2024 (12) TMI 1597 - AT - Income Tax

Deduction u/s 10A and 10AA - Interest income from Fixed Deposits Inter Corporate Deposits and Employee Loans - HELD THAT - Interest earned on fixed deposits and inter corporate deposits are part of the export business of the undertakings claiming deduction u/s 10A/10AA of the Act as the assessee had placed temporary surplus generated out of revenue earned from export of Information Technology (IT)/IT Enabled Services (ITeS) as deposits with bank and related companies so as to make an efficient utilization of the surplus generated out of the assessee business. Deposits were placed with bank and related companies only for such period for which the surplus generated out of the assessee business could not have been efficiently deployed in the assessee business / expansion plans. As regards interest on employee s loan it is submitted that employees were engaged in rendering IT/ITeS and hence are part of the day to day running of the business of the assessee and assists in smooth conduct of its business. Thus the interest received are inextricably linked to the conduct of the business of the eligible undertakings of the assessee and should also be section treated as profit of the business eligible for deduction under section 10A - Decided in favour of assessee. Foreign Exchange Gain and Forward Contract Gain eligible for deduction u/s. 10A and 10AA Reduction of freight and telecommunication charges from the ambit of total turnover while computing deduction u/s.10A and 10AA and reduction of migration / on the job training for the ambit of total turnover while computing deduction u/s. 10A and 10AA - HELD THAT - In the present case the export bills were raised by the assessee to its overseas customers basis the agreed rates/ remuneration methodology in respect of the projects executed. Revenue from the contracts is recognized by the assessee on the basis of billable time spent by the employees working on the project priced at the contracted rate. Telecommunication expenses incurred in foreign currency were not invoiced by the assessee to its overseas customers and hence these expenses cannot be excluded from export turnover. Therefore since the assessee itself had not included the recovery of expenses in respect of telecommunication expenses and migration on the job training services in the figure of export turnover while computing deduction u/s 10AA of the Act the same cannot be excluded. CIT(A) in AY 2011-12 partly allowed the ground of appeal raised by the assessee by holding that the amount by which export turnover is reduced on account of telecommunication expenses should be reduced from the total turnover for the purpose of computing the deduction allowable u/s 10AA. No infirmity in the order ld. CIT(A) on these issue hence we uphold the same and reject the Ground no. 5 6 raised by the Revenue. Provision for customer discount - Recently identical issue has been decided in favour of the assessee by ITAT in case of assessee for AY 2011-12 2024 (5) TMI 215 - ITAT DELHI . Disallowance on account of excess depreciation on computer peripherals - HELD THAT - Assets like printers routers along with other accessories/ peripherals form one integrated system and would be of no use independently of each other. Therefore all such facilities form part of computers and are hence eligible for depreciation rate specified for Computers . See Hotel Excelsior 2010 (12) TMI 1080 - ITAT DELHI and BSES Yamuna Powers 2010 (8) TMI 58 - DELHI HIGH COURT . Including of freight and communication expenses and recovery of expenses in respect of migration / on the job training services within the ambit of export turnover while computing deduction u/s. 10AA

Summary

The core legal questions considered by the Tribunal in this matter primarily relate to the eligibility and computation of deductions under sections 10A and 10AA of the Income-tax Act, 1961, for an assessee engaged in Information Technology enabled services. The issues include:

1. Whether income from interest on fixed deposits, inter-corporate deposits, and employee loans qualifies for deduction under sections 10A and 10AA.

2. Whether foreign exchange gain and forward contract gain arising from hedging activities are eligible for deduction under sections 10A and 10AA.

3. The correctness of reducing freight and telecommunication charges from total turnover for the purpose of computing deductions under sections 10A and 10AA.

4. The treatment of expenses related to migration and on-the-job training in the computation of export turnover for deduction under section 10AA.

5. The validity of disallowance of provisions for customer discounts and customer-related provisions and losses in computing eligible turnover.

