ORDER
Shamim Yahya, Accountant Member
1. This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-V, Chennai-34 dated 27.01.2005 and pertains to assessment year 2001-02.
2. The first issue raised in the appeal is that Commissioner of Income Tax (Appeals) erred in holding that assessee is entitled to exemption Under Section 10A.
2.1 The brief facts of the case are as under:
The company was incorporated in the financial year 1993-94 to trade in computer hardware, software and software development. The company started its export activities in the financial year 1998-99 relating to assessment year 1999-2000. The company is registered under Software Technology Park of India (STPI) w.e.f 25.3.2000. The custom formalities were completed on 2.6.2000. The assessee showed a profit of Rs. 7,55,36,413/- from STPI Unit and a loss of Rs. 1,58,27,453/- from non-STPI Unit. The entire profit of the STPI Unit is claimed as exempt Under Section 10A of the Income Tax Act, 1961 and the loss from non-STPI Unit is carried forward to subsequent year. The STPI Unit is doing 100% export sales while non-STPI Unit is engaged both in domestic as well as export sales. In the year ending 31.03.2001, the STPI Unit and non-STPI Unit have shown export sales to the tune of Rs. 10,65,21,516/- and Rs. 9,88,637/- respectively. The total turnover of the company is Rs. 27.87 crores, out of which the turnover of non-STPI Unit is around Rs. 17.21 crores as compared to Rs. 10.65 crores of STPI.
2.2 During the course of assessment, the Assessing Officer denied exemption Under Section 10A of the Act holding that the STPI Unit is not a new unit and there is a splitting or reconstruction of earlier business.
2.3 The Assessing Officer placed reliance upon Hon’ble Apex Court decision in the case of Bajaj Tempo Ltd. v. CIT 196 ITR 188 and Hon’ble Madras High Court decision in the case of LG. Balakrishnan and Brothers Ltd. v. CIT 151 FTR 270. The Assessing Officer held that,
i) The company cannot be said to have commenced operation from 1.4.2000, as on 31.3.2000 it did not have any Plant & Machinery,
ii) There is no manufacturing activity in the STPI Unit; and
iii) There is splitting or reconstruction of earlier business.
2.4 The Assessing Officer further observed as under:
The STPI Unit started exporting from May, 2000 onwards but it has purchased software and hardware mostly after September, 2000. The above facts, were confirmed by Shri K. Vinod, General Manager (Operations) at the time of survey Under Section 133A of the Act on 8.3.2004 and subsequently by Shri S. Madhavan, whole time Director on 11.3.2004. Therefore, the software and hardware purchased from 1.4.2000 to 31.3.2001 of Rs. 1,43,70,174/- cannot be included in the computation of software and hardware as on 25.3.2000. As a corollary the Assessing Officer has held that the STPI Unit is using the old Plant & Machinery (software and hardware) for the purpose of export by STPI Unit.
The company is using the same software and hardware acquired in the financial year 1998-99 to develop application software. It has developed its own product called RAP (Response Application Platform) in financial year 1999-2000 i.e. before STPI Unit came into existence. The company earns its income out of the sale of the software and hardware and hardware already in possession from its business partners and the RAP developed by the company. From the above,. it is clear that the STPI Unit is not developing any software by its own but is engaged in the trading of the software, hardware and RAP, which were developed prior to the commencement of STPI Unit.
There is splitting up or reconstruction of the earlier business due to:
i) Use of same software and hardware purchased in 1998-99, i.e. before the STPI Unit came into existence.
ii) The products and application of software exported by the company prior to incorporation of STPI Unit is similar to that of STPI Unit even after the formation.
iii) The overseas principal customers of the assessee company remain the same even after the formation of STPI Unit.
iv) Employees of STPI Unit were employed by the company even before the formation of new STPI Unit and there is rotation of employees between STPI Unit and non STPI Unit.
v) Prior to formation of STPI Unit, company’s foreign inward remittance was received through EEEC Account held at Centurion Bank, Anna Salai, Chennai-600 006 and even after the formation of STPI Unit, there is no change in the bank account and the foreign exchange inward remittances are through the same bank accounts.
