2014 (1) TMI 1751 - AT - Income Tax

Benefit of section 10A - assessee excluded communication charges, expenditure incurred in foreign currency from export turnover and also from the total turnover - Held that - The admitted factual position in the present case is that the assessee is in the business of exporting computer software and therefore the expenses incurred in foreign exchange cannot be said to be one incurred by the assessee in connection with providing technical services outside India. The assessee does not claim exclusion of telecommunication charges or insurance attributable to the delivery of software outside India. The claim for exclusion from the export turnover is made by the assessee only in respect of expenses incurred in foreign currency in providing technical services outside India. We however do not have the break-up of the item of expenditure incurred in foreign currency outside India. A copy of the agreement between the Assessee and Robert Bosch, Germany titled software project agreement (SPA) has been filed before us. We do not know as to whether the entire export turnover is in relation to this client alone or there were other clients for whom the Assessee rendered computer software development services. A perusal of the SPA filed before us shows that the Assessee agreed to carry out software development work for Robert Bosch Germany at Germany also. The terms of the agreement for rendering services on-site at clauses-5.2 to 5.2.6 of the agreement does not involve rendering of any technical services. The question as to whether the entire expenditure incurred in foreign exchange outside India relates to providing technical services outside India cannot be decided in the absence of the required information as stated above. If the claim of the Assessee that the entire expenditure incurred in foreign exchange outside India does not relate to providing technical services outside India, then the same cannot be excluded from the export turnover. Since the factual verification is required for adjudicating the aforesaid issue, we deem it appropriate to set aside the order of the CIT(A) and remand the issue to him with a direction to decide the issue - Decided in favour of assessee for statistical purpose.

Summary

Issues Involved:

1. Exclusion of communication charges and expenses incurred in foreign currency from export turnover.
2. Whether the exclusion of expenses incurred in foreign currency from export turnover should also apply to total turnover.
3. Determination of whether the expenses incurred in foreign currency were for providing technical services outside India.

Detailed Analysis:

Issue 1: Exclusion of Communication Charges and Expenses Incurred in Foreign Currency from Export Turnover

The assessee, a company engaged in software development and related activities, claimed a deduction under Section 10A of the Income Tax Act. The Assessing Officer (AO) excluded communication charges and expenses incurred in foreign currency from the export turnover based on clause (iv) of Explanation 2 of Section 10A. The AO referred to the ITAT Chennai Bench decision in California Software Co. Ltd. v. ACIT, which held that such exclusions need not be reduced from the total turnover. Consequently, the AO computed the deduction by reducing these expenses from the export turnover alone, resulting in a lower deduction amount.

Issue 2: Whether the Exclusion of Expenses Incurred in Foreign Currency from Export Turnover Should Also Apply to Total Turnover

The assessee argued before the CIT(A) that if expenses are excluded from the export turnover, they should also be excluded from the total turnover. The CIT(A) agreed with this alternative submission, following the Special Bench decision of ITAT Chennai in ITO v. Sak Soft Ltd., and directed the AO to exclude the telecommunication expenses and expenses incurred in foreign currency from the total turnover as well.

Issue 3: Determination of Whether the Expenses Incurred in Foreign Currency Were for Providing Technical Services Outside India

The assessee contended that the expenses incurred in foreign currency were not for providing technical services outside India but for software development. The CIT(A) did not address this issue on merits. The Tribunal noted that the Hyderabad Bench of ITAT in Patni Telecom Pvt. Ltd. held that expenses incurred for software development should not be excluded from the export turnover if they are not for independent technical services. The Tribunal found that the factual position regarding whether the expenses were for technical services was not clear and required verification. Thus, the Tribunal set aside the CIT(A)'s order and remanded the issue for further examination.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the CIT(A) to verify the nature of the expenses incurred in foreign currency and decide whether they should be excluded from the export turnover. The Tribunal emphasized that the exclusion of such expenses should only apply if they were for providing technical services outside India.