Income Tax Appellate Tribunal - Bangalore
M/S Think 3 Designs India P Vt. Ltd.,, ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'A'
BEFORE SMT. P.MADHAVI DEVI, JUDICIAL MEMBER
and
SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA Nos.692 to 694(Bang)/2010
(Assessment years: 2004-05 to 2006-07)
Deputy Commissioner of Income-tax,
Circle 12(4),
Bangalore. ... Appellant
Vs.
M/s. Think 3 Designs India Pvt. Ltd.
3rd floor, AKEMPS, No.28, 3rd Main,
1st Cross, Ashwini Layout, Ejipura,
Bangalore-47. ... Respondent
AND
ITA Nos.875 & 876(Bang)/2010
(Assessment years: 2005-06 & 2006-07)
M/s. Think 3 Designs India Pvt. Ltd.
Bangalore. ... Appellant
Vs.
Assistant Commissioner of Income-tax,
Circle 12(4), Bangalore. ... Respondent
Revenue by: Smt. Jacinta Zimik Vashai.
Assessee by : Shri Kaushik Mukerjee.
O R D E R
Per Smt. P.MADHAVI DEVI, JM :
The issues raised in the assessee's appeals for assessment year 2005-06 and 2006-07 are common and the issues raised in the revenue's appeal for assessment years ITA 692 to 694, 875 & 876(Bang)/2010 Page 2 of 12 2004-05 to 2006-07 are also common and therefore the appeals were heard together and are disposed of by this consolidated and common order for the sake of convenience.
2. The assessee has raised the following grounds of appeal in its appeal for assessment year 2005-06:
"The grounds mentioned herein below are without prejudice to each other 1(a) That the learned CIT(A) erred in upholding the action of the Assessing Officer in not allowing deduction under section 10A of the Income-tax Act 1961 ("the Act") on exchange fluctuation gain of Rs.27,44,387 arising on account of export sales made from the Software Technology Park of India ('STPI') Unit and treating the same as separate income.
1(b) That the learned CIT(A) erred in observing that the appellant 'failed to establish that the foreign exchange fluctuation gain is in conjunction with the development of software charges'.
1(c) That the learned CIT(A) erred in not deleting add back of the exchange gain of Rs.27,44,387 even after the AO having held that such gain was not real but notional.
2. That the learned CIT(A) erred in not holding that the appellant is not engaged in the business of rendering technical services outside India and the expenditure on per diem expenses of Rs.37,17,059 towards employees going abroad for training purposes is not required to be reduced from either export turnover or total turnover for computing deduction u/s 10A of the Act.
3. That the appellant craves leave to add to and/or to alter, amend, rescind, modify, the grounds herein above or produce further documents before or at the time of hearing of this appeal."
ITA 692 to 694, 875 & 876(Bang)/2010 Page 3 of 12
3. As regards ground No.1, facts of the case are that the assessee is an Indian company which is engaged in the business of development of software, carried out from an undertaking registered with Software Technological Park of India (STPI) authorities of India and the income from the said undertaking was eligible for deduction u/s 10A of the Income- tax Act, 1961 [hereinafter referred to as "the Act"]. In the return of income filed by the assessee, the assessee had claimed deduction u/s 10A. During the assessment proceedings u/s 143(3), the AO observed that the assessee has credited an amount of Rs.27,44,387/- as foreign exchange gain. On verification of records, he found that this claim was due to foreign exchange fluctuation in relation to provision. He further observed that the foreign exchange gain on value of payments to be made has only been re-stated by the assessee as on 31- 3-2005 but no actual payments of any gain has been received and therefore he held that the amount of foreign exchange gain of Rs.27,44,387/- is not allowable as there has been no payment which has been received as on the date of re- statement of receipt which is due but continued to be reflected in the books of account of the company. He held that the assessee-company has re-valued payment to be received in foreign exchange and claimed the gain on notional basis and therefore it is not justifiable to be included in the export turnover. He accordingly disallowed the same and reduced it from the exempt income computed u/s 10A of the Act.
ITA 692 to 694, 875 & 876(Bang)/2010 Page 4 of 12 Aggrieved, the assessee preferred an appeal before the CIT(A) stating that the exchange gain is on account of exports made by the assessee and, therefore, it has direct nexus with the export activity and it should be considered as export turnover. In support of his contention, he also placed reliance upon the following decisions of the Tribunal:
i. Renaissance Jewellery (P) Ltd. Vs. ITO (289 ITR 65) ii. Changepond Technologies P Ltd. Vs. ACIT (119 TTJ 18) iii. Priyanka Gems vs. ACIT (94 TTJ 557) iv. Sujata Grover vs. DCIT (74 TTJ 347)(Del) v Discover India Tours (P) Ltd. Vs. AO (104 TTJ
298)(Del)
4. On appeal, after considering the assessee's submissions, the CIT(A) held that there is no nexus between the assessee's software business development of the eligible undertaking and the earning of foreign exchange gain. Placing reliance upon the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. Vs. CIT (129 Taxman 539), he held that the assessee has failed to establish that the foreign exchange fluctuation gain is in conjunction with the development of software business. He therefore held that the AO's action in taxing the foreign exchange fluctuation gain amounting to Rs.27,44,387/- as part of taxable income is upheld. Aggrieved, the assessee is in appeal before us.
