TMI Blog2019 (7) TMI 865X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is no express order granting approval by the authorized bankers extending the time limit of six months for receipt of foreign remittances on account of export sales, the assessee is entitled to the benefit of deduction u/s 10A - ground No.3.1 of the assessee s appeal is allowed. Excluding export sales from export turnover, even though the proceeds of these export sales were realized within the time limit specified u/s 10A(3) - HELD THAT:- As we have already held that those export sale proceeds that were realized within the time limit and those export sales proceeds for which extension of time limit was applied for by the assessee to the authorized bankers are eligible for deduction u/s 10A, this ground is also covered by the aforesaid decision in the case of Wipro Ltd. [ 2015 (10) TMI 826 - KARNATAKA HIGH . Consequently, ground No.3.2 raised by the assessee in this appeal is allowed. Exclusion of Expenditure incurred in foreign currency from Export Turnover - HELD THAT:- While the assessee has given some break-up of details of expenses incurred in foreign currency, the details do not establish that all of these expenses were not incurred for rendering technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt has not made any distinction between employees contribution and employer s contribution to PF and that the above conditions / time specified for payment thereof apply to both these contributions to PF. Respectfully following the aforesaid judgments in the case of Sabari Enterprises [ 2007 (7) TMI 169 - KARNATAKA HIGH COURT] and Spectrum Consultants India Pvt. Ltd. [ 2014 (2) TMI 127 - KARNATAKA HIGH COURT] we uphold the decision of the CIT(A) and dismiss ground Nos.2 and 3 of Revenue s appeal. Deduction u/s 10A Export turnover / total turnover computation - HELD THAT:- High Court of Karnataka in the case of CIT v Tata Elxsi Ltd [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT] has held that when certain expenses are excluded from the export turnover for the purposes of computing deduction admissible under the Act; like u/s. 10A , such expenses are also to be excluded from total turnover, as export turnover is a part of total turnover. This issue is no longer res integra, and has been decided in favour of the assessee and against revenue by the decision of the Hon'ble Apex Court in the case of CIT V. HCL Technologies Ltd. [ 2018 (5) TMI 357 - SUPREME COURT] - we direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment Year 2010-11, have filed cross appeals before the Tribunal, which we now proceed to dispose off hereunder. Assessee s appeal in ITA No.1519/Bang/2017 for Assessment Year 2010-11 4. In this appeal, the assessee has raised the following grounds:- 1. The order dated 31 March 2014 ( impugned order') passed by the Deputy Commissioner of Income Tax, Circle 16(1), New Delhi (hereinafter referred to as Ld. AO') under section 143(3) of the Income Tax Act, 1961 (Vice) and upheld by the Commissioner of Income-tax (Appeals)-15 Ld. CIT(A)1 is contrary to the facts and circumstances of the case and hence is bad in law. Reduction in deduction claimed under section 10A of the Act 2. The CIT(A) has erred on facts and in law in upholding the order of the Ld. AO restricting deduction under section 10A of the Act to INR 14,99,61,185 as against INR 29,16,64,872 as claimed by the Appellant. 3. On facts and in law, the Ld. CIT(A) erred in upholding the order of the Ld. AO reducing INR 37,61,94,696 from export turnover ( ET') on the ground of non-realization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... INR 1,11,111 paid to non-resident parties under section 40(a)(i) of the Act without appreciating that such payments were not taxable in India. Levy of interest under sections 234B and 234D of the Act 7. On the facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the levy of interest under sections 234B and 234D of the Act. Penalty 8. On the facts and circumstances of the case, the Ld. CIT(A) has erred in not directing the Ld. AO to drop the penalty proceedings initiated under section 274 read with section 271(1)(c) of the Act. Relief 9. On the facts and circumstances of the case and in law, the Appellant prays that the Ld. AO be directed to grant all such relief arising from the preceding grounds as also all relief consequential thereto. 5. Ground Nos.1,2 and 9 (supra) are general in nature and since they require no adjudication, are accordingly dismissed as infructuous. 6. Ground Nos.3 (3.1 to 3.3) to 5 Deduction under section 10A of the Act 6.1 Ground Nos. 3 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the provisions of section 10A(3) of the Act and the RBI Circular in this regard dated 28.01.2002, held that a specific extension letter from the authorized banker is a must to claim the benefit under section 10A of the Act. Since no specific extension from the authorized banker was filed by the assessee, the AO denied the assessee the benefit of deduction under section 10A of the Act to the extent of the export sales, whose proceeds were not received within the six month period; i.e., amounting to ₹ 37,61,94,696/- and reduced the same from the export turnover, while computing the deduction under section 10A of the Act. 7.2 Aggrieved by the order of the AO, the assessee carried the matter in appeal before the CIT(A); who upheld the AO s action and rejected the assessee s contentions. 