2020 (5) TMI 17 - AT - Income Tax

Eligible profit for deduction u/s.10A - CIT(A) in directing the AO to deduct the export sale proceeds not received within the stipulated period from both the export turnover as well as the total turnover - HELD THAT - Decision of the Ld.CIT(A) is inconsonance with the decision of CIT v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT and also the decision of CIT v. M/s.Maars Software International Ltd. 2019 (3) TMI 578 - MADRAS HIGH COURT components of the total turnover/denominator in the formula would be the quantum of export turnover/numerator plus proceeds from domestic sales. Thus what is 'export turnover' for the purpose of the numerator would have to be the 'export turnover' for the purpose of denominator as well and 'export turnover' cannot assume two different characteristics for two parts of the same formula. Disallowing the loss on account of the exchange rate fluctuation in respect of sale proceeds holding to be a notional - HELD THAT - As decided in OIL NATURAL GAS CORPORATION LTD. VERSUS COMMISSIONER OF INCOME TAX 2010 (3) TMI 81 - SUPREME COURT held that the loss suffered by the Assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI), on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet was an item of expenditure u/s 37(1) notwithstanding that the liability had not been discharged in the year in which the fluctuation in the rate of foreign exchange occurred. Loss claimed by the Assessee on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is allowable as expenditure under Section 37(1) - Decided in favour of the assessee Depreciation on the cost of the imported software from the eligible profits for the deduction u/s.10A - what can be allocated between the STP Unit and the non-STP Units is only indirect expenditure. The expenditure which can be directly be identified with a particular unit cannot be apportioned between the two units - HELD THAT - Admittedly, the AO apportioned the depreciation between the STP units and the non-STP units, but the contention of the assessee is that the depreciation on imported software cannot be apportioned to STP Unit, because it was exclusively used in the domestic sales, is required to be adjudicated with reference to the evidence on record as it is a question of fact. But CIT(A) had not gone into the evidence whether the imported software was used exclusively in the domestic sales or not. In these circumstances, we are of the considered opinion that the matter should go back to the AO to adjudicate the issue as - Whether the imported software was used exclusively in the domestic sales? If so, to exclude the same from the eligible profit for deduction u/s.10A - Appeal filed by the Revenue is partly allowed for statistical purposes.

Summary

Issues:
1. Disallowance of notional loss due to foreign exchange fluctuation
2. Restriction on deduction u/s.10B for export sale proceeds not received within due date
3. Allocation of common expenditure between STP and non-STP divisions
4. Exclusion of depreciation on imported software for deduction u/s.10B

Analysis:
1. The matter was remanded by the High Court. The AO disallowed notional loss due to foreign exchange fluctuation. The CIT(A) partly allowed the loss. The Tribunal reversed the CIT(A)'s decision, restoring the addition. The High Court framed questions of law and remanded the matter for fresh adjudication. The loss on account of foreign exchange fluctuation was held to be allowable as expenditure under Section 37(1) of the Act by following the decision of the Supreme Court. The Tribunal dismissed the ground challenging the disallowance of the loss.

2. The CIT(A) directed to deduct export sale proceeds not received within the stipulated period from both export turnover and total turnover. The Tribunal upheld this decision citing relevant case laws. The Tribunal dismissed the ground challenging this decision.

3. The CIT(A) excluded depreciation on imported software from eligible profits for deduction u/s.10B. The Tribunal directed the matter to be adjudicated by the AO to determine if the imported software was exclusively used in domestic sales. The Tribunal partly allowed the ground for statistical purposes, remanding the issue for further examination by the AO.

4. The appeal filed by the Revenue was partly allowed for statistical purposes. The Tribunal pronounced the order on 26th February, 2020 in Chennai.