2.5 From the above, Assessing Officer concluded that it is clear that the STPI Unit is not a new unit and merely exporting activities. Prior to the formation of the STPI Unit, the company was involved in both domestic and export sales and after STPI came into existence, the exports are booked under STPI Unit and domestic sales are under non STPI Unit and, hence, there is splitting up or reconstruction of already existing business. Merely making entries in the books of accounts does not substantiate that it is a new unit. Even after the formation of STPI Unit, physically it is not possible to distinguish between STPI Unit and non STPI Unit as employees of both the units are same, the product and services are also same and the infrastructure is similar and hence, the intention of Section 10A of the Act would be defeated if such kind of arrangement can be allowed to avail the benefit Under Section 10A-of the Act.
3. Aggrieved by the aforesaid order, assessee appealed before the learned Commissioner of Income Tax (Appeals). After considering the assessee’s submissions, the learned Commissioner of Income Tax (Appeals) held as under:
After going through the facts of the case, observation of the Assessing Officer and the detailed submissions made by the assessee as above, I find the assessee has furnished sufficient material to show that there is a separate and distinct STPI Unit formed, which has engaged itself in development and export of software involving substantial investment in infrastructure including computers and software and employees and the Assessing Officer’s conclusion that there is a splitting up of the existing unit taking the reference date as 25.03.2000 is not correct and is done without analyzing and appreciating all the relevant facts. The fact and details furnished above has clearly established that the new STPI Unit is separate with separate employees generating substantial turnover during the year. The fact that the export turnover has been shifted from the existing STPI Unit or the STPI Unit dealing with same or similar customers or projects is not relevant. The assessee’s contention that the new STPI Unit has to be accepted for the following reasons:
i) There is no transfer of old machinery. The STPI Unit has acquired new machinery for its operations.
ii) The assessee has registered as STPI on 25.03.2000 and obtained custom bonding licence on 2.6.2000 and export sales are made only from STPI Unit. Thereafter, the first export invoice for the financial year 2000-01 was raised by STPI Unit on 30.6.2000 followed by two more invoices towards onsite projects for a customer called Soft quest’. The STPI Unit has started work for its new projects for US subsidiary called ‘Rockwell Project’. The necessary infrastructure for these new projects in terms of purchase of the computers / systems etc. was purchased in July, 2000. The first batch of such machines was cleared by customs and recorded in the Customs Bonding Register on 2.8.2000. The first invoice towards the new project was raised in the STPI Unit on 31.08.2000. The details of all the export invoices were furnished.
iii) Custom Bonding Licence was issued for the III Floor (3100 sq. ft.) of the premises specifically approved / earmarked for STPI Unit.
iv) The assessee has acquired total assets worth Rs. 1.43 crores for STPI Unit during the financial year 2000-2001 as per the details given above.
v) Details of fixed assets held as on 1.4.2000 and additions during the financial year 2000-2001 for both the STPI Unit and non STPI Unit was filed, which is as under:
Fixed Assets details for Financial Year 2000-2001
———————————————————————-
As on Domestic STPI
(Rs.) (Rs.)
----------------------------------------------------------------------
01.04.2000 1,30,19,365 NIL
----------------------------------------------------------------------
Additions during the year 3,56,53,582 1,43,70,174
----------------------------------------------------------------------
vi) Details of sales for STPI Unit and non STPI Unit are filed. STPI Unit is engaged only in exports with a turnover of Rs. 10.65 crores and non STPI Unit is engaged in domestic sales.
vii) The STPI Unit is engaged in the business of software development which is the manufacturing activity as per provisions of Section 10A of the Act.
viii) The STPI Unit is having a separate bank account (4 Nos. ) with Centurion Bank Ltd., Chennai-600 035 for its foreign exchange transaction as on 30.03.2000, 8.6.2000 and subsequent dates.
ix) It has also issued separate invoices for each project.
x) It has been maintaining separate hooks of accounts for both STPI Unit and non STPI Unit duly audited by statutory auditor.
xi) All expenditure including employees directly attributable to the STPI Unit have been claimed in such unit. Communication expenses have been allocated between STPI Unit and non STPI Unit on the basis of sales turnover. Interest on term loan has been reallocated between STPI Unit and non STPI Unit on the basis of proportionate assets acquired during the year. During the appeal hearing, the assessee has further reallocated the expenditure under various heads as a result of which, the Income from STPI Unit has been revised from Rs. 7.87 crores to Rs. 7.54 crores. Similarly, the loss from non STPI Unit has been reduced from Rs. 1.63 crores to Rs. 1.30 crores.
