2014 (4) TMI 815 - AT - Income Tax

Tribunal remands Section 10A deduction issue for fresh review, allows staff welfare expenses. Foreign tax credit plea dismissed.

The Tribunal remanded the issue of the Section 10A deduction to the AO for fresh consideration, allowing the assessee to establish the nature of services ... Disallowance of deduction u/s 10A of the Act - Whether the Assessee manufactures or produces 'Computer Software' – Held that:- The nature of services rendered for which the Assessee receives foreign exchange can be established by the Assessee by tracing back each payment with the purpose for which the payment is received - There is no such correlation established by the Assessee - the nature of work to be performed for British Council, would be in the nature of, if not 'manufacture or production of computer software', at least in the nature of 'Data Processing' or 'Engineering' or 'Support Centre' which are all notified services for available the benefit of deduction u/s.10A of the Act - the Assessee has not established correlation between the receipts in foreign exchange and the nature of services rendered for which the payment was received - the Assessee has not made any attempts to demonstrate that it was engaged in production or manufacture of Computer Software or was rendering notified IT-Enabled Services. Whether the Assessee exported computer software/ITES out of India – Held that:- There can be no doubt on the satisfaction of this condition - Sample copies of Software Export Declaration (Softex) forms filed with the STPI (relating to/ corresponding to the invoices raised by the Assessee on overseas SAP entities) have been filed before the Revenue authorities - The Softex forms are certified by the STPI authorities as being exported out of the country - the arguments raised by the assessee are not being considered elaborately for the reason that the nature of services rendered needs to be ascertained first – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Levy of interest u/s 234D of the Act – Held that:- Assessee contended that the interest u/s 234C of the Act, can be levied only when there is a shortfall in payment of advance tax instalment by considering the advance taxes paid on the tax due on the 'returned income' and not the 'assessed income' - the grievance has probably not been properly projected by the assessee nor appreciated by the CIT(A) in proper perspective - thus, the AO is directed to charge interest accordingly. Disallowance of staff welfare expenses – Held that:- The expenses are essential for the purpose of employee welfare, and clearly allowable as business expenditure - it is an industry-wide practice followed in India by IT companies - Such facilities are extended in the industry to ensure low employee attrition which will progress the growth of the Assessee - With effect from AY 2005-06, value of free food and non-alcoholic beverages provided by the employer to an employee is not even treated as 'perquisites' in the hands of - even under the Fringe Benefit Taxes ('FBT') regime, though inapplicable for AY 2005-06, it may be pertinent to note that a specific exemption has been provided in respect of expenditure incurred on food or beverages procured by the employer for providing to his employees in an office or factory - such benefits not to be considered as the expenditure which would provide any benefit of a personal nature for the employees – there was no basis for disallowance of the remaining expenses out of staff welfare expenses also – Decided in favour of Assessee. Disallowance of sales promotion expenses – Held that:- The Assessee claims that it is responsible for advertising and promotion of SAP products in the Indian sub-continent and undertakes advertising for SAP products including designing product brochures, deciding the medium of advertising and developing advertising content for the products – thus, sales promotion expenses, being incurred wholly and exclusively for the purpose of the Assessee's business, are fully allowable as deduction u/s 37(1) of the Act – Decided in favour of Assessee. Issues Involved:1. Deduction under Section 10A of the Income Tax Act, 1961.2. Disallowance of staff welfare expenses.3. Disallowance of sales promotion expenses.4. Credit for foreign taxes paid.5. Levy of interest under Sections 234B, 234C, and 234D of the Income Tax Act, 1961.Detailed Analysis:1. Deduction under Section 10A of the Income Tax Act, 1961:The primary issue was whether the assessee was entitled to a deduction under Section 10A for the profits derived from its Global Delivery Centre (GDC) unit, which provides software development and implementation support services. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the deduction, arguing that the assessee was only rendering consultancy services and not producing or manufacturing computer software. The Tribunal observed that the GDC unit was engaged in developing software modules and customizing SAP software to meet specific customer requirements, which could be considered as 'developing software' under Section 10A. However, the Tribunal remanded the issue to the AO for fresh consideration, directing the assessee to establish the nature of services rendered and correlate the foreign exchange receipts with the services provided.2. Disallowance of Staff Welfare Expenses:The AO disallowed a portion of the staff welfare expenses, including expenses on free meals and gifts to employees, on an ad-hoc basis, arguing that these expenses were not incurred wholly and exclusively for business purposes. The CIT(A) reduced the disallowance but upheld the AO's view. The Tribunal, however, held that such expenses were essential for employee welfare and were industry-wide practices. It allowed the entire staff welfare expenses, emphasizing that the expenses were incurred wholly and exclusively for business purposes and satisfied the test of commercial expediency.3. Disallowance of Sales Promotion Expenses:The AO disallowed a portion of the sales promotion expenses, including expenses on sponsorships, conferences, and promotional gifts, on the grounds that they were not incurred exclusively for business purposes. The CIT(A) reduced the disallowance but upheld the AO's view. The Tribunal allowed the entire sales promotion expenses, noting that these expenses were necessary for promoting SAP software products in the Indian sub-continent and were incurred wholly and exclusively for business purposes.4. Credit for Foreign Taxes Paid:The assessee's plea for allowing credit for foreign taxes paid on income earned in foreign jurisdictions was not pressed, as the necessary relief had already been obtained from the AO pursuant to an application filed under Section 154 of the Income Tax Act, 1961. Thus, this ground was dismissed as not pressed.5. Levy of Interest under Sections 234B, 234C, and 234D:The Tribunal held that interest under Section 234C should be levied based on the advance tax payable on the returned income, not the assessed income. It directed the AO to charge interest accordingly. Interest under Section 234B was deemed consequential, and the AO was directed to provide consequential relief. Similarly, the levy of interest under Section 234D was considered consequential, and the AO was directed to provide the necessary relief.Conclusion:The Tribunal remanded the issue of the Section 10A deduction to the AO for fresh consideration, allowing the assessee to establish the nature of services rendered. It allowed the entire staff welfare and sales promotion expenses, emphasizing their necessity for business purposes. The plea for credit for foreign taxes paid was dismissed as not pressed, and the AO was directed to provide consequential relief for the levy of interest under Sections 234B, 234C, and 234D.