TaxTMI 
TaxTMI 
2017 (12) TMI 343
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....y supplied from time to time. In the course of assessment proceedings Assessing Officer was not satisfied that the assessee has complied with necessary conditions provided u/s. 10A for claiming exemption and accordingly denied the claim. The Assessing Officer also pointed out by referring to audit report on Form 26F that the sale consideration of Rs. 74,60,891/- has not been received in convertible foreign exchange for export made to a concern namely Workflex Solutions LLC thereby not fulfilling the requirements of the provisions of section 10A(3) of the Act. Accordingly, deduction claimed u/s. 10A at Rs. 1,68,30,581/- was disallowed and income assessed at Rs. 1,86,24,130/-. 3. Aggrieved the assessee went in appeal before CIT (A) and succeeded as CIT (A) held that the assessee has complied all the conditions of claiming exemption u/s. 10A and CIT (A) also referred to the issue relating to non receipt of export sale consideration, export sale proceeds of Rs. 74,60,891/- in convertible foreign exchange observing that assessee has been allotted equity shares by Workflex Solutions LLC against the outstanding sale proceeds and assessee has complied with the necessary formalities as req....
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....hange did not brought into India and therefore according to him the assessee has failed to fulfil the requirement of section 10A(3) of the Income tax Act, 1961. As a matter of fact the comment of the auditors suggests that requirement u/s. 10A(3) of the Act were duly compiled with. A reading of the report of the auditors is not suggesting that any of the conditions for claim of exemption u/s. 10A of the Act was not complied with by the assessee. As a matter of fact the auditors are explaining as to how requirement under section 10A(3) of the Act was met by the Assessee. Had the Ld. A.O. asked for any explanation regarding bad debts Rs. 6,67,229/- and investment in equity shares of Workflex Solutions LLC Rs. 67,93,662/- the matter would have been explained with reference to books of account. As the auditor's report is explanatory and clarificatory as per the requirement of law, the Ld. A.O. committed mistake in taking adverse view by observing that the assessee has failed to fulfil the requirement of section 10A(3) of the Act. The amount of Rs. 6,67,229/- written off as bad debts and Rs. 67,93,662/- were converted into equity shares of Workflex Solutions LLC (USA) against the balanc....
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....gn entity and therefore it is covered u/s. 10A(3) of the Act. 7.4 That in order to liberalize and rationalize the overseas investments, RBI issued Circular No. 48 dated June 03,2008 and the relevant portion of circular is as under: "Capitalization of Exports In terms of Regulation 11(1) of Notification No. FEMA120/RB- 2004 dated July 07, 2004 [Foreign Exchange Management Transfer or Issue of any Foreign Security Regulations,2004] as amended from time to time, an Indian Party making direct investment outside India in accordance with Regulations, by way of capitalization, in full or part of the amount due to the Indian Party from the foreign entity on account of payment for export of plant, machinery, equipment and other goods/software to the foreign entity, has to obtain the prior approval of the Reserve Bank -where such export proceeds have remained unrealized beyond a period of six months from the date of exports. In order to align this provision with the Foreign Trade Policy, Indian parties may, henceforth approach the Reserve Bank for capitalization of export proceeds only in cases where the exports remain outstanding beyond the prescribed period of realization." 7.5 Learn....
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.... made regulations relating to transfer or issue of any foreign security by a person resident in India. The relevant regulation 11 and 12 are reproduced below: "11. Investment by capitalization (1) An Indian Party may make direct investment outside India in accordance with the Regulations in Part I by way of capitalisation in full or part of the amount due to the Indian Party from the foreign entity towards: - i. payment for export of plant, machinery, equipment and other goods/software to the foreign entity; ii. fees, royalties, commissions or other entitlements due to the Indian Party from the foreign entity for the supply of technical know-how, consultancy, managerial or other services Provided that where the export proceeds have remained unrealized beyond a period of six months from the date of export, and fees, royalties, commissions or other entitlements of the Indian party have remained unrealised from the date on which such payment is due, such proceeds shall not be capitalised without the prior permission of the Reserve Bank. (2) An Indian Software exporter may receive in the form of shares upto 25% of the value of exports to an overseas software start up compan....
