Zylog Systems vs. ITO (ITAT Chennai Special Bench)

For s. 10B foreign expenditure for self purposes and turnover retained abroad cannot be reduced from “export turnover”

The assessee was engaged in the business of development of software by way of on-site and off-shore development and had a branch in USA for which separate accounts were maintained. The assessee claimed deduction u/s 10B in respect of the exports of software made. In computing the export turnover, the AO held that an amount of Rs. 3.33 crores incurred by the USA branch constituted “expenses incurred in foreign exchange in providing technical services outside India” and had to be deducted from the export turnover as provided in s. 10B. He also held that the turnover of the USA branch to the extent of Rs. 15.14 crores had to be reduced from the export profits as it had not been received in convertible foreign exchange in India within the period specified in s. 10B (3). On appeal, the CIT (A) upheld the claim of the assessee with regard to Rs. 15.14 crores while he rejected the claim with regard to Rs. 3.33 crores. The cross appeals of the parties were referred to the Special Bench. HELD by the Special Bench deciding both issues in favour of the assessee:

(i) As regards the expenditure of Rs. 3.33 crores incurred abroad, though the definition of “export turnover” in s. 10B excludes “expenses incurred in foreign exchange in providing technical services outside India”, expenses incurred in a foreign country towards pay roll etc in connection with staff in the foreign branch is not covered because there is no provision of technical services to any outside agency but it is towards fulfillment of the object to develop software. A person cannot provide services to self. Even as per Circular Nos. 621 dated 19.12.91 and 694 dated 23.11.94, expenditure incurred on site abroad is eligible for deduction u/s 10B;

(ii) As regards the turnover of Rs. 15.14 crores retained abroad, one limb of the Government cannot be allowed to defeat the operation of the other limb. While s. 10B requires the foreign exchange to be brought to India within the prescribed period, the RBI permits the assessee to retain the said foreign exchange abroad for specific purposes. RBI is the competent authority for s. 10B as well. The result is that the reinvestment of export earning is deemed to have been received in India and thereafter to have been repatriated abroad (principle in J.B. Boda & Co 223 ITR 271 followed).