Insurance charges not attributable to export of computer software is not includible in export turnover (2023)

DCIT Vs Mindtree Limited (ITAT Bangalore)

ITAT Bangalore held that insurance charges incurred by the assesse are not attributable to delivery/ export of computer software outside India and hence cannot be included in export turnover.

Facts- The assessee is a company engaged in the business of software development, consultancy services, etc. For AY 2014-15 return of income was filed on 27.11.2014 declaring income of Rs.332,23,05,8230/- under the normal provisions of the Income Tax Act, 1961 (the Act) and Rs.563,74,68,310/- u/s. 115JB of the Act, after claiming deduction u/s. 10AA of the Act amounting to Rs.211,80,72,024/-.

The assessment was concluded u/s. 143(3) of the Act vide order dated 20.12.2016 by denying claim of depreciation on goodwill; denying claim of allowance towards provision for discounts of Rs.29,00,00,000/- without however considering the enhanced income for deduction u/s. 10AA; excluding insurance charges of Rs.2,53,00,297/- from export turnover in computing u/s. 10AA of the Act and excluding telecommunication charges of Rs.7,98,45,983/- from export turnover in computing deduction u/s. 10AA of the Act.

Aggrieved by the assessment order the assessee filed appeal before the first appellate authority. The CIT(A) vide the impugned order dated 28.09.2022 partly allowed the appeal of the assessee.

Aggrieved by the order of the first appellate authority the Revenue has filed the present appeal before the Tribunal.

Conclusion- From reading of Explanation 1(i) to Section 10AA of the Act, we are of the view that the use of the term ‘attributable’ makes it clear that . In the instant case the insurance charge is accounted for under ‘other expenses’ in Schedule 3.7 of the P&L Account.

Held that the insurance charges incurred by the assessee are not attributable to delivery/export of computer software outside India. The AO and CIT(A) have failed to appreciate that the assessee is engaged in export of computer software which are developed by the assessee in India. The said software is exported through electronic media, i.e. internet/ digital media with click of a button and same are not physically exported to get it insured. Thus the question of insuring the software exported by assessee does not arise. Such being the case it cannot be said that insurance charges are included in export turnover.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the Revenue and the cross objection (CO) filed by the assessee are directed against the order of the CIT(A)-11, Bangalore dated 28.09.2022. The relevant assessment year is 2014-15.

2. The brief facts of the case are as follows: –

The assessee is a company engaged in the business of software development, consultancy services, etc. For AY 2014-15 return of income was filed on 27.11.2014 declaring income of Rs.332,23,05,8230/- under the normal provisions of the Income Tax Act, 1961 (the Act) and Rs.563,74,68,310/- under Section 115JB of the Act, after claiming deduction under Section 10AA of the Act amounting to Rs.211,80,72,024/-. The assessment was selected for scrutiny and notice under Section 143(2) of the Act was issued on 01.09.2015. The assessment was concluded under Section 143(3) of the Act vide order dated 20.12.2016 by making following additions/disallowances to the total income: –

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i) By denying the claim of depreciation of Rs.28,67,245/- on goodwill;

ii) By denying the claim of allowance towards provision for discounts of Rs.29,00,00,000/- without however considering the enhanced income for deduction under Section 10AA;

iii) By excluding insurance charges of Rs.2,53,00,297/- from export turnover in computing under section 10AA of the Act;

iv) By excluding telecommunication charges of Rs.7,98,45,983/- from export turnover in computing deduction under Section 10AA of the Act.

3. Aggrieved by the assessment order the assessee filed appeal before the first appellate authority. The CIT(A) vide the impugned order dated 28.09.2022 partly allowed the appeal of the assessee.

4. Aggrieved by the order of the first appellate authority the Revenue has filed the present appeal before the Tribunal and the assessee has filed the CO. We shall take up for adjudication the Revenue’s appeal first.

ITA No. 1069/Bang/2022 (Revenue appeal)

5. The grounds of appeal raised by the Revenue read as follows: –

“1. Whether on the facts and in circumstances of the case, the ITAT was right in law in holding that the provision for discount is allowable as expense in the current year?

2. Whether on the facts and in circumstances of the case, the ITAT was right in law in holding that the provision for discount is allowable when same is contingent in nature?”