5. Shri Kaushik Mukherjee, learned counsel for assessee while reiterating the submissions made by the assessee before ITA 692 to 694, 875 & 876(Bang)/2010 Page 5 of 12 the authorities below submitted that the foreign exchange gain is only on account of export receipt of the assessee from the export of software and therefore it is part of the export turnover. He placed reliance upon the decisions cited by him before the CIT(A).
Smt. Jacinta Zimik Vashai, learned Departmental Representative, on the other hand, supported the orders of the authorities below and submitted that the income to be exempt u/s 10A should have been derived directly from the business of the undertaking and as the foreign exchange gain is not from the business of export of computer software, it is not to be included in the export turnover and is not exempt u/s 10A of the Act.
6. Having heard both the parties and having considered the rival contentions and the material on record, we find that the AO has disallowed the claim of the assessee on the ground that the amount has not been received by the assessee in foreign exchange and the assessee has only revalued the probable receipts as on 31st March 2005 on a notional basis without actual receipt. We find that the CIT(A) has not considered this issue at all. He went on the presumption that the assessee is challenging the order of the AO on the ground that he has not accepted the foreign exchange gain as part of export turnover. The CIT(A) has however upheld the finding of the AO. All the decisions relied upon by the assessee are to the effect that the foreign exchange gain on export of goods and ITA 692 to 694, 875 & 876(Bang)/2010 Page 6 of 12 articles is also part of the export turnover. The factor to be considered by us in this appeal is whether the gain on revaluation of the receivable foreign exchange also forms part of the export turnover without actual receipt. The learned counsel for assessee has not made any submissions on this issue nor has he brought any evidence on record to show that this foreign exchange gain is on actual receipt of export proceeds.
As defined under clause (iv) to Explanation 2 to section 10A of the Act, 'export turnover' means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. Thus, it can be seen that the consideration has to be received or brought into India to be included in the export turnover. But in the case before us, the AO has clearly brought out that this gain has not been received or brought into India. In view of the same, we restore the order of the AO to the effect that it is not includible in the export turnover.
7. As regards the second ground of appeal, brief facts of the case are that the assessee has incurred an expenditure of ITA 692 to 694, 875 & 876(Bang)/2010 Page 7 of 12 Rs.37,17,059/- for the assessment year 2005-06 and an amount of Rs.40,42,696/- for the assessment year 2006-07 in foreign currency on account of per diem expenses in relation to employees sent abroad to the holding company for the purpose of their training. The AO disallowed the same holding it to be expenditure incurred towards providing technical services outside India incurred in foreign exchange and he reduced it from the export turnover.
8. Aggrieved, the assessee preferred an appeal before the CIT(A) submitting that its business comprises of developing software in India on behalf of its holding company abroad and therefore the assessee's employees were required to be trained in the holding company and they were not carrying out any technical services during their visit outside India. Thus, according to him, the expenditure incurred on their training need not be reduced from the export turnover. In support of his contention he placed reliance upon the following decisions:
i. Infosys Technologies Ltd. (ITA Nos.50, 793 to 795, 742 and 732 to 734/Bang/2001) ii. Mphasis Ltd. Vs. ACIT (ITA No.884/Bang/2007)
9. The CIT(A), however, held that this expenditure is to be reduced from the total turnover also. Aggrieved, the assessee is in appeal before us.
10. Learned counsel for assessee, while reiterating the submissions made by the assessee before the authorities below, ITA 692 to 694, 875 & 876(Bang)/2010 Page 8 of 12 submitted that the employees have been sent for training abroad and the expenditure incurred on their training in foreign exchange is to be included in the export turnover. In the alternative, learned counsel for assessee submitted that even if the finding of the AO is to be accepted that the employees of the assessee were rendering technical services outside India, then the same also is allowable in view of Explanation 3 to sub- section (8) of section 10A, according to which technical services provided by the assessee outside India for development of computer software as subscriptions of the clients come under the definition of onsite development of computer including services for development of software outside India and hence expenses incurred on salary, training and other perquisites of staff shall be included in the export turnover of the assessee. In support of his contention, he placed reliance upon the decision of the Chennai Bench of the Tribunal in the case of Changepond Technologies (P) Ltd. Vs. ACIT (119 TTJ (Chennai)18). A copy of the said order is also placed before us.
