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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