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2013 (1) TMI 767 - AT - Income TaxDisallowance of expenditure u/s 10A - foreign currency expenditure and telecommunication expenditure - Held that - The assessee eveloped software on contract basis according to the agreement and handed over the same to the customer - expenditure incurred was for development of software according to the software development agreement entered into between the client and the assessee and therefore the expenses incurred in that connection in foreign currency cannot be excluded from the export turnover - Decided im favor of assessee Telecommunication expenditure incurred in Indian currency should not be excluded from the export turnover as per the judgment of the Income-tax Appellate Tribunal Hyderabad Bench in the case of Patni Telecom P. Ltd. vs ITO 308 ITR (AT) 414 - Decided im favor of assessee Can the losses of eligible units be allowed to set off against other taxable profits u/s 10A - Held that - held that the current year s profit of the eligible units should not be reduced by setting off of the brought forward losses of earlier years even though relating to eligible units - The AO has to give deduction under section 10A on eligible profits of the current AY - Decided im favor of assessee Disallowance of 2% of exempt income treating as expenditure u/s 14A - Held that - the disallowance of 2% made by the assessing authority is reasonable - also the profit for the purpose of section 10A will be enhanced to the extent of the above disallowance - partly decided in favour of the assessee
Issues Involved:
1. Exclusion of foreign currency expenditure from export turnover under Section 10A. 2. Exclusion of telecommunication expenditure from export turnover under Section 10A. 3. Set-off of losses of eligible units against other taxable profits. 4. Disallowance under Section 14A. 5. Exclusion of net exchange gain from EEFC account from profits eligible for deduction under Section 10A. 6. Provision for liabilities as contingent expenditure. 7. Disallowance of expenditure incurred by SEZ units that have not commenced operations. 8. Addition by Transfer Pricing Officer on reimbursement of expenses. 9. Disallowance of recruitment expenditure and mark-up. 10. Disallowance under Section 40(a)(i) on payments to non-residents for examination fees. Issue-wise Detailed Analysis: 1. Exclusion of Foreign Currency Expenditure from Export Turnover under Section 10A: The assessee argued that foreign currency expenditure should not be excluded from the export turnover while computing the deduction under Section 10A of the Income-tax Act, 1961. The Tribunal referenced the case of Patni Telecom P. Ltd. vs. ITO, 308 ITR (AT) 414 (Hyderabad), where it was held that expenses incurred in foreign exchange as part of the export cannot be excluded from the export turnover. The Tribunal directed the Assessing Officer to include the foreign currency expenditure in the export turnover. This issue was decided in favor of the assessee. 2. Exclusion of Telecommunication Expenditure from Export Turnover under Section 10A: The assessee contended that telecommunication expenditure incurred in Indian currency should not be excluded from the export turnover. Following the judgment in the Patni Telecom case, the Tribunal directed the Assessing Officer to treat telecommunication expenditure as part of the export turnover. This issue was decided in favor of the assessee. 3. Set-off of Losses of Eligible Units Against Other Taxable Profits: The Assessing Officer adjusted the brought forward losses of the eligible units against the current year's profits before computing the deduction under Section 10A. The Tribunal, following the decisions of the Hon'ble Karnataka High Court in the cases of CIT vs. Yokogawa India Ltd. and CIT vs. Tata Elxsi Ltd., held that current year's profit of eligible units should not be reduced by setting off brought forward losses. This issue was decided in favor of the assessee. 4. Disallowance under Section 14A: The Assessing Officer disallowed 2% of exempt income as expenditure incurred in connection with earning exempt income. The Tribunal found the disallowance reasonable but accepted the assessee's alternate contention that the profit for Section 10A should be enhanced by the disallowance amount. This issue was partly decided in favor of the assessee. 5. Exclusion of Net Exchange Gain from EEFC Account from Profits Eligible for Deduction under Section 10A: The assessee argued that the net exchange gain on EEFC account should be included in profits eligible for deduction under Section 10A. The Tribunal referenced several cases, including CIT vs. Indian Toners and Developers Ltd., and directed the Assessing Officer to include the gain from the EEFC account as part of the profits eligible for deduction. This issue was decided in favor of the assessee. 6. Provision for Liabilities as Contingent Expenditure: The Revenue argued that the provision made by the assessee for liabilities of expenditure was contingent. The Tribunal, referencing the case of Bharat Earth Movers vs. CIT, held that the provision was against actual expenditure and not contingent. This issue was decided in favor of the assessee. 7. Disallowance of Expenditure Incurred by SEZ Units That Have Not Commenced Operations: The Assessing Officer treated the expenditure incurred by SEZ units that had not commenced operations as losses eligible for deduction under Section 10AA. The Tribunal held that the Assessing Officer was not justified in disallowing the expenditure and directed the disallowance to be deleted. This issue was decided in favor of the assessee. 8. Addition by Transfer Pricing Officer on Reimbursement of Expenses: The Transfer Pricing Officer added a 5% markup on certain travel costs reimbursed by the associate enterprise. The Tribunal found that the reimbursement was made on a cost-to-cost basis without any service element and deleted the addition. This issue was decided in favor of the assessee. 9. Disallowance of Recruitment Expenditure and Mark-up: The Assessing Officer added an 8% markup on recruitment expenditure reimbursed by the associate enterprise. The Tribunal found no reason for such a markup and deleted the addition. This issue was decided in favor of the assessee. 10. Disallowance under Section 40(a)(i) on Payments to Non-residents for Examination Fees: The Assessing Officer disallowed payments made to non-residents for examination fees under Section 40(a)(i). The Tribunal held that the payments did not constitute income in India and there was no requirement to deduct tax at source. The disallowance was deleted. This issue was decided in favor of the assessee. Conclusion: - The appeals filed by the assessee for the assessment years 2005-06 and 2007-08 were partly allowed. - The appeal filed by the Revenue for the assessment year 2005-06 was dismissed.
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