2018 (5) TMI 1081 - AT - Income Tax

Exclusion of proportionate unbilled revenue from the export turnover while computing deduction under section 10A - Held that - The assessee has duly accounted for the said work done following the revenue recognition as per the accounting standard 9 issued by ICAI. Moreover, the assessee is consistently following the practice of revenue recognition of unbilled revenue in its business which is accepted by the revenue in the past. The case of the assessee is also squarely covered by the decision of co-ordinate bench of the Tribunal in the case of M/s. iNautix Technologies India Pvt. Ltd. vs. ACIT (2012 (12) TMI 615 - ITAT CHENNAI) wherein a similar issue has been decided that the amount of unbilled revenue should be included in the export turnover and also in the total turnover for the purpose of calculating deduction u/s 10A of the Act - Decided in favour of assessee. Excluding the proportionate revenue earned from onsite work subcontracted to its associated enterprise while computing under section 10A of the Act - Held that - The case of the assessee is squarely covered in the case of CIT vs. M/s. Mphasis Software and Service India Pvt. Ltd. (2015 (10) TMI 2062 - KARNATAKA HIGH COURT) wherein it has been held that profit is attributable to onsite work of development of software through sub-contracting of certain operation to AEs is part of the net profit for the purpose of claiming deduction under section 10A. We set aside the order of Ld. CIT(A) and direct the AO to allow the deduction in respect of sub-contracting amount - Decided in favour of assessee.

Summary

Issues:
1. Exclusion of unbilled revenue from export turnover for deduction under section 10A.
2. Exclusion of revenue earned from onsite work subcontracted to associated enterprise for deduction under section 10A.

Issue 1: Exclusion of unbilled revenue from export turnover for deduction under section 10A:
The assessee appealed against the CIT(A)'s decision to exclude unbilled revenue from the export turnover while computing deduction under section 10A. The AO observed unbilled revenue in the balance sheet and excluded it from the export turnover, reducing the deduction under section 10A. The CIT(A) affirmed this decision without detailed findings. The assessee argued that unbilled revenue represented work done but not billed due to pending milestones, following accounting standards. They cited precedents where unbilled revenue was included in both total and export turnover for section 10A deduction. The DR supported the AO and CIT(A) decisions. The tribunal noted the consistent practice of including unbilled revenue in turnover and export turnover for section 10A, following precedents. They directed the AO to include unbilled revenue in the export turnover for deduction under section 10A.

Issue 2: Exclusion of revenue earned from onsite work subcontracted to associated enterprise for deduction under section 10A:
The AO excluded revenue earned from onsite work subcontracted to an associated enterprise from the deduction under section 10A. The CIT(A) dismissed the appeal, citing the assessee's failure to challenge the order of the Principal CIT under section 263. The assessee referred to a Karnataka High Court decision supporting the inclusion of such income for section 10A deduction. The tribunal found that the profit from subcontracting operations to AEs onsite is part of the net profit for section 10A deduction, as per the Karnataka High Court decision. They set aside the CIT(A) order and directed the AO to allow the deduction for the subcontracting amount.

This detailed analysis covers the issues of exclusion of unbilled revenue and revenue earned from onsite work subcontracted to an associated enterprise for deduction under section 10A, providing a comprehensive overview of the tribunal's decision and the arguments presented by the parties involved.