Assessee's Deduction Claims Disputed: Tribunal Ruling on Foreign Exchange, Turnover, and Expenses

The assessee was allowed to claim deductions under both Sections 10B and 80HHE for AY 2003-04. However, for AY 2005-06, the Tribunal dismissed the appeal regarding foreign exchange gains, upheld the exclusion of telecommunication and foreign currency expenses from export turnover and total turnover, and rejected the pro rata division of telecommunication charges between export and local sales. The appeal for AY 2003-04 was allowed, while for AY 2005-06, the appeal was dismissed, except for a partial allowance in favor of the Revenue.

---

---

Issues Involved:
1. Deduction under Section 80HHE after claiming deduction under Section 10B for AY 2003-04.
2. Foreign exchange fluctuation gain on EEFC account for deduction under Section 10B for AY 2005-06.
3. Exclusion of telecommunication expenditure from export turnover for AY 2005-06.
4. Exclusion of expenditure in foreign currency from export turnover for AY 2005-06.
5. Exclusion of telecommunication and foreign currency expenses from total turnover for AY 2005-06.
6. Pro rata division of telecommunication charges between export sales and local sales for AY 2005-06.

Summary:

1. Deduction under Section 80HHE after claiming deduction under Section 10B for AY 2003-04:
The assessee claimed a 90% deduction u/s 10B and sought a 10% deduction u/s 80HHE for the remaining profits. Both the AO and CIT(A) denied this, citing decisions from co-ordinate Benches. However, the Tribunal referenced the case of Covansys (India) Pvt. Ltd., where it was held that simultaneous deductions under Sections 10B and 80HHE are permissible. The Tribunal concluded that the assessee is entitled to claim deductions under both sections.

2. Foreign exchange fluctuation gain on EEFC account for deduction under Section 10B for AY 2005-06:
The Tribunal upheld the decision from the assessee's own case for AY 2004-05, stating that gains from EEFC account conversion do not have a direct nexus with export transactions and thus are not eligible for deduction u/s 10B.

3. Exclusion of telecommunication expenditure from export turnover for AY 2005-06:
The Tribunal referred to the definition of "export turnover" in Section 10B and concluded that telecommunication charges attributable to the delivery of computer software outside India must be excluded from export turnover. This was consistent with the decision in the assessee's own case for AY 2004-05.

4. Exclusion of expenditure in foreign currency from export turnover for AY 2005-06:
The Tribunal found that the expenses incurred in foreign currency were for technical services rendered outside India and thus should be excluded from export turnover, supporting the AO and CIT(A)'s view.

5. Exclusion of telecommunication and foreign currency expenses from total turnover for AY 2005-06:
The Tribunal upheld the CIT(A)'s decision to exclude these expenses from total turnover, aligning with the Special Bench decision in Sak Soft Ltd., which mandates that whatever is excluded from export turnover must also be excluded from total turnover.

6. Pro rata division of telecommunication charges between export sales and local sales for AY 2005-06:
The Tribunal agreed with the Revenue that there were no local sales, and thus, the CIT(A)'s direction for pro rata division of telecommunication charges was unwarranted.

Conclusion:
- The appeal of the assessee for AY 2003-04 is allowed.
- The appeal of the assessee for AY 2005-06 is dismissed.
- The appeal of the Revenue for AY 2005-06 is partly allowed.

The order was pronounced in the Court on 14th October, 2011.

---