2012 (11) TMI 547 - AT - Income Tax

Tribunal Quashes CIT's Order, Upholds AO's Decision on Foreign Travel Expenses

M/s Global E Business Operations Pvt. Ltd. Versus The CIT, Bangalore

M/s Global E Business Operations Pvt. Ltd. Versus The CIT, Bangalore - TMI Issues Involved:1. Computation of deduction under Section 10A of the IT Act, 1961.2. Exclusion of expenses incurred in foreign exchange from export turnover.3. Validity of the CIT's order under Section 263 of the IT Act, 1961.Detailed Analysis:1. Computation of Deduction under Section 10A of the IT Act, 1961:The assessee, a software development company, filed its return for AY 2005-06 declaring a loss and claimed a deduction under Section 10A. The computation of eligible deduction under Section 10A is based on the formula: Export turnover x Eligible business profits / Total turnover. The term 'export turnover' is defined to exclude freight, telecommunication charges, insurance, and expenses incurred in foreign exchange for providing technical services outside India.2. Exclusion of Expenses Incurred in Foreign Exchange from Export Turnover:During the assessment, the AO required the assessee to adjust for freight, telecom, insurance, and technical services expenses while computing the deduction under Section 10A. The assessee reduced communication expenses from both export turnover and total turnover. However, the AO held that such expenses should only be reduced from the export turnover, not the total turnover. The CIT, under Section 263, found the AO's order erroneous and prejudicial to revenue, arguing that foreign travel expenses related to technical services should be excluded from export turnover. The assessee contended that it was engaged in data processing and IT-enabled services, not technical services, and cited several ITAT decisions supporting this view.3. Validity of the CIT's Order under Section 263 of the IT Act, 1961:The CIT issued a show cause notice under Section 263, asserting that the AO failed to exclude foreign travel expenses from export turnover. The CIT argued that software developers could render technical services outside India, necessitating such exclusions. The assessee countered that the AO had considered the relevant aspects and taken a plausible view, supported by multiple ITAT decisions. The Tribunal noted that as of the CIT's order date, several judicial pronouncements supported the assessee's stance that expenses incurred in foreign currency need not be excluded from export turnover for software development services.The Tribunal concluded that the AO's view was a possible one, and the CIT could not substitute his view under Section 263. The Tribunal quashed the CIT's order, emphasizing that the AO had made relevant inquiries and the assessee's claim was consistent with prevailing judicial interpretations.Conclusion:The appeal filed by the assessee was allowed, and the CIT's order under Section 263 was quashed. The Tribunal held that the AO's view was a possible one, supported by judicial precedents, and the CIT could not invoke Section 263 merely to substitute his view for that of the AO.