ACIT, CHENNAI V. M/s. RR Donnelley India Outsource Private Ltd., CHENNAI

ITA 2049/CHNY/2012

• Counselvise Citation: 204921714 RSA 2012
• Duration Of Justice: 2 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 25-06-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 09-11-2012
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN JCITD R
• Assessee Lawyers: DR ANITA SUMANTH
• Keywords: Business income; Earning of tax free income; Period of limitation; Non-deduction of tax
• Section: 143(3); 14A; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI ... , . , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NOS.2049 /MDS./2012 ( ! '! / ASSESSMENT YEAR :2006-07) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-V(4), CHENNAI -34. VS. M/S.R.R.DONNELLEY INDIA OUTSOURCE PVT. LTD ., (FORMERLY KNOWN AS ASTRON DOCUMENT MANGEMENT PVT. LTD.) 43A,1 ST MAIN ROAD, R.A.PURAM, CHENNAI 600 028. PAN AABCH 1990 A ( / APPELLANT ) ( / RESPONDENT ) ./ I.T.A.NOS.2064 /MDS./2012 ( ! '! / ASSESSMENT YEAR :2006-07) M/S.R.R.DONNELLEY INDIA OUTSOURCE PVT. LTD ., (FORMERLY KNOWN AS ASTRON DOCUMENT MANGEMENT PVT. LTD.) 43A,1 ST MAIN ROAD, R.A.PURAM, CHENNAI 600 028. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-V(4), CHENNAI -34. PAN AABCH 1990 A ( / APPELLANT ) ( / RESPONDENT ) ITA NO.2049,2064 /MDS/2012 2 #$ % & / APPELLANT BY : MR.P.RADHAKRISHNAN,JCIT,D.R '(#$ % & /RESPONDENT BY : DR.ANITA SUMANTH ,ADVOCATE ) * % +, / DATE OF HEARING : 25.06.2015 -' % +, /DATE OF PRONOUNCEMENT : 24.08.2015 / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IN ITA NO.2049/MDS./2012 IS FILED BY THE REVENUE AND THE OTHER APPEAL IN ITA NO.2064/MDS./2012 BY TH E ASSESSEE FOR THE ASSESSMENT YEAR 2006-07, AGGRIEVED BY THE O RDER OF THE LEARNED COMMISSIONER OF INCOME TAX (A)-V, CHENNAI, DATED 31.08.2012 IN ITA NO.40/2011-12 PASSED UNDER SECTIO N 143(3) READ WITH SECTION 250 OF THE ACT. 2.1 THE REVENUE HAS RAISED FOUR GROUNDS IN ITS APP EAL, HOWEVER, THE CRUXES OF THE ISSUES ARE CONCISED AS FOLLOWS:- 1. THE LD.CIT(A) HAD ERRED IN HOLDING THAT EXPENDIT URE INCURRED IN FOREIGN EXCHANGE TOWARDS TELECOMMUNICATION EXPENDIT URE AND ITA NO.2049,2064 /MDS/2012 3 TRAVEL EXPENDITURE DEDUCTED FROM EXPORT TURNOVER SH OULD ALSO BE DEDUCTED FROM TOTAL TURNOVER FOR ARRIVING AT THE EL IGIBLE DEDUCTION U/S.10B OF THE ACT. 2. THE LD. CIT (A) HAD ERRED IN HOLDING THAT LOSS ON ACCOUNT OF CONVERSION OF AMOUNT OUTSTANDING IN EEFC ACCOUNT TO INDIAN RUPEE HAS TO BE EXCLUDED, WHILE COMPUTING THE DEDUC TION U/S.10B OF THE ACT, AND THE SAME HAS TO BE TREATED AS OTH ER LOSSES AND ALLOWED TO BE SET OFF AGAINST ANY OTHER INCOME, THO UGH THIS GROUND WAS NOT RAISED BY THE ASSESSEE BEFORE THE LD.A.O TH US, VIOLATING THE PROVISION SECTION 46A OF THE ACT. 2.2 THE ASSESSEE HAS RAISED THREE GROUNDS IN ITS AP PEAL, HOWEVER, THE CRUXES OF THE ISSUES ARE CONCISED AS FOLLOWS:- 1) THE LD. CIT (A) HAD ERRED IN EXCLUDING THE ENTIR E TELECOMMUNICATION EXPENDITURE FROM THE EXPORT TURNO VER, THOUGH THE SAME WAS NOT INCLUDED IN THE EXPORT TURNOVER. 2) THE LD. CIT (A) HAD ERRED IN EXCLUDING THE EXPEN DITURE INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER, THOUG H THE SAME WAS NOT INCLUDED IN THE EXPORT TURNOVER. ITA NO.2049,2064 /MDS/2012 4 3) THE LD. CIT (A) HAD ERRED IN DIRECTING THE AO TO RE-COMPUTE THE DEDUCTION U/S.10B OF THE ACT FOR THE EARLIER ASSESS MENT YEARS. ADDITIONAL GROUND RAISED BY THE ASSESSEE 4) THE LD. CIT(A) OUGHT NOT HAVE INVOKED THE PROVIS ION OF SEC.14A OF THE ACT IN THIS RELEVANT CASE WITH RESPECT TO TH E EARLIER ASSESSMENT YEARS. