2024 (10) TMI 1681 - AT - Income Tax

ITAT allows deduction under sections 10A and 10AA on interest income, dismisses excess depreciation disallowance on computer peripherals

ITAT Delhi ruled in favor of the assessee on multiple issues. The tribunal allowed deduction u/s 10A and 10AA on interest income from fixed deposits, ... Deduction u/s 10A and 10AA - Interest earned on fixed deposits, Interest income on corporate deposits and Interest income on loans to employees - HELD THAT:- While considering identical nature of dispute in assessee’s own case in assessment year 2011-12 [2024 (5) TMI 215 - ITAT DELHI] wherein held AO himself had treated the said mentioned receipts as only ‘business income’ and not ‘income from other sources’, which is evident from the computation of total income, enclosed in assessment order. Once it is treated as ‘business income’, the assessee would be automatically eligible for deduction u/s 10A & 10AA of the Act. Even otherwise, the provisions of Section 10A(4) are very clear to state that the entire ‘profits of the business of the undertaking’ in proportion of export turnover to total turnover would be eligible for deduction u/s 10A of the Act. Hence, subject mentioned receipts constitute business receipts would fall within the ambit of Section 10A(4) of the Act, thereby making the assessee eligible for deduction thereon. Deduction u/s 10A and 10AA in respect of income from Foreign Exchange Gain & Forward Contract Gain - FAA deleted addition - HELD THAT:- Having verified the aforesaid factual position, learned first appellate authority has given a categorical finding that the AO has wrongly added exchange gain even after the assessee has offered it to tax. The Revenue has failed to bring on record any material to controvert the aforesaid factual finding of learned first appellate authority. In view of the aforesaid, we uphold the decision of learned first appellate authority by dismissing the ground. Allowing 95% of the cost recoveries to be set off against the expenses - HELD THAT:- We find, while deciding identical issue in assessee’s own case in assessment year 2011-12 [2024 (5) TMI 215 - ITAT DELHI] AO had not disputed the basic fact that recovery of expenses is nothing but reimbursement of expenses on actual cost to cost. Non deduction of tax at source on the expenses incurred was never the case of the ld. AO. Hence the CIT DR cannot make out a fresh case before this Tribunal. This matter is very well settled by the decision of the Special Bench of Mumbai Tribunal in the case of Mahindra & Mahindra Ltd. [2020 (6) TMI 564 - ITAT MUMBA] wherein it was categorically held that DR while arguing the case before Tribunal can only support the order of ld. AO and cannot make out a new case by pointing out flaws, if any, in the order of ld. AO. Hence, the argument advanced by the ld. CIT(DR) on the aspect of applicability of provisions of section 40(a)(ia) of the Act stands dismissed. Allowance of customer discount - Claim disallowed entire claim of the assessee alleging that they are not ascertained liabilities and the amount pertaining to 10A units was added back to the total export turnover - HELD THAT:- Having considered rival submissions, we find while deciding identical nature of dispute in assessee’s own case in assessment year 2011-12 [2024 (5) TMI 215 - ITAT DELHI] though the Circular has been issued in the context of applicability of deduction of TDS u/s 194R of the Act pursuant to the amendment brought in by the Finance Act, 2022 w.e.f. 01.07.2022, the analogy that discount is only a lesser realization of sale price has been accepted and agreed by the CBDT. Drawing support from this Circular and considering the fact that the export sale price declared by the assessee has been accepted to be at arm’s length price (ALP) by the TPO in the order passed by him u/s 92CA(3) and also considering the fact that the provision of discount has been made on a rational basis as detailed supra, we do not find any infirmity in the order of ld. CIT(A) deleting the disallowance made thereof by the ld. AO. Excess depreciation on computer peripherals - assessee had claimed depreciation at the rate of 60% on certain computer peripherals., such as, printers, routers etc. - Alleging that printers, routers etc. are capable of running independently and also in conjunction with computer, the AO held that they cannot be categorized as computer - HELD THAT:- As decided in assessee’s own case in assessment year 2011-12 [2024 (5) TMI 215 - ITAT DELHI] assets like printers, routers along with other accessories/ peripherals form one integrated system and would be of no use independently