2011 (3) TMI 1661 - AT - Income Tax

Tribunal Allows Assessee's Appeal on Section 80HHE Claim

The Tribunal allowed the assessee's appeal regarding the denial of claim under Section 80HHE on 10% of profits, citing harmony between sections 10B and ... Simultaneous deductions under section 10B and section 80HHE - interpretation of exclusion clauses in section 10B(6)(iii) - treatment of expenses in foreign exchange for computation of export turnover under section 10B - exclusion of telecommunication charges from export turnover - deductibility of foreign exchange fluctuation loss under accounting standard AS-11 - applicability of interest under section 234D to assessment year 2003-04Simultaneous deductions under section 10B and section 80HHE - interpretation of exclusion clauses in section 10B(6)(iii) - Deduction under section 80HHE can be claimed in respect of the remaining 10% profits not allowed under reduced 90% deduction of section 10B. - HELD THAT: - The Tribunal held that where an undertaking qualifies both under section 10B and section 80HHE, the two provisions must be read harmoniously. Parliament expressly excluded certain sections (for example, sections 80HH, 80HHA, 80-I, 80-IA and 80-IB) in section 10B(6)(iii) but did not exclude section 80HHE; thus section 80HHE is not rendered otiose and simultaneous entitlement to both deductions is permissible. The Tribunal relied on precedent including the Madras High Court decision in CIT v. Ambatture Clothing Ltd and relevant ITAT decisions which support that allowing section 80HHE for the residual profits after 90% deduction under section 10B does not amount to impermissible double deduction. The conclusion follows from the statutory scheme, the specific exclusions in section 10B(6)(iii) and the legislative reduction of section 10B benefit to 90%, leaving scope for deduction under other provisions not expressly excluded. [Paras 9]Assessee permitted to claim deduction under section 80HHE in respect of the remaining 10% profits not covered by the 90% deduction under section 10B.Treatment of expenses in foreign exchange for computation of export turnover under section 10B - exclusion of telecommunication charges from export turnover - Whether expenses incurred in foreign exchange (including travelling, boarding, lodging and emoluments) and telecommunication expenses are to be excluded from export turnover and correspondingly from total turnover for computing deduction under section 10B is to be examined on facts and remitted to the Assessing Officer. - HELD THAT: - The Tribunal agreed with the legal proposition that expenses which fall within Explanation 2(iii) to section 10B (expenses incurred in foreign exchange in providing technical services outside India, freight, telecommunication, insurance attributable to delivery outside India) are to be excluded from export turnover and, where applicable, should be adjusted in total turnover as well. However, the factual matrix in the assessee's case was unclear as to whether the foreign exchange expenses related to provision of technical services outside India or were of a different character. Given the need for factual clarification (invoices, inclusion of such expenses in sale/service invoices, and nature of expenditure), the Tribunal restored the issue to the file of the Assessing Officer for fresh adjudication and factual verification. The telecommunication-expenditure ground was not pressed and was dismissed, but the factual enquiries required for Ground No.2 apply similarly. [Paras 10, 11, 12]Issue remanded to the Assessing Officer for fresh consideration and verification of facts; allowed for statistical purposes pending AO's determination.Deductibility of foreign exchange fluctuation loss under accounting standard AS-11 - Loss on account of foreign exchange fluctuation computed pursuant to restatement of current assets and liabilities under AS-11 is allowable as revenue loss. - HELD THAT: - The Tribunal found the loss pertained to revenue transactions (sundry debtors and travelling expenses) and that the assessee consistently followed the accounting treatment under AS-11. The assessee furnished supporting details and the accounting method has been recognised by higher authority in precedent (CIT v. Woodward Governor India Pvt. Ltd.). Accordingly, the loss on foreign exchange fluctuation was held deductible from business profits. [Paras 16]Deduction of the foreign exchange fluctuation loss from business profits allowed.Applicability of interest under section 234D to assessment year 2003-04 - Interest under section 234D