Learned Departmental Representative, on the other hand, submitted that the assessee has stated that this is expenditure incurred by the assessee on training of its employees abroad and therefore it is clear that the expenditure is incurred in foreign exchange outside India and therefore does not fall within the nature of turnover. She submitted that the claim of the assessee that the export turnover is computed on the cost + ITA 692 to 694, 875 & 876(Bang)/2010 Page 9 of 12 mark up basis cannot be accepted without there being any proper proof and evidence to this effect.
11. Having heard both the parties and having considered the rival contentions, we find that the assessee's claim has always been that the expenditure is incurred on training of its personnel abroad. It is the finding of the AO that these employees have rendered technical services outside India and the CIT(A) has also upheld this finding of the AO but he has only directed the AO to exclude the same from the total turnover also. As is evident from the invitation letter filed by the assessee at pages 7 to 10 of the paper book, the employees have been invited to visit the foreign company only to undergo advanced training on use of their software and also have discussions with their research and development engineers on the projects that are to be supported in Bangalore. Therefore, it could be said without any doubt that the employees have not rendered any technical services outside India and therefore we are of the opinion that the finding of the AO as well as the CIT(A) on this issue is not correct. Coming to the argument of the assessee that the expenditure on the training of its employees is part of the cost of development of software and therefore it has to be included in the export turnover is concerned, we find that this is the expenditure incurred by the assessee and the assessee being 100% EOU with no indigenous development of software, it could be said that this expenditure is towards the development of software and its export. Such ITA 692 to 694, 875 & 876(Bang)/2010 Page 10 of 12 being the case, it has to be included as part of the export turnover provided the assessee is computing the export turnover on the cost + mark up basis. Therefore, we deem it fit and proper to remit this issue to the file of the AO only for the purpose of verifying as to how the assessee is computing export turnover. If it is found that the export turnover is computed on the basis of cost + mark up, then this amount is to be included as part of the cost and consequently as part of export turnover and also total turn over. This ground of appeal is partly allowed.
12. In the result, the assessee's appeal is partly allowed.
13. As the grounds of appeal for assessment year 2006- 07 are also the same, the appeal for assessment year 2006-07 is also partly allowed.
14. Coming to the revenue's appeals, we find that the revenue has raised the following grounds of appeal for the assessment year 2004-05(ITA No.692/Bang/2010):
1. The order of the ld.CIT(A) is opposed to law and facts of the case.
2. The CIT(A) has erred in law in directing the Assessing Officer to exclude telecommunication expenses of Rs.35,47,840/- for delivery of software from total turnover for the purpose of computation of deduction u/s 10A of the Income-
tax Act,1961.
ITA 692 to 694, 875 & 876(Bang)/2010 Page 11 of 12
3. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
15. Brief facts of the case are that while examining the computation of export turnover and the total turnover for the purpose of allowing deduction u/s 10A of the Act, the AO observed that the telecommunication charges and the insurance expenses have not been reduced from the export turnover. He, accordingly, reduced the same by applying the provisions of Explanation 2(iv) to section 10A of the Act. On appeal, the CIT(A) confirmed the order of the AO. But however, following various judicial decisions, directed the AO to reduce the same from the total turnover also. Aggrieved by the relief given by the CIT(A), the revenue is in appeal before us.
16. Having heard both the parties and having gone through the material on records, we find that the issue is covered in favour of the assessee by various decisions which have been followed by the CIT(A) including the decision of the Special Bench in the case of ITO vs. Sak Soft Ltd. (313 ITR
353). Learned Departmental Representative had submitted that the department has not accepted this decision and has filed further appeal before the Hon'ble High Court of Madras. However, having regard to the fact that this decision has not been set aside by the higher judiciary, we are bound to follow the decision of the Special Bench and also other co-ordinate ITA 692 to 694, 875 & 876(Bang)/2010 Page 12 of 12 Benches. Therefore, as the CIT(A)'s order is consonance with the judicial decisions on the issue, we do not see any reason to interfere with the same.
17. In the result, the revenue's appeal is dismissed.
18. As the grounds of appeal for assessment years 2005- 06 and 2006-07 in the revenue's appeals (ITA Nos.693 & 694/Bang/2010) are also on the same issue, for the detailed reasons given above, the appeals of the revenue for these years are also dismissed.
Order pronounced in the open court on 23rd December, 2010 Sd/- sd/-
(A. Mohan Alankamony) (Smt.P.Madhavi Devi)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Place : Bangalore
Dated: 23rd December, 2010
Eks
Copy to :
1. Appellant
2. Respondent
3. CIT(A) concerned
4. CIT
5. DR, ITAT, Bangalore
6. Guard file
By Order
Assistant Registrar, ITAT, Bangalore