2021 (9) TMI 350 - AT - Income Tax

Deduction claimed u/s 10A - exclude expenditure incurred in foreign currency from export turnover while computing deduction u/s 10A - HELD THAT - As relying on own case 2021 (6) TMI 987 - ITAT BANGALORE we restore this issue to the file of Ld CIT(A) for examining it afresh. Reduce expenses incurred towards telecom charges and expenditure incurred in foreign currency from both export turnover and total turnover while computing deduction u/s 10A - It is now settled that the amount reduced from the export turnover has to be reduced from the total turnover also as held in the case of HCL Technologies Ltd 2018 (5) TMI 357 - SUPREME COURT Accordingly, the decision rendered by Ld CIT(A) on this issue does not require interference TP adjustment in respect of Software development services (IT services) - Comparable selection - HELD THAT - Exclusion of companies functionally different from that of assessee - companies with RPT in excess of 15% of operating revenues need to be rejected. Rejection of deduction u/s 10A in respect of sale proceeds which have not been realised within a period of six months - HELD THAT - We notice that the circular issued by RBI allowed a period of 12 months for realisation of export proceeds. Accordingly, we direct the AO to recompute the deduction u/s 10A of the Act by considering the permitted period of realisation of export proceeds as 12 months. Disallowance u/s 14A - AO noticed that the assessee has earned exempt dividend income from mutual funds - AO computed disallowance under Rule 8D(2)(iii) @ 0.50% of average value of investments - HELD THAT - The assessee has made fresh investments in six schemes of mutual funds during this year, out of which three schemes fall under Growth/reinvestment schemes. Considering the less number of schemes, in our view, it may not be proper to apply Rule 8D mechanically. Accordingly, we are of the view that the disallowance may be estimated to meet the requirements of sec.14A of the Act. Accordingly, we estimate the disallowance u/s 14A at ₹ 2.00 lakhs and in our view, the same would meet the requirements of the provisions of sec.14A of the Act. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance u/s 14A to ₹ 2.00 lakhs. Disallowance of expenses on foreign language training of spouses of employees - AO disallowed the above said claim holding that the expenses incurred on spouses of employees for imparting training in foreign language is not for the purposes of business - CIT(A) also confirmed the same - HELD THAT - CIT(A) has held that the payment for language skill enhancement of spouses of employees has got no link with the business of the assessee. In our view, the Ld CIT(A) was justified in holding so, since we also do not find any connection between the expenditure and the business of the assessee. Accordingly, we confirm the disallowance made by the AO. Short credit of TDS amount - HELD THAT - Since this issue requires verification of factual aspects, we restore this issue to the file of the AO.

Summary

Issues Involved:
1. Exclusion of expenditure incurred in foreign currency from export turnover for deduction under Section 10A.
2. Deduction of telecom charges from total turnover.
3. Selection of comparable companies for transfer pricing adjustments in the software development segment.
4. Selection of comparable companies for transfer pricing adjustments in the ITES segment.
5. Realization period of export proceeds for deduction under Section 10A.
6. Disallowance under Section 14A for expenditure attributable to earning exempt income.
7. Disallowance of expenses on foreign language training for spouses of employees.
8. Short credit of TDS amount.

Detailed Analysis:

1. Exclusion of Expenditure Incurred in Foreign Currency from Export Turnover for Deduction under Section 10A:
The revenue challenged the CIT(A)'s decision to not exclude ?111,35,86,857/- incurred in foreign currency from the export turnover. The assessee argued that this exclusion applies only to export turnover from providing technical services outside India and not to the export of computer software. The Tribunal restored this issue to the CIT(A) for fresh examination, consistent with earlier years' decisions in the assessee's own case.

2. Deduction of Telecom Charges from Total Turnover:
The CIT(A) directed the AO to deduct telecom charges and expenditure incurred in foreign currency from both export turnover and total turnover while computing deduction under Section 10A. This decision was upheld by the Tribunal, aligning with the Supreme Court's ruling in HCL Technologies Ltd.

3. Selection of Comparable Companies for Transfer Pricing Adjustments in the Software Development Segment:
The CIT(A) applied turnover and RPT filters, leading to the exclusion of certain companies. The Tribunal upheld the application of the turnover filter and modified the RPT filter to 15%. Consequently, companies like Flextronics Software, iGate Global Solutions Ltd, Persistent Systems Ltd, and Sasken Communication Technologies Ltd were included as comparables, while Persistent Systems Ltd was excluded based on functional dissimilarity.

4. Selection of Comparable Companies for Transfer Pricing Adjustments in the ITES Segment:
Similar to the software development segment, the CIT(A) applied turnover and RPT filters, excluding several companies. The Tribunal upheld the turnover filter and modified the RPT filter to 15%. Companies like Aditya Birla Minacs Worldwide Ltd, Datamatics Financial Services Ltd, e4e Healthcare Solutions Ltd, and Spanco Ltd were included as comparables, while E-clerx Services Ltd was excluded based on functional dissimilarity.

5. Realization Period of Export Proceeds for Deduction under Section 10A:
The AO reduced the deduction under Section 10A for unrealized export proceeds within six months. The Tribunal directed the AO to consider the RBI's circular allowing a 12-month realization period for export proceeds, thereby recomputing the deduction.

6. Disallowance under Section 14A for Expenditure Attributable to Earning Exempt Income:
The AO disallowed ?29,04,760/- under Section 14A, which was confirmed by the CIT(A). The Tribunal, considering the limited number of investment schemes, estimated the disallowance at ?2.00 lakhs, directing the AO to restrict the disallowance accordingly.

7. Disallowance of Expenses on Foreign Language Training for Spouses of Employees:
The AO disallowed ?10,992/- incurred on foreign language training for spouses of employees, which was confirmed by the CIT(A). The Tribunal upheld this disallowance, finding no business connection between the expenditure and the assessee's business.

8. Short Credit of TDS Amount:
The assessee claimed a short credit of TDS amounting to ?1,98,67,264/- instead of ?1,97,61,981/- granted by the AO. The Tribunal restored this issue to the AO for verification and appropriate action.

Conclusion:
The Tribunal partly allowed both the revenue's and the assessee's appeals, providing detailed directions on each issue for further examination or modification as necessary. The decisions were based on precedents, functional analysis, and adherence to legal provisions.