2018 (4) TMI 568 - AT - Income Tax

Tribunal ruling: Exclusion of expenses, interest income remanded, deduction for forex loss allowed

Toshiba Embedded Software (India) Pvt. Ltd. Versus The Dy. Commissioner of Income-tax, Circle-12 (4), Bengaluru

The Tribunal upheld the exclusion of telecommunication and insurance expenses from export turnover for deduction under section 10A of the Income Tax Act, ... Deduction u/s.10A - exclusions from the export turnover and total turnover - reimbursement of telecommunication expenses and Insurance expenses incurred in foreign currency - Held that:- Taking into consideration the decision rendered by the Hon’ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT], we are of the view that the order of the CIT(A) directing the Assessing Officer to exclude communication charges and travelling and conveyance expenses both from export turnover and total turnover, is just and proper and calls for no interference. The only grievance of the Revenue is that the decision of Hon'ble High Court of Karnataka in Tata Elxsi (supra) has not attained finality and a SLP by the department is pending before the Hon'ble Supreme Court. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us Excluding interest income derived from fixed deposits from “income from business” while computing deduction u/s.10A - Held that:- Tribunal in Assessee’s own case in AY 2011-12 on identical issue held that interest income arose from fixed deposits that were made out of profits generated from export business and therefore the Assessee was entitled to deduction u/s.10A of the Act on interest income treating the same as part of business income. We are of the view that the source of fixed deposit has to be examined in this AY and since this exercise has not been done by the revenue authorities, we deem it fit to remand the issue to the AO for fresh consideration in the light of the decisions of the Tribunal referred to above. Deduction of loss on account of foreign exchange fluctuation as on the last date of the previous year - addition on the ground that the loss in question was only contingent and hence cannot be allowed - Held that:- a contract has been concluded and a liability has crystallized. In this factual matrix, from the wordings of the Instruction of CBDT, it follows that the loss arising out of the forward contract is not notional. In such a case, the CBDT Instruction requires the Assessing Officer to examine whether such a loss is on account of a speculative transaction as contemplated in section 43(5). As discussed earlier, in the case on hand there has been an existing contract with a binding obligation accrued against the assessee when it entered into for ex forward contracts. The forward contracts are in respect of consideration for exports proceeds, which are revenue items. There is an actual contract for sale of merchandise. In this factual matrix, it is clear that the transaction in question will not qualify to be called as speculative transaction. In view of the facts and circumstances of the case on hand, as discussed above, the provision for losses on derivative contracts is allowable as expenditure. See Quality Engineering & Software Technologies (P) Ltd. [2015 (1) TMI 869 - ITAT BANGALORE] Issues:1. Whether expenses like telecommunication and insurance should be excluded from export turnover while computing deduction under section 10A of the Income Tax Act.2. Whether interest income from fixed deposits should be excluded from 'income from business' for deduction under section 10A.3. Whether a loss on account of foreign exchange fluctuation can be claimed as a deduction.Issue 1:The first issue revolves around the exclusion of telecommunication and insurance expenses from export turnover while computing deduction under section 10A of the Income Tax Act. The Appellant, a software development company, argued that these expenses were not related to the export of computer software and should not be excluded. The CIT(A) accepted the Appellant's plea and directed the exclusion of these expenses from both export turnover and total turnover. The Tribunal upheld the CIT(A)'s decision, citing a previous judgment by the Hon'ble Karnataka High Court. The Tribunal found the CIT(A)'s order justified and confirmed it, dismissing the appeal by the Revenue.Issue 2:The second issue involves the exclusion of interest income from fixed deposits from 'income from business' for deduction under section 10A. The Tribunal referred to previous decisions in the Assessee's case and remanded the issue to the Assessing Officer for fresh consideration. The Tribunal emphasized the need to examine the source of fixed deposit in the current assessment year, as done in previous years, to determine eligibility for deduction under section 10A.Issue 3:The third issue pertains to the claim for deduction of loss on account of foreign exchange fluctuation. The Assessee had entered into forward contracts to safeguard against adverse fluctuations in foreign exchange rates. The AO and CIT(A) disallowed the claim, considering the loss speculative and notional. The Assessee appealed, citing judicial pronouncements supporting the claim. The Tribunal, referencing a similar case, held that the loss on forward contracts should be allowed as a deduction, as the transaction was not speculative. The Tribunal partly allowed the Assessee's appeal, emphasizing the applicability of the previous judgment to the current case.This comprehensive analysis of the judgment outlines the key issues addressed, the arguments presented, and the decisions rendered by the Tribunal for each issue involved.