Income Tax Appellate Tribunal - Delhi
Headstrong Services India Pvt. Ltd., ... vs Assessee on 25 June, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'C' : NEW DELHI)
SHRI A.D. JAIN, JUDICIAL MEMBER
and
BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.4181/Del./2010
(Assessment Year : 2006-07)
ACIT, Circle 16 (1), vs. M/s. Headstrong Services India Pvt. Ltd.,
New Delhi. (Formerly known as Techspan India Pvt. Ltd.),
103, Ashoka Estate, 24, Barakhamba Road,
New Delhi - 110 001.
(PAN : AABCT7650D)
CO No.391/Del/2010
(in ITA No.4181/Del./2010)
(Assessment Year : 2006-07)
ACIT, Circle 16 (1), vs. M/s. Headstrong Services India Pvt. Ltd.,
New Delhi. (Formerly known as Techspan India Pvt. Ltd.),
103, Ashoka Estate, 24, Barakhamba Road,
New Delhi - 110 001.
(PAN : AABCT7650D)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Salil Kapoor, Advocate
REVENUE BY : Shri Satpal Singh, Senior DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
Both, appeal being ITA No.4181/Del/2010 filed by the revenue and Cross Objection No.391/Del/2010 filed by the assessee, emanate from the order of the CIT (Appeals)-XIX, New Delhi dated 25.06.2010. 2 ITA No.4181/Del./2010 CO No.391/Del/2010
2. The assessee company incorporated on October 5, 1998 under the Companies Act, 1956. The assessee is engaged in the development and export of computer software. The business activities during the year under consideration were carried out from NOIDA and Bangalore. Both the units are set up in accordance with the Software Technology Park (STP) Scheme notified by Ministry of Commerce and Industry, Government of India. Both these units were eligible for deduction of profits and gain derived by them u/s 10A of the Income-tax Act, 1961.
3. The grounds of appeal taken by the revenue read as under :-
"1. The Ld. CIT(A) has erred in facts and in law by directing the AO to include the gains of ` 72,96,422/- on account of fluctuation in foreign exchange rates in the eligible profits for computing deduction u/s 10A of the Act, ignoring that the gains from fluctuation in foreign exchange rates is only attributable to and is not derived from the export activities of the assessee.
2. The Ld. CIT(A) has erred on facts and in law by setting aside to the file of the AO the issue of verification of additional evidence in connection with claim of payment of compensation of ` 45,88,500/-, ignoring that :
(i) The powers of Ld. CIT(A) to set aside issues decided in scrutiny assessment have been curtailed with effect from 1.6.2001. .
(ii) By not calling for a remand report from the AO on the issues set aside for verification, the Ld. CIT(A) has not decided the appeal in accordance with the Board's Circular No.14 dated 12.12.2001 on the issue.3 ITA No.4181/Del./2010 CO No.391/Del/2010
(iii) The condition laid down for admitting additional evidence under Rule 46A are not satisfied in this case."
4. The grounds taken by the assessee in the cross objection read as under:-
"1. That the learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in disallowing deduction under section 10A of the Income-tax Act, 1961 ('the Act') to the Defendant Company in respect of excess provision written back of Rs.841,810 (Noida unit - Rs.85,328 and Bangalore unit - Rs.756,482) and in respect of miscellaneous income of Rs.673,700 (Noida unit - Rs.79,791 and Bangalore unit - Rs.593,909).
Place New Delhi
2. That the learned Commissioner of Income Tax (Appeals) has failed to comprehend that excess provision written back and miscellaneous income are profits of business of the undertaking and are eligible for deduction under section 10A of the Act."
5. The CIT (A) has granted the relief on the foreign exchange fluctuation gain in para 13.1.1 of his order by holding as under :-
"13.1.1 Foreign Exchange Fluctuation Gain :
Rs. 30,38,650/- Noida Unit Rs. 42,57,772/- Bangalore Unit 13.1.2 The AO excluded the gain from eligible profits on the ground that it is not related to exports and also included the same in the total turnover.
13.1.3 There is a gain on account of fluctuation in rate of exchange in respect of sales proceeds of export. The AO reduced this amount from eligible profits while including the same in total turnover which has led to lesser deduction u/s 10A. 13.1.4 The AR stated that gain on foreign exchange fluctuation is part of sales proceeds and is part of eligible profits.
In case the said amount is taken as part of total turnover, the 4 ITA No.4181/Del./2010 CO No.391/Del/2010 same should be included in the export turnover also on the principle of parity.
