2016 (1) TMI 1019 - AT - Income Tax

Entitlement to claim deduction u/s. 10A on the amount of foreign currency expenditure - Held that - In the present case from the work flow of the activities provided by the assessee which has been reproduced in para 7 above, it is evident that the assessee is not providing any end product such as computer software or design to its parent company in Germany. The assessee is providing technical services to its holding company. In so far as the findings of Commissioner of Income Tax (Appeals) on this aspect of the issue is concerned we are in agreement with him. Whether the technical services provided by the assessee are outside India or from India? - Held that - The assessee has its situs and work platform in India. Thus, in our considered opinion the assessee is providing technical services to its parent company from India. As far as first two components of the expenses i.e. IT expenses and technical consultancy services, are concerned undoubtedly they are the part of the expenditure required for the technical services performed by the assessee to its AE. These expenses as per the contentions of the assessee are mainly with respect to setting up of workstations i.e. Desktops/Laptops, Wide Area Network, leased line for data transfer between KSB AG and the assessee, printers, internet etc. Applications such as Unigraphics, Autocad, SAP, Ms-office, various other softwares, etc. Payment for technical consultancy services include, technical consultancy fees, off-shore salary paid by KSB AG to its technical representative deputed with the assessee, etc. As far as the third element i.e. reimbursement is concerned they relate to expenses incurred by holding company on behalf of the employees of the assessee when they visited Germany for training. These expenses include mainly rent, accommodation, conveyance, training etc. Therefore, these reimbursements do not form part of the expenditure eligible for deduction u/s. 10A. In the definition of the term export turnover it has been specifically stated that expenses incurred in foreign exchange in providing technical services outside India. Thus, the scope of the exclusion from the word export turnover cannot be enlarged by excluding the expenses incurred in foreign exchange in providing the technical services from India. Exclusion of foreign currency expenditure from export turnover as well as total turnover while computing deduction u/s. 10A confirmed

Summary

Issues Involved:

1. Reduction of foreign currency expenditure from export turnover for deduction under Section 10A.
2. Classification of the assessee's services as technical services outside India.
3. Exclusion of foreign currency expenses from total turnover.

Issue-wise Detailed Analysis:

1. Reduction of foreign currency expenditure from export turnover for deduction under Section 10A:

The assessee contested the reduction of foreign currency expenditure from export turnover while computing the deduction under Section 10A. The assessee argued that the expenditure should not be reduced as it was incurred for providing final products in the form of design and software to its holding company. However, the Revenue maintained that the assessee was providing technical services outside India, and thus, the expenses incurred in foreign currency should be excluded from the export turnover as per Explanation 2(iv) of Section 10A of the Income Tax Act, 1961. The Tribunal upheld the Revenue's view, agreeing that the assessee was providing technical services rather than exporting articles or software.

2. Classification of the assessee's services as technical services outside India:

The Tribunal examined the nature of the services provided by the assessee, which included creating CAD drawings, flow/stress analysis, developing selection software, and designing pumps and valves. The Tribunal concluded that these activities constituted technical services provided from India, as the assessee used its workforce and infrastructure in India, despite using the server of its parent company in Germany. Therefore, the expenses incurred in foreign currency for these services were not eligible for deduction under Section 10A.

3. Exclusion of foreign currency expenses from total turnover:

The Revenue appealed against the decision to exclude foreign currency expenses from both export turnover and total turnover. The Tribunal referred to the precedent set by the Hon'ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd., which established that any amount excluded from export turnover must also be excluded from total turnover. The Tribunal found no error in the Commissioner of Income Tax (Appeals)'s directive to exclude the foreign currency expenses from both export turnover and total turnover, thereby dismissing the Revenue's appeal.

Conclusion:

The Tribunal partially allowed the assessee's appeals for the assessment years 2007-08 and 2008-09, agreeing with the exclusion of foreign currency expenses from both export turnover and total turnover. However, it upheld the Revenue's classification of the services as technical services provided from India, thereby reducing the benefit of deduction under Section 10A. The Revenue's appeal was dismissed, affirming the principle that exclusions from export turnover must also apply to total turnover.