2012 (12) TMI 562 - AT - Income Tax

Nature of service in order to calculate export turnover u/s 10B - Whether the expenses incurred in foreign currency on onsite software development outside India was to be excluded from export turnover Assessee contended that it was not rendering any technical services outside India to any third party, but the foreign currency expenses incurred were in connection with its own staff in foreign branch in foreign country - Held that - Since the fact of the case was not similar as quoted by assessee in his favour. Therefore, admittedly these were related to technical services rendered outside India. Hence decides in favour of revenue Assessee has not raise separate billing for such expense to its clients Held that - Once expenses of the nature mentioned in clause (iii) of Explanation 2 to Sec. 10B are incurred, these will have to be excluded from export turnover, whether or not billings of the assessee specifically mentioned such items. Even if such expenses other than on technical services, are incurred in India, it still has to be excluded from export turnover. Appeal decides in favour of revenue & remand back to AO Exclusion of expense from total turnover calculated in relation to Sec. 10B Held that - The items which were excluded by the AO from export turnover by relying on clause (iii) of Explanation 2 to Sec 10B, will have to be excluded from total turnover also for the purpose of computing deduction u/s 10B. Issue decides in favour of assessee & remand back to AO

Issues Involved:
1. Condonation of delay in filing cross-objections.
2. Exclusion of foreign currency expenses from export turnover under Section 10B of the Income-tax Act, 1961.
3. Non-exclusion of such amounts from total turnover.

Detailed Analysis:

1. Condonation of Delay in Filing Cross-Objections:
The cross-objections filed by the assessee were delayed by 117 days. The assessee provided reasons for the delay, and the Revenue did not raise any serious objections. The tribunal found the reasons justifiable, condoned the delay, and admitted the cross-objections.

2. Exclusion of Foreign Currency Expenses from Export Turnover:
The assessee, engaged in e-publishing and photo typesetting for foreign publishers, claimed relief under Section 10B of the Income-tax Act for the assessment years 2005-06, 2006-07, and 2007-08. The Assessing Officer (A.O.) noted that the assessee incurred expenses in foreign currency for business promotion, foreign travel, job work charges, salary, commission, internet charges, training expenses, marketing consultancy expenses, and other operating expenses. The A.O. excluded these expenses from the export turnover as per clause (iii) of Explanation 2 to Section 10B of the Act but did not exclude them from the total turnover.

The assessee argued that these expenses should not be excluded from the export turnover as they were not for technical services rendered to third parties outside India. The CIT(Appeals) agreed with the assessee, citing the Special Bench decision in Zylog Systems Ltd v ITO, which held that expenses incurred in foreign currency for technical services not rendered to third parties should not be excluded from export turnover.

However, the tribunal noted that in the assessee's own case for earlier years (2001-02, 2003-04, and 2004-05), it was held that the services rendered by Ms. Anitha Madhavan were technical in nature. The tribunal emphasized that the decision in Zylog Systems Ltd. did not apply as the assessee did not have a foreign branch, and the expenses were not incurred for its own staff but for an agent. The tribunal concluded that the expenses incurred in foreign currency should be excluded from the export turnover as they were for technical services rendered outside India.

3. Non-Exclusion of Such Amounts from Total Turnover:
The assessee raised the issue that if the expenses were excluded from the export turnover, they should also be excluded from the total turnover. The CIT(Appeals) did not adjudicate on this issue. The tribunal, referring to the Special Bench decision in ITO v. Sak Soft Ltd., held that items excluded from export turnover should also be excluded from total turnover for computing the deduction under Section 10B of the Act. The tribunal directed the A.O. to exclude the foreign currency expenses from both the export turnover and the total turnover while re-computing the deduction.

Conclusion:
In conclusion, the tribunal allowed the appeals of the Revenue and the cross-objections of the assessee. The orders of the CIT(Appeals) were set aside, and the A.O.'s computation was reinstated with the direction to exclude the foreign currency expenses from both the export turnover and the total turnover for the purpose of computing the deduction under Section 10B of the Act.

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