6. The appropriateness of disallowance of excess depreciation on computer peripherals.

7. The entitlement to credit for Tax Deducted at Source (TDS).

8. Additional legal issue raised by the assessee concerning the applicability of Dividend Distribution Tax (DDT) rates under the Double Taxation Avoidance Agreement (DTAA) vis-`a-vis the Income-tax Act.

Issue-wise Detailed Analysis:

1. Eligibility of Interest Income for Deduction under Sections 10A and 10AA

The Tribunal examined whether interest income earned on fixed deposits, inter-corporate deposits, and employee loans forms part of the eligible business income for deduction under sections 10A and 10AA, which provide tax incentives for export-oriented undertakings.

Legal Framework and Precedents: Sections 10A and 10AA allow deduction of profits derived from specified export businesses. The issue revolves around whether incidental income such as interest on temporary surplus funds qualifies as business income eligible for deduction.

Court's Reasoning: The Tribunal noted that the Assessing Officer initially treated such interest income as income from other sources and disallowed the deduction. However, the Commissioner of Income Tax (Appeals) (CIT(A)) had allowed the deduction, following precedents and the assessee's own earlier assessments.

The Tribunal relied on the assessee's submissions that the interest income is incidental and integral to the export business, as surplus funds generated from export operations were prudently invested to maximize returns pending deployment in business activities. Interest on employee loans was also considered part of the business operations since employees are essential to the IT/ITeS business.

Precedents cited include decisions from Karnataka and Delhi tribunals and the Supreme Court, such as Motorola India Electronics, Hewlett Packard Global Soft Ltd, and Reliance Energy Ltd, which support the inclusion of such incidental incomes as part of business profits eligible for deduction.

Application of Law to Facts: The Tribunal found no infirmity in CIT(A)'s order and upheld the allowance of deduction on interest income.

Treatment of Competing Arguments: The Revenue did not contest the precedents or the assessee's submissions, effectively conceding the point.

Conclusion: Grounds relating to interest income (grounds 1 to 3 of Revenue's appeal) were rejected, affirming the deduction under sections 10A and 10AA.

2. Foreign Exchange Gain and Forward Contract Gain

The issue was whether gains arising from foreign exchange fluctuations and forward contracts, particularly those related to hedging activities, qualify for deduction under section 10AA.

Legal Framework and Precedents: Section 10AA allows deduction on profits derived from export business. The question is whether gains from hedging are incidental to the business or separate income.

Court's Reasoning: The CIT(A) allowed the deduction, relying on prior orders and judicial pronouncements. The assessee argued that foreign exchange gains pertain to the export undertaking and are integral to the business.

Relevant precedents cited include Pentasoft Technologies, Gen Plus Jewellery, and Cognizant Technology Solutions, which support the view that foreign exchange gains linked to export business are eligible for deduction.

Application of Law to Facts: The Tribunal accepted the assessee's submissions and CIT(A)'s order, noting the Revenue did not contest the issue.

Conclusion: Deduction was upheld, rejecting the Revenue's ground on foreign exchange gains (ground 4).

3. Reduction of Freight and Telecommunication Charges and Migration/On-the-job Training Expenses

The issue concerned whether freight, telecommunication charges, and expenses related to migration/on-the-job training should be excluded from export turnover while computing deduction under section 10AA.

Legal Framework: Explanation 1(i) to section 10AA defines "export turnover" and mandates exclusion of freight, telecommunication charges, insurance, and expenses incurred in foreign exchange if included in the consideration received.

Court's Reasoning: The Tribunal observed that the assessee had not invoiced telecommunication expenses to overseas clients, and migration/on-the-job training expenses were reimbursed and netted off in the accounts. Therefore, these expenses were not part of the export turnover consideration and should not be excluded.

The CIT(A) had held similarly in the preceding assessment year, partially allowing the assessee's claim.

Application of Law to Facts: The Tribunal agreed with the assessee's interpretation of the statutory definition and CIT(A)'s approach.