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.... with the provisions of FEMA regulations rests with AD Bank and/or the Indian Party. As per guidelines of RBI for capitalisation of exports dues are one of the sources of funds for oversees direct investment. In view of above noted facts and procedure laid down by RBI through FEMA it is evident that the assessee company had complied with the necessary requirements of RBI which is the authority under FEMA as stated u/s. 10A of Income-tax Act under which such deduction is claimed. The appeal filed by the Department may kindly be dismissed and the claim of assessee company u/s. 10A of Income-tax Act may kindly be allowed." 8. We have heard rival contentions and perused the record placed before us. Revenue is aggrieved with the order of CIT (A) allowing assessee's plea of claiming deduction u/s. 10A on the profit generated from sale proceeds of Rs. 74,60,891/- which were not received by the assessee in convertible foreign exchange. We observe that the assessee is dealing in software development and the undertaking is eligible for deduction u/s. 10A of the Act. This fact is not disputed by any of the party. The sole issue which is there before us for adjudication is about the sum o....
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....e of Foreign Exchange Amendment Act and any rules made therein. From going through the above provisions of section 10A(3), we understand that the provision is very specific and is made to provide deduction of profits and gains from the total income to such undertakings operating in free trade zone and complying with the conditions provided in section 10A of the Act. It specifies that deduction can be claimed only if sale proceeds have been received in convertible foreign exchange within a period of six months from the end of the financial year. Further Explanation-2 specifies that if the assessee is unable to receive the sale proceeds within the time limit provided but gets the approval from Reserve Bank of India allowing the assessee to receive money in any separate bank account maintained by the assessee with any bank outside India then it shall be deemed to have been received in India in convertible foreign exchange. Therefore, there are two possibilities for the assessee; (i) either to receive money in convertible foreign exchange in India (ii) such sale proceeds are created to the separate account with any bank outside India with the approval of Reserve Bank of India. Apart f....
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....the Rules and Regulation of Reserve Bank of India, convertible foreign exchange means the permitted foreign currency. The expression permitted currency is referred in Reserve Bank of India manual as "foreign currency which is further convertible i.e. currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currency like US$, Pound and for which a fairly active market exists for dealing against the major currency. Accordingly, authorized dealers may maintain balance positions in any permitted currency. Authorized dealers may also maintain positions in EURO of the European currency area." So convertible foreign exchange means the permitted currency and the sale proceeds from export as referred in section 10A(3) have to be received in the form of permitted currency. We further observe from going through Notification No. FEMA 14(R)/2016-4B dated May 02, 2016 relating to manner of receipt and payment throw light in the manner of receipt in foreign exchange, which we will like to reproduce below. RESERVE BANK OF INDIA FOREIGN EXCHANGE DEPARTMENT CENTRAL OFFICE MUMBAI 400 001 Notification No. FEMA 14(R)/2016-RB May 02, 201....
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.... the member country in which the other party to the transaction is resident or by credit to the Asian Clearing Union Dollar account and/or Asian Clearing Union Euro Account of the authorized dealer maintained with the correspondent bank in that member country; (b) Receipt may also be made in any freely convertible currency in all other cases. (c) In respect of exports from India to Myanmar, payment may be received in any freely convertible currency or through ACU mechanism from Myanmar. (ii) Nepal and Bhutan - (a) Receipt may be in Rupees (b) Receipts for export of goods to Nepal may be made in free foreign exchange, provided the importer resident in Nepal has been permitted by the Nepal Rashtra Bank to make payment in free foreign exchange. However such receipts shall not be routed through the ACU mechanism. (iii) Islamic Republic of Iran (a) Receipt for export of eligible goods and services, in any freely convertible currency and/or in accordance with the directions issued by the Reserve Bank to the authorized dealers from time to time. (b) Receipt in any freely convertible currency and/or in accordance with the directions issued by the Reserve Bank to the authori....