2012 (6) TMI 632 - AT - Income Tax

ITAT directs AO: Allow Section 10A deduction, adjust foreign currency expenditure, recalculate interest.

The ITAT allowed the appeal, directing the AO to grant the deduction under Section 10A, adjust the foreign currency expenditure exclusion, and recalculate ... Deduction under section 10A - transfer of undertaking by slump sale - continuity of undertaking in same place, form and substance - effect of organisational change on tax holiday - exclusion of expenses in foreign currency from export turnover and total turnoverDeduction under section 10A - transfer of undertaking by slump sale - continuity of undertaking in same place, form and substance - effect of organisational change on tax holiday - Claim for deduction under section 10A by an assessee which took over an STPI undertaking from its foreign parent by slump sale/conversion from branch to subsidiary. - HELD THAT: - The Tribunal held that the undertaking continued to exist in the same place, form and substance and carried on the same business before and after the change in legal character from a branch of the foreign parent to an Indian subsidiary. The STPI authority's approval for transfer of STP activities was noted. Relying on coordinate Bench decisions (DCIT v. LG Soft India Pvt. Ltd. and ITO v. GXS Technology Centre Pvt. Ltd.) the Tribunal concluded that a mere organisational change or change in ownership does not amount to creation of a new unit for the purposes of section 10A, and therefore such change alone is not a ground to deny the deduction. The Tribunal set aside the orders of the lower authorities and directed the Assessing Officer to allow the claim of deduction under section 10A. [Paras 15, 17]Allowed claim for deduction under section 10A; change from branch to subsidiary by slump sale/transfer did not disentitle the assessee where the undertaking continued in same place, form and substance and STPI approval was given.Exclusion of expenses in foreign currency from export turnover and total turnover - deduction under section 10A - Whether expenses incurred in foreign currency and excluded from export turnover must also be excluded from total turnover in computing deduction under section 10A. - HELD THAT: - The Tribunal followed Special Bench and High Court authority holding that items recoverable as reimbursements (such as freight, telecom, insurance or expenses in foreign exchange for providing technical services) lack the element of 'turnover' or 'consideration' for export and are properly excluded from export turnover. Consistently, such excluded items cannot form part of 'total turnover' for the purposes of computing the deduction under section 10A. The Tribunal held that where expenditure in foreign currency was excluded from export turnover, the same must be excluded from total turnover and directed the Assessing Officer to give effect accordingly. [Paras 23, 24, 25]Directed exclusion of specified foreign currency expenses from both export turnover and total turnover for computation of deduction under section 10A.Final Conclusion: The appeal is allowed: the claim of deduction under section 10A is upheld on the facts (branch converted to subsidiary with continuity of undertaking and STPI approval), and the Assessing Officer is directed to exclude specified foreign currency expenses from both export turnover and total turnover when computing the deduction; interest issues under sections 234B/234D were treated as consequential. Issues Involved:1. Denial of deduction claim under Section 10A of the Income Tax Act.2. Exclusion of expenditure incurred in foreign currency from export turnover but not from total turnover.3. Charging of interest under Sections 234B and 234D of the Income Tax Act.Detailed Analysis:Issue 1: Denial of Deduction Claim under Section 10AThe appellant contested the denial of a deduction claim amounting to Rs. 23,17,32,627 under Section 10A of the Income Tax Act. The key facts revealed that the appellant, a wholly-owned subsidiary of M/s. Samsung Electronics Company Ltd., South Korea, engaged in software development, claimed this deduction for its STPI undertaking. The business was transferred from the parent company's branch office to the appellant through a slump sale. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] denied the deduction, reasoning that the undertaking was formed by transferring previously used machinery, thus violating Section 10A(2) conditions.The appellant argued that the transfer was a mere organizational change and cited ITAT decisions in similar cases (DCIT v. LG Soft India Pvt. Ltd. and ITO v. GXS Technology Center Pvt. Ltd.) to support their claim. The ITAT upheld the appellant's contention, emphasizing that the business continued in the same place, form, and substance, merely changing from a branch to a subsidiary. The tribunal noted that the STPI authority approved the transfer, and thus, the organizational change did not disqualify the appellant from claiming the deduction under Section 10A. Consequently, the ITAT directed the AO to allow the deduction claim.Issue 2: Exclusion of Expenditure Incurred in Foreign CurrencyThe appellant challenged the exclusion of Rs. 47,89,64,483 incurred in foreign currency from the export turnover without corresponding exclusion from the total turnover. The AO and CIT(A) upheld this exclusion due to the denial of the Section 10A deduction. However, the appellant argued that this issue was covered by the jurisdictional High Court's decision in CIT v. Tata Elxsi Ltd., which mandated that any expenditure excluded from export turnover must also be excluded from total turnover.The ITAT agreed with the appellant, referencing the Special Bench decision in ITO v. Sak Soft Ltd. and the High Court's affirmation in Tata Elxsi Ltd., which clarified that expenses excluded from export turnover should also be excluded from total turnover for computing deductions under Section 10A. Thus, the ITAT set aside the CIT(A)'s order and directed the AO to exclude the foreign currency expenses from both export and total turnover.Issue 3: Charging of Interest under Sections 234B and 234DThe appellant disputed the liability for interest under Sections 234B and 234D, arguing that interest should only be levied on the returned income and that no opportunity was provided before levying the interest. Both parties agreed that the issue was consequential to the primary issues.The ITAT acknowledged the consequential nature of this issue and ordered accordingly, implying that the interest calculations would be adjusted based on the final determination of the primary issues.Conclusion:The ITAT allowed the appeal of the assessee, directing the AO to grant the deduction under Section 10A and to adjust the foreign currency expenditure exclusion in line with the established legal precedents. The interest levied under Sections 234B and 234D was to be recalculated based on the revised assessments.