Tribunal rules in favor of assessee on foreign currency expenses in software development for export turnover.

The Tribunal allowed the assessee's appeal concerning the inclusion of expenses incurred in foreign currency for onsite software development in export turnover under Section 10B of the Income Tax Act. Additionally, the Tribunal upheld the inclusion of foreign exchange retained abroad in export turnover for deduction purposes, dismissing the revenue's appeal. The Special Bench ruled in favor of the assessee on both issues.

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Issues Involved:
1. Inclusion of expenses incurred in foreign currency for providing technical services outside India in export turnover for computing deduction under Section 10B of the Income Tax Act.
2. Inclusion of foreign exchange retained abroad by the assessee in export turnover for computing deduction under Section 10B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Inclusion of Expenses Incurred in Foreign Currency for Providing Technical Services Outside India in Export Turnover:

The primary issue revolves around whether the expenses incurred in foreign currency on computer software development onsite at the client's place outside India should be excluded from export turnover for computing deduction under Section 10B of the Income Tax Act. The assessee, a company engaged in software development both onsite and offshore, argued that the expenses incurred for onsite development should not be excluded from export turnover. The Assessing Officer excluded Rs. 3,33,46,592 incurred by the assessee outside India in foreign exchange for providing technical services, while computing deduction under Section 10B, citing the definition of "export turnover" in the Income Tax Act, which excludes such expenses.

The first appellate authority upheld the Assessing Officer's decision, stating that the provisions of the Act clearly exclude expenses incurred in foreign exchange for providing technical services outside India from export turnover. However, the assessee contended that this exclusion resulted in double addition, as 70% of the export turnover was already excluded by the Assessing Officer. The assessee further argued that the expenses were related to onsite development of software, not technical services to third parties, and thus should be included in export turnover.

The Tribunal noted that the definition of "export turnover" excludes expenses incurred in foreign exchange for providing technical services outside India. However, it also observed that the expenses in question were incurred for onsite development of software by the assessee's employees at its foreign branch, not for providing technical services to external parties. The Tribunal found force in the assessee's argument that a person cannot provide services to oneself and that the expenses were related to the development of software, which should be included in export turnover.

The Tribunal concluded that the expenses incurred by the assessee in foreign currency for onsite development of software should not be excluded from export turnover for computing deduction under Section 10B. Thus, the appeal of the assessee was allowed on this ground.

2. Inclusion of Foreign Exchange Retained Abroad by the Assessee in Export Turnover:

The second issue pertains to whether the foreign exchange retained by the assessee abroad in accordance with RBI guidelines should be included in export turnover for computing deduction under Section 10B. The Assessing Officer excluded Rs. 15,14,20,226 of foreign exchange retained by the assessee abroad, arguing that it was not received in convertible foreign exchange in India within the prescribed time under Section 10B(3).

The first appellate authority allowed the assessee's appeal, directing the Assessing Officer to include the foreign exchange retained abroad in export turnover. The appellate authority reasoned that the RBI allows retention of foreign exchange abroad for specific purposes, and such retention should be deemed as receipt in India. The authority cited the Supreme Court's decision in J.B. Boda & Co. Pvt Ltd v. CBDT, which held that unnecessary rituals of receiving and remitting foreign exchange should be avoided.

The Tribunal concurred with the first appellate authority, stating that the foreign exchange retained abroad by the assessee for specific purposes should be considered as deemed receipt in India. The Tribunal upheld the appellate authority's decision to include the foreign exchange retained abroad in export turnover for computing deduction under Section 10B, dismissing the revenue's appeal on this ground.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the inclusion of expenses incurred in foreign currency for onsite development of software in export turnover. It also dismissed the revenue's appeal, upholding the inclusion of foreign exchange retained abroad in export turnover for computing deduction under Section 10B. The question referred to the Special Bench was answered in favor of the assessee.

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