2013 (10) TMI 1488 - AT - Income Tax

ITAT Rules on Telecom Expense Adjustment, Interest Income Deduction, and TDS Credit in Software Service Case.

The appeal was partly allowed, with the ITAT directing the AO to adjust telecommunication expenses from both export and total turnover and to treat ... Computation of Export turnover and total turnover - For the purpose of section 10A the telecommunication expenses in respect of export required to be excluded from the export turnover or total turnover and both - HELD THAT - In view of the decision of the High Court in [2011 (8) TMI 782 - KARNATAKA HIGH COURT], the AO is directed to reduce the telecommunication expenses from the export turnover as well as the total turnover, while computing deduction u/s. 10A of the Act. Decision in favor assessee. Investment made out of temporary fund available from business - Income from short term deposits to be treated as Income from other sources or business income for purpose of deduction u/s 10A? - HELD THAT - Referring [2005 (3) TMI 93 - KARNATAKA HIGH COURT] where the assessee, instead of keeping that amount idle, since it did not require the same for its immediate business activity, had deposited that amount by way of short-term deposit in the bank and the amount so deposited is only the funds which it had received towards the export to be made by it and the amounts so deposited in the bank and the interest income derived because of such deposit have close link with the business activity of the assessee and therefore the interest on bank deposits was assessable as business income. In light of the aforesaid decisions, we are of the view that the claim made by the assessee deserves to be accepted. Business of software development services - the appellant is in the business of man power deployment - recompute the deduction u/s 10A of the Act after reducing the profit attributable to Business of Man Power Deployment​​​​​​​ - violation of the principles of natural justice - the assessee is eligible to deduction u/s. 10A? - HELD THAT - the order of the CIT(A) does not give any basis for coming to the conclusion that the assessee was in the business of manpower deployment. It is not understandable as to how such conclusion can be arrived at on the basis of perusal of P&L account and the composition of personnel cost found in the P&L account. The conclusions are without any basis and in our view cannot be sustained. Decision in favor assessee. Issues Involved:1. Exclusion of telecommunication expenses from export turnover.2. Attribution of interest income as income from other sources.3. Charging of interest u/s 234B & 234C.4. Credit for tax deducted at source.5. Business nature and deduction u/s 10A.Summary:Issue 1: Exclusion of Telecommunication Expenses from Export TurnoverThe assessee contested the exclusion of Rs. 40,79,921 telecommunication expenses from the export turnover by the CIT(A). The Tribunal referenced the Karnataka High Court's decision in Tata Elxsi Ltd., which mandates that if expenses are excluded from export turnover, they must also be excluded from total turnover for computing deduction u/s 10A. The Tribunal directed the AO to reduce telecommunication expenses from both export and total turnover, thus addressing the assessee's grievance.Issue 2: Attribution of Interest Income as Income from Other SourcesThe assessee argued that interest income from short-term deposits should be considered business income for deduction u/s 10A. The Tribunal cited various judicial precedents, including the Karnataka High Court's decision in CIT v. Producin Pvt. Ltd., which supports treating interest on short-term deposits as business income if it has a perceptible link with business activities. The Tribunal concluded that the interest income should be included in business income for deduction u/s 10A.Issue 3: Charging of Interest u/s 234B & 234CThe Tribunal noted that the issue of charging interest u/s 234B & 234C is consequential and directed the AO to provide consequential relief.Issue 4: Credit for Tax Deducted at SourceThe assessee claimed a discrepancy in the credit for TDS. The CIT(A) had directed the AO to verify and allow the correct credit. The Tribunal found this direction sufficient to address the assessee's grievance.Issue 5: Business Nature and Deduction u/s 10AThe CIT(A) concluded that the assessee was in the business of manpower deployment based on personnel costs in the P&L account, reducing the deduction u/s 10A. The Tribunal found no basis for this conclusion, noting that the AO had accepted the assessee's business as software development services. The Tribunal held that the CIT(A)'s conclusions were without basis and allowed the assessee's ground.Conclusion:The appeal by the assessee was partly allowed, with directions to the AO to adjust the telecommunication expenses and include interest income as business income for deduction u/s 10A. The Tribunal also addressed the issues of TDS credit and rejected the CIT(A)'s conclusion on the nature of the assessee's business.