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A COMPANY, ENGAGED IN THE BUSINESS OF PROVIDING DIVERSIFIED BU SINESS PROCESS OUTSOURCING (BPO) SOLUTIONS AND RELATED ACTIVITIES, FILED ITS RETURN OF INCOME ON 30.11.2006 AND SUBSEQUENTLY FILED A REVIS ED RETURN OF INCOME ON 27.02.2007 DECLARING ITS INCOME AS ` 80,22,796/- AFTER CLAIMING DEDUCTION OF ` 3,95,23,332/- U/S.10B OF THE ACT. THE CASE WAS TAKEN UP FOR SCRUTINY AND THE ASSESSMENT WAS CO MPLETED U/S.143(3) OF THE ACT ON 09.12.2009 WHEREIN THE LD. ASSESSING OFFICER MADE CERTAIN ADDITIONS U/S.40(A)(IA) OF THE ACT FOR ` 1,54,03,137/- AND DISALLOWANCE U/S.10B OF THE ACT FOR ` 47,26,748/- ( ` 3,95,23,332 - ` 3,47,26,748). ITA NO.2049,2064 /MDS/2012 5 REVENUES APPEAL 4.1 GROUND NO.1 EXPENDITURE INCURRED IN FOREIGN EXCHA NGE TOWARDS TELECOMMUNICATION EXPENDITURE AND TRAVEL EX PENDITURE DEDUCTED FROM EXPORT TURNOVER SHOULD ALSO BE DEDUCT ED FROM TOTAL TURNOVER FOR ARRIVING AT THE ELIGIBLE DEDUCTI ON U/S.10B OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE L D. ASSESSING OFFICER OBSERVED THAT WHILE COMPUTING DED UCTION U/S.10B OF THE ACT THE ASSESSEE HAD EXCLUDED TELECOMMUNIC ATION CHARGES OF ` 2,09,64,702/- & TRAVELLING EXPENSES OF ` 64,33,093/- (TRAVELLING EXPENSE ` 55,58,560/- + SOFTWARE CHARGES ` 8,74,533/-) BOTH INCURRED IN FOREIGN CURRENCY, FROM THE EXPORT TURNOVER AS WE LL AS FROM THE TOTAL TURNOVER. THE LD. ASSESSING OFFICER WAS OF THE VIEW THAT TELECOMMUNICATION CHARGES AND TRAVELLING EXPENSES I NCURRED IN FOREIGN CURRENCY SHOULD ONLY BE DEDUCTED FROM THE E XPORT TURNOVER AND NOT FROM THE TOTAL TURNOVER AND ACCORDINGLY, CO MPUTED THE DEDUCTION U/S. 10B OF THE ACT. ITA NO.2049,2064 /MDS/2012 6 4.2 THE LD. A.R. HAD ARGUED BEFORE THE LD. ASSESSI NG OFFICER THAT THE AFORE-STATED EXPENDITURES SHOULD BE EXCLUDED FR OM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER RELYING ON THE DECISION OF THE SPECIAL BENCH OF THE CHENNAI TRIBUNAL IN THE CA SE ITO VS. SAK SOFT LTD ., REPORTED IN 313 ITR (AT) 353. HOWEVER THE LD. A .O OPINED THAT SINCE THE REVENUE IS IN APPEAL AND THE DECISIO N OF THE TRIBUNAL HAS BEEN CONTESTED BY THE DEPARTMENT, HE NEED NOT F OLLOW THAT DECISION. 4.3 ON APPEAL, THE LD. CIT (A) DISCUSSING THE ISSUE IN DEPTH AND BY FOLLOWING THE DECISION IN THE CASE OF ITO VS. SAK S OFT LTD., CITED SUPRA DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. THE RE LEVANT PORTION OF THE LD. CIT(A)S ORDER IS REPRODUCED HEREIN BELOW F OR REFERENCE:- THE APPELLANT HAD PUT-FORTH THE FOLLOWING ARGUMENT S: IF THE TELECOMMUNICATION EXPENDITURE IS NOT INCLU DED IN EXPORT TURNOVER IN THE FIRST PLACE, THE SAME SHOULD RIOT BE EXCLUDED F ROM EXPORT TURNOVER. THE TELECOMMUNICATION EXPENDITURE IS INCURRED IN INDIAN RUPEES AND HENCE, SHOULD NOT BE EXCLUDED FROM EXPORT TURNOVER. ONLY TELECOMMUNICATION EXPENDITURE ATTRIBUTABLE T O DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA WOULD NEED TO BE EXCLUDED FR OM THE AMBIT. ITA NO.2049,2064 /MDS/2012 7 IT WAS ALSO SUBMITTED THAT INCASE TELECOMMUNICATI ON EXPENDITURE ARE EXCLUDED FROM EXPORT TURNOVER, THE SAME SHOULD BE E XCLUDED FROM TOTAL TURNOVER ALSO. RELIANCE IN THIS REGARD HAS BEEN PLA CED BY THE APPELLANT ON THE FOLLOWING JUDICIAL PRECEDENTS: - GEM PLUS JEWELLERY INDIA PRIVATE LIMITED [330 ITR 175] [BOMBAY HC] - ITO V SAK SOFT LTD [20091 [313 ITR 353] (ITAT CHE NNAI SPECIAL BENCH) 7.1 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT AS ABOVE. WITH RESPECT TO THE GROUND THAT EXPENSES SHOULD NOT BE EXCLUDED FROM EXPORT TURNOVER IN THE FIRST PLACE, I AM OF THE VIE W THAT THE FORMULA SEEKS TO IMPUTE A MECHANISM TO EXCLUDE ITEMS EVEN IF NOT INC LUDED. IN OTHER WORDS, DOES NOT INCLUDE IN THE DEFINITION OF THE TERM E XPORT TURNOVER SHOULD BE READ AS AS REDUCED BY. THEREFORE, THIS GROUND OF APPEAL IS REJECTED. 