According to the Tribunal, where the assessee is not involved in providing technical services, expenses incurred in foreign currency need not be excluded from the export turnover.

Most software companies claim deduction under Section 10A/10B of the Act, which postulates deduction in respect of the profits and gains derived from the export of computer software. The deduction would be in the proportion that the export turnover of the undertaking bears to the total turnover of the undertaking.

‘Export turnover’ is defined in Section 10A/10B. The definition provides that telecommunication, insurance and freight attributable to the delivery of software outside India would be required to be excluded from the export turnover. Further, expenses incurred in foreign exchange in providing technical services outside India should also be excluded.

The assessee, a company involved in software development, claimed deduction under Section 10B. The assessee took a position that since it is not involved in providing technical services, it need not exclude foreign currency expenditure from the export turnover for computing the deduction under Section 10B. The assessee took an alternative argument that, if excluded from export turnover, such expenses should also be excluded from the total turnover.

The assessing officer (AO) took a call that the expenditure incurred in foreign currency was in respect of the assessee’s personnel deputed outside India for providing technical services outside India and concluded that expenses incurred in foreign currency should be excluded from the export turnover.

Further, as total turnover is not defined in the Act, the AO did not make similar exclusions from the total turnover. The Commissioner Appeals confirmed the AO’s action as being correct.

On appeal before the Tribunal, the assessee explained that the expenses incurred in foreign currency in respect of the assessee’s personnel deputed outside India were in connection with the development of software and software development services provided by the assessee from India. The assessee is not engaged in the business of providing technical services outside India, the Revenue was not able to dispute these facts.

The Tribunal relied on the Bangalore ITAT’s decision in the Infosys Technologies Ltd case, and concluded that since the assessee is not involved in the business of providing technical services outside India, expenses incurred in foreign currency for providing software development outside India need not be excluded from the export turnover.

Further, the ITAT also emphasised that incentive provisions should be construed liberally and in a manner so as to promote the object and not frustrate it.

In respect of exclusions to be made from total turnover, the ITAT, relying on the Infosys and Tata Elxsi decisions, held that based on the parity of basis between export turnover and total turnover, the exclusions made from export turnover should also be made from total turnover.

The ITAT had analysed the fact pattern before delivering its judgment on the interpretation of law.

In these types of cases, it is important for the assessee to substantiate that it is engaged only in software development and software development services that do not involve any element of rendering technical services.

Typically, the statement of work (SoW) and contracts with clients go on to illustrate the true facts of the case. The fact is that many software companies are predominantly involved in offshore delivery and onsite work only for data collation and installation. Hence no technical services are being rendered. The same may not be true of a product company which may be involved in customisation of the same, which would tantamount to technical services.

This decision lays down a good precedent on this issue. We now see an alarming trend of the need to take every matter before the ITAT even when it could have been very well adjudicated at the Commissioner Appeals level.

Also, there is this trend where the Revenue appeals against every judgment which is pro-assessee, thereby increasing the whole cost of litigation, which at the very first instance could have been avoided. A complete overhaul of the adjudication process by the Revenue authorities is needed.

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