2017 (12) TMI 343 - AT - Income Tax

Deduction u/s. 10A - export sales - non-receipt in convertible foreign exchange - Held that - Provisions provided in the manual of Reserve Bank of India which clearly specify the manner of receipt in foreign exchange as well as the meaning of foreign exchange. Now on going through the provisions of section 10A(3) and Explanation thereto, Explanation-2 to section 10A and the information provided in the manual of Reserve Bank of India all together, we are of the opinion that the assessee in order to claim deduction u/s. 10A has necessarily to prove that export sale proceeds are recovered in convertible foreign exchange/currency in India or has kept the money outside India in another bank account with the approval of Reserve Bank of India. Certainly, the assessee has not fulfilled any of these conditions. Even for the sake of discussion, the plea of the assessee of converting the outstanding sale proceeds into overseas direct investment to be treated as compliance of provision of section 10A(3) then also it cannot be accepted as there is no proper approval of Reserve Bank of India for capitalization of outstanding export sale proceeds. In view of our detailed discussion above, are of the view that assessee is not eligible to claim deduction u/s. 10A on the export sales of ₹ 74,60,891/- as they have not been received in convertible foreign exchange as per the provisions of section 10A(3). Therefore, we set aside the order of CIT(A) and confirm the disallowance made by the Assessing Officer.

Summary

Issues Involved:
1. Eligibility for deduction under section 10A of the Income Tax Act.
2. Compliance with the conditions specified under section 10A(3) of the Income Tax Act regarding receipt of sale proceeds in convertible foreign exchange.

Detailed Analysis:

Issue 1: Eligibility for Deduction under Section 10A
The primary issue revolves around whether the assessee, a software development and consultancy company, is eligible for a deduction under section 10A of the Income Tax Act for the assessment year 2011-12. The Assessing Officer (AO) denied the claim, pointing out that the sale consideration of ?74,60,891/- had not been received in convertible foreign exchange, as required under section 10A(3). The assessee contended that it had complied with the necessary conditions, as the outstanding sale proceeds were converted into equity shares of Workflex Solutions LLC, and this conversion was approved by the Reserve Bank of India (RBI).

Issue 2: Compliance with Section 10A(3)
The AO's denial was based on the observation that the sale proceeds were not credited to a separate account maintained outside India, nor was there prior approval from the RBI. The CIT(A) reversed this decision, accepting the assessee's argument that the conversion into equity shares satisfied the conditions under section 10A(3). The CIT(A) noted that the assessee had complied with the necessary formalities required by the RBI.

Tribunal's Findings:

Revenue's Appeal:
The Revenue argued that the CIT(A) erred in allowing the deduction under section 10A. The Departmental Representative emphasized that the assessee did not bring the sale proceeds of ?74,60,891/- in convertible foreign exchange, as confirmed by the auditor's report. The plea that the amount was converted into equity shares and approved by the RBI was deemed insufficient, as section 10A(3) does not specify such a possibility.

Assessee's Defense:
The assessee's counsel argued that the auditor's report did not contain any negative remarks and explained how the requirements under section 10A(3) were met. The counsel provided various documents, including the ledger copy of Workflex Solutions LLC, the membership interest subscription agreement, and the RBI approval letter, to support their claim.

Tribunal's Analysis:
The Tribunal examined the provisions of section 10A(3) and the relevant RBI guidelines. It noted that the section specifies two possibilities for compliance: (i) receipt of sale proceeds in convertible foreign exchange in India, or (ii) credit to a separate account with any bank outside India with RBI approval. The Tribunal found that the assessee did not fulfill either condition. The RBI document cited by the assessee was merely an intimation of allotment of a Unique Identification Number (UIN) and not an approval for the overseas direct investment. The Tribunal emphasized that the receipt of sale proceeds in convertible foreign exchange is mandatory for claiming the deduction under section 10A.

Conclusion:
The Tribunal concluded that the assessee was not eligible for the deduction under section 10A on the export sales of ?74,60,891/- as they were not received in convertible foreign exchange. Consequently, the Tribunal set aside the CIT(A)'s order and confirmed the AO's disallowance. The Cross Objection filed by the assessee, which was merely in support of the CIT(A)'s order, was dismissed.

Final Judgment:
- The appeal of the Revenue was allowed.
- The Cross Objection of the assessee was dismissed.