Bookmark
PDF
Share
CaseIQ

Commissioner Of Income-Tax And Another v. Infosys Technologies Ltd. (No. 4)

Karnataka High Court

Nov 22, 2011

Judgment

Subsequent
References

CaseIQ

Smart Summary (Beta)

Judgment Summary

Factual and Procedural Background

The assessee is an exporter of software who filed a return of income on November 27, 1998, declaring a return of income of Rs. 3,33,94,389. The return was processed under section 143(1) of the Income-tax Act, 1961 and accepted on August 23, 2000. Subsequent scrutiny under section 143(2) raised issues concerning certain deductions claimed by the assessee:

Payment of Rs. 1,93,521 for corporate membership of clubs (claimed as revenue expenditure).
Expenditure of Rs. 8,74,278 towards obtaining ISO certification (claimed as revenue expenditure).
Expenditure of Rs. 33,40,422 towards repairs and maintenance of leased premises (claimed as revenue expenditure).
Whether fluctuation in the value of currency (in respect of foreign exchange receipts for software exports) could be taken into account for computing deduction under section 80HHE.

The Assessing Officer held that the club membership fee, ISO certification expenses and repair/maintenance expenses were capital in nature and rejected the assessee's claim for benefit arising from currency fluctuation. The assessee appealed to the Commissioner of Income-tax (Appeals), which, by order dated July 4, 2003, allowed the appeal and held that the aforementioned expenses were revenue in nature and that the assessee was entitled to the benefit of currency fluctuation in respect of software exports. The Revenue appealed, and the Income-tax Appellate Tribunal (ITAT) in I.T.A No. 1130.Bang/2003, by order dated April 7, 2006, dismissed the Revenue's appeal. The Revenue filed the present appeal challenging the ITAT order. The judgment of this court was dictated on November 22, 2011 by Justice V.G. Sabhahit sitting on a Division Bench with Justice S.N. Satyanarayana.

Legal Issues Presented

Whether the corporate membership fee paid by the assessee to acquire membership of a club is a revenue expense and not a capital expense as held by the Assessing Officer?
Whether the amount paid to obtain the ISO certification useful for a number of years in international business is a revenue expense and not a capital expense as held by the Assessing Officer?
Whether the expenditure incurred towards repairs and maintenance of leased premises of Rs. 33,40,422 is a revenue expenditure and not a capital expenditure and whether the assessee would be entitled to depreciation under section 32(1) Explanation 1 as held by the Assessing Officer?
Whether exchange rate fluctuation should be taken into consideration for computing deduction under section 80HHE by reversing the Assessing Officer's finding that, as per Explanation C to section 80HHE, only the actual amount of foreign exchange received in India can be included in the export turnover for computation of the deduction?

Arguments of the Parties

Revenue's Arguments

The Revenue contended that the Assessing Officer was correct in treating the club membership fee, ISO certification expenditure, and repairs/maintenance of leased premises as capital expenditure rather than revenue expenditure.
On the currency fluctuation issue, the Revenue submitted that any fluctuation in the valuation of the rupee in terms of foreign exchange which is brought into India cannot be taken into account for the purpose of section 80HHE and must be included in other receipts; hence the Revenue contended for allowing its appeal on this issue.

Assessee's Arguments

The assessee argued that the expenses for corporate membership, ISO certification and repairs/maintenance were revenue in nature and deductible as revenue expenditure.
With respect to exchange rate fluctuation, the assessee submitted that where export of software has been completed and invoices issued in foreign currency, any fluctuation in the valuation of the rupee on conversion is directly connected to the export transaction and therefore cannot be treated as income from other sources.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Infosys Technologies Ltd. (No. 1), [2012] 349 ITR 582 (Karn)	Held that, in respect of the same assessee, expenses towards corporate membership, ISO certification and repairs/maintenance were revenue expenditure (answered against the Revenue).	The court followed the reasons assigned in this judgment and relied on it to answer substantial questions of law Nos. 1 to 3 against the Revenue and in favour of the assessee.
CIT v. Infosys Technologies Ltd. (No. 2), [2012] 349 ITR 588 (Karn)	Same or related holding (in respect of the same assessee) that those expenses were revenue in nature.	The court followed this judgment as well in concluding that questions Nos. 1 to 3 were to be decided against the Revenue.

