2018 (7) TMI 2168 - AT - Income Tax

Deduction u/s 10AA on foreign exchange and forward contract gain - forward contract gain and foreign exchange gain not considered as income from the business of the export which is eligible for deduction under section 10 AA - HELD THAT - In the case of CIT v. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT has ruled that Gain from fluctuation of foreign exchange is directly related with the export activities and should be considered as income derived from export in the year in which the export took place for the purpose of deduction u/s 10A. Exchange rate fluctuation for claiming deduction U/s 10AA of the Act is income of the business as the exchange rate fluctuation are resultant from realization of export sale proceeds as per the export invoices and as per the definition of export turnover, the consideration received in respect of the exports, for example, total amount realized for sale invoices shall form part of export turnover. Therefore, the total turnover is denominator, which sale also includes the effect of foreign exchange fluctuation. Therefore, such inclusion of foreign exchange fluctuation in the profits shall qualify for deduction U/s 10AA of the Act. Telecommunication expenses also be reduced from the total turnover for the purpose of computing deduction under section 10 AA - CIT A relying upon the decision of the Hon ble Delhi High Court in the case of Gen pact India 2011 (11) TMI 119 - DELHI HIGH COURT wherein it has been held that there should be Uniformity in the ingredients of both the numerator and denominator in the formula for computation of deduction under section 10 A of the income tax act. Therefore, he directed the AO to include the telecommunication expenses in the export turnover if it is included in the total turnover for computing deduction under section 10 AA of the act. As the Ld. CIT A has decided the issue following the decision of the Hon ble Delhi High Court we find no infirmity in his order. Further identical view has also been taken by the Hon ble Karnataka High Court in in case of Dell international services India private limited 2012 (5) TMI 388 - KARNATAKA HIGH COURT and Samsung electronics Co Ltd 2011 (11) TMI 429 - KARNATAKA HIGH COURT - Revenue dismissed. Allowing migration/on the job training expenses from the total turnover for the purpose of computing deduction under section 10 AA - CIT-A rejected the finding of the Ld. assessing officer holding that the Hon ble Delhi High Court in Karnataka High Court ..has taken a view that numerator and denominator should be same. The above view is the correct view otherwise the profit eligible for deduction will give a distorted picture. The detailed finding of been given by the Ld. CIT A in para No. 6 of his order. We do not find any infirmity in the order of the Ld. CIT A and therefore the ground No. 3 of the appeal of the revenue is dismissed. TP Adjustment - interest at the rate of LIBOR 1.5% instead of 16% rate of interest charged on the delayed payment from the associated enterprises - HELD THAT - CIT appeal who reduced the addition holding that interest shall be chargeable at the rate of LIBOR 1.5% instead of 16% computed by the Ld. transfer pricing officer. The Ld. CIT A while reducing the interest component has relied upon the decision of the coordinate bench 2013 (12) TMI 1535 - ITAT MUMBAI for assessment year 2008 09 wherein the coordinate bench has held that notional interest at the rate of LIBOR 1.5% should be charged on the delayed payments the associated enterprise. As the Ld. CIT A has followed the decision of the coordinate bench on the similar facts and circumstances where the interest component was computed on the delayed payment of charges by the associated enterprise. In view of this we do not find any infirmity in the order of the Ld. CIT A and Ld. Departmental representative also could not show us that the interest computation mechanism directed by the Ld. CIT A is not appropriate - Appeal of revenue dismissed.

Summary

Issues involved:
1. Deduction under section 10AA on foreign exchange and forward contract gain.
2. Treatment of telecommunication expenses for computing deduction under section 10AA.
3. Inclusion of migration/on the job training expenses in total turnover for deduction under section 10AA.
4. Calculation of interest rate for delayed payments from associated enterprises.
5. General issue dismissed.

Issue 1: Deduction under section 10AA on foreign exchange and forward contract gain:
The appellant disputed the allowance of deduction under section 10AA on foreign exchange and forward contract gain. The assessing officer disallowed the claim, stating that the gain was not derived from the specified business activity of the undertaking in SEZ. However, the CIT (A) allowed the claim based on previous decisions favoring the assessee. The tribunal upheld the CIT (A)'s decision, citing that foreign exchange fluctuation is directly related to export activities and should be considered as income derived from export for the purpose of deduction under section 10AA. The tribunal found no infirmity in the CIT (A)'s order and dismissed the appeal.

Issue 2: Treatment of telecommunication expenses for computing deduction under section 10AA:
The revenue contended that telecommunication expenses should be reduced from the total turnover for computing deduction under section 10AA. The assessing officer held that such expenses should be included in the total turnover. The CIT (A) directed the AO to include telecommunication expenses in the export turnover if included in the total turnover, following decisions of the Delhi High Court and Karnataka High Court. The tribunal found the CIT (A)'s decision in line with judicial precedents and dismissed the appeal.

Issue 3: Inclusion of migration/on the job training expenses in total turnover for deduction under section 10AA:
The revenue challenged the inclusion of migration/on the job training expenses in the total turnover for computing deduction under section 10AA. The assessing officer excluded these expenses from export turnover but included them in total turnover. The CIT (A) disagreed with the assessing officer, stating that numerator and denominator should be the same for accurate deduction calculation. The tribunal upheld the CIT (A)'s decision, finding it consistent with the correct interpretation of the law.

Issue 4: Calculation of interest rate for delayed payments from associated enterprises:
The revenue objected to the CIT (A)'s direction to charge interest at LIBOR + 1.5% instead of 16% on delayed payments from associated enterprises. The CIT (A) relied on a previous bench decision for similar cases, reducing the interest component. The tribunal found the CIT (A)'s decision appropriate, as it aligned with the earlier precedent. Consequently, the appeal on this ground was dismissed.

Issue 5: General issue dismissed:
The tribunal dismissed a general issue raised by the revenue, as it did not pertain to specific legal arguments or contentions. The appeal filed by the revenue was ultimately dismissed in its entirety.