of each other. Therefore, all such facilities from part of computers and hence eligible for depreciation at the rate applicable for computers. This issue is duly covered by the decision in the case of BSES Yamuna Powers [2010 (8) TMI 58 - DELHI HIGH COURT] and in the case of Orient Ceramics reported [2011 (1) TMI 26 - DELHI HIGH COURT] TDS u/s 195 - non-deduction of tax at source on payment made to Genpact Mauritius Bhopal SEZ, Genpact Mauritius Kolkata SEZ and Genpact Mauritius Hyderabad SEZ - AO has made the disallowance on the ground that the payment made by the assessee towards purchase of shares is taxable as capital gain in India at the hands of the seller entities - HELD THAT:- As rightly observed by learned first appellate authority, in terms with Article 13(4) of India – Mauritius DTAA, capital gain arising at the hands of the resident of Mauritius is taxable in Mauritius.Before us, the assessee has further submitted that while completing the assessment in case of the seller entities, capital gain has not been assessed to tax. Keeping in view the aforesaid factual and legal position, we do not find any infirmity in the decision of learned first appellate authority. Ground raised is dismissed. Deduction u/s 10A - excluding the receipts from the ambit of export turnover, i.e. Telecommunication Expenses, Recovery of Expenses in respect of migration/on-the-job training services - HELD THAT:- We hold that once the receipts are excluded from the export turnover, they have to be excluded from total turn over as well for computing deduction under section 10A of the Act. Grounds are allowed. 5% disallowance of cost-to-cost recoveries from sister concerns from being set off against the expenses of eligible units for claiming deduction under section 10A The central legal questions considered in this judgment pertain to the computation of deduction under sections 10A and 10AA of the Income Tax Act, 1961, specifically regarding the treatment of various receipts and expenses in the context of an assessee engaged in Information Technology Enabled Services (ITES). The core issues include:1. Whether interest income earned on fixed deposits, corporate deposits, and loans to employees forms part of the profits and gains of the business eligible for deduction under sections 10A and 10AA.2. The tax treatment of foreign exchange gain and forward contract gain in computing export turnover and deduction under sections 10A and 10AA.3. The allowance of cost recoveries received from sister concerns to be set off against expenses in the eligible business units.4. The deductibility of customer discounts provided to customers and their impact on export turnover.5. The admissibility of depreciation on computer peripherals at the rate applicable to computers.6. The applicability of section 40(a)(i) disallowance for non-deduction of tax at source on payments made for acquisition of shares from entities located in Mauritius under the India-Mauritius Double Taxation Avoidance Agreement (DTAA).7. The inclusion or exclusion of telecommunication expenses and recovery of expenses related to migration/on-the-job training services in the computation of export turnover for deduction under section 10A.8. The proportionate disallowance of cost recoveries from sister concerns in computing eligible expenses for deduction under section 10A.Issue-wise Detailed Analysis1. Treatment of Interest Income for Deduction under Sections 10A and 10AAThe Assessing Officer (AO) disallowed interest income earned on fixed deposits, corporate deposits, and loans to employees from the deduction under sections 10A and 10AA, contending that such income is not derived from the eligible business undertaking. The assessee contested this, relying on a prior Tribunal decision in its own case for assessment year 2011-12.The Tribunal referred to the Coordinate Bench's ruling in the same assessee's case for AY 2011-12, which held that the AO had himself treated these receipts as business income rather than income from other sources. The Tribunal emphasized that once the receipts are classified as business income, they are eligible for deduction under sections 10A and 10AA as per the explicit language of sections 10A(4) and 10AA(7), which allow deduction in proportion to export turnover. The Tribunal dismissed the Revenue's arguments relying on the AO's observations, holding that the disallowance was unwarranted.The court applied the law to the facts by observing that the interest income was included in the business profits and gains and thus fell within the scope of eligible income for deduction. The prior consistent judicial precedent and the AO's own