is not leviable for assessment year 2003-04. - HELD THAT: - There are divergent High Court decisions on retrospectivity of section 234D, but the Tribunal followed the Chennai Bench Special Bench authority which held that section 234D is not retrospective and operates from assessment year 2004-05 onwards. Respectfully following that Special Bench and the Chennai Bench decision, the Tribunal confirmed the CIT(A)'s finding in favour of the assessee and dismissed Revenue's contention. [Paras 18]Revenue's appeal on levy of interest under section 234D dismissed; interest not applicable for AY 2003-04.Final Conclusion: Assessee's appeal partly allowed: deduction under section 80HHE permitted for the residual 10% profits after 90% deduction under section 10B; factual issues regarding exclusion of foreign-exchange and telecommunication expenses from export and total turnover remitted to the Assessing Officer for fresh inquiry; foreign exchange fluctuation loss under AS-11 allowed. Revenue's appeal dismissed regarding interest under section 234D for AY 2003-04. Issues Involved:1. Denial of claim under section 80HHE on 10 percent of the profits of the undertaking.2. Expenditure incurred in foreign currency and its exclusion from export turnover but not from total turnover in computing deduction under section 10B.3. Telecommunication expenditure and its exclusion from export turnover but not from total turnover in computing deduction under section 10B.4. Loss on account of foreign exchange fluctuation.5. Levy of interest under section 234D of the Act.Issue-Wise Detailed Analysis:Issue 1: Denial of Claim under Section 80HHE on 10 Percent of the Profits of the UndertakingThe assessee claimed that the remaining 10% of profits, after the 90% deduction under section 10B, should be eligible for deduction under section 80HHE. The assessee argued that section 10B(6)(iii) excludes deductions under sections 80HH, 80HHA, 80-I, 80-IA, and 80-IB but not under section 80HHE. The Tribunal noted that the provisions of section 10B and section 80HHE should be read in harmony, allowing simultaneous deductions under both sections. The Tribunal cited the decision of the Hon'ble Madras High Court in the case of CIT vs M/s Ambatture Clothing Ltd, which supported the assessee's claim. Consequently, Ground No.1 of the assessee's appeal was allowed.Issue 2: Expenditure Incurred in Foreign CurrencyThe assessee contended that expenses incurred in foreign exchange should be excluded from both export turnover and total turnover when computing the deduction under section 10B. The Tribunal agreed with the assessee, referencing the Special Bench decision in the case of Sak Soft Ltd, which supports the exclusion of such expenses from both export and total turnover. However, the Tribunal restored the issue to the Assessing Officer to verify if the expenses were indeed related to providing technical services outside India. Hence, this ground was allowed for statistical purposes.Issue 3: Telecommunication ExpenditureThe Tribunal noted that this issue was not pressed at the time of hearing and thus dismissed it. However, the Tribunal's findings on Issue 2 also applied to this issue, indicating that telecommunication expenses should be excluded from both export and total turnover. Therefore, Ground No.4 was restored to the Assessing Officer with similar directions as given for Ground No.2 and allowed for statistical purposes.Issue 4: Loss on Account of Foreign Exchange FluctuationThe assessee incurred a loss due to foreign exchange fluctuations, which was rejected by the Assessing Officer as notional loss. The Tribunal found that the loss was related to revenue transactions and was computed based on 'Accounting Standard 11' issued by ICAI. The Tribunal upheld the deduction of this loss from business profits, referencing the Hon'ble Supreme Court's decision in CIT vs Woodward Governor India Pl Ltd.Issue 5: Levy of Interest under Section 234DThe Tribunal noted that the provisions of section 234D are not retrospective and only applicable from assessment year 2004-05. The Tribunal followed the decision of the ITAT Delhi Special Bench in the case of ITO vs Ekta Promoters Pvt. Ltd and the Hon'ble Delhi High Court in the case of Jacobs Civil Incorporated. Consequently, the Tribunal confirmed the finding of the ld. CIT(A) and dismissed the Revenue's appeal on this ground.Conclusion:The appeal of the assessee was partly allowed and partly allowed for statistical purposes, while the appeal of the Revenue was dismissed. The order was pronounced in the open court on 18.3.2011.