ORDER

Per Anandi Lal Gehlot, Accountant Member. - These appeals by the assessee are directed against the orders dated 4-3-2006 and 12-10-2004 of the Commissioner of Income-tax (Appeals) -II, Hyderabad for the assessment years 2000-01 and 2001-02. One ground raised in both appeals is based on identical set of facts, therefore, for the sake of convenience both appeals are decided by this common order.

2. A common ground raised in the grounds of appeal for both assessment years 2001-02 and 2000-01 pertains to calculation of export turnover for the purpose of section 10A. The amounts involved in both years are as under :

The facts leading to the issue are in assessment year 2001-02, therefore, the facts and figures considered by us are for assessment year 2001-02.

3. The ground raised in assessment year 2001-02 is that the CIT (Appeals) erred in confirming the deduction of Rs. 40,93,493 in respect of Internet Service Provider (in short hereinafter called ISP) charges and Rs. 1,16,61,307 in respect of expenses incurred in foreign exchange for providing technical services outside India from Export Turnover while computing exempted income under section 10A of the Act.

4. Brief facts of the case are that the assessee-company is engaged in the business of development and export of software. The assessee filed a return of income declaring an income of Rs. 3,72,771 for assessment year 2001-02 after claiming exemption under section 10A to the tune of Rs. 1,12,93,116. The assessee has also filed Form No. 56F, a report of the Chartered Accountant under section 10A of the Income-tax Act where the amount of deduction under section 10A was arrived at Rs. 1,12,93,116. During the assessment proceedings, on perusal of the statement filed by the assessee, the Assessing Officer noticed that total export amounted to Rs. 9,36,22,966. The expenses incurred in foreign exchange to earn the above export income was Rs. 1,16,61,043. The Assessing Officer treated this expenditure as expenses incurred in foreign exchange in providing technical services outside India. The Assessing Officer further noticed that the expenses attributable to the delivery of software are Rs. 40,93,493 booked under Internet Service Provider (ISP) since the assessee got leased ISP line exclusively. The Assessing Officer reduced export turnover by Rs. 1,16,61,043 and Rs. 40,93,493 on account of ISP and expenses attributable to delivery of software respectively. The relevant observations of the Assessing Officer are reproduced as below :

"The details of foreign exchange outflow were filed by the assessee during the course of hearing. It comprises Rs. 1,16,61,307 on account of expenditure incurred in foreign exchange for providing technical services outside India, as per the statement filed by the Manager of the assessee-company and he has stated that the said expenditure was incurred by the personnel on site. The balance amount of Rs. 2,03,936 was spent in foreign exchange for training of the personnel.

The assessee has also filed the details of communication expenses of Rs. 68,04,550 included under the head 'Software development charges' which comprises other telephone expenses Rs. 7,93,441, ISP - Rs. 40,93,493, Fixed Telecom Aristasoft - Rs. 12,88,632 and Mobile Telecom Aristasoft - Rs. 6,28,984. According to the assessee, the expenses attributable to the delivery of the software are only Rs. 40,93,493 booked under Internet Service Provider, since the assessee got leased ISP line exclusively."

After considering the assessee's submission, the Assessing Officer computed the total income of the assessee as under :

"In view of the above, the total income is computed as under:

Exemption under section 10A is worked out as under:

Less:

COMPUTATION OF INCOME

Aggrieved by the order of the Assessing Officer, the assessee preferred appeal before the CIT (Appeals) agitating the reduction of the claim of exemption under section 10A from Rs. 1,12,93,116 to Rs. 93,89,508. The CIT (Appeals) after considering the definition of the "export turnover" as provided in clause (iv) below Explanation 2 of section 10A of the Act, noticed that a plain reading of the said provision of the Act makes it clear that expenditure of Rs. 40,93,493 is attributable to freight, tele- communication charges or insurance attributable to delivery of the articles or things or computer software outside India. In respect of ISP provider charges of Rs. 40,93,493, the CIT (Appeals) observed that the assessee has admitted before the Assessing Officer that these expenses were attributable to delivery of the software and, therefore, squarely falls for non-inclusion within the meaning of export turnover as laid down in clause (iv) of Explanation 2 to section 10A of the Act. As regards the expenditure of Rs. 1,16,61,307, the CIT (A) noticed that there is a clear finding of the Assessing Officer that this amount was attributable to the expenditure incurred for providing technical services outside India and, therefore, falls for not to be included within the meaning of definition of export turnover as defined in clause (iv) of Explanation 2 to section 10A of the Act. The CIT (A) confirmed the order of the Assessing Officer wherein the Assessing Officer out of the export turnover of Rs. 9,34,65,038 excluded the expenses Rs. 40,93,493 on account of ISP provider charges and Rs.1,16,61,307 expenses incurred in foreign exchange in providing technical services outside India and, accordingly, computed the export turnover at Rs. 7,77,10,238 (Rs. 9,34,65,038 less Rs. 1,57,54,800) .

