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TMI Blog2014 (1) TMI 1701X X X X Extracts X X X X X X X X Extracts X X X X ..... on 40(a) (ia) of the Act, the question of computing deduction under section 10A of the Act on enhanced income does not arise. - Decided in favour of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... he deduction under section 10A on the ground that the appellant company was entitled to deduction under section 10A on the total income as enhanced by the disallowance of ₹ 1,38,36,518 under section 40(a)(i) without appreciating that deduction is admissible on the profits of business of undertaking and the disallowance of technical nature in terms of section 40(a)(i) does not increase the profits of business of the undertaking. 6. The learned CIT (Appeals) has erred in directing the Assessing Officer to consider the enhanced profits for the purposes of computing deduction under section10A, when form 56F cannot be revised after filing of the return and any failure to furnish the form will disentitle the assessee from the benefit of section 10A. 7. The CIT (Appeals) erred in not appreciating the fact that the deduction under section 10A is admissible only on the profits and gains as derived by an undertaking from exports and technical disallowance does not enhance the profits derived from the exports. 8. The CIT (Appeals) erred in not appreciating that the disallowance under section 40(a)(i) does not in any manner increase the profits derived from the exports. 9. The CIT (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. From the record, it is seen that, in the course of assessment proceedings, the Assessing Officer restricted the assessee's claim for deduction under section 10A of the Act to ₹ 2,96,26,025 as against a claim of ₹ 3,30,28,510 made by the assessee. The Assessing Officer did this by reducing the expenditure of ₹ 54,73,725 and ₹ 1,90,88,594 relating to internet connectivity and travelling incurred in foreign currency form export turnover. On appeal by the assessee, the learned CIT (Appeals) reversed the decision of the Assessing Officer and directed the Assessing Officer to recompute the deduction under section 10A of the Act by reducing the aforesaid expenses incurred in foreign currency on travelling and internet connectivity both from export turnover and total turnover following the decision of the Hon'ble Karnataka High Court in the case of CIT V Tata Elxsi and others reported in 349 ITR 98 (Kar). 5.2 In support of the grounds raised by revenue at S.Nos. 2 to 4, the learned Departmental Representative contended that the learned CIT (Appeals) had erred in directing the Assessing Officer to recompute the deduction under section 10A of the Act aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried on by the undertaking. The formula which is prescribed by sub-section (4) of section 10A is as follows : Profits derived from export of articles or things or computer software. Profits of the business of the undertaking. Export turnover in respect of the articles or things or computer software. Total turnover of the business carried on by the undertaking The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln.2 to s.10A which the expression is defined to mean the consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court held as under : "53. For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of section 10-B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded, both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula….." The formula for computation of the deduction under section 10A would be as under : Profits of the business x export turnover / Total turnover 9 IT(I.T.)A No.1640/Bang/12 & C.O. No.63/Bang/2013 From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore the formula for computation of the deduction under section 10A, would be as under : Profits of the business of the undertaking x Export turn over (Export turnover + domestic turn over) Total Turnover 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the revenue." Respectfully following the aforementioned decision of the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made on the aforesaid payments under section 195 of the Act, the assessee submitted that these payments are in the nature of reimbursement of expenses and therefore do not constitute income in the hands of the non-resident company. This explanation of the assessee that no TDS under section 195 of the Act was to be made in respect of these payments as these persons were its employees for all practical purposes was not accepted by the Assessing Officer. The Assessing Officer held that since these persons were the employees of the UK company, the aforesaid payments were not in the nature of reimbursement of expenses and hence liable for deduction of tax thereon under section 195 of the Act. Since the assessee had failed to deduct tax at source under section 195 of the Act, the entire payment made by the assessee amounting to ₹ 1,38,36,518 was disallowed by the Assessing Officer under section 40(a)(ia) of the Act. 6.4.1 On appeal, the learned CIT (Appeals) confirmed the decision of the Assessing Officer holding that the aforesaid payments by the assessee to AON Ltd., UK are not in the nature of reimbursement and therefore the assessee was required to withhold tax on such payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no income element in the aforesaid impugned payments made by the assessee to the UK Company. The view of the authorities below, however, is that these payments are not in the nature of reimbursement. 7.0 We have heard both parties and carefully perused and considered the material on record. In this regard the following issues / questions arise for our consideration : (i) Whether the assessee is responsible for incurring the expenses towards the employees, necessitating the reimbursement of cross charges ? (ii) Whether these payments made by the assessee to the UK Company were pure reimbursement of expenses and if so whether the said reimbursements constituted income in the hands of the UK Company ? (iii) Whether these payments were liable for TDS under section 195 of the Act ? (iv) Whether these impugned payments were liable for disallowance under section 40(a)(ia) of the Act ? 7.1 This issue at (i) above of whether the assessee is responsible for incurring the expenses towards the employees necessitating the reimbursement of cross charges was considered and elaborately discussed in the decision of the co-ordinate bench of this 15 IT(I.T.)A No.1640/Bang/12 & C.O. No.63/Bang/2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of salaries paid to secondees. Thus, we are of the view that the decision of the co-ordinate bench of the Tribunal in the case of IDS Software 16 IT(I.T.)A No.1640/Bang/12 & C.O. No.63/Bang/2013 Solutions India P. Ltd. (supra) squarely applies to the assessee's case on hand. This decision was followed by the co-ordinate bench in the following cases in which it was held that in the secondment arrangement, the Indian Company reimbursing the salary and other expenses to the foreign entity should be considered as the economic employer of the secondees : (i) Cerner Healthcare Solutions Pvt. Ltd v ITO Bangalore ITAT (ii) Caterpillar India P Ltd v DDIT - Bangalore ITAT - I.T.A. No.630(Bang.)/2010 (iii) Caterpillar India P Ltd v DDIT - Bangalore ITAT - I.T.A. No. 607(Bang.)/2010 (iv) Caterpillar India P Ltd v DDIT - Bangalore ITAT I.T.A. No.149(Bang.)/2010 (v) Caterpillar India P Ltd v DDIT - Bangalore ITAT I.T.A. No.629(Bang.)/2010 (vi) Caterpillar India P Ltd v DDIT - Bangalore ITAT I.T.A. No. 606(Bang.)/2010 (vii) ITO v M/s Ariba Technologies India Pvt. Ltd ITA No. 616/Bang/2011 dated 4.4.2012." In para 15.3 of the decision of the co-ordinate bench of the Tribunal in the case of Abbey B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The issue at (ii) is of whether the payments made by the assessee to the UK Company were pure reimbursement of expenses and whether the said reimbursements constituted income in the hands of the UK Company. On this issue, which was considered by the Special Bench of the Mumbai Tribunal in the case of Mahindra & Mahindra Ltd. (2009) 313 ITR (AT) 263 the Bench held that reimbursements made to foreign company were not liable for deduction of tax at source. This decision was followed by the coordinate bench of this Tribunal in the case of Abbey Business Services (India) (P) Ltd. (supra) wherein at para 14.6 thereof, it has been held as under : 14.6 The Special Bench of the ITAT, Mumbai in the case of Mahindra & Mahindra Ltd Vs. DCIT (2009) 313 ITR (AT) 263 held "when a particular amount of expenditure is incurred and that sum is reimbursed as such, that cannot be considered as having any part of it in the nature of income. Any payment, in order to be brought within the scope of income by way of fees for technical services under section 9(1)(vii), should be or have atleast some element of income in it. Such payment should involve some compensation for the rendering of any services, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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