2010 (1) TMI 891 - AT - Income Tax

Deduction under section 10A - after excluding the expenditure incurred in foreign exchange in providing technical services outside India, for the purposes of computing the total turnover under section 10A - Held that - no conscious application of mind by the Assessing Officer while excluding the expenses incurred in foreign exchange in providing the technical services outside India for the purposes of computing the total turnover, order of the Assessing Officer set aside directed to pass a fresh assessment order after recomputing the deduction under section 10A of the Act after excluding the expenses incurred in foreign exchange in providing technical services outside India for the purpose of computing the total turnover Deduction under section 10A - allocation of the establishment expenses between the Software Technology Park ( STP ) unit and the non-STP unit and to reallocate the expenses on a most rational and scientific basis - Held that - claims made by the assessee regarding the basis of allocation in various heads required to be looked into by the Assessing Officer with the help of primary records relating to the expenses under different heads, exercise of allocation of expenses, or of examining the allocation of expenses is to be done afresh by the Assessing Officer after giving due and fair opportunity of hearing to the assessee and after dealing with the contentions of the assessee by way of a speaking order in accordance with law, order of the Commissioner of Income-tax set aside, appeal filed by the assessee is allowed for statistical purpose.

Summary

Issues Involved:
1. Legality of the Commissioner of Income-tax's order under section 263 of the Income-tax Act, 1961.
2. Re-computation of deduction under section 10A after excluding foreign exchange expenditure.
3. Allocation of establishment expenses between STP and non-STP units.

Detailed Analysis:

1. Legality of the Commissioner of Income-tax's order under section 263:
The assessee contested the Commissioner of Income-tax's (CIT) decision to set aside the assessment order under section 263, arguing that the original assessment was neither erroneous nor prejudicial to the interests of the Revenue. The assessee cited the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108, asserting that the CIT cannot revise an order merely due to disagreement with the Assessing Officer's (AO) conclusion. The Tribunal found that the AO had not properly scrutinized the allocation of expenses and had failed to apply his mind to the details provided by the assessee. Consequently, the Tribunal upheld the CIT's decision to invoke section 263, emphasizing the AO's duty to conduct a thorough investigation and pass a detailed order, as supported by the decision in Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375.

2. Re-computation of deduction under section 10A after excluding foreign exchange expenditure:
The CIT directed the AO to recompute the deduction under section 10A by excluding expenses incurred in foreign exchange for providing technical services outside India from the 'total turnover.' The assessee argued that for maintaining harmony, both the numerator (export turnover) and the denominator (total turnover) should exclude such expenses. The CIT, however, held that the term 'total turnover' should be adopted without exclusions unless explicitly provided by the statute. The Tribunal, referencing the Special Bench decision in ITO v. Sak Soft Ltd. [2009] 313 ITR (AT) 353, concluded that the issue is covered by this precedent, thus allowing the assessee's appeal on this ground.

3. Allocation of establishment expenses between STP and non-STP units:
The CIT found that the AO had not considered the allocation of establishment expenses between the STP and non-STP units, which required scrutiny of primary records. The assessee contended that all expenses specific to the STP unit were allocated appropriately and certified by a chartered accountant. The Tribunal noted that the AO had not conducted a proper inquiry or investigation into the allocation of expenses. Therefore, the Tribunal set aside the CIT's order and remanded the matter to the AO for fresh examination, ensuring a fair opportunity for the assessee to present their case.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the allocation of expenses and recompute the deduction under section 10A in accordance with the law, while vacating the CIT's observations on the merits of the issue. The Tribunal emphasized the need for a detailed and reasoned order from the AO after thorough investigation and consideration of the assessee's submissions.