2010 (12) TMI 756 - AT - Income Tax

Deduction u/s 10A - Software Technology Park of India ( STPI ) - whether the gain on revaluation of the receivable foreign exchange also forms part of the export turnover without actual receipt - The learned counsel for assessee has not made any submissions on this issue nor has he brought any evidence on record to show that this foreign exchange gain is on actual receipt of export proceeds - consideration has to be received or brought into India to be included in the export turnover. But in the case before us, the AO has clearly brought out that this gain has not been received or brought into India - Decided against the assessee Regarding disallowance of expenses - AO disallowed the same holding it to be expenditure incurred towards providing technical services outside India incurred in foreign exchange and he reduced it from the export turnover. - Held that assessee s claim has always been that the expenditure is incurred on training of its personnel abroad. It is the finding of the AO that these employees have rendered technical services outside India and the CIT(A) has also upheld this finding of the AO but he has only directed the AO to exclude the same from the total turnover also - If it is found that the export turnover is computed on the basis of cost mark up, then this amount is to be included as part of the cost and consequently as part of export turnover and also total turn over - In the result, the assessee s appeal is partly allowed

Summary

Issues Involved:
1. Deduction under section 10A of the Income-tax Act on exchange fluctuation gain.
2. Expenditure on per diem expenses for employees going abroad for training purposes.
3. Exclusion of telecommunication expenses from total turnover for computation of deduction under section 10A.

Issue-wise Analysis:

1. Deduction under section 10A of the Income-tax Act on exchange fluctuation gain:

The assessee, an Indian company engaged in software development, claimed a deduction under section 10A for foreign exchange gain amounting to Rs. 27,44,387. The Assessing Officer (AO) disallowed this claim, stating that the gain was not actual but notional, as it was based on revaluation of receivables and not on actual receipts. The CIT(A) upheld the AO's decision, relying on the Supreme Court's decision in Pandian Chemicals Ltd. vs. CIT, which emphasized that there must be a direct nexus between the business activity and the income for it to be deductible. The Tribunal observed that the CIT(A) did not address the AO's point about the notional nature of the gain and upheld the AO's decision, stating that the gain had not been received in convertible foreign exchange as required under section 10A.

2. Expenditure on per diem expenses for employees going abroad for training purposes:

The assessee incurred expenses for training its employees abroad and claimed that these should not be reduced from the export turnover. The AO disallowed this claim, treating the expenses as incurred for providing technical services outside India. The CIT(A) directed the AO to exclude these expenses from both the export and total turnover. The Tribunal found that the employees were sent abroad for training and not for rendering technical services. It remitted the issue back to the AO to verify if the export turnover was computed on a cost-plus-markup basis. If so, the expenses should be included in the export turnover.

3. Exclusion of telecommunication expenses from total turnover for computation of deduction under section 10A:

The AO reduced telecommunication and insurance expenses from the export turnover but not from the total turnover. The CIT(A) directed the AO to reduce these expenses from the total turnover as well, following judicial precedents including the Special Bench decision in ITO vs. Sak Soft Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the department had not succeeded in overturning the judicial precedents relied upon by the CIT(A).

Conclusion:

The appeals of the assessee for the assessment years 2005-06 and 2006-07 were partly allowed, with the issue of per diem expenses remitted back to the AO for verification. The revenue's appeals for the assessment years 2004-05 to 2006-07 were dismissed, upholding the CIT(A)'s direction to exclude telecommunication expenses from the total turnover for the purpose of section 10A deduction.