Computation of turnover U/s 10A - Case law

IN THE INCOME TAX APPELLATE TRIBUNAL,BANGALORE BENCH ‘B’ BANGALORE
ITA No.248 & 249/Bang/2007(Asst. Year 2002-03 & 2003- 04)
M/s I-GATE GLOBAL SOLUTIONS LTD158-162(P) & 165(P)-170(P), EPIP,Phase-II, Whitefiled, Bangalore-560006
Vs
THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-11(3), BANGALORE

Though there is no definition of the term 'total turnover' in section 10A, there is also nothing in the said section to mandate that what is excluded from the numerator (export turnover) would nevertheless form part of the denominator. One would have to apply consistent standards in understanding and applying a term, particularly when, such term, viz. export turnover has an independent function and at the same time a part of a larger term viz., total turnover. Thus, if some expenses, for any reason are excluded in arriving at the 'export turnover' the same should be reduced form 'total turnover' also.

ORDER
The assessee has filed the appeals against the order of learned Commissioner of Income-tax (Appeals) - I, Bangalore dated 19th Dec, 2006 and 6th Jan, 07. Some of the grounds of appeal for both the asst. years are the same, therefore, these appeals are being decided by a single consolidated order.
2. One of the common ground of appeal raised is that the learned CIT(A) has erred in concluding 80% of the up-linking charges are to be reduced from export turnover in arriving at the amount of deduction eligible under section 10A.
3. The learned CIT(A) during the course of appellate proceedings referred to the definition of export turnover as given in clause – IV of explanation 2 below section 10A(8). From the consideration received, freight, telecommunication charges or insurance attributable to delivery of software have to be reduced. The learned CIT(A) noticed that no expenditure was reduced from the export turnover. Hence, it was indicated to the learned AR that income has to be enhanced. Expenditure on delivery of software has not been reduced from the export turnover. Before the learned CIT(A), the assessee made the following submissions in respect of the above issue."Link lines are obtained using a WAN (Wide area Network). The WAN provides video, data and voice connectivity services across a large geographical area from iGATE locations in India. A wide area network (WAV) or leased line link includes communication lines and equipment up to and including the router at a particular and user site, excluding local area networks (LANs). Our links are connected between offices as well as to our overseas Collocation Centres. AT&T provides a Rack Space specifically for iGate. iGate will use this rack space through the telecom infrastructure/telecom lines and put the network equipments in that rack and finally connect to the end customer.
These link lines are required to receive inputs i.e (raw data and information) from the customer who is based outside and to transmit the software outside India which is based on the inputs received from the customer.
Hence at any time link lines are always used for two transfers :
1. Transfer in i.e receiving raw data and information from the customer.2. Transfer out i.e transmission of software to the customer site. At any given point of time the raw data and information received from the customer is very voluminous and requires 60% of the time whereas the software transmitted to the customers is in a processed form and the same requires 40% of the time. However, so to say if not 40% at least a minimum of 50% of the leased lines will always be used for inbound transmission of data and balance 50% of the leased lines will always be used for outbound transmission of data.
During the FY 01-02, as per the profit account total expenditure incurred on data processing transmission was Rs.17,159,189/. The break up of the same is as follows :
S.N Description Amount (in Rs.)
1 Expenses towards computer consumables, office supplies, computer supplies, computer printing and stationery etc. 47,24,974
2 Expenses towards Link Charges 1,24,34,215
TOTAL AS PER PROFIT & LOSS A/C 1,71,59,189
As per the above table, Rs.1,24,34,215/- is the link costs incurred out of which 50% i.e Rs.62,17,108/- can be considered as being telecommunication charges attributable to the delivery of computer software outside India."
4. The learned CIT(A) discussed the business model of software company with representatives of various companies. From the discussion, the learned CIT(A) gathered that in a software development product, initial discussions are held in the form of personal meetings and conferences. Hence, for initial discussions, not much of the dedicated facilities utilized for inward transmission of data. Once the development works starts, the software developer has to continuously send data outwards. In many instances, development of software done in separate modules. It is sometimes done by different individuals or entities. All the modules need not be developed from India. Software development also includes modification of software already developed. The dedicated line is used for all such operations. The learned CIT(A), therefore, held that estimate of 50% of data link charges as made by the assessee, as attributable to delivery of software is on the lower side. The learned CIT(A) estimated it at 80% of the up-linking charges.