treatment of the receipts as business income weighed heavily in favor of the assessee. The Revenue's competing argument, based on the nature of the income, was rejected as contrary to the AO's own computation and the statutory provisions.Conclusion: The disallowance of interest income was rightly deleted, and the deduction under sections 10A and 10AA was upheld.2. Foreign Exchange Gain and Forward Contract GainThe Revenue challenged the allowance of deduction under sections 10A and 10AA on foreign exchange gain and forward contract gain amounting to Rs. 2,42,02,481/-. The AO had added back the gain, but the assessee contended that it had offered such gains to tax.The Tribunal noted that the first appellate authority (CIT(A)) found that the foreign exchange gain of the non-eligible undertaking was netted off against losses of the eligible undertaking, resulting in a net loss debited to the profit and loss account. This meant the assessee had offered the foreign exchange gain to tax. The Revenue failed to produce evidence to rebut this factual finding.The Tribunal applied the principle that once the gain is offered to tax, it cannot be disallowed again. The AO's addition was therefore held to be erroneous.Conclusion: The disallowance was rightly deleted, and deduction was allowed.3. Allowance of Cost Recoveries from Sister ConcernsThe AO disallowed the claim of the assessee to set off cost recoveries received from sister concerns against expenses, arguing that mere matching of receipts and expenses is insufficient unless the expenditure is wholly and exclusively for the purpose of earning income. The assessee relied on prior decisions in its own case for multiple assessment years where similar claims were allowed.The Tribunal referred to a Coordinate Bench decision for AY 2011-12, which held that cost recoveries represent pure reimbursement of expenses on an actual cost basis without any element of profit. It also cited the Special Bench ruling that the Departmental Representative cannot raise new grounds not taken by the AO. The Tribunal observed that the CIT(A) had consistently allowed 95% of such recoveries to be set off against expenses, estimating 5% as non-eligible.The Tribunal found that the assessee had provided detailed cost-sharing workings and that the recoveries were a negligible proportion of total expenses, thereby justifying the allowance. The Revenue's argument that the CIT(A) order was perverse was rejected as improper since the Revenue had not challenged earlier years' decisions appropriately.Conclusion: The Tribunal upheld the allowance of 95% of cost recoveries to be set off against expenses for deduction under section 10A.4. Customer DiscountsThe AO disallowed the provision for customer discounts amounting to Rs. 1,94,92,305/- pertaining to eligible undertakings, treating them as unascertained liabilities and adding back the amount to export turnover. The assessee contended that the provision was made on a scientific basis, reflecting commercial negotiations and industry practice.The Tribunal relied on the Coordinate Bench decision for AY 2011-12, which accepted that the provision for customer discounts was based on specific criteria such as customer relationship, brand recognition, contract longevity, and revenue, and was not ad hoc. The liability was held to have crystallized during the year.The Tribunal also referenced the Supreme Court's decision in Bharat Earth Movers Ltd. and the jurisdictional High Court's ruling in Insilco Ltd., supporting the deductibility of such provisions. Further, the CBDT Circular No. 12 of 2022 was noted, which recognized discounts as lesser realization of sale price, reinforcing the assessee's position.Conclusion: The disallowance was rightly deleted, and the provision for customer discounts was allowed for deduction under section 10A.5. Depreciation on Computer PeripheralsThe AO disallowed depreciation claimed at 60% on computer peripherals such as printers and routers, contending they are capable of independent use and thus not eligible for the higher rate applicable to computers.The Tribunal referred to the Coordinate Bench decision for AY 2011-12 and judicial precedents including the jurisdictional High Court's rulings, which held that peripherals like printers and routers form an integrated system with computers and are not useful independently. Therefore, they qualify for depreciation at the rate applicable to computers.Conclusion: The Tribunal upheld the allowance of depreciation at 60% on computer peripherals.6. Non-deduction of Tax at Source on Payments for Share AcquisitionThe AO disallowed expenses under section 40(a)(i) for