7.3 Before us, the learned AR for the assessee submitted that this issue has been considered and decided in favour of the assessee s and against Revenue, and placed reliance, inter alia, on the following judicial pronouncements:- ( i) Wipro Ltd., Vs. DCIT (2016) 382 ITR 179 (Kar); ( ii) CIT Vs. Wipro GE Medi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nos.907 86 909/2008; Question of law No.24 in ITA Nos.904 86 905/2008; Question of law No.8 in ITA Nos.210 21112009 and Question of law No.12 in ITA No.363/2009 (Department's appeal)] 146. The facts are riot in dispute. The assessee is a status holder exporter. The export has been done strictly in accordance with law. Foreign exchange remittances should have been received within six months from and of the financial year. It has not been received. Therefore, an application is filed seeking for extension of time to the Reserve Bank of India. Even to this day the Reserve Bank of India has not rejected the said request. On the contrary, after the period of 6 months, foreign exchange remittances are received and credited to the assessee's account through the Reserve Bank of India. It is in this context merely because the written approval of extension is not passed by the Reserve Bank of India, whether the assessee could be denied the benefit of Section 10A. The Tribunal on consideration of the entire material on record, taking note of the statutory provisions and the object underlying this provision, has come to the conclusion that notwithstanding the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in this appeal is allowed. 7.7 Ground No.3.3 7.7.1 In this ground (supra), the assessee contends that the CIT(A) has erred in not directing the AO to amend the order of assessment for Assessment Year 2010-11 under section 155(11A) of the Act to allow deduction under section 10A of the Act in respect of export sales proceeds which were received subsequently. Since we have already held earlier in this order (supra) that those export sales proceeds which were realized within the specified time limit as well as those export sales proceeds which were received subsequently and for which extension of time limit was applied to the authorized bankers are eligible for deduction under section 10A of the Act, this ground No.3.3 becomes infructuous and is accordingly dismissed. 8. Ground No.4 : Exclusion of Expenditure incurred in foreign currency from Export Turnover 8.1 In the course of assessment proceedings, the AO observed from Note No.16 of Schedule 16 of the financial statements that the assessee had incurred amounts totaling ₹ 30,16,21,142/- (i.e., ₹ 4,42,94,575/- and ₹ 25,73,26,566/- fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed as academic. 9. Ground No.5 : Deduction under section 10A of the Act to be on assessed income 9.1 In this ground (supra), the assessee contends that the AO erred in restricting the deduction under section 10A of the Act only to the extent claimed in the return of income, i.e., on returned income and that the AO ought to have computed the deduction under section 10A of the Act on the assessed income. In support of this proposition, the assessee placed reliance on the decision of the Hon ble Karnataka High Court in the case of CIT Vs. M/s. M. Pact Technology Services Pvt. Ltd., (since merged with Wipro Ltd.,) in ITA No.228/2013 dated 11.07.2018. 9.2.1 We have considered the rival contentions and carefully perused the material on record. We find from the impugned order of assessment that the AO has made certain disallowances under section 40(a)(i) of the Act, thereby increasing the business profits of the assessee. It is however seen that the AO has allowed the deduction under section 10A of the Act only to the extent claimed by the assessee in the return of income. On appeal, the CIT(A) rejected the contentions of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.37/2016 dated 02.11.2016 issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, relating to the subject: Date of Judgment 11-07-2018 I.T.A.No.228/2013 Commissioner of Income Tax Anr. Vs. M/s. M PACT Technology Services Pvt. Ltd. Chapter VI-A deduction on enhanced profits, is quoted hereunder: The issue of the claim of higher education on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: [ i] If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non- deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee af te r adjusting disallowance under section 4orallia] of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the employer's and the employee's contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the Assessing Officer to the income. All profits of the unit of the assessee have Date of Judgment 11-07-2018 I.T.A.No.228/2013 Commissioner of Income Tax Anr. Vs. M/s. M PACT Technology Services Pvt. Ltd., been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed, relate to the manufacturing activity. The disallowance of the Provident Fund/ESIC payments has been made because of the statutory provisions - Section 43B in the case of the employer's contribution and Section 36(v) read with Section 2(24)(x) in the case of the employee's contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under Section 10A the addition made on account of the disallowance of the Provident Fund / ESIC payments ought to be ignored cannot be accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for deduction under section 10A of the Act, it is liable to be taxed in India and therefore held that the assessee was under obligation to deduct tax at source on such payments. As the assessee had not deducted tax at source on the said commission payments to non-residents, the AO invoked the provisions under section 40(a)(i) of the Act and disallowed these expenses claimed. On appeal, the CIT(A) upheld the order of the AO on this issue. 