2016 (12) TMI 405 - AT - Income Tax

Foreign exchange gain - eligibility for exemption u/s 10A - AO observed that the gain is from reinstatement of balance in EEFC A/c - Held that - The export turnover is always brought into India by way of foreign exchange deposited into the EEFC A/c. The assessee has kept the foreign exchange in the EEFC A/c as it did not require the same immediately for its business purposes. By virtue of the deposits remaining in the EEFC A/c, the assessee has gained on the foreign exchange fluctuation. Merely because the sale consideration is retained in the bank a/c, it will not lose the character of being export consideration. The gain is on a/c of conversion of foreign exchange. We find that similar issue had arisen in the case of Banyan Chemicals Ltd. before a third Member Bench reported in (2008 (12) TMI 296 - ITAT AHMEDABAD ). Thus we hold that the forex gain as on the date of deposit into EEFC A/c only is part of the export turnover Gain on account of the forward contracts has been held to be in the nature of the business income eligible for deduction u/s 10A of the Act. See Majestic Exports vs. JCIT 2015 (7) TMI 936 - ITAT CHENNAI Amount received from its AE towards the reimbursement of the expenditure - ALP adjustment - Held that - Having regard to the rival contentions and the material on record, we find that the reimbursement of the expenditure by the AE to the assessee is also on international transaction. The TPO u/s 92CA of the Act, has not made any ALP adjustment to the reimbursement of expenditure which only shows that the genuineness of the transaction has been accepted. When there is no impact on the profit of the assessee by the said transaction, we agree with the contention of the assessee that it does not have any impact on the computation of income of the assessee. Levy of interest u/s 234A - Held that - As assessee submitted that in the relevant A.Y, the CBDT has extended the time for filing of the returns till 15.11.2011 and the assessee had filed its return of income on 13.11.2011 itself and therefore, the interests u/s 234A of the Act is not chargeable. Since these facts need verification, we deem it fit and proper to remit the issue to the file of the AO for verification of the details and direct the AO to charge interest u/s 234A of the Act only if there is a delay in filing of the return of income inspite of extension of time by the CBDT. This ground is therefore, allowed for statistical purposes.

Summary

Issues Involved:
1. Eligibility of foreign exchange gain for exemption under Section 10A of the Income Tax Act.
2. Treatment of foreign exchange gain from forward contracts.
3. Eligibility of reimbursement of expenses for exemption under Section 10A.
4. Levy of interest under Section 234A.
5. Levy of interest under Sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Eligibility of Foreign Exchange Gain for Exemption Under Section 10A (A.Y. 2009-10):

The primary issue in ITA No.320/Hyd/2016 for A.Y. 2009-10 was whether the foreign exchange gain of ?2,75,260 derived by the assessee was eligible for exemption under Section 10A of the Income Tax Act. The assessee, engaged in software development and design, claimed this deduction, arguing that the forex gain was linked to export consideration deposited in an EEFC account. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied the exemption, treating the gain as "income from other sources" since it was derived from the reinstatement of balance in the EEFC account, not directly from export business. The Tribunal, referencing similar cases (e.g., Banyan Chemicals Ltd.), held that the forex gain on the date of deposit into the EEFC account was part of the export turnover and eligible for Section 10A deduction. Thus, the appeal was dismissed.

2. Treatment of Foreign Exchange Gain from Forward Contracts (A.Y. 2010-11):

In ITA No.3221/Hyd/2016 for A.Y. 2010-11, the assessee contested the exclusion of ?92,14,741 from eligible profits for exemption under Section 10A, arguing that this gain was derived from forward contracts. The AO and CIT(A) treated this as "income from other sources." The Tribunal referenced the decision in Majestic Exports vs. JCIT, where gains from forward contracts were considered business income eligible for Section 10A deduction. Following this precedent, the Tribunal allowed the appeal, recognizing the forward contract gains as part of the business income.

3. Eligibility of Reimbursement of Expenses for Exemption Under Section 10A (A.Y. 2010-11):

The assessee also challenged the exclusion of ?31,83,463, which was reimbursement from its AE, from the eligible profits for Section 10A exemption. The AO and CIT(A) disallowed this, insisting it should pass through the Profit & Loss (P&L) account. The Tribunal noted that the genuineness of the transaction was not disputed and that the reimbursement had no impact on the assessee's profit. Consequently, the Tribunal allowed this ground, recognizing that the reimbursement did not affect the computation of income.

4. Levy of Interest Under Section 234A (A.Y. 2010-11):

The assessee argued against the levy of interest under Section 234A, claiming timely filing of the return by the extended deadline of 15.11.2011. The Tribunal remitted this issue to the AO for verification, directing interest to be charged only if there was a delay despite the extension.

5. Levy of Interest Under Sections 234B and 234C (A.Y. 2010-11):

Regarding the interest under Sections 234B and 234C, the Tribunal noted these were consequential and directed the AO to recompute the interest in accordance with the law, ensuring a fair hearing for the assessee.

Conclusion:

The appeal for A.Y. 2009-10 was dismissed, affirming the non-eligibility of forex gain for Section 10A exemption. For A.Y. 2010-11, the appeal was partly allowed, recognizing the forward contract gains and reimbursement of expenses as eligible for Section 10A exemption, while remitting the interest-related issues for further verification.