Case Law Details
Navayuga Info tech Private Limited Vs DCIT (ITAT Hyderabad)- Expenditure incurred on foreign travel, spent in foreign exchange, is to be reduced from the export turnover for the purpose of the computation of the deduction under s 10A. Interest on term deposits, profit on exchange variation, etc, do not form part of the profits and gains derived from the industrial undertakings qualifying for the exemption under s 10A.
The mere fact that the deposit made was for the purpose of obtaining letters of credit which were used for the purpose of the business of the industrial undertaking does not establish a direct nexus between the interest and the industrial underrating. As rightly held by the lower authorities, the interest income for all the years under consideration has to be assessed as income from other sources and were therefore not part of profits and gains derived from the industrial undertakings qualifying for exemption under section 10A of the Act. In view of the above, we confirm the orders of lower authorities and decide this issue against the assessee.
Navayuga Infotech Private Limited VS DCIT
ITAT Hyderabad
ITA Nos. 1087 to 1092/Hyd/09 & 1099/Hyd/09
ITA Nos. 1082 to 1086/Hyd/09
Date of Decision 11.02.2011
O R D E R
Per Bench:
These twelve appeals, seven by the assessee and five by the Revenue are directed against separate orders of the CIT (A)-I, Hyderabad all dated 25th August, 2009 and they pertain to the assessment year 2003-04 to 2006-07. Since common and identical issues are involved in all these appeals, these are clubbed together and disposed off by this consolidated order for the sake of convenience.
2. First let us deal with the appeals filed by the Revenue. The only effective and common ground raised by the revenue in its all appeals is with regard to the exclusion of expenditure incurred in foreign exchange from the export turnover (numerator in the calculation) should also be reduced from the total turnover (denominator in the calculation) for the purpose of arriving at the deduction under section 10A of the Income-tax Act.
3. The learned departmental representative submitted that the very intention of the introduction of section 10A is to encourage inflow of foreign exchange into the country to attain the object of achieving the favorable balance of trade. If the expenditure incurred in foreign exchange ought to be reduced from both the turnover and the total turnover as stated in the Explanation 2(iv) to section 10A the very purpose of introduction of section 10A is defeated and the impact on restricting the deduction will be nullified. Hence, the CIT (A) is not correct in his findings. On the other hand, the learned counsel for the assessee submitted that the issue is covered in favor of the assessee relying on various decisions of this Tribunal.
4. We have considered the rival submission of the parties and perused the material available on record. This issue is squarely covered by the decisions of various benches of this Tribunal including the jurisdictional Bench of ITAT, Hyderabad in the case of M/s. Ex-band (India) Pvt. Limited Hyderabad vs. Into, Circle 2(1) and in ITA Nos. 983 and 984/Hyd/2006, in the case of ITO vs. D E Block India Software Pvt. Limited as also in the case of Patni Telecom Pvt. Ltd., formerly Cymbal Information Services Pvt. Limited vs. ITO ward -1(1), Hyderabad in ITA No.354/Hyd/2006 for assessment year 2000-01 and in ITA No.5/Hyd/2005. This view has also been upheld by ITAT Special Bench, Chennai in the case of ITO vs. Sak Soft Ltd (2009-TIOL-187-ITAT-Mad-SB), dated 6-3-2009. Accordingly, we do not see any infirmity in the order of the CIT (A) in directing the assessing officer to reduce the expenditure incurred in foreign exchange from the total turnover also while computing the deduction under section 10A of the Act. Accordingly, these appeals filed by the revenue are stand dismissed.
5. Now let us deal with the assessee’s appeals. For the sake of brevity, we will deal with the facts as mentioned in ITA No. 1092/Hyd/2009 for the assessment year 2006-07. Brief facts of the case are that the assessee-company engaged in the development of computer software, had filed its return of income on 30-11-2006 admitting taxable income under the normal provisions of the Act at Rs. 31,65,864/- after claiming exemption under section 10A of the Act of Rs. 97,89,755/-. Consequent to a search operation under section 132 of the Act in the Navayuga group of cases, the assessee was issued notice under section 153A for filing of the return of income. In response to the same, the assessee filed return of income on 11-12-2007 admitting the same income as was originally returned. In course of the assessment proceedings, the assessing officer recomputed the deduction under section 10A of the Act. While doing so, the assessing officer excluded the foreign travel expenses of Rs. 17,52,851/- which was spent in foreign exchange from the export turnover holding that the said expenditure was for providing technical services which needs to be reduced from the export turnover. Similarly, the assessing officer excluded the other income of Rs. 2,86,267/- comprising interest on term deposits, profit on exchange variation etc., from the net profits for the purpose of computing the deduction under section 10A of the Act. Therefore, the allowable deduction under section 10A was arrived at Rs. 92,65,739/- as against Rs. 36,89,880/- Aggrieved by the order of the assessing officer, the assessee went in appeal before the CIT (A). On appeal, the CIT (A) upheld the action of the assessing officer that the expenditure incurred in foreign exchange was incurred in connection with providing technical services outside India to its clients. Hence, the CIT (A) confirmed the action of the assessing officer in reducing the amount from export turnover for the purpose of computing eligible exemption under section 10A of the Act. By following the various decisions of the Tribunal including the jurisdictional Tribunal’s decision in the case of M/s Ex-band (India) Pvt. Limited, Hyderabad vs. ITO (supra) and the decision of the Special Bench, Chennai ITAT in the case of ITO vs. Sak soft directed the assessing officer to reduce the expenditure in foreign exchange from the total turnover also while computing the deduction under section 10A of the Act. Hence, the assessee is in appeal before us against the findings of the CIT (A) with regard to the interest income to be excluded for the purpose of computation under section 10A of the Act and also reducing the amount of expenditure incurred in foreign exchange from the export turnover for the purpose of computation of deduction under section 10A of the Act.