5. The learned A.R. submitted that the assessee is a 100 per cent export oriented unit registered under STP Scheme for developing and exporting software. Its export business was entirely based on its agreement with a foreign customer, namely, Arista Soft Corporation, U.S.A. The software development services were rendered both Onsite and Offshore. Onsite services were rendered at the customer's place by the employees of the assessee sent there. The Offshore services are rendered at the assessee's place locally. Remuneration for both types of services was received in U.S. Dollars. The learned A.R. submitted that section 10A (4) read with clause (iv) of Explanation 2 is not applicable to the facts of the case of the assessee. He further submitted that the said provisions are applicable to a case where the assessee has export business as well as domestic sales and has maintained composite books of account for both the business and a single trading and profit and loss account. The learned A.R. further submitted that in the case of composite business, the eligible profit for deduction are arrived at under section 10A (4) by applying the following formula:

The learned A.R. submitted that the above formula does not arise in assessee's case as the entire profit was on account of export business only. There was no turnover other than export turnover and there were no profit other than export profit. Learned A.R. submitted that computation made by the Assessing Officer is erroneous and is not warranted in law for the reason that the assessee had no business other than the business of software export, the profit were entirely eligible for deduction under section 10A (4) and clause (iv) of the Explanation 2 to the section has no application at all. Learned A.R. submitted that where the assessee has maintained separate books of account and trading receipts and profit and loss account for export sales and domestic sales and there was no warrant for disallowing any portion of the export earnings pro rata. Learned A.R. in support of his contention relied upon the judgments of the Madras High Court in the case of Commissioner Of Income-Tax v. Rathore Brothers [2002] 254 ITR 656 and the latest decision in the case of Commissioner Of Income-Tax v. Suresh B. Mehta [2007] 291 ITR 462 . Learned A.R. further submitted that the Assessing Officer was not justified in making certain deductions from the export turnover while applying the provisions of section 10A (4) . He submitted that even assuming that the items of expenditure stated in clause (iv) of Explanation 2 are to be excluded from the export turnover for the purpose of sub-section (4) , such exclusion can arise only if those expenses were recovered from the customer and formed part of the export turnover received in India. Invoices raised by the assessee on the foreign customer were with reference to work done on time basis. Learned A.R. while referring to pages 2.1 to 2.8 of the agreement submitted that the payments schedule which exhibit 'A' to the agreement is at pages 2.9 and 2.10 of the paper book clearly indicates the position. The learned A.R. further submitted that the Apex Court had the occasion to consider the scope of exclusion of freight or insurance attributable to the turnover for the purpose of calculation of eligible profit for deduction under section 80HHC in the case of Commissioner Of Income Tax, Coimbatore v. Lakshmi Machine Works [2007] 290 ITR 667 (SC) . The Apex Court at page 683 observed while referring to total turnover, that the freight and insurance attributable to transfer of goods shall be excluded if they were part of turnover. The learned A.R. submitted that the telecommunication charges for ISP was for transmitting the data, i.e., software developed by the assessee and charges for ISP facility were paid every quarter to VSNL though such expenditure does not come within the meaning of items of expenditure referred to in clause (iv) of Explanation 2. The learned A.R. further submitted that the expenditure was incurred on travel and allowances to employees who were sent to customers' place for rendering the software development services on site. The expenditure was not in connection with providing technical services. The alternate submission of the learned A.R. if the formula for computation of eligible profits for deduction provided in section 10A (4) is applied, the amount excluded from export turnover should also be excluded from the total turnover. The learned A.R. in support of his contention relied upon the decision of the ITAT, Hyderabad Bench in the case of Exband (India) (P.) Ltd. v. ITO [IT Appeal No. 1102 (Hyd.) of 2004, dated 31-7-2007] and in the case of ITO v. D.E. Block India Software (P.) Ltd. [IT Appeal Nos. 983 and 984 (Hyd.) of 2006 (SMC) , dated 31-7-2007] and the judgment of the Madras High Court in Commissioner Of Income-Tax v. Madras Motors Ltd./M.M Forgings Ltd. [2002] 257 ITR 60 and of the Calcutta High Court in the case of CIT v. Chloride India Ltd. [2002] 256 ITR 625 . In respect of expenditure of Rs. 1,16,61,307 the contention of the learned A.R. is that the expenditure incurred on travel and allowance of employees who are sent to customers place for rendering software services on site. The learned A.R. has also filed details in this regard which has been placed on record. The learned A.R. submitted that the expenditure incurred was not in connection with providing technical services. The assessee did not render any technical services. The expenditure incurred in respect of the goods sold as the assessee developed software on contract basis, as per the agreement and handed over the same to the customers. There was no question of any technical services involved. The learned A.R. in support of his contention relied upon a decision of the ITAT, Bangalore Bench in the case of Infosys Technology Ltd. in ITA No. 50/Bang./01 & others (order dated 31-3-2005) (sic) .

