HCL Technologies Limited (SC); 'Export turnover' exclusions u/s. 10A deductible from 'total turnover’: Expenditure incurred in foreign exchange for providing technical services outside India are deductible from export as well as total turnover.

HCL Technologies Limited (SC)

'Export turnover' exclusions u/s. 10A deductible from 'total turnover’

ISSUE

Whether software development charges incurred in foreign exchange attributable to the delivery of technical services outside India, DEDUCTIBLE FROM EXPORT TURNOVER, BE EXCLUDED FROM TOTAL TURNOVER also for computing deduction under section 10AA?

FACTS:

1. The assessee-company was engaged in the business of development and export of computer software and rendering technical services.

2. While computing the deduction u/s. 10A, assessee deducted the software development charges from total turnover as well as export turnover on the ground that such charges are relatable towards expenses incurred on providing technical services outside India, in terms of Explanation 2(iv) of Section 10A.

3. AO denied deduction from total turnover for such software charges.

PROVISION APPLICABLE

1. Sec.10AA provides deduction to SEZ-unit from profits and gains derived from

the export of articles or things manufactured or produced.

2.Explanation 1 (i) defines the term ‘export turnover’ means the consideration

in respect of export by the undertaking, being the Unit of articles or things or

services received in, or brought into, India by the assessee BUT DOES NOT

INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE

ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OUTSIDE

INDIA OR EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN

RENDERING OF SERVICES (INCLUDING COMPUTER SOFTWARE) OUTSIDE

INDIA

ANALYSIS:

1) Clause (i) of Explanation 1 to Sec. 10AA excludes from the definition of “export

turnover” freight, telecommunication charges, insurance or expenses, if any, incurred

in foreign exchange in rendering of services outside India Clause (i) of Explanation

1 to Sec. 10AA defines “export turnover” to mean the consideration that has

been received for export of articles/things/services received. Normally the

consideration will include the freight/telecommunication charges/insurance which

had been incurred to deliver the article/things or expenses incurred in rendering

of services outside India. However, clause (i) of Explanation 1 specifically seeks to

exclude these three categories of expenditure for delivering the export of

articles/things or expenses incurred in foreign exchange in rendering of services

outside India.

2) The term “total turnover” has not been defined in Sec. 10AA

The Court observed that when a particular word such as “total turnover” is not

defined by the legislature, ordinary meaning is to be attributed in conformity

with the context in which it is used.

3) One of the components of “total turnover” is export turnover and therefore,

what is excluded from export turnover should be excluded from total turnover as

well else it would lead to inadvertent results.

Section 10AA deduction depends on arriving at the profit from export business,

thus, expenses excluded from “export turnover” must also be excluded from

“total turnover”, since one of the components of “total turnover” is export

turnover. Expenses incurred in foreign exchange for providing the technical services

outside are thus, to be excluded from total turnover also.

4) If deductions in respect of freight, telecommunication charges and insurance

attributable to delivery of articles, things etc. or expenditure incurred in foreign

exchange in rendering of services outside India are allowed only against export

turnover but not from the total turnover for computing deduction under section

10AA, then, it would give rise to inadvertent, unlawful, meaningless and illogical

results causing grave injustice, which could have never have been the intent of the

Legislature.

CONCLUSION:

Expenditure incurred in foreign exchange for providing technical services outside India

are deductible from export as well as total turnover.

NOTE:

Further, CBDT in line with SC ruling has also clarified vide issued Circular

No.4/2018 dated 14.8.2018 that freight, telecommunication charges and

insurance expenses are to be excluded from both “export turnover” as well as

“total turnover” while working out the admissible deduction u/s 10A to the

extent they are attributable to the delivery of articles/things/computer software

outside India.

Though the above decision of the Supreme Court is in relation to erstwhile section

10A, the same is also relevant in the context of section 10AA. Accordingly, the

reference to section 10A and the relevant sub-section and Explanation number

thereto have been modified

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