Case: C.I.T., CENTRAL-III, N.DELHI Vs. HCL TECHNOLOGIES LTD

a. The Respondent ? HCL Technologies Ltd. is a company registered under the Companies Act, 1956 and engaged in the business of development and export of computer softwares and rendering technical services.b. The Respondent has shown gross income from business at Rs. 267,01,76,529/- while claiming deductions under Section 10A of the IT Act to the tune of Rs. 273,45,39,379/- showing a net loss of Rs. 6,43,62,850/-. The Respondent filed its return of income for the Assessment Year 2004-05 on 01.11.2004 declaring the undisclosed income at Rs. 91,25,68,114/-. Thereafter, on 31.03.2005, a revised return of income for Rs. 91,16,99,060/- was filed by the Respondent which was selected for scrutiny under Section 143 of the Income Tax Act, 1961 (in short the IT Act).c. The Assessing Officer, vide order dated 28.12.2006, held that the software development charges, as claimed by the Respondent, are nothing but in the nature of expenses incurred for technical services provided outside India. Further, in view of the fact that it is not purely technical services and some element of software development is also involved in it and in the absence of such bifurcation, the Assessing Officer estimated such expense at the rate of 40% and remaining 60% for providing technical services by the Respondent in foreign exchange to its offshore clients and re-assessed the taxable income at Rs. 137,20,34,576/- and penalty to the tune of Rs. 21,81,90,239/-.d. Being aggrieved, the Respondent preferred an appeal being No. 331/06-07 before the Commissioner of Income Tax (Appeals). Learned CIT (Appeals), vide order dated 09.05.2007, partly allowed the appeal while estimating 10% as software development charge incurred for technical services provided outside India as against 60% estimated by the Assessinge. Being aggrieved, the Respondent as well as the Revenue, preferred cross appeals being ITAT Nos. 3199 and 3344/Del/2007 before the Tribunal. The Tribunal, vide order dated 23.01.2009, dismissed the appeal filed by the Revenue while allowing the appeal of thef. Being aggrieved, the Revenue preferred an appeal before the High Court being No. ITA No. 1250 of 2009. The High Court, vide order dated 15.12.2009, dismissed the appeal of theg. Hence, these appeals have been filed before this Court.

Court's reasoning:
7. On the other hand, learned senior counsel appearing for the Respondent submitted that the export turnover is the numerator whereas the total turnover is the denominator in the formula for computing profit from exports. The export turnover as defined in Section 10A of the IT Act would not include freight, telecommunication charges or insurance attributable to the delivery of goods outside India and the expenses incurred in foreign exchange for providing technical services outside India. The same cannot be included in the total turnover as if numerator included the aforesaid amount, which the denominator doesnt include, the formula would render undesirable results. Therefore, the Respondent is legally entitled to exclude the above said expenses from the total turnover as well. Hence, these appeals deserve to be dismissed at the outset.It is an undisputed fact that neither Section 10A nor Section 2 of the IT Act define the term total turnover. However, the term total turnover is given in clause (ba) of the Explanation to Section 80 HHC of the IT Act which defines the meaning of total turnoverSection 10A of the IT Act is a special beneficial provision and the purpose of deduction under such Section is to encourage and boost the new business undertakings situated in the free trade zone of this Nation by providing suitable deductions to such business entities. Sometimes, while calculating the deduction, disputes arise regarding the methodology of deduction which ought to be followed. Undisputedly, it is a matter of record that the Respondent is engaged in the activity of trading of generic software and providing customized software development services for domestic as well as for foreign clients through its two units situated in Software Technology Park, Gurgaon (Now Gurugram) which falls under the definition of the Section 10A of the IT Act. The contention of the Respondent is that it incurred expenditure in foreign exchange in sending professionals abroad as per the agreements with the foreign constituents.12. It is undisputed fact that the Respondent was engaged in the business of software development for its customers engaged in different activities at software development centres of the Respondent. However, in the process of such customized software development, certain activities were required to be carried out at the sight of customers on site, located outside India for which the employees of the branches of the Respondent located in the country of the customers are deployed. It is true that it is not defined that which activity will be termed as providing technical services outside India. Moreover, after delivery of such softwares as per requirement, in order to make it fully functional and hassle free functioning subsequent to the delivery of softwares in many cases, there can be requirement of technical personnel to visit the client on site. The Assessing Officer could not bring any evidence that the Respondent was engaged in providing simply technical services independent to software development for the client for which the expenditures were incurred outside India in foreign currency.