6. We have considered the rival submissions and perused the materials available on record. With regard to the first effective ground relating to exclusion of expenditure incurred in foreign currency from export turnover, it is the contention of the learned counsel for the assessee that the department is not justified in excluding Rs. 17.53 lakhs from the export turnover without appreciating the fact that the part of the expenditure was incurred in Indian currency and balance of expenditure incurred in foreign currency for the purpose of development of software or training the personnel and was only paid towards maintenance of the employees. We find that the issue is covered in favour of the assessee by the decision of the jurisdictional Tribunal in the case of Patni Telecom (Pvt.) Ltd., vs. ITO reported in 308 ITR (AT) 414 wherein it was held that expenditure incurred for the development of software, travelling allowance expenses not in connection with providing technical services are not in the nature of expenditure for the technical services and hence such expenditure not to be excluded from consideration received in convertible foreign exchange for the purpose of computation of deduction under section 10A of the Act. Respectfully following the same, we allow the ground raised by the assessee on this issue and direct the assessing officer not to reduce the expenditure under discussion from the export turnover for the purpose of computation of deduction under section 10A of the Act.
7. The second effective ground of appeal is relating to the exclusion of other income from the business profit for computing deduction under section 10A of the Act. We find that the issue is already settled by various judgements/ decisions of the Courts/ Tribunal against the assessee and in favour of the department. The High Court of Kerala in the case of CIT vs. G. Sathish Nair reported in 264 ITR 377 had held that even in a case where margin money was deposited with a bank for opening letter of credit for the purpose of importing raw materials, the interest received on such deposits has to be assessed under the head other sources. The Delhi bench of the Tribunal in the case of Global Ventedge P. Ltd vs. DCIT reported in 1 ITR [Trib] 326, had held that interest earned on fixed deposits and miscellaneous income was not the profit derived by an undertaking from export. Section 10A grants exemption only in respect of such profits and gains which are derived by an undertaking from the export of articles or things or computer software. The Apex Court in the case of Cambay Electric supply industrial Co. ltd., reported in 113 ITR 84 held that the words ‘derived from’ are narrower in scope than the words ‘ attributable to’. Similarly in the case of Sterling foods reported in 237 ITR 579, the Apex Court held that unless the source of income is from an industrial undertaking, such income cannot be regarded as derived from an industrial undertaking. On similar view, the Madras High court in the case of CIT vs. Me-non Imp ex P. ltd., reported in 259 ITR 403 had held that the interest received by the assessee was on deposits made by it in the banks. It is the deposits which is the source of income. The mere fact that the deposit made was for the purpose of obtaining letters of credit which were used for the purpose of the business of the industrial undertaking does not establish a direct nexus between the interest and the industrial underrating. As rightly held by the lower authorities, the interest income for all the years under consideration has to be assessed as income from other sources and were therefore not part of profits and gains derived from the industrial undertakings qualifying for exemption under section 10A of the Act. In view of the above, we confirm the orders of lower authorities and decide this issue against the assessee.
8. Similar and identical grounds were taken by the assessee in ITA Nos. 1087 to 1091/Hyd/09 & 1099/Hyd/09. We have discussed in detail the issues raised by the assessee in these appeals while adjudicating the appeal in ITA No. 1092/Hyd/10. In view of the above, the assessing officer is directed to follow our observations and directions contained in paras- 6 and 7 of this order in so far as the grounds raised by the assessee in these appeals are concerned.
9. In the result, all the appeals of the assessee are partly allowed whereas those of the revenue are dismissed.
Order pronounced in the Court on 11-02-2011.