5. On the above referred issue, we have heard both the parties. The details of expenses incurred towards link charges are available with the assessee company. It would not have been difficult for the assessee company to have asked the services provider to give the details of expenses incurred in transmitting information from India. The assessee could have obtained the details of expenses of outward transmission of data. When a specific information is available with the assessee and if the same is not produced, then adverse inference can be drawn. The assessee in the course of proceedings before the learned CIT(A) estimated such expenditure for transmission of data at 50% of the expenditure on link charges. The learned CIT(A) discussed the software development with a number of representatives of various companies. Facts as mentioned by the learned CIT(A) in his order has not been controverted by the learned AR. Therefore, we decline to interfere with the finding of the learned CIT(A) in estimating that 80% of up linking charges are to be reduced from the export turnover. Such finding is upheld for both the asst. years.
6. The second common grievance for the asst. year is that the learned CIT(A) has erred in not appreciating that uplinking charges reduced from the export turnover are also to be reduced form the total turnover.
7. The above referred issue has been decided by the Bangalore Bench in the following cases :
1) M/s Tata Elxsi Ltd., 315/Bang/2006 dt. 16/10.07
2) ACIT VS. M/s Infosys Ltd., 653 & 969/Bang/06
8. In the case of Tata Elxsi Ltd., it was submitted as under :"The term 'total turnover' no doubt is not defined in section 10A. However, the term 'total turnover' would be an enlargement of the term 'export turnover'. In other words, the sum total of export turnover and domestic turnover would constitute 'total turnover'. The formula for computation of the deduction u/s 10A, when re-stated in the above manner, would be as under :
Export turnoverProfits of the business X ----------------------------------(Export turnover + domestic turnover)
The term 'export turnover' would then be a component or part of the denominator; the other component being the domestic turnover. In other words, to the extent of 'export turnover' there would be a commonality between the numerator and denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the 'export turnover' in the numerator is to be arrived at after excluding certain expenses, the same should be also be excluded in computing the 'total turnover' in the denominator. Though there is no definition of the term 'total turnover' in section 10A, there is also nothing in the said section to mandate that what is excluded from the numerator (export turnover) would nevertheless form part of the denominator. One would have to apply consistent standards in understanding and applying a term, particularly when, such term, viz. export turnover has an independent function and at the same time a part of a larger term viz., total turnover. Thus, if some expenses, for any reason are excluded in arriving at the 'export turnover' the same should be reduced form 'total turnover' also.
Even otherwise, in the context of section 80HHC where under a similar formula is applicable, it has been held that the components entering into export turnover and the total turnover should be the same. In other words, one should compare apples with apples and not apples with oranges."
9. Reliance was also placed on the number of judgments of the high courts, vide which, it has been held that excise duty and sales-tax should not be included in the total turnover, as the same are not includible in the export turnover. The learned Apex court in the case of CIT VS. Lakshmi Machine Works, 290 ITR 667 and in the case of CIT Vs. Catapharma (India) Pvt. Ltd., 292 ITR 641 has held that excise duty and sales-tax are not includible in the total turnover. It was, therefore, held in the case of Tata Elxsi and Infosys Technologies that expenditure incurred in foreign currency by the assessee should be excluded from the total turnover, as the same is not to be considered in export turnover. Following the same reasoning, it is held that uplinking charges which are reduced for ascertaining the export turnover are also not to be considered for the purposes of total turnover, as total turnover is sum total of export turnover and internal turnover.