2020 (3) TMI 338 - AT - Income Tax

Tribunal decisions: Exclusions, deductions, remand & appeals.

The Tribunal directed the exclusion of KALs Information System Ltd. from the final list of comparables, upheld the exclusion of Infosys Technologies Ltd. ... TP Adjustment - comparable selection - HELD THAT:- Assessee company is carrying out all IT enabled services and no marketing is done by the assessee, no sale of IT products are done by the assessee - assessee is performing only development services relating to software, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Bigger sized company is in the position to undertake more risks in the business as compared to the smaller size companies - Companies with huge difference of turnover with the assessee need to be deselected. Telecommunication Expenses u/s.10A & 10AA - HELD THAT:- Any amount reduced from ‘Export turnover’ should also be reduced from the amount of ‘Total turnover’ in the computation of deduction u/s.10A of the Act. Following the same, we allow the assessee’s ground and dismiss that of the Revenue. Exclusion of expenditure on providing technical services abroad from the turnover while computing deduction u/s.10A/10AA - HELD THAT:- AR fairly agreed that the full amount of foreign currency expenses has been rightly held to be excludible from the amount of ‘Export turnover’. It was, however, prayed that the same amount may also be excluded from the amount of ‘Total turnover’ - we hold that the amount of Foreign currency expenses to the tune of ₹ 107.63 crore be excluded from the ‘Export turnover’ as well as ‘Total turnover’.” Disallowance u/s.14A r.w.r.8D - HELD THAT:- When interest free funds in the form of share capitaland reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. Respectfully following the precedents, we order to delete the disallowance under Rule 8D(2)(ii) whereas, in respect of disallowance u/s.8D(2)(iii) hat only those investments should be considered for computing average value of investments which yield exempt income during the year. In view of the afore referred precedents, we set aside the impugned order to this extent and remit the matterto the file of Assessing Officer for re-computing the disallowance under Rule 8D(2)(iii) by considering only such investments in calculating the average value of investments, which have yielded exempt income during the year. The assessee will be allowed hearing opportunity in the fresh proceedings. Deputation of Technical Manpower (DTP) - HELD THAT:- In assessee’s own case for assessment year 2007-08 decided that there is no gainsaying that `profits of the business of the undertaking' are not only the profits derived from the export of computer software but also those which are attributable to the business of undertaking. So long as there exists a direct link between the eligible undertaking and some income, the same is profit of the business of undertaking, even if may not be derived from the export of computer software etc. Without accepting, even if we presume the contention of the ld. DR as correct that income from DTM and onsite software services rendered abroad cannot be considered as derived from the export of computer software, it, in any case, will have to be regarded as `profits of the business of the undertaking'. In view of the foregoing discussion, we uphold the impugned order on this score. Foreign exchange fluctuation gain directly credited to the reserves - HELD THAT:- As given considerable thought to the findings of the First Appellate Authority wherein at the very outset, the Ld. CIT(Appeals) observed that Assessing Officer has not examined as to how much fluctuation gain is on the capital account and how much is on the revenue account. Therefore, in the interest of justice, we set aside the order of the Ld. CIT(Appeals) and restore the matter to the file of the AO/TPO for proper verification and adjudication after complying with the principles of natural justice. Thus, Ground of the assessee’s appeal is allowed for statistical purposes. Issues Involved:1. Exclusion of KALs Information System Ltd. from the final list of comparables.2. Inclusion of Infosys Technologies Ltd. in the final list of comparables.3. Telecommunication expenses under sections 10A and 10AA of the Income Tax Act.4. Exclusion of expenditure on providing technical services abroad from the turnover while computing deduction under sections 10A/10AA.5. Disallowance under section 14A read with rule 8D of the Income Tax Rules, 1962.6. Deputation of Technical Manpower (DTM) and its impact on the deduction under sections 10A/10AA.7. Foreign exchange fluctuation gain directly credited to the reserves.Issue-wise Detailed Analysis:1. Exclusion of KALs Information System Ltd. from the final list of comparables:The assessee argued for the exclusion of KALs Information System Ltd. from the final list of comparables, citing that the company is engaged in IT-enabled services and not in the sale of IT products, with most risks undertaken by the AEs. The TPO retained KALs Information System Ltd. in the final list, and the CIT(A) upheld this decision, relying on the 'Safe Harbour Rules'. The Tribunal, following previous decisions, directed the AO/TPO to exclude KALs Information System Ltd. from the final list of comparables.2. Inclusion of Infosys Technologies Ltd. in the final list of comparables:The Revenue sought to include Infosys Technologies Ltd. in the final list of comparables. The TPO included Infosys Technologies Ltd., but the CIT(A) excluded it, citing the significant difference in turnover and the ability of larger companies to undertake more risks. The Tribunal upheld the CIT(A)’s decision, noting the substantial turnover difference (Infosys Technologies Ltd. turnover being Rs. 22,742 crore versus the assessee’s Rs. 805 crore).3. Telecommunication expenses under sections 10A and 10AA of the Income Tax Act:The AO reduced telecommunication expenses from the export turnover while computing deductions under sections 10A and 10AA. The CIT(A) confirmed this decision but directed the AO to reduce the telecommunication expenses from both the export turnover and the total turnover. The Tribunal, following the decision in the assessee’s own case for the previous assessment year, allowed the assessee’s ground and dismissed the Revenue’s ground.4. Exclusion of expenditure on providing technical services abroad from the turnover while computing deduction under sections 10A/10AA:The AO reduced the expenses incurred in foreign currency for providing technical services from the export turnover. The CIT(A) upheld this decision, stating that software development services are considered technical services. The Tribunal, following its earlier decision in the assessee’s own case, directed the AO to exclude the foreign currency expenses from both the export turnover and the total turnover.5. Disallowance under section 14A read with rule 8D of the Income Tax Rules, 1962:The AO made a disallowance under section 14A read with rule 8D. The CIT(A) deleted the disallowance, noting that the AO did not provide a satisfactory reason for invoking rule 8D. The Tribunal, following its decision in the assessee’s own case, deleted the disallowance under rule 8D(2)(ii) and remanded the issue under rule 8D(2)(iii) to the AO for re-computation.6. Deputation of Technical Manpower (DTM) and its impact on the deduction under sections 10A/10AA:The AO reduced the deduction under sections 10A/10AA by Rs. 3,42,46,639, considering it as income from body shopping activities. The CIT(A) confirmed this decision. The Tribunal, following its earlier decision in the assessee’s own case, set aside the CIT(A)’s order and allowed the assessee’s ground, holding that the amount related to DTM and onsite software services should be considered eligible for deduction under sections 10A/10AA.7. Foreign exchange fluctuation gain directly credited to the reserves:The AO included the forex gain of Rs. 2,01,99,730 in the total income, considering it as taxable. The CIT(A) directed the AO to ascertain the amount of forex gain on the capital and revenue accounts. The Tribunal set aside the CIT(A)’s order and restored the matter to the AO/TPO for proper verification and adjudication.Combined Result:The appeal of the assessee is allowed for statistical purposes, and the appeal of the Revenue is partly allowed for statistical purposes.