2019 (1) TMI 1732 - AT - Income Tax

Product development expenses incurred in foreign currency - CIT(A) has taken a view that expenditure for development of products cannot be reduced from export turnover as against the view taken by the Assessing Officer otherwise - HELD THAT - CIT(A) has deleted this addition by following the Tribunal orders by the time the decision of Special Bench in M/S ZYLOG SYSTEMS LIMITED VERSUS THE INCOME TAX OFFICER 2010 (11) TMI 76 - ITAT CHENNAI has also come which confirms the finding of the ld. CIT(A) that development of product is different from rendering of technical services and therefore it is not required to be excluded from the export turnover. Consequently by respectfully following the Special Bench decision(supra)we cannot allow the grounds raised by the Revenue. Reopening of assessment u/s 147 - HELD THAT - We are in agreement with the ld. CIT(A) as the Assessing Officer has formed the opinion that income to that extent has escaped assessment. Expenses claimed by the assessee with regard to taking over of contracts with clients alongwith their business as claimed by the assessee (at 1/5th) - CIT(A) failed to note that the expenditure incurred by the assessee is for the purpose of warding of competition and hence the same is to be disallowed as capital in nature - HELD THAT - We find that the facts of this issue are incomplete and further investigation of facts regarding application of 35DD or otherwise is required. The Tribunal being the final fact finding body it becomes imperative that the issue should be churned afresh to cull out the exact facts of an issue. Hence we restore this issue to the file of the Assessing Officer. The decisions relied on by both the parties on the issue shall be taken into consideration by the Assessing Officer. The Assessing Officer shall decide the issue anew after giving opportunity of hearing to the assessee. The grounds raised by the Revenue are allowed for statistical purposes.

Summary

Issues Involved:
1. Product development expenses incurred in foreign currency and their exclusion from export turnover.
2. Reopening of assessment under section 147 r.w.s 148.
3. Exclusion of expenses incurred in foreign exchange for providing technical services from export turnover.
4. Foreign travel expenses.
5. Disallowance of exchange fluctuation loss.
6. Amortization of expenses related to the takeover of contracts and their classification as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Product Development Expenses Incurred in Foreign Currency and Their Exclusion from Export Turnover:
For the assessment year 2001-02, the Revenue appealed against the CIT(A)'s decision that product development expenses should not be reduced from export turnover. The ITAT found that this issue was covered in favor of the assessee by a Special Bench decision for the assessment year 2003-04, which held that product development expenses are different from technical services and should not be excluded from export turnover. Consequently, the Revenue's appeal was dismissed.

2. Reopening of Assessment Under Section 147 r.w.s 148:
In the assessee's appeal for the assessment year 2001-02, the issue of reopening the assessment under section 147 r.w.s 148 was raised. The CIT(A) upheld the reopening, agreeing that income had escaped assessment. The ITAT found no reason to overturn this decision and dismissed the assessee's ground on this issue.

3. Exclusion of Expenses Incurred in Foreign Exchange for Providing Technical Services from Export Turnover:
For the assessment year 2001-02, the assessee contested the exclusion of ?4,43,19,916/- from export turnover. The ITAT, following the Special Bench decision, held that such expenses should not be excluded from export turnover and ordered to delete the addition. For the assessment year 2002-03, the CIT(A) had directed the Assessing Officer to verify and allow the claim, which was done, rendering the issue moot.

4. Foreign Travel Expenses:
For the assessment year 2001-02, the assessee requested a remand to produce evidence for foreign travel expenses. The ITAT remanded the issue to the Assessing Officer for fresh consideration. For the assessment year 2002-03, the CIT(A) confirmed the exclusion of ?44,26,416/- from export turnover due to lack of evidence, and the ITAT upheld this decision.

5. Disallowance of Exchange Fluctuation Loss:
For the assessment year 2004-05, the Revenue appealed against the CIT(A)'s decision to allow exchange fluctuation loss. The ITAT upheld the CIT(A)'s decision, following the Supreme Court's ruling in Sutlej Cotton Mills Ltd vs. CIT and other tribunal decisions favoring the assessee.

6. Amortization of Expenses Related to the Takeover of Contracts and Their Classification as Capital or Revenue Expenditure:
For the assessment year 2004-05, the Revenue contested the CIT(A)'s decision to allow amortization of expenses related to the takeover of contracts as revenue expenditure. The ITAT found the facts incomplete and remanded the issue to the Assessing Officer for further investigation. A similar issue for the assessment year 2005-06 was also remanded to the Assessing Officer.

Summary of Results:
- A.Y 2001-02: Assessee's appeal partly allowed for statistical purposes; Revenue's appeal dismissed.
- A.Y 2002-03: Assessee's appeal dismissed.
- A.Y 2004-05: Assessee's appeal partly allowed; Revenue's appeal partly allowed for statistical purposes.
- A.Y 2005-06: Assessee's appeal allowed; Revenue's appeal allowed for statistical purposes.

Order pronounced in the open court on 28.2.2011.