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2016 (9) TMI 1565 - AT - Income TaxDeduction u/s 10A computation - exclusion of travel expenses by the AO from the export turnover - HELD THAT - In instant case the expenditure had been incurred on foreign soil in connection with development of software by the employees of the assessee-company at foreign branch and nothing had been incurred on managerial or technical services rendered to any outsiders in foreign soil. In view of this discussion it was to be held that said expenditure could not be excluded from the export turnover for computing deduction under section 10B. Para 24 As decided in M/S ZYLOG SYSTEMS LIMITED VERSUS THE INCOME TAX OFFICER 2010 (11) TMI 76 - ITAT CHENNAI that the expenditure incurred for the purpose of business in the Foreign soil should not be excluded from the export turnover for the purpose of deduction u/s 10B. In the assessee s case the expenditure was incurred for the purpose of business and should not be excluded from the export turnover. The assessee s case is squarely covered by the special bench decision. Therefore we delete the addition made by the AO and set aside the Lower authorities orders Deduction u/s 80JJAA - AO was of the view that the company was engaged in the business of software and its employees cannot be called as workmen - HELD THAT - As per the memorandum to Finance Act 1988 sec. 80JJAA the Government of India considered it necessary to provide fiscal incentives in Income-tax Act in order to encourage the employers to create more and more employment opportunities. When the assessee is creating new employment opportunities the beneficial provisions should not be summarily rejected. Though the assessee is engaged in manufacture of computer software Firstly it is covered by Explanation 1 of sec. 10(15) of the Act within the meaning of industrial undertaking and it is supported by COMP-HELP SERVICES P. LTD. 1998 (10) TMI 15 - MADRAS HIGH COURT . Secondly the employees working in the companies engaged in the computer software are also covered as workmen within the meaning of Industrial Dispute act as per the decisions of coordinate benches of Bangalore and Delhi cited supra. The Government of Tamilnadu vide letter dated 30/05/2016 clarified that the IT industry is not exempted from the provisions of Industrial Disputes Ac 1947. AO s case is not that the assessee is not satisfying the eligibility conditions for deduction u/s 80JJAA. The learned DR did not place any material controverting the above decisions. Therefore we hold that assessee is entitled for the deduction u/s 80JJAA and accordingly we set aside the orders of the lower authorities and allow deduction u/s 80JJAA. The assessee s grounds on this issue are allowed. Short credit for the TDS - assessee claimed TDS of Rs. 14, 82, 45, 072/- and the Assessing Officer has allowed only Rs. 14, 19, 47, 495/- - HELD THAT - AO is directed to verify the assessee s claim and give credit for the shortfall. The assessee s groungd on this issue is allowed for statistical purposes. Computing the deduction u/s 10A - Exclusion of travel and communication expenditure incurred in foreign currency from total turnover - HELD THAT - CIT(A) while deleting the addition followed the decision of the Special Bench in ITO vs Sak Soft 2009 (3) TMI 243 - ITAT MADRAS-D - DR during the appeal did not place any decision controverting the decision relied up on by the ld.CIT(A). Therefore we do not find any infirmity in the order of the Ld.CIT(A) and the ground raised by the Revenue on this issue is dismissed. TDS u/s 195 on software - whether transaction with non-resident towards purchase of software cannot be held as a royalty for use of copyrights u/s 9(1)(vi) r.w. Explanation 2 clause(v)? - CIT(A) deleted the addition relying on the decision of this Tribunal in the assessee s own case 2014 (10) TMI 463 - ITAT CHENNAI - HELD THAT - DR relied on the assessment order and the ld. AR relied on the CIT(A) s order. However the ld. DR could not place any decision controverting the decision of the Tribunal in assessee s own case. The ld. DR also did not cite any High Court judgment supporting the decision of Assessing Officer. Therefore we do not find any infirmity in the order of the ld.CIT(A) and the same is upheld. The ground on this issue stands dismissed. Marketing expenditure to subsidiaries - As per the CIT(A) in the present case the Australian subsidiary had been successfully generating revenues for the assessee through its activities and accordingly deleted the addition - HELD THAT - The marketing expenditure is always incurred in advance and returns are expected subsequently in the business. Therefore it is not correct to disallow the expenditure since there was no income. Sometimes even if the expenditure is incurred it will take lot of time to make the sales and to expect the business receipts. A prudent businessman has to incur business expenditure in the shape of marketing and product promotion in advance. In the case of the assessee the CIT(A) found that the payment was made for the compensation at the instance of Australian subsidiaries at Arm s length basis at a mark up of 10% on the operating expenses. The operating expenses also had been defined in clause 4.3 of the marketing support service agreement dated 1.7.2009 which was produced before the CIT(A). CIT(A) called for the details of the expenses incurred in connection with the transactions between the assessee and subsidiary companies for a period of four years and verified and then held that the disallowance has been made without examining the transactions perse. The CIT(A) also observed that the revenues have been generated in subsequent years therefore we agree with the order of the Ld. CIT(A) and uphold the same. Revenue has raised objection under Rule 46A and Bench has asked the nature of additional evidence produced by the assessee before the Ld. CIT(A) - DR has replied that the agreement and the details of expenses. The agreement was placed before the Assessing Officer and the books of account were also produced by the assessee before the Assessing Officer. - We do not find any additional evidence produced by the assessee before the CIT(A) which requires a fresh opportunity to the Assessing Officer. Therefore there is no merit in the ground raised by the Revenue in relation to Rule 46A. Accordingly we dismiss the ground raised by the Revenue on this issue.
