Sasken Communication Technology, vs Department Of Income Tax

M/s.Sasken Communication Technologies Ltd. 139/25, Domlur Ring road, Domlur, Bangalore. ... Appellant/ PAN: AAECS 6424 R Cross Objector

Vs.

Deputy Commissioner of Income-tax, Circle 12(3), Bangalore. ... Respondent AND

ITA No.176/Bang/2013 (Assessment year: 2004-05)

Deputy Commissioner of Income-tax, Circle 12(3), Bangalore. ... Appellant

Vs.

M/s.Sasken Communication Technologies Ltd. Bangalore. ... Respondent

Assessee by: Shri Sudheendra, CA. Revenue by: Dr.K.Shankar Prasad, JCIT(DR)

Date of hearing : 23/02/2015. Date of pronouncement: 04/03/2015. ITA Nos.1645,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd. Page 2 of 8

Per Smt. P.MADHAVI DEVI, JM:

All these appeals and the cross-objections are fixed for

hearing on account of one of the issues being remanded to the file

of the Tribunal for re-consideration.

2. The Hon'ble High Court of Karnataka vide its judgment

dated 16/09/2014 in ITA Nos.40 to 42 of2014 and others had

remanded one of the grounds of appeal raised by the assessee for

fresh consideration. The ground remanded is as follows:

"Whether the telecommunication expenses, insurance charges, personnel expenses, professional expenses, branch office expenses and other expenses incurred in foreign exchange should not be excluded from the export turnover for the purpose of computing deduction under section 10B of the Income Tax Act,1961?"

3. In view of the same, these appeals are re-fixed for

hearing. It is the case of the assessee that the Assessing

Officer(AO) and the CIT(A) had excluded the travelling expenses

incurred in foreign exchange from the export turnover while

computing deduction u/s 10A of the Income-tax Act, 1961

[hereinafter referred to as 'the Act' for short]. The learned

counsel for the assessee submitted that the assessee had made an

alternative claim before the Tribunal that if such expenditure was

to be excluded from the export turnover the same should also be

excluded from the total turnover as held by the Hon'ble

jurisdictional High Court in the case of Tata Elxsi Ltd. in ITA ITA Nos.1645,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd.

Page 3 of 8 No.142 of 2008 dated 20/10/2014. He submitted that the

Tribunal had accepted the alternative plea and has not dealt with

the original ground as to whether the travelling expenses incurred

in foreign exchange are to be excluded from the export turnover

at all. He submitted that this issue had been considered by this

Tribunal in the case of Softtek India Pvt. Ltd. vs. ITO in IT(TP)A

No.222/Bang/2014 dated 31/10/2014 wherein, after considering

the judgment of the Hon'ble High Court in the case of CIT vs.

Motor Industries Co. Ltd.in ITA No.1172/2006 dated 13/06/2014

as well as the decision of the Hon'ble High Court of Karnataka in

the case of CIT vs. Elxsi Ltd. in ITA No.660 of 2008 dated

16/9/2014 has held that the assessee is eligible for exemption u/s

10A of the Act if it is in the business of manufacture and export of

computer software and the travelling of the employees of the

assessee is the integral part of the software development and

therefore it cannot be reduced or excluded from the export

turnover for computation of deduction u/s 10A of the Act. Copies

of the orders of the Hon'ble High Court as well as this Tribunal are

filed before us. As seen from the assessment order for the

assessment year 2006-07, the AO has examined the details of the

expenditure incurred in foreign exchange while computing

deduction u/s 10A of the Act and observed that these expenses

included salary payment, travelling and stay expenses of deputed

employees etc. Before the AO, the assessee submitted that these

expenses represent the salary payment outside India in foreign ITA Nos.1645,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd.

Page 4 of 8 currency to the employees on deputation abroad which comes to

Rs.34,07,89,280/- while travelling expenses of the employees for

being deputed abroad in providing software services comes to

Rs.2,49,87,302/-. The AO held that the services rendered by the

engineers abroad would squarely fall within 'technical services' and

therefore they have been specifically directed to be excluded from

the definition of the export turnover while computing deduction

u/s 10A of the Act. Therefore, it is clear that the assessee, which

is in the development of software, has deputed its personnel

abroad for providing software services in terms of its development

of software and therefore it is part and parcel of the activity of

development and export of computer software. The Hon'ble High

Court in the case of Motor Industries Co. Ltd. (cited supra), while

considering the definition of export turnover u/s 80HHC of the Act,

has at para. 19 of its order held as under:

"19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer software outside India. If the technical services rendered by the assessee's Engineers is in connection with the ITA Nos.1645,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd.