xii) The expenditure on advertisement and sales promotion, human resources, cost, rent, electricity and depreciation on fixed assets and communication expenses have been considered for respective units. Expenses on communication, traveling, vehicles, electrical installation, office equipment and Plant & Machinery has been allocated on the basis of the turnover. The same has been verified and found to be correct. A copy of the allocation filed is enclosed to this order.
xiii) The purchase of software and hardware is only in respect of non-STPI Unit as it is dealt with only by non STPI Unit, though it integrates its own developed software at the time of sale. There is no such activity in STPI Unit. It has also clarified that in respect of project, ‘soft quest’ executed onsite from June to August, 2000 it did not require any specific software or hardware. Specific identifiable personnel associated with this project and the employees’ cost is debited to STPI Unit.
xiv) The ‘loss’ in the domestic unit, referred to by the Assessing Officer was explained by the assessee.
Profit & Loss Account for the year ended 31.03.1999
———————————————————————-
Domestic Exports Total
----------------------------------------------------------------------
Sales 33,678,104 10,718,13 44,396,217
----------------------------------------------------------------------
Net profit 2,318,644 5,168,100 7,486,744
before tax
----------------------------------------------------------------------
Profit & Loss Account for the year ended 31.03.2000
----------------------------------------------------------------------
Domestic Exports Total
----------------------------------------------------------------------
Sales 67,165,746 43,301,474 110,467,220
----------------------------------------------------------------------
Net Profit (7,945,846) 25,894,041 17,948,195
before tax
----------------------------------------------------------------------
Profit & Loss Account for the year ended 31.03.2001
----------------------------------------------------------------------
Non STPI STPI Total
----------------------------------------------------------------------
Sales 172,187,681 106,521,516 278,709,197
----------------------------------------------------------------------
Net Profit (loss) (16,398,704) 78,787,400 62,388,696
before tax
----------------------------------------------------------------------
It is seen from the above details that domestic turnover has resulted in a very small profit or loss even in earlier years and it is only the exports which are profitable.
Considering the totality of the facts and circumstances of the case, the assessee has substantiated its claim with facts and figures. It is clear that the STPI Unit is engaged in the business of software development and export and it is a new unit with separate infrastructure, manpower deployment, bank accounts, separate books of accounts and allocation of expenses wherever necessary has been done as per the accounting principles. There is no splitting up of existing business. The assessee has fulfilled the relevant conditions under Section 10A of the Act. Hence, the assessee is entitled for exemption under Section 10A of the Act, in respect of ‘profits of STPI Unit. The Assessing Officer is directed to allow exemption under Section 10A of the Income Tax Act, 1961 accordingly after computing the total income. Thus, grounds No. l & 2 are allowed.”
4. We have heard the rival contentions and perused the relevant records. We find that Section 10A which provides for special provision in respect of newly established undertakings in free trade zones provides vide Clause (2) the conditions which are to be satisfied by the undertakings in order to claim exemption granted by the Section as under:
(2) This section applies to any undertaking which fulfils all the following conditions, namely:
(i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year:
(a) commencing on or after the 1st day of April, 1981, in any free trade zone; or
(b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park;
(c) commencing on or after the 1st day of April, 2001 in any special economic zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in Section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation.– provisions of Explanation 1 and Explanation 2 to Sub-section (2) of Section 80-I shall apply for the purposes of Clause (iii) of this sub-section as they apply for the purposes of Clause (if) of that subsection.
Admittedly, it is Revenue’s case that assessee has not complied with Clause 2 (ii) & (iii). In other words, the Assessing Officer has made up a case that the STPI Unit was formed by splitting up or by reconstruction of the business already set up at Chennai and the STPI Unit was formed by transfer of plant & machinery previously used by the old unit.
5. First, we address the issue regarding use of old unit’s machinery by the STPI. In this regard, following facts are noted:
The assessee has registered as STPI on 25.03.2000 and obtained custom bonding licence on 2.6.2000 and export sales are made only from STPI Unit. Thereafter, the first export invoice for the financial year 2000-01 was raised by STPI Unit on 30.6.2000 followed by two more invoices towards onsite projects for a customer called ‘Soft quest’. The STPI Unit has started work for its new projects for US subsidiary called ‘Rockwell Project’. The necessary infrastructure for these new projects in terms of purchase of the computers / systems etc. was purchased in July, 2000. The first batch of such machines was cleared by customs and recorded in the Customs Bonding Register on 2.8.2000. The first invoice towards the new project was raised in the STPI Unit on 31.08.2000.
