2015 (7) TMI 983 - AT - Income Tax

Re-compute the deduction u/s 10A - disallowance made by the AO was allowed ignoring the facts that the foreign exchange fluctuation gain received has not been earned by the assessee through export of software - Held that - There is no dispute as the assessee engaged in the business of software development realized a higher sale price on account of foreign exchange fluctuation. The assessee by way of a revised return included this gain also in its claim of exemption u/s 10A. Considering the provision of section 10A(1) of the Act and the decisions referred to by the CIT(A) read along with the decision of the Madras High Court in the case of CIT vs Penatsoft (2010 (7) TMI 75 - MADRAS HIGH COURT ), we find that the Revenue s challenge has to fail. The gain in the sale price as a result of fluctuation in the foreign currency has a direct nexus and is of the first degree and cannot be equated to situations where surplus funds are parked in Fixed Deposits yielding interest income . The increase in sale price as a result of currency fluctuation impacts the sale price on which the exemption is to be calculated. The issue under consideration was whether on the ECB loan (external borrowings) which yielded a gain as a result of foreign exchange fluctuation was a capital receipt or a Revenue receipt. Considering the principle laid down by the Apex Court in Woodward Governor (2009 (4) TMI 4 - SUPREME COURT), it was held that it is a Revenue receipt on the principle that if a loss suffered on account of foreign exchange fluctuation is allowable as a Revenue expenditure then the gain on such a receipt would be a revenue receipt. The issue was in the content of utilization of the loan at the relevant point of time. In the facts of the present case, the gain due to foreign exchange fluctuation is in the sale price and not on account of external borrowing. The gain following the principle of FabIndia Overseas Ltd.(1979 (11) TMI 36 - DELHI High Court) can be considered to be arising on account of additional sale proceeds. The view is also supported by the decision of the Madras High Court. Decided against revenue.

Summary

Issues:
1. Correctness of the order dated 21.11.2012 of CIT(A)-IV, New Delhi pertaining to 2009-10 assessment year.
2. Re-computation of deduction u/s 10A and disallowance of &8377; 38,91,437/- made by the AO.

Issue 1: Correctness of the CIT(A) Order
The appellant challenged the order of CIT(A)-IV, New Delhi regarding the 2009-10 assessment year. The dispute revolved around the treatment of foreign exchange gains in relation to section 10A deductions. The AO excluded the foreign exchange gain of &8377; 38,91,437/- from section 10A calculations, categorizing it as "income from other sources." The appellant argued that the gain was directly linked to their software export business and should be considered for section 10A benefits. The CIT(A) directed the AO to re-compute the deduction u/s 10A based on the appellant's explanations and relevant case laws.

Issue 2: Re-computation of Deduction u/s 10A
The primary contention was whether the foreign exchange gain should be included in the section 10A calculations. The appellant maintained that the gain was a result of currency fluctuation impacting the sale price, thus directly related to their export business. The Revenue, however, relied on various judgments emphasizing the term "derived from" and argued against allowing exemption for gains from foreign exchange fluctuations. The Tribunal analyzed the facts and legal precedents cited by both parties. It noted that the gain due to foreign exchange fluctuation was integral to the sale price and not external borrowing, distinguishing it from previous cases. The Tribunal upheld the CIT(A)'s decision, emphasizing that the gain was a direct outcome of the export business, making it eligible for section 10A benefits.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the decision of the CIT(A) to re-compute the deduction u/s 10A and allow the foreign exchange gain in the appellant's section 10A calculations. The judgment highlighted the direct nexus between the gain and the export business, emphasizing that the fluctuation in foreign exchange directly impacted the sale price, making it an integral part of the business profits. The decision was based on a detailed analysis of the facts, legal interpretations, and relevant case laws, ultimately supporting the appellant's position regarding the inclusion of foreign exchange gains in section 10A deductions.