Page 5 of 8 export of computer software for the purpose of testing, installation and monitoring of software such a turnover do not fall within clause (ii) of subsection (1) of section 80HHE of the Act. Such a turnover falls within sub-clause (i) of subsection (1) of section 80HHE of the Act, that is export out of India of computer software or its transmission from India to a place outside India by any means. The expenditure incurred in the form of foreign exchange for such services cannot be excluded in computing the export turnover as it forms part of the export turnover. In the instant case as is clear from the order of the Assessing Authority, he proceeds on the assumption that the assessee is a company engaged in rendering technical services outside India in connection with production of said software. Therefore the expenditure incurred in foreign exchange in providing such technical services outside India of Rs.62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction under section 80HHE of the Act. The assessee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of 80HHE of the Act, of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (i) of sub section (1) section 80HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export ITA Nos.1645,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd.

Page 6 of 8 turnover. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of the assessee and against the revenue. Ordered accordingly."

This decision was further followed by the Hon'ble High Court in the

case of Emphasis Ltd. in ITA No.1075/2008 and 196/9 dated

01/08/2014 wherein the issue was the exclusion of expenditure

incurred in foreign currency for providing software development

services outside India for computation of deduction u/s 10B of the

Act. The Hon'ble High Court has followed the decision of the co-

ordinate bench of the Hon'ble High Court in the case of Motor

Industries Co. Ltd. (cited supra) and also its own decision in the

case of CIT & another vs. Tata Elxsi Ltd. reported in (2012) 349

ITR 98(Kar.) in answering the substantial question of law in favour

of the assessee and further holding that if the expenditure is to be

excluded from the export turnover then the same has to be

excluded from the total turnover as well. Respectfully following

the judgment of the jurisdictional High Court in the case of Motor

Industries Co. Ltd. (cited supra) as well as the decision of the co-

ordinate bench of the Tribunal in the case of Softtek India Pvt. Ltd,

to which both of us are signatories, we direct the AO not to

exclude the expenditure incurred in foreign currency towards

travelling and also salary of the employees of the assessee

deployed abroad for development of, testing, installation and

monitoring of software outside India, after verification of the exact

nature of expenditure while computing deduction u/s 10A of the ITA Nos.1645,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd.

Page 7 of 8 Act. Therefore, the ground of appeal No.2.1 in the assessee's

appeal for assessment year 2006--07 is treated as allowed.

Similarly, ground No.2 in the assessee's cross-objection

No.72/Bang/2013 in ITA No.176/Bang/2013 is also on the same

issue and therefore, the ground No.2 in the assessee's cross

objection is allowed.

4. As regards the revenue's appeal in ITA No.176/Bang/2013

for the assessment year 2004-05 is concerned, the grounds are

only against the direction of the CIT(A) to exclude the expenditure

incurred in foreign currency from the export turnover as well as

the total turnover for the purpose of computation of deduction u/s

10A of the Act by following the decision of the jurisdictional High

Court in the case of Tata Elxsi Ltd.,(cited supra). It is the case of

the Revenue that its SLP before the Hon'ble Supreme Court is

pending and therefore the CIT(A) direction is erroneous.

However, respectfully following the decision of the jurisdictional

High Court, we do not see any reason to interfere with the order of

the CIT(A). The grounds No.5 and 6 are accordingly rejected.

5. For the assessment year 2008-09 in ITA

No.1646/Bang/2012, the assessee's ground of appeal No.2.1 is on

the exclusion of the expenditure incurred in foreign currency from

the export turnover for computation of deduction u/s 10A of the

Act. Following our decision for the assessment years 2004-05 and

2006-07, this ground of appeal of the assessee is also allowed

subject to verification of facts by the AO.

ITA Nos.1645,1646/B/12, 176 & CO 72/Bang/2013 M/s.Sasken Communication Technologies Ltd.

Page 8 of 8

6. In the result, the assessee's appeals for assessment

years 2006-07 and 2008-09 are allowed for statistical purposes

and the Revenue's appeal for assessment year 2004-05 is

dismissed; and the cross objection of the assessee for assessment

year 2004-05 is allowed for statistical purposes.

Order pronounced in the open court on 04th March, 201515.

sd/- sd/- (Jason P Boaz) (Smt. P.Madhavi Devi) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu

Copy to:

1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore