2008 (2) TMI 486 - AT - Income Tax

Computation of deduction u/s 10A - Exclude the Gain from foreign exchange fluctuation and Interest on fixed deposits - Computation of export turnover - Exclude expenses incurred outside India on the employees for providing technical services outside India - Setting off of b/f losses from the current year business income before allowing the deduction u/s 10A - Development of computer software considered as export of technical services ? Exclude the Gain from foreign exchange fluctuation for the computation of deduction u/s 10A - HELD THAT - Following the decision in case of Renaissance Jewellery (P) Ltd. vs. ITO 2005 (5) TMI 246 - ITAT BOMBAY-G . We are of the view that the gain from the fluctuation of foreign exchange is directly related with the export activities and should be considered as income derived from export activities. It is pertinent that such gain due to fluctuation of foreign exchange arises only due to the export and not due to other activities of the assessee. If the assessee has not exported any article then the question of any gain or loss due to foreign exchange does not arise. Therefore we decide this issue in favour of the assessee and set aside the order of the CIT(A). Accordingly gain on foreign exchange would be included in the total turnover while computing the deduction under s. 10A of the Act. Interest on fixed deposits for the computation of deduction u/s 10A - In view of the decision In the case of CIT vs. Menon Impex (P) Ltd. 2002 (9) TMI 75 - MADRAS HIGH COURT . We are also of the opinion that the interest on deposits cannot be regarded as income derived from industrial undertaking. There is no direct nexus between the interest on deposits and the industrial undertaking. Therefore we decide this issue against the assessee and the order of the CIT(A) in this regard is upheld. Exclusion of expenses incurred towards salaries travelling and other perquisites of the employees in connection with providing technical services outside India for the purpose of section 10A - To understand the meaning of computer software and profits and gains deriving from development of computer software one has to read the s. 10A along with sub-s. (4) Expln. 2(i) and (iv) and Expln. 3 to sub-s. (8) of s. 10A of the Act simultaneously and harmoniously. Explanation 2(i) provides the meaning of computer software and it is clear that any computer programme recorded on any disc tape perforated media or other information storage device or any customized electronic data or any product or service of similar nature as may be notified which is transmitted or exported from India to any place outside India by any means. The exclusion of charges or expenses incurred in foreign exchange in providing technical services outside India by cl. (iv) of Expln. 2 is only those expenses which are incurred for rendering and providing technical services outside India to the other party and not the expenses incurred for technical services utilized for development of computer software on site. Therefore cl. (iv) of Expln. 2 is not derogatory or contradictory to the Expln. 3 and these two provisions deal with separate subjects. We are of the opinion that the technical services provided outside India by the assessee are only for the development of computer software which is also a part of the requirement of the assessee in development of software as part of the requirements and specifications of the clients and therefore the said activity of the assessee comes under the definition of on site development of computer software including services for development of software outside India as provided in Expln. 3 to sub-s. (8) of s. 10A of the Act. Therefore we hold that the expenses incurred on salaries travelling and other perquisites shall be included in the export turnover of the assessee. We do not agree with the contention of the assessee that in case of exclusion of these expenses from the export turnover the same should be excluded from the total turnover while deciding the deduction under s. 10A as held by the Hon ble apex Court in the case of CIT vs. K. Ravindranathan Nair 2007 (11) TMI 10 - SUPREME COURT . It is clear that independent income does not form part of the profits and gains and also shall not form part of export turnover but the same shall be included in the total turnover while computing the deduction. As a result the issue is decided in favour of the assessee and the order of the CIT(A) is set aside in this regard. Setting off of b/f losses from the current year business income before claiming deduction u/s 10A - We are of the view that the CIT(A) was not justified in holding that the total income of the assessee for any relevant assessment year is required to be computed after taking into consideration the carried forward losses incurred after 1st April 2001 and after setting off the loss if there is any positive income is left the same is exempted under s. 10A. We accordingly set aside the impugned order of the CIT(A) and allow the deduction under s. 10A without setting off the brought forward losses. This issue is thus decided in favour of the assessee and against the Revenue. In the result the appeal is partly allowed.