Court's Reasoning and Analysis

The court proceeded in two analytical steps corresponding to the grouped substantial questions:

Questions 1–3 (nature of expenses) — The court observed that these questions were "no more res integra" because, in respect of the same assessee, earlier judgments of this court (cited as CIT v. Infosys Technologies Ltd. (No. 1) and (No. 2)) had already held that the expenditure towards corporate membership, ISO certification and repairs/maintenance of leased premises were revenue expenditure and not capital expenditure. The court therefore followed the reasons assigned in those earlier judgments and answered substantial questions Nos. 1 to 3 against the Revenue and in favour of the assessee.
Question 4 (exchange rate fluctuation and section 80HHE) — The Revenue argued that fluctuation in the rupee's value on conversion should not be taken into account for computing deduction under section 80HHE and, if brought into account, must be treated as other receipts. The assessee argued that where exports and invoicing in foreign currency have occurred, any fluctuation in the rupee's valuation on conversion has a direct nexus with the export transaction and therefore cannot be treated as income from other sources. The court examined the record and the concurrent findings of the first appellate authority and the ITAT, both of which had decided the matter in favour of the assessee. The court agreed with the assessee's position, holding that the fluctuation in currency valuation has a direct nexus with the export of software and therefore cannot be included as income from other sources. The court found the concurrent findings to be justified and not liable to interference.

Holding and Implications

Holding: The court answered all four substantial questions of law against the Revenue and in favour of the assessee and therefore dismissed the Revenue's appeal. DISMISSED.

Implications:

The Assessing Officer's findings that the club membership fee, ISO certification expenses and repairs/maintenance were capital and not deductible were set aside; those items are to be treated as revenue expenditure as per the earlier judgments relied upon by the court.
The court confirmed that fluctuations in the valuation of the rupee relating to receipts from software exports, where invoicing in foreign currency has occurred, have a direct nexus with the export transaction and cannot be treated as income from other sources for the purposes of computing deduction under section 80HHE.
The direct effect is that the assessee's position, as accepted by the CIT(A) and the ITAT, stands affirmed by this court. This decision follows and applies earlier decisions of this court in respect of the same assessee.
This opinion follows earlier rulings and, accordingly, does not purport to set out a new principle beyond the scope of those prior decisions.

Judgment transcribed on November 22, 2011. Dictated by Justice V.G. Sabhahit, Division Bench with Justice S.N. Satyanarayana. Transcription signed by Nirmala Devi, Senior Judgment Writer.

Show all summary ...

V.G Sabhahit, J.:— This appeal is filed by the Revenue being aggrieved by the order passed by the Income-tax Appellate Tribunal (hereinafter called-as “the ITAT”), in I.T.A No. 1130.Bang/2003, dated April 7, 2006, wherein the appeal filed by the Revenue has been dismissed and the appeal filed by the assessee in I.T.A No. 1022 of 2003 is allowed in part confirming the order passed by the Commissioner of Income-tax (Appeals).

2. The material facts leading up to this appeal are as under:

The assessee is an exporter of software and filed return of income on November 27, 1998, showing the return of income at Rs. 3,33,94,389 which was processed under section 143(1) of the Income-tax Act, 1961 (hereinafter called as “the Act”); on August 23, 2000 accepting the income returned. After scrutiny of the assessment made on August 23, 2000, a notice was issued under section 143(2) of the Act. In response to which the assessee furnished details. The notice pertains to the payment of Rs. 1,93,521 to clubs to acquire corporate membership, the expenditure incurred in a sum of Rs. 8,74,278 towards the ISO certification and the amount spent. towards repairs and maintenance of leased, premises in a sum of Rs., 33, 40, 422, which was proposed as revenue expenditure by the assessee. Further, it was also proposed by the assessee that the fluctuation in the value of currency regarding actual amount realised by the assessee could not have been taken as benefit of the assessee.

3. The Assessing Officer, after considering the contentions raised by the assessee, held that the expenditure incurred towards acquisition of corporate membership in the clubs, amount spent towards obtaining the ISO certification and the amount spent towards repair and maintenance of the leased premises ought to be treated as capital expenditure and not as revenue expenditure as claimed by the assessee.

4. Further, he held that the contention of the assessee that he should have the benefit of fluctuation in the value of currency in respect of software export, cannot be accepted. Accordingly, the Assessing Officer passed the order of assessment. Being aggrieved by the said order an appeal was preferred by the assessee.