6. The assessee had claimed deduction of provision for discount amounting to Rs.29 crores. The Assessing Officer (AO) disallowed the provision for discount by observing as follows: –

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“4. Provisions for Discounts

During the year the assessee has debited a sum of Rs 29 Crores towards provisions for discounts. This provision has not been added back by the assessee. The assessee was given opportunity to explain the same. The AR explained that ITAT has given favorable order for AY 2004-5 to AY 2007-08 on this issue. However the department has not accepted this decision and has made an appeal to the high court on this issue. Hence to maintain consistency with the earlier assessment years, the expenditure is considered to be contingent in nature is disallowed and added back to total income. ADDITION: Rs. 29,00,00,000/-”

7. Aggrieved, assessee filed appeal before the first appellate authority. During the course of appellate proceedings it was submitted that the AO has incorrectly held that provisions was contingent in nature. It was contended that said provision for discount was in respect of crystallised liability and the same is to be allowed as deduction since the assessee was consistently following mercantile system of accounting. It was further submitted that discount was in the nature of reduction in sale price and therefore was to be considered while determining the sale price itself. The CIT(A) having considered the submissions of the assessee, followed the Tribunal’s order in assessee’s own case for AY 2004-05 in ITA No. 80/Bang/2012 (order dated 31.10.2012) for allowing the issue raised in favour of the assessee. The relevant findings of the CIT(A) read as follows: –

“5.2 The submissions of the appellant have duly been considered. It is noted that on identical facts for AY 2004-05 the appeal of the appellant was allowed by CIT(A) and the appeal of the Revenue on this issue was dismissed by ITAT vide order dt. 31.10.2012 in ITA No., 80/Bang/2012 (in Mindtree Consulting Ltd., the earlier name of the appellant). Considering the above, following the decision of the ITAT on this issue in appellant’s own case on identical facts, the disallowance made by the AO is deleted and the ground of appeal 3(1) as raised by the appellant is allowed. The grounds of appeal 3(8) and 3(9) become academic and as such the same are not being adjudicated.”

8. The Revenue, being aggrieved, has raised this issue before the Tribunal.

We have heard the rival contentions and perused the material on record. On identical facts the Bangalore Bench of the Tribunal in assessee’s own case for AY 2004-05 (supra) had accepted the claim of the assessee that provisions for discount is an allowable expenditure. The relevant findings of the Bangalore Bench of the Tribunal read as follows: –

5. Coming to the Revenue’s appeals, we find that the grounds raised by the Revenue are against the order by the learned CIT (Appeals) in directing the Assessing Officer to delete the disallowance of provision for discount, provision for warranty and to treat the software purchased as Revenue in nature. The other ground is relating to the direction by the learned CIT (Appeals) to the Assessing Officer to exclude travel expenses, professional charges, branch office expenses and other expenses from both the ‘export turnover’ as well as the ‘total turnover’. We find that the last ground relating to the exclusion of certain expenses from both the ‘export turnover’ as well as the ‘total turnover’ is covered by the decision of the jurisdictional High Court in the case of Tata Elxsi Ltd (supra) which has been followed by the learned CIT (Appeals) in giving the above direction. In view of the same, we do not interfere with the same. This ground of Revenue is accordingly rejected.

6. As regards the disallowance of provision for discount is concerned, brief facts of the case are that the assessee company, dealing with software development, consultancy services and providing internet enabling technology had made a provision for discount of Rs.30,51,239 for Assessment Year 2004-05 and charged it to the profit and loss account. On a query from the Assessing Officer as to why it should not be treated as contingent liability, the assessee submitted that the provision is made to meet a contractual liability scientific and therefore is allowable. The Assessing Officer, however, was not convinced with the explanation given by the assessee and treated it as contingent liability holding that the provision is made only on adhoc basis and is not allowable in the year under consideration. He therefore disallowed the claim of the assessee.

7. Aggrieved the assessee preferred the appeal before the learned CIT (Appeals). The learned counsel for the assessee reiterated the submissions made before the Assessing Officer. The learned CIT (Appeals) after considering the assessee’s submissions at length observed that the assessee has created the ‘provision for discount’ based upon the actual business volume achieved and not on the whole of the targeted volume of sale and that during the subsequent year upon achieving the targeted volumes, the discount was actually paid by the appellant customer. He, therefore, held that the provision cannot be treated as contingent only, since it was created on a systematic and consistent basis. He further observed that the Assessing Officer himself has allowed such ‘provision for discount’ in the assessments for subsequent Assessment Years 2005- 06 to 2007-08 and also that the assessee has discharged the said provision fully in the subsequent years. By following the decision of the Hon’ble Supreme Court in the case of BEML Vs. CIT (2000) 245 ITR 428 (SC), the learned CIT (Appeals) granted relief to the assessee. Aggrieved the Revenue is in appeal before us.

