2010-TIOL-576- ITAT-MUM IN THE INCOME TAX APPELLATE TRIBUNAL BENCH 'J', MUMBAI ITA No.

4329/Mum/2008 Assessment Year : 2004-05 M/s WILLIS PROCESSING SERVICES (INDIA) PVT LTD (FORMERLY TRINITY COMPUTER PROCESSING (I) PVT LTD) C/O S P CHOPRA & CO 15A HORNIMAN CIRCLE, BHARAT INSURANCE BLDG MUMBAI-400023 PAN NO:AAACT1796R Vs ASST COMMISSIONER OF INCOME TAX 2(3), AAYAKAR BHAVAN, M K ROAD MUMBAI-400020 D K Agarwal (JM) And B Ramakotaiah (AM) Dated : September 30, 2010 Appellant Rep by: Shri Farrokh V Irani Respondent Rep by: Smt Kusum Ingle Income tax - Sec 10A - Whether assessee to process data received from the client, are to be treated whether such charges are to be availing Sec 10A benefits. fixed satellite charges incurred by the from overseas clients but not recovered as part of telecommunication charges excluded from the export turnover for

Assessee is a company engaged in the business of processing information relating to insurance claims received from Trinity Processing Services Ltd. (TSPL). The information processed is viewed either by TPSL or Willis Limited (Willis) which is a client of TPSL. In the business operations the raw data received by is processed and then sent back to TPSL via computers/ leased lines. The return of income declaring total income of Rs.2,99,83,335/- was filed on 29.10.2004. The return was processed under section 143(1)(a) of the Act on 07.02.2005. Subsequently the case was selected for scrutiny thro ugh CASS (score based) and the assessment was completed under section 143(3) of the Act on 30.11.2006 determining the total income at Rs.3,47,00,432/-. While determining this income the Assessing Officer recomputed deduction under section 10A by reducing the expenses relating to technical fees and satellite charges to arrive at the export turnover as defined under section 10A Explanation 2(iv). Aggrieved, the assessee

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preferred appeal before the CIT(A). It was the submission of the assessee that the satellite charges are not telecommunication charges and the same has not been incurred in foreign currency and the same were not recovered from the foreign company TSPL, hence the same cannot be excluded from export turnover and further if the satellite charges are to be considered as telecommunication charges the same are to be excluded from the total turnover as well. The CIT(A) analysed the issue and held that satellite charges are to be considered as telecommunication charges attributable to delivery of processed data and accordingly upheld the action of the A.O. On further appeal, the Tribunal held that, ++ even though the assessee has utilised the satellite link for receiving data and also for transferring data this cannot be considered as telecommunication charges for delivery of goods on FOB basis. Not only that what the assessee was getting was a fixed service charge for processing data from the foreign company, Trinity Processing Services Ltd. on a monthly basis in terms of the agreement dated 16th October 2001. There are no separate charges recovered from the foreign company towards telecommunication charges which can be considered as amount recovered in foreign exchange from the foreign party. Since no such amount is recovered or included in the turnover, question of exclusion from the export turnover also does not arise on the facts of the case; ++ assessee has made an alternate contention that the satellite link charges, in case they are considered as telecommunication charges this should also be excluded from the total turnover as considered by the Special bench in the case of ITO vs. Sak Soft Ltd. (2009-TIOL-187-ITAT-MAD-SB) wherein it was held that parity to be maintained with export turnover to that of total turnover and where expenses on telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India required to be excluded from export turnover, they are also to be excluded from total turnover; ++ since the satellite link charges cannot be considered as telecommunication charges to be excluded as per the definition of export turnover there is no need to consider the alternate contention; ++ the expenses on satellite link charges does not come within the scope of telecommunication charges as provided in clause (iv) of Explanation 2 to section 10A and accordingly, the A.O. is directed not to exclude the same from export turnover. A.O. is directed to recalculate the deduction under section 10A. Assessee's appeal allowed. ORDER