6. The learned D.R., on the other hand, relied upon the orders of the Assessing Officer and the CIT (Appeals) and submitted that clause (iv) of Explanation 2 to section 10A is very clear and Assessing Officer has rightly calculated the exemption under section 10A (1) of the Act. He, accordingly, urged that the order of the Assessing Officer may be confirmed.

7.1 We have heard the learned representatives of the parties and records perused. The controversy under consideration revolves round the calculation of "Export Turnover" for the purpose of exemption under section 10A. The relevant portion of section 10A which is necessary and related to the issue reads as under :

"10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :

Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years :

Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the 51 [undertaking began to manufacture or produce such articles or things or computer software] in such free trade zone or export processing zone :

Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software :

Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years."

Explanation 2 of section 10A defines certain terms for the purpose of section 10A. "Export Turnover" has been defined in the said Explanation 2 to section 10A under clause (iv) which reads as under :—

"(iv) "export turnover" means the consideration in respect of export [by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3) , but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;"

Sub-section (4) of section 10A states about profits of the business relating to export turnover. The said sub-section (4) of section 10A reads as under :—

"[(4) For the purposes of 57 [sub-sections (1) and (1A) ], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.]"

The meaning of 'Export turnover' is also provided in other sections of the Income-tax Act, say clause (c) of section 80HHE and Explanation (b) to section 80 HHC. According to Explanation (b) to section 80HHC, the sale proceeds receivable in foreign exchange as per sub-section 2 (a) of section 80HHC, 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 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.

7.2 On an analysis of definition of 'export turnover' as provided in clause (iv) of the Explanation 2 to section 10A, we notice 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, telecommunication charges, or insurance charges is that delivery of goods should be Free on Board (FOB) . The CBDT vide its Circular No. 564, dated 5-7-1990 - 184 ITR (St.) 137-clarified this aspect in respect of deduction under section 80HHC, the relevant portion of the circular is reproduced as below :—

"The term "export turnover" under the existing provisions, means the sale proceeds (excluding freight and insurance) , receivable by the assessee in convertible foreign exchange. In other words, FOB value of exports. The Finance Act, 1990 has restricted the definition of the term "Export turnover" to mean FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months or the end of the previous year or within such further period as the Chief Commissioner/Commissioner may allow in this regard."