Further, the assessee has also clarified that in respect of project, ‘soft quest’ executed onsite from June to August, 2000 it did not require any specific software or hardware. Specific identifiable personnel associated with this project and the employees’ cost is debited to STPI Unit.
From the above it is clear that the case that same machinery as that of the old unit were used by the STPI is only based upon suspicion and not tenable. As a matter of fact, the assessee has acquired total assets worth Rs. 1.43 crores for the STPI Unit during financial year 2000-2001.
5.1 As regards the statement of Mr. Vinod, the then General Manager, the assessee submitted that,
Mr. Vinod, the then General Manager, had been with the respondent company only for a few months in India in the year 2003 and was only just getting his bearings in the Indian arm of the company. We submit that this fact should be considered while weighing the sworn statement of Mr. Vinod.
In the sworn statement given by Mr. Vinod, who is basically a marketing person, now abroad, he had stated that employees during their career life in the company are rotated across projects and geographies. This is a normal personnel policy of the company just as in any other organization, Government or otherwise and cannot be construed to mean that employees are always interchanged between STPI and non-STPI Units. Moreover, in the said statement, Mr. Vinod himself had stated that he and his professional team were only 3 months old in the company and that they would provide all information relating to the assessment in question i.e. year ended 31.03.2001 at the earliest.
From the above, we find that the statement of Mr. Vinod cannot be taken as a basis for denying benefit of Section 10A to the assessee.
5.2 We further note that Hon’ble Madras High Court in the case of CIT v. Gopal Plastics (P) Ltd. 215 ITR 136 has held as under:
The scheme of Section 80J of the Income Tax Act, 1961, is to make available the benefit of tax holiday for a period of consecutive years, the commencement point of such period being the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles. The profits and gains derived from business are assessable in each assessment year. Therefore, in each assessment year falling within the stipulated number of years, the question will arise whether the new industrial undertaking which claims the benefit of tax holiday, satisfies the conditions laid down. In other words, according to the legislative scheme, it is apparent that in each assessment year commencing from the assessment year relevant to the | previous year in which such new industrial undertaking begins manufacture or production, the taxing authority will have to consider whether the industrial undertaking was formed by the transfer to its new business of building, machinery or plant previously used for any purpose, and, if so, whether the total value of such transferred asset exceeded 20 per cent of the total value of the building, machinery or plant used in the business of such undertaking during the relevant year. If the new industrial undertaking which has not satisfied such test In any of the earlier assessment years comprised in the stipulated period acquires new building, machinery or plant during any one of the succeeding assessment years and as a result of such acquisition, the condition prescribed is fulfilled, then, as from the assessment year in which such condition is satisfied, the benefit of tax holiday will be available to it for the remaining period of the stipulated time.
5.3 From the above it is emanating that, exemption has to be granted as and from the assessment year in which conditions prescribed in the section have been satisfied until the end of the holiday period and that the test of compliance has to be made in every assessment year for which the tax holiday period is available.
5.4 The Assessing Officer has placed reliance upon Hon’ble Madras High Court decision in the case of L.G. Balakrishnan and Brothers Ltd. v. CIT 151 ITR 270 wherein it was expounded that a new undertaking can be said to have been formed only when it is ready to commence the production of article for which the undertaking was established which will not include the initial steps taken for its establishment.
We find that in this case, there is no dispute that the STPI Unit has commenced the production of article/exported the software and development I thereof from the current assessment year. Absence of Plant & Machinery as on I 31.3.2000 (when initial steps were being taken for the STPI Unit) cannot be a ground for denial of benefit to the assessee Under Section 10A.
5.5 Further, in this regard, Assessing Officer’s reliance upon Hon’ble Apex Court decision in the case of Bajaj Tempo Ltd. v. CIT 196 ITR 188 is rather misplaced. As a matter of fact, in that decision, the Hon’ble Apex Court, with respect to relief for new industrial undertaking Under Section 15C of the Income Tax Act, 1922 has held that such provisions should be construed liberally. Very literal construction which defeats the very purpose of enacting the provision should be avoided.
Further, it was expounded in that case that, even if the new industrial undertaking is established by transfer of building, plant or machinery but it is not formed as a result of such transfer, the assessee cannot be denied the benefit.