10.3.1 Before us, the learned AR for the assessee reiterated the submissions put forth before the authorities below. It is submitted that the only reason for disallowance of these expenses incurred on commission payments to non-residents is that TDS was liable to be deducted on these payments and which was not done. According to the learned AR, the details of the parties to whom the payments were made were admittedly submitted before the AO and as can be seen from the details, these parties are nonresidents and have no permanent establishment (PE) or business connection in India. Therefore, according to the learned AR, since these payments having been made to non-residents for services rendered abroad, they are not taxable in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents made to non-residents. Under Section 195 of the Act, an obligation is cast on a person making payment to a non-resident of any sum, which is chargeable to tax under the provisions of the Act, to deduct tax at the time of payment of such sum or at the time of credit thereof to the account of the payee, whichever is earlier. In terms of the aforesaid provision, tax is required to be withheld in respect of payments to non-residents only if such payment is chargeable to tax in India. The Hon ble Apex Court in the case of GE India Technology Centre (P) Ltd., Vs. CIT (327 ITR 456) (SC), explaining its earlier decision rendered in the case of Transmission Corporation of AP Vs. CIT (239 ITR 587) (SC), held that only if the income is chargeable to tax in India in the hands of the non-resident recipient, would tax be required to be deducted at source from such payment. Various Courts and Tribunals have followed the aforesaid decision of the Hon ble Apex Court and have consistently held that in the absence of any activity in India by a non-resident commission agent, the commission does not accrue or arise in India and is not taxable in India. 10.5.3 Explanation 2 adde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the opening words of Section 195(1) of the Act which reads : any person responsible for paying to non-resident. Therefore, it only defines the person responsible for paying to non-resident and not the payee i.e., the non-resident to whom the payment is being made. 10.5.5 It is, therefore, imperative to first analyze whether the commission paid by the assessee to the non-resident commission agents are chargeable to tax in India. If the answer to the said question is in the affirmative, only then the provisions relating to the withholding of tax under section 195 of the Act shall be applicable /attracted. As per Section 5(2) of the Act, a non-resident is liable to be taxed in India in respect of: ( a) income received or is deemed to be received in India in such year by or on behalf of such person; or ( b) income accrues or arises or is deemed to accrue or arise in India during such year. Section 5(2) of the Act, the charging section for taxing non-resident income, provides for two conditions (supra). The first condition of receipt of income in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident: Provided that such business g-n-ration shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business. Explanation 2A.-For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident in India shall constitute business connection in India and significant economic presence for this purpose, shall mean- ( a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or ( b) systematic and continuous soliciting of business activities or engaging in intera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act are not applicable in the case on hand. In order to invoke the provisions of Section 195 of the Act, the income should be chargeable to tax in India. In the case on hand, since the commission payments to non-residents are not chargeable to tax in India, therefore the provisions of section 195 of the Act are not applicable / attracted. In this view of the matter, we hold that the action of the AO in invoking the provisions of section 40(a)(ia) of the Act to disallow the impugned payments is unsustainable and the said disallowance is deleted. Consequently, ground No.6 of the assessee s appeal is allowed. 11. Ground No.7 Charging of interest under section 234B and 234D of the Act 11.1 In this ground (supra), the assessee denies itself liable to be charged interest under section 234B and 234D of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition was upheld by the Hon ble Apex Court in the case of Anjum H. Ghaswala (252 ITR 1) (SC). We, therefore, uphold the AO s action in charging the aforesaid interest. We, however, direct the AO to re-compute the interest chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputing the deduction under section 10A of the Act. The CIT(A) held that, the expenses incurred in foreign currency which was reduced from export turnover by the AO shall also be excluded from the total turnover and in doing so, followed the judgment of the Hon ble Delhi High Court in the case of CIT Vs. Genpact India (supra). 14.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement cited. he jurisdictional High Court of Karnataka in the case of CIT v Tata Elxsi Ltd (349 ITR 98) (Kar) has held that when certain expenses are excluded from the export turnover for the purposes of computing deduction admissible under the Act; like u/s. 10A of the Act, such expenses are also to be excluded from total turnover, as export turnover is a part of total turnover. The decision in the case of Tata Elxsi Ltd (supra) has also been followed by the Hon'ble Court in its order in the case of DCIT v Motor Industries Co. Ltd., (ITA No. 776/2006, 744/2007 and 1155/2006 dated 13.06.2014), holding that if any expenditure is sought to be removed from export turnover, then it should also be reduced from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Deputy Commissioner of Income Tax, Circle 25(1), New Delhi (hereinafter referred to as Ld. AO') under section 143(3) r.w.s 92CA(4) of the Income Tax Act, 1961 ( Act') and upheld by the Commissioner of Income-tax (Appeals) - 15 1'Ld. CIT(A)'] is contrary to the facts and circumstances of the case and hence is bad in law. Reduction in deduction claimed under section 10A of the Act 2. The CIT(A) has erred on facts and in law in upholding the order of the Ld. AO restricting deduction under section 10A of the Act to INR 26,37,87,412 as against INR 37,90,37,279 as claimed by the Appellant. 