2012 (6) TMI 632 - AT - Income Tax

Deduction u/s 10A - denial on ground of non-satisfcation of conditions of Section 10A - change in organization status of STPI undertaking - assessee company entirely held by M/s. Samsung Electronics Company Ltd., South Korea (SECL), engaged in the business of software development for its parent company - Held that - Assessee undertaking existed in the same place, form and substance and did carry on the same business before and after the change in the legal character of the form of the organization. Formerly it was a branch establishment of a non-resident company/foreign company, but later on it was converted into a subsidiary company. However, for the above change of organization status, same unit continued to function throughout the time and even Software Technology Parks of India (STPI) authority gave the approval for transfer of STP activities of M/s. SECL to the assessee w.e.f. 01.12.2005. Therefore a mere organizational change was not a ground for the AO to hold that the assessee was not entitled for deduction u/s. 10A within the meaning of section 10A(2) - Decided in favor of assessee. For the purpose of computation of deduction u/s. 10A, if any expenditure is excluded from the export turnover, the same has to be excluded from the total turnover also.

Issues Involved:
1. Denial of deduction claim under Section 10A of the Income Tax Act.
2. Exclusion of expenditure incurred in foreign currency from export turnover but not from total turnover.
3. Charging of interest under Sections 234B and 234D of the Income Tax Act.

Detailed Analysis:

Issue 1: Denial of Deduction Claim under Section 10A

The appellant contested the denial of a deduction claim amounting to Rs. 23,17,32,627 under Section 10A of the Income Tax Act. The key facts revealed that the appellant, a wholly-owned subsidiary of M/s. Samsung Electronics Company Ltd., South Korea, engaged in software development, claimed this deduction for its STPI undertaking. The business was transferred from the parent company's branch office to the appellant through a slump sale. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied the deduction, reasoning that the undertaking was formed by transferring previously used machinery, thus violating Section 10A(2) conditions.

The appellant argued that the transfer was a mere organizational change and cited ITAT decisions in similar cases (DCIT v. LG Soft India Pvt. Ltd. and ITO v. GXS Technology Center Pvt. Ltd.) to support their claim. The ITAT upheld the appellant's contention, emphasizing that the business continued in the same place, form, and substance, merely changing from a branch to a subsidiary. The tribunal noted that the STPI authority approved the transfer, and thus, the organizational change did not disqualify the appellant from claiming the deduction under Section 10A. Consequently, the ITAT directed the AO to allow the deduction claim.

Issue 2: Exclusion of Expenditure Incurred in Foreign Currency

The appellant challenged the exclusion of Rs. 47,89,64,483 incurred in foreign currency from the export turnover without corresponding exclusion from the total turnover. The AO and CIT(A) upheld this exclusion due to the denial of the Section 10A deduction. However, the appellant argued that this issue was covered by the jurisdictional High Court's decision in CIT v. Tata Elxsi Ltd., which mandated that any expenditure excluded from export turnover must also be excluded from total turnover.

The ITAT agreed with the appellant, referencing the Special Bench decision in ITO v. Sak Soft Ltd. and the High Court's affirmation in Tata Elxsi Ltd., which clarified that expenses excluded from export turnover should also be excluded from total turnover for computing deductions under Section 10A. Thus, the ITAT set aside the CIT(A)'s order and directed the AO to exclude the foreign currency expenses from both export and total turnover.

Issue 3: Charging of Interest under Sections 234B and 234D

The appellant disputed the liability for interest under Sections 234B and 234D, arguing that interest should only be levied on the returned income and that no opportunity was provided before levying the interest. Both parties agreed that the issue was consequential to the primary issues.

The ITAT acknowledged the consequential nature of this issue and ordered accordingly, implying that the interest calculations would be adjusted based on the final determination of the primary issues.

Conclusion:

The ITAT allowed the appeal of the assessee, directing the AO to grant the deduction under Section 10A and to adjust the foreign currency expenditure exclusion in line with the established legal precedents. The interest levied under Sections 234B and 234D was to be recalculated based on the revised assessments.

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