7.2 WITH RESPECT TO THE GROUNDS THAT TELECOMMUNICA TION EXPENDITURE ARE ACTUALLY INCURRED IN INDIAN RUPEES AND ARE NOT ATTR IBUTABLE TO SUPPLY OF COMPUTER SOFTWARE OUTSIDE INDIA, WOULD NEED TO BE E XCLUDED FROM THE AMBIT, I AM OF THE VIEW THAT THERE IS NO REQUIREMEN T THAT THE EXPENDITURE SHOULD BE INCURRED IN FOREIGN CURRENCY FOR IT TO BE EXCLUDED FROM THE EXPORT TURNOVER. THEREFORE, THIS GROUND IS REJECTED. 7.3 WITH RESPECT TO THE GROUND ON ONLY TELECOMMUNIC ATION EXPENDITURE ATTRIBUTABLE TO DELIVERY OF COMPUTER SOFTWARE OUTSI DE INDIA SHOULD BE EXCLUDED FROM EXPORT TURNOVER, I AM OF THE VIEW THA T THE EXPENDITURE HAS BEEN ENTIRELY INCURRED FOR THE PURPOSE OF BUSINESS. THEREFORE, THIS GROUND OF APPEAL IS REJECTED. 7.4 ON THE TREATMENT OF EXCLUDING THE TELECOMMUNICA TION EXPENDITURE FROM TOTAL TURNOVER, THE APPELLANT, DURING THE COURSE OF HEARIN.G SUBMITTED THAT THE HONBLE CHENNAI ITAT IN THE APPELLANTS OWN CAS E (ITA NO. 1989/MDS/2010 AND 1990/MDS/2010) HAS HELD THAT TELE COMMUNICATION EXPENDITURE (WHETHER INCLUDED OR NOT IN THE INVOICE ) HAVE TO BE EXCLUDED FROM EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER FOR THE PURPOSES OF COMPUTATION OF DEDUCTION UNDER SECTION 1OB. IT IS O BSERVED THAT THE ISSUE HAS BEEN SQUARELY COVERED BY THE RULING OF THE JURI SDICTIONAL SB OF THE CHENNAI TRIBUNAL IN THE CASE OF ITO V SAK SOFT LTD [2009] 313 ITR (AT) 353 (CHENNAI). THE CHENNAI SB OBSERVED AS UNDER:- IF THE PARITY PRINCIPLE IS TO BE APPLIED, IT FOLLO WS THAT WHATEVER HAS BEEN EXCLUDED FROM THE EXPORT TURNOVER BY THE DEFINITION SHALL STAND EXCLUDED FROM THE TOTAL TURNOVER ALSO. THE POSITION WOULD BE SOMEWHAT SIMILAR TO THE CASE BEFORE THE CALCUTTA BENCH OF THE TRIBUNAL IN T HE CASE OF CHLORIDE INDIA ITA NO.2049,2064 /MDS/2012 8 LTD [1995] 53 LTD I 8.IN CLAUSE (III,1 OF EXPLANATI ON 2 TO SECTION 1 OB, THE FREIGHT, TELECOM CHARGES AND INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE GOODS OUTSIDE INDIA AND EXPENSES INCURRED IN FOREIG N EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA HAVE BEE N EXCLUDED FROM EXPORT TURNOVER. THEREFORE, THE SAME HAVE TO BE EXCLUDED A LSO FROM THE TOTAL TURNOVER THOUGH THATEXPRESSION HAS NOT BEEN DEFINED IN THAT SECTION. FOLLOWING THE RUING OF THE JURISDICTIONAL SB AND TH E ORDER IN THE CASE OF THE APPELLANT IN THE EARLIER YEARS, IT IS HELD THAT TEL ECOMMUNICATION EXPENDITURE WHEN REDUCED FROM THE EXPORT TURNOVER SHOULD BE EXC LUDED FROM THE TOTAL TURNOVER ALSO. ACCORDINGLY, THIS GROUND IS HE][D IN FAVOR OF THE APPELLANT TO THIS EXTENT. 8. THE FOURTH GROUND OF APPEAL RELATES TO EXCLUSION OF EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM EXPORT TURNOVER IN COMPUTI NG THE DEDUCTION UNDER SECTION 1OB OF THE ACT. IT HAS BEEN SUBMITTED THAT THE APPELLANT HAD INCURR ED RS 64,33,093 IN FOREIGN CURRENCY FOR TRAVEL ABROAD BY EMPLOYEES IN CONNECTION WITH TRAINING, PREPARATORY AND AUXILIARY WORK OF UNDERSTANDING CLI ENT SPECIFICATION AND MEETING CLIENT PERSONNEL BEFORE COMMENCEMENT OF ACT UAL IT ENABLED SERVICES (ITES) ACTIVITY AND OTHER RELATED EXPENS ES AND REIMBURSEMENTS. THE AO HAS DEDUCTED THE EXPENDITURE IN FOREIGN CURR ENCY FROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UND ER SECTION 10A OF THE ACT. HOWEVER, NO CORRESPONDING DEDUCTION WAS MADE F ROM TOTAL TURNOVER. THE AO HAD MADE THE ADJUSTMENT ON THE GROUND THAT T HE TERM EXPORT TURNOVER AS DEFINED IN EXPLANATION 