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Per: B Ramakotaiah(AM): This appeal by the assessee is against the order of the CIT(A)-XXX, Mumbai dated 23.03.2008. Assessee vide letter dated 9th December 2009 had brought to the notice of the ITAT the change in the name of the company from Trinity Computer Processing (India) Pvt. Ltd. to Willis Processing Services (India) Pvt. Ltd. and enclosed the PAN card issued by the Department in support. The PAN continues to be the same. Accordingly the change of name was incorporated. 2. Assessee has raised the following two grounds with reference to exclusion of satellite expenses from the export turnover: 1. Deduction under section 10A Satellite expenses a. The learned CIT(A) erred in confirming the computation of deduction u/s. 10A of the Act by excluding the satellite expenses of Rs.2,04,15,912/- while computing the export turnover. b. The learned CIT(A) erred in not appreciating that the expenditure was incurred in Indian currency and accordingly cannot be excluded from export turnover. c. The learned CIT(A) failed to appreciate that such satellite expenses do not separately form part of the receipt from income. The appellant relied on the decision in the case of Patni Telecom P. Ltd. V. Income Tax Officer (22 SOT 26) (Hyd Tribunal) = (2008-TIOL-665-ITAT-HYD). d. The learned CIT(A) erred in not appreciating the submissions of the appellant in the correct perspective. e. The appellant therefore prays that the learned Assessing Officer be directed not to exclude the satellite expenses while computing the export turnover for the purpose of deduction under section 10A of the Act. 2. Without prejudice to the above, a. The learned CIT(A) erred in not excluding the satellite expenses while computing total turnover for the purpose of deduction under section 10A of the Act. b. The learned CIT(A) erred in not appreciating that if the said expenses were to be excluded from the export turnover, the same would also be required to be excluded from the total turnover. The appellant relies on the decision in the case of CIT V. Surdarshan Chemicals industries Ltd. 245 ITR 769 (Bom) = (2003-TIOL-95-HC-MUMIT). 3. Briefly stated the facts are that the assessee is a company engaged in the business of processing information relating to insurance claims received from Trinity Processing Services Ltd. (TSPL). The information processed is viewed either by TPSL

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or Willis Limited (Willis) which is a client of TPSL. In the business operations the raw data received by is processed and then sent back to TPSL via computers/ leased lines. The return of income declaring total income of Rs.2,99,83,335/- was filed on 29.10.2004. The return was processed under section 143(1)(a) of the Act on 07.02.2005. Subsequently the case was selected for scrutiny through CASS (score based) and the assessment was completed under section 143(3) of the Act on 30.11.2006 determining the total income at Rs.3,47,00,432/-. While determining this income the Assessing Officer recomputed deduction under section 10A by reducing the expenses relating to technical fees and satellite charges to arrive at the export turnover as defined under section 10A Explanation 2(iv). Aggrieved, the assessee preferred appeal before the CIT(A). It was the submission of the assessee that the satellite charges are not telecommunication charges and the same has not been incurred in foreign currency and the same were not recovered from the foreign company TSPL, hence the same cannot be excluded from export turnover and further if the satellite charges are to be considered as telecommunication charges the same are to be excluded from the total turnover as well. The CIT(A), vide para 6 of the order analysed the issue and held that satellite charges are to be considered as telecommunication charges attributable to delivery of processed data and accordingly upheld the action of the A.O. 4. The learned counsel in the course of detailed arguments made the following propositions: 1A No part of the Satellite Expenses can be excluded while determining export turnover, inter alia as: (a) the Satellite Expenses are not invoiced to the overseas clients [See Patni Telecom (P) Ltd. V. ITO (2008) 22 SOT 26 (Hyd. ITAT) = (2008-TIOL-665-ITAT-HYD) (see particularly pages 37 to 40)] (b) the Satellite Expenses are completely fixed charges and are not dependent upon usage and hence cannot be regarded as attributable to the d elivery of the articles or things or computer software outside India .. (c) the Satellite Expenses are not incurred in foreign exchange B In any event the entire Satellite Expenses cannot be excluded because Explanation 2(iv) sanctions the exclusion only of .. telecommunication charges .. attributable to the delivery of the articles or things or computer software outside India .. II Without prejudice to above, if it is held that the Satellite Expenses or any part thereof are to be excluded from the export turnover, the said Satellite Expenses or part thereof must also be excluded from total turnover [See M/s. TCE Consulting Engineers Ltd. V. Addl. CIT (see particularly pages 2, 3 to 6 and 16)

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 ITO v. Sak Soft Ltd. 313 ITR 353 (AT)(SB)] =

(2009-TIOL-187-ITAT-MAD-SB)