On the basis of the above material and discussion, it can be said that only those freight, telecommunication charges or 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. One more aspect which is required to be considered here is that the consideration received in convertible foreign exchange is including such expenses. If such expenses are not included in the consideration received in convertible foreign exchange, deduction of such expenditures from the consideration does not arise. 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 where price of goods and charges of expenses are separately stated. In 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 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 cases 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 quoted above that the delivery of the goods should be Free on Board (FOB) . Both the situations can be explained by a simple example. Mr. X exported goods out of India and received consideration Rs. 1,000 in convertible foreign exchange which is only in respect of goods. Mr. Y in a similar type of transaction charged Rs. 1,000 for goods and Rs. 100 for such expenses. Total convertible foreign exchange received in case of X is Rs. 1,000 and in case of Y is Rs. 1,100. In case of Mr. Y, Rs. 100 is required to be deducted from consideration received as he is getting Rs. 100 attributable to delivery of the goods. In case of X no deduction is required from consideration received in convertible foreign exchange. Thus, by reduction of Rs. 100 in case of Y the goods exported is FOB. The goods exported at FOB is important in the sense that deduction under section 10A is permissible only in respect of consideration received against goods and not for the consideration received against freight, etc. All the assessees should get deduction 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 Explanation 2 to section 10A is required to be interpreted accordingly.

7.3 The definition of 'export turnover' can be summarized in the following formula :—

(if same are included in above consideration)

(i) Freight
(ii) Telecommunication charges
(iii) Insurance or**

(2) Expenses, if any, incurred in foreign exchange

in providing technical Services outside India**

******

Export turnover

7.4 Now we examine the facts of the case in the light of the above discussion. The Assessing Officer noticed that the expenses attributable to the delivery of the software was Rs. 40,93,493 booked under Internet Service Provider, since the assessee got leased line exclusively. The Assessing Officer deducted this amount from consideration treating it as communication charges. We find that 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 of Income-tax Act because ISP was for transmitting the data, i.e., software developed by the assessee. The ISP expenses incurred is in respect of development of software, i.e., goods. The ISP expenses is not attributable to the delivery of computer software, therefore, such expenses need not be excluded from consideration in foreign exchange. However, if for the sake of arguments it is presumed that the expenditure incurred is attributable to delivery of goods outside India even though same is not to be excluded. The words 'received' and 'but not include' used in clause (iv) of Explanation 2 to section 10A of Income-tax Act are significant. What is to be excluded is out of what is received. In the case under consideration, the assessee received consideration against software, i.e., goods. For this purpose, the assessee has demonstrated by referring invoices (Page 4.1 to 4.4) and agreement (page 2.1) of which photocopies have been placed in assessee's paper book. The agreement, invoices and the turnover clearly show that the assessee did not recover any such expenditure. Therefore, there is no scope for any exclusion from the 'export turnover' on account of such expenses. If at all on presumption, it is to be excluded for the purpose of 'export turnover' then on the same assumption, reason and analogy it should be excluded from 'total turnover'. The simple reason is that such expenditure is also included in consolidated consideration which is forming part of 'total turnover'. In order to make the formula for the purpose of "export turnover" in section 10A workable one has to give a schematic interpretation to the formula. Elimination should be from both the denominator and the numerator. We, therefore, find that the Assessing Officer was not correct in excluding Rs. 40,93,493 from conside-ration received in convertible foreign exchange while calculating export turnover for the purpose of section 10A of the Income-tax Act.

8. Another expenditure Rs. 1,16,61,307 excluded for the purpose of export turnover by Assessing Officer is on account of expenses incurred in foreign exchange in providing technical services outside India. On reading of clause (iv) of Explanation 2 to section 10A, we notice that all expenses need not be reduced from consideration received in convertible foreign exchange for the purpose of calculation of 'export turnover' under section 10A. Only those expenses incurred in foreign exchange in providing technical services outside India are required to be reduced. Thus, expenditure incurred should be for providing technical services. The technical services relevant to clause (iv) of Explanation 2 to section 10A have not been defined in the section. However, Technical services are defined in other provisions of the Act, that is in Explanation 2 to section 9 (1) (vii) of the Income-tax Act. The said definition reads as under :—

"Explanation 2.—For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consi-deration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'."