13.1.5 Exchange Fluctuation gain is in respect of sale proceeds on account of export. There is no adverse finding to this effect. The AO has not given any finding that the amount is assessable under income from other sources. After careful consideration of the facts brought on record, the gain on foreign exchange fluctuation is related to sales and is to be included in the turnover in view of the ratio laid down in the following cases:
1. ACIT, Circle 16(1), Mumbai VS. Prakash L. Shah 115 ITD 167 (MUM.) (SB)
2. CIT, Patiala VS. Roadmaster Industries of India 2 Dtlonline 48 (Punj. & Har.) 13.1.6 In view of the above discussion, the AO is hereby directed to include the gain in the eligible profits, total turnover and also the export turnover."
6. We have heard both the sides on this issue in detail. We agree with CIT (A) that foreign exchange fluctuation gain when it is from sale proceeds then it is part of total turnover and export turnover also. This issue is also covered by various decisions in favour of the assessee wherein it has been held that foreign exchange fluctuation gain is a part of export turnover and also eligible for deduction u/s 10A of the Income-tax Act, 1961. The foreign exchange fluctuation gain is the part of the sale proceeds and the foreign exchange fluctuation gain is taxable as business profit, as held in various cases. In the case of Sujata Grover vs. DCIT - 74 TTJ 347, ITAT, Delhi held as under :-5 ITA No.4181/Del./2010 CO No.391/Del/2010
"A.Y. 1994-95 the gains made from exchange rate fluctuation is part of the export turnover. It is not in the nature of brokerage etc. mentioned in the Explan. (baa). Therefore, the income from foreign exchange fluctuation would be eligible from deduction under section 80HHC."
In the case of Sony India (P) Ltd. vs. DCIT - 118 TTJ 865, ITAT, Delhi bench held as under :-
"23. While finalizing its books of account, the foreign currency transactions were reinstated by the taxpayer company at the exchange rate prevailing on the balance sheet date and the resulting loss on account of foreign exchange fluctuation on such reinstatement of current assets or liabilities amounting to Rs.31,33,745 was debited to the profit and loss account. Similarly, the gain due to fluctuation in foreign exchange amounting to Rs.14,00,761 was credited in the profit and loss account. According to the Assessing Officer, the corresponding liabilities having not become due in the year under consideration and the same were payable in the subsequent years, the loss claimed by the taxpayer on account of foreign exchange fluctuation was only notional. He, therefore, disallowed the said loss. The learned CIT(A), however, allowed the claim of the taxpayer company for the said loss holding that it was not a notional loss as alleged by the Assessing Officer.
24. At the time of hearing before us, the learned representatives of both the sides have agreed that this issue is squarely covered by the judgment of Hon'ble Delhi High Court in the case of CIT v. Woodward Governor India P. Ltd. 294 ITR 451 wherein it was held that the liability arising out of contracts had already accrued the minute the contract was entered into and the mere postponement of the payment of such liability to a future date would not extinguish the same so as to render it notional or contingent. It was also held that any increase in such liability as a result of fluctuation in the value of foreign currency in relation to Indian currency thus was a fate accompli and such increase in liability as per the exchange rate prevailing on the last date of the financial year was allowable as deduction being not notional or contingent. Respectfully following the said 6 ITA No.4181/Del./2010 CO No.391/Del/2010 judgment of Hon'ble Jurisdictional High Court, we uphold the impugned order of the learned CIT(A) on this issue and dismiss ground No.6 of the revenue's appeal."
In the case of CIT vs. Rachna Udhyog - 230 CTR 72, Hon'ble Bombay High Court held as under :-
"5. Having heard the learned counsel appearing on behalf of the appellant and learned counsel appearing for the assessee, we are of the view that the difference on account of exchange rate fluctuation is liable to be allowed under Section 80IB. The exchange rate fluctuation arises out of and is directly related to the sale transaction involving the export of goods of the industrial undertaking. The exchange rate fluctuation between the rupee equivalent of the value of the goods exported and the actual receipts which are realized arises on account of the sale transaction. The difference arises purely as a result of a fluctuation in the rate of exchange between the date of export and the date of receipt of proceeds, since there is no variation in the sale price under the contract. The view which we have taken is also consistent with the view taken by a Division Bench of this Court on 15th December 2009 in the case of Syntel Limited (Income Tax Appeal Nos.1974, 1976 and 1978 of 2009). In the circumstances, we would affirm the judgment of the tribunal in so far as the question of exchange rate fluctuation is concerned."