5. The learned D.R., however, relied on the orders of the A.O. and the CIT(A). 6. As seen from the facts of the assessee the A.O. has originally issued a show cause notice to the assessee why satellite charges paid by the assessee company should not be treated as capital expenditure for which the assessee has furnished the following reply: Trinity Computer Processing (India) Pvt. Ltd. (the Company) is engaged in the business of processing information relating to insurance claims received from Trinity Processing Services Limited (TSPL). In the business operations, the raw date received by is processed and then sent back to the TPSL via computers. As stated above, the raw data received by the Company is processed and then sent back via computes. For providing such services, the company requires very highly effective Internet connectivity. The Company has accordingly paid fees to the Videsh Sanchar Nigam Limited (VSNL), Software Technology Parks of India (STPI) and Mahanagar Telephone Nigam Limited (MTNL) for International lease lines circuit charges. In view of the above, your goodself will appreciate that in order to receive the raw data and provide the processed information back to the client, the Company has to obtain the International lease lines from VSNL/STPI /MTNL. In other words, for getting effective connectivity of the internet, the Company has paid charges for lease line circuit. Your goodself will appreciate that the Company is required to obtain such leased lines for the conduct of its day-to-day business. In other words, International lease line charges paid to VSNL/STPI/MTNL is an integral part of the profit earning process and not for acquisition of any asset. Your goodself will therefore appreciate that the said expenditure is a revenue expenditure. Moreover, your goodself will appreciate that the International lease lines fees paid is an annual fees, which has to be paid every year. It is a recurring expenditure, which is incurred in the course of business and does not bring into existence an asset or advantage of an enduring benefit. In view of the above, your goodself will appreciate that the satellite link charges of Rs.20,415,912 paid to the VSNL/STPI/MTNL is in the nature of revenue expenditure. 7. However, while completing the assessment the A.O. treated the above satellite link charges as part of telecommunication charges. This issue was discussed elaborately by the Coordinate Bench in the case of Patni Telecom (P.) Ltd. vs. ITO (wherein one of us, the J.M. was a member) 22 SOT 26 (Hyd) = (2008-TIOL-665-ITATHYD) wherein on similar facts the issue was considered with reference to export turnover as defined in clause (iv) of section 10A and held as under: -

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Export turnover has been defined in clause (iv) of the Explanation 2 to section 10A. The meaning of export turnover is also provided in other sections of the Act, say clause (c) of section 80HHE and Explanation (b) to section 80HHC. According to Explanation (b) to section 80HHC, export turnover means the sale proceeds receivable in foreign exchange as per sub-section 2(a) of section 80HHC of all goods which are exported out of India, but which does not include freight and insurance. Similarly, total turnover for the purpose of deduction under section 80HHC, which is defined in Explanation (ba) at the end of section 80HHC in the negative term, means as not including freight and insurance attributable to transport of goods or merchandise beyond the custom station and profit on sale of licence, cash assistance, duty drawback, etc. Thus, the term export turnover does not include freight and insurance attributable to transport. Explanation (c) to section 80HHE is similar to clause (iv) of Explanation 2 to section 10A. On an analysis of definition of export turnover as provided in clause (iv) of the Explanation 2 to section 10A, it is clear that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e. freight, telecommunic ation charges, or insurance charges is that delivery of goods should be Free on Board (FoB). The CBDT vide its Circular No. 564, dated 5-71990 clarified this aspect in respect of deduction under section 80HHC. On the basis of the above discussion, it can be said that only those freight, communication charges of insurance attributable to delivery of goods out of India are to be considered while reducing from consideration received in convertible foreign exchange. Thus, if such expenses are not attributable to delivery of goods outside India, such expenses are not required to be deducted from the consideration. Normally, in a transaction of purchase and sale, there are two types of conditions between the parties. One is where price quoted of goods is inclusive of all expenses or in other words price quoted is only in respect of goods. Another condition is where price of goods and charges of expenses are separately stated. In a case where such expenses are to be separately charged, invoices are prepared showing value of the goods and such expenses. If the quoted price is inclusive of such expenses, then consolidated value of the goods is only mentioned in the invoice. In a case where only value of goods is quoted, expense is borne by the supplier. In cases where expenses have not been separately charged, the convertible foreign exchange received is consideration of the goods only. Where such expenses are separately charged in the invoices, the consideration received in convertible foreign exchange includes the value of the goods and such expenses. If the consideration received is only against the goods, then there is no need to deduct such expenses from the consideration received in convertible foreign exchange. In case where such expenses are separately charged, the expenses are required to be reduced from the consideration received for the purpose of arriving at the export turnover. The logic and reason behind this have been explained by the CBDT vide its Circular No. 564, dated 5-7-1990, that the delivery of the goods should be Free on Board (FoB). The goods exported at FOB is important in the sense that deduction under section 10A is

