2013 (6) TMI 593 - AT - Income Tax

Calculation of eligible exemption u/s 10A - whether communication and internet charges attributable to the delivery of computer software and expenses incurred in foreign exchange in providing the technical services outside India be included - Held that - As decided in ITO Vs. Sak Soft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D for the purpose of applying the formula under sub-section (4), the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to the excluded both from the export turnover and from the total turnover, which are the numerator and denominator respectively in the formula. In favour of assessee. Computation of arm s length price - contention of the department that the fund transferred to the subsidiaries on account of share premium without any interest and the assessee could not furnish any such analysis to show that the premium paid was at arm s length - Held that - The monies parked with its subsidiaries in the form of share premium have to be treated as loan transactions. Vide order sheet noting dated 28/06/2010 and 14/10/2010, the tax payer was asked to justify the funds given to its AEs in the form of share premium on the above lines. There is no compliance from the taxpayer. Being so, the TPO computed notional interest on that and disallowed the same. CIT(A) considered certain datas furnished by the assessee and allowed the claim of the assessee. Thus it is appropriate to remit the issue back to the file of the AO for deciding the issue afresh & assessee directed to place all the necessary evidences before AO what was placed before the CIT(A) for re consideration. Appeal of revenue allowed for statistical purposes.

Summary

Issues Involved:
1. Calculation of eligible exemption under Section 10A of the Income Tax Act.
2. Arm's length interest on funds given to subsidiaries in the form of share premium.
3. Interest on loans given to subsidiaries.

Detailed Analysis:

1. Calculation of Eligible Exemption Under Section 10A of the Income Tax Act:
The assessee company, engaged in IT-enabled services, filed its return for the assessment year 2007-08, claiming a deduction under Section 10A amounting to Rs. 51,05,98,237/-. The Assessing Officer excluded communication, internet, and other charges from the export turnover while calculating the deduction under Section 10A. The CIT(A), relying on the case of Patni Telecom Pvt. Ltd. Vs. ITO, held that these charges should be reduced from both the export turnover and the total turnover. This decision was upheld by the Tribunal, which referenced the Special Bench decision in the case of ITO Vs. Sak Soft Ltd., confirming that such expenses should be excluded from both the export and total turnover for the purpose of Section 10A exemption calculation.

2. Arm's Length Interest on Funds Given to Subsidiaries in the Form of Share Premium:
The assessee had made significant investments in its subsidiaries, including a share premium of Rs. 131,17,01,796/-. The Assessing Officer treated this share premium as a deemed loan and computed notional interest, which was disallowed. The CIT(A) found no evidence to support the claim that the share premium was actually a loan and deleted the addition. However, the Tribunal noted that the assessee failed to justify the premium paid as per arm's length principles and remitted the issue back to the Assessing Officer for fresh consideration. The assessee was directed to provide all necessary evidence to substantiate the transaction.

3. Interest on Loans Given to Subsidiaries:
The CIT(A) confirmed the addition of Rs. 2,31,66,591/- as interest on loans given to subsidiaries, as the assessee could not provide evidence of lower risk in its loans. The Tribunal referred to the decision of the coordinate bench in the case of M/s Four Soft Ltd., which held that the arm's length price for international loans should be determined using the LIBOR rate. The Tribunal remitted the issue back to the Assessing Officer to verify the actual average LIBOR rate and adopt it for the assessment year under consideration. The assessee was instructed to provide all material evidence to support its claim.

Conclusion:
The Tribunal dismissed the revenue's appeal regarding the calculation of eligible exemption under Section 10A. It remitted the issues concerning arm's length interest on funds given to subsidiaries and interest on loans given to subsidiaries back to the Assessing Officer for fresh consideration, directing the assessee to provide all necessary evidence. The appeals were allowed for statistical purposes.