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2016 (1) TMI 1334 - AT - Income TaxComputing deduction under section 10A - Held that - We find that the Hon ble High Court of Karnataka in the case of Tata EIxsi Ltd (2011 (8) TMI 782 - KARNATAKA HIGH COURT) has held that while computing deduction under section 10A expenditure incurred by the assessee, if excluded from the export turnover ( ET ), should also be excluded from the total turnover ( TT ). TDS u/s 195 - whether he payment in question was reimbursement and therefore there was no obligation to deduct tax at source on the part of the Assessee? - Held that - In our view it would be unnecessary to go into the question whether the payment in question is reimbursement of expenses or in the nature of FTS or the question whether the services rendered made available technology to the Assessee in terms of Article 12(4) of the India USA DTAA, because even assuming the sum in question is to be disallowed u/s.40(a)(ia) of the Act, the disallowance will only go to enhance the profits derived by the Assessee from the business of export of computer software and on such enhanced profits deduction u/s.10A of the Act has to be allowed, thereby rendering tax implication on the Assessee insignificant. As rightly contended on behalf of the Assessee the consequence of disallowance u/s.40(a)(ia) of the Act will be that the business profits of the Assessee to that extent will stand enhanced. - Decided against revenue
Issues Involved:
1. Computation of deduction under Section 10A of the Income Tax Act, 1961. 2. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of tax at source on payments made to Cerner US. Issue-Wise Detailed Analysis: 1. Computation of Deduction under Section 10A: The primary issue was whether telecommunication expenses and expenses incurred in foreign currency should be reduced from the export turnover while computing the deduction under Section 10A of the Income Tax Act, 1961. The Assessee, engaged in software development and testing services, did not reduce these expenses from the export turnover, arguing they were not attributable to the delivery of software outside India or for providing technical services outside India. The Assessing Officer (AO) recomputed the deduction by reducing these amounts from the export turnover but did not reduce them from the total turnover, leading to a lower deduction. The CIT(A) allowed the Assessee's alternative claim that if such expenses are excluded from export turnover, they should also be excluded from total turnover, citing the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd. The Tribunal upheld the CIT(A)'s decision, emphasizing that the Hon'ble High Court of Karnataka's ruling mandates that any exclusion from export turnover should also be excluded from total turnover. The Tribunal dismissed the Revenue's grounds, noting that the potential appeal to the Supreme Court does not negate the binding nature of the jurisdictional High Court's decision. 2. Disallowance under Section 40(a)(ia): The second issue involved the disallowance of Rs. 3,87,19,625 under Section 40(a)(ia) for non-deduction of tax at source on payments made to Cerner US. The Assessee argued these payments were mere reimbursements without any mark-up or profit element, and thus not liable for TDS. The AO, however, treated these payments as fees for technical services (FTS) and disallowed the amount for non-deduction of tax. The CIT(A) deleted the disallowance, accepting the Assessee's contention that these were reimbursements and not FTS, and relied on the Tribunal's decision in the Assessee's own case for the previous year. The Tribunal, while considering the Revenue's appeal, noted that even if the disallowance under Section 40(a)(ia) was justified, it would only enhance the Assessee's business profits, thereby increasing the deduction under Section 10A, rendering the tax impact insignificant. The Tribunal allowed the Assessee's application under Rule 27 of the ITAT Rules to argue that the disallowance should enhance the profits eligible for deduction under Section 10A. Citing the Bombay High Court's decision in CIT vs Gem Plus Jewellery India Ltd, the Tribunal concluded that the enhanced business profits due to disallowance should be considered for computing the deduction under Section 10A. Consequently, the Tribunal upheld the CIT(A)'s order and dismissed the Revenue's grounds. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both issues. The Tribunal ruled that expenses excluded from export turnover should also be excluded from total turnover for Section 10A computation and that disallowance under Section 40(a)(ia) would enhance the Assessee's business profits, thereby increasing the deduction under Section 10A.
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