From the facts of the case, it is clear in this case that it cannot be said that the STPI Unit was formed as a result of any transfer of asset from the old unit.
5.6 In this context, it will be worthwhile to refer to Hon’ble Apex Court decision in the case of Textile Machinery Corporation Ltd. v. Commissioner of Income Tax, West Bengal wherein it was held that,
A new activity launched by the assessee by establishing new plants and machinery by investing substantial funds may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognizable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business. For the purpose of Section 15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of Section 15C the new undertaking must be formed by reconstruction of the old business.
If an undertaking is not formed by the reconstruction of the old business that undertaking will not be denied the benefit of Section 15C merely because it goes to expand the general business of the assessee in some directions.
Use by the assessee of the articles produced in its existing business or the concept of expansion are not decisive tests in construing Section 15C.
5.7 Some other important case laws in this regard are discussed as under:
i) Hon’ble jurisdictional High Court in the case of CIT v. Metropolitan Springs (P) Ltd. 191 ITR 288 has held in the context of provisions of Section 80J that, even if some members of the staff were common to the old and new unit, it will not be a bar on the eligibility or deduction Under Section 80J.
ii) Hon’ble Apex Court decision in the case of CIT v. Indian Aluminium Company Ltd. 108 ITR 367 has held that, even if the new undertaking was involved in manufacturing the same commodity as manufactured by the old unit, it will still be treated eligible undertaking for Section 801
iii) Hon’ble jurisdictional High Court decision in the case of CIT v. Premier Cotton Mills Ltd. 240 ITR 434 has held that, it was not required for deciding the question of splitting up or reconstruction of the existing business that the new undertaking should produce different article to that produced by the old unit.
5.8 On the anvil of aforesaid discussion and case laws, we find that in this case there is a clear establishment of new unit by substantial investment in Plant & Machinery. The STPI Unit is an integrated unit by itself. The assessee is engaged in export of computer software which duly qualifies for exemption Under Section 10A. The assessee commenced export of computer software from the current assessment year. The assessee’s activities include development and export of software. This, inter alia, includes onsite integration of software. The Assessing Officer’s contention that earlier developed software is only being sold is unfounded and devoid of cogency. The fact that new unit also deals in the same products as that of old unit or that there are some old unit’s employees or customers cannot be taken as a ground for denying the benefit Under Section 10A as evident from the case laws cited above. The old unit’s incurring of losses etc. has also been explained by giving data that the domestic turnover has resulted in a very small profit or loss in earlier years and it is only the exports, which are profitable.
5.9 In the background of above discussion and case laws cited above, it is clear that it cannot be said that the STPI Unit of the assessee was established as a result of splitting or reconstruction of the old unit. Hence, we uphold the order of the learned Commissioner of Income Tax (Appeals) in this regard and decide the issue in favour of the assessee.
5.10 It will not be out of place here to mention that it is a settled proposition often reiterated by the Hon’ble Apex Court that in cases where two views are possible, the one favourable to the assessee should be adopted. CIT v. Podar Cements Ltd. and Anr. 226 ITR 625 (SC) and Mysore Minerals Ltd. v. Commissioner of Income Tax 239 ITR 775 (SC).
6. The next issue raised is that,
i) The Commissioner of Income Tax (Appeals) erred in holding that the expenses on consultancy charges, subscription charges, exhibition expenses, advertisement, traveling expenses and software expenses are not expenses incurred in providing the technical services outside India.
ii) The Commissioner of Income Tax (Appeals) erred in observing that the provisions of Section 10A are the same as that of Section 80HHE in respect of export turnover and total turnover on the aspect of exclusion of expenditure incurred in foreign exchange.
7. In this case although denying the deduction Under Section 10A, the Assessing Officer has granted deduction Under Section 80HHE. The Assessing Officer held that the expenditure incurred in foreign currency to the tune of Rs. 88,32,4237- has to be reduced from the export as well as total turnover as per the provisions of Section 80HHE. The learned Commissioner of Income Tax (Appeals) held that provisions of Section 10A are same as Section 80HHE in this respect. It is relevant even while computing the income exempt Under Section 10A. The learned Commissioner of Income Tax (Appeals) also observed that considering the nature of expenditure, they are not expenses incurred in providing the technical services outside India.