5. The appellate authority by order dated July 4, 2003, allowed the appeal and held that the expenses incurred towards acquisition of corporate membership in clubs, expenses incurred towards obtaining the ISO certification and the amount spent towards repairs and maintenance on the leased premises should be treated as revenue expenditure and not as capital expenditure. It also upheld the contention of the assessee that the assessee is entitled to have the benefit of fluctuation in the value of rupee in respect of the value of expert of software made by him. Accordingly, allowed the appeal. Being aggrieved by the same the Revenue preferred an appeal and the assessee also has preferred an appeal regarding the other findings, which are not the subject-matter of this appeal. The Income-tax Appellate Tribunal by a common order dismissed the appeal filed by the Revenue. Being aggrieved by the same, this appeal is filed raising the following substantial questions of law for consideration of this court, which are as under:

“(1) Whether the appellate authorities were correct in holding that the corporate membership fee paid by the assessee to acquire membership of a club is a revenue expense and not a capital expense as held by the Assessing Officer?

(2) Whether the appellate authorities were correct in holding that the amount paid to obtain the ISO certification useful for a number of years in international business is a revenue expense and not a capital expense as held by the Assessing Officer?

(3) Whether the appellate authorities were correct in holding that the expenditure incurred towards repairs and maintenance of leased premises of Rs. 33,40,422 is a revenue expenditure and not a capital expenditure and that the assessee would be entitled to depreciation under section 32(1) Explanation 1 as held by the Assessing Officer?

(4) Whether the appellate authorities were correct in holding that the exchange rate fluctuation should be taken into consideration for computing section 80HHE deduction by reversing the finding of the Assessing Officer that as per Explanation C to section 80HHE of the Act only actual amount of foreign exchange received in India can be included in the export, turnover for computation of deduction under section 80HHE of the Act?”

6. We have heard the learned counsel appearing for the parties. The substantial questions of law 1 to 3 are no more res integra, as in respect of the same assessee the expenses incurred towards obtaining corporate membership, the amount spent towards obtaining the ISO certificate and the expenses incurred towards repair and maintenance of leased premises have been held to be revenue expenditure and not as capital expenditure as contended by the Revenue. The said substantial questions of law have been answered against the Revenue and in favour of the assessee in I.T.A No. 2975 of 2005, disposed off on October 21, 2011, 1. T.A No. 3011 of 2005 disposed off on October 21, 2011, (since reported in CIT v. Infosys Technologies Ltd. (No. 1), [2012] 349 ITR 582(Karn)) and I.T.A No. 2973 of 2005 disposed of on November 4, 2011, (since reported in CIT v. Infosys Technologies Ltd. (No. 2), [2012] 349 ITR 588(Karn)) respectively. Accordingly, following the reasons assigned in the said judgments rendered by this court, substantial questions of law Nos. 1 to 3 are answered against the Revenue and in favour of the assessee.

7. Regarding the fourth substantial question of law, the learned counsel submitted that if there is any fluctuation in the valuation of rupee in terms of the foreign exchange which is brought into India, the same cannot be taken into account and has to be included in other receipts and submitted that it has to be answered in favour of the Revenue.

8. On the other hand, the learned counsel appearing for the respondent submitted that when the export of software has already been done and invoices have been issued in terms of the foreign currency, if there is any fluctuation in the valuation of the rupee in terms of the conversion of value into foreign currency, there is direct nexus between the transaction of export of software and cannot be treated as. income from other sources.

9. We have heard the learned counsel appearing for the parties and scrutinised the material on record. Both the first appellate authority and the Appellate Tribunal have answered the abovesaid substantial question of law in favour of the assessee and against the Revenue. The said concurrent finding arrived at by the authorities is justified as the fluctuation in the valuation of currency which has to be converted to foreign currency has direst nexus to the export of software and can never be included as income from other sources. Wherefore, the said finding does not suffer from any error or illegality as to call for interference in this appeal. Accordingly, we answer the fourth substantial question of law also against the Revenue and in favour of the assessee. Accordingly, we hold that the appeal is devoid of merits and pass the following:

10. The appeal is dismissed.

The above is true transcription of the judgment dictated to me by the late hon'ble Shri Justice V.G Sabhahit presiding over the Division Bench with hon'ble Shri Justice S.N Satyanarayana in open court on November 22, 2011.

(Sd.)……

Nirmala Devi,

Senior Judgment Writer