2011 (12) TMI 571 - AT - Income Tax

Tribunal partially allows assessee's appeal, upholds interest levy, excludes telecom expenses for deduction. Disallowance rejected.

M/s. Cerner Healthcare Solutions Pvt. Ltd. Versus Income-tax Officer

The tribunal partly allowed the appeal of the assessee. Grounds related to general issues were dismissed. The levy of interest under section 234B was ... Computing the exemption u/s 10A - Held that:- While computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. Disallowance u/s 40(a)(i)- Payments made by assessee to Cerner, USA - reimbursement of expenses OR “fees for technical services” (FTS)- Held that:- Both parties had agreed that the reimbursement payment cannot be liable to tax and the issue is covered by the order of the Tribunal in the case of IDS Software Solutions (India) Pvt. Ltd.(2009 (1) TMI 363 - ITAT BANGALORE-A ). Since the facts being identical, respectfully following the decision of the co-ordinate Bench of the Tribunal, we hold that the AO is not justified in making disallowance of Rs. .2,74,59,496 u/s 40(a)(i) Issues Involved:1. General grounds of appeal2. Levy of interest under section 234B3. Computation of deduction under section 10A4. Disallowance under section 40(a)(i)5. Incidental/consequential issuesIssue-Wise Detailed Analysis:1. General Grounds of Appeal:The assessee raised 15 grounds of appeal, but during the hearing, it was admitted that ground Nos. 1 to 5 were general in nature and did not require any adjudication. Consequently, these grounds were dismissed.2. Levy of Interest Under Section 234B:Ground No. 15 pertained to the levy of interest under section 234B of the Income Tax Act. The tribunal held that the levy of interest under section 234B is mandatory and consequential, thus dismissing this ground.3. Computation of Deduction Under Section 10A:Ground Nos. 6, 7, and 8 related to the computation of deduction under section 10A of the Act. The key points of contention were:- Reduction of Telecommunication Expenses: The AO reduced telecommunication expenses from export turnover while computing the deduction under section 10A, but did not reduce the same from the total turnover.- Alternative Plea: The assessee argued that if telecommunication expenses are reduced from export turnover, they should also be reduced from total turnover to maintain parity.- Restriction of Deduction: The AO restricted the deduction under section 10A to Rs. 4,07,09,139 as against the claimed amount of Rs. 4,08,90,550.The tribunal referred to the judgments of the Karnataka High Court in CIT v. M/s Tata Elxsi Ltd., the Mumbai High Court in CIT v. Gem Plus Jewellery India Ltd., and the Special Bench of ITAT in ITO v. M/s Sak Soft Ltd., which supported the assessee's alternative plea. It was held that for computing the deduction under section 10A, if certain expenses are excluded from export turnover, they must also be excluded from total turnover. Thus, the tribunal directed the AO to exclude the telecommunication expenses from both export turnover and total turnover while calculating the deduction under section 10A. Ground No. 7 was allowed, and ground Nos. 6 and 8 were dismissed as not pressed.4. Disallowance Under Section 40(a)(i):Ground Nos. 9 to 13 concerned the disallowance of Rs. 2,74,59,496 under section 40(a)(i) of the Act. The facts were:- Certain employees of Cerner, US were deputed to work for Cerner, India, and the expenses including salaries were reimbursed by Cerner, India to Cerner, US.- The AO disallowed these expenses on the grounds that they constituted 'fees for technical services' (FTS) and were liable to tax deduction at source.The tribunal noted that the CIT(A) had held that the payments were reimbursements and not FTS, but still taxable under the Act. However, both parties agreed that reimbursements cannot be liable to tax as per the order in IDS Software Solutions (India) Pvt. Ltd. (122 TTJ 410), which followed the judgment in Sedco Forex International Inc (214 CTR 192). Respectfully following this decision, the tribunal held that the AO was not justified in making the disallowance under section 40(a)(i). Thus, ground Nos. 9 to 13 were allowed.5. Incidental/Consequential Issues:Ground No. 14 was incidental/consequential to ground Nos. 9 to 13. Since ground Nos. 9 to 13 were allowed in favor of the assessee, ground No. 14 was dismissed as redundant and infructuous.Conclusion:The appeal of the assessee was partly allowed as indicated above. The tribunal pronounced the order in the open court on 16th December 2011.