In the case of Sharp Credit Limited vs. DCIT - 83 TTJ 1056, the ITAT, Delhi held as under :-
"4. On due consideration of the matter, we are of the view that the assessees deserves to succeed. The term "total turnover" has been defined in a negative manner not to include freight, insurance or incentives earned by the assessee. When the definition specifically excludes certain items from the "total turnover", it automatically follows that the remaining items shall form part of the total turnover. Even otherwise, the amount received by the assessee on account of exchange difference is nothing but realisation of the goods exported by it and hence, such proceeds have to be construed as the turnover of the 7 ITA No.4181/Del./2010 CO No.391/Del/2010 assessee only. We find support from the decision of the Delhi Bench of the Tribunal in the case of Sujata Grover vs. Dy. CIT (2002) 74 TTJ 347 (Del) wherein it has been specifically held that exchange rate fluctuation difference is nothing but part of sales. It is further observed that under all circumstances the basic character of the receipt of foreign currency remains, the same, i.e., it remains attributable to the export effected by the assessee.
Whether there is a profit or a loss, it ultimately goes to increase or reduce the figures of export turnover recorded initially by the assessee in its books of account. In view of this position of law, we uphold the claim of the assessee and direct that the assessee be granted deduction under s. 80HHC of the Act."
In the case of Infosys Technologies Ltd. vs. JCIT - 109 TTJ 631, the ITAT, Bangalore held as under :-
12.3 In view of the finding of this Tribunal in appellant's case for asst. yr. 1999-2000, the exchange rate fluctuation is to be considered as part of exchange (sic-export) turnover and total turnover for the purpose of deduction under s. 80HHE of the Act. Similar view has been held by the Tribunal in the case of Encore Software Ltd. in ITA No. 794/Bang/2005, wherein it was held as under:
"We have considered the rival submissions. The foreign exchange gain arises because of the fluctuation in the foreign exchange rate. When the sales are effected, the sales are accounted in Indian rupees on the basis of exchange rate prevailing at the time of sale. Subsequently when the sale proceeds are received in convertible foreign exchange, the assessee realized higher sum. Instead of accounting the same as turnover or sales, the same is accounted as foreign exchange fluctuation gain. Though it is worded as foreign exchange currency fluctuation, it is nothing but part of export turnover and a sort of additional sale price. Thus, the same is profit of the eligible undertaking for claiming deduction under s. 10B. Similarly, it cannot be treated as other receipts for excluding 90 per cent of the same under s. 80HHE. We accordingly hold that such sum being foreign exchange gain is not to be excluded while computing profit eligible for deduction under s.8 ITA No.4181/Del./2010 CO No.391/Del/2010
10B as well as for computing profits of the business for the purpose of computing deduction under s. 80HHE. The decisions of Tribunal, Delhi Bench in the case of Smt. Sujata Grover vs. Dy. CIT (2002) 74 TTJ (Del) 347 and the decision of Tribunal, Bangalore in the case of Infosys Technologies Ltd. vs. Asstt. CIT (ITA No. 471/Bang/2003), relied by learned counsel for assessee, is squarely applicable".
In the case of Changepond Technologies (P.) Ltd. vs. ACIT - 119 TTJ 18, the ITAT, Chennai held as under :-
"6. We have considered the rival contentions as well as the material on record. In the case of Renaissance Jewellery (P.) Ltd. (supra) the Mumbai Bench of this Tribunal has held as under:
"26. We have carefully considered the submissions made before us by both the sides and have gone through the provisions of law and the precedents relied upon by learned counsel for the assessee. In our view, this issue is covered in the assessee's favour by several cases relied upon by learned counsel for the assessee and discussed above. There is no material difference between the requirement of section 80HHC and section 10A. The profit on account of foreign exchange gain is directly referable to the articles and things exported by the assessee. Such profits are, therefore, in the same nature as the sale proceeds and there is no reason why deduction under section 10A should not be allowed in respect of such exchange 1 gain. Therefore, we vacate the order of the learned Commissioner of Income-tax (Appeals) on this issue."
We are also of the view that the gain from the fluctuation of foreign exchange is directly related with the export activities and should be considered as income derived from export activities. It is pertinent that such gain due to fluctuation of foreign exchange arises only due to the export and not due to other activities of the assessee. If the assessee has not exported any article then the question of any gain or loss due to foreign exchange does not arise. Therefore, we decide this issue in favour of the assessee and set aside the order of the C.I.T. 9 ITA No.4181/Del./2010 CO No.391/Del/2010 (Appeals). Accordingly, gain on foreign exchange would be included in the total turnover while computing the deduction under section 10A of the Act."