2(IV) TO SECTIO N 1OA IS AN EXPLICIT PROVISION AND THEREFORE THE EXPORT TURNOVER SHOULD BE REDUCED BY THE EXPENSES MENTIONED THEREIN. THE HONBIE CHENNAI ITAT IN THE APPELLANTS OWN CAS E FOR THE AY 2004-05 AND 2005-06 HELD THAT SUCH EXPENDITURE IN FOREIGN C URRENCY HAVE TO BE REDUCED FROM EXPORT TURNOVER. THE APPELLANT HAD MAD E SIMILAR ARGUMENTS AS IT HAD MADE FOR TELECOMMUNICATION EXPENDITURE. A S THE PRINCIPLE INVOLVED HERE IS THE SAME AS THAT OF THE EARLIER GR OUND, THIS GROUND OF APPEAL IS ALSO ALLOWED ON THE SAME BASIS AS THAT OF THE EARLIER GROUND. THIS GROUND OF THE APPELLANT IN THIS REGARD IS NOT ALLOW ED. 8.2 WITH RESPECT TO THE GROUND THAT FOREIGN CURRENC Y EXPENDITURE EXCLUDED FROM EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM T OTAL TURNOVER, AS DISCUSSED IN PARA 7.4, RELYING ON THE DECISION OF T HE HONBLE CHENNAI ITAT IN THE APPELLANTS OWN CASE, I CONCLUDE THAT ITEMS EXCLUDED FROM EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM TOTAL TURNOVE R ALSO. THIS GROUND HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT TO THIS EXT ENT. ITA NO.2049,2064 /MDS/2012 9 4.4 AT THE OUTSET, THE LD. A.R. SUBMITTED BEFORE U S THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO.1302/MDS./2008 FOR THE ASSESSMEN T YEAR 2004-05 VIDE ORDER DATED 19.08.2011 AND THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. SAK SOFT LTD. CITED SUPRA WHEREIN IT WAS HELD THAT SUCH EXPENDITURE OUGHT TO BE EXCLUDED BOTH FROM EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER. THE LD. D.R COULD NOT CONTROVERT THE SUBMISSIONS OF THE LD. A.R. 4.5 AFTER HEARING BOTH SIDES AND PERUSING THE ORDE RS CITED BY THE LD. A.R, IT IS EVIDENT THAT THE SPECIAL BENCH OF TH E TRIBUNAL IN THE CASE CITED SUPRA HAS CATEGORICALLY HELD THAT EXPEND ITURE INCURRED TOWARDS FREIGHT CHARGES AND INSURANCE PREMIUM IN FO REIGN EXCHANGE OUGHT TO BE EXCLUDED FROM BOTH EXPORT TURNOVER AS W ELL AS FROM THE TOTAL TURNOVER. FURTHER IN THE RECENT DECISION OF T HE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE M/S.ALLSEC TECHNOLOGIES LT D. IN ITA NO.1710/MDS./2013 VIDE ORDER DATED 21.01.2015, THE ISSUE HAS BEEN FURTHER CLARIFIED CONCURRING WITH THE ORDER OF THE SPECIAL BENCH OF THE ITA NO.2049,2064 /MDS/2012 10 TRIBUNAL. THE RELEVANT PORTION OF THE RECENT ORDER OF THE TRIBUNAL AT PAGE-16, PARA NO.6.1 IS REPRODUCED HEREIN BELOW FOR REFERENCE:- 6.1 AT THE OUTSET WE FIND THAT THE LD. CIT (A) HAS SIMPLY FOLLOWED THE DECISION IN THE CASE OF ITO VS. SAK SOFT LTD., REPO RTED IN 313 ITR (AT) 353 (CHENNAI)(SB) AND DECIDED THE MATTER IN FAVOUR OF T HE ASSESSEE. THE RELEVANT PORTION OF THE AFORESAID PORTION IS REPROD UCED HEREIN BELOW FOR REFERENCE:- FOR THE PURPOSE OF APPLYING THE FORMULA UNDER SUB- SECTION (4) OF SECTION 10B, THE FREIGHT, TELECOM CHARGES, OR INSURANCE ATTRIBUT ABLE TO DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE IND IA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECH NICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNO VER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINAT OR RESPECTIVELY IN THE FORMULA. THE SAME ANALOGY IS APPLICABLE WITH RESPECT TO SECT ION 10A OF THE ACT. LET US EXAMINE THIS ISSUE IN ANOTHER PERSPECTI VE. SUBSECTION (4) TO SECTION.10A STIPULATES THAT THE PROFIT DERIV ED FROM EXPORT OF ARTICLE OF THINGS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTA KING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUC H ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. THUS, THE ELIGIBLE PROFIT FOR DEDUCTION U/S. 10A WOULD BE:- PROFIT X EXPORT TURNOVER ITA NO.2049,2064 /MDS/2012 11 TOTAL TURNOVER IN THIS CONTEXT, EXPLANATION 2(IV) TO SECTION 10A O F THE ACT STIPULATES THAT EXPORT TURNOVER DOES NOT INCLUDE FREIGHT, TE LECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY O F ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES IF A NY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICE S OUTSIDE INDIA. THE ARITHMETIC CONSEQUENTIAL IMPLICATION OF SUCH EX CLUSION OF THE ABOVE STATED EXPENDITURES FROM EXPORT TURNOVER WOULD BE, TO IRON OUT THE ELEMENT OF THOSE EXPENDITURES, WHIL E COMPUTING THE ELIGIBLE DEDUCTION U/S. 10A OF THE ACT. IN THE GIVEN CASE BEFORE US, THE RELEVANT EXPENDITURE THAT HAS TO BE EXCLUDE D FROM THE EXPORT TURNOVER IS TELECOMMUNICATION CHARGES. THUS ON G IVING EFFECT TO EXPLANATION 2(IV) TO SECTION 10A OF THE ACT, THE T ELECOMMUNICATION CHARGES SHOULD BE EXCLUDED NOT ONLY FROM EXPORT T URNOVER, BUT IT HAS ALSO TO BE REDUCED FROM THE DEBIT SIDE OF PR OFIT AND LOSS ACCOUNT. MOREOVER, ONCE THE TELECOMMUNICATION CHA RGE IS REDUCED FROM THE EXPORT TURNOVER, IT WILL STAND REDUCED T O THAT EXTEND IN TOTAL TURNOVER BECAUSE EXPORT TURNOVER IS A PART AND P ARCEL OF TOTAL TURNOVER WHILE DRAWING THE PROFIT AND LOSS ACCOUN T. FURTHER, NEEDLESS TO MENTION THAT TOTAL TURNOVER IS A CRE DIT SIDE ITEM IN THE PROFIT AND LOSS ACCOUNT. THUS, THE OVERALL EFFEC T IN THE PROFIT AND LOSS ACCOUNT WOULD BE THAT, THE PROFIT WILL REMA IN THE SAME, SINCE TELECOMMUNICATION CHARGE IS EXCLUDED FROM BOTH D EBIT SIDE AND CREDIT SIDE OF THE PROFIT AND LOSS ACCOUNT, HOW EVER THE EXPORT ITA NO.2049,2064 /MDS/2012 12 TURNOVER AND THE TOTAL TURNOVER WILL STAND REDUC ED TO THE EXTENT OF TELECOMMUNICATION CHARGES SO EXCLUDED. 4.6 FURTHER AS CITED BY THE LD. A.R., IN THE ASSESS EES OWN CASE IN ITA NO.1302/MDS./2008 DATED19.08.2011, THE IDENTICA L ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE FOLLOWING TH E SPECIAL BENCH OF THE TRIBUNAL CITED SUPRA. IN THESE CIRCUMSTANCES, WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE ORDER OF THE LD. CI T (A) ON THIS ISSUE. 5.1 GROUND NO.2 LOSS ON ACCOUNT OF CONVERSION OF THE AMOUNT OUTSTANDING IN EEFC ACCOUNT IN FOREIGN CURRE NCY TO INDIAN CURRENCY. THE ASSESSEE HAD RAISED AN ADDITIONAL GROUND BEFO RE THE LD. CIT (A) IN RESPECT OF THE TREATMENT OF THE LOSS INC URRED ON EARNERS EXCHANGE FOREIGN CURRENCY (EEFC) ACCOUNT AMOUNTING TO ` 1,00,70,120/- PERTAINING TO THE 10-B UNIT OF THE AS SESSEE. ITA NO.2049,2064 /MDS/2012 13 CONSIDERING THE GROUND RAISED BY THE ASSESSEE, THE LD. CIT (A) HAS HELD THE ISSUE IN FAVOUR OF THE ASSESSEE BY OBSERVI NG AS UNDER:- 9. THE APPELLANT HAS RAISED AN ADDITIONAL GROUND O N TREATMENT OF LOSS ON EARNERS EXCHANGE FOREIGN CURRENCY (EEFC ACCOUNT IN CURRED BY THE APPELLANT AMOUNTING TO RS. 1,00,70,120 PERTAINING T O TAX HOLIDAY UNIT WHILE COMPUTING THE DEDUCTION UNDER SECTION 10B OF THE AC T. THE APPELLANT DURING THE COURSE OF HEARING HAS SUBM ITTED THAT THE HONBLE CHENNAI ITAT IN THE APPELLANTS OWN CASE FOR THE AY 2004-0 5 AND 2005-06 HAS HELD THAT GAIN ON EEFC ACCOUNT DOES NOT HAVE AN Y DIRECT NEXUS WITH THE PROFITS OF EXPORT ORIENTED UNDERTAKING AND THER EFORE NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT. THE APPELLA NT DURING THE SUBJECT AY HAS INCURRED A LOSS OF RS. 1,00,70,120 ON EEFC A CCOUNT WHICH PERTAINS TO TAX HOLIDAY UNIT. RELYING ON THE DECISION OF THE HONBLE ITAT, THE APPELLANT SUBMITTED THAT SINCE GAIN ON EEFC ACCOUNT WAS HELD AS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT , THEN LOSS FROM EEFC ACCOUNT SHOULD ALSO BE TREATED IN A SIMILAR MANNER. THE LOSS FROM EEFC ACCOUNT SHOULD