Issues Involved:
1. Exclusion of travel expenses from export turnover. 2. Exclusion of unrealized export proceeds from export turnover. 3. Deduction under Section 80JJAA. 4. Short credit for TDS. 5. Exclusion of travel and communication expenses from total turnover. 6. TDS on software purchases. 7. Marketing expenditure to subsidiaries. Detailed Analysis: 1. Exclusion of Travel Expenses from Export Turnover: The assessee claimed travel expenses of Rs. 1,01,53,363/- related to its 100% STPI unit. The Assessing Officer excluded these expenses from the export turnover, presuming they were incurred for services rendered outside India. The CIT(A) upheld this exclusion. The ITAT, referencing Explanation 2(iii) of Section 10A and the Special Bench decision in Zylog Systems, determined that business expenses incurred in foreign currency should not be excluded from export turnover unless they are directly related to services rendered outside India. The ITAT concluded that the travel expenses were business expenditures and should not be excluded from the export turnover. Thus, the ITAT allowed the assessee's appeal on this ground. 2. Exclusion of Unrealized Export Proceeds from Export Turnover: The Assessing Officer excluded Rs. 23,89,578/- representing unrealized export proceeds from the export turnover, and the CIT(A) confirmed this exclusion. The assessee did not make any argument on this issue before the ITAT, leading to the dismissal of this ground. 3. Deduction under Section 80JJAA: The Assessing Officer disallowed the assessee's claim of Rs. 3,23,94,721/- under Section 80JJAA, arguing that software employees do not qualify as workmen. The CIT(A) upheld this view, interpreting the benefit as intended for manufacturing sector workers. The ITAT, however, referred to various case laws and definitions, including the Industrial Disputes Act, and concluded that employees in the software industry qualify as workmen. The ITAT found that the assessee met the conditions for deduction under Section 80JJAA and allowed the deduction, setting aside the lower authorities' orders. 4. Short Credit for TDS: The assessee claimed TDS of Rs. 14,82,45,072/-, but the Assessing Officer allowed only Rs. 14,19,47,495/-. The ITAT directed the Assessing Officer to verify the claim and provide credit for the shortfall. This ground was allowed for statistical purposes. 5. Exclusion of Travel and Communication Expenses from Total Turnover: The CIT(A) directed the Assessing Officer to exclude travel and communication expenses from both export turnover and total turnover while computing the deduction under Section 10A. The ITAT upheld this decision, referencing the Special Bench decision in ITO vs. Sak Soft, as the Revenue did not present any contrary decisions. Thus, the Revenue's appeal on this issue was dismissed. 6. TDS on Software Purchases: The Assessing Officer disallowed Rs. 13,99,575/- for software purchases, arguing that TDS was not deducted, relying on a Karnataka High Court judgment. The CIT(A) deleted this addition, referencing a prior Tribunal decision in the assessee's favor. The ITAT upheld the CIT(A)'s decision, noting no contrary decisions were presented by the Revenue. The Revenue's appeal on this issue was dismissed. 7. Marketing Expenditure to Subsidiaries: The Assessing Officer disallowed Rs. 2,80,00,000/- paid to subsidiaries in the US and Australia, citing no business exigency due to lack of revenue from these countries. The CIT(A) allowed the expenditure, noting that revenue generation is not required every year and the expenditure was at arm's length. The ITAT agreed with the CIT(A), emphasizing the necessity of marketing expenditures and the subsequent revenue generation. The ITAT found no merit in the Revenue's objection under Rule 46A and dismissed the Revenue's appeal on this issue. Summary: The assessee's appeal was partly allowed, with significant relief granted on the exclusion of travel expenses from export turnover and the deduction under Section 80JJAA. The Revenue's appeal was dismissed entirely, upholding the CIT(A)'s decisions on the exclusion of travel and communication expenses, TDS on software purchases, and marketing expenditures to subsidiaries.
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