2012 (11) TMI 547 - AT - Income Tax

Exemption u/s 10A - Freight/telecom/insurance/technical services - revision u/s 263 - Held that - As the assessee was not engaged in the business of rendering technical services outside India. The foreign travel expenses incurred in foreign currency are not required to be excluded from the export turnover for the purpose of computing the deduction allowable u/s 10A. It was stated that the assessee was in fact engaged in carrying out call centre activities and back office operations and the same does not amount to rendering technical services outside India. Total turnover is the sum of the export turnover and domestic turnover. If the concerned charges do not form part of the export turnover as per the definition, then there is no scope to include such charges in the total turnover The CIT thereafter, proceeded to hold that there was non-application of mind by the AO on this aspect and therefore, the order of AO was erroneous and prejudicial to the interest of revenue. The CIT also held that what is excluded from the export turnover need not be excluded from the total turnover as contended by the assessee and set aside the order of the AO for fresh consideration by the AO on the aspects discussed by the CIT in his order u/s 263 . AO has taken a possible view and the CIT cannot in exercise of powers u/s 263 seek to substitute his view with that of the AO. On this basis order u/s 263 cannot be sustained and the same is quashed Appeal of assessee is allowed.

Summary

Issues Involved:
1. Computation of deduction under Section 10A of the IT Act, 1961.
2. Exclusion of expenses incurred in foreign exchange from export turnover.
3. Validity of the CIT's order under Section 263 of the IT Act, 1961.

Detailed Analysis:

1. Computation of Deduction under Section 10A of the IT Act, 1961:

The assessee, a software development company, filed its return for AY 2005-06 declaring a loss and claimed a deduction under Section 10A. The computation of eligible deduction under Section 10A is based on the formula: Export turnover x Eligible business profits / Total turnover. The term "export turnover" is defined to exclude freight, telecommunication charges, insurance, and expenses incurred in foreign exchange for providing technical services outside India.

2. Exclusion of Expenses Incurred in Foreign Exchange from Export Turnover:

During the assessment, the AO required the assessee to adjust for freight, telecom, insurance, and technical services expenses while computing the deduction under Section 10A. The assessee reduced communication expenses from both export turnover and total turnover. However, the AO held that such expenses should only be reduced from the export turnover, not the total turnover. The CIT, under Section 263, found the AO's order erroneous and prejudicial to revenue, arguing that foreign travel expenses related to technical services should be excluded from export turnover. The assessee contended that it was engaged in data processing and IT-enabled services, not technical services, and cited several ITAT decisions supporting this view.

3. Validity of the CIT's Order under Section 263 of the IT Act, 1961:

The CIT issued a show cause notice under Section 263, asserting that the AO failed to exclude foreign travel expenses from export turnover. The CIT argued that software developers could render technical services outside India, necessitating such exclusions. The assessee countered that the AO had considered the relevant aspects and taken a plausible view, supported by multiple ITAT decisions. The Tribunal noted that as of the CIT's order date, several judicial pronouncements supported the assessee's stance that expenses incurred in foreign currency need not be excluded from export turnover for software development services.

The Tribunal concluded that the AO's view was a possible one, and the CIT could not substitute his view under Section 263. The Tribunal quashed the CIT's order, emphasizing that the AO had made relevant inquiries and the assessee's claim was consistent with prevailing judicial interpretations.

Conclusion:

The appeal filed by the assessee was allowed, and the CIT's order under Section 263 was quashed. The Tribunal held that the AO's view was a possible one, supported by judicial precedents, and the CIT could not invoke Section 263 merely to substitute his view for that of the AO.