The CBDT vide its Circular No. 694, dated 23-11-1994, while clarifying tax holiday under sections 10A and 10B stated that computer programmes are not physical goods but are developed as a result of an intellectual analysis of the system and method followed by the purchaser of the programme, it is often prepared on site with the software personnel going to the client's premises. The Government's policy is to give incentive to software exports where technical services are provided outside India for development or production of computer software, i.e., goods. Therefore, in such cases benefits should not be denied. The assessee-company entered into a Software Development Agreement with Aristasoft Corporation, USA on 1-10-1999. In the said agreement, assessee is called as 'Contractor' and USA party is called as 'Developer'. The Developer desired to have rights developed into a new generation technology for the products and to have various support services performed related to its business. The assessee-contractor has the expertise and facilities to undertake such development work and support services. The nature of business of assessee pointed out is as under :—

"Aristasoft International (P.) Ltd. was incorporated under the Companies Act, 1956 with Registrar of Companies, Hyderabad on 15-5-1999 vide No. 01-31633 of 1999. It is a 100 per cent Export-Oriented Software Development Unit registered under STP scheme vide letter No. STP PER : 34 (1999) /EOP/31/99 dated 12-6-1999.

Aristasoft Intl. Pvt. Ltd. was a subsidiary of Aristasoft Corporation, California, US and was its Global Technology Centre (GTC) . Aristasoft Corporation was focusing on high tech manufacturing industry and was engaged in providing integrated business process for its customers relying heavily on its GTC. It used the ASP model to serve its customers.

Aristasoft Corporation identified business applications that would benefit the high tech industry that include JD Edwards (ERP) , Clarify (CRM) , Agile (PDM) among others. The business plan was to sub-lenience these applications to its customers. It also had identified standard business processes that can be integrated across the diverse applications and chose web methods as its integration platform to deliver its EAI services. While Aristasoft Corporation was focusing on business vision and marketing activities, its GTC in Hyderabad was executing its vision. The activities involved in gathering the customers' requirements, implementing, customizing the applications, and supporting the customers after they go live. These activities call for a lot of travel to the customer's place and demand dedicated connectivity to customers' data centers. Supporting the customer's issues adhering to the service level agreements with them, GTC had implemented technology that would connect it to its US office via voice/data called VOIP. This demands, again, high hand width connectivity between US office and Hyderabad."

As per the agreement the assessee was to pay amount as per Exhibit A which reads as under :—

"1. Fixed Price Projects executed

(a) On Site (At "Developer" premises) —
Project Cost is derived based on the assumption that the "Developer" will provide all the hardware and software necessary for the "Contractor" to execute the project at the premise of the "Developer".
If some specialized training is required for the project team member of "Contractor", the "Developer" will pay for all expenses related to such training either directly to the training organization or reimburse the "Contractor".
The "Contractor" will assume all the administrative and other travel related expenses other than lodging costs.
The project will be billed by the "Contractor" to the "Deve-loper" at a flat fee as previously agree and approved and will be based on estimated efforts spent multiplied by an hourly rate of US$ 70. In case the efforts put in exceed 10 per cent of the previously estimated efforts due to no fault of the "Contractor". Then the "Developer" will be required to pay for additional efforts and it will be negotiated in good faith between the "Developer" and the "Contractor".
(b) Off Site (At "Contractor" premises)
Project Cost is derived based on the assumption that the majority of the work will be carried out at the premise of the "Contractor" and the "Developer" has provided computer hardware and peripherals (list enclosed) on loan basis which shall remain the property of the "Developer."
The project will be billed by the "Contractor" to the "Deve-loper" at a flat fee as previously agreed and approved and will be based on estimated efforts spent multiplied by an hourly rate of US$ 15 for Junior Programmers, US$ 20 for Senior Programmers, US$ 30 for Project Leaders and US$ 40 for Center Heads. In case the efforts put in exceed 10 per cent of the previously estimated efforts due to no fault of the "Contractor", then the "Developer" will be required to pay for additional efforts and it will be negotiated in good faith between the "Developer" and the "Contractor".