BE EXCLUDED WHILE COMPUTING PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 10B AND SUCH LOSS SHOULD BE CONSIDERE D AS BUSINESS LOSS WHICH IS ELIGIBLE FOR SET OFF AGAINST OTHER BUSINES S INCOME/ ANY OTHER INCOME, AS PER THE PROVISIONS OF THE ACT. BASED ON THE SUBMISSIONS FILED BY THE APPELLANT, I AM OF THE VIEW THAT THE LOSS FROM EEFC ACCOUNT SHOULD BE TREATED SIMILA R TO TREATMENT ADOPTED FOR GAIN FROM EEFC ACCOUNT. THEREFORE, LOSS ON EEF C ACCOUNT SHOULD BE EXCLUDED WHILE COMPUTING THE PROFITS ELIGIBLE FOR D EDUCTION UNDER SECTION 10B AND SUCH LOSS SHOULD BE CONSIDERED AS BUSINESS LOSS WHICH IS ELIGIBLE FOR SET OFF AGAINST OTHER BUSINESS INCOME/ ANY OTHE R INCOME, AS PER THE ITA NO.2049,2064 /MDS/2012 14 PROVISIONS OF THE ACT. AS A RESULT, THE GROUND RAI SED BY THE APPELLANT IN THIS REGARD IS ALLOWED. AGGRIEVED BY THE ORDER OF THE LD. CIT (A), THE REVE NUE IS IN APPEAL. 5.2 BEFORE US, THE LD. D.R SUBMITTED THAT THE LD. CIT (A) HAD ERRED BY HOLDING THAT THE LOSS FROM EEFC ACCOUNT SHOULD B E SET OFF AGAINST THE OTHER BUSINESS INCOME OR ANY OTHER INCOME OF TH E ASSESSEE WHILE AS ON THE OTHER HAND THE LD. A.R. RELIED ON THE ORD ER OF THE LD. CIT (A). 5.3 AFTER HEARING BOTH THE SIDES AND CAREFULLY PER USING THE MATERIALS ON RECORD, WE DO NOT FIND ANY INFIRMITY I N THE ORDER OF THE LD. CIT (A). ANY LOSS INCURRED BY THE ASSESSEE HAS TO BE ALLOWED TO BE SET OFF AGAINST THE SAME BUSINESS INCOME OR AGAINST THE OTHER BUSINESS INCOME OR ANY OTHER INCOME AS PER THE PROV ISIONS OF THE ACT. THE TRIBUNAL ON THE EARLIER OCCASION IN THE ASSESSE ES OWN CASE HAS ONLY DECIDED THE ISSUE OF GRANTING DEDUCTION U/S.10 B OF THE ACT WITH RESPECT TO THE GAIN DERIVED FROM EEFC ACCOUNT WHICH DOES NOT HAVE DIRECT NEXUS WITH THE PROFITS EARNED OUT OF EXPORT BY HOLDING THAT SUCH ITA NO.2049,2064 /MDS/2012 15 GAINS SHOULD BE EXCLUDED FOR THE PURPOSE OF DEDUCTI ON U/S.10B OF THE ACT. THIS IS ONLY FOR THE LIMITED PURPOSE OF GRANT ING DEDUCTION U/S.10B OF THE ACT. HOWEVER AS PER THE PROVISIONS OF THE ACT, ANY GAIN OR LOSS INCURRED BY THE 10-B UNIT OF THE ASSES SEE, THOUGH NOT ELIGIBLE FOR DEDUCTION WHILE COMPUTING THE INCOME O F THE ASSESSEE, SUCH GAINS OR LOSSES HAVE TO BE CONSIDERED IN ACCOR DANCE WITH THE NORMAL PROVISIONS OF THE ACT. WE DO NOT FIND ANY BA R ON THE CLAIM OF THE ASSESSEE BY ANY OF THE PROVISIONS UNDER THE ACT . THEREFORE, WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE ORDE R OF THE LD. CIT (A). ASSESSEES APPEAL 6.1 GROUND NOS.1 & 2 EXCLUDING TELECOMMUNICATION EXPE NDITURE AND TRAVELLING EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM EXPORT TURNOVER, THOUGH THE SAME WERE NOT INCLUDED IN THE EXPORT TUR NOVER. IT APPEARS FROM THE GROUND RAISED BY THE ASSESSEE THAT THE LD. ASSESSING OFFICER HAD EXCLUDED THE TELECOMMUNICATIO N EXPENDITURE AND TRAVELLING EXPENDITURE FROM THE EXPORT TURNOVER , THOUGH IT WAS NOT INCLUDED IN THE EXPORT TURNOVER. ON THIS ISSUE, WE HAVE ONLY TO SAY ITA NO.2049,2064 /MDS/2012 16 THAT IF THESE EXPENDITURES HAVE ALREADY BEEN EXCLUD ED BY THE ASSESSEE, THE SAME NEED NOT BE EXCLUDED ONCE AGAIN. FURTHER, THE LD. ASSESSING OFFICER IS HEREBY DIRECTED TO FOLLOW THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE SAK SOFT CITED (SUPRA) WHILE GIVING EFFECT TO THE ORDER OF TRIBUNAL IN THIS RELE VANT CASE BEFORE US. 7.1 GROUND NO.3 DIRECTION OF THE LD. ASSESSING OFFICER TO RE-COMPUTE THE DEDUCTION U/S.10B OF THE ACT FOR THE EARLIER YEARS. IT APPEARS THAT THE ASSESSEE IS AGG RIEVED BY THE ORDER OF THE LD. CIT (A) FOR DIRECTING THE LD. ASSESSING OFF ICER TO RE-COMPUTE THE PROFIT OF THE