8. We have heard the rival contentions and perused the relevant records. The learned Counsel of the assessee submitted that these expenses cannot be directly termed as expenses incurred in foreign exchange in providing the technical services outside India. However, without prejudice to the above stand he submitted that, in the event the same is to be treated as such, then, the same is to be deducted both from export turnover as well as total turnover. We have given a careful consideration to the above and we find that Section 10A Explanation 2 (iv) defines ‘export turnover’ as,
The consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with Sub-section (3), but does not include 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.
9. However, there is no definition of total turnover’ given in Section 10A of the Act. But we note that Section 80HHE which provides for deduction in respect of profits from export of computer software etc., defines ‘export turnover’ on similar lines as Section 10A as under in Explanation (c):
Export turnover means the consideration in respect of computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with Sub-section (2), but does not include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India.
It further defines total turnover’ in Explanation (e) as:
Total turnover’ shall not include:
i) any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28;
ii) any freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India; and
iii) expenses, if any, incurred in foreign exchange in providing the technical services outside India.
10. Thus, it is seen that what is excluded from export turnover is also excluded from total turnover. Now in this case, the learned Commissioner of Income Tax (Appeals) has held that Section 10A is akin to Section 80HHE, hence the deduction can be properly computed only by deducting expenditure incurred in foreign exchange, both from the total turnover and also from the export turnover.
11. We find that Hon’ble Apex Court in the case of CIT v. Lakshmi Machine Works had the occasion to consider the meaning of ‘total turnover’ with respect to Section 80HHC. In that context, the Court expounded that (head notes):
Section 80HHC of the Income Tax Act, 1961, is a beneficial section: it was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. Just as commission received by the assessee is relatable to exports and yet it cannot form part of “turnover” for the purposes of Section 80HHC, excise duty and sales tax also cannot form part of “turnover”. Just as interest, commission, etc., do not emanate from the “turnover” so also excise duty and sales tax do not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover such taxes had to be excluded. Commission, interest, rent, etc., do yield profits, but they do not partake of the character of turnover and therefore they are not includible in the “total turnover”. If so, excise duty and sales tax also cannot form part of the “total turnover” under Section 80HHC(3).
One cannot interpret the words “total turnover” with reference to the definition of the word “turnover” in other laws like the Central Sales Tax or as defined in accounting principles.
Excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government.
12. The Hon’ble Apex Court further held that,
The principal reason for enacting a formula in Section 80HHC of the Income Tax Act, 1961, is to disallow a part of the concession thereunder when the entire deduction claimed cannot be regarded as relating to exports. Therefore, while interpreting the words “total turnover” in the formula in Section 80HHC one has to give a schematic interpretation. The various amendments made therein show that receipts by way of brokerage, commission, interest, rent, etc., do not form part of business profits as they have no nexus with the activity of export. The amendments made from time to time indicate that they became necessary in order to make the formula workable. If so, excise duty and sales tax also cannot form part of the ‘total turnover” under Section 80HHC(3) : otherwise the formula becomes unworkable.
13. On the anvil of aforesaid exposition, we find that Section 10A also is a beneficial section. It is intended to provide incentive to promote exports. In fact Section 10A is meant provided by Section 80HHE by providing the assessee. If the expenditure incurred in foreign currency are excluded from export turnover but not from total turnover, the benefit granted by Section 10A would be considerably reduced. This, in our opinion, cannot be the scheme of the Act.
14. In this regard, Hon’ble Apex Court in the case of K.P. Varghese v. Income Tax Officer, Ernkaulam and Anr. 131 ITR 597 (SC) had held that a literal construction that leads to absurdity, unjust result or mischief should be avoided. Similarly Hon’ble Apex Court in the case of Bajaj Tempo Ltd. v. Commissioner of Income Tax 196 ITR 188 with respect to relief for new industrial undertaking Under Section 15C of the Income Tax Act, 1922 has held that such provisions should be construed liberally. Very literal construction which defeats the very purpose of enacting the provision should be avoided.
15. Considering the aforesaid, in our view, these expenditures incurred in foreign currency are to be excluded from export turnover and they should also be excluded from total turnover in order to properly work out and grant relief that is intended by this section. Hence, in our opinion, these items which are to be excluded from export turnover cannot be included in total turnover while calculating the relief Under Section 10A.
In the result, this appeal by the Revenue is partly allowed.