2011 (6) TMI 735 - AT - Income Tax

Tribunal grants relief: separate books, sub-contracted work, foreign currency expenses, bad debts.

The Tribunal partly allowed the appeal by granting relief under section 10A for non-maintenance of separate books and sub-contracted work, allowing ... Disallowance of deduction claimed u/s 010A - Non-maintenance of separate books of accounts - HELD THAT:- In view of the fact that the maintenance of separate books of account for STP Units is not a condition laid down in the provisions of s.010A of the Act and also in conformity with the rulings of the (i) CWT Vs KRIPASHANKAR DAYASHANKER WORAH [1971 (7) TMI 4 - SUPREME COURT] (ii) SMT. TARULATA SHYAM Vs CIT, [1977 (4) TMI 3 - SUPREME COURT], (iii) PHILIP JOHN PLASKET THOMAS Vs CIT [1963 (3) TMI 45 - SUPREME COURT] and the finding of the Hon’ble Bench in the assessee’s own case for the immediately preceding AY, we are of the considered view that the Ld. CIT (A) was not justified in denying the legitimate claim of the assessee u/s 010A of the Act. It is ordered accordingly. Disallowance sub-contracted work - HELD THAT:- The fact remains that the assessee had exported from STP Units and the engagement of the sub-contractors by the assessee to whom assessee paid from its bank account maintained abroad which only provided services to the assessee and have not exported anything by themselves and it would not be considered as exports, unless provision of those services from one STP unit to another unit that exports is considered as exports within the meaning of the Act. Since it is accepted that it is the assessee who had exported computer software for which it was paid, the entitlement of exemption u/s 010A is satisfied. In conformity with the reasoning of the Hon’ble Bench, we are of the considered view that the assessee is entitled to relief u/s 010A of the Act in respect of the work subcontracted by IBM India. It is ordered accordingly. Deduction on bad debts - In the case of CIT v. Star Chemicals (Bombay) P. Ltd. [2008 (2) TMI 399 - BOMBAY HIGH COURT] held that u/s 036(1)(vii) and Circular No.551 dated January, 23, 1990 if the assessee had written off the debt as a bad debt that would satisfy the purpose of the section. Accordingly, we hold that the bad debts written off by the assessee in its books of account shall be allowed as a deduction. It is ordered accordingly. Disallowance claim for exclusion of foreign currency expenses - The assessee’s claim for exclusion of foreign currency expenses from both the export turnover as well as total turnover. it is held that up-linking charges which are reduced for ascertaining the export turnover are also not to be considered for the purposes of total turnover, as total turnover is sum total of export turnover and internal turnover. We are in total agreement with the observations of the earlier Bench as well as the Hon’ble special Bench of Chennai Tribunal on the issue. It is ordered accordingly. Issues Involved:1. Denial of claim of relief under section 10A due to non-maintenance of separate books of account.2. Ineligibility to claim relief under section 10A for sub-contracted work.3. Reduction of expenses pertaining to freight, insurance, and communication charges from 'export turnover' in computing relief under section 10A.4. Disallowance of bad debts amounting to Rs. 12.72 crores.Detailed Analysis:I. Denial of Claim of Relief Under Section 10A Due to Non-Maintenance of Separate Books of Account:The assessee contended that separate books of account were not required under section 10A as long as the profit/loss of each STP unit could be derived from consolidated books. The CIT (A) had denied the claim citing the need for separate books post the amendment effective from 1.4.2001. However, the Tribunal noted that the requirement for separate books was not explicitly stated in section 10A and referred to the earlier decision in the assessee's own case for AY 2000-01, which held that allocation of indirect costs based on turnover was reasonable. The Tribunal cited the ruling in Smt. Tarulata Shyam v. CIT (108 ITR 345 SC) emphasizing that legislative intent should be gathered from the statute's words without presumption. The Tribunal concluded that the CIT (A) was not justified in denying the claim under section 10A based on non-maintenance of separate books.II. Ineligibility to Claim Relief Under Section 10A for Sub-Contracted Work:The CIT (A) held that the assessee was not eligible for relief under section 10A for sub-contracted work as the sub-contractors were also claiming relief under the same section. The Tribunal referred to its earlier decision in the assessee's case for AY 2000-01, which granted relief under section 10A for sub-contracted work, stating that the benefit should be considered based on the assessee's exports. The Tribunal upheld that the assessee was entitled to relief under section 10A for sub-contracted work.III. Reduction of Expenses Pertaining to Freight, Insurance, and Communication Charges from 'Export Turnover':The CIT (A) excluded foreign currency expenses from export turnover but not from total turnover, citing his reasoning in the case of Jaipuria Silk Mills (P) Ltd. The Tribunal, however, referred to the decision in iGate Global Solutions Ltd. v. ACIT (112 TTJ 1002) and the Special Bench decision in ITO v. Sak Soft Ltd. (313 ITR AT 353), which held that such expenses should be excluded from both export turnover and total turnover. The Tribunal agreed with these precedents, allowing the exclusion of foreign currency expenses from both export and total turnover.IV. Disallowance of Bad Debts:The CIT (A) disallowed the bad debts, stating that the assessee did not follow the proper procedure for write-off. The Tribunal, referencing various judicial pronouncements, including the Supreme Court decision in T.R.F. Ltd. v. CIT (323 ITR 397 SC), held that after the amendment to section 36(1)(vii) effective from 1.4.1989, it was sufficient for the bad debt to be written off in the accounts without proving it had become irrecoverable. The Tribunal concluded that the bad debts written off by the assessee should be allowed as a deduction.Conclusion:The Tribunal partly allowed the appeal, granting relief under section 10A for non-maintenance of separate books and sub-contracted work, allowing exclusion of foreign currency expenses from both export and total turnover, and permitting the deduction of bad debts written off in the books.