In the case of CIT vs. Pentasoft Technologies Ltd., Hon'ble High Court of Madras held as under :-
"4. In order to allow a claim under Section 10A of the Act, what all is to be seen is whether such benefit earned by the assessee was derived by virtue of export made by the assessee. The exchange value based on upward or downward of the Rupee value is not in the hands of the assessee. In other words, the assessee does not determine the exchange value of the Indian Rupee. It has to be remembered but for the fact that the assessee is an export house, there was no question of earning any foreign exchange. Therefore, when the fluctuation in foreign exchange rate was solely relatable to the export business of the assessee and the higher Rupee value was earned by virtue of such exports carried out by the assessee, there is no reason whey the benefit of Section 10(A) should not be allowed to the assessee."
In view of these facts, we are of the considered view that the order of the CIT (A) deserves to be sustained on this issue. In the result, the ground no.1 of revenue's appeal stands dismissed.
7. The ground in assessee's cross objection wherein liability written back of Rs.85,328/- in respect of NOIDA unit and Rs.7,56,482/- in respect of Bangalore unit have not been considered to be included in the total turnover of the units eligible for deduction u/s 10A. The misc. income (recovery of notice period, writing off of provisions for internet expenses and refund of sales-tax from STP1) of Rs.79,791/- in respect of NOIDA unit and 10 ITA No.4181/Del./2010 CO No.391/Del/2010 Rs.5,93,909/- in respect of Bangalore unit has not been considered to be eligible to include in the total turn over and eligible for deduction u/s 10A. These items of income have been treated as not eligible for deduction u/s 10A in the light of jurisdictional High Court in the case of CIT vs. K. Ravindranathan Nair reported in 295 ITR 228. Relevant para of CIT (A) order read as under :-
"13.3 Interest Income:
Rs.1,549/ - from Noida Unit The AR admitted that interest income is not from the business activity of the eligible industrial undertaking. The AO is hereby directed to exclude this from eligible profits of the undertaking. At the same time, the amount cannot be included in total turnover.
13.4 Excess liability 85,328/- Noida Unit
7,56,482/- Bangalore Unit
Miscellaneous Income 79,791/- Noida Unit
5,93,909/- Bangalore Unit
Provision for increase in
the value of Investment 7,337/- Bangalore Unit
These items are not eligible for deduction u/s 10A in the light of decision of Hon'ble Supreme Court in the case of CIT vs. K. Ravindranathan Nair (295 ITR 228). At the same time, these items cannot be included in total turnover of the units eligible for deduction u/s 10A.
The AO is hereby directed to re-compute the deduction u/s 10A as per the discussion above."
11 ITA No.4181/Del./2010CO No.391/Del/2010
8. Ld. AR placed reliance on the decisions of ITAT, Delhi Bench in ST Micro Electronics Pvt. Ltd. vs. DCIT (ITA No.1182 & 4743/Del/2005) for eligibility of excess liability written back eligible for section 10A deduction and Jubiliant Enpro Ltd. vs. DCIT (12 SOT 194) for recovery of notice period eligible for section 10A deduction as income derived from by an undertaking from export of article or things or computer software. On the other hand, the ld. DR relied on the order of Hon'ble Supreme Court in the case of CIT vs. K. Ravindranathan Nair, cited supra, and also on the decision of CIT (A).
9. We have heard both the sides on this issue. In the case of ST Micro Electronics Pvt. Ltd., cited supra, on which the ld. AR relied, the issue involved was written back of the liability on account of communication charges claimed by the assessee as deemed profit & gain of undertaking for the purposes of computation of deduction u/s 10B. The relevant para of the order is 3.2.1 which read as under :-
"3.2.1 We have considered he rival submissions. The fact that the A.O. himself agreed that the write back of the amount more so the remission of the liability is the profit & gains of the business of the undertaking in the year of such remission of the liability remains undisputed. A perusal of the provisions of Section 10B clearly shows that deduction as provided in Section 10B is the profit & gains as derived by the 100% export oriented undertaking from the export of articles and things or software for the period of 10 consecutive Assessment Years as specified therein. A perusal of the provisions of Section 10B(3) of the Act shows that the provisions of section 10B available to the undertaking if the sales proceeds of the articles and things or computer software exported out of India is received in or brought into India in convertible foreign exchange within the 12 ITA No.4181/Del./2010 CO No.391/Del/2010 period of 6 months from the end of the previous year or within such further period as the competent authority may allow. A remission of the liability which is treated as the profit & gains of the business by applying the provisions of section 41(1) of the Act is not on account of sales proceeds. A perusal of the audit report as filed before us clearly shows that the auditors have also categorically given a certificate that the sale proceeds have been received in India within the prescribed 6 months period. The remission of the liability being considered as profit & gains of business is on account of legal fiction provided in Section 41(1) of the Act. The remission of liability is not by payment or return of money paid by he assessee. The remission of liability is normally done by book entry. In these circumstances as the remission of liability itself is not a part of sales proceeds, the conditions specified in section 10B(3) do not apply to the remission of liability and the treatment of the same as profits & gains of the business under the provisions of Section 41 (1) of the Act. In these circumstances, we are of the view that the findings of Ld. CIT(A) on this issue is on a right footing and does not call for any interference."