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permissible only in respect of consideration received against goods and not for the consideration received against freight, etc. A the assessees should get deduction ll under section 10A on consideration received against supply of goods at FoB. Therefore, the condition of delivery of goods at FoB has been put and the definition of export turnover as provided in clause (iv) of the Explanation 2 to section 10A is required to be interpreted accordingly. In the instant case, the Assessing Officer had deducted the ISP expenses from foreign exchange consideration treating it as communication charges. The said expenditure on Internet Service Provider (ISP) does not come within the scope of telecommunication charges as provided in clause (iv) of Explanation 2 to section 10A, because ISP is for transmitting the data, i.e., software developed by the assessee. The ISP expenses incurred were in respect of development of software, i.e., goods. The ISP expenses were not attributable to the delivery of computer software, outside India and, therefore, such expenses need not be excluded from consideration in foreign exchange. However, if for the sake of arguments it was presumed that the expenditure incurred was attributable to delivery of goods outside India even though same was not to be excluded. The words received and but not include used in clause (iv) of Explanation 2 to section 10A are significant. What is to be excluded is out of what is received. In the instant case, the assessee received consideration against software, i.e., goods. For this purpose, the assessee had demonstrated by referring to invoices and agreement. The agreement, invoices and the turnover clearly showed that the assessee did not recover any such expenditure. Therefore, there was no scope for any exclusion from the export turnover on account of such expenses. If at all on presumption, it was to be excluded for the purpose of export turnover, then on the same assumption, reason and analogy it should be excluded from total turnover. Therefore, the Assessing Officer was not correct in excluding ISP expenses from consideration received in convertible foreign exchange while calculating export turnover for the purpose of section 10A. 8. The ISP expenses considered in the above said decision are similar to the satellite link charges paid by the assessee. As seen from the bills placed on record before the authorities the assessee has paid satellite link charges to VSNL, MTNL and also to Software Technology Park India (STPI) towards bi- monthly half circuit charges/international half circuit charges and rent for TMI Frame Relay CCT charges including port charges. The port charges, however, were calculated on the basis of USD per annum basis where as rest of the charges were paid on annual lease agreement periodically and these are fixed charges not connected with the delivery attributable to the export of goods. Even though the assessee has utilised the satellite link for receiving data and also for transferring data this cannot be considered as telecommunication charges for delivery of goods on FOB basis. Not only that what the assessee was getting was a fixed service charge for processing data from the foreign company, Trinity Processing Services Ltd. on a monthly basis in terms of the agreement dated 16th October 2001. There are no separate charges recovered from the foreign company towards telecommunication charges which can be considered as amount recovered in foreign exchange from the foreign party. Since no such amount is recovered or included in the turnover, question of exclusion from the export turnover also does not arise on the facts of the case.

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9. Assessee has made an alternate contention that the satellite link charges, in case they are considered as telecommunication charges this should also be excluded from the total turnover as considered by the Special bench in the case of ITO vs. Sak Soft Ltd. 313 ITR 353 (AT)(SB) = (2009-TIOL-187-ITAT-MAD-SB) wherein it was held that parity to be maintained with export turnover to that of total turnover and where expenses on telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses incurred in fore ign exchange in providing technical services outside India required to be excluded from export turnover, they are also to be excluded from total turnover. Since we have considered that the satellite link charges cannot be considered as telecommunication charges to be excluded as per the definition of export turnover there is no need to consider the alternate contention. Accordingly, this alternate ground raised is not considered as it becomes academic in nature. 10. After considering the facts of the case a nd the principles established by the Coordinate bench in the case of Patni Telecommunication (P) Ltd. vs. ITO 22 SOT 26 (Hyd) = (2009-TIOL-187-ITAT-MAD-SB), it is held that the expenses on satellite link charges does not come within the scope of telecommunication charges as provided in clause (iv) of Explanation 2 to section 10A and accordingly, the A.O. is directed not to exclude the same from export turnover. A.O. is directed to recalculate the deduction under section 10A. Assessees grounds are considered allowed. 11. In the result, appeal of the assessee is allowed. (Order pronounced in the open court on 30.9.2010.)
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