2014 (10) TMI 852 - AT - Income Tax

Treatment given to foreign currency expenditure deducted from the export turnover for the purpose of computing the deduction u/s 10A - Held that - As decided in CIT vs. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT there should be uniformity in the ingredients of both the numerator and the denominator of the formula Section 10-A is a beneficial section. It is intended to provide incentives to promote exports. If the export turnover in the numerator is to be arrived at after excluding certain expenses the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Formula will be Profits of the business of the undertaking Export turn over / (Export turnover domestic turn over) Total Turn Over Non deduction of tax at source - foreign currency expenditure in relation to recharge of international assignee cost were considered as technical service fee - Held that - The issue requires a revisit by the Assessing Officer. Whether the employees of the affiliates abroad were rendering services to the assessee company as a part of any technical services agreed to be rendered by such affiliates to the assessee has to be seen based on the verification of actual services rendered by them. Assessee should also be given an opportunity to show that the employees came to India only on a secondment and had not rendered any technical services on behalf of the affiliates abroad. We therefore set aside the order of the Assessing Officer in this regard and remit the issue back to the file of the Assessing Officer for consideration afresh. - Decided in favour of assessee for statistical purposes. TPA - selection of comparable - Held that - Assessee here is engaged in the software development business thus comparbles of same nature are to be accepted .

Issues Involved:

1. Corporate tax matters.
2. Treatment of foreign currency expenditure.
3. Disallowance under Section 40(a)(ia) of the Income Tax Act.
4. Transfer pricing issues.
5. Treatment of foreign exchange fluctuation income.
6. Credit for tax deducted at source.
7. Levy of interest under Section 234B of the Income Tax Act.

Detailed Analysis:

1. Corporate Tax Matters:

The appellant raised issues concerning the treatment of foreign currency expenditure and its deduction from the export turnover for computing the deduction under Section 10A of the Income Tax Act. The DRP allowed the alternate claim for deducting these amounts from the total turnover, justified by the decision in CIT vs. Tata Elxsi Ltd (349 ITR 98). Consequently, this ground was dismissed.

2. Treatment of Foreign Currency Expenditure:

The appellant contested the disallowance of foreign currency expenditure related to the recharge of international assignee costs as technical service fees under Section 40(a)(ia) for non-deduction of tax at source. The appellant argued that these were reimbursements for salaries and other costs for employees seconded to India and that tax was deducted on the entire salary, including the reimbursed portion. The appellant relied on decisions in IDS Software Solutions (India) (P) Ltd vs. ITO (2009) and others, asserting that such reimbursements did not constitute fees for technical services.

The respondent countered that the payments included miscellaneous expenditures beyond business travel, thus constituting technical services, necessitating tax deduction under Section 195. The Tribunal found inconsistencies in the appellant's documentation and noted the absence of secondment agreements. The issue was remitted back to the Assessing Officer for fresh consideration, allowing the appellant to demonstrate that the employees did not render technical services on behalf of affiliates abroad.

3. Transfer Pricing Issues:

The appellant challenged the application of certain filters by the Assessing Officer, excluding certain comparables and the treatment of foreign exchange fluctuation income as non-operational. The appellant, a branch of Cisco Systems Services B.V., provided software support services and justified its transfer pricing with a profit margin of 14.82%, compared to the average margin of 13.18% of comparables.

The TPO rejected 12 comparables, included 6 new ones, and excluded forex gains, resulting in an adjusted margin of 26.05%. The TPO recommended an adjustment of Rs. 21,98,76,959/-. The Tribunal directed that forex gains be considered operational income, as in Cisco Systems India (P) Ltd vs. DCIT, and recomputed the appellant's profit margin to 37.38%, directing verification and acceptance if correct.

4. Treatment of Foreign Exchange Fluctuation Income:

The appellant argued that foreign exchange gains were operational, arising from debtors' realization, creditors' payments, and inter-company cross charges. The Tribunal agreed, referencing the decision in Cisco Systems India (P) Ltd vs. DCIT, and directed that such gains be treated as operating income.

5. Credit for Tax Deducted at Source:

The appellant claimed a discrepancy in the credit for tax deducted at source, receiving only Rs. 1,46,966/- against an eligibility of Rs. 2,13,96,098/-. The Tribunal directed the Assessing Officer to verify and provide the correct credit.

6. Levy of Interest Under Section 234B:

This issue was deemed consequential and required no separate adjudication.

Conclusion:

The appeal was partly allowed for statistical purposes, with directions for fresh consideration on specific issues and verification of claims. The stay petition was dismissed as infructuous.

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