2.1 On facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the action of the Ld. AO to exclude expenditure incurred in foreign currency amounting to INR 20,61,56,297 from export turnover ( ET') while computing the deduction under section 10A of the Act without appreciating the fact that these amount were neither included in the export invoices nor did they form part of ET. 2.2 On the facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment Year 2010-11, in this year also, the AO has reduced the expenses incurred in foreign currency from the export turnover while computing the deduction under section 10A of the Act. While upholding the AO s action, the CIT(A) has allowed the assessee s alternate claim that if such expenses are excluded from export turnover, they should also be excluded from the total turnover. 18.2 We have considered the rival contentions put forth on this issue. While the assessee has given some break-up of details of expenses incurred in foreign currency, the details do not establish that all these expenses were not incurred outside India as claimed by the assessee. In the absence of details, the issue is only academic and we do not consider it necessary to adjudicate this issue as the CIT(A) has addressed the assessee s grievance and allowed the assessee s claim raised on this issue. Consequently, ground No.2.1 of assessee s appeal is dismissed as academic. 19. Ground No.2.2 Other Income to be included for computing deduction under section 10A of the Act 19.1.1 In the course of assessment proceedings, the AO observed that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. Ground No.2.3 Deduction under section 10A of the Act on assessed income 20.1 The very same issue i.e., that the assessee is to be allowed deduction under section 10A of the Act on assessed income has been adjudicated at pre paragraphs 9 to 9.2.3 of this order while disposing off ground No.5 of assessee s appeal for Assessment Year 2010-11 (supra). All facts being similar, the same would apply this year, i.e., Assessment Year 2011-12 also. In the decision rendered by us for Assessment Year 2010-11 (supra), it has been held that when disallowance of expenses has been made under section 40(a)(i) of the Act for failure on the part of the assessee to deduct tax at source on such payment and such disallowance automatically enhances the taxable income of the assessee, then the assessee is entitled for deduction under section 10A of the Act on the enhanced assessed income. As the facts of the matter before us for this year are also similar to those in Assessment Year 2010-11, respectfully following the aforesaid decision of the Hon ble Karnataka High Court in the case of CIT Vs. M. Pact Technology Services Pvt. Ltd., (supra), we hold that the deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23. Ground No.5 23.1 In this ground (supra), the assessee challenges the initiation of penalty proceedings under section 274 r.w.s. 271(1)(c) of the Act. Since no penalty under section 271(1)(c) of the Act has been levied by the AO in the impugned order, this ground is premature and non-maintainable and is accordingly dismissed. 24. In the result, the assessee s appeal for Assessment Year 2011-12 is partly allowed. Revenue s appeal in ITA No.1448/Bang/2017 for Assessment Year 2011-12 25. In its appeal for Assessment Year 2011-12, Revenue has raised the following grounds: 1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. Whether on the facts and circumstances of the case the CIT(A) is justified in law in not( considering the provisions of Section 36(1) of the I. T. Act ? 3. Whether on the facts and circumstances of the case the CIT(A) is justified in law in considering that the contribution of PF remitted by the employer after due date prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to PF is paid before the date specified i.e., 20th of the following month. On appeal, the CIT(A) allowed the assessee s claim by relying on the decision of the Hon ble Delhi High Court in the case of CIT Vs. AIMIL Ltd., (2010) 321 ITR 508 (Del HC). 27.2 Aggrieved by the order of the CIT(A), Revenue has carried the matter in appeal before us. After having heard the rival contentions in the matter and considering the judicial precedents in the matter, we find that this issue has been decided by the Hon ble Karnataka High Court in the case of CIT Vs. Sabari Enterprises (2008) 298 ITR 141 (Kar), which has been followed by the Hon ble Karnataka High Court in the case of CIT Vs. Spectrum Consultants India Pvt. Ltd., in WA No.4077/2013 (T-IT) dated 09.12.2013. In the aforesaid decisions (supra), the Hon ble Court has held that the employer shall get deduction for payment of employees contributions to PF provided they are deposited before the due date for filing the return of income under section 139(1) of the Act. It has further held that Parliament has not made any distinction between employees contribution and employer s contribution to PF and that the above con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computer software under Section10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. 21. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover. 28.3 In this legal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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