2. Ongoing Software Operation

(a) Offsite (At Contractor's premises)
Services projects executed from the "Contractor" site. Such ongoing projects will be executed on the basis of commonly used T & M (Time and Material) basis :
The Ongoing Software Operation Services projects will be billed by the "Contractor" to the "Developer" on an hourly rate basis at a uniform bill rate of US$ 15 per hour for Junior Programmers, US$ 20 per hour for Senior Programmers, US$ 30 per hour for Project Leaders, US$ 40 per hour for Center Heads.
For the Ongoing Software Operation Service projects, the invoices will be categorized and specify the category. These invoices will be produced periodically on the basis of project milestones as determined by the "Contractor". However, in no case will the "Contractor" invoice the "Developer" in advance for work not yet performed unless approved by the "Developer".
The invoice produced will carry the name of the individual contributor assigned by the "Contractor" and the total number of hours worked along with the bill rate and the amount that is payable by the "Developer".
(b) Onsite (At Developers premises)
The "Contractor" will assume all the administrative and other travel related expenses other than lodging costs.
The project will be billed by the "Contractor" to the "Developer" at a flat fee as previously agreed and approved and will be based on estimated efforts spent multiplied by an hourly rate of US$ 70. In case the efforts put in exceed 10 per cent of the previously estimated efforts due to no fault of the "Contractor", then the "Developer" will be required to pay for additional efforts and it will be negotiated in good faith between the "Developer" and the "Contractor"."

From the above terms and conditions of the agreement, we find that software development services were rendered, both "onsite" and "offsite". "Onsite" services were rendered at customer's place by the assessee's employee sent there. The 'offsite' services are rendered at the assessee's place locally. The activities of the assessee-company amounts sale of goods in the form of computer software. The assessee received consideration in convertible foreign exchange for both types of services. The travel and allowance expenses of Rs. 1,16,61,307 was treated by the Assessing Officer as expenditure incurred in foreign exchange for providing technical services outside India and same was reduced from convertible foreign exchange received by the assessee. But we find that the expenditure was not in connection with providing technical services. The assessee did not render any independent technical services. It developed software on contract basis as per the agreement and handed over the same to the customer. There is software development agreement between the client and the assessee. The expenditure incurred is for Development of Software. The general accepted accountancy and other prevailing practice in the business are that if any services are rendered in respect of goods either for sale or manufacture, those expenditures relate to goods and such expenditures cannot be described independent expenses so as to say in the nature of technical services. Here distinction is to be noted in respect of consideration received against expenditures incurred for the purpose of goods sold or manufactured or produced and consideration received against independent services rendered. Up to the point of sale of goods expend-iture incurred is related to goods. Such expenses incurred cannot be said to be expenditure for technical services. If the technical services are rendered independently which is being agreed to separately charge in addition to the price of the goods, in such circumstances expenditure incurred could be in the nature of expenditure for the purpose of technical services. In the case under consideration undisputed facts are that expenditure incurred by the assessee is on account of travelling allowances and others for the purpose of development of software at client's site outside India i.e., in respect of goods. Such expenditure is not in the nature of expenditure for technical services. Since the expenditure is not for technical services, there is no need to exclude these expenditures from consideration received in convertible foreign exchange for the purpose of calculating 'export turnover' as defined in clause (iv) of Explanation 2 to section 10A.

9. One more ground in addition to common ground raised in the appeal for assessment year 2000-01 is in respect of disallowance of employee's contribution to PF after due date. The Assessing Officer assessed Rs. 2,52,340 as employee's contribution to PF which was not deposited land credited to Profit & Loss account, as income from other sources, considering provisions of section 56 (2) (ic) , read with sections 2 (24) (x) and 36 (va) , of Income-tax Act. The assessee did not object to this before the Assessing Officer. However, the CIT (A) after considering the submission of the assessee confirmed of the order of the Assessing Officer. The contention of the learned A.R. that employee's contribution to PF paid after the due date is not taxable under the head 'Income from other sources'. It should be assessed as income from business as assessee-company is already engaged in the business of development and export of computer software and the employees are employed in the course of such business. The contention of the learned A.R. is not acceptable in view of the clear provisions of sections 2 (24) (x) , 36 (va) and 56 (2) (ic) of the Income-tax Act. The unpaid PF contribution of employees cannot be said to be a business receipt. If this receipt is allowed or to be treated as business receipt, then the assessee will be entitled to set off of all business expenditure against this receipt which is not permissible. The assessee's business is in software and not in dealing with contribution of PF of employees. We are, therefore, inclined to uphold the order of the CIT (A) . Accordingly, the order of the CIT (A) on this issue is confirmed.

10. In the result, appeal for the assessment year 2000-01 is partly allowed and appeal for assessment year 2001-02 is allowed.