2023 (3) TMI 1341 - AT - Income Tax

Allowability of Provision for discount - whether allowable as expense in the current year? - as contended that said provision for discount was in respect of crystallised liability and the same is to be allowed as deduction since the assessee was consistently following mercantile system of accounting - HELD THAT - Tribunal for AY 2009-10 had accepted the claim of the assessee for provision for discount as an allowable expenditure Further the Department has filed appeal against the said order of the Tribunal for AY 2009-10 before the Hon'ble High Court of Karnataka 2017 (8) TMI 1699 - KARNATAKA HIGH COURT wherein the issue relating to provision for discount was not assailed. In the light of the orders of the Tribunal in assessee s own case for AY 2004-05 and AY 2009-10 which is identical to the facts of the instant case, we reject the grounds of appeal raised by the Revenue. Exclusion of insurance charges from the export turnover for computing 10AA deduction - CIT(A) directed the AO to exclude from export turnover as well as from the total turnover, the insurance charges while computing deduction under Section 10AA - HELD THAT - The insurance charges incurred by the assessee are not attributable to delivery/export of computer software outside India. AO and CIT(A) have failed to appreciate that the assessee is engaged in export of computer software which are developed by the assessee in India. The said software is exported through electronic media, i.e. internet/ digital media with click of a button and same are not physically exported to get it insured. Thus the question of insuring the software exported by assessee does not arise. Such being the case it cannot be said that insurance charges are included in export turnover. The assessee has not charged its customers separately in respect of the insurance charges nor has the assessee included the same in the export turnover nor recovered it from its customers. Export turnover of the assessee does not include the aforesaid expenses. Such being the case, the question of reducing the aforesaid expenditure from the export turnover does not arise. As decided in Tata Elxsi vs. ACIT 2015 (3) TMI 1220 - ITAT BANGALORE if the expenditure incurred on telecommunication charges and insurance charges were not recovered and not included in the export turnover, the Assessing Officer shall not reduce the same from the export turnover We are of the view that there is no necessity to exclude from the export turnover the insurance charges. Therefore, we direct the AO to recompute the deduction under Section 10AA of the Act, keeping in view our aforesaid direction. Appeal filed by the Revenue dismissed.

Summary

Issues Involved:
1. Allowability of provision for discount as an expense.
2. Exclusion of insurance charges from export turnover for computing deduction under Section 10AA of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Allowability of Provision for Discount as an Expense:

The primary issue raised by the Revenue was whether the provision for discount amounting to Rs. 29 crores claimed by the assessee is allowable as an expense. The Assessing Officer (AO) disallowed this provision, deeming it contingent in nature and not added back by the assessee. The AO's decision was based on the department's consistent stance in prior years, despite favorable ITAT orders for the assessee in earlier assessment years.

Upon appeal, the CIT(A) allowed the provision for discount, referencing the Tribunal's order in the assessee's own case for AY 2004-05, where it was held that the provision was a crystallized liability and allowable as the assessee followed the mercantile system of accounting. The CIT(A) noted that the provision was based on actual business volume achieved and was systematically and consistently created.

The Tribunal upheld the CIT(A)'s decision, noting that the provision for discount was scientific and systematic, and had been fully discharged in subsequent years. The Tribunal also referenced similar favorable decisions for the assessee in AY 2009-10, where the Department did not contest this issue further in higher courts. Thus, the Tribunal dismissed the Revenue's appeal, affirming that the provision for discount is an allowable expenditure.

2. Exclusion of Insurance Charges from Export Turnover for Computing Deduction under Section 10AA:

The second issue pertained to the exclusion of insurance charges amounting to Rs. 2,53,00,297/- from the export turnover while computing the deduction under Section 10AA. The AO, supported by the CIT(A), excluded these charges based on Explanation 1(i) to Section 10AA, which states that export turnover does not include freight, telecommunication charges, or insurance attributable to the delivery of articles or things outside India.

The assessee contended that the insurance charges were not attributable to the delivery of computer software outside India, and therefore, should not be excluded from the export turnover. The insurance charges were related to property, business liability, and overseas travel insurance, and were not included in the export turnover nor recovered from customers.

The Tribunal agreed with the assessee, emphasizing that the insurance charges were not related to the delivery of software, which was exported electronically. The Tribunal referenced the Bangalore Bench decision in Tata Elxsi vs. ACIT, which held that if such charges were not recovered and included in the export turnover, they should not be excluded from it. The Tribunal also noted that the Department did not contest this issue in higher courts in similar cases.

Consequently, the Tribunal directed the AO to recompute the deduction under Section 10AA without excluding the insurance charges from the export turnover, thus allowing the assessee's cross objection.

Conclusion:

The appeal filed by the Revenue was dismissed, and the cross objection filed by the assessee was allowed. The Tribunal upheld the CIT(A)'s decision to allow the provision for discount as an expense and directed the AO to include insurance charges in the export turnover while computing the deduction under Section 10AA.