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2012 (11) TMI 536 - AT - Income TaxComputation of eligible income for deduction u/s 10A Treatment of misc. income, credit Balance written back Held that - Following the decision in case of EXTRUSION PROCESS PVT. LTD. (2006 (6) TMI 261 - ITAT MUMBAI), there is no decision to the contrary brought to its notice and finally decided the issue in favour of the assessee. In favour of assessee Notice period salary for the purposes of arriving at the deduction u/s 10A Held that - Since the said amount represents recovery of the business expenses earlier incurred by the assessee in recruiting and training of the employees concerned, the income arising on account of such recovery also represents the business income of the assessee. Included in income. In favour of assessee Eligible income u/s 10A - Foreign exchange fluctuation gain Held that - Following the decision in case of Renaissance Jewellery (P.) Limited. (2005 (5) TMI 246 - ITAT BOMBAY-G) held that the profit on account of foreign exchange gain is directly referable to the articles and things exported by the assessee. Such profits are, therefore, in the same nature as the sale proceeds and there is no reason while deduction u/s 10A should not be allowed in respect of such exchange gain. In favour of assessee Interest income for purposes of computing eligible income u/s. 10A Held that - Following the decision in case of Navbharat Explosives Co. P. Ltd. (2010 (6) TMI 588 - CHHATTISGARH HIGH COURT) wherein it was held that the income by way of interest on fixed deposits is not eligible for special deduction u/s 10A. In favour of revenue Deduction u/s 10A - Sales made to the branch office located in US AO argued that it is merely a case of transfer Held that - Following the decision in case of Virage Logic International (2007 (1) TMI 299 - ITAT DELHI) held that the said exports constitutes sales. As the transfers between the HO and the Branch Office and vice versa with the approval of the STPI clubbed with satisfaction of other conditions like realization of proceeds in foreign exchange, constitutes exports for the purpose of the deduction u/s 10A. In favour of assessee Disallowance made invoking Sec 195 r.w. Sec. 40(a)(ia) - DTAA with USA Whether remittance made by the assessee to its branch office abroad subject to TDS provision - Assessee made payment to its US Branch on account of work sub-contracted to them Held that - Following the decision in case of GE India Technology Centre Private Ltd. (2010 (9) TMI 7 - SUPREME COURT OF INDIA) that these payments are outside the scope of Sec 195 for the reason that the branch office abroad is part and parcel of the assessee and it is a resident in status and not non-resident , as made out by the Revenue. The provisions of Sec 195(1) mention clearly that only the payments to non-residents attract provisions of Sec 195. Issue is decided in favour of the assessee
Issues involved:
1. Inclusion of miscellaneous income, credit balance written back, and notice period salary for deduction under Section 10A. 2. Inclusion of gain on account of foreign exchange fluctuation for computing eligible income under Section 10A. 3. Disallowance under Section 40(a)(ia). 4. Exclusion of interest income for computing eligible income under Section 10A. 5. Exclusion of sums received from the US branch from "export turnover" for purposes of Section 10A. 6. Disallowance invoking the provisions of Section 195 read with Section 9 and DTAA with the USA. Detailed Analysis: Revenue's Appeal: 1. Inclusion of Miscellaneous Income, Credit Balance Written Back, and Notice Period Salary for Deduction under Section 10A: - The Tribunal referenced its previous decision dated 19th August 2009, in the assessee's own case for the assessment year 2005-06, where it was decided that miscellaneous income and the credit balance written back should be included in the profit eligible for computation of exemption under Section 10A. This decision was based on the Mumbai Bench of the Tribunal in the case of Extrusion Processes (P) Ltd V/s. ITO (2007) 106 ITD 336. - Regarding notice period salary, the Tribunal relied on the Supreme Court's decision in Lakshmi Machine Works (290 ITR 667), concluding that the notice period salary recovered from employees represents business income and should be included in the eligible profits for deduction under Section 10A. - The CIT(A)'s decision to include these incomes for deduction under Section 10A was upheld. 2. Inclusion of Gain on Account of Foreign Exchange Fluctuation: - The CIT(A) decided this issue based on the Bombay Bench of the Tribunal in the case of Renaissance Jewellery P. Ltd. V/s. ITO (101 ITD 380), and no contrary decision was presented. The Tribunal found no infirmity in the CIT(A)'s order and confirmed it. 3. Disallowance under Section 40(a)(ia): - The Tribunal noted that the CIT(A) had confirmed the disallowance made by the assessing officer, and the ground raised by the Revenue was erroneous. The Departmental Representative agreed to this mistake. Therefore, this ground was rejected as misconceived. Assessee's Appeal: 1. Exclusion of Interest Income for Computing Eligible Income under Section 10A: - The assessee argued that the interest income derived from temporary parking of business funds should be included in the profits eligible for exemption under Section 10A. However, the assessing officer excluded this income based on the Supreme Court's decision in Sterling Foods (1999) 237 ITR 579, treating it as income under the head 'other sources.' - The CIT(A) confirmed this exclusion, relying on the Mumbai Bench decision in Renaissance Jewellery P. Ltd. V/s. ITO (101 ITD 380). The Tribunal upheld the CIT(A)'s decision, referencing the Chattisgarh High Court's decision in Nav Bharat Explosives Co. Pvt. Ltd. (337 ITR 0515), which held that interest on fixed deposits is not eligible for special deduction under Section 10A. 2. Exclusion of Sums Received from the US Branch from "Export Turnover": - The assessee included sums received from its US branch in the export turnover for Section 10A deduction. The assessing officer excluded these sums, considering them as transfers rather than sales. - The CIT(A) confirmed this exclusion but also excluded these sums from the total turnover to maintain parity. - The Tribunal referenced the Delhi Bench's decision in Virage Logic International V/s. Dy. Director of Income-tax (2007) 13 SOT 270, which recognized transfers between head office and branch with STPI approval as exports for Section 10A purposes. The Tribunal reversed the CIT(A)'s decision and allowed these sums to be included in the export turnover and total turnover. 3. Disallowance Invoking the Provisions of Section 195 Read with Section 9 and DTAA with the USA: - The assessing officer disallowed payments made to the US branch, invoking Section 195, treating the branch as a non-resident. The CIT(A) upheld this disallowance, relying on the Karnataka High Court's decision in CIT V/s. Samsung Electronics Ltd. (320 ITR 209). - The assessee argued that the branch is part of the assessee and should be treated as a resident. The Tribunal noted that the Supreme Court had set aside the Karnataka High Court's decision in GE India Technologies Pt. Ltd. V/s. CIT (327 ITR 456), clarifying that Section 195 applies only to payments to non-residents. - The Tribunal concluded that the payments to the US branch do not attract Section 195 provisions and allowed the assessee's appeal on this issue. Conclusion: - The Revenue's appeal (ITA No. 915/Hyd/2010) was dismissed. - The assessee's appeal (ITA No. 824/Hyd/2010) was partly allowed.
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