8. The learned Departmental Representative while supporting the order of the Assessing Officer, submitted that the assessee is following Mercantile System of Accounting and there is no scientific or systematic method followed by the assessee for making the provision for discount, the same cannot be allowed. He submitted that the assessee has not incurred such expenditure during the year under consideration and therefore the provision created is very much a contingent liability and not allowable under the Act.

9. The learned counsel for the assessee, on the other hand, supported the order of the learned CIT (Appeals) and submitted that the assessee gives discount to the customers based upon the volume of the sale and after reaching a specified target. He submitted that by following the matching principle of Revenue, the assessee has to make a provision for discount to be paid to the customer after the target is achieved. He submitted that since the Revenue is earned during the relevant Assessment Year but the discount is paid often after the target is achieved, in some cases, after the end of the financial year, the assessee is making a provision for discount and as observed by the learned CIT (Appeals), these provisions have been discharged fully in subsequent years which shows that the assessee is making the provision on a scientific and specific method. He also submitted that the Assessing Officer has himself allowed such provision for discount in the Assessment Years subsequent to A.Y. 2004-05.

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10. Having heard both the parties and having considered the rival contentions, we find that the assessee is giving discount to its customers depending upon the volume of sales over a specified limit and that the discounts are paid only after the target is achieved and these discounts are usually paid in the subsequent financial year when the target is reached. Therefore, we are in agreement with the contentions of the assessee that following the matching principle, expenses relating to discount accruing during the year have to be provided for in the relevant financial year itself. The learned CIT (Appeals) has observed that the provision has been fully discharged in subsequent years which shows that the method adopted by the assessee for making the provision is scientific and based on the material. Further, the Assessing Officer has himself has allowed such provision for discount in the subsequent assessment years. In view of the foregoing, we do not see any reason to interfere with the finding of the learned CIT (Appeals).

11. In the result, this ground of appeal by the Revenue is dismissed.”

9. We also notice that the Tribunal for AY 2009-10 had accepted the claim of the assessee for provision for discount as an allowable expenditure in ITA No. 1414/Bang/2013 (order dated 11.05.2016). Further the Department has filed appeal against the said order of the Tribunal for AY 2009-10 before the Hon’ble High Court of Karnataka in ITA No. 55 of 2017 wherein the issue relating to provision for discount was not assailed. In the light of the orders of the Tribunal in assessee’s own case for AY 2004-05 and AY 2009-10 which is identical to the facts of the instant case, we reject the grounds of appeal raised by the Revenue. It is ordered accordingly.

CO No. 1/Bang//2023 – AY 2014-15

10. The grounds raised by the assessee in the CO read as follows: –

“1. The Order of the Learned Commissioner (Appeals) (in so far as same is prejudicial to the Assessee] is not justified in law and on facts and circumstances of the case.

2. As regards exclusion of insurance charges of Rs. 2,53,00,297/-from the export turnover for computing 10AA deduction:

2.1. The Learned Commissioner (Appeals) is not justified in upholding the action of the Learned Assessing Officer in excluding insurance charges of Rs. 2,53,00,297/-from the export turnover while computing deduction under section 10AA of the IT Act when the same does not warrant exclusion from export turnover under Explanation 1 (i) to section 10AA of the IT Act.

2.2. The Commissioner (Appeals) Officer has failed to appreciate that the phrase used in the Explanation l(i) to section 10AA “does not include” and not “to be reduced by”. The said phrases have different connotations. The phrase “does not include” deals with the items which by trade practice or contractual terms or accounting treatment are considered as components of export turnover but by the aforesaid fiction are not to be so considered. The phrase “to be reduced by” may mean statutory deduction irrespective of the composition of the sale price.

2.3. The Learned Commissioner (Appeals) is not justified in failing to appreciate that in the present case of the Assessee, when the insurance charges incurred were not attributable to the delivery of the computer software outside India, no exclusion could have been made from the ‘export turnover’ of the Assessee.

