommunication charges for ISP was for transmitting the data, i.e., software developed by the assessee and charges for ISP facility were paid every quarter to VSNL though such expenditure does not come within the meaning of items of expenditure referred to in clause (iv) of Explanation 2. The learned authorised representative further submitted that the expenditure was incurred on travel and allowances to employees who were sent to customers' place for rendering the software development services on site. The expenditure was not in connection with providing technical services. The alternate submission of the learned authorised representative if the formula for computation of eligible profits for deduction provided in section 10A(4) is applied, the amount excluded from the export turnover should also be excluded from the total turnover. The learned authorised representative in support of his contention relied upon the decision of the Income-tax Appellate Tribunal, Hyderabad Bench in I.T. A. No. 1102 (Hyd.) of 2004 in the case of Exband (India) P. Ltd. v. ITO (dated July 31, 2007) and in I. T. A. Nos. 983 and 984 (Hyd.) of 2006 (SMC) in the case of ITO v. D. E. Block India Sof....
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....ed from the total income of the assessee : Provided that where in computing the total income of the under taking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub- section only for the unexpired period of the aforesaid ten consecutive assessment years : Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the undertaking began to manufacture or produce such articles or things or computer software in such free trade zone or export processing zone : Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the pro....
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....insurance attributable to transport. Clause (c) of Explanation to section 80HHE is similar to clause (iv) of Explanation 2 to section 10A. 15. On an analysis of definition of "export turnover"as provided in clause (iv) of Explanation 2 to section 10A, we notice that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of articles or things or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e., freight, telecommunication charges, or insurance charges is that delivery of goods should be Free on Board (FoB). The Central Board of Direct Taxes vide its Circular No. 564, dated July 5, 1990 ([1990] 184 ITR (St.) 137 ), clarified this aspect in respect of deduction under section 80HHC, the relevant portion of the circular is reproduced as below : "The term ' export turnover' under ....
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....e separately charged, the expenses are required to be reduced from the consideration received for the purpose of arriving at the export turnover. The logic and reason behind this have been explained by the Central Board of Direct Taxes vide its Circular No. 564, dated July 5, 1990, quoted above that the delivery of the goods should be Free on Board (FoB). Both the situations can be explained by a simple example. Mr. X exported goods out of India and received consideration of Rs. 1,000 in convertible foreign exchange which is only in respect of goods. Mr. Y in a similar type of transaction charged Rs. 1,000 for goods and Rs. 100 for such expenses. Total convertible foreign exchange received in case of X is Rs. 1,000 and in case of Y is Rs. 1,100. In case of Mr. Y Rs. 100 is required to be deducted from consideration received as he is getting Rs. 100 attributable to delivery of the goods. In case of X no deduction is required from consideration received in convertible foreign exchange. Thus by reduction of Rs. 100 in case of Y the goods exported is FoB. The goods exported at FoB is important in the sense that deduction under section 10A is permissible only in respect of consideration....
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....e excluded is out of what is received. In the case under consideration the assessee received consideration against software, i.e., goods. For this purpose, the assessee has demonstrated by referring invoices (pages 4.1 to 4.4) and agreement (page 2.1) of which photocopies have been placed in the assessee' s paper book. The agreement, invoices and the turnover clearly show that the assessee did not recover any such expenditure. Therefore, there is no scope for any exclusion from the export turnover on account of such expenses. If at all on presumption, it is to be excluded for the purpose of "export turnover"then on the same assumption, reason and analogy it should be excluded from "total turnover". The simple reason is that such expenditure is also included in consolidated consideration which is forming part of "total turnover". In order to make the formula for the purpose of "export turnover"in section 10A workable one has to give a schematic interpretation to the formula. Elimination should be from both the denominator and the numerator. We, therefore, find that the Assessing Officer was not correct in excluding Rs. 40,93,493 from consideration received in convertible foreign....
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....e is called as "Contractor"and USA party is called as "Developer". The developer desired to have rights developed into a new generation technology for the products and to have various support services performed related to its business. The assessee-contractor has the expertise and facilities to undertake such development work and support services. The nature of business of the assessee pointed out is as under : "Aristasoft International (P.) Ltd. was incorporated under the Companies Act, 1956 with the Registrar of Companies, Hyderabad on 15th May, 1999 vide No. 01- 31633 of 1999. It is a 100 per cent Export Oriented Software Development Unit registered under STP scheme vide letter No. STP PER : 34 (1999)/EOP/31/99, dated June 12, 1999. Aristasoft Intl. Pvt. Ltd. was a subsidiary of Aristasoft Corporation, California, US and was its Global Technology Centre (GTC). Arista soft Corp. was focusing on high tech manufacturing industry and was engaged in providing integrated business process for its customers relying heavily on its GTC. It used the ASP model to serve its customers. Aristasoft Corp. identified business applications that would benefit the high tech industry that inclu....
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....oject Cost is derived based on the assumption that the majority of the work will be carried out at the premise of the ' Con tractor' and the ' Developer' has provided computer hardware & peripherals (list enclosed) on loan basis which shall remain the property of the ' Developer.' The project will be billed by the ' Contractor' to the ' Developer' at a flat fee as previously agreed and approved and will be based on estimated efforts spent multiplied by an hourly rate of US $15 for junior programmers, US $20 for senior programmers, US $30 for project leaders and US $40 for center heads. In case the efforts put in exceed 10 per cent of the previously estimated efforts due to no fault of the ' contractor', then the ' developer' will be required to pay for additional efforts and it will be negotiated in good faith between the ' developer' and the ' contractor' . 2. Ongoing software operation (a) Off site (At contractor' s premises) Services projects executed from the ' contractor' site. Such ongoing projects will be executed on the basis of commonly used T&M (time and material) basis : The ong....
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.... received by the assessee. But we find that the expenditure was not in connection with providing technical services. The assessee did not render any independent technical services, it developed software on contract basis as per the agreement and handed over the same to the customer. There is a software development agreement between the client and the assessee. The expenditure incurred is for development of software. The general accepted accountancy and other prevailing practice in the business are that if any services are rendered in respect of goods either for sale or manufacture, those expenditures relate to goods and such expenditures cannot be described independent expenses so as to say in the nature of technical services. Here distinction is to be noted in respect of consideration received against expenditures incurred for the purpose of goods sold or manufactured or produced and consideration received against independent services rendered. Up to the point of sale of goods expenditures incurred is related to goods. Such expenses incurred cannot be said to be expenditure for technical services. If the technical services are rendered independently which is being agreed to separa....