2015 (5) TMI 811 - AT - Income Tax

Exemption u/s 10A - Treatment to foreign exchange rate gain on packing credit foreign currency loan - income from other sources OR income from business for the purpose of computing deduction under section 10A - Held that - On going through the order of the Commissioner of Income Tax (Appeals) we do not find any valid reason to reverse the findings of the Commissioner of Income Tax (Appeals) in holding that the foreign exchange gain on packing credit foreign currency loan is not eligible for deduction under section 10A of the Act. The case laws relied on by the counsel for the assessee are distinguishable on facts and are not applicable to the facts of the assessee s case. Decided against assesse. Exclusion of travelling expenditure incurred in foreign currency from the total turnover also while computing deduction under section 10A - Held that - The Commissioner of Income Tax (Appeals) following the Special Bench decision in the case of ITO Vs. Saksoft Ltd.(2009 (3) TMI 243 - ITAT MADRAS-D) rightly directed the Assessing Officer to exclude the travelling expenditure from total turnover also. Thus we uphold the order of the Commissioner of Income Tax (Appeals) on this issue. Excluding 50% of telecommunication expenditure incurred in Indian rupee from the export turnover - Held that - only if telecommunication charges were incurred in foreign exchange the same can be excluded fom the export turnover. However in the instant case the entire telecommunication were incurred in Indian Rupees and hence requires no exclusion from the export turnover and the Hon ble jurisdictional Tribunal in the case of California Software Company Ltd. 2008 (8) TMI 430 - ITAT MADRAS-A has confirmed this view. Therefore the action of the AO is not justified in excluding the said expenditure from the export turnover as it was not incurred in foreign exchange.

Summary

Issues Involved:
1. Treatment of foreign exchange rate gain on packing credit foreign currency loan for deduction under section 10A of the Act.
2. Exclusion of traveling expenditure incurred in foreign currency from total turnover while computing deduction under section 10A.
3. Exclusion of 50% of telecommunication expenditure incurred in Indian Rupees from export turnover while computing deduction under section 10A.

Detailed Analysis:

1. Treatment of Foreign Exchange Rate Gain:
The primary issue in the assessee's appeal was whether the foreign exchange rate gain on packing credit foreign currency loan should be treated as income from other sources or income from business for computing deduction under section 10A of the Act. The assessee argued that the gain arose from a business transaction as the loan was taken for working capital purposes, and thus, it should be treated as business income. The assessee cited the Supreme Court's decisions in Sutluj Cotton Mills Ltd. Vs. CIT and CIT Vs. Woodward Governor India Pvt. Ltd. to support this view. However, the Assessing Officer and Commissioner of Income Tax (Appeals) held that the gain did not have a direct nexus with the export of software and thus should be treated as income from other sources. The Tribunal upheld this view, stating that the gain on foreign exchange fluctuation on the packing credit foreign currency loan is not eligible for deduction under section 10A of the Act, as it did not arise directly from the export business.

2. Exclusion of Traveling Expenditure:
The first issue in the Revenue's appeal was whether the Assessing Officer should exclude traveling expenditure incurred in foreign currency from the total turnover while computing deduction under section 10A. The assessee argued that this issue was covered by the Special Bench decision in ITO Vs. Saksoft Ltd., which held that if traveling expenses are excluded from export turnover, they should also be excluded from total turnover. The Commissioner of Income Tax (Appeals) agreed with this view and directed the Assessing Officer to exclude the traveling expenditure from total turnover. The Tribunal upheld this decision, affirming that the exclusion should apply to both export turnover and total turnover for parity.

3. Exclusion of Telecommunication Expenditure:
The second issue in the Revenue's appeal concerned the exclusion of 50% of telecommunication expenditure incurred in Indian Rupees from the export turnover. The assessee cited the co-ordinate bench decision in California Software Company Ltd., which held that such expenditure should not be excluded from export turnover as it was not incurred in foreign exchange. The Commissioner of Income Tax (Appeals) followed this decision and allowed the assessee's claim. The Tribunal upheld this decision, stating that only telecommunication charges incurred in foreign exchange should be excluded from export turnover, and since the charges in this case were incurred in Indian Rupees, they should not be excluded.

Conclusion:
The Tribunal dismissed the appeals of both the assessee and the Revenue, as well as the cross objection filed by the assessee. The Tribunal upheld the findings of the Commissioner of Income Tax (Appeals) on all issues, maintaining the treatment of foreign exchange rate gain as income from other sources, and the exclusion of traveling and telecommunication expenditures from total turnover and export turnover, respectively, in accordance with established judicial precedents.