2.4. The Learned Commissioner (Appeals) is not justified in excluding insurance charges of Rs. 2,53,00,297/- from the export turnover when the same is incurred in respect of property, business liability & overseas travel insurance and not attributable to delivery of computer software outside India.

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2.5. The Learned Commissioner (Appeals) has failed to appreciate the fact that the Appellant has neither included the said expenditure in the export turnover nor recovered the same from its customers, thus, the same cannot be excluded from export turnover.

2.6. The Learned Commissioner (Appeals) is not justified in perversely stating that “For the year under consideration the appellant has not brought on record that the said expenses were not recovered and included in the export turnover”, when in fact the Assessee had furnished sample invoices in support of its claim.”

11. The AO, while recomputing the deduction under Section 10AA of the Act had excluded insurance charges of Rs.2,53,00,209/- from the export turnover. For excluding the insurance charges, the AO placed reliance on Explanation to Section 10AA of the Act. The view taken by the AO was confirmed by the CIT(A). However, the CIT(A) directed the AO to exclude from export turnover as well as from the total turnover, the insurance charges of Rs.2,53,00,209/- while computing deduction under Section 10AA of the Act.

12. Aggrieved assessee has raised this issue in the CO. The relevant provision, namely Explanation 1 to sub-clause (i) to Section10AA of the Act (relied on by the AO) reads as follows: –

“(i) “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;”

13. In ground Nos. 2.3 and 2.4 the assessee submits that insurance charges incurred were not attributable to delivery of computer software outside India and no exclusion could have been made from the export turnover of the assessee. From reading of the above Explanation 1(i) to Section 10AA of the Act, we are of the view that the use of term ‘attributable’ makes it clear that only so much of insurance charges as would relate to delivery of computer software outside India should be excluded. In the instant case the insurance charge is accounted under ‘other expenses’ in Schedule 3.7 of the P&L Account. The breakup of insurance charge as per the P&L Account are as follows: –

ParticularsAmount
Property Insurance40,65,484
Liability Insurance3,50,04,090
Overseas Travel Insurance Direct5,68,198
Total3,96,37,772

14. From the above it is evident that the insurance charges incurred by the assessee are not attributable to delivery/export of computer software outside India. The AO and CIT(A) have failed to appreciate that the assessee is engaged in export of computer software which are developed by the assessee in India. The said software is exported through electronic media, i.e. internet/ digital media with click of a button and same are not physically exported to get it insured. Thus the question of insuring the software exported by assessee does not arise. Such being the case it cannot be said that insurance charges are included in export turnover.

15. Moreover, the assessee has not charged its customers separately in respect of the insurance charges nor has the assessee included the same in the export turnover nor recovered it from its customers. Export turnover of the assessee does not include the aforesaid expenses. Such being the case, the question of reducing the aforesaid expenditure from the export turnover does not arise. Reference was made to the sample copies, which are placed on record as Annexure-2. On a perusal of the same it is clear that the assessee hasnot cross charged insurance charges from its customers. The Bangalore Bench of the Tribunal in the case of Tata Elxsi vs. ACIT in ITA Nos. 398, 1074 & 1410/Bang/2012 (order dated 20.03.2015) has held as follows: –

“6.2……………………….. On the other hand, if the expenditure incurred on telecommunication charges and insurance charges were not recovered and not included in the export turnover, the Assessing Officer shall not reduce the same from the export turnover

………………….. “

16. The Department filed appeal before the Hon’ble High Court against the aforesaid order of the ITAT. However, the Department did not press the question of law in respect of the aforesaid issue, i.e. exclusion of telecommunication and insurance charges from the export turnover. This is clear from the judgement of the Hon’ble High Court reported in 382 ITR 654. The SLP filed before the Hon’ble Supreme Court against the judgemnt of the Hon’ble High Court was dismissed in SLP NO. 19150/2015 dated 22.02.2019. In light of the aforesaid reasoning and the judicial pronouncements cited supra we are of the view that there is no necessity to exclude from the export turnover the insurance charges. Therefore, we direct the AO to recompute the deduction under Section 10AA of the Act, keeping in view our aforesaid direction.

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17. In the result, the appeal filed by the Revenue dismissed and the CO filed by the assessee is allowed.

Order pronounced in the open Court on 23rd February, 2023.

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