Treatment of Competing Arguments: The Revenue did not contest the submissions or place contrary decisions.

Conclusion: Grounds relating to these expenses (grounds 5 and 6 of Revenue's appeal and grounds 1 and 2 of assessee's appeal) were rejected in favor of the assessee.

4. Provision for Customer Discount and Customer-related Provisions and Losses

The Revenue disallowed provisions for customer discounts and related losses on the ground that these expenses were not crystallized during the year.

Court's Reasoning: The CIT(A) deleted the disallowance for customer discount provision, following earlier orders and judicial precedents. However, the issue relating to customer-related provisions and losses was not adjudicated with a speaking order by CIT(A).

Application of Law to Facts: The Tribunal, considering the material submitted, remitted the issue to the Assessing Officer for fresh adjudication after providing the assessee an opportunity to be heard.

Conclusion: Provision for customer discount disallowance was deleted; the issue of customer-related provisions and losses was remitted for reassessment.

5. Disallowance of Excess Depreciation on Computer Peripherals

The Revenue disallowed excess depreciation claimed on computer peripherals, contending that such assets do not qualify for the higher depreciation rate applicable to computers.

Legal Framework and Precedents: The depreciation rate for computers is higher, and peripherals integrated with computers may qualify similarly.

Court's Reasoning: The Tribunal upheld CIT(A)'s order allowing depreciation on peripherals like printers and routers as integral to computer systems, relying on decisions such as Hotel Excelsior, BSES Yamuna Powers, Orient Ceramics, and Birlasoft Ltd.

Application of Law to Facts: The Tribunal found the assets formed an integrated system, justifying the depreciation treatment.

Conclusion: Disallowance was deleted, rejecting Revenue's ground 8.

6. Credit for Tax Deducted at Source (TDS)

The assessee claimed credit for TDS amounting to Rs. 98,44,965/- which was not granted by the Assessing Officer.

Court's Reasoning: The Tribunal directed the Assessing Officer to allow TDS credit in accordance with law, as the Revenue did not oppose this submission.

Conclusion: Direction issued to grant TDS credit.

7. Additional Ground on Dividend Distribution Tax (DDT) Rate

The assessee sought to restrict the DDT rate to 5% as per the Double Taxation Avoidance Agreement (DTAA), instead of the higher rate under section 115-O of the Income-tax Act.

Court's Reasoning: The Tribunal admitted the ground as a legal issue but noted that the matter was decided against the assessee by a Special Bench decision in a precedent case, which was binding.

Conclusion: The additional ground was dismissed.

Significant Holdings:

"The interest received are inextricably linked to the conduct of the business of the eligible undertakings of the assessee and should also be section treated as profit of the business eligible for deduction under section 10A of the Act."

"A perusal of the said definition clearly shows that it is only when such expenses are included in the consideration received in convertible foreign exchange that the same have to be reduced from export turnover and total turnover, however in the instant case, said expenses have not been invoiced by the assessee to the overseas customers/clients and therefore, the same were wrongly excluded by the AO while computing the export turnover u/s 10AA of the Act."

"Assets like printers, routers along with other accessories/peripherals form one integrated system and would be of no use independently of each other. Therefore, all such facilities form part of computers and are hence eligible for depreciation rate specified for 'Computers'."

"Considering the material brought on record by the assessee, we deem it fit and proper to remit back the issue to the file of Assessing Officer to reassess the issue under consideration considering the material placed on record by the assessee after giving proper opportunity of being heard."

The Tribunal's final determinations included upholding the CIT(A)'s allowance of deductions under sections 10A and 10AA on interest income and foreign exchange gains, rejecting the Revenue's disallowances on freight, telecommunication, and training expenses, deleting disallowance of depreciation on peripherals, directing allowance of TDS credit, remitting the issue of customer-related provisions for reassessment, and dismissing the assessee's additional ground on DDT rates.