2020 (8) TMI 19 - HC - Income Tax

Computing deduction u/s 10AA - expenditure incurred in foreign currency by the appellant - Whether to be excluded from export turnover for the purpose of computing deduction? - finding of the Tribunal that the expenditure incurred in foreign currency by the appellant needs to be excluded from the export turnover for the purpose of computation of deduction - HELD THAT - Appeal before the Tribunal was on the direction of the DRP to exclude the foreign exchange expenditure. Unfortunately, the Tribunal did not discuss the matter but proceeded on the basis that foreign currency expenditures cannot be considered as part of 'export turnover' and at the same time, it cannot form part of 'total turnover'. The Tribunal did not decide as to whether it was expenses incurred by the assessee in respect of services rendered by the assessee outside India. Assessee has explained, nevertheless AO did not take into consideration as to whether there were any services outside India and held against the assessee and proceeded to make a draft assessment. Before the DRP, which is a fact finding expert body, the assessee placed all materials and established that the assessee did not render any services outside India and they operate on a cost plus model and the reimbursement constitute a part of the operating cost which was recovered by the assessee from their associated enterprises. This factual matrix had not been examined by the Tribunal. No useful purpose would be served in remanding the matter to the Tribunal for fresh consideration as submitted by the Revenue as an alternate submission. The principal submission of the Revenue is to support the order passed by the Tribunal and seeking for dismissal of this appeal. Even in the grounds of appeal filed by the Revenue before the Tribunal, a cost plus model of functioning by the assessee appears to be have not been disputed but their contention was that the definition of ''export turnover'' in explanation 1 to Section 10 AA does not distinguish or exclude reimbursement or advances. In our considered view, the issue is not as to whether reimbursement or advances, but the issue is whether these were incurred by the assessee in foreign exchange in respect of rendering services outside India. If it is established that no services have been rendered outside India and the assessee has been reimbursed the actual cost only, the question of exclusion from the 'export turnover' does not arise. The issue in the instant case is whether at all expenses were incurred for rendering any of the services outside India. On facts, it has been established that no such services have been rendered. Therefore, we are of the considered view that the Tribunal fell in error in reversing the decision of the DRP. Appeal filed by the assessee is allowed and the order passed by the Tribunal is set aside

Summary

Issues Involved:
1. Whether the Tribunal erred in excluding the expenditure incurred in foreign currency from export turnover for the purpose of computing deduction under Section 10AA of the Income Tax Act, 1961.
2. Whether the Tribunal's finding on excluding the expenditure incurred in foreign currency from export turnover is vitiated by perversity and arbitrariness.

Issue-Wise Detailed Analysis:

1. Exclusion of Expenditure Incurred in Foreign Currency from Export Turnover:
The assessee, a Private Limited Company operating as a Special Economic Zone (SEZ) unit, filed its return of income for the assessment year 2009-10, claiming a deduction under Section 10AA of the Income Tax Act, 1961. The Assessing Officer excluded certain expenditures incurred in foreign currency from the 'export turnover' for computing the deduction under Section 10AA. The excluded expenditures included travel expenses, IT & technical support services, professional and consultation fees, and reimbursements to Renault Global Management and Nissan Motor Co., Ltd., totaling ?261,572,828.

The assessee contended that only expenditures related to freight, telecommunication charges, and insurance, if attributable to the delivery of articles or things outside India, should be excluded from 'export turnover'. The Dispute Resolution Panel (DRP) agreed with the assessee, directing the Assessing Officer not to exclude these expenditures as they were not incurred for rendering services outside India.

The Tribunal, however, reversed the DRP's decision, holding that foreign currency expenditures should not be considered as part of 'export turnover' or 'total turnover'. The Tribunal did not provide specific reasons for rejecting the DRP's findings and relied on the decision in ITO Vs. Saksoft Limited, directing the Assessing Officer to exclude these expenditures from both 'export turnover' and 'total turnover'.

2. Perversity and Arbitrariness of Tribunal's Finding:
The Tribunal's decision was challenged on the grounds that it did not address the specific contention raised by the Revenue, which argued that the DRP erred in deleting the exclusion of foreign currency expenditures from 'export turnover'. The Revenue's appeal was based on the assertion that the DRP's decision was incorrect because the definition of 'export turnover' under Section 10AA does not distinguish or exclude reimbursements or advances.

The High Court found that the Tribunal did not adjudicate on whether the expenditures were incurred by the assessee for services rendered outside India. The assessee had consistently argued that these expenditures were reimbursements for costs incurred and did not involve any provision of services outside India. The DRP had accepted this position, noting that the expenditures were part of the operating cost base and were recovered from associated enterprises at arm's length markups.

The High Court concluded that the Tribunal failed to consider the factual matrix established by the assessee and the DRP. The Tribunal's decision was found to be erroneous as it did not address whether the expenditures were incurred for services rendered outside India. The High Court held that if no services were rendered outside India and the expenditures were merely reimbursements, they should not be excluded from 'export turnover'.

Conclusion:
The High Court allowed the appeal filed by the assessee, set aside the Tribunal's order, and restored the DRP's decision. The substantial questions of law were answered in favor of the assessee, concluding that the Tribunal erred in excluding the foreign currency expenditures from 'export turnover' for computing the deduction under Section 10AA of the Income Tax Act, 1961.