BUSINESS ELIGIBLE FOR DEDUCTION U /S.10B OF THE ACT FOR THE EARLIER YEARS BY NOT INCREASING THE PROFIT DUE TO DISALLOWANCE U/S.40(A)(IA) OF THE ACT. ON THE EARLIER OCCASION THE ASSESSEE HAD RAISED THE FOLLOWING GROUNDS BEFORE THE LD. CIT (A) :- GROUNDS THE LD. ASSESSING OFFICER IS NOT JUSTIFIED IN DISA LLOWING A DEDUCTION CLAIM OF EXPENSES PAID TO NON-RESIDENT WHICH HAS BEEN DIS ALLOWED IN EARLIER YEARS (I.E. A.Y 2002-03, A.Y 2003-04, A.Y 2004-05 & A.Y 2005-06) DUE TO NON-DEDUCTION OF TDS ESPECIALLY WHEN SECTION-40 (A) (IA) OF THE ACT ITA NO.2049,2064 /MDS/2012 17 SPECIFIES THAT SUCH EXPENDITURE SHOULD BE AVAILABLE AS DEDUCTION WHEN TDS ON THE SAME HAS BEEN REMITTED TO THE REVENUE AU THORITIES. 7.2 ON THIS ISSUE THE LD. CIT (A) HAD HELD AS FOLL OWS:- 6.4 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPE LLANT AND HAVE ALSO GONE THROUGH THE REASONS GIVEN BY THE AO IN TH E ASSESSMENT ORDER FOR DENYING THE ALLOWABILITY OF THE EXPENSES WHICH WERE DISALLOWED IN THE EARLIER YEARS ON ACCOUNT OF NON-DEDUCTION OF TAX AN D WHICH THE APPELLANT HAS CLAIMED DURING THE YEAR UNDER CONSIDERATION ON THE BASIS OF PROVISO TO SECTION 40(A)(IA) OF THE ACT. THE EXPENSES IN QUEST ION ARE MANAGEMENT RECHARGE EXPENSES AND SOFTWARE EXPENSES PERTAINING TO THE ASSESSMENT YEARS 2002-03 TO 2005-06 TOTALING TO RS. 1,54,03,31 7 / -. THE AO HAS DISCUSSED THAT THOUGH THESE EXPENSES WERE DISALLOWE D IN THE RESPECTIVE YEARS BUT DEDUCTION ON THE SAID DISALLOWANCE HAD BE EN ALLOWED TO THE APPELLANT UNDER SECTION 10B OF THE ACT. THE AO FURT HER MENTIONED THAT THE EXPENSES RELATING TO THE TAX HOLIDAY PERIOD ARE NOW CLAIMED AGAINST THE PROFITS MADE DURING THE PERIOD IN WHICH THE APPELLA NTS INCOME IS SUBJECT TO TAX. 6.4.1 AS PER THE PROVISIONS OF SECTION 10B(4) THE D EDUCTION UNDER SECTION 10B B ON THE PROFITS DERIVED FROM THE EXPORT OF ART ICLE OR THING OR SOFTWARE ETC. WILL BE ALLOWED TO THE EXTENT OF THE PROFITS O F BUSINESS IN THE RATIO OF EXPORT TURNOVER TO THE TOTAL TURNOVER. THE SAID PRO FIT OF BUSINESS SHALL NOT INCREASE DUE TO DISALLOWANCE U/S 40(A)(IA) READ WIT H THE PROVISIONS OF CHAPTER XVII-B OF THE ACT. SINCE THE PROFITS SHALL NOT INCREASE THE DEDUCTION SHALL BE ALLOWED ONLY TO THE EXTENT OF PR OFITS OF BUSINESS. THE PROFITS OF BUSINESS WILL NOT INCREASE BECAUSE OF DI SALLOWANCE UNDER SECTION 40A(IA) BECAUSE THE EXPENSES THAT EXPENSES HAVE ALR EADY BEEN INCURRED BY THE APPELLANT AND THE SAME HAVE BEEN IRRETRIEVAB LY LOST/PAID OUT. ITA NO.2049,2064 /MDS/2012 18 BECAUSE OF THE CLEAR MANDATE OF PROVISO TO SECTIO N 40A(IA) THE EXPENSES THAT HAVE BEEN DISALLOWED FOR FAILURE TO D EDUCT TDS UNDER THE PROVISIONS OF CHAPTER XVII-B SHALL BE ALLOWED IN TH E YEAR IN WHICH SUCH TAX HAS BEEN DEDUCTED AND PAID. HOWEVER THE PROVISIONS OF SECTION 40(A)(IA) READ WITH THE PROVISIONS OF CHAPTER XVII-B OF THE A CT CANNOT BE ALLOWED TO BE USED AS A DEVICE TO CLAIM DOUBLE BENEFIT THAT IS TO POSTPONE THE CLAIM OF EXPENDITURE IN THE YEAR WHEN THE PERIOD OF TAX HOLI DAY IS OVER. IN THE PRESENT CASE THERE IS NO DOUBT THAT THERE HAS BEEN NO EFFECT OF THE DISALLOWANCE MADE UNDER SECTION 40(A)(IA) AS TH E APPELLANT HAD INCORRECTLY BEEN ALLOWED DEDUCTION UNDER SECTION 10 B B OF THE ACT ON THE ADDITION OF AMOUNT IN THE RESPECTIVE YEARS. IN VIEW OF THE ABOVE DISCUSSION AND FACTS OF THE CA SE THE AO IS DIRECTED TO ALLOW THE CLAIM OF THE APPELLANT IN RESPECT OF THES E EXPENSES AS PER THE CLEAR MANDATE OF PROVISO TO SECTION 40A(IA) AND TO RE-COMPUTE THE DEDUCTION UNDER SECTION 10B B ALREADY ALLOWED TO TH E APPELLANT IN THE RESPECTIVE YEARS AND TO WITHDRAW THE INCORRECT DEDU CTION ALLOWED ON THE EXPENSES DISALLOWED UNDER SECTION 40(A)(IA). SUBJEC T TO THIS THE GROUND RAISED BY THE APPELLANT IN THIS REGARD IS ALLOWED. 