2012 (5) TMI 484 - AT - Income Tax

Appellate Tribunal affirms exclusion of telecommunication expenses for deduction u/s 10A

The Appellate Tribunal ITAT, Bangalore upheld the CIT(A)'s decision to exclude telecommunication expenses from both export turnover and total turnover for ... Parity between numerator and denominator in computation of deduction under section 10A - definition of export turnover excludes freight, telecommunication charges and insurance - where an item is excluded from export turnover it must also be excluded from total turnover - avoidance of absurdity in statutory construction by maintaining consistent meaning of terms in formula - ratio of decision in ITO v. M/s Sak Soft Ltd. (Special Bench) applying to section 10A as provisions mirror section 10BParity between numerator and denominator in computation of deduction under section 10A - definition of export turnover excludes freight, telecommunication charges and insurance - where an item is excluded from export turnover it must also be excluded from total turnover - Whether telecommunication expenses excluded from export turnover must also be excluded from total turnover for computing deduction under section 10A - HELD THAT: - The Tribunal upheld the view that export turnover, as defined, excludes items such as telecommunication charges, and that the same meaning must be retained when export turnover forms part of the total turnover in the formula under sub section (4) of section 10A. Relying on the reasoning of the Hon'ble Bombay High Court in Gem Plus Jewellery India Ltd., the Court held that treating the term differently in the numerator and as a constituent of the denominator would produce an absurdity and allow receipts without element of profit (such as telecommunication charges) to be brought into turnover. The Tribunal also applied the ratio of the Special Bench decision in ITO v. M/s Sak Soft Ltd. (decided under section 10B) to section 10A, noting the material identity of the provisions and their definitions, and concluded that items excluded from export turnover must be excluded from total turnover to maintain parity between numerator and denominator. On that basis the CIT(A)'s direction was sustained and the Assessing Officer was directed to exclude the telecommunication expenses from both export turnover and total turnover while computing deduction under section 10A. [Paras 10]The CIT(A)'s order directing exclusion of the telecommunication expenses from both export turnover and total turnover for computing deduction under section 10A is upheld and the AO is directed to give effect to that exclusion.Final Conclusion: The department's appeal is dismissed; telecommunication expenses excluded from export turnover must also be excluded from total turnover when computing deduction under section 10A for AY 2006-07. Issues involved:Whether telecommunication expenses should be excluded from total turnover for the purpose of computation of deduction u/s 10A of the IT Act, 1961.Analysis:The appeal before the Appellate Tribunal ITAT, Bangalore involved a dispute regarding the exclusion of telecommunication expenses from the total turnover for calculating deduction u/s 10A of the IT Act, 1961. The assessee, a Company engaged in information technology services, had filed its return of income for the relevant assessment year, claiming deduction u/s 10A. The Assessing Officer (AO) reduced the deduction by excluding telecommunication expenses from the export turnover but not from the total turnover, resulting in an increased tax liability for the assessee. The CIT(A) directed the AO to exclude these expenses from both the export turnover and the total turnover based on relevant case laws. The department appealed this decision.During the proceedings, the department's representative relied on the AO's findings, while the assessee's representative cited judgments from the Hon'ble Bombay High Court and a Special Bench decision to support the exclusion of telecommunication expenses from both turnovers. The Tribunal examined the legal precedents cited, particularly the Gem Plus Jewellery India Ltd. case and the Sak Soft Ltd. case. The Mumbai High Court's ruling emphasized maintaining parity between the export turnover and total turnover to calculate deduction u/s 10A, excluding items like freight and insurance from both turnovers. The Special Bench decision reiterated the exclusion of specific expenses from both turnovers for accurate computation of export profits.Ultimately, the Tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal and directing the AO to exclude telecommunication expenses from both the export turnover and the total turnover while calculating the deduction u/s 10A of the IT Act. The Tribunal reasoned that the principles established in the cited cases applied equally to section 10A, aligning with the formula for computing export profits under section 10B. The decision highlighted the necessity of consistent treatment of expenses in both turnovers to ensure a fair and accurate determination of the deduction allowable under the Act.