non-deduction of tax at source on payments made to Mauritius-based entities for acquisition of shares in Indian companies. The AO treated the payments as taxable capital gains in India, requiring TDS under section 195.The Tribunal noted that under Article 13(4) of the India-Mauritius DTAA, capital gains arising to a resident of Mauritius on the sale of shares are taxable only in Mauritius. The assessee also demonstrated that the seller entities were not assessed to tax in India on these gains.The Tribunal held that there was no requirement for TDS under section 195 in this case, and thus the disallowance under section 40(a)(i) was rightly deleted.Conclusion: The Tribunal dismissed the Revenue's appeal on this ground.7. Inclusion of Telecommunication Expenses and Recovery of Expenses in Export TurnoverThe assessee challenged the exclusion of telecommunication expenses and recovery of expenses related to migration/on-the-job training services from export turnover for computing deduction under section 10A.The Tribunal referred to the Coordinate Bench decision for AY 2011-12, which analyzed the nature of these expenses. The assessee provided IT/ITES services including business process outsourcing, requiring on-the-job training and migration of customer operations from overseas to India. The expenses incurred were reimbursed by customers and netted off against the respective expense items.The Tribunal noted the Supreme Court's ruling in CIT v. HCL Technologies Ltd., which mandates that items excluded from export turnover in the numerator must also be excluded from total turnover in the denominator to maintain parity in deduction calculations.Conclusion: The Tribunal allowed the assessee's grounds, holding that such receipts must be excluded from both export turnover and total turnover for deduction computation.8. Proportionate Disallowance of Cost RecoveriesThe assessee challenged the 5% disallowance of cost recoveries from sister concerns. The Tribunal, following the Coordinate Bench decision for AY 2011-12, upheld the disallowance of 5% as non-eligible and allowed 95% to be set off against expenses.Conclusion: The Tribunal dismissed the assessee's ground and upheld the proportionate disallowance.Significant Holdings'Once it is treated as 'business income', the assessee would be automatically eligible for deduction u/s 10A & 10AA of the Act. Even otherwise, the provisions of Section 10A(4) are very clear to state that the entire 'profits of the business of the undertaking' in proportion of export turnover to total turnover would be eligible for deduction u/s 10A of the Act. Hence, subject mentioned receipts constitute business receipts would fall within the ambit of Section 10A(4) of the Act.'This principle establishes that classification of income as business income is determinative for eligibility of deduction under sections 10A and 10AA.'The assets like printers, routers along with other accessories/ peripherals form one integrated system and would be of no use independently of each other. Therefore, all such facilities form part of computers and hence eligible for depreciation at the rate applicable for computers.'This clarifies the treatment of computer peripherals for depreciation purposes.'In terms with Article 13(4) of India - Mauritius DTAA, capital gain arising at the hands of the resident of Mauritius is taxable in Mauritius.'This holding affirms the tax treaty's primacy in determining taxability and TDS obligations.'For the purpose of computing the deduction u/s 10A/10AA/10B/80HHC/80HHE etc. all items that were sought to be excluded from export turnover need to be excluded from total turnover also in order to bring parity.'This principle ensures consistency in the computation of eligible deductions under the Act.'Cost recoveries made by the assessee represent pure cost recovery only without any element of profit in it... estimate 5% of the cost recovery as not eligible for deduction u/s 10A of the Act.'This establishes the approach for treatment of cost recoveries in deduction computations.'Provision for customer discount has been made by the assessee on a scientific basis and as per the prevailing industry practice... liability had duly crystallized during the year.'This supports the allowance of provisions for customer discounts as deductible expenses.The final determinations on all issues favored the assessee, with the Tribunal dismissing the Revenue's appeals and partly allowing the assessee's appeal where appropriate, consistently following Coordinate Bench precedents and judicial pronouncements to uphold the assessee's claims on deductions and disallow the Revenue's challenges.