Issues Involved:
1. Exclusion of foreign exchange fluctuation gains from business profits for deduction under Section 10A.
2. Exclusion of interest on fixed deposits from business profits for deduction under Section 10A.
3. Exclusion of expenses incurred outside India on salaries, traveling, and other perquisites in connection with providing technical services outside India.
4. Determination of whether the appellant is engaged in providing technical services outside India.
5. Set-off of brought forward loss and unabsorbed depreciation against business income before allowing deduction under Section 10A.
6. Deletion of interest levied under Section 234B.

Detailed Analysis:

1. Exclusion of Foreign Exchange Fluctuation Gains:
The assessee argued that foreign exchange fluctuation gains are directly related to export activities and should not be treated as separate income. The Tribunal referenced the case of Renaissance Jewellery (P) Ltd. vs. ITO, where it was held that profits from foreign exchange gains are directly referable to the articles and things exported and should be treated similarly to sale proceeds. The Tribunal concluded that foreign exchange gains are directly related to export activities and should be included in the total turnover while computing the deduction under Section 10A. Therefore, the order of the CIT(A) excluding these gains was set aside.

2. Exclusion of Interest on Fixed Deposits:
The assessee contended that the interest income from fixed deposits was incidental to business activities and should be eligible under Section 10A. However, the Tribunal upheld the CIT(A)'s decision, referencing CIT vs. Menon Impex (P) Ltd., which established that interest on deposits does not have a direct nexus with the business of the industrial undertaking and cannot be regarded as income derived from the industrial undertaking. Consequently, the interest income was excluded from the business profits for the purpose of Section 10A.

3. Exclusion of Expenses Incurred Outside India:
The assessee claimed that expenses on salaries, traveling, and perquisites incurred outside India were related to the development of software and not for providing technical services to other parties. The Tribunal examined Section 10A and its explanations, concluding that expenses incurred for technical services utilized for the development of software on-site should be included in the export turnover. The Tribunal referenced the case of Infosys Technologies Ltd., where it was held that technical services provided outside India for software development are part of the export turnover. Thus, the expenses incurred on salaries, traveling, and perquisites were included in the export turnover.

4. Engagement in Providing Technical Services Outside India:
The Tribunal agreed with the assessee that the technical services provided outside India were for the development of computer software and not for rendering consultancy services. The Tribunal held that these activities fall under the definition of on-site development of computer software, as per Explanation 3 to sub-section (8) of Section 10A. Therefore, the expenses related to these activities were included in the export turnover.

5. Set-off of Brought Forward Loss and Unabsorbed Depreciation:
The assessee argued that the deduction under Section 10A should be allowed without setting off brought forward losses and unabsorbed depreciation. The Tribunal referenced several cases, including CIT vs. Mother India Refrigeration Industries (P) Ltd. and CIT vs. Smt. P.K. Kochammu Amma Peroke, which support the view that deductions under Section 10A should be computed independently of brought forward losses. The Tribunal concluded that the CIT(A) was incorrect in setting off brought forward losses before giving the exemption under Section 10A. The deduction under Section 10A should be allowed without setting off brought forward losses, and the order of the CIT(A) was set aside.

6. Deletion of Interest Levied Under Section 234B:
The Tribunal did not specifically address the issue of interest levied under Section 234B in the provided judgment. Therefore, no detailed analysis is available for this issue.

Conclusion:
The appeal was partly allowed, with the Tribunal setting aside the CIT(A)'s decisions on the inclusion of foreign exchange gains and the set-off of brought forward losses, while upholding the exclusion of interest on fixed deposits from business profits. The expenses incurred outside India on salaries, traveling, and perquisites were included in the export turnover for the purpose of computing the deduction under Section 10A.

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