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 80HHE. The expenses incurred in foreign currency were to be excluded from export and total turnover under Section 10B, subject to verification. The issue of telecommunication expenditure was dismissed but aligned with the decision on foreign currency expenses. The Tribunal upheld the deduction for loss on foreign exchange fluctuation and dismissed the levy of interest under Section 234D. The assessee's appeal was partly allowed, partly for statistical purposes, while the Revenue's appeal was dismissed.

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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 Undertaking
The 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 Currency
The 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 Expenditure
The 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 Fluctuation
The 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 234D
The 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.

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