2017 (8) TMI 1643 - AT - Income Tax

Deduction u/s.10B on the deemed export - assessee, a company in the business of software development at Chennai - claim denied by the Revenue on the ground that the work for the same was carried out in India and the sale proceeds were received in Indian rupees i.e., as against in convertible foreign exchange, as required by sec. 10B - HELD THAT - Even assuming that the export proceeds are received in foreign exchange, a matter which, in view of the contrary contentions, would require being finally determined on the basis of some material as, say, a certificate/s from the assessee s banker/s, the question becomes of no consequence. The assessee has therefore been rightly disallowed its claim for deduction u/s. 10B on the deemed export, i.e., even assuming MGSC to be a STP Unit, and the export proceeds in respect of the development of computer software therefor, and which is further for its foreign client, being received by the assessee in foreign exchange, i.e., either by its purchase from an authorized dealer or through direct remittance from abroad. The definition of deemed export under the foreign trade policy, which includes the supply of manufactured goods so that its applicability to computer software is suspect, to a STP Unit, would be of little assistance in view of the specific provisions of the Act, a self contained code in itself, and the provisions of which are in fact applicable under the SEZ Act itself. Further still, we may also here clarify that the Circular (No.1001/8/2015-CX.8, dated 28-04-2014) by CBEC, stating that the supply of goods from DTA to a SEZ Act would constitute an export, would again be of little relevance. This is as the same is in respect of rebate on duty on goods cleared from DTA to SEZ as well as cenvat credit in respect thereof. The same, accordingly, has no bearing on the deduction under the provision of the Act. Chapter VI of the SEZ Act, titled Special fiscal provisions of Special Economic Zones , under which Chapter section 27 falls, contains several provisions (viz. ss. 26 to 30) with regard to the exemption of duties under the Customs Act and the Central Excise Act, making the said Circular consistent with the provisions of the SEZ Act. We have already clarified that such a mechanism only would ensure extension of the benefit of the provisions of the Act, i.e., by reference or by incorporation under the relevant statues. We draw support for our decision from the judgment in the case of CIT v. Electronic Controls and Discharge Systems Pvt. Ltd. 2011 (7) TMI 541 - KERALA HIGH COURT relied upon by the ld. CIT(A), which, with respect, we consider as laying down the correct position in law, making it explicitly clear that inter unit sales in the Export Processing Zone cannot be treated an export for the purpose of s. 10A, an analogous provision - Decided against assessee. Deduction of interest on Bandwidth and Telephone expenses in computing the assessee s export turnover - assessee contends, being not incurred in foreign exchange, cannot be deducted - HELD THAT - We find that assessee s contention is valid in-as-much as export turnover, as defined in Explanation 2 to s. 10B, itself provides for the exclusion of telecommunication charges where incurred in foreign exchange. There is, however, no finding in this respect by any authority. Rather, it is not clear if this issue was raised before the ld. CIT(A), which is claimed to be vide Gd. 3 before him, widely worded, as is Gd. 3 before us, alleging the AO have to erred in computing the deduction u/s. 10A. The ld. CIT(A) having not disposed the assessee s Gd.3 before him, the matter is to be restored back to this file for the same. So however, in-as-much as the AO has effected the adjustment without show causing the assessee in its respect, the matter is set aside to the file of the AO. Assessee s appeal is partly allowed.

Summary

Issues:
1. Entitlement to deduction u/s. 10B of the Income Tax Act on deemed export.
2. Deduction of interest on Bandwidth and Telephone expenses in computing export turnover.

Issue 1: Entitlement to deduction u/s. 10B on deemed export

Analysis:
The appeal was directed against the Commissioner of Income Tax (Appeals) order partly allowing the assessee's appeal contesting its assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2009-10. The main issue was whether the assessee, a software development company in Chennai, was entitled to deduction u/s. 10B on the deemed export of a specific amount. The Revenue denied the deduction on the grounds that the work was carried out in India and the sale proceeds were received in Indian rupees instead of convertible foreign exchange as required by sec. 10B. The assessee claimed that the recipient of the software was a Software Technology Park (STP) Unit and the export proceeds were received in US dollars. The Tribunal examined the provisions of sec. 10B and the Special Economic Zones Act, 2005 to determine the eligibility for the deduction. The Tribunal held that the benefits under the foreign trade policy do not automatically translate to eligibility for deduction u/s. 10B. The Tribunal also emphasized that the provisions of the Income Tax Act apply to transactions between the parties, and the export out of India must meet specific criteria as per the Act. The Tribunal referred to relevant case laws to support its decision and concluded that the assessee's claim for deduction u/s. 10B on deemed export was rightly disallowed.

Issue 2: Deduction of interest on Bandwidth and Telephone expenses in computing export turnover

Analysis:
Another issue raised in the appeal was the deduction of interest on Bandwidth and Telephone expenses in computing the assessee's export turnover. The assessee contended that these expenses, not incurred in foreign exchange, should not be deducted. The Tribunal found merit in the assessee's argument as the definition of export turnover under Explanation 2 to sec. 10B excludes telecommunication charges incurred in foreign exchange. However, there was no clear finding on this issue by any authority. The Tribunal noted that this issue was not disposed of by the Commissioner of Income Tax (Appeals) and required further examination. The matter was set aside to the file of the Assessing Officer for proper consideration. The Tribunal partially allowed the assessee's appeal on this issue.

In conclusion, the Tribunal upheld the decision to disallow the deduction u/s. 10B on deemed export while directing further examination of the interest deduction issue. The judgment provided detailed analysis of the legal provisions and case laws to support its conclusions, ensuring a comprehensive understanding of the issues involved in the appeal.