2014 (1) TMI 1177 - AT - Income Tax

Deduction u/s 10A - Whether sale of hardware components be excluded from the export turnover - Held that - Following Income-Tax Officer. Versus Sak Soft Limited. 2009 (3) TMI 243 - ITAT MADRAS-D - There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results - In the case of s. 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in s. 10A, the export profit is to be derived from the total business of the undertaking - If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator - The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different - Though there is no definition of the term total turnover in s. 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible - If that were the intention of the legislature, they would have expressly stated so - If they have not chosen to expressly define what the total turnover means then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover - The issue has been restored for fresh adjudication. Foreign travel expenditure Held that - The expenses incurred in foreign currency outside India are mainly for the personnel of the assessee deployed abroad for on-site development of the software and not for providing any technical services outside India Expenses are not to be excluded from the export turnover and also from the total turnover - Decided in favour of assessee. Notional interest on interest free loan given to its subsidiary concern Held that - The authorities below have not recorded any relevant reasons for making either addition or sustaining the same - The AO should have recorded his reasons by way of a speaking order, highlighting what constitutes for resorting to such an addition - The Revenue has also failed to prove the nexus between the interest bearing loan availed by the assessee and interest free advance extended to its subsidiary The issue has been restored for fresh adjudication.

Issues Involved:
1. Exclusion of Rs.9.53 crores from the export turnover for computing deduction u/s 10A.
2. Reduction of courier, internet, and insurance charges from the export turnover.
3. Reduction of foreign travel expenditure from the export turnover.
4. Set-off of domestic unit loss against income from 10A Unit prior to claim of relief.
5. Addition on account of bad debts recovered.
6. Addition of notional interest on interest-free loan to a subsidiary concern.

Detailed Analysis:

1. Exclusion of Rs.9.53 Crores from the Export Turnover:
The assessee contended that the sale of hardware components was inextricably linked to the software and should not be excluded from the export turnover for computing deduction u/s 10A. The CIT (A) upheld the AO's decision, noting that the assessee did not manufacture hardware but only traded it. The Tribunal referred to the jurisdictional High Court's ruling in CIT v. Tata Elxsi Ltd, which established that if expenses are excluded from the export turnover, they should also be excluded from the total turnover. Consequently, the issue was restored to the CIT (A) for reconsideration in light of this ruling.

2. Reduction of Courier, Internet, and Insurance Charges:
The AO reduced courier charges of Rs.5.91 lakhs, internet charges of Rs.14.18 lakhs, and insurance charges of Rs.14.92 lakhs from the export turnover, treating them as attributable to the delivery of software outside India. The CIT (A) directed the AO to exclude these expenses from both the export and total turnover. The Tribunal upheld this decision, noting that the CIT (A) had already allowed the alternative ground raised by the assessee.

3. Reduction of Foreign Travel Expenditure:
The AO reduced foreign travel expenses from the export turnover, assuming they were incurred for providing technical services outside India. The Tribunal noted that the assessee was engaged in software development and not in providing technical services. Referring to its earlier decision in the assessee's own case, the Tribunal ruled that these expenses should not be excluded from the export turnover.

4. Set-off of Domestic Unit Loss:
The AO adjusted the loss of the non-STP business against the profit of the STP Unit before granting deduction u/s 10A. The CIT (A) upheld this decision, citing various judicial precedents. The Tribunal referred to the jurisdictional High Court's ruling in the assessee's own case, which held that unabsorbed depreciation and brought forward losses should be adjusted before allowing deduction u/s 10A. Consequently, the issue was decided in favor of the assessee.

5. Addition on Account of Bad Debts Recovered:
The AO added Rs.7.36 lakhs recovered from bad debts to the income, which the CIT (A) upheld. The assessee argued that the provision for doubtful debts was already taxed in the year it was created, and adding the recovered amount would result in double taxation. The Tribunal found that the CIT (A) had not properly addressed the assessee's contentions and restored the issue to the CIT (A) for reconsideration.

6. Addition of Notional Interest on Interest-Free Loan:
The AO added Rs.10.54 lakhs as notional interest on an interest-free loan given to a subsidiary. The CIT (A) upheld this addition, stating that the assessee failed to prove the commercial expediency of the loan. The Tribunal noted that the authorities did not provide adequate reasons for the addition and failed to establish a nexus between the interest-bearing loan and the interest-free advance. The issue was restored to the CIT (A) for fresh consideration.

Conclusion:
The Tribunal's order resulted in partial relief for the assessee, with several issues being restored to the CIT (A) for reconsideration. The Tribunal emphasized the need for uniformity in the treatment of export turnover and total turnover, aligning with the jurisdictional High Court's rulings. The decision underscores the importance of detailed reasoning and adherence to judicial precedents in tax assessments.

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