2013 (11) TMI 183 - AT - Income Tax

Deduction u/s 10A - Reduction of telecommunication expenses and expenses incurred in foreign currency - Held that - for the purpose of applying the formula under sub-section (4) of section 10B, 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 be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula - Following decision of CIT v M/s Tata Elxsi Ltd. & Others 2011 (8) TMI 782 - KARNATAKA HIGH COURT - Decided against Revenue.

Summary

Issues Involved:
1. Re-computation of deduction under section 10A of the Income Tax Act, 1961 by excluding telecommunication expenses and foreign currency expenditure from export turnover without a corresponding reduction from total turnover.

Issue-wise Detailed Analysis:

1. Re-computation of Deduction under Section 10A:
The core issue in these appeals is the re-computation of the deduction under section 10A of the Income Tax Act, 1961. The assessee, a company engaged in software development services, claimed deductions under section 10A for the assessment years 2006-07 and 2008-09. The Assessing Officer (AO) restricted these deductions by excluding telecommunication expenses and foreign currency expenditure from the export turnover without a corresponding reduction from the total turnover. For the assessment year 2006-07, the AO reduced the deduction from Rs.1,91,19,645/- to Rs.1,80,84,981/- by excluding Rs.68,93,405/- (foreign currency expenditure) and Rs.16,53,000/- (telecommunication expenditure) from the export turnover. Similarly, for the assessment year 2008-09, the AO reduced the deduction from Rs.3,81,03,677/- to Rs.2,27,99,645/- by excluding Rs.2,66,41,716/- (foreign currency expenditure) and Rs.46,95,933/- (telecommunication charges).

2. Appeal to CIT(A):
The assessee appealed against the AO's orders to the Commissioner of Income Tax (Appeals) [CIT(A)]-I, Bangalore. The primary contention was that the AO erred in recomputing the deduction by excluding telecommunication expenses and foreign currency expenditure from the export turnover without a corresponding reduction from the total turnover. The CIT(A) allowed the appeals, directing the AO to recompute the deduction by excluding these expenses from both the export turnover and the total turnover. The CIT(A) based this decision on the Karnataka High Court ruling in CIT v Tata Elxsi Ltd., which held that expenses excluded from the export turnover should also be excluded from the total turnover to maintain parity.

3. Revenue's Appeal to ITAT:
The revenue appealed against the CIT(A)'s orders to the Income Tax Appellate Tribunal (ITAT), contending that the CIT(A) erred in directing the AO to recompute the deduction by excluding telecommunication expenses and foreign currency expenditure from both the export turnover and the total turnover. The revenue argued that there is no provision in section 10A requiring these expenses to be excluded from the total turnover and that the CIT(A) wrongly relied on the Karnataka High Court decision, which the department had not accepted and had recommended for an SLP before the Supreme Court.

4. ITAT's Decision:
The ITAT dismissed the revenue's appeals, upholding the CIT(A)'s orders. The ITAT relied on the Karnataka High Court's decision in CIT v Tata Elxsi Ltd., which emphasized that for computing deductions under section 10A, expenses excluded from the export turnover must also be excluded from the total turnover. The ITAT noted that excluding these expenses only from the export turnover without a corresponding reduction from the total turnover would lead to anomalies and absurd results, contrary to the legislative intent of section 10A as an incentive for exporters. The ITAT also referenced similar rulings from the Mumbai High Court in Gem Plus Jewellery India Ltd. and the Special Bench in Sak Soft Ltd., which supported the principle of maintaining parity between the numerator (export turnover) and the denominator (total turnover) in the deduction formula under section 10A.

Conclusion:
The ITAT concluded that the CIT(A) was correct in directing the AO to exclude telecommunication expenses and foreign currency expenditure from both the export turnover and the total turnover while calculating the deduction under section 10A. Consequently, the revenue's appeals for the assessment years 2006-07 and 2008-09 were dismissed.