2017 (1) TMI 1739 - AT - Income Tax

Deduction allowable u/s 10A - treatment to expenditure reduced from the export turnover - HELD THAT - Following the judgment in the case of M/s Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein as held by that the total turnover is sum total of export turnover and domestic turnover and therefore, if an amount is reduced from export turnover then the total turnover also automatically goes down by the same amount. We direct the AO that the expenses he has reduced from the export turnover should also be reduced from the total turnover for the purpose of computation of deduction allowable u/s 10A of the Act. These grounds are allowed in this manner. Deduction u/s 10A - computed after setting off losses incurred by certain undertakings as against computing relief for each undertaking separately - HELD THAT - Claim allowed by respectfully following the judgment of the Hon ble High Court rendered in the case of M/s Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT which has been approved by the Hon ble Apex Court. Whether interest income is assessed under the head Income from business or Income from other sources is not having any impact on the tax liability of the assessee in the present year, we hold that this issue is only of academic interest in the present year and we do not enter into this aspect in the present year and the same is left open for a decision in a later year where it will have an impact on the tax liability of the assessee. Allowability of expenditure on purchase of computer software along with related hardware - HELD THAT - Expenditure incurred on purchase of computer software along with related hardware is not allowable as revenue expenditure u/s 37 and only depreciation thereon is allowable as per the applicable rate but the income of the assessee should be considered after making this disallowance for the purpose of computing deduction allowable to the assessee u/s 10A of the IT Act because in our considered opinion, if an amount is not allowable on the basis of this dispute that it is capital expenditure and not revenue expenditure then it has to be accepted that the actual business income was the income assessed after making such disallowance and the same should be considered for the purpose of computing the deduction allowable u/s 10A of the IT Act, 1961. Foreign tax credit - HELD THAT - We restore the matter regarding granting of foreign tax credit to the assessee to the file of the AO for a fresh decision with the direction that if it is established by the assessee that an income was taxed in a foreign country and the same was also taxed in India and on such income, no exemption was claimed by the assessee in India then foreign tax paid in a foreign country should be considered for foreign tax credit as per law. The AO should pass necessary order as per law on this aspect after providing adequate opportunity of being heard to the assessee. The issue involved in ground no. 15 in respect of chargeability of interest is consequential in nature for which no separate adjudication is called for

Summary

Issues:
Transfer Pricing
Adjustments under Section 10A of the Act
Others

Transfer Pricing:
The appeal was against the assessment order passed by the AO under the IT Act, 1961. The assessee raised various grounds related to transfer pricing, questioning the determination of Arm's Length Price (ALP), selection of comparable companies, computation of operating margins, and the application of transfer pricing provisions. The Honorable DRP and the learned AO/TPO were accused of errors in fact and law, including the use of selective information and not considering the lower range of 5 percent for margin determination. The assessee argued that being entitled to a tax holiday under section 10A of the Act, there was no motive to shift profits. Ultimately, several grounds related to transfer pricing were withdrawn by the assessee during the proceedings.

Adjustments under Section 10A of the Act:
The assessee contested the exclusion of communication expenses and foreign currency expenditures from export turnover for the purpose of relief computation under section 10A. The grounds related to these issues were allowed based on judgments favoring the assessee by the Hon'ble Karnataka High Court and the Hon'ble Apex Court. Additionally, it was argued that disallowances should be added to the profit for computing deductions under section 10A. The issue of foreign tax credit was also discussed, with a direction to the AO to reconsider the matter, ensuring that foreign tax credit is granted only on income taxed in both India and a foreign country.

Others:
Grounds related to interest income classification and expenses on computer software were also addressed. The Tribunal held that the interest income classification issue had no impact on the current tax liability and was left open for future consideration. The expenditure on computer software was deemed capital in nature, allowing only depreciation deductions. However, the resulting disallowance was to be considered for computing deductions under section 10A. The matter of granting foreign tax credit was remanded to the AO for a fresh decision, ensuring compliance with the relevant laws. The appeal was partly allowed, with certain issues being upheld in favor of the assessee based on legal precedents and interpretations.