In the assessee's case, the issue is for deduction u/s 10A on the excess provision written back. In the case of S.T. Micro Electronics Pvt. Ltd. it was remission of liability. Section 10A deduction available on profits and gains derived by undertaking from export of article and things or computer software. Further every receipt or income having no nexus with exports qualifies for deduction u/s 10A of the Act. The facts are at variance from the facts of the case of S.T. Micro Electronics Pvt. Ltd. relied upon by the ld. AR. In the case of Jubiliant Enpro Ltd. vs. DCIT, the issue was of the notice pay. The fact was that it was debited to the software division and when recovered it was to be treated as income derived from industrial undertaking. Hon'ble Supreme Court in the case of CIT vs. K. Ravindranathan Nair, cited supra, 13 ITA No.4181/Del./2010 CO No.391/Del/2010 has held that nature of every receipt needs to be examined in order to find out whether the said receipt forms part of / or that it has attributed of an export turnover. Independent income which had no element of export turnover distort the figure of export profits. Hon'ble Supreme Court had held that processing charges which were part of gross total income was an independent income. In our considered view, when excess provision written back, the same cannot be said to be income derived from export turnover of article or thing or computer software. The misc. income which is consisting of recovery of notice period, writing off provision of internet expenses and refund for CST from STP1 requires further examination to determine whether these are derived from the exports of article or things or computer software by the undertaking. Such amount may be income in the conceptual sense under the Income-tax Act, 1961 but for working out the deduction u/s 10A it has to be the receipt derived from the exports of article or things or computer software by the undertaking in free trade zone. In view of these facts, we restore the issue to the file of Assessing Officer for fresh adjudication. The cross objection of the assessee is partly allowed for statistical purposes.
10. In the ground no.2 of the revenue's appeal, the issue involved is setting aside the issue regarding the claim of payment of compensation of Rs.45,88,500/- for verification to the file of the Assessing Officer. The CIT (A) has dealt this issue in paras 17 to 19.2 of the order which read as under :- 14 ITA No.4181/Del./2010 CO No.391/Del/2010
"17. The AO disallowed the compensation of Rs.45,88,500/- paid to Agilent Technologies mainly on the ground that there was no proof of FIR and whether Mr. T.S. Shiv Kumar is authorized to do services and for the other reasons mentioned in the assessment order.
18. The following are the documents which are led as additional evidence:
• Copy of the employment letter of Mr. Shiv Kumar • Copy of the termination letter issued to Mr. Shiv Kumar • An email sent to the directors and other senior employees about theft of information 19.1 After careful consideration of the facts, these documents are crucial to decide the issue on hand. Accordingly, these documents mentioned above are admitted as additional evidence. In view of these facts & circumstances, the issue is set aside to the file of the AO for the limited verification and if the AO is satisfied with the genuineness of documents & explanation of the AR, no addition is called for. 19.2 The alternate plea of the assessee may be addressed by the AO while giving effect to this order in the light of decision given while deciding the Ground Nos.3, 4, 5 7 5.1 of the appeal."
11. We have heard both the sides on this issue. The assessee submitted the following documents before the CIT (A) during the appellate proceedings and admitted these evidences :-
• Copy of the employment letter of Mr. Shiv Kumar • Copy of the termination letter issued to Mr. Shiv Kumar • An email sent to the directors and other senior employees about theft of information The CIT (A) has also held that these documents were crucial to decide the issue. The revenue's objection is that the CIT (A) has no power to set aside the issue to the Assessing Officer with effect from 01.06.2001. The CIT (A) should have called the remand report from the Assessing Officer and decide the issue accordingly. The revenue also objected to admit the additional evidence under Rule 46A.
12. We have heard both the sides. After hearing, we find that the additional evidences submitted by the assessee are crucial to decide the issue. 15 ITA No.4181/Del./2010 CO No.391/Del/2010 CIT (A) should have called the remand report and decide the issue at his level. Therefore, we set aside the direction of the CIT (A) and direct CIT (A) to decide the issue at his level after calling the remand report from the Assessing Officer.
13. In the result, the appeal of the revenue and cross objection of assessee are partly allowed for statistical purposes.
Order pronounced in open court on this 31st day of July, 2012.
Sd/- sd/-
(A.D. JAIN) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : the 31st day of July, 2012
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-XIX, New Delhi.
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.