7.3 FROM THE ABOVE, IT IS APPARENT THAT THE LD. AS SESSING OFFICER FOR THE EARLIER YEARS HAVE INCORRECTLY GRANTED DEDUCTIO N U/S.10B OF THE ACT I.E., EVEN FOR THE INCREASE IN PROFITS DUE TO D ISALLOWANCE U/S.40(A)(IA) OF THE ACT. WHILE GRANTING DEDUCTION U/S.10B OF THE ACT, THE DISALLOWANCE MADE U/S.40(A)(IA) OF THE ACT CANN OT BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF GRANTING THE BENEF IT OF DEDUCTION ITA NO.2049,2064 /MDS/2012 19 BECAUSE SECTION-10B OF THE ACT IS A PROVISION WITH FICTION AND SECTION.40(A)(IA) OF THE ACT IS ALSO A PROVISION WI TH FICTION AND A PROVISION WITH FICTION CANNOT BE SUPER IMPOSED ON A NOTHER PROVISION WITH FICTION. THEREFORE, THE LD. CIT (A) HAS RIGHTL Y DIRECTED THE LD. ASSESSING OFFICER TO RE-COMPUTE THE DEDUCTION U/S.1 0B OF THE ACT FOR THE EARLIER YEARS, HOWEVER, SUBJECT TO THE PERIOD OF LIMITATION PROVIDED UNDER THE ACT . IT IS PERTINENT TO MENTION HERE THAT THE POWERS OF THE LD.CIT(A) ARE PLENARY WHILE DISPOSING OF AN APPEAL. THE SCOPE OF HIS POWERS IS CO-TERMINUS WITH THAT OF THE ASSESSING OFFICER. HE CAN DO WHAT THE ASSESSING OFFICER CAN DO AND ALSO DIRECT HIM TO DO WHAT HE HAS FAILED TO DO. IF THE ASSESSI NG OFFICER HAS THE OPTION TO ASSESS ONE, OR OTHER OF THE ENTITIES IN T HE ALTERNATIVE, THE LD. CIT (A) CAN DIRECT HIM TO DO WHAT THE LD. ASSESSING OFFICER SHOULD HAVE DONE IN THE CIRCUMSTANCE OF THE CASE AS HELD B Y THE HONBLE APEX COURT IN THE CASE CIT VS. KANPUR COURT SYNDICA TE (1964) REPORTED IN 53 ITR 225. THEREFORE WE HEREBY CONFIR M THE ORDER OF THE LD.CIT(A) SUBJECT TO THE ADHERENCE OF THE PERIOD OF LIMITATIONS PROVIDED UNDER THE ACT. ITA NO.2049,2064 /MDS/2012 20 ADDITIONAL GROUND 8.1 GROUND NO.4 INVOKING THE PROVISIONS OF SECTION-14 A OF THE ACT FOR THE EARLIER ASSESSMENT YEARS. THE LD. ASSESSING OFFICER HAD OBSERVED IN HIS ORD ER THAT THE MANAGEMENT RECHARGE EXPENSES AND SOFTWARE EXPENSES WERE ALSO EXPENSES RELATED TO EARNING OF EXEMPT INCOME U/S.10 B OF THE ACT AND THEREFORE, CANNOT BE ALLOWED AGAINST THE TAXABLE IN COME IN VIEW OF THE PROVISIONS OF SECTION 14A OF THE ACT RELAYING O N THE VARIOUS DECISIONS CITED IN HIS ORDER. FOR THE PURPOSE OF G IVING EFFECT TO THIS FINDING OF THE LD. CIT (A) HE DIRECTED THE LD. ASSE SSING OFFICER TO RE-COMPUTE THE INCOME OF THE ASSESSEE FOR THE EARLI ER ASSESSMENT YEARS 2002-03 TO 2005-06. AGGRIEVED BY THE ORDER OF THE LD. CIT (A), THE ASSESSEE IS IN APPEAL BEFORE US BY STATING THAT LD. CIT (A) HAD EXCEEDED HIS JURISDICTION BY DIRECTING THE LD. ASSE SSING OFFICER TO RE-COMPTUE THE DEDUCTION U/S.10B OF THE ACT FOR THE EARLIER ASSESSMENT YEARS OTHER THAN THE YEAR UNDER APPEAL. SINCE WE HAVE ALREADY HELD IN THE EARLIER GROUND AT PARA 7.3 THAT THE LD. CIT (A) HAS POWERS UNDER THE PROVISIONS OF THE ACT TO DIRECT TH E LD. ASSESSING OFFICER TO MODIFY THE ASSESSMENT OF THE EARLIER YEA RS BASED ON THE ITA NO.2049,2064 /MDS/2012 21 FINDINGS IN THE SUBSEQUENT ASSESSMENT YEAR UNDER AP PEAL BEFORE THE LD. CIT (A), THIS GROUND IS ALSO ACCORDINGLY DISPOS ED OFF. 9. IN THE RESULT, BOTH THE APPEAL OF REVENUE AS WE LL AS THE APPEAL OF ASSESSEE IS DISMISSED AS INDICATED HEREINABOVE. ORDER PRONOUNCED ON 24 TH AUGUST, 2015 AT CHENNAI. SD/- SD/- ( . . . ) ( N.R.S.GANESAN ) ( . '#$ %' ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 24 TH AUGUST, 2015. K S SUNDARAM. % '+./ 0 /'+ /COPY TO: 1. #$ /APPELLANT 2. '(#$ /RESPONDENT 3. ) 1+ () /CIT(A) 4. ) 1+ /CIT 5. /4 '+5 /DR 6. 6! 7* /GF